Document:

Exhibit
      10.5

    

    CONVERSION
      AGREEMENT

     

    This
      Conversion Agreement (the “Agreement”) is made and entered into as of this day
      of September 5, 2006, by and between Xact Aid, Inc., a Nevada corporation,
      (the
“Company”) and Edward Withrow III, (the “Holder”) the Holder and the Company are
      collectively referred to herein as the “Parties.” This Conversion Agreement is
      made with reference to the following:

     

    A. Pursuant
      to that certain Promissory Note dated as of December 6, 2005 (the “Promissory
      Note”) in the principal sum of $950,000. Section 1 provides that at the election
      of’ the Holder the principal and accrued interest may be converted in to common
      stock of the Company.

     

    B. On
      July
      15, 2006 the Company entered into a Share Exchange Agreement between the Company
      and Fred Dc Luca “Shareholder” on the one part and Conch, Ltd, a British Virgin
      Island corporation and Technorient, Ltd., a Hong Kong corporation on the other
      part. all collectively named as “Parties.”

     

    C. Pursuant
      to the Share Exchange Agreement the Company agreed that in consideration of
      the
      cancellation of the Promissory Note that the obligation shall be converted
      into
      16,600,000 common shares of the Company.

     

    D. The
      Holder, Edward Withrow, III has cancelled the Promissory Note and delivered
      the
      original Promissory Note to the Company, and assigns his rights to the converted
      shares as set forth below.

     

    NOW
      THEREFORE, the Parties hereto agree as follows:

     

    Holder,
      herein assign all his right title and interest in the 16,600,000 shares to
      he
      converted to the following entities (the “Assigned Parties”) as
      follows:

     

    
      	
              Main
                Pacific, Ltd.

            	 	
              5,840,000
                common shares

            
	
              Lucky
                Time Asia Limited

            	 	
              5,840,000
                common shares

            
	
              Cartier
                Fleming International, Ltd.

            	 	
              2,920,000
                common shares

            
	
              Huntington
                Chase, Inc.

            	 	
              2,000,000
                common shares

            

    

    

    CONVERSION

     

    Upon
      the
      terms and conditions set forth herein, concurrently with the closing of the
      Share Exchange Agreement (“the “Closing”) the Holder and the Assigned Parties
      hereby agree to convert (the “Conversion”) the Promissory Note including all
      accrued interest into 16,600,000 shares of the Company’s Common Stock and the
      Promissory Note shall he cancelled.

     

    At
      the
      Closing the 16,600.000 shares shall be issued to the following Assigned
      Parties:

     

    
      	
              Main
                Pacific, Ltd.

            	 	
              5,840,000
                common shares

            
	
              Lucky
                Time Asia Limited

            	 	
              5,840,000
                common shares

            
	
              Cartier
                Fleming International, Ltd.

            	 	
              2,920,000
                common shares

            
	
              Huntington
                Chase, Inc.

            	 	
              2,000,000
                common shares

            

    

     

    
      
         

      

      
         

        
          

        

      

       

    

    

    Said
      shares shall be 144 restricted shares. If the Company at any time proposes
      for
      any reason to register Common Shares or other securities under the Securities
      Act (other than on Form S-4 under the Securities Act or any successor forms
      thereto), the Assigned Panics shall have piggy-back rights to he included in
      such registration on the same terms and conditions as the securities otherwise
      being sold in such registration statement. The cost for the registration of
      the
      shares shall be borne by the Company.

     

    1.  The
      Assigned Parties warrant and represent that the Shares are being acquired solely
      for their own account and not with a view to, or for resale in connection with,
      any distribution of common shares within the meaning of the Act. The Assigned
      Parties agree that the Shares may not be sold in absence of registration unless
      such sale is exempt from registration under the Act and any applicable state
      securities laws. The certificate For [lie Shares shall bear the following
      restrictive legend:

     

    “THE
      SHARES REPRESENTED BY THE CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
      SECURTTIES ACT OF 1933 (THE “ACT”) AND ARE “RESTRICTED SECURITIES” AS THAT TERM
      IS DEFINED IN RULE 144 UNDER THE ACT. THE SHARES MAY NOT BE OFFERED FOR SALE,
      SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
      STATEMENT UNDER THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER
      THE
      ACT, TUE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF
      THE
      COMPANY.”

     

    2.  In
      the
      event any action is brought to enforce this Agreement, the prevailing party
      in
      any such dispute or proceeding shall be entitled to recover said party’s total
      reasonable attorneys’ fees and costs arising out of or in connection with such
      action.

     

    3.  The
      provisions of this Agreement will be binding upon and inure to the benefit
      of
      the heirs, executors, administrators, personal representatives, successors
      in
      interest and assigns to the respective parties to it.

     

    4.  This
      Agreement shall in all respects be interpreted, enforced and governed under
      the
      laws of the state of California. The language and all parts of this Agreement
      shall be in all eases construed as a whole according to its very meaning and
      not
      strictly for or against any individual party.

     

    5.  This
      Agreement memorializes and constitutes the entire agreement and understanding
      among the parties regarding the subject matter hereof, and supersedes all prior
      negotiations, proposed agreements and agreements, whether written or unwritten,
      The parties acknowledge that no other party, nor any agent or attorney of any
      other party, has made any promises, representations, or warranties whatsoever,
      expressly or impliedly, which are not expressly contained in this Agreement,
      and
      the parties further acknowledge that they have not executed this Agreement
      in
      reliance upon any collateral promise, representation, warranty, or in reliance
      upon any belief as to any fact or matter not expressly recited in this
      Agreement.

    
      
         

      

      
         

        
          

        

      

       

    

     

    6.  The
      parties shall hereafter execute all documents and do all that is necessary,
      convenient or desirable in the reasonable opinion of the other party to effect
      the provisions of this Agreement.

     

    7.  For
      the
      convenience of the parties, this Agreement may be executed by facsimile
      signatures and in counterparts that shall together constitute the agreement
      of
      the parties as one and the same instrument. It is the intent of the parties
      that
      a copy of this Agreement signed by any party shall be fully enforceable against
      that party.

     

    8.  Should
      any provision of this Agreement be declared or determined by any court to be
      illegal or invalid, the validity of the remaining parts, terms or provisions
      shall not be affected thereby and, in lieu of such illegal or invalid provision,
      there shall be added a provision as similar in terms and amount to such illegal
      or invalid provision as may be possible and, if such illegal or invalid
      provision cannot he so modified, then it shall he deemed not to he a part of’
this Agreement.

     

    IN
      WITNESS WHEREOF the parties have executed this Agreement as of the date first
      above written.

     

    
      	Xact Aid, Inc.	 	 	 
	 	 	 	 	 
	By:	 	 	 	 
	 	
              

              Name: Robert
                G. Pautsch

              Title: President

            	 	 	
              
Edward
              W. Withrow, III

    

     

    
      
        	Main Pacific, Ltd.	 	 	 
	 	 	 	 	 
	By:	 	 	By:	 
	 	
                

                Name:
                  ______________________________

                Title:  
                  ______________________________

              	 	 	
                

                Name:
                  ______________________________

                Title:  
                  ______________________________

              

      

       

    

    
       

      
        	Lucky Time Asia Limited	 	 	 
	 	 	 	 	 
	By:	 	 	 	 
	 	
                

                
                  Name:
                    ______________________________

                  Title:  
                    ______________________________

                

              	 	 	 

      

    

    
      
         

      

      
         

        
          

        

      

       

    

    Huntington
      Chase, Inc.

    
      
        
          	 	 	 	 
	 	 	 	 	 
	By:	 	 	 	 
	 	
                  

                  
                    Name:
                      ______________________________

                    Title:  
                      ______________________________Exhibit 10.1

                                ELECTROGLAS, INC.

                           LOAN AND SECURITY AGREEMENT

<PAGE>

     This LOAN AND  SECURITY  AGREEMENT is entered into as of July 16, 2004 (the
"Agreement"),  by and between  COMERICA BANK ("Bank") and  ELECTROGLAS,  INC., a
Delaware corporation ("Borrower").

                                    RECITALS

     Borrower  wishes to obtain  credit  from time to time from  Bank,  and Bank
desires to extend  credit to Borrower.  This  Agreement  sets forth the terms on
which Bank will advance credit to Borrower,  and Borrower will repay the amounts
owing to Bank.

                                    AGREEMENT

     The parties agree as follows:

     1.   DEFINITIONS AND CONSTRUCTION.

          1.1  Definitions.  As used in this Agreement,  all  capitalized  terms
shall have the definitions set forth on Exhibit A. Any term used in the Code and
not defined herein shall have the meaning given to the term in the Code.

          1.2  Accounting Terms. Any accounting term not specifically defined on
Exhibit A shall be construed in accordance with GAAP and all calculations  shall
be made in accordance with GAAP. The term "financial  statements"  shall include
the accompanying notes and schedules.

     2.   LOAN AND TERMS OF PAYMENT.

          2.1  Credit Extensions.

               (a)  Promise to Pay.  Borrower promises to pay to Bank, in lawful
money of the United States of America,  the aggregate unpaid principal amount of
all Credit  Extensions  made by Bank to Borrower,  together with interest on the
unpaid  principal  amount of such Credit  Extensions at rates in accordance with
the terms hereof.

               (b)  Advances Under Revolving Line.

                    (i)  Amount. Subject to and upon the terms and conditions of
this  Agreement,  at any time and from time to time from the date hereof through
the Business Day immediately prior to the Revolving Maturity Date,  Borrower may
request, and Bank will make, Advances in an aggregate  outstanding amount not to
exceed the amount of the  Revolving  Line.  Borrower may request  Advances in an
aggregate  amount not to exceed  $2,000,000 (the  "Non-Formula  Amount") without
regard to the  Borrowing  Base.  In addition,  subject to and upon the terms and
conditions  of this  Agreement,  at any time and from time to time from the date
hereof  through the Business Day  immediately  prior to the  Revolving  Maturity
Date,  Borrower  may request  Advances in an aggregate  outstanding  amount that
exceeds the Non-Formula Amount,  provided that, the aggregate outstanding amount
of Advances in excess of the  Non-Formula  Amount shall not exceed the lesser of
(A) the Revolving  Line minus the  Non-Formula  Amount or (B) the Borrowing Base

                                       1
<PAGE>

(each,  a "Borrowing  Base  Advance").  If at any time or from time to time, the
aggregate  outstanding  amount of Advances  exceeds the Non-Formula  Amount and,
thereafter,  the aggregate  outstanding  amount of Advances is reduced below the
Non-Formula Amount, for so long as the aggregate  outstanding amount of Advances
is less  than or equal to the  Non-Formula  Amount,  the  Advances  shall not be
subject to the Borrowing  Base.  Subject to and upon the terms and conditions of
this Agreement,  amounts borrowed  pursuant to this Section 2.1(b) may be repaid
and  reborrowed at any time prior to the Revolving  Maturity Date, at which time
all Advances  under this Section  2.1(b) shall be  immediately  due and payable.
Borrower  may  prepay  any  Advances,  in whole or in part,  without  penalty or
premium.

                    (ii) Form of Request.  Whenever Borrower desires an Advance,
Borrower will notify Bank by facsimile  transmission  or telephone no later than
3:00 p.m.  Pacific  time (1:00 p.m.  Pacific  time for wire  transfers),  on the
Business  Day that the Advance is to be made.  Each such  notification  shall be
promptly  confirmed  by a  Payment/Advance  Form in  substantially  the  form of
Exhibit C. Bank is authorized to make Advances under this Agreement,  based upon
instructions  received from a Responsible Officer or a designee of a Responsible
Officer.  Bank shall be entitled  to rely on any  telephonic  notice  given by a
person who Bank  reasonably  believes to be a Responsible  Officer or a designee
thereof,  and Borrower shall indemnify and hold Bank harmless for any damages or
loss suffered by Bank as a result of such reliance.  Bank will credit the amount
of Advances made under this Section 2.1(b) to Borrower's deposit account.

                    (iii) Advances may be used by Borrower for general corporate
purposes and to meet its working capital requirements.

          2.2  Overadvances. If the aggregate amount of the outstanding Advances
exceeds the amounts permitted to be borrowed under Section  2.1(b)(i),  Borrower
shall immediately pay to Bank, in cash, the amount of such excess.

          2.3  Interest Rates, Payments, and Calculations.

               (a)  Interest Rates.

                    (i)  Advances.  Except as set forth in Section  2.3(b),  the
Advances shall bear interest,  on the outstanding daily balance thereof,  as set
forth in the LIBOR Addendum attached hereto as Exhibit D.

               (b)  Late Fee;  Default  Rate.  If any payment is not made within
ten (10) days after the date such payment is due, Borrower shall pay Bank a late
fee equal to the  lesser of (i) 1% of the amount of such  unpaid  amount or (ii)
the maximum amount permitted to be charged under applicable law. All Obligations
shall bear interest, from and after the occurrence and during the continuance of
an Event of Default,  at a rate equal to three (3)  percentage  points above the
interest rate  applicable  immediately  prior to the  occurrence of the Event of
Default.

               (c)  Payments. Interest hereunder shall be due and payable on the
1st  calendar  day of each month  during the term  hereof.  Bank  shall,  at its
option,  charge such  interest,  all Bank  Expenses,  and all Periodic  Payments
against any of Borrower's  deposit  accounts or against the  Revolving  Line, in
which case those  amounts  shall  thereafter  accrue  interest  at the rate then

                                       2
<PAGE>

applicable  hereunder.  Any  interest not paid when due shall be  compounded  by
becoming a part of the Obligations,  and such interest shall  thereafter  accrue
interest at the rate then applicable hereunder.

               (d)  Computation.  In the event the Prime  Rate is  changed  from
time to time  hereafter,  the  applicable  rate of interest  hereunder  shall be
increased or decreased, effective as of the day the Prime Rate is changed, by an
amount equal to such change in the Prime Rate. All interest chargeable under the
Loan  Documents  shall be computed on the basis of a 360 day year for the actual
number of days elapsed.

          2.4  Crediting  Payments.  Prior  to the  occurrence  of an  Event  of
Default,  Bank shall  credit a wire  transfer  of funds,  check or other item of
payment to such deposit account or Obligation as Borrower  specifies.  After the
occurrence  of an Event of  Default,  Bank  shall  have the  right,  in its sole
discretion,  to immediately  apply any wire transfer of funds,  check,  or other
item of payment Bank may receive to conditionally  reduce Obligations,  but such
applications  of funds shall not be considered a payment on account  unless such
payment is of immediately available federal funds or unless and until such check
or other item of payment is honored when presented for payment.  Notwithstanding
anything to the contrary contained herein, any wire transfer or payment received
by Bank after 12:00 noon Pacific  time shall be deemed to have been  received by
Bank as of the opening of business on the  immediately  following  Business Day.
Whenever  any payment to Bank under the Loan  Documents  would  otherwise be due
(except by reason of  acceleration)  on a date that is not a Business  Day, such
payment shall instead be due on the next  Business Day, and  additional  fees or
interest, as the case may be, shall accrue and be payable for the period of such
extension.

          2.5  Fees. Borrower shall pay to Bank the following:

               (a)  Facility  Fee. On or before the Closing Date, a fee equal to
$18,750, which shall be nonrefundable;

               (b)  Bank  Expenses.  On the  Closing  Date,  all  Bank  Expenses
incurred  through the  Closing  Date,  and,  after the  Closing  Date,  all Bank
Expenses within ten (10) Business Days of demand  therefor,  provided that if an
Event of Default has occurred and is continuing, all such Bank Expenses shall be
paid as and when they become due upon demand by Bank.

          2.6  Term. This Agreement  shall become  effective on the Closing Date
and,  subject to Section  13.7,  shall  continue in full force and effect for so
long as any  Obligations  remain  outstanding or Bank has any obligation to make
Credit Extensions under this Agreement.  Upon payment in full of all outstanding
Obligations (other than contingent  indemnification  obligations)  hereunder and
under the other Loan Documents and  termination  of Bank's  commitment to make a
Credit  Extension  hereunder,  this Agreement and the other Loan Documents shall
terminate without further act and Bank will, at Borrower's expense,  execute and
deliver such  documents  and take such other  action as Borrower may  reasonably
request to evidence such termination and to release the Collateral from the Lien
of this Agreement.  Notwithstanding the foregoing,  Bank shall have the right to
terminate  its  obligation  to  make  Credit  Extensions  under  this  Agreement
immediately and without notice upon the occurrence and during the continuance of
an Event of Default.

                                       3
<PAGE>

     3.   CONDITIONS OF LOANS.

          3.1  Conditions Precedent to Initial Credit Extension.  The obligation
of Bank to make  the  initial  Credit  Extension  is  subject  to the  condition
precedent that Bank shall have received,  in form and substance  satisfactory to
Bank, the following:

               (a)  this Agreement;

               (b)  an  officer's   certificate  of  Borrower  with  respect  to
incumbency  and  resolutions  authorizing  the  execution  and  delivery of this
Agreement;

               (c)  a financing statement (Form UCC-1);

               (d)  the LIBOR Addendum;

               (e)  agreement to provide insurance;

               (f)  payment of the fees and Bank  Expenses then due specified in
Section 2.5;

               (g)  current SOS  Reports  indicating  that except for  Permitted
Liens,  there  are no  other  security  interests  or  Liens  of  record  in the
Collateral;

               (h)  an audit of the  Collateral,  the  results of which shall be
satisfactory to Bank;

               (i)  current financial  statements,  including audited statements
for  Borrower's  most recently  ended fiscal year,  together with an unqualified
opinion, a company prepared  consolidated balance sheet and income statement for
the most recently ended fiscal quarter in accordance  with Section 6.2, and such
other updated financial information as Bank may reasonably request;

               (j)  current  Compliance  Certificate in accordance  with Section
6.2;

               (k)  if the initial  Credit  Extension  shall include a Borrowing
Base Advance, current Borrowing Base Certificate, together with aged listings by
invoice date of accounts  receivable and accounts  payable,  in accordance  with
Section 6.2, at least 15 days prior to the date of the initial Credit Extension;
and

               (l)  such other documents or certificates, and completion of such
other matters, as Bank may reasonably deem necessary or appropriate.

                                       4
<PAGE>

          3.2  Conditions Precedent to all Credit Extensions.  The obligation of
Bank to make each Credit Extension,  including the initial Credit Extension,  is
further subject to the following conditions:

               (a)  timely  receipt  by  Bank  of the  Payment/Advance  Form  as
provided in Section 2.1; and

               (b)  the  representations  and warranties  contained in Section 5
shall be true and correct in all material respects on and as of the date of such
Payment/Advance  Form and on the  effective  date of each  Credit  Extension  as
though  made at and as of each such  date,  and no Event of  Default  shall have
occurred and be  continuing,  or would exist after giving  effect to such Credit
Extension  (provided,   however,   that  those  representations  and  warranties
expressly  referring to another date shall be true,  correct and complete in all
material respects as of such date). The making of each Credit Extension shall be
deemed to be a  representation  and  warranty  by  Borrower  on the date of such
Credit  Extension  as to the  accuracy of the facts  referred to in this Section
3.2.

     4.   CREATION OF SECURITY INTEREST.

          4.1  Grant of Security Interest. Borrower grants and pledges to Bank a
continuing security interest in the Collateral to secure prompt repayment of any
and all Obligations and to secure prompt  performance by Borrower of each of its
covenants  and  duties  under  the Loan  Documents.  Except  as set forth in the
Schedule,  such security interest  constitutes a valid,  first priority security
interest in the  presently  existing  Collateral,  and will  constitute a valid,
first priority security interest in later-acquired  Collateral.  Notwithstanding
any  termination,  Bank's Lien on the  Collateral  shall remain in effect for so
long as any Obligations are outstanding.

          4.2  Perfection of Security Interest. Borrower authorizes Bank to file
at any  time  financing  statements,  continuation  statements,  and  amendments
thereto that (i) either  specifically  describe the  Collateral  or describe the
Collateral  as all assets of Borrower of the kind pledged  hereunder  other than
excluded  assets  as set  forth  on  Exhibit  B,  and  (ii)  contain  any  other
information required by the Code for the sufficiency of filing office acceptance
of any financing  statement,  continuation  statement,  or amendment,  including
whether  Borrower  is  an  organization,   the  type  of  organization  and  any
organizational identification number issued to Borrower, if applicable. Any such
financing statements may be signed by Bank on behalf of Borrower, as provided in
the  Code,  and may be  filed  at any time in any  jurisdiction  whether  or not
Revised Article 9 of the Code is then in effect in that  jurisdiction.  Borrower
shall from time to time endorse and deliver to Bank, at the request of Bank, all
Negotiable  Collateral and other documents that Bank may reasonably  request, in
form  satisfactory  to Bank, to perfect and continue  perfected  Bank's security
interests  in the  Collateral  and  in  order  to  fully  consummate  all of the
transactions  contemplated  under  the  Loan  Documents.   Borrower  shall  have
possession of the Collateral,  except where expressly otherwise provided in this
Agreement or where  possession of the Collateral by Bank is deemed  necessary or
desirable  in order for Bank to  maintain a first  priority  perfected  security
interest  therein.  Borrower shall use commercially  reasonable  efforts to take

                                       5
<PAGE>

such  steps as Bank  reasonably  requests  for Bank (i) where  Collateral  is in
possession  of a third  party  bailee and has a  standard  cost  (determined  in
accordance with GAAP) exceeding $500,000,  to obtain an acknowledgment,  in form
and  substance  satisfactory  to Bank,  of the bailee that the bailee holds such
Collateral for the benefit of Bank; provided that no such  acknowledgment  shall
be  required  from any Person  with  respect to  Inventory  held at spare  parts
depots,  Inventory in transit,  Inventory held by any of Borrower's customers or
potential  customers  which is in the process of sale  acceptance,  or Inventory
temporarily located with any of Borrower's  customers or potential customers for
demonstration  purposes;  and (ii) to obtain "control" of any Collateral located
in the United  States  consisting  of  investment  property,  deposit  accounts,
letter-of-credit  rights or electronic chattel paper (as such items and the term
"control"  are  defined  in  Revised  Article  9 of the  Code)  by  causing  the
securities  intermediary or depositary  institution or issuing bank to execute a
control agreement in form and substance  satisfactory to Bank;  provided that no
such  control  agreement  shall  be  required  if such  Collateral  held by such
securities intermediary,  depositary institution or issuing bank does not exceed
$1,000,000. Upon Bank's reasonable request, Borrower will not create any chattel
paper  without  placing  a  legend  on the  chattel  paper  acceptable  to  Bank
indicating that Bank has a security interest in the chattel paper.

          4.3  Right to Inspect.  Bank (through any of its officers,  employees,
or agents) shall have the right, upon reasonable prior notice, from time to time
during  Borrower's usual business hours but no more than twice a year (unless an
Event of Default has occurred and is continuing),  to inspect  Borrower's  Books
and to make copies  thereof and to check,  test,  and appraise the Collateral in
order to verify Borrower's  financial condition or the amount,  condition of, or
any other matter relating to, the Collateral.

     5.   REPRESENTATIONS AND WARRANTIES.

     Borrower represents and warrants as follows:

          5.1  Due  Organization  and  Qualification.  Borrower is a corporation
duly  existing  under  the laws of the  state in  which it is  incorporated  and
qualified  and  licensed to do business in any state in which the conduct of its
business or its ownership of property  requires that it be so qualified,  except
where the failure to do so would not  reasonably be expected to cause a Material
Adverse  Effect.  Each Subsidiary is a corporation or other entity duly existing
under  the  laws of the  state  in which it is  incorporated  or  organized  and
qualified  and  licensed to do business in any state in which the conduct of its
business or its ownership of property  requires that it be so qualified,  except
where the failure to do so would not  reasonably be expected to cause a Material
Adverse Effect.

          5.2  Due  Authorization;  No Conflict.  The execution,  delivery,  and
performance of the Loan Documents are within Borrower's  powers,  have been duly
authorized,  and are  not in  conflict  with  nor  constitute  a  breach  of any
provision  contained in Borrower's  Certificate of Incorporation or Bylaws,  nor
will they  constitute an event of default under any material  agreement by which
Borrower is bound. Borrower is not in default under any agreement by which it is
bound,  except to the extent such default  would not  reasonably  be expected to
cause a Material Adverse Effect.

          5.3  Collateral.  Borrower  has rights in or the power to transfer the
Collateral,  and its title to the Collateral is free and clear of Liens, adverse
claims,  and  restrictions  on transfer or pledge  except for  Permitted  Liens.

                                       6
<PAGE>

Substantially all of the Collateral is located in the Collateral Locations.  The
Eligible Accounts are bona fide existing  obligations.  The property or services
giving rise to such  Eligible  Accounts  have been  delivered or rendered to the
account  debtor  or its  agent  for  immediate  shipment  to  and  unconditional
acceptance by the account debtor.  Borrower has not received notice of actual or
imminent Insolvency Proceeding of any account debtor whose accounts are included
in any Borrowing Base  Certificate as an Eligible  Account.  All Inventory is in
all material respects of good and merchantable  quality,  free from all material
defects, except for Inventory for which adequate reserves have been made. Except
as set forth in the Schedule and except for such  Collateral held by such Person
having a fair market  value not  exceeding  $1,000,000,  none of the  Collateral
consisting of investment property, deposit accounts,  letter-of-credit rights or
electronic chattel paper is maintained or invested with a Person other than Bank
or Bank's Affiliates.

          5.4  Name; Location of Chief Executive Office.  Except as disclosed in
the Schedule,  during the past five years,  Borrower has not done business under
any name other than that specified on the signature  page hereof,  and its exact
legal name is as set forth in the first paragraph of this  Agreement.  The chief
executive  office of Borrower is located in the Chief Executive  Office State at
the address indicated in Section 10 hereof.

          5.5  Litigation.  Except  as set forth in the  Schedule,  there are no
actions or proceedings  pending by or against Borrower or any Subsidiary  before
any court or  administrative  agency in which a likely  adverse  decision  would
reasonably be expected to have a Material Adverse Effect.

          5.6  No  Material   Adverse  Change  in  Financial   Statements.   All
consolidated  financial  statements  related to Borrower and any Subsidiary that
are  delivered  by  Borrower  to Bank fairly  present in all  material  respects
Borrower's   consolidated  financial  condition  as  of  the  date  thereof  and
Borrower's  consolidated  results of operations for the period then ended. There
has not been a material adverse change in the consolidated  financial  condition
of  Borrower  since  the date of the most  recent of such  financial  statements
submitted to Bank.

          5.7  Solvency,  Payment  of Debts.  Borrower  is able to pay its debts
(including  trade debts) as they mature;  the fair saleable  value of Borrower's
assets (including  goodwill minus  disposition  costs) exceeds the fair value of
its liabilities;  and Borrower is not left with unreasonably small capital after
the transactions contemplated by this Agreement.

          5.8  Compliance   with  Laws  and   Regulations.   Borrower  and  each
Subsidiary  have met the minimum  funding  requirements of ERISA with respect to
any employee  benefit  plans subject to ERISA.  No event has occurred  resulting
from Borrower's failure to comply with ERISA that is reasonably likely to result
in Borrower's incurring any liability that could have a Material Adverse Effect.
Borrower  is  not  an  "investment  company"  or a  company  "controlled"  by an
"investment  company" within the meaning of the Investment  Company Act of 1940.
Borrower is not engaged principally,  or as one of the important activities,  in
the  business  of  extending  credit for the purpose of  purchasing  or carrying
margin  stock  (within  the  meaning  of  Regulations  T and U of the  Board  of
Governors of the Federal Reserve System).  Borrower has complied in all material
respects  with all the  provisions  of the  Federal  Fair Labor  Standards  Act.
Borrower  is  in  compliance  with  all  environmental  laws,   regulations  and
ordinances except where the failure to comply is not reasonably likely to have a

                                       7
<PAGE>

Material  Adverse  Effect.  Borrower  has  not  violated  any  statutes,   laws,
ordinances or rules applicable to it, the violation of which could reasonably be
expected to have a Material  Adverse  Effect.  Borrower and each Subsidiary have
filed or caused to be filed all tax returns required to be filed, and have paid,
or have made adequate  provision for the payment of, all taxes reflected therein
except those being contested in good faith with adequate  reserves under GAAP or
where the failure to file such returns or pay such taxes would not reasonably be
expected to have a Material Adverse Effect.

          5.9  Subsidiaries.  Borrower  does  not  own  any  stock,  partnership
interest  or  other  equity  securities  of any  Person,  except  for  Permitted
Investments.

          5.10 Government  Consents.  Borrower and each Subsidiary have obtained
all consents,  approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental  authorities that are necessary
for the  continued  operation of  Borrower's  business as  currently  conducted,
except  where the failure to do so would not  reasonably  be expected to cause a
Material Adverse Effect.

          5.11 Inbound Licenses.  Except as disclosed on the Schedule,  Borrower
is not a party to,  nor is bound by,  any  material  license  or other  material
agreement  that  prohibits  or  otherwise  restricts  Borrower  from  granting a
security  interest in  Borrower's  interest in such  license or agreement or any
other property.

          5.12 Full Disclosure.  No representation,  warranty or other statement
made by Borrower in any certificate or written statement furnished to Bank taken
together with all such  certificates  and written  statements  furnished to Bank
contains any untrue  statement  of a material  fact or omits to state a material
fact necessary in order to make the statements contained in such certificates or
statements not misleading,  it being recognized by Bank that the projections and
forecasts  provided  by  Borrower  in  good  faith  and  based  upon  reasonable
assumptions  are not to be viewed as facts and that  actual  results  during the
period or periods covered by any such  projections and forecasts may differ from
the projected or forecasted results.

     6.   AFFIRMATIVE COVENANTS.

     Borrower   covenants  that,  until  payment  in  full  of  all  outstanding
Obligations  hereunder  and under the other Loan  Documents,  and for so long as
Bank may have any  commitment  to make a Credit  Extension  hereunder,  Borrower
shall do all of the following:

          6.1  Good Standing and Government Compliance.  Borrower shall maintain
its corporate  existence and good standing in the Borrower State and each of its
Subsidiaries' corporate or legal existence and good standing in the jurisdiction
of such Subsidiary's  formation,  shall maintain qualification and good standing
in each other  jurisdiction  in which the  failure  to so  qualify  could have a
Material  Adverse  Effect,   and  shall  furnish  to  Bank  the   organizational
identification  number  issued to  Borrower by the  authorities  of the state in
which Borrower is organized, if applicable. Borrower shall meet, and shall cause
each Subsidiary to meet, the minimum funding  requirements of ERISA with respect
to any employee  benefit  plans subject to ERISA.  Borrower  shall comply in all
material  respects  with all  applicable  Environmental  Laws,  and maintain all

                                       8
<PAGE>

material permits,  licenses and approvals required  thereunder where the failure
to do so could have a Material Adverse Effect.  Borrower shall comply, and shall
cause each  Subsidiary  to  comply,  with all  statutes,  laws,  ordinances  and
government rules and regulations to which it is subject, and shall maintain, and
shall  cause  each of its  Subsidiaries  to  maintain,  in force  all  licenses,
approvals and material  agreements,  the loss of which or failure to comply with
which would reasonably be expected to have a Material Adverse Effect.

          6.2  Financial Statements, Reports, Certificates.

               (a)  Borrower  shall  deliver to Bank:  (i) as soon as available,
but in any event within fifty (50) days after the end of each fiscal quarter,  a
company  prepared  consolidated  balance  sheet and  income  statement  covering
Borrower's  operations  during such period,  in a form reasonably  acceptable to
Bank and certified by a Responsible Officer;  (ii) as soon as available,  but in
any event within one hundred and twenty  (120) days after the end of  Borrower's
fiscal year, audited  consolidated  financial statements of Borrower prepared in
accordance with GAAP,  consistently  applied,  together with an opinion which is
unqualified  or  otherwise  consented  to in writing  by Bank on such  financial
statements  of  an  independent  certified  public  accounting  firm  reasonably
acceptable to Bank; (iii) copies of all statements,  reports and notices sent or
made available  generally by Borrower to its security  holders or to any holders
of Subordinated Debt (other than those statements,  reports and notices that are
otherwise  publicly  available  through the Securities  and Exchange  Commission
EDGAR system); (iv) if applicable, a copy of all reports on Form 10-K filed with
the Securities and Exchange Commission, within one hundred and twenty (120) days
after the end of Borrower's  fiscal year, and a copy of all reports on Form 10-Q
filed with the Securities and Exchange Commission,  within fifty (50) days after
the end of each fiscal  quarter  (other than those  reports  that are  otherwise
publicly available through the Securities and Exchange Commission EDGAR system);
(v)  promptly  upon  receipt of written  notice  thereof,  a report of any legal
actions  pending or threatened  against  Borrower or any  Subsidiary  that could
result in damages or costs to Borrower or any  Subsidiary of $5,000,000 or more;
(vi)  promptly  upon  receipt,  each  management  letter  prepared by Borrower's
independent  certified public  accounting firm regarding  Borrower's  management
control systems; and (vii) such budgets,  sales projections,  operating plans or
other  financial  information  generally  prepared by  Borrower in the  ordinary
course of business as Bank may reasonably request from time to time.

               (b)  While any Borrowing  Base Advances are  outstanding,  within
thirty (30) days after the last day of each  month,  Borrower  shall  deliver to
Bank  a  Borrowing  Base  Certificate   signed  by  a  Responsible   Officer  in
substantially  the form of  Exhibit E hereto,  together  with aged  listings  by
invoice date of accounts receivable and accounts payable; provided that Borrower
shall also  deliver to Bank a current  Borrowing  Base  Certificate  signed by a
Responsible Officer in substantially the form of Exhibit E hereto, together with
aged  listings by invoice date of accounts  receivable  and accounts  payable at
least  15 days  prior  to the  date of any  Credit  Extension  that  includes  a
Borrowing  Base Advance if no Borrowing Base  Certificate  was delivered for the
month immediately preceding such Credit Extension.

               (c)  Borrower shall deliver to Bank with the quarterly and annual
financial  statements a Compliance  Certificate  certified as of the last day of
the  applicable  quarter  or  year  and  signed  by  a  Responsible  Officer  in
substantially the form of Exhibit F hereto.

                                       9
<PAGE>

               (d)  As soon as possible and in any event within 5 Business  Days
after  becoming  aware of the  occurrence  or  existence  of an Event of Default
hereunder,  Borrower shall deliver to Bank a written  statement of a Responsible
Officer  setting  forth  details of the Event of Default,  and the action  which
Borrower has taken or proposes to take with respect thereto.

               (e)  Bank shall have a right from time to time hereafter to audit
Borrower's Accounts and appraise Collateral at Borrower's expense, provided that
such audits will be  conducted  no more often than every 6 months  during  usual
business  hours upon  reasonable  prior  notice to  Borrower  unless an Event of
Default has occurred and is continuing.

     Borrower  may  deliver  to Bank on an  electronic  basis any  certificates,
reports or information  required pursuant to this Section 6.2, and Bank shall be
entitled to rely on the information  contained in the electronic files, provided
that Bank in good faith  believes that the files were delivered by a Responsible
Officer.  If Borrower  delivers this information  electronically,  it shall also
deliver  to  Bank  by U.S.  Mail,  reputable  overnight  courier  service,  hand
delivery,  facsimile or .pdf file within 5 Business  Days of  submission  of the
unsigned  electronic copy the certification of quarterly  financial  statements,
the Borrowing Base Certificate and the Compliance Certificate,  each bearing the
physical signature of the Responsible Officer.

          6.3  Inventory; Returns. Borrower shall keep all Inventory in good and
merchantable condition,  free from all material defects except for Inventory for
which  adequate  reserves  have been made.  Returns and  allowances,  if any, as
between  Borrower  and its  account  debtors  shall be on the same  basis and in
accordance with the usual customary practices of Borrower,  as they exist on the
Closing Date.

          6.4  Taxes.  Borrower shall make,  and cause each  Subsidiary to make,
due and timely  payment or deposit of all  material  federal,  state,  and local
taxes,  assessments,  or contributions required of it by law, including, but not
limited to, those laws concerning  income taxes,  F.I.C.A.,  F.U.T.A.  and state
disability,  and will execute and deliver to Bank, on demand, proof satisfactory
to Bank  indicating  that  Borrower or a  Subsidiary  has made such  payments or
deposits and any  appropriate  certificates  attesting to the payment or deposit
thereof; provided that Borrower or a Subsidiary need not make any payment if the
amount or validity of such  payment is  contested  in good faith by  appropriate
proceedings  and is  reserved  against  (to the  extent  required  by  GAAP)  by
Borrower.

          6.5  Insurance.

               (a)  Borrower, at its expense,  shall keep the Collateral insured
against  loss or damage by fire,  theft,  explosion,  sprinklers,  and all other
hazards and risks, and in such amounts,  as ordinarily  insured against by other
Persons  in similar  businesses  conducted  in the  locations  where  Borrower's
business is conducted on the date hereof. Borrower shall also maintain liability
and other  insurance in amounts and of a type that are  customary to  businesses
similar to Borrower's.

               (b)  All such policies of insurance  shall be in such form,  with
such  companies,  and in such amounts as reasonably  satisfactory  to Bank.  All
policies of personal  property  insurance  shall contain a lender's loss payable
endorsement,  in a form satisfactory to Bank, showing Bank as an additional loss

                                       10
<PAGE>

payee,  and all liability  insurance  policies  shall show Bank as an additional
insured and specify  that the insurer must give at least twenty (20) days notice
to Bank  before  canceling  its  policy for any  reason.  Upon  Bank's  request,
Borrower shall deliver to Bank certified copies of the policies of insurance and
evidence of all premium  payments.  If no Event of Default has  occurred  and is
continuing,  proceeds payable under any casualty  personal property policy will,
at Borrower's  option,  be payable to Borrower to replace the personal  property
subject to the  claim,  provided  that any such  replacement  property  shall be
deemed  Collateral  in which  Bank has been  granted a first  priority  security
interest.  If an Event of Default has occurred and is  continuing,  all proceeds
payable under any such policy shall, at Bank's option,  be payable to Bank to be
applied on account of the Obligations.

          6.6  Operating and Money Market  Account.  Borrower  shall maintain an
operating account and a money market account with Bank.

          6.7  Financial  Covenants.  Borrower  shall as of the last day of each
fiscal quarter of Borrower maintain the financial ratios and covenants set forth
in  subsections  (a),  (b) and (c) below and  shall at all  times  maintain  the
financial covenant set forth in subsection (d) below:

               (a)  Quick  Ratio.  A  ratio  of Cash  held  at  Bank  or  Bank's
Affiliates  plus net billed trade accounts  receivable aged less than 90 days to
Current Liabilities of at least 0.60 to 1.00.

               (b)  Effective  Tangible  Net Worth.  An  Effective  Tangible Net
Worth of not less than  $60,000,000  plus 75% of the net  proceeds  received  by
Borrower or any of its Subsidiaries  after the date of this Agreement in cash or
cash equivalents from the sale or issuance of additional shares of capital stock
or  Subordinated  Debt (other than the sale or issuance of additional  shares of
capital stock or Subordinated Debt to Borrower or any wholly-owned  Subsidiary);
provided that such amount shall be increased (but not decreased) on a cumulative
basis at the end of each  fiscal  quarter  (commencing  with the fiscal  quarter
ending on June 30, 2004) by 75% of the  Borrower's  Consolidated  Net Income for
such fiscal quarter.

               (c)  Total  Liabilities  Minus  Subordinated  Debt  to  Effective
Tangible Net Worth. A ratio of Total  Liabilities less the long-term  portion of
Subordinated Debt to Effective Tangible Net Worth of not more than 0.75 to 1.00.

               (d)  Minimum  Cash.  A  balance  of Cash in a Bank  money  market
account or a Bank deposit account of not less $7,500,000.

          6.8  Registration of Intellectual Property Rights.  Borrower shall, to
the  extent  it deems  appropriate  in its  reasonable  business  judgment,  (i)
protect,  defend and maintain the  validity and  enforceability  of its material
trade  secrets,  Trademarks,  Patents  and  Copyrights,  (ii)  use  commercially
reasonable efforts to detect infringements of its material  Trademarks,  Patents
and  Copyrights  and promptly  advise Bank in writing of material  infringements
detected and (iii) not allow any material  Trademarks,  Patents or Copyrights to
be abandoned,  forfeited or dedicated to the public without the written  consent
of Bank, which shall not be unreasonably withheld.

                                       11
<PAGE>

          6.9  Further  Assurances.  At any time and from time to time  Borrower
shall execute and deliver such further  instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.

     7.   NEGATIVE COVENANTS.

     Borrower  covenants and agrees that, so long as any credit  hereunder shall
be available and until the outstanding Obligations hereunder and under the other
Loan  Documents are paid in full or for so long as Bank may have any  commitment
to make any Credit Extensions, Borrower will not do any of the following without
Bank's prior written consent, which shall not be unreasonably withheld:

          7.1  Dispositions. Convey, sell, lease, license, transfer or otherwise
dispose of (collectively,  to "Transfer"),  or permit any of its Subsidiaries to
Transfer,  all or any part of its business or property, or move cash balances on
deposit with Bank to accounts opened at another financial  institution unless no
violation of Section 6.7 would  result from the movement of such cash  balances,
other  than  Permitted  Transfers,  or,  except  as set  forth in the  Schedule,
covenant to any other  Person that  Borrower  in the future  will  refrain  from
conveying,  selling, leasing, licensing,  transferring or otherwise disposing of
all or any material item of its Intellectual Property.

          7.2  Change  in  Name,   Location,   Executive  Office,  or  Executive
Management; Change in Business; Change in Fiscal Year; Change in Control. Change
its name or the Borrower  State or relocate its chief  executive  office without
thirty (30) days prior written notification to Bank; replace its chief executive
officer or chief  financial  officer  without  giving Bank written  notification
within  (5) days  thereafter;  engage  in any  business,  or  permit  any of its
Subsidiaries  to engage in any  business,  other than or  reasonably  related or
incidental to the businesses currently engaged in by Borrower; change its fiscal
year end; or have a Change in Control.

          7.3  Mergers or Acquisitions.  Merge or consolidate,  or permit any of
its  Subsidiaries  to merge or  consolidate,  with or into  any  other  business
organization  (other than mergers or consolidations of a Subsidiary into another
Subsidiary or into Borrower),  or acquire,  or permit any of its Subsidiaries to
acquire,  all or  substantially  all of the capital stock or property of another
Person  except  where  (i)  such  transactions  do not in the  aggregate  exceed
$5,000,000  during any fiscal year,  (ii) no Event of Default has  occurred,  is
continuing or would exist after giving effect to such  transactions,  (iii) such
transactions  do not result in a Change in  Control,  and (iv)  Borrower  is the
surviving entity.

          7.4  Indebtedness.  Create,  incur, assume,  guarantee or be or remain
liable with  respect to any  Indebtedness,  or permit any  Subsidiary  so to do,
other than Permitted Indebtedness.

          7.5  Encumbrances.  Create,  incur,  assume  or allow  any  Lien  with
respect to any of its personal property, or assign or otherwise convey any right
to receive  income,  including  the sale of any  Accounts,  or permit any of its
Subsidiaries  so to do,  except for  Permitted  Liens,  or covenant to any other

                                       12
<PAGE>

Person that  Borrower  in the future  will  refrain  from  creating,  incurring,
assuming or allowing  any Lien with  respect to any of  Borrower's  Intellectual
Property.

          7.6  Distributions.  Pay any dividends or make any other  distribution
or payment on account of or in redemption, retirement or purchase of any capital
stock except for (i)  repurchases  of stock under terms  approved by  Borrower's
Board of Directors in May 1998 not to exceed  $5,000,000 in the aggregate in any
fiscal year so long as no Event of Default has occurred,  is continuing or would
exist after  giving  effect to the  repurchases  and (ii)  repurchases  of stock
described in clause (c) of the defined term "Permitted Investments."

          7.7  Investments.

               (a)  Except as permitted by Section 7.3,  directly or  indirectly
acquire or own, or make any Investment in or to any Person, or permit any of its
Subsidiaries so to do, other than Permitted Investments;

               (b)  maintain or invest  with a Person  other than Bank or Bank's
Affiliates  any of its  property  consisting  of  investment  property,  deposit
accounts,  letter-of-credit  rights or electronic chattel paper, except for such
property  held  by  such  Person  having  a  fair  market  value  not  exceeding
$1,000,000,  or permit any Subsidiary to do so, other than (i) deposit  accounts
maintained  with a financial  institution in Singapore and France which are used
to fund  business  operations  in the ordinary  course of business,  and (ii) if
reasonably requested by Bank, Borrower shall use commercially reasonable efforts
to obtain from such Person, if located in the United States, a control agreement
with Bank, in form and substance satisfactory to Bank; or

               (c)  suffer  or  permit  any  Subsidiary  to be a party to, or be
bound by, an agreement that restricts such Subsidiary  from paying  dividends or
otherwise distributing property to Borrower.

          7.8  Transactions  with Affiliates.  Directly or indirectly enter into
or permit to exist any  material  transaction  with any  Affiliate  of  Borrower
except for transactions that are in the ordinary course of Borrower's  business,
upon terms that are no less  favorable to Borrower  than would be obtained in an
arm's length transaction with a non-affiliated Person.

          7.9  Subordinated   Debt.   Make  any   payment   in  respect  of  any
Subordinated  Debt, or permit any of its  Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt and except (i) for
the conversion of Subordinated  Debt into equity securities of Borrower and (ii)
Borrower may prepay any  Subordinated  Debt in an aggregate amount not to exceed
$5,000,000 so long as before and after giving effect thereto no Event of Default
exists,  or  amend  any  provision  affecting  Bank's  rights  contained  in any
documentation  relating to the  Subordinated  Debt without  Bank's prior written
consent.

          7.10 Inventory and Equipment.  Store  Inventory  (other than Inventory
held at spare  parts  depots,  Inventory  in transit,  Inventory  held by any of
Borrower's  customers  or  potential  customers  which is in the process of sale
acceptance, or Inventory temporarily located with any of Borrower's customers or
potential  customers for demonstration  purposes) or Equipment having a standard
cost  (determined  in accordance  with GAAP)  exceeding  $500,000 with a bailee,
warehouseman,  or similar third party unless,  if reasonably  requested by Bank,

                                       13
<PAGE>

the third party has been notified of Bank's  security  interest and (a) Borrower
uses commercially  reasonable efforts to obtain for Bank an acknowledgment  from
the third party that it is holding or will hold the  Inventory or Equipment  for
Bank's  benefit or (b) Bank is in  possession of the  warehouse  receipt,  where
negotiable,  covering such Inventory or Equipment.  Except for Inventory sold in
the ordinary course of business, Inventory held at spare parts depots, Inventory
in transit, Inventory held by any of Borrower's customers or potential customers
which is in the process of sale acceptance,  and Inventory  temporarily  located
with any of  Borrower's  customers  or  potential  customers  for  demonstration
purposes,  and except for such other  locations  as Bank may approve in writing,
Borrower shall keep a substantial portion of the Inventory and Equipment only at
the Collateral  Locations and such other  locations of which Borrower gives Bank
prior  written  notice and as to which Bank files a  financing  statement  where
needed to perfect its security interest.

          7.11 No Investment Company; Margin Regulation. Become or be controlled
by an "investment  company," within the meaning of the Investment Company Act of
1940,  or become  principally  engaged in, or undertake as one of its  important
activities,  the business of extending  credit for the purpose of  purchasing or
carrying  margin  stock,  or use the proceeds of any Credit  Extension  for such
purpose.

     8.   EVENTS OF DEFAULT.

     Any one or more of the  following  events  shall  constitute  an  Event  of
Default by Borrower under this Agreement:

          8.1  Payment Default.  If Borrower fails to pay any of the Obligations
within 5 days after their due date;

          8.2  Covenant Default.

               (a)  If Borrower  fails to perform any  obligation  under Section
6.2, 6.5, 6.6, or 6.7 or violates any of the covenants contained in Article 7 of
this Agreement; or

               (b)  If  Borrower  fails or  neglects  to perform or observe  any
other material term, provision, condition, covenant contained in this Agreement,
in any of the Loan  Documents,  or in any  other  present  or  future  agreement
between  Borrower  and  Bank  and as to  any  default  under  such  other  term,
provision,  condition  or  covenant  that can be cured,  has failed to cure such
default  within  ten (10) days after  Borrower  receives  notice  thereof or any
officer of  Borrower  becomes  aware  thereof;  provided,  however,  that if the
default  cannot by its nature be cured  within the ten (10) day period or cannot
after  diligent  attempts by Borrower be cured  within such ten (10) day period,
and such default is likely to be cured within a reasonable  time,  then Borrower
shall have an additional  reasonable  period (which shall not in any case exceed
thirty (30) days) to attempt to cure such  default,  and within such  reasonable
time period the failure to have cured such default  shall not be deemed an Event
of Default but no Credit Extensions will be made;

          8.3  Defective Perfection. If Bank shall receive at any time following
the  Closing  Date an SOS Report  indicating  that except for  Permitted  Liens,

                                       14
<PAGE>

Bank's  security  interest in the  Collateral is not prior to all other security
interests or Liens of record reflected in the report;

          8.4  Material  Adverse  Change.  If there  occurs a  material  adverse
change in Borrower's prospects,  business or financial condition, or if there is
a  material  impairment  in the  prospect  of  repayment  of any  portion of the
Obligations  or a material  impairment in the  perfection,  value or priority of
Bank's security interests in the Collateral;

          8.5  Attachment.  If any  material  portion  of  Borrower's  assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment,  seizure, writ or distress warrant or levy has not
been removed,  discharged  or rescinded  within ten (10) days, or if Borrower is
enjoined,  restrained, or in any way prevented by court order from continuing to
conduct all or any material  part of its business  affairs,  or if a judgment or
other  claim  becomes  a lien  or  encumbrance  upon  any  material  portion  of
Borrower's  assets,  or if a notice of lien,  levy,  or  assessment  is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department,  agency, or instrumentality thereof, or by any state, county,
municipal,  or  governmental  agency,  and the same is not paid  within ten days
after  Borrower  receives  notice  thereof,  provided that none of the foregoing
shall  constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Credit Extensions will be made during such cure period);

          8.6  Insolvency.  If Borrower becomes  insolvent,  or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against  Borrower  and is not  dismissed  or  stayed  within  thirty  (30)  days
(provided that no Credit  Extensions will be made prior to the dismissal of such
Insolvency Proceeding);

          8.7  Other  Agreements.  If there is a  default  or other  failure  to
perform in any  agreement  to which  Borrower  is a party with a third  party or
parties  resulting  in a right by such third  party or  parties,  whether or not
exercised, to accelerate the maturity of any Indebtedness in an amount in excess
of $5,000,000 or that could have a Material Adverse Effect;

          8.8  Subordinated  Debt. Except for (i) the conversion of Subordinated
Debt into equity securities of Borrower, (ii) the payment in connection with the
exercise of any warrants issued with respect to the Subordinated Debt, and (iii)
any  prepayment  permitted  by Section  7.9,  if  Borrower  makes any payment on
account of Subordinated  Debt, except to the extent the payment is allowed under
the terms thereof or under any subordination agreement entered into with Bank;

          8.9  Judgments. If a judgment or judgments for the payment of money in
an amount,  individually or in the aggregate,  of at least  $2,000,000  shall be
rendered against Borrower and shall remain unsatisfied and unstayed for a period
of ten (10) days (provided that no Credit  Extensions  will be made prior to the
satisfaction or stay of the judgment); or

          8.10 Misrepresentations. If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth

                                       15
<PAGE>

herein  or in any  certificate  delivered  to  Bank by any  Responsible  Officer
pursuant to this Agreement or to induce Bank to enter into this Agreement or any
other Loan Document.

     9.   BANK'S RIGHTS AND REMEDIES.

          9.1  Rights  and  Remedies.   Upon  the   occurrence  and  during  the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without  demand,  do any one or more of the  following,  all of
which are authorized by Borrower:

               (a)  Declare  all   Obligations,   whether   evidenced   by  this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable  (provided that upon the occurrence of an Event of Default  described in
Section 8.6, all  Obligations  shall become  immediately due and payable without
any action by Bank);

               (b)  Cease  advancing  money or  extending  credit  to or for the
benefit of Borrower  under this Agreement or under any other  agreement  between
Borrower and Bank;

               (c)  Settle or adjust  disputes and claims  directly with account
debtors  for  amounts,  upon terms and in  whatever  order that Bank  reasonably
considers advisable;

               (d)  Make  such  payments  and do such  acts  as  Bank  considers
necessary  or  reasonable  to protect its security  interest in the  Collateral.
Borrower agrees to assemble the Collateral if Bank so requires,  and to make the
Collateral available to Bank as Bank may designate.  Borrower authorizes Bank to
enter the  premises  where  the  Collateral  is  located,  to take and  maintain
possession of the Collateral, or any part of it, and to pay, purchase,  contest,
or compromise any  encumbrance,  charge,  or lien which in Bank's  determination
appears to be prior or superior to its security interest and to pay all expenses
incurred  in  connection  therewith.  With  respect to any of  Borrower's  owned
premises, Borrower hereby grants Bank a license to enter into possession of such
premises  and to occupy the same,  without  charge,  in order to exercise any of
Bank's rights or remedies provided herein, at law, in equity, or otherwise;

               (e)  Set  off  and  apply  to the  Obligations  any  and  all (i)
balances and deposits of Borrower  held by Bank,  and (ii)  indebtedness  at any
time owing to or for the credit or the account of Borrower held by Bank;

               (f)  Ship, reclaim,  recover,  store, finish,  maintain,  repair,
prepare  for sale,  advertise  for sale,  and sell (in the manner  provided  for
herein) the Collateral.  Bank is hereby granted a license or other right, solely
pursuant  to the  provisions  of  this  Section  9.1,  to use,  without  charge,
Borrower's  labels,  patents,  copyrights,  rights  of use of  any  name,  trade
secrets, trade names, trademarks,  service marks, and advertising matter, or any
property of a similar nature,  as it pertains to the  Collateral,  in completing
production  of,  advertising  for sale,  and  selling  any  Collateral  and,  in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights  under all licenses and all  franchise  agreements  shall inure to Bank's
benefit;

               (g)  Sell the  Collateral  at either a public or private sale, or
both, by way of one or more contracts or transactions,  for cash or on terms, in
such  manner  and  at  such  places  (including  Borrower's  premises)  as  Bank

                                       16
<PAGE>

determines is commercially reasonable, and apply any proceeds to the Obligations
in whatever manner or order Bank deems appropriate. Bank may sell the Collateral
without  giving  any  warranties  as to the  Collateral.  Bank may  specifically
disclaim  any  warranties  of  title or the  like.  This  procedure  will not be
considered adversely to affect the commercial  reasonableness of any sale of the
Collateral.  If Bank sells any of the Collateral  upon credit,  Borrower will be
credited only with payments  actually made by the  purchaser,  received by Bank,
and applied to the indebtedness of the purchaser.  If the purchaser fails to pay
for the  Collateral,  Bank may  resell  the  Collateral  and  Borrower  shall be
credited with the proceeds of the sale;

               (h)  Bank may credit bid and purchase at any public sale;

               (i)  Apply for the appointment of a receiver, trustee, liquidator
or  conservator  of the  Collateral,  without  notice and without  regard to the
adequacy of the security for the  Obligations and without regard to the solvency
of  Borrower,  any  guarantor  or  any  other  Person  liable  for  any  of  the
Obligations; and

               (j)  Any  deficiency   that  exists  after   disposition  of  the
Collateral as provided above will be paid immediately by Borrower.

Bank may  comply  with any  applicable  state or  federal  law  requirements  in
connection  with a disposition  of the  Collateral  and  compliance  will not be
considered adversely to affect the commercial  reasonableness of any sale of the
Collateral.

          9.2  Power of Attorney.  Effective only upon the occurrence and during
the  continuance of an Event of Default,  Borrower hereby  irrevocably  appoints
Bank (and any of Bank's  designated  officers,  or employees) as Borrower's true
and lawful attorney to: (a) send requests for verification of Accounts or notify
account  debtors  of Bank's  security  interest  in the  Accounts;  (b)  endorse
Borrower's  name on any checks or other  forms of payment or  security  that may
come into Bank's possession;  (c) sign Borrower's name on any invoice or bill of
lading relating to any Account,  drafts against account  debtors,  schedules and
assignments  of  Accounts,  verifications  of  Accounts,  and notices to account
debtors; (d) dispose of any Collateral;  (e) make, settle, and adjust all claims
under and decisions with respect to Borrower's policies of insurance; (f) settle
and adjust  disputes and claims  respecting  the accounts  directly with account
debtors, for amounts and upon terms which Bank determines to be reasonable;  and
(g) to file,  in its sole  discretion,  one or more  financing  or  continuation
statements and amendments thereto, relative to any of the Collateral without the
signature of Borrower  where  permitted by law;  provided Bank may exercise such
power of attorney to sign the name of Borrower on any of the documents described
in clause (g) above, regardless of whether an Event of Default has occurred. The
appointment  of Bank as Borrower's  attorney in fact,  and each and every one of
Bank's rights and powers,  being coupled with an interest,  is irrevocable until
all of  the  Obligations  have  been  fully  repaid  and  performed  and  Bank's
obligation to provide advances hereunder is terminated.

          9.3  Accounts Collection.  At any time after the occurrence and during
the continuation of an Event of Default,  Bank may notify any Person owing funds
to Borrower of Bank's  security  interest in such funds and verify the amount of
such  Account.  Borrower  shall  collect all amounts owing to Borrower for Bank,

                                       17
<PAGE>

receive in trust all payments as Bank's trustee,  and  immediately  deliver such
payments to Bank in their  original  form as received  from the account  debtor,
with proper endorsements for deposit.

          9.4  Bank  Expenses.  If Borrower  fails to pay any amounts or furnish
any  required  proof of payment due to third  persons or  entities,  as required
under the terms of this Agreement,  then Bank may do any or all of the following
after  reasonable  notice to Borrower:  (a) make payment of the same or any part
thereof;  (b)  set up such  reserves  under  the  Revolving  Line as Bank  deems
necessary  to protect  Bank from the exposure  created by such  failure;  or (c)
obtain and maintain  insurance  policies of the type discussed in Section 6.5 of
this Agreement,  and take any action with respect to such policies as Bank deems
prudent.  Any  amounts  so  paid or  deposited  by Bank  shall  constitute  Bank
Expenses,  shall be due and payable  within 10 Business Days of demand  therefor
(unless an Event of Default has occurred and is  continuing,  in which case such
expenses  shall be immediately  due and payable upon demand by Bank),  and shall
bear interest at the then applicable  rate  hereinabove  provided,  and shall be
secured by the  Collateral.  Any payments  made by Bank shall not  constitute an
agreement by Bank to make similar  payments in the future or a waiver by Bank of
any Event of Default under this Agreement.

          9.5  Bank's Liability for Collateral.  Bank has no obligation to clean
up or otherwise  prepare the Collateral  for sale.  All risk of loss,  damage or
destruction of the Collateral shall be borne by Borrower.

          9.6  No Obligation to Pursue Others. Bank has no obligation to attempt
to satisfy the  Obligations by collecting  them from any other person liable for
them and Bank may release,  modify or waive any collateral provided by any other
Person to secure any of the  Obligations,  all without  affecting  Bank's rights
against  Borrower.  Borrower  waives  any right it may have to  require  Bank to
pursue any other Person for any of the Obligations.

          9.7  Remedies  Cumulative.  Bank's  rights  and  remedies  under  this
Agreement,  the Loan Documents,  and all other  agreements  between Borrower and
Bank shall be  cumulative.  Bank shall have all other  rights and  remedies  not
inconsistent  herewith as  provided  under the Code,  by law,  or in equity.  No
exercise  by Bank of one right or remedy  shall be  deemed an  election,  and no
waiver by Bank of any Event of  Default  on  Borrower's  part  shall be deemed a
continuing  waiver.  No delay by Bank shall  constitute a waiver,  election,  or
acquiescence  by it. No  waiver  by Bank  shall be  effective  unless  made in a
written  document  signed on behalf of Bank and then shall be effective  only in
the  specific  instance  and for the  specific  purpose  for which it was given.
Borrower expressly agrees that this Section 9.7 may not be waived or modified by
Bank by course of performance, conduct, estoppel or otherwise.

          9.8  Demand;  Protest. Except as otherwise provided in this Agreement,
Borrower  waives  demand,  protest,  notice of  protest,  notice of  default  or
dishonor, notice of payment and nonpayment and any other notices relating to the
Obligations.

     10.  NOTICES.

     Unless otherwise provided in this Agreement,  all notices or demands by any
party  relating  to  this  Agreement  or any  other  agreement  entered  into in
connection herewith shall be in writing and (except for financial statements and
other  informational  documents which may be sent by first-class  mail,  postage

                                       18
<PAGE>

prepaid)  shall  be  personally  delivered  or  sent by a  recognized  overnight
delivery service,  certified mail, postage prepaid, return receipt requested, or
by  telefacsimile  to Borrower or to Bank,  as the case may be, at its addresses
set forth below:

     If to Borrower:         ELECTROGLAS, INC.
                             6024 Silver Creek Valley Road
                             San Jose, CA  95138
                             Attn: Chief Financial Officer
                             FAX: (408) 528-3556

     If to Bank:             COMERICA BANK
                             2321 Rosecrans Ave., Suite 5000
                             El Segundo, CA  90245
                             Attn: Manager
                             FAX: (310) 297-2290

     with a copy to:         COMERICA BANK
                             226 Airport Parkway, Suite 100
                             San Jose, CA  95110
                             Attn: Robert Shutt, Senior Vice President & Manager
                             FAX: (408) 451-8568

     The  parties  hereto may  change  the  address at which they are to receive
notices  hereunder,  by notice in writing in the  foregoing  manner given to the
other.

     11.  CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.

     This Agreement shall be governed by, and construed in accordance  with, the
internal  laws of the  State of  California,  without  regard to  principles  of
conflicts  of law.  Each of Borrower  and Bank hereby  submits to the  exclusive
jurisdiction  of the state and  Federal  courts  located  in the County of Santa
Clara, State of California. BANK AND BORROWER EACH ACKNOWLEDGE THAT THE RIGHT TO
TRIAL BY JURY IS A CONSTITUTIONAL  ONE, BUT THAT IT MAY BE WAIVED. EACH OF THEM,
AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT, WITH COUNSEL OF THEIR
CHOICE,  KNOWINGLY,  VOLUNTARILY AND INTENTIONALLY  WAIVES ANY RIGHT ANY OF THEM
MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION  BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR ANY RELATED  INSTRUMENT OR LOAN DOCUMENT OR ANY OF THE TRANSACTIONS
CONTEMPLATED  BY THIS  AGREEMENT OR ANY COURSE OF CONDUCT,  DEALING,  STATEMENTS
(WHETHER ORAL OR WRITTEN),  OR ACTION OF ANY OF THEM. THESE PROVISIONS SHALL NOT
BE  DEEMED TO HAVE BEEN  MODIFIED  IN ANY  RESPECT  OR  RELINQUISHED  BY BANK OR
BORROWER, EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY EACH OF THEM.

     12.  JUDICIAL REFERENCE.  If and only if the jury trial waiver set forth in
Section 11 of this  Agreement is  invalidated  for any reason by a court of law,

                                       19
<PAGE>

statute  or  otherwise,  the  reference  provisions  set  forth  below  shall be
substituted in place of the jury trial waiver.  So long as the jury trial waiver
remains  valid,  the  reference  provisions  set forth in this Section  shall be
inapplicable.

          12.1 Each controversy,  dispute or claim (each, a "Claim") between the
parties arising out of or relating to this Agreement or any other Loan Document,
other  than (i) all  matters  in  connection  with  nonjudicial  foreclosure  of
security  interests in real or personal  property;  or (ii) the appointment of a
receiver or the  exercise  of other  provisional  remedies  (any of which may be
initiated  pursuant to  applicable  law) that are not settled in writing  within
fifteen (15) days after the date on which a party subject to the Loan  Documents
gives written notice to all other parties that a Claim exists (the "Claim Date")
shall be resolved by a reference proceeding in California in accordance with the
provisions of Section 638 et seq. of the California Code of Civil Procedure,  or
their successor  sections  ("CCP"),  which shall constitute the exclusive remedy
for the resolution of any Claim concerning the Loan Documents, including whether
such Claim is subject to the reference  proceeding.  Except as set forth in this
section,  the parties waive the right to initiate legal proceedings against each
other concerning each such Claim.  Venue for these  proceedings  shall be in the
Superior Court in the County where the real property, if any, is located or in a
County where venue is otherwise  appropriate  under state law (the "Court").  By
mutual agreement, the parties shall select a retired Judge of the Court to serve
as referee, and if they cannot so agree within fifteen (15) days after the Claim
Date,  the  Presiding  Judge of the Court (or his or her  representative)  shall
promptly select the referee. A request for appointment of a referee may be heard
on an ex parte or expedited  basis.  The referee  shall be appointed to sit as a
temporary  judge,  with all the powers for a temporary  judge,  as authorized by
law,  and upon  selection  should  take and  subscribe  to the oath of office as
provided for in Rule 244 of the California  Rules of Court (or any  subsequently
enacted Rule).  Each party shall have one peremptory  challenge  pursuant to CCP
ss.170.6.  Upon being  selected,  the referee  shall (a) be requested to set the
matter for a status and trial-setting  conference within fifteen (15) days after
the date of selection and (b) if  practicable,  try any and all issues of law or
fact and report a statement of decision upon them within ninety (90) days of the
date of selection.  The referee will have power to expand or limit the amount of
discovery  a party may employ.  Any  decision  rendered  by the referee  will be
final,  binding and  conclusive,  and judgment shall be entered  pursuant to CCP
ss.644 in any court in the State of California having jurisdiction.  The parties
shall  complete  all  discovery no later than fifteen (15) days before the first
trial date established by the referee. The referee may extend such period in the
event of a  party's  refusal  to  provide  requested  discovery  for any  reason
whatsoever,  including,  without  limitation,  legal  objections  raised to such
discovery  or  unavailability  of a witness due to absence or illness.  No party
shall be entitled to "priority" in conducting  discovery.  Either party may take
depositions  upon seven (7) days written  notice,  and shall respond to requests
for  production or inspection of documents  within ten (10) days after  service.
All disputes relating to discovery which cannot be resolved by the parties shall
be submitted to the referee whose  decision  shall be final and binding upon the
parties.  Pending  appointment of the referee as provided  herein,  the Superior
Court  is  empowered  to  issue  temporary  and/or  provisional   remedies,   as
appropriate.

          12.2 Except as expressly set forth herein, the referee shall determine
the manner in which the reference proceeding is conducted including the time and
place of all  hearings,  the order of  presentation  of evidence,  and all other
questions  that arise with  respect to the course of the  reference  proceeding.

                                       20
<PAGE>

Except for trial,  all  proceedings  and hearings  conducted  before the referee
shall be  conducted  without a court  reporter  unless a party  requests a court
reporter.  The party making such a request shall have the  obligation to arrange
for and pay for the court  reporter.  Subject  to the  referee's  power to award
costs to the prevailing  party,  the parties shall equally bear the costs of the
court reporter at the trial and the referee's expenses.

          12.3 The  referee  shall  determine  all  issues  in  accordance  with
existing  California  case and  statutory  law.  California  rules  of  evidence
applicable to  proceedings  at law will apply to the reference  proceeding.  The
referee  shall be  empowered  to enter  equitable  as well as legal  relief,  to
provide all temporary and/or provisional  remedies and to enter equitable orders
that  shall  be  binding  upon  the  parties.  At the  close  of  the  reference
proceeding,  the referee  shall issue a single  judgment at disposing of all the
claims of the parties that are the subject of the reference. The parties reserve
the right (i) to contest or appeal  from the final  judgment  or any  appealable
order or appealable  judgment entered by the referee and (ii) to obtain findings
of fact, conclusions of laws, a written statement of decision, and (iii) to move
for a new trial or a different judgment, which new trial, if granted, shall be a
reference proceeding under this provision.

          12.4 If the enabling  legislation  which provides for appointment of a
referee is repealed (and no successor  statute is enacted),  any dispute between
the parties that would otherwise be determined by the reference procedure herein
described will be resolved and determined by arbitration  conducted in San Jose,
California  (or if such city is not  available,  then another city in California
selected  by Bank) by a  retired  judge of the  Court,  in  accordance  with the
California  Arbitration Act ss.1280 through ss.1294.2 of the CCP as amended from
time to time.  The  limitations  with  respect to discovery as set forth in this
Section shall apply to any such arbitration proceeding.

     13.  GENERAL PROVISIONS.

          13.1 Successors and Assigns.  This  Agreement  shall bind and inure to
the benefit of the respective  successors  and permitted  assigns of each of the
parties  and  shall  bind all  persons  who  become  bound  as a debtor  to this
Agreement;  provided,  however,  that  neither  this  Agreement  nor any  rights
hereunder  may be assigned by Borrower  without  Bank's prior  written  consent,
which consent may be granted or withheld in Bank's sole  discretion.  Bank shall
have the right  without the consent of or notice to Borrower to sell,  transfer,
negotiate,  or grant  participation  in all or any part of, or any  interest in,
Bank's obligations, rights and benefits hereunder.

          13.2 Indemnification.   Borrower  shall  defend,  indemnify  and  hold
harmless  Bank  and  its  officers,  employees,  and  agents  against:  (a)  all
obligations,  demands,  claims, and liabilities claimed or asserted by any other
party in connection with the  transactions  contemplated by this Agreement;  and
(b) all losses or Bank Expenses in any way suffered,  incurred, or paid by Bank,
its officers,  employees and agents as a result of or in any way arising out of,
following,  or consequential  to transactions  between Bank and Borrower whether
under this Agreement,  or otherwise  (including  without  limitation  reasonable
attorneys fees and  expenses),  except for losses caused by Bank's or such other
indemnified party's gross negligence or willful misconduct.

                                       21
<PAGE>

          13.3 Time of Essence.  Time is of the essence for the  performance  of
all obligations set forth in this Agreement.

          13.4 Severability  of  Provisions.  Each  provision of this  Agreement
shall be severable from every other  provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.

          13.5 Amendments  in  Writing,   Integration.   All  amendments  to  or
terminations  of this  Agreement or the other Loan  Documents must be in writing
except  as  provided  in  Section  2.6.  All prior  agreements,  understandings,
representations,  warranties,  and negotiations  between the parties hereto with
respect to the subject matter of this Agreement and the other Loan Documents, if
any, are merged into this Agreement and the Loan Documents.

          13.6 Counterparts.  This  Agreement  may be  executed in any number of
counterparts and by different parties on separate  counterparts,  each of which,
when  executed  and  delivered,  shall be deemed to be an  original,  and all of
which, when taken together, shall constitute but one and the same Agreement.

          13.7 Survival.  All covenants,  representations and warranties made in
this  Agreement  shall  continue  in  full  force  and  effect  so  long  as any
Obligations  hereunder or under the other Loan Documents  remain  outstanding or
Bank  has  any  obligation  to  make  any  Credit  Extension  to  Borrower.  The
obligations of Borrower to indemnify Bank with respect to the expenses, damages,
losses, costs and liabilities  described in Section 13.2 shall survive until all
applicable  statute of  limitations  periods with respect to actions that may be
brought against Bank have run.

          13.8 Confidentiality.  In handling any confidential information,  Bank
and all employees and agents of Bank shall exercise the same degree of care that
Bank exercises with respect to its own proprietary information of the same types
to maintain the  confidentiality of any non-public  information thereby received
or  received   pursuant  to  this  Agreement  except  that  disclosure  of  such
information  may be  made  (i) to the  subsidiaries  or  Affiliates  of  Bank in
connection with their present or prospective  business  relations with Borrower,
(ii) to  prospective  transferees  or  purchasers  of any interest in the Loans,
provided that they have entered into a comparable  confidentiality  agreement in
favor of Borrower and have  delivered a copy to  Borrower,  (iii) as required by
law, regulations, rule or order, subpoena, judicial order or similar order, (iv)
as may be  required  in  connection  with  the  examination,  audit  or  similar
investigation  of Bank  and (v) as Bank may  determine  in  connection  with the
enforcement of any remedies hereunder.  Confidential information hereunder shall
not  include  information  that  either:  (a) is in the public  domain or in the
knowledge or possession  of Bank when  disclosed to Bank, or becomes part of the
public  domain  after  disclosure  to Bank  through no fault of Bank;  or (b) is
disclosed to Bank by a third party, provided Bank does not have actual knowledge
that such third party is prohibited from disclosing such information.

                                       22
<PAGE>

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
executed as of the date first above written.

                                              ELECTROGLAS, INC.

                                              By:    /s/ Thomas E. Brunton
                                                     ---------------------------

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

                                              COMERICA BANK

                                              By:    /s/ Robert R. Shutt
                                                     ---------------------------

                                              Title: Senior Vice President
                                                     ---------------------------

                                       23
<PAGE>

                                    EXHIBIT A

                                   DEFINITIONS

     "Accounts"  means all presently  existing and hereafter  arising  accounts,
contract  rights,  and all other forms of obligations  owing to Borrower arising
out of the sale or lease of goods (including,  without limitation, the licensing
of software and other  technology)  or the rendering of services by Borrower and
any and all credit insurance,  guaranties,  and other security therefor, as well
as all  merchandise  returned to or reclaimed by Borrower and  Borrower's  Books
relating to any of the foregoing.

     "Advance" or  "Advances"  means a cash advance or cash  advances  under the
Revolving Line.

     "Affiliate"  means,  with  respect to any  Person,  any Person that owns or
controls  directly or  indirectly  such Person,  any Person that  controls or is
controlled  by or is under common  control  with such  Person,  and each of such
Person's senior executive officers, directors, and partners.

     "Bank  Expenses"  means  all  reasonable   costs  or  expenses   (including
reasonable  attorneys'  fees and  expenses,  whether  generated  in-house  or by
outside  counsel)  incurred in  connection  with the  preparation,  negotiation,
administration,  and  enforcement of the Loan Documents;  reasonable  Collateral
audit  fees;  and  Bank's  reasonable  attorneys'  fees  and  expenses  (whether
generated  in-house or by outside  counsel)  incurred in amending,  enforcing or
defending the Loan Documents  (including fees and expenses of appeal),  incurred
before,  during  and  after an  Insolvency  Proceeding,  whether  or not suit is
brought.

     "Borrower  State" means  Delaware,  the state under whose laws  Borrower is
organized.

     "Borrower's  Books" means all of  Borrower's  books and records  including:
ledgers;  records concerning  Borrower's assets or liabilities,  the Collateral,
business operations or financial condition;  and all computer programs,  or tape
files, and the equipment, containing such information.

     "Borrowing  Base"  means an amount  equal to 80% of Eligible  Accounts,  as
determined by Bank with reference to the most recent  Borrowing Base Certificate
delivered by Borrower.

     "Business Day" means any day that is not a Saturday,  Sunday,  or other day
on which banks in the State of California are authorized or required to close.

     "Cash" means unrestricted cash and cash equivalents.

     "Change in  Control"  shall mean a  transaction  in which any  "person"  or
"group"  (within the  meaning of Section  13(d) and  14(d)(2) of the  Securities
Exchange Act of 1934) becomes the  "beneficial  owner" (as defined in Rule 13d-3
under  the  Securities  Exchange  Act of 1934),  directly  or  indirectly,  of a
sufficient number of shares of all classes of stock then outstanding of Borrower
ordinarily  entitled  to vote in the  election  of  directors,  empowering  such
"person" or "group" to elect a majority of the Board of  Directors  of Borrower,
who did not have such power before such transaction.

                                       1
<PAGE>

     "Chief  Executive  Office State" means  California,  where Borrower's chief
executive office is located.

     "Closing Date" means the date of this Agreement.

     "Code"  means  the  California   Uniform  Commercial  Code  as  amended  or
supplemented from time to time.

     "Collateral"  means the property described on Exhibit B attached hereto and
all  Negotiable  Collateral  to the extent not described on Exhibit B, except to
the extent any such  property  (i) is  nonassignable  by its terms  without  the
consent of the  licensor  thereof or another  party (but only to the extent such
prohibition on transfer is enforceable under applicable law, including,  without
limitation,  Sections  9406 and 9408 of the  Code),  or (ii) the  granting  of a
security  interest therein is contrary to applicable law, provided that upon the
cessation  of  any  such   restriction  or  prohibition,   such  property  shall
automatically become part of the Collateral.

     "Collateral  Location"  means the  following  location or  locations  where
substantially  all of the  Collateral  is  located:  San  Jose,  California  and
Singapore.

     "Consolidated  Net Income" means the  consolidated net income of any Person
and its Subsidiaries,  after deduction of all expenses,  taxes, and other proper
charges,  determined in accordance with GAAP,  after  eliminating  therefrom all
extraordinary items of income.

     "Contingent  Obligation"  means,  as applied to any  Person,  any direct or
indirect liability,  contingent or otherwise, of that Person with respect to (i)
any  indebtedness,  lease,  dividend,  letter of credit or other  obligation  of
another,  including,   without  limitation,  any  such  obligation  directly  or
indirectly guaranteed,  endorsed, co-made or discounted or sold with recourse by
that  Person,  or in respect  of which  that  Person is  otherwise  directly  or
indirectly  liable;  (ii) any  obligations  with  respect to undrawn  letters of
credit,  corporate  credit cards or merchant  services issued for the account of
that Person; and (iii) all obligations arising under any interest rate, currency
or commodity swap agreement,  interest rate cap agreement,  interest rate collar
agreement,  or other  agreement or  arrangement  designated  to protect a Person
against  fluctuation  in interest  rates,  currency  exchange rates or commodity
prices;  provided,  however,  that the term  "Contingent  Obligation"  shall not
include  endorsements  for  collection  or  deposit  in the  ordinary  course of
business.  The  amount  of any  Contingent  Obligation  shall be deemed to be an
amount equal to the stated or  determined  amount of the primary  obligation  in
respect  of which  such  Contingent  Obligation  is made or,  if not  stated  or
determinable, the maximum reasonably anticipated liability in respect thereof as
determined  by such Person in good faith;  provided,  however,  that such amount
shall not in any event exceed the maximum  amount of the  obligations  under the
guarantee or other support arrangement.

     "Copyrights"  means any and all copyright rights,  copyright  applications,
copyright  registrations  and like  protections  in each work or authorship  and
derivative work thereof, whether published or unpublished and whether or not the
same also  constitutes  a trade  secret,  now or  hereafter  existing,  created,
acquired or held.

                                       2
<PAGE>

     "Credit  Extension"  means each Advance or any other extension of credit by
Bank to or for the benefit of Borrower hereunder.

     "Current  Liabilities"  means, as of any applicable  date, all amounts that
should,  in  accordance  with GAAP,  be included as current  liabilities  on the
consolidated balance sheet of Borrower and its Subsidiaries as at such date.

     "Effective Tangible Net Worth" means, as of any applicable date, the sum of
(i)  all  items  which  in  conformity   with  GAAP  would  be  included   under
shareholders'  equity  on a  consolidated  balance  sheet  of  Borrower  and its
Subsidiaries  plus (ii) the long-term  portion of Subordinated  Debt minus (iii)
intangible assets,  determined in accordance with GAAP. Any non-cash  impairment
charges   related  to  Borrower's  real  property  will  be  excluded  from  the
calculation of Effective Tangible Net Worth.

     "Eligible  Accounts" means those Accounts that arise in the ordinary course
of Borrower's  business that comply with all of Borrower's  representations  and
warranties to Bank set forth in Section 5.3; provided,  that Bank may change the
standards of eligibility by giving Borrower 30 days prior written notice. Unless
otherwise agreed to by Bank, Eligible Accounts shall not include the following:

          (a)  Accounts that the account debtor has failed to pay in full within
ninety (90) days of invoice date;

          (b)  Credit balances over ninety (90) days;

          (c)  Accounts with respect to an account debtor,  25% (50% in the case
of National  Semiconductor)  of whose  Accounts the account debtor has failed to
pay within ninety (90) days of invoice date;

          (d)  Accounts   with   respect   to  an  account   debtor,   including
Subsidiaries and Affiliates, whose total obligations to Borrower exceed 25% (30%
in the case of  National  Semiconductor)  of all  Accounts,  to the extent  such
obligations exceed the aforementioned percentage,  except as approved in writing
by Bank;

          (e)  Accounts  with respect to which the account  debtor does not have
its  principal  place of  business  in the United  States,  except for  Eligible
Foreign Accounts;

          (f)  Accounts  with respect to which the account  debtor is the United
States or any  department,  agency,  or  instrumentality  of the United  States,
except for  Accounts of the United  States if the payee has assigned its payment
rights to Bank and the assignment has been acknowledged  under the Assignment of
Claims Act of 1940 (31 U.S.C. 3727);

          (g)  Accounts with respect to which  Borrower is liable to the account
debtor for goods sold or services  rendered by the account  debtor to  Borrower,
but only to the  extent  of any  amounts  owing to the  account  debtor  against
amounts owed to Borrower;

                                       3
<PAGE>

          (h)  Accounts  with respect to which goods are placed on  consignment,
guaranteed  sale,  sale or  return,  sale on  approval,  bill and hold,  demo or
promotional, or other terms by reason of which the payment by the account debtor
may be conditional;

          (i)  Accounts with respect to which the account  debtor is an officer,
employee, agent or Affiliate of Borrower;

          (j)  Accounts  that have not yet been billed to the account  debtor or
that relate to deposits  (such as good faith  deposits) or other property of the
account  debtor held by Borrower for the  performance of services or delivery of
goods which Borrower has not yet performed or delivered;

          (k)  Accounts  with  respect  to which  the  account  debtor  disputes
liability or makes any claim with respect thereto as to which Bank believes,  in
its sole  discretion,  that  there may be a basis for  dispute  (but only to the
extent of the  amount  subject to such  dispute or claim),  or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business;

          (l)  Accounts the collection of which Bank reasonably determines after
inquiry and consultation with Borrower to be doubtful; and

          (m)  Retentions and hold-backs.

     "Eligible  Foreign  Accounts"  means  Accounts  with  respect  to which the
account  debtor  does not have its  principal  place of  business  in the United
States and that are (i)  supported by one or more letters of credit in an amount
and of a tenor, and issued by a financial institution,  acceptable to Bank, (ii)
insured  by the  Export  Import  Bank of the  United  States or covered by other
credit  insurance  acceptable to Bank, (iii) generated by an account debtor with
its principal place of business in Canada,  provided that the Bank has perfected
its security interest in the appropriate  Canadian province,  (iv) Accounts with
respect  to which the  account  debtor is any of ST  Microelectronics,  National
Semiconductor,  Philips, or Infineon,  or (v) approved by Bank on a case-by-case
basis. All Eligible Foreign Accounts must be calculated in U.S. Dollars.

     "Environmental  Laws" means all laws,  rules,  regulations,  orders and the
like  issued by any  federal  state,  local  foreign  or other  governmental  or
quasi-governmental  authority or any agency  pertaining to the environment or to
any hazardous  materials or wastes,  toxic substances,  flammable,  explosive or
radioactive materials, asbestos or other similar materials.

     "Equipment" means all present and future machinery,  equipment,  furniture,
fixtures,  vehicles,  tools,  parts and  attachments  in which  Borrower has any
interest.

     "ERISA"  means the Employee  Retirement  Income  Security  Act of 1974,  as
amended, and the regulations thereunder.

     "Event of Default" has the meaning assigned in Article 8.

     "GAAP"  means  United  States  generally  accepted  accounting  principles,
consistently applied, as in effect from time to time.

                                       4
<PAGE>

     "Indebtedness"  means  (a)  all  indebtedness  for  borrowed  money  or the
deferred purchase price of property or services,  including  without  limitation
reimbursement  and other obligations with respect to surety bonds and letters of
credit,  (b) all obligations  evidenced by notes,  bonds,  debentures or similar
instruments,   (c)  all  capital  lease  obligations,  and  (d)  all  Contingent
Obligations.

     "Insolvency  Proceeding"  means any proceeding  commenced by or against any
Person or entity under any  provision of the United States  Bankruptcy  Code, as
amended, or under any other bankruptcy or insolvency law, including  assignments
for the  benefit  of  creditors,  formal or  informal  moratoria,  compositions,
extension generally with its creditors,  or proceedings seeking  reorganization,
arrangement, or other relief.

     "Intellectual  Property" means all of Borrower's right, title, and interest
in and to the following:

          (a)  Copyrights, Trademarks, Patents, and Mask Works;

          (b)  Any and all trade secrets, and any and all intellectual  property
rights in computer  software  and  computer  software  products now or hereafter
existing, created, acquired or held;

          (c)  Any and all design  rights which may be available to Borrower now
or hereafter existing, created, acquired or held;

          (d)  Any and all claims for damages by way of past, present and future
infringement of any of the rights included  above,  with the right,  but not the
obligation,  to sue for and collect such damages for said use or infringement of
the intellectual property rights identified above;

          (e)  All  licenses  or  other  rights  to use  any of the  Copyrights,
Patents,  Trademarks or Mask Works,  and all license fees and royalties  arising
from such use;

          (f)  All amendments, renewals and extensions of any of the Copyrights,
Trademarks, Patents, or Mask Works; and

          (g)  All  proceeds and products of the  foregoing,  including  without
limitation all payments under insurance or any indemnity or warranty  payable in
respect of any of the foregoing.

     "Inventory"  means all present and future  inventory in which  Borrower has
any interest.

     "Investment"   means  any   beneficial   ownership  of  (including   stock,
partnership  or limited  liability  company  interest or other  securities)  any
Person, or any loan, advance or capital contribution to any Person.

     "Lien" means any mortgage,  lien, deed of trust, charge,  pledge,  security
interest or other encumbrance.

                                       5
<PAGE>

     "Loan Documents"  means,  collectively,  this Agreement,  any note or notes
executed by Borrower,  and any other document,  instrument or agreement  entered
into in connection with this Agreement,  all as amended or extended from time to
time.

     "Mask  Works"  means all mask works or  similar  rights  available  for the
protection of semiconductor chips now owned or later acquired.

     "Material  Adverse  Effect"  means a  material  adverse  effect  on (i) the
business operations, condition (financial or otherwise) or prospects of Borrower
and its Subsidiaries taken as a whole, (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents, (iii)
Borrower's interest in, or the value,  perfection or priority of Bank's security
interest in the Collateral.

     "Negotiable  Collateral" means all of Borrower's present and future letters
of  credit  of  which  it  is  a  beneficiary,  drafts,  instruments  (including
promissory  notes),  securities,  documents  of title,  and chattel  paper,  and
Borrower's Books relating to any of the foregoing.

     "Obligations" means all debt, principal,  interest, Bank Expenses and other
amounts  owed to Bank by Borrower  pursuant to this  Agreement or any other Loan
Document,  whether absolute or contingent, due or to become due, now existing or
hereafter arising, including any interest that accrues after the commencement of
an Insolvency Proceeding and including any debt, liability,  or obligation owing
from Borrower to others that Bank may have obtained by assignment or otherwise.

     "Patents"  means all  patents,  patent  applications  and like  protections
including without limitation improvements,  divisions, continuations,  renewals,
reissues, extensions and continuations-in-part of the same.

     "Periodic  Payments" means all installments or similar  recurring  payments
that Borrower may now or hereafter  become  obligated to pay to Bank pursuant to
the terms and  provisions  of any  instrument,  or agreement now or hereafter in
existence between Borrower and Bank.

     "Permitted Indebtedness" means:

          (a)  Indebtedness  of  Borrower  in favor of Bank  arising  under this
Agreement or any other Loan Document;

          (b)  Indebtedness  existing on the Closing  Date and  disclosed in the
Schedule;

          (c)  Indebtedness  not to exceed  $2,000,000  in the  aggregate in any
fiscal year of Borrower secured by a lien described in clause (c) of the defined
term "Permitted Liens";

          (d)  Indebtedness secured by a Lien on any of Borrower's real property
and any  appurtenances,  improvements  or fixtures  thereto,  provided that such
Indebtedness  shall not at any time exceed 75% of the fair  market  value of the
real  property,   appurtenances,   improvements   and  fixtures   securing  such
Indebtedness;

          (e)  Subordinated Debt;

                                       6
<PAGE>

          (f)  Indebtedness to trade  creditors  incurred in the ordinary course
of business; and

          (g)  Extensions,  refinancings  and renewals of any items of Permitted
Indebtedness,  provided that the principal  amount is not increased or the terms
modified to impose more burdensome terms upon Borrower or its Subsidiary, as the
case may be.

          "Permitted Investment" means:

          (a)  Investments  existing  on  the  Closing  Date  disclosed  in  the
Schedule;

          (b)  Investments made in accordance with Borrower's  investment policy
furnished to Bank in writing prior to the Closing Date;

          (c)  Repurchases  of stock  from  former  employees  or  directors  of
Borrower under the terms of applicable repurchase agreements (i) in an aggregate
amount not to exceed  $500,000  in any fiscal  year,  provided  that no Event of
Default has  occurred,  is  continuing or would exist after giving effect to the
repurchases, or (ii) in any amount where the consideration for the repurchase is
the  cancellation  of  indebtedness  owed by such former  employees  to Borrower
regardless of whether an Event of Default exists;

          (d)  Investments accepted in connection with Permitted Transfers;

          (e)  Investments  of   wholly-owned   Subsidiaries   in  or  to  other
wholly-owned   Subsidiaries   or  Borrower  and   Investments   by  Borrower  in
wholly-owned Subsidiaries in the ordinary course of business;

          (f)  Investments not to exceed $500,000 in the aggregate in any fiscal
year consisting of (i) travel advances and employee  relocation  loans and other
employee loans and advances in the ordinary  course of business,  and (ii) loans
to  employees,  officers  or  directors  relating  to  the  purchase  of  equity
securities of Borrower or its  Subsidiaries  pursuant to employee stock purchase
plan agreements approved by Borrower's Board of Directors;

          (g)  Investments  (including debt obligations)  received in connection
with  the  bankruptcy  or  reorganization  of  customers  or  suppliers  and  in
settlement of delinquent  obligations of, and other disputes with,  customers or
suppliers arising in the ordinary course of Borrower's business;

          (h)  Investments   consisting  of  notes  receivable  of,  or  prepaid
royalties  and other credit  extensions,  to customers and suppliers who are not
Affiliates, in the ordinary course of business,  provided that this subparagraph
(h) shall not apply to Investments of Borrower in any Subsidiary; and

          (i)  Joint ventures or strategic  alliances in the ordinary  course of
Borrower's business consisting of the non-exclusive licensing of technology, the
development of technology or the providing of technical  support,  provided that
any cash  Investments  by Borrower do not exceed  $5,000,000 in the aggregate in
any fiscal year.

                                       7
<PAGE>

          "Permitted Liens" means the following:

          (a)  Any Liens  existing  on the  Closing  Date and  disclosed  in the
Schedule  (excluding Liens to be satisfied with the proceeds of the Advances) or
arising under this Agreement or the other Loan Documents;

          (b)  Liens for taxes, fees,  assessments or other governmental charges
or levies, either not delinquent or being contested in good faith by appropriate
proceedings and for which Borrower  maintains  adequate  reserves,  provided the
same have no priority over any of Bank's security interests;

          (c)  Liens not to exceed  $2,000,000  in the  aggregate (i) upon or in
any Equipment  acquired or held by Borrower or any of its Subsidiaries to secure
the purchase price of such  Equipment or  indebtedness  incurred  solely for the
purpose  of  financing  the  acquisition  or  lease of such  Equipment,  or (ii)
existing on such  Equipment at the time of its  acquisition,  provided  that the
Lien is confined  solely to the property so acquired and  improvements  thereon,
and the proceeds of such Equipment;

          (d)  Liens  incurred  in  connection  with the  extension,  renewal or
refinancing  of the  indebtedness  secured  by Liens of the  type  described  in
clauses (a) or (c) above,  provided that any  extension,  renewal or replacement
Lien shall be limited to the property  encumbered  by the existing  Lien and the
principal amount of the indebtedness being extended,  renewed or refinanced does
not increase;

          (e)  Liens  arising  from   judgments,   decrees  or   attachments  in
circumstances not constituting an Event of Default under Sections 8.5 or 8.9;

          (f)  Carriers',  warehousemen's,  materialmen's,  and  mechanics'  and
other similar  Liens  imposed by law arising in the ordinary  course of business
which  are not  delinquent  or which are being  contested  in good  faith and by
appropriate  proceedings for which adequate  reserves are being maintained under
GAAP;

          (g)  Liens  incurred  or  deposits  made  in the  ordinary  course  of
business in connection with workers'  compensation,  unemployment  insurance and
other  types of  social  security  legislation  and other  Liens to  secure  the
performance and return of money bonds and other similar  obligations  (exclusive
of  obligations  for the payment of  borrowed  money)  incurred in the  ordinary
course of business,  whether pursuant to statutory  requirements,  common law or
consensual arrangements;

          (h)  Licenses  or  sublicenses  granted  in  the  ordinary  course  of
Borrower's business and any interest or title of a licensor or sublicensor under
any license or sublicense;

          (i)  Liens on real property and any  appurtenances,  improvements  and
fixtures thereto; and

          (j)  Other Liens that do not in the aggregate  exceed  $500,000 at any
time outstanding.

                                       8
<PAGE>

     "Permitted Transfer" means the conveyance,  sale, lease, license,  transfer
or disposition by Borrower or any Subsidiary of:

          (a)  Inventory in the ordinary course of business;

          (b)  licenses and similar  arrangements for the use of the property of
Borrower or its Subsidiaries in the ordinary course of business;

          (c)  worn-out or obsolete Equipment;

          (d)  real property and any  appurtenances,  improvements  and fixtures
thereto; or

          (e)  other assets of Borrower or its  Subsidiaries  that do not in the
aggregate exceed $2,500,000 during any fiscal year.

     "Person" means any individual,  sole proprietorship,  partnership,  limited
liability   company,   joint  venture,   trust,   unincorporated   organization,
association,  corporation,  institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.

     "Prime Rate" means the variable rate of interest,  per annum, most recently
announced by Bank, as its "prime rate,"  whether or not such  announced  rate is
the lowest rate available from Bank.

     "Responsible  Officer" means each of the Chief Executive Officer, the Chief
Financial Officer and the Controller of Borrower.

     "Revolving Line" means a Credit Extension of up to $7,500,000.

     "Revolving Maturity Date" means July 15, 2005.(1)

     "Schedule" means the schedule of exceptions attached hereto and approved by
Bank, if any.

     "SOS Reports" means the official  reports from the  Secretaries of State of
each Collateral  State,  Chief Executive Office State and the Borrower State and
other  applicable  federal,  state or local government  offices  identifying all
current security interests filed in the Collateral and Liens of record as of the
date of such report.

     "Subordinated   Debt"  means  any  debt   incurred  by  Borrower   that  is
subordinated  in  writing  to the  debt  owing  by  Borrower  to Bank  on  terms
reasonably  acceptable  to Bank (and  identified  as being such by Borrower  and
Bank). Borrower and Bank hereby identify as "Subordinated Debt" Borrower's 5.25%
Convertible Subordinated Notes due 2007 in the aggregate principal amount not to
exceed  $35,500,000  issued  pursuant to the Indenture dated as of June 21, 2002
(the "Indenture") by and between Borrower,  as issuer, and The Bank of New York,
as trustee.  Borrower and Bank hereby  designate the  Obligations as "Designated
Senior Debt" for purposes of the Indenture.

---------------
1    364 days from the date of the Agreement.

                                       9
<PAGE>

     "Subsidiary"  means  any  corporation,  partnership  or  limited  liability
company or joint venture in which (i) any general  partnership  interest or (ii)
more than 50% of the stock,  limited liability company interest or joint venture
of which by the  terms  thereof  ordinary  voting  power to elect  the  Board of
Directors,  managers  or  trustees  of the  entity,  at the time as of which any
determination is being made, is owned, directly or indirectly, by Borrower.

     "Total  Liabilities" means at any date as of which the amount thereof shall
be  determined,  all  obligations  that  should,  in  accordance  with  GAAP  be
classified as liabilities on the consolidated balance sheet of Borrower.

     "Trademarks" means any trademark and servicemark rights, whether registered
or not,  applications  to  register  and  registrations  of the  same  and  like
protections,  and the entire goodwill of the business of Borrower connected with
and symbolized by such trademarks.

                                       10
<PAGE>

DEBTOR:             ELECTROGLAS, INC.

SECURED PARTY:      COMERICA BANK

                                    EXHIBIT B

                      COLLATERAL DESCRIPTION ATTACHMENT TO
                           LOAN AND SECURITY AGREEMENT

     All personal  property of Borrower  (herein  referred to as  "Borrower"  or
"Debtor")  whether  presently  existing or hereafter  created or  acquired,  and
wherever located, including, but not limited to:

     (a)  all accounts (including  health-care-insurance  receivables),  chattel
paper  (including  tangible and electronic  chattel  paper),  deposit  accounts,
documents (including negotiable documents),  equipment (including all accessions
and additions thereto),  general intangibles  (including payment intangibles and
software), goods (including fixtures), instruments (including promissory notes),
inventory (including all goods held for sale or lease or to be furnished under a
contract of  service,  and  including  returns  and  repossessions),  investment
property (including  securities and securities  entitlements),  letter of credit
rights,  money, and all of Debtor's books and records with respect to any of the
foregoing, and the computers and equipment containing said books and records;

     (b)  any  and all  cash  proceeds  and/or  noncash  proceeds  of any of the
foregoing, including, without limitation, insurance proceeds, and all supporting
obligations and the security therefor or for any right to payment.

     Notwithstanding  the foregoing,  the collateral  described  above shall not
include any Intellectual  Property (as defined in the Loan Agreement  referenced
below),  provided,  however,  that the collateral shall include all accounts and
general  intangibles that consist of rights to payment from the sale,  licensing
or  disposition of all or any part of, or rights in, the  Intellectual  Property
(the  "Rights  to  Payment").  Notwithstanding  the  foregoing,  if  a  judicial
authority  (including a U.S. Bankruptcy Court) holds that a security interest in
the underlying Intellectual Property is necessary to have a security interest in
the Rights to Payment, then the collateral shall automatically, and effective as
of the date of the Loan and Security  Agreement dated as of July 16, 2004 by and
between Debtor and Secured Party, include the Intellectual  Property only to the
extent necessary to permit  perfection of Secured Party's  security  interest in
the Rights to Payment.

     All terms above have the meanings given to them in the  California  Uniform
Commercial Code, as amended or supplemented from time to time, including revised
Division 9 of the Uniform Commercial Code-Secured Transactions,  added by Stats.
1999, c.991 (S.B. 45), Section 35, operative July 1, 2001.

<PAGE>

                                    EXHIBIT C

                   LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM

LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM DEADLINE FOR SAME DAY PROCESSING FOR
ADVANCES IS 3:00 P.M.,  PACIFIC TIME (1:00 P.M., PACIFIC TIME FOR WIRE
TRANSFERS).
TO:     [__________]                                    DATE: __________________
FAX #:  [__________]                                    TIME: __________________

FROM: Electroglas, Inc.
      --------------------------------------------------------------------------
CLIENT NAME: Electroglas, Inc.
             -------------------------------------------------------------------
REQUESTED BY:
              ------------------------------------------------------------------
AUTHORIZED SIGNER'S NAME

AUTHORIZED SIGNATURE:
                      ----------------------------------------------------------

PHONE NUMBER:
              ------------------------------------------------------------------
FROM ACCOUNT # ______________________               TO ACCOUNT # _______________

REQUESTED TRANSACTION TYPE                          REQUEST DOLLAR AMOUNT
--------------------------                          ---------------------
                                                    $___________________________
PRINCIPAL INCREASE
(PRIME RATE OPTION ADVANCE)                         $___________________________
PRINCIPAL INCREASE
(LIBOR OPTION ADVANCE)                              $___________________________
PRINCIPAL PAYMENT - PRIME RATE
OPTION ADVANCE (ONLY)                               $___________________________
PRINCIPAL PAYMENT - LIBOR
OPTION ADVANCE (ONLY)                               $___________________________
INTEREST PAYMENT (ONLY)                             $___________________________
PRINCIPAL AND INTEREST - PRIME RATE
OPTION ADVANCE (PAYMENT)                            $___________________________
PRINCIPAL AND INTEREST - LIBOR
OPTION ADVANCE (PAYMENT)                            $___________________________
CONVERSION TO PRIME RATE OPTION ADVANCE
                                                    $___________________________
CONVERSION TO LIBOR RATE OPTION ADVANCE*
                                                    $___________________________
* APPLICABLE LIBOR PERIOD                           _________ DAYS

OTHER INSTRUCTIONS:_____________________________________________________________

--------------------------------------------------------------------------------
All  representations  and warranties of Borrower stated in the Loan and Security
Agreement are true, correct and complete in all material respects as of the date
of the telephone request for an Advance  confirmed by this Loan  Payment/Advance
Telephone  Request  Form;  provided,  however,  that those  representations  and
warranties  expressly  referring  to  another  date shall be true,  correct  and
complete in all material respects as of such date.
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
BANK USE ONLY
TELEPHONE REQUEST:
-----------------

The following  person is  authorized  to request the loan payment  transfer/loan
advance on the advance designated account and is known to me.

----------------------------------------------------    ------------------------
Authorized Requester                                    Phone #

----------------------------------------------------    ------------------------
Received By (Bank)                                      Phone #

Authorized Signature (Bank)
--------------------------------------------------------------------------------

<PAGE>

                                    EXHIBIT D

                                      LIBOR
                     ADDENDUM TO LOAN AND SECURITY AGREEMENT

     This LIBOR  Addendum to Loan and Security  Agreement  (this  "Addendum") is
entered  into as of the 16th day of July,  2004,  by and between  COMERICA  BANK
("Bank") and ELECTROGLAS, INC. ("Borrower"). This Addendum supplements the terms
of the Loan and Security Agreement entered into by and between Borrower and Bank
dated as of July 16,  2004 and as further  amended  from time to time (the "Loan
Agreement").

     1.   Definitions.   Unless   otherwise   defined   herein,   all  initially
capitalized terms in this Addendum shall be as defined in the Loan Agreement.

          (a)  Advance. As used herein, "Advance" means a borrowing requested by
Borrower and made by Bank under Section 2.1(b) of the Loan Agreement,  including
a LIBOR Option Advance and/or a Prime Rate Option Advance.

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

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

                    (1)  "Base  LIBOR"  means the rate per annum  determined  by
                         Bank at which  United  States  dollar  deposits for the
                         relevant  LIBOR  Period would be offered to Bank in the
                         approximate amount of the relevant LIBOR Option Advance
                         in the inter-bank  LIBOR market  selected by Bank, upon
                         request of Bank at 10:00 a.m.  Pacific time, on the day
                         that is the first day of such LIBOR Period.

                    (2)  "LIBOR Reserve Percentage" means the reserve percentage
                         prescribed  by the Board of  Governors  of the  Federal
                         Reserve  System (or any  successor)  for  "Eurocurrency
                         Liabilities" (as defined in Regulation D of the Federal
                         Reserve  Board,  as  amended),  adjusted  by  Bank  for
                         changes   in  such   reserve   percentage   during  the
                         applicable   LIBOR  Period  (such   adjustment   to  be
                         automatically  effective  on the date  such  change  is
                         made).

<PAGE>

          (c)  LIBOR Business Day. As used herein,  "LIBOR Business Day" means a
Business  Day on which  dealings  in dollar  deposits  may be carried out in the
relevant interbank LIBOR market.

          (d)  LIBOR  Option.  As used herein,  "LIBOR  Option" means the option
described in Section 2(a) below.

          (e)  LIBOR Option  Advance.  As used herein,  "LIBOR  Option  Advance"
means an Advance as to which the LIBOR Option was selected.

          (f)  LIBOR Period. As used herein,  "LIBOR Period" means, with respect
to a LIBOR Option Advance:

                    (1)  initially,  the period  commencing  on, as the case may
                         be,  the date the  Advance is made or the date on which
                         the Advance is converted to a LIBOR Option Advance, and
                         continuing  for,  in every  case,  30,  60,  or 90 days
                         thereafter  so long as the LIBOR  Option is quoted  for
                         such period in the applicable  interbank  LIBOR market,
                         as such period is selected by Borrower in the notice of
                         Advance as provided in this Addendum; and

                    (2)  thereafter,  each period  commencing on the last day of
                         the next  preceding  LIBOR  Period  applicable  to such
                         LIBOR Option Advance and continuing for, in every case,
                         30,  60,  or 90 days  thereafter  so long as the  LIBOR
                         Option is  quoted  for such  period  in the  applicable
                         interbank  LIBOR market,  as such period is selected by
                         Borrower in the notice of  continuation  as provided in
                         this Addendum.

          (g)  Prime Rate Option. As used herein,  "Prime Rate Option" means the
option described in Section 2(b) below.

          (h)  Prime Rate Option  Advance.  As used  herein,  "Prime Rate Option
Advance" means an Advance as to which the Prime Rate Option was selected.

          (i)  Regulation D. As used herein,  "Regulation D" means  Regulation D
of  the  Board  of  Governors  of the  Federal  Reserve  System  as  amended  or
supplemented from time to time.

          (j)  Regulatory Development.  As used herein, "Regulatory Development"
means any or all of the  following:  (i) any  change in any law,  regulation  or
interpretation  thereof by any public authority (whether or not having the force
of  law);  (ii)  the  application  of  any  existing  law,   regulation  or  the
interpretation  thereof by any public authority (whether or not having the force
of law); and (iii) compliance by Bank with any request or directive  (whether or
not having the force of law) of any public authority.

                                       2
<PAGE>

     2.   Interest  Rate  Options.  Borrower  shall have the  following  options
regarding  the interest  rate to be paid by Borrower on Advances  under the Loan
Agreement:

          (a)  A rate equal to three percent  (3.00%) above Bank's LIBOR,  which
rate shall be in effect during the relevant LIBOR Period; or

          (b)  A rate equal to one  quarter  of one  percent  (0.25%)  above the
"Prime  Rate" as defined in the Loan  Agreement  and quoted from time to time by
Bank as such rate may change from time to time..

     3.   LIBOR Option Advance.  Each LIBOR Option Advance will not be less than
Two Hundred Fifty  Thousand  Dollars  ($250,000).  No more than two LIBOR Option
Advances may be outstanding at any time.

     4.   Payment  of  Interest.  Interest  on all  Advances  shall  be  payable
pursuant to the terms of the Loan  Agreement.  Interest on LIBOR Option Advances
shall be computed on the basis of a 360-day  year and shall be assessed  for the
actual number of days elapsed from the first day of the LIBOR Period  applicable
thereto but not including the last day thereof.

     5.   Bank's Records Re: LIBOR Option  Advances.  With respect to each LIBOR
Option Advance,  Bank is hereby  authorized to note the date,  principal amount,
interest rate and LIBOR Period applicable  thereto and any payments made thereon
on Bank's books and records (either  manually or by electronic  entry) and/or on
any schedule  attached to the Loan  Agreement,  which  notations  shall be prima
facie evidence of the accuracy of the information noted.

     6.   Selection/Conversion of Interest Rate Options. At the time any Advance
is requested under the Loan Agreement and/or Borrower wishes to select the LIBOR
Option  Advance  for all or a portion  of such  Advance,  and at the end of each
LIBOR Period,  Borrower shall give Bank notice  specifying (a) the interest rate
option selected by Borrower;  (b) the principal amount subject thereto;  and (c)
if the LIBOR Option is selected,  the length of the applicable LIBOR Period. Any
such notice may be given by  telephone  so long as,  with  respect to each LIBOR
Option Advance selected by Borrower, (i) Bank receives written confirmation from
Borrower not later than three (3) Business Days after such  telephone  notice is
given; and (ii) such notice is given to Bank prior to 10:00 a.m.,  Pacific time,
three  Business  Days before the first day of the LIBOR  Period.  For each LIBOR
Option requested  hereunder,  Bank will quote the applicable fixed LIBOR Rate to
Borrower at  approximately  10:00 a.m.,  Pacific  time,  on the first day of the
LIBOR Period.  If Borrower does not immediately  accept the rate quoted by Bank,
any subsequent  acceptance by Borrower shall be subject to a redetermination  of
the rate by Bank; provided,  however,  that if Borrower fails to accept any such
quotation  given,  then the  quoted  rate  shall  expire  and Bank shall have no
obligation  to permit a LIBOR  Option to be selected on such day. If no specific
designation  of interest is made at the time any Advance is requested  under the
Loan  Agreement or at the end of any LIBOR Period,  Borrower  shall be deemed to
have selected the Prime Rate Option for such Advance or the principal  amount to
which  such LIBOR  Period  applied.  At any time the LIBOR  Option is in effect,
Borrower may, at the end of the  applicable  LIBOR Period,  convert to the Prime
Rate  Option.  At any time the Prime  Rate  Option is in  effect,  Borrower  may
convert to the LIBOR Option, and shall designate a LIBOR Period.

                                       3
<PAGE>

     7.   Prepayment.  Bank is not under any obligation to accept any prepayment
of any LIBOR Option  Advance  prior to the last day of a LIBOR Period  except as
described below or as required under applicable law. Borrower may prepay a Prime
Rate  Option  Advance,  in whole or in part,  at any time,  without  paying  any
Prepayment  Amount (as  defined  below).  Borrower  may  prepay an LIBOR  Option
Advance,  in whole or in part, in increments of Five Hundred  Dollars  ($500.00)
prior to the end of the LIBOR  Period,  as long as (i) Bank is provided  written
notice of such  prepayment  at least five (5) LIBOR  Business  Days prior to the
date thereof (the  "Prepayment  Date");  and (ii) Borrower  pays the  Prepayment
Amount.  The notice of prepayment shall contain the following  information:  (a)
the Prepayment Date; and (b) the LIBOR Option Advance which will be prepaid.  On
the Prepayment Date, Borrower shall pay to Bank the Prepayment Amount.  Bank, in
its sole discretion, may accept any prepayment of a LIBOR Option Advance even if
not required to do so under the Loan Agreement and may deduct from the amount to
be applied  against the LIBOR Option  Advance any other  amounts  required to be
paid as part of the Prepayment Amount.

     The Prepayment Principal Amount will be applied to the LIBOR Option Advance
being prepaid as Bank shall  determine in its sole  discretion.  The "Prepayment
Principal  Amount" means the amount of the principal balance of the LIBOR Option
Advance  which  Borrower  has  elected to prepay or the amount of the  principal
balance of the LIBOR Option  Advance which Bank has required  Borrower to prepay
because of acceleration, as the case may be.

     If Bank exercises its right to accelerate the payment of the Loan Agreement
prior to  maturity  based  upon an Event of  Default  under the Loan  Agreement,
Borrower  shall pay to Bank,  in addition to any other  amounts that may then be
owing under the Loan Agreement,  on the date specified by Bank as the Prepayment
Date, the Prepayment Amount.

     Bank's  determination  of the Prepayment  Amount shall be conclusive in the
absence of obvious  error or fraud.  If requested  in writing by Borrower,  Bank
shall provide Borrower a written statement specifying the Prepayment Amount.

     The  Prepayment  Amount shall be due and payable in full on the  Prepayment
Date. As used herein,  "Prepayment  Amount" means the sum of: (i) the Prepayment
Principal  Amount;  (ii) interest  accruing on the Prepayment  Principal  Amount
through  the  Prepayment  Date;  and (iii) the  amount (if any) by which (A) the
additional  interest which would have been payable on the amount so received had
it not been  received  until the last day of such LIBOR  Period  exceeds (B) the
interest  which  would have been  recoverable  by Bank by placing  the amount so
received  on  deposit in the  certificate  of  deposit  markets or the  offshore
currency interbank markets or United States Treasury investment products, as the
case may be, for a period  starting on the date on which it was so received  and
ending on the last day of such LIBOR Period at the interest  rate  determined by
Bank. Bank's determination as to such amount shall be conclusive absent manifest
error.

     BY INITIALING BELOW, BORROWER ACKNOWLEDGES AND AGREES THAT: (A) THERE IS NO
RIGHT TO PREPAY ANY LIBOR OPTION  ADVANCE , IN WHOLE OR IN PART,  WITHOUT PAYING
THE PREPAYMENT  AMOUNT,  EXCEPT AS OTHERWISE  REQUIRED UNDER APPLICABLE LAW; (B)
BORROWER SHALL BE LIABLE FOR PAYMENT OF THE PREPAYMENT  AMOUNT IF BANK EXERCISES
ITS RIGHT TO  ACCELERATE  PAYMENT OF ANY LIBOR OPTION  ADVANCE AS PART OR ALL OF

                                       4
<PAGE>

THE OBLIGATIONS OWING UNDER THE LOAN AGREEMENT,  INCLUDING  WITHOUT  LIMITATION,
ACCELERATION UNDER A DUE-ON-SALE PROVISION; (C) BORROWER WAIVES ANY RIGHTS UNDER
SECTION 2954.10 OF THE CALIFORNIA CIVIL CODE, OR ANY SUCCESSOR  STATUTE,  TO THE
EXTENT  APPLICABLE;  AND (D) BANK HAS MADE EACH LIBOR OPTION ADVANCE PURSUANT TO
THE LOAN AGREEMENT IN RELIANCE ON THESE AGREEMENTS.

--------------------
BORROWER'S INITIALS

     8.   Hold Harmless and  Indemnification.  Borrower agrees to indemnify Bank
and to hold  Bank  harmless  from,  and to  reimburse  Bank on demand  for,  all
reasonable losses and expenses which Bank sustains or incurs as a result of (but
without  duplication of the Prepayment Amount) (i) any payment of a LIBOR Option
Advance  prior to the last day of the  applicable  LIBOR  Period for any reason,
including,  without  limitation,  termination  of the  Loan  Agreement,  whether
pursuant to this  Addendum or the  occurrence  of an Event of Default;  (ii) any
termination  of a LIBOR  Period  prior  to the date it  would  otherwise  end in
accordance with this Addendum; or (iii) any failure by Borrower, for any reason,
to borrow any portion of a LIBOR Option Advance.

     9.   Funding Losses. The  indemnification  and hold harmless provisions set
forth in this Addendum shall include, without limitation,  all reasonable losses
and expenses (but without  duplication  of the Prepayment  Amount)  arising from
interest and fees that Bank pays to lenders of funds it obtains in order to fund
the  loans to  Borrower  on the  basis of the  LIBOR  Option(s)  and all  losses
incurred in  liquidating  or  re-deploying  deposits  from which such funds were
obtained  and  loss of  profit  for the  period  after  termination.  A  written
statement  by Bank to Borrower of such losses and expenses  shall be  conclusive
and binding,  absent manifest  error,  for all purposes.  This obligation  shall
survive the termination of this Addendum and the payment of the Loan Agreement.

     10.  Regulatory  Developments Or Other Circumstances Relating To Illegality
or Impracticality of LIBOR. If any Regulatory Development or other circumstances
relating to the interbank LIBOR markets shall, at any time, in Bank's reasonable
determination  , make it unlawful or  impractical  for Bank to fund or maintain,
during any LIBOR  Period,  or to determine or charge  interest  rates based upon
LIBOR, Bank shall give notice of such circumstances to Borrower and:

          (a)  In the case of a LIBOR Period in  progress,  Borrower  shall,  if
requested by Bank,  promptly pay any  interest  which had accrued  prior to such
request and the date of such  request  shall be deemed to be the last day of the
term of the LIBOR Period; and

          (b)  No  LIBOR  Period  may  be  designated   thereafter   until  Bank
determines that such would be practical.

     11.  Additional Costs. Borrower shall pay to Bank from time to time, within
10 Business Days of Bank's request  (unless an Event of Default has occurred and

                                       5
<PAGE>

is  continuing,  in which  case  upon  Bank's  request),  such  amounts  as Bank
reasonably  determines  are needed to compensate  Bank for any costs it incurred
which are  attributable to Bank having made or maintained a LIBOR Option Advance
or to Bank's obligation to make a LIBOR Option Advance,  or any reduction in any
amount  receivable  by Bank  hereunder  with respect to any LIBOR Option or such
obligation  (such increases in costs and reductions in amounts  receivable being
herein called "Additional Costs"),  resulting from any Regulatory  Developments,
which (i) change the basis of taxation of any amounts  payable to Bank hereunder
with respect to taxation of any amounts  payable to Bank  hereunder with respect
to any LIBOR Option  Advance (other than taxes imposed on the overall net income
of  Bank  for  any  LIBOR  Option  Advance  by the  jurisdiction  where  Bank is
headquartered or the jurisdiction  where Bank extends the LIBOR Option Advance);
(ii) impose or modify any  reserve,  special  deposit,  or similar  requirements
relating to any extensions of credit or other assets of, or any deposits with or
other  liabilities  of, Bank (including any LIBOR Option Advance or any deposits
referred to in the definition of LIBOR) which are not otherwise  included in the
determination  of LIBOR;  or (iii)  impose any other  condition  affecting  this
Addendum (or any of such extension of credit or liabilities).  Bank shall notify
Borrower of any event  occurring  after the date hereof which  entitles  Bank to
compensation  pursuant to this  paragraph  as promptly as  practicable  after it
obtains  knowledge   thereof  and  determines  to  request  such   compensation.
Determinations  by Bank for  purposes  of this  paragraph  shall be  conclusive,
provided that such determinations are made on a reasonable basis.

     12.  Legal Effect. Except as specifically modified hereby, all of the terms
and conditions of the Loan Agreement remain in full force and effect.

                           [SIGNATURE PAGE TO FOLLOW]

                                       6
<PAGE>

     IN WITNESS WHEREOF, the parties have agreed to the foregoing as of the date
first set forth above.

ELECTROGLAS, INC.                               COMERICA BANK

By:                                             By:
   ------------------------------------             ----------------------------

Title:                                          Title:
      ---------------------------------               --------------------------

                                       7
<PAGE>

                                    EXHIBIT E

                           BORROWING BASE CERTIFICATE

Borrower: Electroglas, Inc.                                Lender: Comerica Bank
<TABLE>
<CAPTION>
Commitment Amount: $7,500,000
<S>             <C>                                             <C>                 <C>
ACCOUNTS RECEIVABLE*

     1.        Accounts Receivable Book Value as of ___                        $___________
     2.        Additions (please explain on reverse)                           $___________
     3.        TOTAL ACCOUNTS RECEIVABLE                                       $___________

ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)*

     4.        Amounts over 90 days of invoice date            $___________
     5.        Balance of 25% (50% in the case of National
               Semiconductor) over 90 day accounts             $___________
     6.        Concentration Limits                            $___________
     7.        Foreign Accounts                                $___________
     8.        Governmental Accounts                           $___________
     9.        Contra Accounts                                 $___________
     10.       Demo Accounts                                   $___________
     11.       Intercompany/Employee Accounts                  $___________
     12.       Other (please explain on reverse)               $___________
     13.       TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS                            $___________
     14.       Eligible Accounts (#3 minus #13)                                $___________
     15.       LOAN VALUE OF ACCOUNTS (80% of #14)                             $___________

BALANCES

     16.       Maximum Loan Amount                                             $___________
     17.       Total Funds Available [Lesser of #16 or #15]                    $___________
     18.       Present balance owing on Line of Credit                         $___________
     19.       RESERVE POSITION (#17 minus #18)                                $___________

*    As determined in accordance  with the Loan and Security  Agreement dated as
     of July 16, 2004 between Borrower and Lender.
</TABLE>

     The  undersigned  represents  and  warrants  that  the  foregoing  is true,
complete and correct, and that the information  reflected in this Borrowing Base
Certificate  complies with the  representations  and warranties set forth in the
Loan and Security Agreement between the undersigned and Comerica Bank.

ELECTROGLAS, INC.

By:
    --------------------------------------------
     Authorized Signer

<PAGE>

                                    EXHIBIT F

                             COMPLIANCE CERTIFICATE

TO:       COMERICA BANK

FROM:     Electroglas, Inc.

     The undersigned  authorized  officer of Electroglas,  Inc. hereby certifies
that in  accordance  with the  terms  and  conditions  of the Loan and  Security
Agreement  between  Borrower  and  Bank  (as  amended  from  time to  time,  the
"Agreement"),  (i)  Borrower is in  complete  compliance  for the period  ending
_______________  with all required  covenants except as noted below and (ii) all
representations  and warranties of Borrower stated in the Agreement are true and
correct in all material  respects as of the date hereof.  Attached  herewith are
the required documents supporting the above  certification.  The Officer further
certifies that this  Certificate  has been prepared in accordance with Generally
Accepted Accounting  Principles (GAAP)  consistently  applied from one period to
the next except as explained in an accompanying letter or footnotes.

     Please  indicate  compliance  status by circling  Yes/No  under  "Complies"
column.
<TABLE>
<CAPTION>
Reporting Covenant                                                    Required                        Complies
<S>                                                                     <C>                             <C>    <C>
Company prepared financial statements (Consolidated)           Quarterly within 50 days               Yes        No
Annual (CPA Audited; Consolidated)                             FYE within 120 days                    Yes        No
10K and 10Q                                                    Within 5 days after filing with        Yes        No
                                                               the Securities and Exchange
                                                               Commission unless available on
                                                               EDGAR
Borrowing Base Certificate                                     Monthly within 30 days when            Yes        No
                                                               Borrowing Base Advances are
                                                               outstanding

Financial Covenant                                                    Required       Actual           Complies
Maintain on a Quarterly Basis:
Minimum Quick Ratio                                            0.60:1.00            ____:1.00         Yes        No
Minimum Effective Tangible Net Worth                           $60,000,000 (as    $____________       Yes        No
                                                               adjusted per
                                                               Section 6.7(b))

Total Liabilities Minus  Subordinated Debt to
Effective Tangible Net Worth                                   0.75:1.00           _____:1.00         Yes        No
Maintain at all times:
Minimum Cash with Bank                                         $7,500,000         $___________        Yes        No

Comments Regarding Exceptions:  See Attached.

                                                               BANK USE ONLY
                                                               Received by:
                                                                           ---------------------------
Sincerely,                                                                      AUTHORIZED SIGNER
                                                               Date:
                                                                    ----------------------------------

                                                               Verified:
---------------------------------------------                           ------------------------------
SIGNATURE                                                                       AUTHORIZED SIGNER
                                                               Date:
---------------------------------------------                       ----------------------------------
TITLE
ELECTROGLAS, INC.                                              Compliance Status                      Yes        No

DATE
</TABLE>

<PAGE>

                             SCHEDULE OF EXCEPTIONS

Permitted Indebtedness  (Exhibit A)

5.25% Convertible  Subordinated Notes due 2007 in the aggregate principal amount
not to exceed  $35,500,000 issued pursuant to the Indenture dated as of June 21,
2002

$200,000 Letter of Credit collateralized by deposit at UBS

Permitted Investments (Exhibit A)

Ownership  investments  in Cascade  Microtech and NanoNexus as disclosed in 10-k
report

Funds  currently  held at financial  institutions  worldwide  including  but not
limited to:  Provident/Blackrock,  Wells Fargo,  Foothill Capital  (affiliate of
Wells  Fargo),  Morgan  Stanley,  Bank of  America,  Banque  Regionale  de L'Ain
(France), Standard Chartered Bank (Singapore)

$600,000 held in escrow until July 15, 2004 in  connection  with sale of Knights
Technology assets to FEI in July 2003

$200,000 deposit at UBS as collateral for Letter of Credit

Wholly owned Electroglas  Subsidiaries:  EG Soft Holdings Corporation,  EG Soft,
Inc., Electroglas  International,  Inc., Electroglas Barbados, Inc., Electroglas
GmbH, Electroglas Singapore Private Limited

Permitted Liens (Exhibit A)

UCC financing  statement  #11168967 filed 9/17/01 with the Delaware Secretary of
State naming  Borrower as debtor and General  Electric  Capital  Corporation  as
secured party

Notice of Judgment Lien # 0127860370 filed 10/4/01 with the California Secretary
of State  naming  Borrower  as the  judgment  debtor and  William A.  Brandt Jr.
(Chapter 11 Trustee) as the judgment creditor

Security Interest (Section 4.1)

Liens  described  in clauses (a), (c) and (d) of the  definition  of  "Permitted
Liens"

Collateral (Section 5.3)

Collateral  consisting of deposit accounts and investment property having a fair
market  value in  excess of  $1,000,000  are  maintained  or  invested  with the
following Persons:

Bank of America
1850 Gateway Blvd.
Concord, CA  94520

                                       1
<PAGE>

PFPC Institutional Funds
400 Bellezue
Wilmington, DE  19809

Morgan Stanley & Co. Incorporated
555 California Street
Suite 2200
San Francisco, CA  94104

Wells Capital Management
525 Market Street, 10th Floor
San Francisco, CA  94105

Standard Chartered Bank
Scotts Mail; 1 Scotts Road; #01-01
Shaw Centre Singapore  228208

HypoVereinsbank,
Munchen Germany

Banque Regionale de
L'Ain
France

Prior Names  (Section 5.4)

None

Litigation  (Section 5.5)

None

Inbound Licenses  (Section 5.11)

SAP - Company  enterprise  software license agreement includes standard language
that requires approval for assignment or pledging

Dispositions (Section 7.1)

Distribution  Agreement dated September 26, 2003 between  Electroglas,  Inc. and
Statit Software, LLC

                                       2
<PAGE>

                                  COMERICA BANK
                                   Member FDIC

                         ITEMIZATION OF AMOUNT FINANCED
                            DISBURSEMENT INSTRUCTIONS
                                   (Revolver)

Name(s):        ELECTROGLAS, INC. Date:

        $       credited to deposit  account No.  ___________  when  Advances
                are requested or disbursed to Borrower by cashiers check or wire
                transfer

Amounts paid to others on your behalf:

        $       to Comerica Bank for Facility Fee

        $       to Comerica Bank for accounts receivable audit (estimate)

        $       to Bank counsel fees and expenses

        $       to _______________

        $       to _______________

        $       TOTAL (AMOUNT FINANCED)

Upon  consummation  of this  transaction,  this  document will also serve as the
authorization for Comerica Bank to disburse the loan proceeds as stated above.

ELECTROGLAS, INC.

------------------------------                    ------------------------------
Signature                                         Signature

<PAGE>

                         AGREEMENT TO PROVIDE INSURANCE

TO:  COMERICA BANK                                Date: _______________
     Attn:  Deni M. Snider, MC 4770
     75 E. Trimble Road                           Borrower:  ELECTROGLAS, INC.
     San Jose, CA  95131

In consideration of a revolving loan in the amount of up to $7,500,000,  secured
by all tangible personal property including inventory and equipment.

I/We agree to obtain adequate  insurance  coverage to remain in force during the
term of the loan.

I/We also agree to advise the below named agent to add Comerica Bank as lender's
loss  payable on the new or existing  insurance  policy,  and to furnish Bank at
above address with a copy of said policy/endorsements and any subsequent renewal
policies.

I/We understand that the policy must contain:

     1.   Fire and extended coverage in an amount sufficient to cover:

          (a)  The amount of the loan, OR

          (b)  All existing encumbrances, whichever is greater,

     2.   Lender's "Loss Payable"  Endorsement Form 438 BFU in favor of Comerica
Bank, or any other form acceptable to Bank.

INSURANCE INFORMATION

     Insurance Co./Agent                          Telephone No.:

     Agent's Address:

          Signature of Obligor: ________________________________________________

          Signature of Obligor: ________________________________________________

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

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

          FOR BANK USE ONLY

          INSURANCE VERIFICATION: Date:__________________________

          Person Spoken to:______________________________________

          Policy Number:_________________________________________

          Effective From: _________  To:_________________________

          Verified by:___________________________________________

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

<PAGE>

--------------------------------------------------------------------------------
COMERICA BANK

                          AUTOMATIC DEBIT AUTHORIZATION

Member FDIC
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
To:     Comerica Bank

Re:     Loan # ___________________________________

You are hereby authorized and instructed to charge account No. _________________
in the name of ELECTROGLAS, INC.
--------------------------------------------------------------------------------
for principal,  interest and other payments due on above  referenced loan as set
forth below and credit the loan referenced above.

        __x__   Debit each  interest  payment as it becomes due according to the
                terms  of the Loan and  Security  Agreement  and any renewals or
                amendments thereof.

        __x__   Debit each principal payment as it becomes due according  to the
                terms  of  the Loan and Security  Agreement  and any renewals or
                amendments thereof.

        __x__   Debit each payment for Bank Expenses as it becomes due according
                to the terms of the Loan and Security Agreement and any renewals
                or amendments thereof.

This  Authorization  is to remain in full  force and  effect  until  revoked  in
writing.
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
Borrower Signature                                      Date

--------------------------------------------------------------------------------
ELECTROGLAS, INC.

By:______________________________

Its:_____________________________

Phone:  (800) 413-4624                                  COMERICA BANK
Fax     (617) 956-0557                                  CLIENT AUTHORIZATION
--------------------------------------------------------------------------------

General Authorization

Electroglas, Inc. hereby authorizes Comerica Bank to use its company name, logo,
and  information  relating to its banking  relationship  with  Comerica  Bank in
Comerica  Bank's  marketing  and  advertising  campaigns  which are intended for
Comerica  Bank's  customers,   prospects  and   shareholders,   subject  to  any
confidentiality provisions contained in the Loan and Security Agreement dated as
of July 16, 2004 between Electroglas, Inc. and Comerica Bank.

<PAGE>

Comerica Bank will forward any  advertising  or article  including  Electroglas,
Inc. for prior review and approval.

ELECTROGLAS, INC.

By_______________________________
           Signature

_________________________________
Printed Name

_________________________________
Title

Electroglas, Inc.
6024 Silver Creek Valley Road
San Jose, CA  95138
(408) 528-3000 (phone)
(408) ________ (fax)
_____________ (email)

_________________________________
Date

                                        2

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