Document:

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<TABLE>

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<S>                             <C>                     <C>                             <C>                     <C>
        LOAN NUMBER                 LOAN NAME                ACCT. NUMBER                NOTE DATE                 INITIALS
         [omitted]               ACTION PRODUCTS                                         06/30/03                     704
                               INTERNATIONAL, INC.

        NOTE AMOUNT             INDEX (w/Margin)                 RATE                  MATURITY DATE             LOAN PURPOSE
       $2,000,000.00          Mercantile Bank Prime             4.75%                    06/30/05                 Commercial
                                Rate plus 0.500%
                                                          Creditor Use Only
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</TABLE>

                     PROMISSORY NOTE and SECURITY AGREEMENT
                  (Commercial - Revolving Draw - Variable Rate)
--------------------------------------------------------------------------------

DATE AND PARTIES.  The date of this Promissory Note and Security Agreement (Loan
Agreement) is June 30, 2003. The parties and their addresses are:

     LENDER:
         Mercantile Bank
         2859 South Delaney Avenue
         Orlando, Florida  32806
         Telephone:  (407) 245-1222

     BORROWER:
         ACTION PRODUCTS INTERNATIONAL, INC.
         a FLORIDA Corporation
         344 CYPRESS ROAD
         OCALA, Florida 34472-3108

 1.  DEFINITIONS.  As used in this Loan Agreement,  the terms have the following
                   meanings:

         A.  Pronouns.  The pronouns  "I," "me," and "my" refer to each Borrower
         signing  this Loan  Agreement,  individually  and  together  with their
         heirs,  successors  and assigns,  and each other person or legal entity
         (including guarantors,  endorsers, and sureties) who agrees to pay this
         Loan  Agreement.  "You"  and  "Your"  refer  to the  Lender,  with  its
         participants or syndicators,  successors and assigns,  or any person or
         company that acquires an interest in the Loan Agreement.

         B. Loan  Agreement.  Loan  Agreement  refers to this  combined Note and
         Security  Agreement,  and any extensions,  renewals,  modifications and
         substitutions of this Loan Agreement.

         C.  Loan.  Loan  refers  to  this  transaction   generally,   including
         obligations and duties arising from the terms of all documents prepared
         or  submitted  for  this  transaction  such as  applications,  security
         agreements, disclosures or notes, and this Loan Agreement.

         D. Property.  Property is any property,  real,  personal or intangible,
         that  secures  my  performance  of the  obligations  of this  Loan.  E.
         Percent.  Rates and rate change limitations are expressed as annualized
         percentages.

2. PROMISE TO PAY. For value  received,  I promise to pay you or your order,  at
your address,  or at such other location as you may designate,  amounts advanced
from  time to time  under the terms of this  Loan  Agreement  up to the  maximum
outstanding principal balance of $2,000,000.00  (Principal),  plus interest from
the date of disbursement, on the unpaid outstanding Principal balance until this
Loan Agreement matures or this obligation is accelerated. I may borrow up to the
Principal amount more than one time.

3.  ADVANCES.  Advances  under this Loan  Agreement  are made  according  to the
following terms and conditions.

         A.  Requests  for  Advances.  My requests  are a warranty  that I am in
         compliance  with all the Loan  documents.  When  required  by you for a
         particular  method of advance,  my requests for an advance must specify
         the  requested  amount  and  the  date  and  be  accompanied  with  any
         agreements,  documents,  and instruments that you require for the Loan.
         Any payment by you of any check,  share  draft or other  charge may, at
         your option, constitute an advance on the Loan to me. All advances will
         be made in United  States  dollars.  I will  indemnify you and hold you
         harmless  for  your  reliance  on any  request  for  advances  that you
         reasonably  believe to be genuine.  To the extent  permitted  by law, I
         will  indemnify  you and hold you harmless  when the person  making any
         request  represents that I authorized this person to request an advance
         even when this person is unauthorized or this person's signature is not
         genuine.

         I or anyone I authorize to act on my behalf may request advances by the
         following methods.
         (1) I make a request in person.
         (2) I make a request by phone.

         B.  Advance  Limitations.  In  addition  to any other Loan  conditions,
         requests  for,  and access to,  advances  are subject to the  following
         limitations.

         (1)  Obligatory  Advances.  You will make all Loan advances  subject to
         this Agreement's terms and conditions.

         (2) Advance  Amount.  Subject to the terms and conditions  contained in
         this Loan  Agreement,  advances  will be made in  exactly  the amount I
         request.

         (3) Cut-Off Time. Requests for an advance received before 02:00 PM will
         be made on any day that you are open for business, on the day for which
         the advance is requested.

<PAGE>

         (4)  Disbursement  of Advances.  On my fulfillment of this  Agreement's
         terms and  conditions,  you will  disburse  the advance into my account
         number ON REQUEST.

         (5) Credit Limit.  I understand  that you will not  ordinarily  grant a
         request for an advance that would cause the unpaid principal of my Loan
         to be greater than the Principal limit. You may, at your option,  grant
         such a request without obligating yourselves to do so in the future.

         (6) Records.  Your records will be conclusive evidence as to the amount
         of  advances,  the Loan's  unpaid  principal  balances  and the accrued
         interest.

 4. INTEREST.  Interest will accrue on the unpaid Principal balance of this Loan
 Agreement at the rate of 4.75 percent (Interest Rate) until July 1, 2003, after
 which time it may change as described in the Variable Rate subsection.

     A. Interest After Default. If you declare a default under the terms of this
     Loan,  including  for failure to pay in full at maturity,  you may increase
     the Interest Rate payable on the outstanding Principal balance of this Loan
     Agreement. In such event, interest will accrue on the outstanding Principal
     balance at 18.000 percent until paid in full.

     B. Maximum  Interest  Amount.  Any amount assessed or collected as interest
     under the terms of this Loan Agreement or obligation will be limited to the
     Maximum Lawful Amount of interest  allowed by state or federal law. Amounts
     collected in excess of the Maximum  Lawful  Amount will be applied first to
     the unpaid Principal balance. Any remainder will be refunded to me.

     C.  Statutory  Authority.  The amount  assessed or  collected  on this Loan
     Agreement is authorized by the Florida usury laws under Fla. Stat. ss. 687.

     D. Accrual.  During the scheduled term of this Loan interest  accrues using
     an Actual/360 days counting method. E. Variable Rate. The Interest Rate may
     change during the term of this transaction.

         (1) Index. Beginning with the first Change Date, the Interest Rate will
         be based on the  following  index:  For the purposes of this note,  the
         term "Prime Rate" shall mean the interest rate announced,  from time to
         time, by Mercantile Bank, at its principal office in Orlando, FL, or by
         its  corporate  successor,  as the  Prime  Rate  (which  rate is only a
         benchmark, is purely discretionary,  and is not necessarily the best or
         lowest rate charged borrowing customers of Mercantile Bank).
         The Current  Index is the most recent  index  figure  available on each
         Change  Date.  You do not  guaranty by  selecting  this  Index,  or the
         margin,  that the Interest Rate on this Loan Agreement will be the same
         rate you charge on any other  loans or class of loans you make to me or
         other  borrowers.  If this  Index  is no  longer  available,  you  will
         substitute a similar index. You will give me notice of your choice.

         (2) Change  Date.  Each date on which the  Interest  Rate may change is
         called a Change  Date.  The  Interest  Rate may change July 1, 2003 and
         daily  thereafter.

         (3) Calculation Of Change. On each Change Date, you will calculate the
         Interest Rate, which will be the Current Index plus 0.500 percent. The
         result  of  this  calculation  will be  rounded  to the  nearest  .001
         percent.  Subject to any  limitations,  this will be the Interest Rate
         until  the  next  Change  Date.  The new  Interest  Rate  will  become
         effective on each Change Date.  The Interest Rate and other charges on
         this Loan  Agreement  will  never  exceed the  highest  rate or charge
         allowed by law for this Loan Agreement.

         (4) Effect Of Variable  Rate. A change in the  Interest  Rate will have
         the following  effect on the payments:  The amount of the final payment
         will change.

 5.  ADDITIONAL  CHARGES. As additional  consideration,  I agree to pay, or have
     paid, these additional fees and charges. A. Nonrefundable Fees and Charges.
     The following  fees are earned when collected and will not be refunded if I
     prepay this Loan Agreement before the scheduled maturity date.

         Loan Fee.  A(n) Loan Fee fee of $10,000.00 payable from separate funds
         on or before today's date.

         Doc. Prep./Loan Maintenance.  A(n) Doc. Prep./Loan Maintenance fee of
         $188.00 payable from separate funds on or before today's date.

 I  understand  and agree that some  payments  to third  parties as part of this
 transaction  may also  involve  money  retained  by you or paid  back to you as
 commissions or other remuneration.

 6. REMEDIAL CHARGES.  In addition to interest or other finance charges, I agree
 that I will pay  these  additional  fees  based on my  method  and  pattern  of
 payment.  Additional  remedial charges may be described  elsewhere in this Loan
 Agreement.

     A. Late  Charge.  If a payment is more than 10 days late, I will be charged
     5.000 percent of the Unpaid Portion of Payment. I will pay this late charge
     promptly but only once for each late payment.

     B.  Returned  Check  Charge.  I agree to pay a fee not to exceed $29.00 for
     each check,  negotiable  order of withdrawal or draft I issue in connection
     with this Loan that is returned because it has been dishonored.

 7. PAYMENT.  I agree to pay this Loan Agreement on demand,  but if no demand is
 made, I agree to pay all accrued interest on the balance  outstanding from time
 to time in regular  payments  beginning July 31, 2003,  then on the same day of
 each month thereafter. Any payment scheduled for a date falling beyond the last
 day of the month,  will be due on the last day.  A final  payment of the entire
 unpaid outstanding balance of Principal and interest will be due June 30, 2005.
 Payments  will be rounded to the nearest  $.01.  With the final  payment I also
 agree  to pay any  additional  fees or  charges  owing  and the  amount  of any
 advances you have made to others on my behalf. Payments scheduled to be paid on
 the 29th, 30th or 31st day of a month that contains no such day will,  instead,
 be made on the last day of such month.  Interest payments will be applied first
 to any  charges I owe other  than late  charges,  then to  accrued,  but unpaid
 interest, then to late charges. Principal payments will be applied first to the
 outstanding  Principal balance, then to any late charges. If you and I agree to
 a different  application  of payments,  we will  describe our agreement on this
 Loan Agreement. The actual amount of my final payment will depend on my payment
 record.

 8.  PREPAYMENT.  I may  prepay  this Loan in full or in part at any  time.  Any
 partial  prepayment will not excuse any later scheduled payments until I pay in
 full.

 9. LOAN  PURPOSE.  The  purpose of this Loan is  RENEWAL  OF LOAN  #5600002572,
 ORIGINALLY FOR WORKING CAPITAL LINE OF CREDIT, LAST DATED MARCH 19, 2001 IN THE
 AMOUNT OF $2,000,000.00 FROM ACTION PRODUCTS INTERNATIONAL, INC. TO CITRUS BANK
 k/n/a MERCANTILE BANK.

<PAGE>

 10.  SECURITY.  This Loan is  secured by  Property  described  in the  SECURITY
 AGREEMENT  section  of this Loan  Agreement  and by the  following,  previously
 executed,  security  instruments or agreements:  COMMERCIAL  SECURITY AGREEMENT
 DATED MARCH 19, 2001 ON ALL  INVENTORY,  CHATTEL  PAPER , DEPOSITS AND ACCOUNTS
 AND ALLL  PROCEEDS  THEREOF;  WHETHER  ANY OF THE  FOREGOING  IS  OWNED  NOW OR
 ACQUIRED  LATERA;  ALL ACCESSIONS  ADDITIONS,  REPLACEMNTS,  AND  SUBSTITUTIONS
 RELATING TO ANY OF THE  FOREGOING;  ALL RECORDS OF ANY KIND  RELATING TO ANY OF
 THE  FOREGOING,  TRADEMARKS AND GOODWILL  ASSOCIATED  WITH  INVENTORY.  GRANTOR
 WARRANTS  THAT IT WILL NOT SELL,  LICENSE OR  OTHERWISE  ENCUMBER  FOR THE TERM
 THEREOF ANY TRADEMARKS OR GOODWILL,  THE SALE,  LICENSE OR EMCUMBRANCE OF WHICH
 WOULD IN ANY MANNER  INMPINGE  OR LIMIT  LENDER'S  RIGHTS AND  ABILITY TO SELL,
 LEASE,  TRANSFER OR CONVEY  INVENTORY  IN AN EVENT OF DEFAULT  SECURED BY UCC-1
 FILING  #200100067574  FILED  MARCH  28,  2001  WITH THE  SECRETARY  OF  STATE,
 TALLAHASSEE,  FLORIDA FROM ACTION PRODUCTS  INTERNATIONAL,  INC. TO CITRUS BANK
 k/n/a MERCANTILE BANK.

 11. SECURITY AGREEMENT.
     A. Secured Debts.  This Security  Agreement will secure the following debts
     (Secured  Debts),  together with all  extensions,  renewals,  refinancings,
     modifications and replacements of these debts:

         (1) Sums  Advanced  under the terms of this  Loan  Agreement.  All sums
         advanced  and  expenses  incurred  by you  under the terms of this Loan
         Agreement.

     B. Security Interest.  To secure the payment and performance of the Secured
     Debts, I give you a security  interest in all of the Property  described in
     this Security  Agreement that I own or have  sufficient  rights in which to
     transfer an  interest,  now or in the future,  wherever  the Property is or
     will  be  located,   and  all  proceeds  and  products  from  the  Property
     (including,   but  not  limited  to,  all  parts,   accessories,   repairs,
     replacements,  improvements,  and accessions to the Property).  Property is
     all the collateral given as security for the Secured Debts and described in
     this  Security  Agreement,  and includes all  obligations  that support the
     payment  or  performance  of the  Property.  "Proceeds"  includes  anything
     acquired upon the sale, lease,  license,  exchange, or other disposition of
     the  Property;  any rights and claims  arising from the  Property;  and any
     collections  and  distributions  on account of the Property.  This Security
     Agreement  remains  in effect  until  terminated  in  writing,  even if the
     Secured Debts are paid and you are no longer  obligated to advance funds to
     me under any loan or credit agreement.

     C. Property Description. The Property subject to this Security Agreement is
     described as follows:

         (1) Specific  Property.  ALL  INVENTORY,  CHATTEL  PAPER,  DEPOSITS AND
         ACCOUNTS  AND ALL  PROCEEDS  THEREOF;  WHETHER ANY OF THE  FOREGOING IS
         OWNED NOW OR ACQUIRED LATER; ALL ACCESSIONS,  ADDITIONS,  REPLACEMENTS,
         AND SUBSTITUTIONS RELATING TO ANY OF THE FOREGOING;  ALL RECORDS OF ANY
         KIND  RELATING  TO  ANY  OF  THE  FOREGOING,  TRADEMARKS  AND  GOODWILL
         ASSOCIATED  WITH  INVENTORY.  GRANTOR  WARRANTS  THAT IT WILL NOT SELL,
         LICENSE OR  OTHERWISE  ENCUMBER FOR THE TERM HEREOF ANY  TRADEMARKS  OR
         GOODWILL, THE SALE, LICENSE OR ENCUMBRANCE OF WHICH WOULD IN ANY MANNER
         IMPINGE OR LIMIT LENDER'S RIGHTS AND ABILITY TO SELL,  LEASE,  TRANSFER
         OR CONVEY INVENORY IN A EVENT OF DEFAULT

     D. Duties Toward Property.

         (1) Protection of Secured Party's Interest.  I will defend the Property
         against any other claim.  I agree to do whatever you require to protect
         your security  interest and to keep your claim in the Property ahead of
         the  claims of other  creditors.  I will not do  anything  to harm your
         position.

         I will keep  books,  records and  accounts  about the  Property  and my
         business  in general.  I will let you examine  these and make copies at
         any  reasonable  time.  I will  prepare  any report or  accounting  you
         request which deals with the Property.

         (2) Use,  Location,  and  Protection of the  Property.  I will keep the
         Property in my  possession  and in good repair.  I will use it only for
         commercial  purposes. I will not change this specified use without your
         prior  written  consent.  You have the  right of  reasonable  access to
         inspect the Property and I will  immediately  inform you of any loss or
         damage  to the  Property.  I will  not  cause  or  permit  waste to the
         Property.

         I will keep the  Property at my address  listed in the DATE AND PARTIES
         section  unless  we agree I may  keep it at  another  location.  If the
         Property is to be used in other states, I will give you a list of those
         states.   The  location  of  the  Property  is  given  to  aid  in  the
         identification of the Property.  It does not in any way limit the scope
         of the security  interest  granted to you. I will notify you in writing
         and obtain your prior written  consent to any change in location of any
         of the Property. I will not use the Property in violation of any law. I
         will notify you in writing prior to any change in my address,  name or,
         if an organization, any change in my identity or structure.

         Until the Secured Debts are fully paid and this  Security  Agreement is
         terminated, I will not grant a security interest in any of the Property
         without  your  prior  written  consent.   I  will  pay  all  taxes  and
         assessments  levied or assessed  against me or the Property and provide
         timely proof of payment of these taxes and  assessments  upon  request.

         (3) Selling,  Leasing or  Encumbering  the  Property.  I will not sell,
         offer to sell,  lease,  or otherwise  transfer or encumber the Property
         without your prior written permission, except for Inventory sold in the
         ordinary course of business at fair market value, or at a minimum price
         established  between you and me. If I am in default under this Security
         Agreement, I may not sell the Inventory portion of the Property even in
         the  ordinary  course of  business.  Any  disposition  of the  Property
         contrary to this  Security  Agreement  will violate  your rights.  Your
         permission  to sell the Property  may be  reasonably  withheld  without
         regard to the  creditworthiness of any buyer or transferee.  I will not
         permit the  Property to be the subject of any court order  affecting my
         rights to the  Property in any action by anyone  other than you. If the
         Property  includes  chattel  paper or  instruments,  either as original
         collateral  or as proceeds of the  Property,  I will note your security
         interest on the face of the chattel paper or instruments.

     E. Authority To Perform. I authorize you to do anything you deem reasonably
     necessary to protect the  Property,  and perfect and continue your security
     interest in the Property.  If I fail to perform any of my duties under this
     Loan Agreement or any other security interest, you are authorized,  without
     notice to me, to perform the duties or cause them to be performed.
     These authorizations include, but are not limited to, permission to:

         (1) pay  and  discharge  taxes,  liens,  security  interests  or  other
         encumbrances at any time levied or placed on the Property.

         (2) pay any rents or other charges under any lease affecting the
         Property.

         (3) order and pay for the repair,  maintenance and  preservation of the
         Property.

         (4) sign,  when permitted by law, and file any financing  statements on
         my behalf and pay for  filing  and  recording  fees  pertaining  to the
         Property.

<PAGE>

         (5)  place  a note  on any  chattel  paper  indicating  your interest
         in the Property.

         (6) take any action  you feel  necessary  to  realize on the  Property,
         including performing any part of a contract or endorsing it in my name.

         (7) handle any suits or other proceedings  involving the Property in my
         name.

         (8)  prepare,  file,  and  sign  my name to any  necessary  reports  or
         accountings.

         (9) make an entry on my books  and  records  showing  the existence of
         this Agreement.

     If you perform for me, you will use reasonable  care.  Reasonable care will
     not include:  any steps necessary to preserve rights against prior parties;
     the duty to send  notices,  perform  services  or take any other  action in
     connection  with the  management of the  Property;  or the duty to protect,
     preserve or maintain any security  interest  given to others by me or other
     parties. Your authorization to perform for me will not create an obligation
     to  perform  and  your  failure  to  perform  will  not  preclude  you from
     exercising  any other rights under the law or this Loan  Agreement.  If you
     come into  actual or  constructive  possession  of the  Property,  you will
     preserve and protect the Property. For purposes of this paragraph, you will
     be in  actual  possession  of the  Property  only  when you have  physical,
     immediate   and   exclusive   control   over  the  Property  and  you  have
     affirmatively accepted that control. You will be in constructive possession
     of the  Property  only  when you have  both the  power  and the  intent  to
     exercise control over the Property.

     F. Name and Location.  My name indicated in the DATE AND PARTIES section is
     my exact legal name. I am an entity organized and registered under the laws
     of Florida.  I will provide  verification of registration and location upon
     your request.  I will provide you with at least 30 days notice prior to any
     change in my name, address, or state of organization or registration.

     G.  Perfection  of Security  Interest.  I authorize you to file a financing
     statement  covering  the  Property.  I will comply  with,  facilitate,  and
     otherwise  assist you in connection  with  obtaining  perfection or control
     over the Property for purposes of perfecting  your security  interest under
     the Uniform Commercial Code.

 12.  DEFAULT.  I  understand  that  you  may  demand  payment  anytime  at your
 discretion. For example, you may demand payment in full if any of the following
 occur:

     A. Payments. I fail to make a payment in full when due.

     B.  Insolvency  or  Bankruptcy.  I make an  assignment  for the  benefit of
     creditors or become  insolvent,  either  because my  liabilities  exceed my
     assets or I am unable to pay my debts as they become due; or I petition for
     protection under federal,  state or local bankruptcy,  insolvency or debtor
     relief laws,  or am the subject of a petition or action under such laws and
     fail to have the petition or action dismissed within a reasonable period of
     time not to exceed 60 days.

     C. Business Termination. I merge, dissolve,  reorganize, end my business or
     existence,  or a partner  or  majority  owner dies or is  declared  legally
     incompetent.

     D.  Failure to  Perform.  I fail to perform  any  condition  or to keep any
     promise or covenant of this Loan Agreement.

     E.  Other  Documents.  A  default  occurs  under  the  terms  of any  other
     transaction document.

     F. Other Agreements.  I am in default on any other debt or agreement I have
     with you.

     G. Misrepresentation. I make any verbal or written statement or provide any
     financial  information that is untrue,  inaccurate,  or conceals a material
     fact at the time it is made or provided.

     H. Judgment. I fail to satisfy or appeal any judgment against me.

     I.  Forfeiture.  The  Property  is used in a manner or for a  purpose  that
     threatens  confiscation by a legal  authority.

     J. Name  Change.  I change my name or assume  an  additional  name  without
     notifying you before making such a change.

     K. Property  Transfer.  I transfer all or a substantial part of my money or
     property.

     L. Property Value. The value of the Property declines or is impaired.

     M. Material Change. Without first notifying you, there is a material change
     in my business, including ownership, management, and financial conditions.

     N. Insecurity. You reasonably believe that you are insecure.

 13. ASSUMPTIONS.  Someone buying the Property cannot assume the obligation. You
 may declare the entire balance of the Loan Agreement to be immediately  due and
 payable  upon the  creation  of, or  contract  for the  creation  of, any lien,
 encumbrance,  or transfer of the  Property.  However,  I may sell or  similarly
 dispose of any Property that is inventory.

 14. WAIVERS AND CONSENT.  To the extent not prohibited by law, I waive protest,
 presentment for payment,  demand,  notice of acceleration,  notice of intent to
 accelerate and notice of dishonor.

     A. Additional  Waivers By Borrower.  In addition,  I, and any party to this
     Loan Agreement and Loan, to the extent permitted by law, consent to certain
     actions you may take,  and generally  waive  defenses that may be available
     based on these  actions  or based  on the  status  of a party to this  Loan
     Agreement.

          (1)  You  may  renew  or  extend  payments  on  this  Loan  Agreement,
          regardless of the number of such renewals or extensions.

          (2)  You  may  release  any  Borrower,  endorser,  guarantor,  surety,
          accommodation maker or any other co-signer.

          (3) You may release,  substitute or impair any Property  securing this
          Loan Agreement.

          (4) You, or any institution  participating in this Loan Agreement, may
          invoke your right of set-off.

          (5) You may enter into any sales,  repurchases  or  participations  of
          this Loan Agreement to any person in any amounts and I waive notice of
          such sales, repurchases or participations.

          (6) I agree that any of us signing  this Loan  Agreement as a Borrower
          is  authorized  to  modify  the terms of this  Loan  Agreement  or any
          instrument securing, guarantying or relating to this Loan Agreement.

     B. No Waiver By Lender.  Your course of dealing,  or your forbearance from,
     or delay in, the exercise of any of your rights,  remedies,  privileges  or
     right to insist upon my strict  performance of any provisions  contained in
     this Loan Agreement,  shall not be construed as a waiver by you, unless any
     such  waiver is in writing  and is signed by you.

     C. Waiver of Claims.  I waive all claims for loss or damage  caused by your
     acts or omissions where you acted reasonably and in good faith.

<PAGE>

 15. REMEDIES.  After I default,  and after you give any legally required notice
 and opportunity to cure the default,  you may at your option do any one or more
 of the following.

     A.  Acceleration.  You may make all or any part of the amount  owing by the
     terms of this Loan Agreement  immediately due.

     B.  Sources.  You may use any and all  remedies  you  have  under  state or
     federal law or in any instrument securing this Loan Agreement.

     C.  Insurance  Benefits.  You may  make a claim  for any and all  insurance
     benefits or refunds that may be available on my default.

     D.  Payments  Made On My  Behalf.  Amounts  advanced  on my behalf  will be
     immediately  due and may be added to the  balance  owing under the terms of
     this Loan  Agreement,  and accrue  interest  at the  highest  post-maturity
     interest rate.

     E.  Termination.  You may  terminate  my right to obtain  advances  and may
     refuse to make any further extensions of credit.

     F.  Set-Off.  You may use the right of set-off.  This means you may set-off
     any amount due and payable under the terms of this Loan  Agreement  against
     any right I have to receive  money from you. My right to receive money from
     you  includes  any deposit or share  account  balance I have with you;  any
     money  owed to me on an item  presented  to you or in your  possession  for
     collection or exchange;  and any repurchase  agreement or other non-deposit
     obligation.  "Any  amount  due and  payable  under  the  terms of this Loan
     Agreement"  means the total  amount  to which  you are  entitled  to demand
     payment  under the terms of this Loan  Agreement  at the time you  set-off.
     Subject to any other  written  contract,  if my right to receive money from
     you is also owned by someone who has not agreed to pay this Loan Agreement,
     your right of set-off  will apply to my interest in the  obligation  and to
     any other amounts I could withdraw on my sole request or endorsement.

     Your  right of set-off  does not apply to an  account  or other  obligation
     where my rights arise only in a representative  capacity.  It also does not
     apply to any Individual Retirement Account or other tax-deferred retirement
     account.

     You will not be liable  for the  dishonor  of any check  when the  dishonor
     occurs because you set-off against any of my accounts.  I agree to hold you
     harmless from any such claims  arising as a result of your exercise of your
     right of set-off.

     G. Assembly of Property. You may require me to gather the Property and make
     it available  to you in a  reasonable  fashion.

     H. Repossession. You may repossess the Property so long as the repossession
     does not  involve  a breach  of the  peace.  You may sell the  Property  as
     provided  by law.  You may  apply  what  you  receive  from the sale of the
     Property to your expenses,  your  attorneys' fees and legal expenses (where
     not  prohibited  by law),  and any debt I owe you. If what you receive from
     the sale of the  Property  does not satisfy the debt,  I will be liable for
     the deficiency  (where  permitted by law). In some cases,  you may keep the
     Property to satisfy the debt. Where a notice is required,  I agree that ten
     days prior written  notice sent by first class mail to my address listed in
     this Loan  Agreement  will be  reasonable  notice  to me under the  Florida
     Uniform  Commercial  Code.  If the Property is  perishable  or threatens to
     decline speedily in value, you may, without notice to me, dispose of any or
     all of the  Property  in a  commercially  reasonable  manner at my  expense
     following any commercially reasonable preparation or processing.

     If any items not otherwise  subject to this Loan Agreement are contained in
     the Property when you take  possession,  you may hold these items for me at
     my risk and you will not be liable for taking  possession  of them.  I. Use
     and Operation. You may enter upon my premises and take possession of all or
     any part of my property for the purpose of  preserving  the Property or its
     value,  so long as you do not breach the peace.  You may use and operate my
     property  for the  length of time you feel is  necessary  to  protect  your
     interest, all without payment or compensation to me.
     J. Waiver. Except as otherwise required by law, by choosing any one or more
     of these  remedies  you do not give up your right to use any other  remedy.
     You do not waive a default if you choose not to use a remedy.  By  electing
     not to use any remedy,  you do not waive your right to later  consider  the
     event a default and to use any remedies if the default  continues or occurs
     again.

 16. COLLECTION EXPENSES AND ATTORNEYS' FEES. On or after Default, to the extent
 permitted by law, I agree to pay all  expenses of  collection,  enforcement  or
 protection  of your rights and  remedies  under this Loan  Agreement.  Expenses
 include, but are not limited to, attorneys' fees of 10 percent of the Principal
 sum due or a larger  amount as the court judges as reasonable  and just,  court
 costs and other legal expenses. These expenses are due and payable immediately.
 If not paid  immediately,  these  expenses  will bear interest from the date of
 payment  until paid in full at the highest  interest rate in effect as provided
 for in the terms of this Loan Agreement.  All fees and expenses will be secured
 by the Property I have  granted to you, if any. To the extent  permitted by the
 United States  Bankruptcy  Code, I agree to pay the reasonable  attorneys' fees
 you incur to collect this Debt as awarded by any court exercising  jurisdiction
 under the Bankruptcy Code.

 17. WARRANTIES AND REPRESENTATIONS.  I make to you the following warranties and
 representations  which  will  continue  as long as this  Loan  Agreement  is in
 effect:

     A. Power. I am duly organized, and validly existing and in good standing in
     all  jurisdictions  in which I operate.  I have the power and  authority to
     enter into this  transaction  and to carry on my business or activity as it
     is now being  conducted and, as  applicable,  am qualified to do so in each
     jurisdiction in which I operate.

     B.  Authority.  The  execution,  delivery  and  performance  of  this  Loan
     Agreement and the obligation evidenced by this Loan Agreement are within my
     powers, have been duly authorized, have received all necessary governmental
     approval,  will not  violate  any  provision  of law,  or order of court or
     governmental  agency,  and will not violate any  agreement  to which I am a
     party or to which I am or any of my Property is subject.

     C. Business Name. Other than previously  disclosed in writing to you I have
     not changed my name or principal place of business within the last 10 years
     and have not used any other trade or  fictitious  name.  Without your prior
     written consent, I do not and will not use any other name and will preserve
     my existing name, trade names and franchises.

     D. Ownership of Property. I represent that I own all of the Property.  Your
     claim to the Property is ahead of the claims of any other creditor,  except
     as disclosed in writing to you prior to any advance on the Secured Debts. I
     represent  that I am the original  owner of the Property  and, if I am not,
     that I have provided you with a list of prior owners of the Property.

 18.  INSURANCE.I  understand  and agree  that any  insurance  premiums  paid to
 insurance  companies as part of this Loan Agreement will involve money retained
 by you or paid back to you as commissions or other remuneration.

     A. Property  Insurance.  I agree to keep the Property  insured  against the
     risks  reasonably  associated  with  the  Property.  I will  maintain  this
     insurance in the amounts you require.  This  insurance  will last until the
     Property is released from this Loan  Agreement.  I may choose the insurance
     company, subject to your approval, which will not be unreasonably withheld.

<PAGE>

     I will have the  insurance  company name you as loss payee on any insurance
     policy. I will give you and the insurance  company  immediate notice of any
     loss.  You may  apply the  insurance  proceeds  toward  what is owed on the
     Secured Debts.  You may require added security as a condition of permitting
     any insurance proceeds to be used to repair or replace the Property.

     If you acquire the Property in damaged condition, my right to any insurance
     policies and proceeds will pass to you to the extent of the Secured  Debts.
     I will immediately  notify you of cancellation or termination of insurance.
     If I fail to keep the Property insured, you may obtain insurance to protect
     your interest in the  Property.  This  insurance may include  coverages not
     originally  required  of me, may be  written by a company  other than one I
     would choose,  and may be written at a higher rate than I could obtain if I
     purchased the insurance.

     B.  Prepayment.  If I prepay in full or if I default and you demand payment
     of the unpaid balance,  I may be entitled to a partial refund credit of any
     prepaid,  unearned insurance premiums. This refund may be obtained from you
     or from  the  insurance  company  named  in my  policy  or  certificate  of
     insurance.

 19.  FINANCING  STATEMENT.  You may file a  financing  statement  covering  the
 Property that does not contain my signature, where permitted by law.

 20. APPLICABLE LAW. This Loan Agreement is governed by the laws of Florida, the
 United  States  of  America  and to the  extent  required,  by the  laws of the
 jurisdiction  where the  Property  is located.  In the event of a dispute,  the
 exclusive  forum,  venue and place of jurisdiction  will be in Florida,  unless
 otherwise required by law.

 21. JOINT AND INDIVIDUAL  LIABILITY AND  SUCCESSORS.  My obligation to pay this
 Loan is  independent  of the obligation of any other person who has also agreed
 to pay it. You may sue me alone,  or anyone else who is obligated on this Loan,
 or any number of us together,  to collect this Loan. Extending this Loan or new
 obligations under this Loan, will not affect my duty under this Loan and I will
 still be obligated to pay this Loan.  The duties and benefits of this Loan will
 bind and benefit the successors and assigns of you and me.

 22.  AMENDMENT,  INTEGRATION AND  SEVERABILITY.  This Loan Agreement may not be
 amended or modified by oral  agreement.  No amendment or  modification  of this
 Loan Agreement is effective  unless made in writing and executed by you and me.
 This Loan Agreement is the complete and final  expression of the agreement.  If
 any provision of this Loan Agreement is  unenforceable,  then the unenforceable
 provision  will  be  severed  and  the  remaining   provisions  will  still  be
 enforceable.

 23.  INTERPRETATION.  Whenever used,  the singular  includes the plural and the
 plural includes the singular. The section headings are for convenience only and
 are not to be used to interpret or define the terms of this Loan Agreement.

 24.  NOTICE,  FINANCIAL  REPORTS AND  ADDITIONAL  DOCUMENTS.  Unless  otherwise
 required  by law,  any notice will be given by  delivering  it or mailing it by
 first  class mail to the  appropriate  party's  address  listed in the DATE AND
 PARTIES section,  or to any other address designated in writing.  Notice to one
 party will be deemed to be notice to all parties.  I will inform you in writing
 of any change in my name,  address  or other  application  information.  I will
 provide you any financial  statement or information you request.  All financial
 statements and information I give you will be correct and complete.  I agree to
 sign, deliver, and file any additional documents or certifications that you may
 consider necessary to perfect, continue, and preserve my obligations under this
 Loan and to confirm your lien status on any Property. Time is of the essence.

 25. CREDIT  INFORMATION.  I agree to supply you with whatever  information  you
 reasonably feel you need to decide whether to continue this Loan. You will make
 requests  for this  information  without  undue  frequency,  and  will  give me
 reasonable time in which to supply the information.

 26. ERRORS AND OMISSIONS.  I agree,  if requested by you, to fully cooperate in
 the correction,  if necessary,  in the reasonable  discretion of you of any and
 all loan closing documents so that all documents  accurately  describe the loan
 between  you  and  me.  I  agree  to  assume  all  costs  including  by  way of
 illustration  and not  limitation,  actual  expenses,  legal fees and marketing
 losses for failing to reasonably  comply with your requests  within thirty (30)
 days.

 27.  SIGNATURES.  By signing under seal, I agree to the terms contained in this
 Loan Agreement. I also acknowledge receipt of a copy of this Loan Agreement.

     BORROWER:

         ACTION PRODUCTS INTERNATIONAL, INC.

              By /s/ RONALD S. KAPLAN (Seal)
                 ------------------------------------------
                 RONALD S. KAPLAN, CHIEF EXECUTIVE OFFICER

<PAGE>

MERCANTILE BANK                                                   Loan Agreement

[X]      Line  of  Credit  -  (hereinafter  sometimes  "Loan  #[omitted]  in the
         principal amount of $2,000,000.00 the terms and conditions of which are
         more fully described  hereinafter and in the Promissory Note made or to
         be made by Borrower to Bank.  The proceeds of this Loan  #[omitted] are
         to be used by Borrower solely for working capital.

[ ]

         Each of the above loans and the Promissory  Note(s)  executed  pursuant
thereto is  hereinafter  jointly  and  severally  sometimes  referred  to as the
"Note(s)".

         Relying upon the  representations and warranties and the agreements and
covenants  herein  contained,  the Bank is  willing  to make the  Loan(s) to the
Borrower  upon  the  terms  and  subject  to  the  conditions  hereinbefore  and
hereinafter set forth:

1. SECURITY FOR LOAN: As security for the Loan(s), Borrower hereby grants a lien
on and/or security interest in and shall deliver to Bank appropriate  mortgages,
assignments  of  leases,  rents  and  profits,  security  agreements,  financing
statements  and other  security  documents in form  satisfactory  to Bank in the
following collateral ("Collateral"):

All inventory,  chattel paper,  deposits and accounts and all proceeds  thereof;
whether any of the  foregoing is owned now or acquired  later;  all  accessions,
additions,  replacements, and substitution relating to any of the foregoing; all
records of any kind relating to any of the  foregoing.  Trademarks  and Goodwill
Associated with Inventory.  Grantor  warrants that it will not sell,  license or
otherwise  encumber for the term hereof any  trademarks  or goodwill,  the sale,
license or  encumbrance  of which would in any manner  impinge or limit Lender's
rights and ability to sell,  lease,  transfer or convey inventory in an Event of
Default.

[ ]      2. CONSTRUCTION  LOANS: If checked here , additional terms,  conditions
and covenants of this Agreement are described in Schedule AA attached hereto.

3. REPRESENTATIONS AND WARRANTIES: The Borrower represents and warrants that:

a.       Organization:  Borrower is duly organized, validly existing and in good
         standing  under the laws of the State of Florida and has power to carry
         on the business in which it is engaged.  The obtaining and  performance
         of the Loan(s) has been duly authorized by all necessary  action of the
         Borrower.

b.       Financial Condition: All balance sheets,  financial statements,  profit
         and loss statements,  and all other information heretofore furnished to
         the  Bank are  true  and  correct  and  fairly  reflect  the  financial
         condition of the Borrower and its subsidiaries, if any, as of the dates
         thereof,  including all  contingent  liabilities of every type and that
         the financial condition as stated in the financial  statements provided
         to Bank has not changed  materially  and  adversely  since the dates of
         such documents.

c.       Pending  Litigation:  To the best  knowledge of Borrower,  there are no
         actions, suits or proceedings pending, or to the knowledge of Borrower,
         threatened:  (i)  involving  the  validity  or  enforceability  of this
         Agreement  or any of  the  documents  evidencing  and/or  securing  the
         Loan(s) ("Loan Documents");  or (ii) involving the priority of any lien
         created by, or granted pursuant to, any of the Loan Documents; or (iii)
         against or affecting the Borrower, or the Collateral.

d.       Violation of Other Agreements:  The execution of this Agreement and the
         Note(s) and the performance of the Borrower  pursuant to this Agreement
         and the Note(s) does not and will not (i) violate any  provision of law
         or its  organizational  documents,  or  (ii)  result  in a  breach  of,
         constitute a default under, require any consent under, or result in the
         creation  of any lien,  charge,  or  encumbrance  upon any  property of
         Borrower pursuant to any instrument, order, or other agreement to which
         Borrower   is  a   party   or   by   which   Borrower,   any   of   its
         partners/members/shareholders  (as  applicable)  as such, or any of its
         property is bound.

e.       Authority:  All  licenses,   permits,   authorizations,   consents  and
         approvals of all governmental bodies, commissions or agencies, State or
         Federal,  necessary to the making or validity of this  Agreement or the
         Note(s) have been obtained by the Borrower.

f.       Asset  Ownership:  The Borrower has good and marketable title to all of
         the properties and assets reflected on the balance sheets and financial
         statements  supplied to Bank by Borrower,  and that all such properties
         and assets are free and clear of mortgages,  pledges,  liens,  charges,
         and all  other  encumbrances,  except  as  otherwise  disclosed  by the
         financial statements submitted to the Bank.

g.       Discharge of Liens and Taxes: The Borrower has, and where pertinent has
         caused each subsidiary, to duly file, pay and/or discharge all taxes or
         other  claims which may become a lien on any of its property or assets,
         except to the extent that such items are being appropriately  contested
         in good faith and an adequate  reserve for the payment thereof is being
         maintained.

<PAGE>

h.       Regulation U: None of the proceeds of the Loan(s) made pursuant to this
         Agreement  shall be used  directly  or  indirectly  for the  purpose of
         purchasing or carrying any stock in violation of any of the  provisions
         of  Regulation  U of the  Board of  Governors  of the  Federal  Reserve
         System.

i.       ERISA:   Each  employee  benefit  plan,  as  defined  in  the  Employee
         Retirement  Income  Security Act of 1974  ("ERISA")  maintained  by the
         Borrower or by any  subsidiary  of the Borrower  meets,  as of the date
         hereof,  the minimum  funding  standards  of Section 302 of ERISA,  all
         applicable  requirements  of ERISA and of the Internal  Revenue Code of
         1954, as amended,  and no "Reportable  Event" (as defined by ERISA) has
         occurred with respect to any such plan.

j.       Hazardous  Materials:  To the  best of  Borrower's  knowledge,  (i) the
         Collateral  does not contain any  underground  storage tank, is not and
         has not been used for the disposal of any property or materials, and is
         not and has not been used in violation of any federal,  state, or local
         health, safety, or environmental law, ordinance, or regulation; (ii) no
         proceeding  has been  commenced,  or notice  received,  concerning  any
         alleged violation of any such law,  ordinance or regulation;  and (iii)
         the Collateral is free of hazardous or toxic wastes, contaminants, oil,
         radioactive or other materials the removal of which is required, or the
         maintenance  of which is  restricted,  prohibited or penalized,  by any
         federal,  state or local agency,  authority,  or governmental  unit, or
         which may be disposed of or  transported  lawfully  only  pursuant to a
         special  permit  or  by  or  at  a  governmentally   approved  facility
         ("Prohibited Materials").

k.       Solvency:  (i)  Borrower  is solvent as of the  effective  date of this
         Agreement;  (ii) the pledge of the Collateral as contemplated herein to
         the Bank will not render  Borrower  insolvent;  (iii) Borrower has made
         adequate  provision for the payment of all of its creditors  other than
         the Bank;  and (iv) neither the Borrower nor any  guarantor has entered
         into this transaction to provide preferential  treatment to the Bank or
         any other creditor of the Borrower or any guarantor in  anticipation of
         seeking relief under the Bankruptcy Code.

4. AFFIRMATIVE  COVENANTS:  The Borrower  covenants and agrees that,  unless the
Bank shall otherwise consent in writing, the Borrower shall:

a.
         Business  Continuity:  Conduct its business in  substantially  the same
         manner and in substantially the same areas as such
         business is now and has  heretofore  been carried on and  conducted and
         maintain executive personnel and management reasonably  satisfactory to
         Bank.

b.       Existence  and  Properties:  Reserve  and keep in force  all  licenses,
         permits,  and  franchises  necessary  for  the  proper  conduct  of its
         business  and  duly  pay and  discharge  all  taxes,  assessments,  and
         governmental  charges  upon  Borrower  or against  Borrower's  property
         before the date on which penalties  attach  thereto,  unless and to the
         extent  only  that the same  shall be  contested  in good  faith and by
         appropriate  proceedings  and  shall  maintain,  preserve  and keep its
         property and assets in good repair, working order and condition, making
         all needed replacements,  additions, improvements and renewals thereto,
         to the extent allowed by this Agreement.

c.       Access to Books and  Records:  Allow the Bank,  or its  agents,  during
         normal  business  hours to have  access to the books,  records and such
         other  documents of the Borrower and its  subsidiaries,  if any, as the
         Bank shall reasonably require, and allow Bank to make copies thereof at
         Bank's expense.

d.       Access to Property: The Bank and its agents shall at all times have the
         right of entry and free access to the property securing the Loan(s) for
         the purposes of inspecting and/or auditing such Collateral.

e.       Insurance: (i) Maintain adequate insurance coverage,  including but not
         limited to, insurance  against loss by fire, and other hazards included
         in the term  "extended  coverage",  workmen's  compensation  insurance,
         comprehensive  general  public  liability  insurance  with  Bank  as an
         additional insured, and business interruption or rent loss insurance in
         such amounts and with such  companies as the Bank may from time to time
         reasonably  require,  upon all  Collateral,  and shall pay all premiums
         therefor  when due. All such  insurance  policies  shall contain a long
         form loss payee clause (such as the New York Standard Mortgagee Clause)
         in favor  of the Bank and  shall  provide  that no such  policy  may be
         canceled without 10 days prior written notice to the Bank.

         (ii) In the event of loss, the Borrower shall give immediate  notice to
         the Bank, which may make proof of loss. Each insurance company shall be
         directed to make payment for such loss directly to the Bank (instead of
         jointly to Borrower and Bank),  and any such insurance  proceeds or any
         part  thereof  may be  applied  by the  Bank in its  discretion  to the
         Loan(s) or for the repair or restoration of the property.  In the event
         the Bank shall elect to apply the insurance  proceeds to the Borrower's
         Loan(s),  such  application  may be made at Bank's  discretion  to that
         portion  last  falling due or in such other manner as the Bank may deem
         desirable.

f.       Leases:  Keep and perform all  covenants  to be performed by the lessor
         under any and all  leases of the  Collateral  or any part  thereof  and
         shall at all times do all things  necessary and  appropriate  to compel
         performance by each other party to the instruments  listed  hereinbelow
         of all  obligations,  covenants and  agreements of such other party and
         shall not, without the written consent of the Bank,  cancel,  surrender
         or modify or  permit  the  cancellation  of any  lease  (including  any
         equipment lease),  rental  agreement,  management  contract,  franchise
         agreement, construction contract, technical services agreement or other
         contract,  license or permit now or hereafter affecting the Collateral.
         Upon  demand,  the  Borrower  will  furnish the Bank with copies of any
         lease of the Collateral or any part thereof.

g.       Perfection: Upon request by Bank, execute and deliver to Bank financing
         statements  or other  documents in form and substance  satisfactory  to
         Bank to perfect or continue any and all liens and security interests of
         Bank in the  Collateral,  including,  but  not  limited  to,  financing
         statements,  continuation  statements,  new or replacement notes and/or
         mortgages  and   agreements   supplementing,   extending  or  otherwise
         modifying the Note(s), this Agreement,  and/or any mortgage or security
         agreement,  and  certificates  as to the  amount  of  the  indebtedness
         evidenced by the  supplementing,  extending or otherwise  modifying the
         Note(s), this Agreement, and/or any mortgage or security agreement, and
         certificates  as to the  amount of the  indebtedness  evidenced  by the
         Note(s).

<PAGE>

         h. Environmental Indemnification:  If checked here , Borrower agrees to
         indemnify  and hold Bank  harmless  from and against,  and to reimburse
         Bank with  respect to, any and all claims,  demands,  causes of action,
         losses, damages, liabilities,  costs and expenses (including reasonable
         attorney's  fees and court  costs) of any and every kind or  character,
         known or unknown, fixed or contingent,  asserted against or incurred by
         Bank at any time and from time to time by reason of or  arising  out of
         any violation of any Environmental Law (as hereinafter defined) and any
         and  all  matters  arising  out  of  any  act,   omission,   event,  or
         circumstance  (including without limitation the presence on, generation
         at,  disposal of at, or release from the  Collateral  of any  hazardous
         substance or waste), regardless of whether the act, omission, event, or
         circumstance  constituted a violation of any  Environmental  Law at the
         time of its existence or occurrence.  The terms  "hazardous  substance"
         and "release"  shall have the meanings  specified in the  Comprehensive
         Environmental  Response Compensation and Liability Act ("CERCLA"),  and
         the term  "disposal"  shall have the meaning  specified in the Resource
         Conservation  and Recovery Act of 1980  ("RCRA");  provided,  if either
         CERCLA or RCRA is  amended  so as to  broaden  the  meaning of any term
         defined  thereby,  such broader  meaning shall apply  subsequent to the
         effective date of such amendment;  and provided further,  to the extent
         the  laws of the  State of  South  Carolina  establish  a  meaning  for
         "hazardous substance," "release," "solid waste," or "disposal" which is
         broader  than that  specified  in either  CERCLA or RCRA,  such broader
         meaning shall apply. For the purposes hereof,  the term  "Environmental
         Law(s)"  shall mean all federal,  state,  or local health,  safety,  or
         environmental laws, ordinances, and regulations,  requiring the removal
         of, or otherwise regulating the maintenance,  storage,  transportation,
         or disposal of any  hazardous  substance or any other toxic  substances
         (including  waste),  asbestos,  contaminants,  petroleum  products,  or
         radioactive  materials.  The provisions of this paragraph shall survive
         the  satisfaction  of the Note and any  mortgage  securing the Note and
         shall continue thereafter in full force and effect.

i.       Bank  Expenses:  Whether or not the Loan is made,  or all Loan proceeds
         disbursed hereunder, the Borrower agrees to pay and shall hold the Bank
         harmless from all expenses  reasonable in amount  incurred by the Bank,
         or by the  Borrower  in  order  to meet  the  Bank's  requirements,  in
         connection with the Loan(s).

5. NEGATIVE  COVENANTS:  The Borrower covenants and agrees that, unless the Bank
shall otherwise consent in writing, the Borrower shall not:

a.       Guarantys: Guarantee or otherwise become responsible for obligations of
         any other person,  corporation, or entity excepting for the endorsement
         of negotiable instruments by the Borrower or any subsidiary, if any, in
         the ordinary course of business for collection.

b.       Encumbrances:  Create, assume, or permit to exist any mortgage, pledge,
         lien,  charge or other  encumbrance  on any of its assets,  whether now
         owned  or  hereafter  acquired,  other  than:  (i)  security  interests
         required  by this  Agreement;  (ii) liens for taxes  contested  in good
         faith; (iii) liens accruing by law for employee benefits; (iv) existing
         liens as  disclosed  by  Borrower to Bank in the  financial  statements
         submitted to the Bank.

c.       Prepayment  of other Debt:  Retire any long-term or funded debt entered
         into  prior to the date of this  Agreement  at a date in advance of its
         legal obligation to do so.

d.       Capital Structure: If Borrower is a corporation,  (i) pay any dividends
         on any of its capital stock (other than stock dividends) nor (ii) alter
         or amend its capital structure or that of its subsidiaries.

e.       Distributions:  Make  any  distribution  of  cash  or  property  to its
         shareholders,  members  or  partners,  as  applicable,  or  permit  the
         withdrawal of assets from Borrower's business.

f.       Change of Name/Principal Place of Business: Change its name or any name
         in which it does  business,  or move its  principal  place of  business
         without giving written notice thereof to Bank at least thirty (30) days
         prior thereto.

g.       Prepaid Rent: Accept any prepayment of rent or installments of rent for
         more than two months in advance  without the prior  written  consent of
         the Bank.

h.       Prohibited  Materials:  Borrower covenants that it shall not permit any
         Prohibited  Materials  to be brought on to any real  property  owned by
         Borrower,  or if so brought or found located  thereon,  such Prohibited
         Materials shall be immediately removed,  with proper disposal,  and all
         required   environmental   cleanup   procedures   shall  be  diligently
         undertaken   pursuant  to  all   applicable   laws,   ordinances,   and
         regulations.   Borrower's   obligations  hereunder  shall  survive  any
         foreclosure of the Collateral securing the Loan(s).

i.       Transfers:  Sell,  transfer  or  convey  all  or  any  interest  in the
         Collateral,   or  sell,  transfer,   assign  or  convey  any  stock  or
         partnership/membership interests in the Borrower or permit or allow any
         sale,   transfer,   assignment   or   conveyance   of  any   stock   or
         partnership/membership interests in the Borrower.

6.       REPORTING REQUIREMENTS:  For so long as any balance(s) remain unpaid on
         the Note(s) the Borrower  shall at all times comply with the  following
         unless the Bank shall otherwise consent in writing:

[X]      a.  Annual Statements

[ ]      (1)  Deliver to the Bank  within 60 days  after the end of each  fiscal
         year,  Borrower's balance sheet and income statement for the year ended
         , audited by a certified public accountant satisfactory to Lender.

[ ]      (2)  Deliver to the Bank  within 30 days  after the end of each  fiscal
         year of the Borrower, a consolidated ( and consolidating) balance sheet
         and a consolidated ( and consolidating)  statement of income (loss) and
         surplus (deficit),  together with supporting  Schedules;  unaudited but
         certified  as to  their  correctness  by the  Borrower  or a  principal
         financial  officer of the  Borrower,  if a corporate  Borrower,  all in
         reasonable  detail,  prepared in  accordance  with  generally  accepted
         accounting  principles  applied on a consistent  basis with that of the
         preceding year and showing the financial  condition of the Borrower and
         its  subsidiaries,  if any, at the close of the year and the results of
         operations  of the Borrower and its  subsidiaries,  if any,  during the
         year.

[ ]      b. Accountant's  Certification:  Deliver to the Bank a certification by
         Borrower's  independent certified public accountant that Borrower is in
         full compliance with this Agreement.

[X]      c. Unaudited  Statements:  Deliver to the Bank within 30 days after the
         end of each fiscal quarter,  Borrower's balance -- sheet and profit and
         loss statement for the period ended,  review by a  certificated  public
         accountant satisfactory to Lender.

[ ]      d. Non-Default Certificate: Borrower shall deliver a certificate signed
         by the  Borrower  or if a corporate  Borrower by a principal  financial
         officer of the  Borrower  to the effect  that no Default  nor any event
         which,  upon notice or lapse of time or both,  would  constitute such a
         Default, has occurred.

[ ]      e. Reports and Proxies:  Borrower shall promptly deliver to Bank a copy
         of all financial  statements,  reports,  notices, and proxy statements,
         sent  by  the  Borrower  or  any  of  its  subsidiaries,   if  any,  to
         stockholders,  and all regular or periodic reports required to be filed
         by Borrower by any governmental agency or authority.

<PAGE>

[X]      f. Other Financial  Information:  Borrower shall promptly  deliver such
         other  information  regarding  the  operation,  business  affairs,  and
         financial condition of the Borrower or any of its subsidiaries, if any,
         which the Bank may reasonably request.

         g. Additional  Requirements.  Borrowing Base reports  accompanied  with
         certification  are required  Monthly.  Inventory  Agings Report will be
         required Quarterly accompanying the 10Q Statement.

         h.  Working  Capital  Requirements.  Borrower  shall  comply  with  the
         following working capital ratio requirements:

         Current  Ratio.  Maintain a Current  Ratio in excess of 1.500 to 1.000.
         The term "Current Ratio" means  Borrower's total Current Assets divided
         by Borrower's total Current Liabilities. This liquidity ratio should be
         maintained at all times and may be evaluated at any time.

         Other Requirements. Maintain a Maximum Debt / Worth Ratio of the lesser
         of or equal to 1.750 to 1.000.  The Ratio  "Maximum Debt / Worth" means
         Borrower's Total  Liabilities  divided by Borrower  Tangible Net Worth.
         This  leverage  ratio  should  be  maintained  at all  times and may be
         evaluated at any time.

         i.  Loan  Proceeds.  Use all Loan  proceeds  soledy  for the  following
         specific  purposes:  Advances  are to be  limited  to  85% of  eligible
         Account Receivable and 50% of eligible inventory  (ineligible  Accounts
         Receivable  consist of any  receivables  exceeding  120 days of initial
         invoice  date  or  foreign   accounts,   intercompany   or   affiliated
         receivables, poor quality credit receivables or other receivables which
         is the sole discretion of Mercantile Bank do not constitute  acceptable
         collateral;  Ineligible inventory consists of obsolete inventory,  slow
         moving  inventory,  inventory  in  transit  in excess  of  $400,000.00,
         fabricated parts inventory, consigned inventory, supplies and packaging
         inventory,  inventory subject to any prior security interest, inventory
         not  located at  Borower'  premises  in Ocala,  Florida,  inventory  in
         qualified public warehousing facilities if any, and any other inventory
         which is the sole  discretion  of Mercantile  Bank does not  constitute
         acceptable collateral).

All financial  reports  required to be provided  under this  Agreement  shall be
prepared in accordance with GAAP,  applied on a consistent  basis, and certified
by Borrower as being true and correct.

7. EVENTS OF DEFAULT: A "Default" shall be the occurrence or existence of any of
the following events or conditions and the continuance thereof for either:

         (i) the specific period of time, if any, herein  specified with respect
         to such event or condition;

         (ii) a period of five (5) days  after  written  notice  thereof  to the
         Borrower  from the Bank if no  period  is  specified  and the  event or
         condition  is a  failure  to pay  money to the  Bank as and  when  due;
         provided  that the Bank shall not be  required to give notice more than
         twice in any twelve  (12)  month  period or at Loan  maturity;

         (iii) a period of thirty  (30) days  after  written  notice  thereof to
         Borrower if no period is specified  and the event or condition is not a
         failure to pay money  (excepting,  however,  those events or conditions
         described  below in this section as to which no right to notice or cure
         period shall exist);

provided,  however, that there shall be no obligation of the Bank to give notice
and no  right of  Borrower  to cure if the  event or  condition  is  either  the
institution of a voluntary  bankruptcy,  insolvency or receivership  action, the
giving of any  material  false or  fraudulent  representation  to the Bank,  the
failure to keep the Collateral  free and clear of consensual  liens not approved
in  writing in  advance  by the Bank or the death or legal  incompetency  of any
individual  Borrower,   any  general  partner/member  of  the  Borrower  or  any
individual guarantor of the Loan(s);

a.       Any  representation or warranty made in any of the Loan Documents shall
         prove to be false or misleading in any material respect; or

b.       Any  report,   certificate,   financial  statement  or  other  document
         furnished  in  connection  with this  Agreement  or the  Loans(s)  made
         pursuant hereto,  shall prove to be false or misleading in any material
         respect; or
c.       Failure to make  prompt  payment of any  installment  of  principal  or
         interest on the Note(s),  as and when due and payable;  or d.  Borrower
         shall  default on any other  obligation  of Borrower when due or in the
         performance of any obligation incurred for
         money borrowed; or

e.       Breach  of any  covenant,  condition,  or  agreement  made by  Borrower
         pursuant to this Agreement, the Note(s) or any Loan Documents; or

f.       Should a custodian,  as that term is defined in the Bankruptcy Code, be
         appointed  for or take  possession  of any or all of the  assets of the
         Borrower or should the Borrower  either  voluntarily  or  involuntarily
         become subject to any insolvency proceeding, proceeding to dissolve the
         Borrower,  proceeding  to  have a  receiver  appointed  or  should  the
         Borrower  make an assignment  for the benefit of  creditors,  or should
         there be an attachment,  execution, or other judicial seizure of all or
         any  portion  of  the  Borrower's  assets,  and  such  seizure  is  not
         discharged within 10 days; or

g.       Final  judgment for the payment of money shall be rendered  against the
         Borrower in excess of $_____________ and shall remain  undischarged for
         a period of 30 days,  unless such judgement and execution thereon shall
         be effectively stayed; or

h.       Dissolution  or  termination  of  the  existence  of  Borrower  or  its
         subsidiaries, if any; or

i.       The Bank should otherwise deem itself, its security interests,  if any,
         or any debt hereunder unsafe or insecure or should Bank believe in good
         faith that the prospect of payment or other  performance by Borrower is
         impaired; or

<PAGE>

j.       The  appearance  on any  survey  required  hereunder  of  easements  or
         encroachments  which have occurred  without the written approval of the
         Bank and which are not removed or  corrected  within ten (10)  business
         days after written notice thereof to the Borrower;

k.       Any court of competent  jurisdiction  (including without limitation the
         U.S.  Bankruptcy  Courts) enjoins or prohibits the Borrower or the Bank
         or either of them from  performing  under this  Agreement or any of the
         Loan  Documents,  and such  proceedings  are not  discontinued  or such
         decree is not vacated  within  forty-five  (45) days after the granting
         thereof;

l.       Any suit, or combination of suits, shall be filed against Borrower, any
         general  partner  thereof,  or any guarantor of the Loan,  which in the
         reasonable  judgment of the Bank has a substantial  likelihood of being
         determined   adversely,   and  which  if  adversely   determined  could
         reasonably be expected substantially to impair the ability of Borrower,
         any general partners thereof,  or any guarantor of the Loan, to perform
         each and every one of their respective  obligations under and by virtue
         of the Loan Documents;

m.       The  death  or  legal  incompetency  of any  individual  Borrower,  any
         individual  general partner thereof or any individual  guarantor of the
         Loan and Borrower fails to provide a substitute guarantor or substitute
         collateral acceptable to the Bank within sixty (60) days of the date of
         death.  Pending receipt of substitute  collateral or the providing of a
         substituted guarantor,  the claim shall be preserved against the estate
         of the guarantor in a matter satisfactory to the Bank;

n.       Any material adverse change (including without limitation a decrease of
         twenty-five (25%) percent or more of any guarantor's net worth from the
         amount thereof as the date hereof) in a guarantor's financial condition
         or creditworthiness.

8. REMEDIES UPON DEFAULT: In the event of the occurrence of a Default, then Bank
may at any time  thereafter,  at its  option,  take any or all of the  following
actions,  at the same or  different  times:

a.       Declare the  balance(s)  of the Note(s) to be forthwith due and payable
         in  full,  both as to  principal  and  interest,  without  presentment,
         demand,  protest,  or other notice of any kind, all of which are hereby
         expressly waived by Borrower,  anything contained herein or the Note(s)
         to the contrary notwithstanding; and/or

b.       Require the Borrower to pledge such collateral or additional collateral
         to the Bank from Borrower's  assets and properties,  the  acceptability
         and  sufficiency  of such  collateral to be determined  solely by Bank;
         and/or

c.       Take immediate  possession of any or all Collateral  including real and
         personal property, which may be granted to the Bank as security for the
         obligations of Borrower under this Agreement; and/or

d.       Exercise  such other rights and remedies as the Bank may be provided in
         the Note(s) or Loan Documents, or as provided by law.

         9. MANDATORY  ARBITRATION:  If checked here , any  controversy or claim
brought by Borrower against Bank arising out of or relating to this Agreement or
any Loan  Documents,  including  any claim  based on or arising  from an alleged
tort, shall be determined by binding  arbitration in accordance with the Federal
Arbitration Act (or if not applicable,  the applicable state law). Judgment upon
any arbitration award may be entered in any court having jurisdiction. Any party
to this  Agreement  may  bring an  action,  including  a  summary  or  expedited
proceeding,  to compel  arbitration  of any  controversy  or claim to which this
Agreement  applies  in any  court  having  jurisdiction  over such  action.  The
arbitration shall be conducted in the city of the Borrower's domicile at time of
this Agreement's execution.

         a.  Borrower and Bank shall each select an  arbitrator  within  fifteen
         (15) days of a demand for arbitration hereunder, and the arbitrators so
         chosen shall select a third arbitrator  within fifteen (15) days of the
         later  arbitrator's  selection.  If either  Borrower  or Bank  fails to
         designate its arbitrator,  or if the arbitrators chosen by Borrower and
         Bank fail to designate a third  arbitrator,  then such arbitrator shall
         be designated by the American  Arbitration  Association upon request by
         either Borrower or Bank.

         b. All  arbitration  hearings shall be commenced  within 90 days of the
         demand for  arbitration;  further,  the arbitrators  shall only, upon a
         showing  of cause,  be  permitted  to extend the  commencement  of such
         hearing for up to an additional 60 days.

         c. The  decision  of a  majority  of the  arbitrators  shall be  final,
         conclusive  and  binding  on the  parties  hereto.

         d.  Nothing  in  this  Agreement  shall  be  deemed  to (i)  limit  the
         applicability  of any  otherwise  applicable  statutes of limitation or
         repose and any waivers contained in this Agreement; or (ii) be a waiver
         by Bank of the  protection  afforded to it by 12 U.S.C.  Sec. 91 or any
         substantially  equivalent  state law;  or (iii) limit the right of Bank
         (A) to exercise self help remedies such as (but not limited to) setoff,
         or (B) to foreclose against any real or personal  property  collateral,
         or (C) to obtain from a court provisional or ancillary remedies such as
         (but  not  limited  to)  injunctive  relief  or  the  appointment  of a
         receiver. Bank may exercise such self help rights,  foreclose upon such
         property,  or obtain such  provisional  or ancillary  remedies  before,
         during or after the  pendency  of any  arbitration  proceeding  brought
         pursuant  to this  Agreement.  At Bank's  option,  foreclosure  under a
         mortgage may be accomplished by any of the following: the exercise of a
         power of sale  under  the  mortgage,  or by  judicial  sale  under  the
         mortgage, or by judicial foreclosure.

 WAIVER OF JURY TRIAL.  All of the parties to this Loan Agreement  knowingly and
 intentionally,  irrevocably and  unconditionally,  waive any and all right to a
 trial  by  jury  in any  litigation  arising  out of or  concerning  this  Loan
 Agreement or any other  related  loan  document or related  obligation.  All of
 these  parties  acknowledge  that this  section has either been  brought to the
 attention of each party's legal counsel or that each party had the  opportunity
 to do so.

10.      MISCELLANEOUS PROVISIONS:

a.       Commitment  Letter:  The terms and conditions of the commitment  letter
         from  the  Bank to the  Borrower,  if  any,  dated  ______________  are
         incorporated herein as reference as if fully set forth herein.

b.       Indirect  Means:  Any act which the Borrower is  prohibited  from doing
         shall  not be done  indirectly  through  a  subsidiary  or by any other
         indirect means.

c.       Non-Impairment:  If any  one  or  more  provisions  contained  in  this
         Agreement  or any Loan  Documents  shall be held  invalid,  illegal  or
         unenforceable in any respect, the validity, legality and enforceability
         of the remaining  provisions  contained in this  Agreement and the Loan
         Documents shall not in any way be affected or impaired thereby and this
         Agreement shall otherwise remain in full force and effect.

<PAGE>

d.       Applicable  Law: This  Agreement,  the Note(s),  and all Loan Documents
         shall be construed in  accordance  with and governed by the laws of the
         State of Florida.

e.       Waiver:  Neither  the  failure nor any delay on the part of the Bank in
         exercising  any right,  power,  or privilege  granted  pursuant to this
         Agreement, the Note(s), or any Loan Document, shall operate as a waiver
         thereof,  nor shall a single or partial  exercise  thereof preclude any
         other or further exercise or the exercise of any other right,  power or
         privilege.

f.       Modification: No modification, amendment, or waiver of any provision of
         this  Agreement,  the Note(s) or any Loan  Document  shall be effective
         unless in writing and signed by the Bank.

g.       Stamps and Fees:  The Borrower shall pay all Federal or State stamps or
         taxes, or other fees and charges,  if any,  payable or determined to be
         payable  by reason  of the  execution,  delivery  or  issuance  of this
         Agreement,  the Note(s) issued pursuant hereto or any security  granted
         to the Bank; and the Borrower agrees to indemnify and hold harmless the
         Bank against any and all liability in respect thereof.

h.       Attorney's Fees: In the event that Borrower shall default in any of its
         obligations  under this Agreement,  the Note(s),  or any Loan Document,
         and the Bank  believes it  reasonably  necessary or proper to employ an
         attorney to assist in the enforcement or collection of the indebtedness
         of Borrower to Bank or to enforce any other term or  condition  of this
         Agreement,  the Note(s), or any Loan Document, or in the event the Bank
         voluntarily  or  otherwise  shall  become  a party to any suit or legal
         proceeding  (including  a  proceeding  conducted  under the  Bankruptcy
         Code),  Borrower  agrees to pay the reasonable  attorney's fees of Bank
         and all costs that may  reasonably be incurred by Bank.  Borrower shall
         be liable for such attorney's fees and costs whether or not any suit or
         proceeding is commenced.

i.       Captions:  The  captions  provided in this Loan  Agreement  are for the
         convenience  of the reader only and shall not be used to  interpret  or
         modify the provisions of the Agreement.

j.       Remedies Cumulative/Nonwaiver. All remedies of Bank provided for herein
         or in the other Loan  Documents are cumulative and shall be in addition
         to any and all other  rights and  remedies  provided  for or  available
         under the other Loan  Documents,  at law or in equity.  The exercise of
         any right or remedy by Bank hereunder shall not in any way constitute a
         cure or waiver of default hereunder or under any of the applicable Loan
         Documents,  or  invalidate  any act  done  pursuant  to any  notice  of
         default,  or  prejudice  the Bank in the  exercise of any of its rights
         hereunder or under the Loan Documents  unless,  in the exercise of said
         rights, Bank realized all amounts owed to it under the Loan Documents.

k.       Assignment.  It is expressly recognized and agreed that Bank may assign
         this  Loan  Agreement,  the  Note,  the  Mortgage  and any  other  Loan
         Documents to any other person,  firm, or legal entity,  that all of the
         provisions thereof shall continue in full force and effect, and, in the
         event of such assignment, that Bank shall thereafter be relieved of all
         liability hereunder and any Loan advances made by any assignee shall be
         deemed made in pursuance  and not in  modification  hereof and shall be
         evidenced  by the Note and secured by the  Mortgage  and any other Loan
         Documents.

l.       No Third Party  Beneficiaries.  This Loan Agreement is made and entered
         into for the sole  protection  and benefit of Bank and Borrower,  their
         successors  and assigns,  and no third person or persons shall have any
         right to action  hereon or  rights to the Loan  funds at any time,  nor
         shall Bank owe any duty  whatsoever to any claimant for labor performed
         or  material  furnished  in  connection  with the  construction  of the
         Improvements,  or to apply any  undisbursed  portion of the Loan to the
         Improvements,  or to apply any  undisbursed  portion of the Loan to the
         payment of any such claim,  or to  exercise  any right or power of Bank
         hereunder or arising from any default by Borrower.

         IN WITNESS  WHEREOF,  the  Borrower  and the Bank have caused this Loan
Agreement to be duly executed all as of the day and year first above written.

WITNESS/ATTEST BORROWER
Signed and delivered               ACTION PRODUCTS INTERNATIONAL, INC.
in the presence of:

/s/                                By: /s/ RONALD S. KAPLAN
--------------------------------       --------------------
Print Name:                        RONALD S. KAPLAN , CHIEF EXECUTIVE OFFICER
           ---------------------

/s/
Print Name:

Signed and delivered               MERCANTILE BANK
in the presence of:

/s/                                By: /s/ ALAN SCARBORO
--------------------------------       -----------------
Print Name:                        ALAN SCARBORO, VICE PRESIDENT
           ---------------------

/s/
--------------------------------
Print Name:

<PAGE>

                                  Exhibit _____

                          Certification of Non-Default
                                    Month of

In accordance with paragraph 6.d of the Loan Agreement dated  _________,  20___,
the following information is provided:

5.g.          Net Worth: Minimum net worth of
              Actual net worth is                       $                .
                                                         ----------------

5.h.          Working Capital: Minimum working capital of
              Actual working capital is                 $                .
                                                         ----------------

6.i. Debt to Worth Ratio:
              Actual debt to worth ratio is to 1.0.

6.j.          Current Ratio: Minimum current ratio of _____ to 1.0.
              Actual current ratio is to 1.0.

6.k.          Fixed Assets Expenditures:
              Fixed asset purchases year-to-date,       $                .
                                                         ----------------

6.l.              Draws are to be limited to 75% of receivables 60 days or less.

6.m            Quarterly receivable aging reports are required.

We certify that is in  compliance  with all terms of the Loan  Agreement,  dated
including,  but not limited to, the financial covenants stated above. We know of
no  transactions  or events  which would cause an event of default or to fail to
comply with the terms of the Agreement.ESOP TRUST AGREEMENT

                                     BETWEEN

                              RSGROUP TRUST COMPANY

                                       AND

                          CLIFTON SAVINGS BANK, S.L.A.

     THIS AGREEMENT OF TRUST (the "Agreement") made effective as of August 1,
2003, by and between CLIFTON SAVINGS BANK, S.L.A., (the "Company") and RSGROUP
TRUST COMPANY, a trust company incorporated under the laws of the State of Maine
(the "Trustee"),

                                   WITNESSETH

     WHEREAS, the Company desires to establish the Clifton Savings Bank, S.L.A.
Employee Stock Ownership Plan (the "Plan"), effective as of January 1, 2003, for
the exclusive purpose of providing benefits to participants and their
beneficiaries under the Plan;

     WHEREAS, the Company desires to establish a trust (the "Trust") for the
Plan and to appoint the Trustee to serve as trustee for the Trust, effective as
of January 1, 2003;

     WHEREAS, the Trustee wishes to accept its appointment as trustee for the
Plan; and

     NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto, intending to be legally bound, hereby agree and declare as
follows:

                                    ARTICLE I
                             ESTABLISHMENT OF TRUST

     SECTION 1.1.   The Company and the Trustee hereby agree to the
establishment of a trust consisting of such sums as shall from time to time be
paid to the Trustee under the Plan and such earnings, income and appreciation as
may accrue thereon which, less payments made by the Trustee to carry out the
purposes of the Plan, are referred to herein as the "Fund". The Trustee shall
carry out the duties and responsibilities herein specified, but shall be under
no duty to determine whether the amount of any contribution by the Company or
any affiliated entity or by any participant under the Plan is in accordance with
the terms of the Plan, nor shall the Trustee be responsible for the collection
of any contributions required under the Plan.

     SECTION 1.2.   The Fund shall be held, invested, reinvested and
administered by the Trustee in accordance with the terms of the Plan and this
Agreement solely in the interest of participants and their beneficiaries under
the Plan and for the exclusive purpose of providing

                                       1
<PAGE>

benefits to participants and their beneficiaries and defraying the reasonable
expenses of administering the Plan. Except as provided in Section 4.2, no assets
of the Plan shall inure to the benefit of the Company or any affiliated entity.

     SECTION 1.3.   The Trustee shall pay benefits and expenses from the Fund
only upon the written direction of the Plan Administrator, the Committee
specified in the Plan as the fiduciary responsible for the day-to-day operation
and administration of the Plan. The Trustee shall be fully entitled to rely on
such directions furnished by the Plan Administrator and shall be under no duty
to ascertain whether the directions are in accordance with the provisions of the
Plan.

                                   ARTICLE II
                             INVESTMENT OF THE FUND

     SECTION 2.1.   In accordance with the provisions of the Plan, the Trustee
shall invest and reinvest the Fund without distinction between principal and
income in Company Stock in accordance with the terms of the Plan and this
Agreement as directed by the Company. To the extent that contributions are made
in Company Stock, the Trustee will be expected to retain such Company Stock. To
the extent contributions are made in cash or other amounts are received in cash
and are not needed to pay principal or interest on an ESOP loan, to pay
distributions to participants and their beneficiaries or to pay expenses of the
Trust, the Trustee will be expected to acquire Company Stock either from other
shareholders or directly from the Company as directed by the Company. If at the
time Company Stock is to be purchased, the Company has outstanding more than one
class of Company Stock, the Company shall direct the Trustee as to which class
of Company Stock shall be purchased.

     SECTION 2.2.   In accordance with the provisions of the Plan and except as
provided in Section 2.1, all assets of the Fund shall be invested by the Trustee
solely in Company Stock, with the exception that if the Trustee is notified by
the Company that a participant is eligible to make a diversification election,
if provided for under the Plan, whereby the participant may transfer a specified
portion of the participant's account to other investment options available under
the Plan, the Trustee shall invest such specified portion of the participant's
account in accordance with the participant's investment directions as provided
for in the Plan and Section 2.3 hereof. The Company shall notify the Trustee of
any such investment options currently available under the Plan and any other
plan sponsored by the Company which accepts such amounts and of any changes
thereto, which changes shall be effective no earlier than 60 days after delivery
of written notice to the Trustee (unless otherwise agreed to by the Trustee).

     In accordance with the provisions of the Plan, the Named Fiduciary of the
Plan is authorized to appoint an "investment manager" as defined in Section
3(38) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), to be responsible for managing one or more of the designated
investment options available under the Plan and selecting the specific
investments that comprise any such investment option. In such case, the Named
Fiduciary shall establish the investment policies and guidelines that the
investment manager shall follow when managing the investment option for the
Plan, but the Named Fiduciary shall not be responsible for the selection of the
specific investments that comprise any such investment option. The Trustee shall
follow the directions of the investment manager regarding the designated
investment option(s) for which the investment manager is assigned
responsibility.

                                       2
<PAGE>

     SECTION 2.3.   In accordance with the provisions of the Plan, each
participant who is eligible to make the diversification election described in
Section 2.2 shall direct the Trustee as to the investment of that portion of his
or her account subject to such election. All investment directions by
participants shall be timely furnished to the Trustee by the Plan Administrator,
except to the extent such directions are transmitted telephonically or otherwise
by participants and beneficiaries directly to the Trustee in accordance with
rules and procedures established and approved by the Plan Administrator and the
Trustee. In making any such investment of the assets of the Fund, the Trustee
shall be fully entitled to rely on the directions from participants that are
properly furnished to the Trustee, and the Trustee shall be under no duty to
make any inquiry or investigation with respect thereto.

     SECTION 2.4.   Subject to the provisions of Section 2.1, 2.2, and 2.3, the
Trustee shall have the authority, in addition to any authority given by law, to
exercise the following powers in the administration of the Fund:

          (a)  with respect to the diversification election described in Section
     2.2 above, to invest and reinvest all or a part of the assets of the Fund
     in the available investment options under the Plan without restriction to
     investments authorized for fiduciaries, including, without limitation on
     the amount that may be invested therein, any common, collective or
     commingled trust fund maintained by the Trustee, investment company, mutual
     fund, or other security or investment option offered by the Trustee. Any
     investment in, and any terms and conditions of, any common, collective or
     commingled trust fund available only to employee trusts which meet the
     requirements of the Code or corresponding provisions of subsequent income
     tax laws of the United States, shall constitute an integral part of this
     Agreement and the Plan;

          (b)  to dispose of all or any part of the investments, securities, or
     other property which may from time to time or at any time constitute the
     Fund and to make, execute and deliver to the purchasers thereof good and
     sufficient deeds of conveyance thereof, and all assignments, transfers and
     other legal instruments, either necessary or convenient for passing the
     title and ownership thereto, free and discharged of all trusts and without
     liability on the part of such purchasers to see to the application of the
     purchase money;

          (c)  to cause any investment of the Fund to be registered in the name
     of the Trustee or the name of its nominee or nominees or to retain such
     investment unregistered or in a form permitting transfer by delivery;
     provided that the books and records of the Trustee shall at all times show
     that all such investments are part of the Fund;

          (d)  to consult and employ any suitable agent to act on behalf of the
     Trustee and to contract for legal, accounting, clerical and other services
     deemed necessary by the Trustee to manage and administer the Fund according
     to the terms of the Plan and this Agreement;

          (e)  to pay from the Fund all taxes imposed or levied with respect to
     the Fund or any part thereof under existing or future laws, and to contest
     the validity or amount of any tax, assessment, claim or demand respecting
     the Fund or any part thereof; and

                                       3
<PAGE>

          (f)  generally to exercise any of the powers of an owner with respect
     to all or any part of the Fund.

     SECTION 2.5.   Each participant or beneficiary to whose account shares of
Company stock have been allocated shall, as a named fiduciary within the meaning
of Section 403(a)(1) of ERISA, direct the Trustee with respect to the voting
and, if applicable, tendering of shares of Company stock allocated to his or her
account, and the Trustee shall follow the directions of those participants and
beneficiaries who provide timely instructions to the Trustee. The Trustee shall
vote the shares of Company stock allocated to the accounts of participants for
whom no timely instructions have been received, and the shares of Company Stock
which have not been allocated to the accounts of participants and beneficiaries,
in the same proportion as those shares of Company stock for which instructions
were timely received, provided that the Plan requires that participants and
beneficiaries be given advance notice as to the consequences of any failure to
instruct the Trustee as to the voting of allocated shares of Company stock.

     SECTION 2.6.   Except as may be authorized by regulations promulgated by
the Secretary of Labor, the Trustee shall not maintain the indicia of ownership
in any assets of the Fund outside of the jurisdiction of the district courts of
the United States.

                                   ARTICLE III
                           DUTIES AND RESPONSIBILITIES

     SECTION 3.1.   The Trustee, Company, Named Fiduciary and Plan Administrator
shall each discharge their assigned fiduciary duties and responsibilities under
this Agreement and the Plan solely in the interest of participants and their
beneficiaries in the following manner:

          (a)  for the exclusive purpose of providing benefits to participants
     and their beneficiaries and defraying reasonable expenses of administering
     the Plan;

          (b)  with the care, skill, prudence, and diligence under the
     circumstances then prevailing that a prudent person acting in a like
     capacity and familiar with such matters would use in the conduct of an
     enterprise of a like character and with like aims;

          (c)  by selecting a range of available investment options under the
     Plan referenced in Section 2.2 so as to permit participants and
     beneficiaries to diversify their investments pursuant to Section 2.3; and

          (d)  in accordance with the provisions of the Plan and this Trust
     Agreement insofar as they are consistent with the provisions of ERISA.

     SECTION 3.2.   The Trustee shall keep full and accurate accounts of all
receipts, investments, disbursements and other transactions hereunder, including
such specific records as may be agreed upon in writing between the Company and
Trustee. All such accounts, books and records shall be open to inspection and
audit at all reasonable times by any authorized representative of the Company,
the Named Fiduciary or the Plan Administrator. Any participant or beneficiary
under the Plan may examine only those individual account records pertaining
directly to that participant or beneficiary.

                                       4
<PAGE>

     SECTION 3.3.   The Trustee shall determine the value of the Fund at such
times as are mutually agreed upon by the Trustee and the Company but in no case
less frequently than annually. The value of shares of Company Stock held in the
Fund shall be determined at their fair market value defined as their closing
market price on the relevant valuation date; provided, however, that in the
event such shares of Company Stock have no readily-ascertainable fair market
value because they are thinly-traded, at their fair value as determined in good
faith and pursuant to written procedures recommended by the Company and approved
by the Trustee as of such times as the Trustee determines to be appropriate, and
from such financial publications, pricing services, or other services or sources
as the Trustee reasonably believes appropriate. All other securities and the
value of other assets held in the Fund shall be valued by the Trustee at their
market values on the relevant valuation date under procedures established by the
Trustee. For purposes of this Section, Company Stock shall be considered "thinly
traded" if it is publicly traded on a national exchange or other generally
recognized market, but not in sufficient volume and/or with sufficient frequency
to assure prompt execution of buy and sell orders. The Trustee may seek an
opinion from an independent investment advisor or legal counsel as to whether a
given stock is "thinly traded."

     SECTION 3.4.   Within 120 days after the end of each plan year for the Plan
or within 120 days after its removal or resignation, the Trustee shall file with
the Named Fiduciary a written account of the administration of the Fund showing
all transactions effected by the Trustee with respect to the assets of the Plan
subsequent to the period covered by the last preceding account to the end of
such plan year or date of removal or resignation and all property held at its
fair market value at the end of the accounting period. Such accounting shall
show the net value of the Plan's interest in each investment option maintained
by the Trustee for the Fund and shall include financial information necessary
for the completion of the annual reports required for the Plan under ERISA. The
Named Fiduciary may approve such accounting by written notice of approval
delivered to the Trustee or by failure to express objection to such accounting
in writing delivered to the Trustee within 120 days from the date on which the
accounting is delivered to the Named Fiduciary.

     SECTION 3.5.   In accordance with the terms of the Plan, the Trustee shall
establish and maintain separate accounts in the name of each participant in
order to record all contributions by or on behalf of the participant to the Plan
and any earnings, losses and expenses attributable thereto. The Plan
Administrator shall furnish the Trustee with participant enrollment data in a
format acceptable to the Trustee identifying the name, address, social security
number, and current investment directions of each participant for whom one or
more separate accounts are to be established by the Trustee under this
Agreement. With respect to all contributions to the Plan and other amounts that
are transmitted to the Trustee, the Plan Administrator shall furnish the Trustee
with participant allocation data in a format acceptable to the Trustee
identifying each participant on whose behalf an amount is being transmitted to
the Trustee and the dollar amount to be allocated to each of the participant's
separate account under the Plan. In allocating amounts to participants' separate
accounts under the Plan, the Trustee shall be fully entitled to rely on the
participant enrollment and allocation data furnished to it by the Plan
Administrator and shall be under no duty to make any inquiry or investigation
with respect thereto.

     SECTION 3.6.   The Trustee shall, at least annually, furnish each
participant in the Plan with statements reflecting the current fair market value
of the participant's separate accounts under the Plan and all activities
occurring within such accounts during the most recent reporting

                                       5
<PAGE>

period, including Plan contributions, earnings, investment exchanges,
distributions, and withdrawals.

     SECTION 3.7.   The Trustee shall not be required to determine the facts
concerning the eligibility of any participant to participate in the Plan, the
amount of benefits payable to any participant or beneficiary under the Plan, or
the date or method of payment or disbursement. The Trustee shall be fully
entitled to rely solely upon the written advice and directions of the Plan
Administrator as to any such question of fact.

     SECTION 3.8.   Unless resulting from the Trustee's gross negligence,
willful misconduct, lack of good faith, or breach of its fiduciary duties under
this Agreement or ERISA, the Company shall indemnify and save harmless the
Trustee from, against, for and in respect of any and all damages, losses,
obligations, liabilities, liens, deficiencies, costs and expenses, including
without limitation, reasonable attorney's fees incident to any suit, action,
investigation, claim or proceedings suffered, sustained, incurred or required to
be paid by the Trustee in connection with the Plan or this Agreement.

                                   ARTICLE IV
                            PROHIBITION OF DIVERSION

     SECTION 4.1.   Except as provided in Section 4.2, at no time prior to the
satisfaction of all liabilities with respect to participants and their
beneficiaries under the Plan shall any part of the corpus or income of the Fund
be used for, or diverted to, purposes other than for the exclusive benefit of
participants or their beneficiaries, or for defraying reasonable expenses of
administering the Plan.

     SECTION 4.2.   The provisions of Section 4.1 notwithstanding, contributions
made by the Company or any affiliated entity under the Plan will be returned to
the Company or affiliated entity under the following conditions:

          (a)  If a contribution is made by mistake of fact, such contributions
     may be returned within one year of the payment of such contribution upon
     demand of the Company or affiliated entity; and

          (b)  Contributions to the Plan are specifically conditioned upon their
     deductibility under the Code. To the extent a deduction is disallowed for
     any such contribution, it will be returned within one year after the
     disallowance of the deduction upon demand of the Company or affiliated
     entity. Contributions which are not deductible in the taxable year in which
     made but are deductible in subsequent taxable years shall not be considered
     to be disallowed for purposes of this subsection; and

          (c)  Contributions to the Plan are specifically conditioned on initial
     qualification of the Plan under the Code. If a Plan is determined by the
     Internal Revenue Service to not be initially qualified, upon demand of the
     Company or affiliated entity any employer contributions made incident to
     that initial qualification will be returned within one year after the date
     the initial qualification is denied, provided that the determination of the
     Internal Revenue Service is made pursuant to an application for
     determination made by the time prescribed by law for filing the return of
     the Company or affiliated

                                       6
<PAGE>

     entity for the taxable year in which the Plan is adopted or such later date
     as is prescribed by the Secretary of the Treasury.

                                    ARTICLE V
                         COMMUNICATION WITH FIDUCIARIES

     SECTION 5.1.   Whenever the Trustee is permitted or required to act upon
the directions or instructions of the Company, any named fiduciary, any
investment manager or the Plan Administrator, the Trustee shall be entitled to
rely upon any written communication signed by any person or agent designated to
act as or on behalf of any such fiduciary. Such person or agent shall be so
designated either under the provisions of the Plan or in writing by the Company
and such authority shall continue until revoked in writing. The Trustee shall
incur no liability for failure to act on such person's or agent's instructions
or orders without written communication, and the Trustee shall be fully
protected in all actions taken in good faith in reliance upon any instructions,
directions, certifications and communications believed to be genuine and to have
been signed or communicated by the proper person.

     SECTION 5.2.   The Company shall notify the Trustee in writing of the
appointment, removal or resignation of any person designated to act as or on
behalf of the Company, the Named Fiduciary, any investment manager, or the Plan
Administrator. After such notification, the Trustee shall be fully protected in
acting upon the directions of any person designated to act as or on behalf of
any such fiduciary until the Trustee receives notice from the Company to the
contrary. The Trustee shall have no duty to inquire into the qualifications of
any person designated to act as or on behalf of the Company, the Named
Fiduciary, any investment manager or the Plan Administrator.

                                   ARTICLE VI
                             TRUSTEE'S COMPENSATION

     SECTION 6.1.   The Trustee shall be entitled to reasonable compensation for
its services as is agreed upon with the Company. The Trustee shall also be
entitled to reimbursement for all direct expenses properly and actually incurred
on behalf of the Plan. Such compensation or reimbursement shall be paid to the
Trustee out of the Fund unless paid directly by the Company.

                                       7
<PAGE>

                                   ARTICLE VII
                       RESIGNATION AND REMOVAL OF TRUSTEE

     SECTION 7.1.   The Trustee may resign at any time by written notice to the
Company which shall be effective 30 days after delivery unless prior thereto a
successor trustee shall have been appointed.

     SECTION 7.2.   The Trustee may be removed by the Company at any time upon
30 days written notice to the Trustee; such notice, however, may be waived by
the Trustee.

     SECTION 7.3.   The appointment of a successor trustee hereunder shall be
accomplished by and take effect upon the delivery to the Trustee of written
notice of the Company appointing such successor trustee, and an acceptance in
writing of the successor trustee hereunder executed by the successor so
appointed. A successor trustee may be either a corporation authorized and
empowered to exercise trust powers or one or more individuals. All of the
provisions set forth herein with respect to the Trustee shall relate to each
successor trustee so appointed with the same force and effect as if such
successor trustee had been originally named herein as the trustee hereunder. If
within 30 days after notice of resignation or removal shall have been given
under the provisions of this Article VII a successor trustee shall not have been
appointed, the Trustee or Company may apply to any court of competent
jurisdiction for the appointment of a successor trustee.

     SECTION 7.4.   Upon the appointment of a successor trustee, the Trustee
shall transfer and deliver the Fund to such successor trustee, within 30 days of
receipt of written notice of such appointment, and after reserving such
reasonable amount as it shall deem necessary to provide for its expenses in the
settlement of its account, the amount of any compensation due to it and any sums
chargeable against the Fund for which it may be liable. If the sums so reserved
are not sufficient for such purposes, the resigning or removed Trustee shall be
entitled to reimbursement for any deficiency from the successor trustee and the
Company who shall be jointly and severally liable therefor.

                                  ARTICLE VIII
                 AMENDMENT AND TERMINATION OF THE TRUST AND PLAN

     SECTION 8.1.   The Company may, by delivery to the Trustee of an instrument
in writing, terminate this Agreement at any time.

     SECTION 8.2.   The Company may partially terminate this Agreement at any
time by delivering to the Trustee a written direction to transfer such part of
the Fund as may be specified in such direction to any other trust established
for the purpose of funding benefits under the Plan or under any other plan
qualifying under Section 401 of the Code, established for the benefit of
participants in the Plan or their beneficiaries by the Company or any affiliated
entity or any successor transferee of the Company or any affiliated entity;
provided such transfer shall be in conformity with the requirements of Federal
law.

     SECTION 8.3.   This Agreement may be amended from time to time by the
Company; provided, however, that no amendment shall increase the duties or
liabilities of the Trustee

                                       8
<PAGE>

without the Trustee's consent; and, provided further, that no amendment shall
divert any part of the Fund to any purpose other than providing benefits to
participants and their beneficiaries under the Plan or defraying the reasonable
expenses of administering the Plan.

     SECTION 8.4.   If the Plan is terminated in whole or in part, the Trustee
shall distribute the Fund or any part thereof in such manner and at such times
as the Plan Administrator shall direct in writing in accordance with the
provisions of the Plan; provided, however, that the Trustee may delay
distribution of the Fund until it has received from the Company a copy of an
Internal Revenue Service determination letter addressing the Plan's
tax-qualified status upon termination, or, in lieu thereof at the Trustee's sole
discretion, an opinion from the Company's legal counsel that the Plan met all
qualification requirements at the date of termination.

                                   ARTICLE IX
                            MISCELLANEOUS PROVISIONS

     SECTION 9.1.   Unless the context of this Agreement clearly indicates
otherwise, the terms defined in the Plan shall, when used herein, have the same
meaning as in the Plan.

     SECTION 9.2.   Except as otherwise required by law in the case of any
qualified domestic relations order within the meaning of Section 414(p) of the
Code, to the extent of any offset of a Participant's benefits as a result of any
judgment, order, decree or settlement agreement provided in Section
401(a)(13)(C) of the Code, or any federal tax levy made pursuant to Section 6331
of the Code, or except as otherwise provided in the Plan with respect to any
loan to a leveraged ESOP described in Section 4975(d)(3) of the Code or loan
from the Fund to a participant in accordance with the provisions of the Plan,
the benefits or proceeds of any allocated or unallocated portion of the assets
of the Fund and any interest of any participant or beneficiary arising out of or
created by the Plan either before or after the participant's retirement shall
not be subject to execution, attachment, garnishment or other legal or judicial
process whatsoever by any person, whether creditor or otherwise, claiming
against such participant or beneficiary. Except as otherwise provided in the
Plan with respect to any loan from the Fund to a participant in accordance with
the provisions of the Plan, no participant or beneficiary shall have the right
to alienate, encumber or assign any of the payments or proceeds or any other
interest arising out of or created by the Plan and any action purporting to do
so shall be void. The provisions of this Section shall apply to all participants
and beneficiaries, regardless of their citizenship or place of residence.

     SECTION 9.3.   Any person dealing with the Trustee may rely upon a copy of
this Agreement and any amendments thereto certified to be true and correct by
the Trustee.

     SECTION 9.4.   The Trustee hereby acknowledges receipt of a copy of the
Plan. The Company will cause a copy of any amendment to the Plan to be delivered
to the Trustee.

     SECTION 9.5.   The construction, validity and administration of this
Agreement shall be governed by ERISA and, to the extent not preempted by ERISA,
the laws of the State of Maine without regard to its rules regarding conflict of
laws.

                                       9
<PAGE>

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their respective names by their duly authorized officers under their
corporate seals as of the day and year first above written.

                                         CLIFTON SAVINGS BANK, S.L.A.

                                         BY:
                                             ------------------------------

                                             ------------------------------
                                                        PRINT NAME
                                             ------------------------------
                                                        TITLE

                                         RSGROUP TRUST COMPANY

                                         BY:
                                             ------------------------------

                                             ------------------------------
                                                        PRINT NAME
                                             ------------------------------
                                                        TITLE

                                       10
<PAGE>

STATE OF NEW JERSEY        )
                           :  ss.:
COUNTY OF                  )

On this ____ day of _________, in the year 2003, before me, the undersigned, a
Notary Public in and for the said state, personally appeared _________,
personally known to me or proved to me on the basis of satisfactory evidence to
be the person(s) whose name(s) is (are) subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
capacity(ies) and that by his/her/their signature(s) on the instrument, the
person(s) or the entity upon behalf of which the person(s) acted, executed the
instrument.

SEAL:
                                     ------------------------------------------
                                     Notary Public of
                                                      -------------------------
                                     My Commission expires
                                                          ---------------------

STATE OF NEW YORK          )
                           :  ss.:
COUNTY OF NEW YORK         )

On this ____ day of _________, in the year 2003, before me, the undersigned, a
Notary Public in and for the said state, personally appeared _________,
personally known to me or proved to me on the basis of satisfactory evidence to
be the person(s) whose name(s) is (are) subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
capacity(ies) and that by his/her/their signature(s) on the instrument, the
person(s) or the entity upon behalf of which the person(s) acted, executed the
instrument.

SEAL:
                                     ------------------------------------------
                                     Notary Public of
                                                      -------------------------
                                     My Commission expires
                                                          ---------------------

                                       11

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