Document:

ASSIGNMENT AND ASSUMPTION OF
                              SPECIFIED LIABILITIES

THIS  ASSIGNMENT  AND  ASSUMPTION,  made as of the 3rd day of May,  2000, by and
between  AURA  CERAMICS,  INC.,  a Delaware  corporation  ("Seller"),  and ALPHA
CERAMICS, INC., a Minnesota corporation ("Buyer").

WHEREAS,  Buyer,  Seller and Aura Systems,  Inc., a Delaware  corporation,  have
entered into that certain Asset Purchase Agreement dated as of February 29, 2000
(the "Asset Purchase Agreement");

WHEREAS,  the Asset Purchase  Agreement provides that Buyer is to acquire all of
the assets of Seller,  other than the "Retained Assets" (as such term is defined
in Section 2.2 of the Asset Purchase Agreement); and

WHEREAS,  the Asset Purchase  Agreement provides that Buyer is to assume certain
specified  liabilities  of  Seller  as set  forth in  Section  2.3 of the  Asset
Purchase Agreement.

NOW,  THEREFORE,  in consideration of the transactions as described in the Asset
Purchase  Agreement,  and other good and  valuable  consideration,  the receipt,
sufficiency and mutuality of which are hereby  acknowledged,  the parties hereto
hereby agree as follows:

1.  ASSUMPTION.  Buyer hereby assumes and agrees to pay according to their terms
all of the "Assumed Liabilities",  as that term is defined in Section 2.3 of the
Asset Purchase Agreement.

2.  RETAINED  LIABILITIES.  Seller shall remain  unconditionally  liable for all
"Retained  Liabilities",  which  term is  defined  in  Section  2.3 of the Asset
Purchase  Agreement as all  obligations,  liabilities and commitments of Seller,
presently  existing  or  contingent  arising  out  of  events  or  circumstances
occurring  on or prior to the Closing Date (as that term is defined in the Asset
Purchase  Agreement).  Buyer is not  assuming  or agreeing to pay or perform the
Retained  Liabilities  or any other  liabilities,  obligations or commitments of
Seller other than the Assumed Liabilities.

                  [Remainder of page intentionally left blank.]

<PAGE>

                                                          SELLER:

Date: May ___, 2000                                       AURA CERAMICS, INC.

                                                          By:
                                                              Its:

                                                          By:
                                                              Its:

                                                          BUYER:

Date: May ____, 2000                                      ALPHA CERAMICS, INC.

                                                          By:
                                                              James E. Sloane
                                                              Its: PresidentASSIGNMENT AND ASSUMPTION OF LEASE

THIS  ASSIGNMENT  AND  ASSUMPTION,  made as of the 3rd day of May,  2000, by and
between Aura Ceramics, Inc., a Delaware corporation (the "Assignor"),  and Alpha
Ceramics, Inc., a Minnesota corporation (the "Assignee").

                                   WITNESSETH:

WHEREAS,  Winnetka Properties,  L.L.C.  ("Landlord") and Aura Ceramics,  Inc., a
Minnesota  corporation  ("Aura"),  as tenant, made and entered into that certain
Amended  and  Restated  Lease  Agreement  dated  October  1, 1997 (the  "Lease")
relating to those certain  premises located at 5121 Winnetka Avenue North in New
Hope, Minnesota,  as more particularly  described in the Lease (the "Premises");
and

WHEREAS,  Assignor and Assignee  have entered into that certain  Asset  Purchase
Agreement dated as of February 29, 2000 (the "Purchase  Agreement")  pursuant to
which,  among other  things,  Assignor has agreed to transfer to Assignee all of
its rights, title and interest under and pursuant to the Lease, and Assignee has
agreed to assume  and agree to pay and  perform  all of  Assignor's  duties  and
obligations under the Lease.

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

1. Effective as of the date hereof, Assignor hereby sells, transfers and assigns
to Assignee all of Assignor's right, title and interest in and to the Lease, but
specifically  excluding  any ancillary  agreements  by and between  Landlord and
Assignor relating to the Premises or otherwise.

2.  Effective  as of the date  hereof,  Assignee  hereby  assumes  and agrees to
perform,  for the  benefit of  Assignor,  all of the  obligations  and duties of
Assignor  under and  pursuant  to the  Lease,  but  specifically  excluding  any
ancillary  agreements  by and between the Landlord and the Assignor  relating to
the Premises or otherwise.

3. Assignor  represents and warrants to Assignee that Assignor is not in default
under the Lease and that  Assignor  knows of no existing or uncured  defaults by
Landlord under the Lease.

4. This  instrument  may be  executed  in  counterparts,  each of which shall be
deemed an original  and all of which  together  shall be deemed one and the same
instrument.

<PAGE>

IN WITNESS  WHEREOF,  the undersigned have caused this Assignment and Assumption
to be executed and delivered as of the day and year first above written.

ASSIGNOR:                                                     ASSIGNEE:

AURA CERAMICS, INC.                                  ALPHA CERAMICS, INC.

By:_______________________________          By:________________________________
     Its:____________________________                            James E. Sloane
                                                                 Its: President

By:_______________________________
     Its:____________________________REVOLVING CREDIT AND TERM LOAN AGREEMENT

         THIS  REVOLVING  CREDIT  AND TERM LOAN  AGREEMENT,  dated as of May __,
2000,  is by and between  ALPHA  CERAMICS,  INC., a Minnesota  corporation  (the
"Borrower"), and EXCEL BANK, a Minnesota state banking corporation (the "Bank").

RECITALS:

         A. The  Borrower  has  requested  that the Bank make  available  to the
Borrower (i) a revolving  credit  facility in an aggregate  amount not to exceed
$200,000  (the  "Revolving  Loan"),  and  (ii) a term  loan  in  the  amount  of
$1,000,000  (the  "Term  Loan")  (the  Revolving  Loan  and the  Term  Loan  are
collectively referred to as the "Loans").

         B. The Borrower  will use the proceeds of the  Revolving  Loan and Term
Loan to acquire certain assets and for general working capital purposes.

         C. The Bank has agreed to make available to the Borrower the Loans, all
upon the terms and conditions of this Agreement.

AGREEMENTS:

         IN  CONSIDERATION of the foregoing  premises,  and the mutual covenants
set forth herein, the parties agree as follows:

         ARTICLE 1  DEFINITIONS AND ACCOUNTING TERMS

         Section 1.1 Defined Terms.  In addition to the terms defined  elsewhere
in  this  Agreement,  the  following  terms  shall  have  the  meanings  set out
respectively  after each (and such meanings shall be equally  applicable to both
the singular and plural form of the terms defined, as the context may require):

         Act of Bankruptcy:  With respect to any Person, if (i) the Person shall
(1) be or become  insolvent,  or (2) apply for or consent to the appointment of,
or the taking of possession by, a receiver,  custodian,  trustee,  liquidator or
the like of the Person or of all or a substantial part of the Person's property,
or  (3)   commence  a   voluntary   case  under  any   bankruptcy,   insolvency,
reorganization,  arrangement,  readjustment of debt, dissolution, liquidation or
similar  proceeding under the laws of any  jurisdiction,  or (4) file a petition
seeking to take advantage of any other law relating to  bankruptcy,  insolvency,
reorganization,  winding up or composition or adjustment of debts,  or (5) admit
in  writing  its  inability  to pay its  debts  as they  mature,  or (6) make an
assignment for the benefit of its creditors;  or (ii) a proceeding or case shall
be commenced, without the application or consent of the Person, and which is not
dismissed  within 30 days after  such  commencement,  in any court of  competent
jurisdiction, seeking (1) the liquidation, reorganization,  dissolution, winding
up or the composition or adjustment of debts of the Person,  (2) the appointment
of a trustee, receiver,  custodian or liquidator or the like of the Person or of
all or any substantial part of the Person's  property,  or (3) similar relief in
respect  of the  Person  under  any  law  relating  to  bankruptcy,  insolvency,
reorganization, winding up or composition or adjustment of debts.

         Adverse  Event:  The  occurrence of any event that could  reasonably be
determined  to have a  material  adverse  effect  on the  business,  operations,
property, assets or condition (financial or otherwise) of the Borrower or on the
ability of the Borrower or any other party  obligated  thereunder to perform its
obligations under the Loan Documents.

         Affiliate:  Any Person (i) which directly or indirectly  through one or
more  intermediaries  controls,  or is controlled by, or is under common control
with, the Borrower or any of its  Subsidiaries  or any  Guarantor,  or (ii) five
percent (5%) or more of the equity interest of which is held  beneficially or of
record by the Borrower or any of its Subsidiaries or any Guarantor.  Control for
purposes of this definition means the possession, directly or indirectly, of the
power to cause the  direction of  management  and policies of a Person,  whether
through the ownership of voting securities or otherwise.

     Agreement:  This  Revolving  Credit and Term Loan  Agreement,  as it may be
amended, modified, supplemented,
restated or replaced from time to time.

         Assignment of Life Insurance: That certain Assignment of Life Insurance
Policy to be executed by the Borrower and delivered to the Bank as  contemplated
by Section  8.15,  as it may be  amended,  modified,  supplemented,  restated or
replaced from time to time.

         Base Rate: The rate of interest from time to time publicly announced by
the Bank as its "base  rate." The Bank may lend to its  customers  at rates that
are at, above or below the Base Rate. For purposes of  determining  any interest
rate which is based on the Base Rate,  such  interest  rate shall  change on the
effective date of any change in the Base Rate.

         Borrower's  Certificate:  The  borrower's  certificate  in the  form of
Exhibit A hereto, or in such other form as the Bank may reasonably  require from
time to time,  to be  delivered by the Borrower to the Bank within 30 days after
the end of each calendar month.

         Borrowing  Base: At any time and subject to change from time to time in
the Bank's discretion, an amount equal to (1) 75% of Eligible Receivables, plus,
if the Bank has received an audited  opening balance sheet and a current monthly
inventory  reporting  (detailed by raw  materials,  work in process and finished
goods),  all in form and substance  acceptable to the Bank,  (2) 30% of Eligible
Inventory.

         Business  Day: Any day (other than a Saturday,  Sunday or legal holiday
in the State of  Minnesota)  on which  state banks are  permitted  to be open in
Minneapolis, Minnesota.

     Capitalized Lease: Any lease which is or should be capitalized on the books
of the lessee in accordance
with GAAP.

     Code:  The Internal  Revenue  Code of 1986,  as amended,  or any  successor
statute, together with
regulations thereunder.

         Collateral:  The collateral as defined in Section 5.1.

         Commitment:  The  obligation  of the Bank to make loans to the Borrower
pursuant  to Section 2.1 and the  Revolving  Note up to an  aggregate  principal
amount at any one time  outstanding  equal to the  lesser  of (a) the  Borrowing
Base, or (b) $200,000.

     Credit Party: The Borrower, the Borrower's Subsidiaries,  the Guarantors or
any Affiliate, or any one or more of them.

         Debt Service Coverage Ratio: For any period of determination, the ratio
of (a) the  Borrower's  EBITDA for such period,  to (b) the sum of (i) scheduled
principal  payments  of  all  Indebtedness  (including  without  limitation  all
Subordinated Debt) of the Borrower paid on or before the last day of such period
excluding the Revolving Loan principal  balance,  plus (ii) Interest Expense for
such period.

         Debt to Tangible  Capital Base Ratio: As of any date of  determination,
the ratio of (a) the Borrower's  total  liabilities  (excluding the Subordinated
Debt) as of such date,  to (b) the  Borrower's  total net worth less  intangible
assets  as of  such  date  plus  the  Subordinated  Debt as of  such  date,  all
determined in accordance with GAAP.

     Default:  Any event  which,  with the giving of notice to the  Borrower  or
lapse of time, or both, would
constitute an Event of Default.

         EBITDA: For any period of determination,  the Borrower's net income for
such period,  plus deductions for Interest Expense,  income taxes,  depreciation
and amortization for such period, all as determined in accordance with GAAP.

         Eligible  Inventory:  The dollar value of all inventory owned solely by
the Borrower that is at all times subject to a first priority perfected security
interest  in favor of the Bank and is not  subject  to any  other  Liens  except
Permitted  Liens  which the Bank deems to be  Eligible  Inventory  and  excludes
inventory  that is  unsaleable  or  unusable  for any  reason in the  Borrower's
operations.  The value of Eligible  Inventory  shall be the lower of the cost or
market value of the Eligible Inventory  computed on a first-in,  first-out basis
in  accordance  with GAAP and shall be  determined  monthly from the  Borrower's
Certificate  and  supporting  reports  delivered  to the Bank  pursuant  to this
Agreement.

         Eligible Receivables:  The dollar value of any account receivable owing
to the  Borrower  for  services  rendered or to be rendered or goods sold in the
ordinary  course of  business  that has been  invoiced  to its  customer  by the
Borrower,  is owned solely by the  Borrower  and is subject to a first  priority
perfected  security  interest  in favor  of the  Bank at the time it comes  into
existence  and  continues  to meet the same until it is collected in full and is
not subject to any other Liens except Permitted Liens which the Bank deems to be
an Eligible  Receivable.  Without  limiting the generality of the  foregoing,  a
receivable shall not be an Eligible Receivable if:

                  (a) it has been  unpaid  more  than 90 days  past the due date
         thereof or it is owed by an account debtor which has 10% or more of its
         receivables unpaid more than 90 days past the due date thereof;

                  (b) it is  subject  to  any  Lien,  other  than  the  security
         interest of the Bank or Permitted Liens;

                  (c) it is not a valid,  legally enforceable  obligation of the
         account debtor to the full extent of its amount;

                  (d)  it  is  subject  to  any  setoff,  counterclaim,   credit
         allowance,  retainage, current claim against the warranty or adjustment
         by the  account  debtor  thereunder,  or to any  claim by such  account
         debtor  denying  liability  thereunder  in whole  or in  part,  or such
         account  debtor  has  refused to accept or has  returned  or offered to
         return any of the goods which are subject to such receivable;

                  (e) the  account  debtor is also a supplier or creditor of the
         Borrower, to the extent of any contra account;

                  (f) it did not arise in the ordinary  course of the Borrower's
         business  or any  notice of the  bankruptcy,  insolvency  or  financial
         impairment of the account  debtor  thereunder  has been received by the
         Borrower;

                  (g) it arose out of any  contract or order which by its terms,
         forbids or makes void or  unenforceable  its assignment by the Borrower
         to the Bank; or

                  (h)  it  is a  receivable  owing  by  (1)  the  United  States
         government  or any  department,  agency  or other  subdivision  thereof
         (except to the  extent  that the  Borrower  complies  with the  Federal
         Assignment of Claims Act of 1940, as amended):  (2) a Person located in
         any  jurisdiction  outside  the United  States;  or (3) any  Affiliate,
         employee or salesperson of the Borrower .

A receivable which is at any time an Eligible  Receivable but which subsequently
fails to meet any of the foregoing  requirements  shall forthwith cease to be an
Eligible  Receivable.  The amount of Eligible  Receivables  shall be  determined
monthly from the Borrower's  Certificate and supporting reports delivered to the
Bank pursuant to the terms of this Agreement.

     ERISA: The Employee Retirement Income Security Act of 1974, as amended, and
any successor statute, together with regulations thereunder.

         ERISA Affiliate:  Any trade or business  (whether or not  incorporated)
that is a member  of a group of which  the  Borrower  is a member  and  which is
treated as a single employer under Section 414 of the Code.

         Event of Default:  Any event described in Section 10.1.

     Federal Reserve Board: The Board of Governors of the Federal Reserve System
or any successor thereto.

         Financing  Statements:  UCC-1 Financing Statements naming the Borrower,
or the  Guarantor,  as the case may be, as debtor and the Bank as secured  party
and describing the Collateral as the property covered thereby.

         GAAP:  Generally accepted accounting principles, consistently applied.

     Guarantors: James E. Sloane or any other Person who may execute a Guaranty.

         Guaranty:  That  certain  Guaranty  Agreements  dated  the date  hereof
executed  by the  Guarantor  and  delivered  to the Bank,  as it may be amended,
modified, supplemented, restated or replaced from time to time.

         Indebtedness:  Without  duplication,  all  obligations,  contingent  or
otherwise, which in accordance with GAAP should be classified upon the obligor's
balance sheet as liabilities,  but in any event including the following (whether
or not they should be classified as liabilities  upon such balance  sheet):  (a)
obligations secured by any mortgage,  pledge, security interest, lien, charge or
other  encumbrance  existing on  property  owned or  acquired  subject  thereto,
whether  or not the  obligation  secured  thereby  shall have been  assumed  and
whether or not the obligation  secured is the obligation of the owner or another
party; (b) any obligation on account of deposits or advances; (c) any obligation
for the deferred purchase price of any property or services,  (d) any obligation
as lessee under any  Capitalized  Lease;  (e) all guaranties,  endorsements  and
other  contingent  obligations  respecting   Indebtedness  of  others;  and  (f)
undertakings  or  agreements  to reimburse  or  indemnify  issuers of letters of
credit.  For all purposes of this Agreement (i) the  Indebtedness  of any Person
shall  include the  Indebtedness  of any  partnership  in which such Person is a
general  partner,  and (ii) the  Indebtedness  of any Person  shall  include the
Indebtedness of any joint venture in which such Person is a joint venturer.  The
term "Indebtedness" shall in no event include Trade Accounts Payable.

         Interest Expense: For any period of determination,  the total scheduled
interest expense for such period (including any default rate of interest if then
applicable), whether paid or accrued, on all Indebtedness of the Borrower.

         Investment:  The acquisition,  purchase, making or holding of any stock
or other security,  any loan,  advance,  contribution  to capital,  extension of
credit (except for trade and customer accounts  receivable for inventory sold or
services  rendered in the ordinary  course of business and payable in accordance
with  customary  trade terms),  any  acquisitions  of real or personal  property
(other  than real and  personal  property  acquired  in the  ordinary  course of
business) and any purchase or  commitment  or option to purchase  stock or other
debt or equity  securities of or any interest in another  Person or any integral
part of any business or the assets comprising such business or part thereof.

         Lien: Any security interest,  mortgage,  pledge,  lien,  hypothecation,
judgment lien or similar legal process,  charge,  encumbrance,  title  retention
agreement or analogous instrument or device (including,  without limitation, the
interest of the lessors  under  Capitalized  Leases and the interest of a vendor
under any conditional sale or other title retention agreement).

         Loan Documents:  This Agreement, the Notes, the Security Agreement, the
Pledge Agreement, the Guaranty, the Financing Statements, the Assignment of Life
Insurance and each other instrument,  document,  guaranty,  security  agreement,
mortgage, or other agreement executed and delivered by the Borrower or any party
granting security interests in connection with this Agreement,  the Loans or any
collateral for the Loans.

     Notes: The Revolving Note and the Term Note, or any one or more of them.

         Obligations:  The obligation of the Borrower:  (a) to pay the principal
of and  interest on the Notes in  accordance  with the terms hereof and thereof,
and to satisfy all of the  Borrower's  other  obligations  to the Bank,  whether
hereunder or otherwise,  whether now existing or hereafter incurred,  matured or
unmatured  including without  limitation the obligations  pursuant to letters of
credit, direct or contingent, joint or several, and including without limitation
obligations  to or credit from others in which the Bank has a direct or indirect
interest   (including   without   limitation   participations),   including  any
extensions,  modifications,  renewals thereof and substitutions therefor; (b) to
repay to the Bank all amounts  advanced by the Bank  hereunder  or  otherwise on
behalf  of  the  Borrower,  including,  but  without  limitation,  advances  for
principal or interest payments to prior secured parties,  mortgagees or lienors,
or for taxes, levies,  insurance,  rent, repairs to or maintenance or storage of
any of the  Collateral;  and (c) to pay all of the  Bank's  expenses  and costs,
together with the reasonable fees and expenses of its counsel in connection with
the preparation and negotiation of this Agreement and other Loan Documents,  and
any amendments thereto and the documents  required  hereunder or thereunder,  or
any  proceedings  brought  or  threatened  to  enforce  payment  of  any  of the
Obligations described in clauses (a) or (b) above.

     PBGC: The Pension Benefit  Guaranty  Corporation,  established  pursuant to
Subtitle A of Title IV of ERISA,  and any successor  thereto or to the functions
thereof.

     Permitted  Lien:  Any Lien of a kind  specified  in  paragraphs  (a)-(d) of
Section 9.11.

         Person: Any natural person,  corporation,  partnership,  joint venture,
firm,   association,   trust,   unincorporated   organization,   government   or
governmental agency or political subdivision or any other entity, whether acting
in an individual, fiduciary or other capacity.

         Plan: An employee benefit plan or other plan,  maintained for employees
of the Borrower or of any ERISA  Affiliate,  and subject to Title IV of ERISA or
Section 412 of the Code.

         Pledge Agreement: That certain Negative Pledge Agreement dated the date
hereof  executed  by James E.  Sloane and  delivered  to the Bank,  as it may be
amended, modified, supplemented, restated or replaced from time to time.

     Pre-Tax Profit: For any period of determination,  the Borrower's net profit
plus income tax expense for such period, as determined in accordance with GAAP.

         Reportable  Event:  A  reportable  event as defined in Section  4043 of
ERISA and the  regulations  issued under such  Section,  with respect to a Plan,
excluding,  however,  such events as to which the PBGC by regulation  has waived
the  requirement of Section  4043(a) of ERISA that it be notified within 30 days
of the  occurrence  of such event,  provided  that a failure to meet the minimum
funding  standard of Section 412 of the Code and Section 302 of ERISA shall be a
reportable  event  regardless  of the issuance of any such waivers in accordance
with Section 412(d) of the Code.

     Revolving Credit  Expiration  Date: The date that first occurs:  (i) May 1,
2001, or (ii) the date on which the Commitment is terminated pursuant to Section
10.2.

         Revolving  Interest  Rate:  The rate of interest equal to the Base Rate
plus 0.50%; provided, however, that from and after the occurrence of any Default
and  continuing  thereafter  until such Default shall be remedied to the written
satisfaction of the Bank, the Revolving  Interest Rate shall, at the election of
the Bank, be that rate of interest  equal to the Base Rate plus 2.50%.  The Bank
may lend to its  customers at rates that are at,  above,  or below the Revolving
Interest Rate.

         Revolving  Note:  That  certain  Revolving  Note dated the date  hereof
executed  by the  Borrower  and  made  payable  to the  order of the Bank in the
original  principal  amount  of  $200,000,  as  it  may  be  amended,  modified,
supplemented, restated or replaced from time to time.

         Security  Agreement:  That certain  Security  Agreement  dated the date
hereof executed by the Borrower and delivered to the Bank, as it may be amended,
modified, supplemented, restated or replaced from time to time.

         Subordinated  Debt: Any  Indebtedness of the Borrower,  now existing or
hereafter  created,  incurred  or  arising,  which is  subordinated  in right of
payment to the payment of the  Obligations in a manner and to an extent that the
Bank has  approved in writing  prior to the date hereof or prior to the creation
of such Indebtedness.

         Subsidiary:  Any Person of which or in which the Borrower and its other
Subsidiaries  own directly or indirectly 50% or more of: (a) the combined voting
power of all  classes  of stock  having  general  voting  power  under  ordinary
circumstances  to elect a majority of the board of directors of such Person,  if
it is a corporation, (b) the capital interest or profit interest of such Person,
if it is a partnership,  joint venture or similar entity,  or (c) the beneficial
interest of such Person, if it is a trust,  association or other  unincorporated
organization.

         Term Interest  Rate:  The rate of interest  equal to the Base Rate plus
0.50%; provided,  however, that from and after the occurrence of any Default and
continuing  thereafter  until such  Default  shall be  remedied  to the  written
satisfaction  of the Bank, the Term Interest Rate shall,  at the election of the
Bank, be that rate of interest  equal to the Base Rate plus 2.50%.  The Bank may
lend to its  customers at rates that are at,  above,  or below the Term Interest
Rate.

         Term Note: That certain Term Note dated the date hereof executed by the
Borrower  and made  payable to the order of the Bank in the  original  principal
amount of $1,000,000, as it may be amended, modified, supplemented,  restated or
replaced from time to time.

         Trade Accounts Payable: The trade accounts payable of any Person with a
maturity of not greater  than 90 days  incurred in the  ordinary  course of such
Person's business.

         Section  1.2  Accounting  Terms  and  Calculations.  Except  as  may be
expressly  provided to the contrary  herein,  all  accounting  terms used herein
shall be interpreted  and all accounting  determinations  hereunder  (including,
without  limitation,  determination  of  compliance  with  financial  ratios and
restrictions  in Articles 8 and 9 hereof) shall be made in accordance  with GAAP
consistently applied.

         Section 1.3 Other Definitional  Terms. The words "hereof," "herein" and
"hereunder"  and words of similar import when used in this Agreement shall refer
to  this  Agreement  as a  whole  and not to any  particular  provision  of this
Agreement.  References to Sections,  Exhibits, Schedules and like references are
to this Agreement unless otherwise expressly provided.

         ARTICLE 2  TERMS OF LENDING

         Section  2.1  Revolving  Loan.  Subject  to  and  upon  the  terms  and
conditions hereof and in reliance upon the representations and warranties of the
Borrower  herein,  the Bank  agrees to make  loans to the  Borrower  under  this
Section 2.1 from time to time from the date hereof  until the  Revolving  Credit
Expiration  Date,  during  which  period the  Borrower may repay and reborrow in
accordance  with the  provisions  hereof,  provided,  that the aggregate  unpaid
principal  amount of all  outstanding  loans  under this  Section  2.1 shall not
exceed the amount of the  Commitment  at any time.  If, at any time,  or for any
reason,  the amount outstanding under the Revolving Loan exceeds the Commitment,
the Borrower  shall  immediately  pay to the Bank,  in cash,  the amount of such
excess.

         Section  2.2 Term Loan.  Subject  to and upon the terms and  conditions
hereof and in reliance upon the  representations  and warranties of the Borrower
herein, the Bank agrees to make the Term Loan to the Borrower under this Section
2.2 on the date hereof.

         Section 2.3  Borrowing  Procedures.  Each time the Borrower  desires to
obtain a loan advance  under the  Revolving  Loan  pursuant to Section 2.1, such
request shall be in writing (which may be by telecopy) or by telephone  promptly
confirmed  in  writing,  and must be given so as to be  received by the Bank not
later than 11:00 a.m.,  Minneapolis time, on the date of the requested  advance.
Each request for an advance shall specify (i) the borrowing date (which shall be
a Business Day), and (ii) the amount of such advance. Unless the Bank determines
that any applicable condition specified in Article 6 has not been satisfied, the
Bank will make the amount of the requested  advance available to the Borrower at
the Bank's principal office in Edina,  Minnesota, in immediately available funds
not later than 5:00 p.m., Minneapolis time, on the date requested.  The Borrower
shall be obligated to repay all advances  the Bank  reasonably  determines  were
requested  on behalf of the  Borrower  notwithstanding  the fact that the person
requesting the same was not in fact authorized to do so.

         Section 2.4       The Notes.

                  (a) Revolving  Note.  The  obligation of the Borrower to repay
         any and all loans  made under  Section  2.1 shall be  evidenced  by the
         Revolving Note of the Borrower, in form and substance acceptable to the
         Bank,  in the  amount  of  $200,000  and  dated  as of the date of this
         Agreement.  The Bank  shall  enter in its  records  the  amount of each
         advance and the payments made on the Revolving  Loan,  and such records
         shall be deemed  conclusive  evidence  of the subject  matter  thereof,
         absent manifest error.

                  (b) Term Note.  The  obligation  of the  Borrower to repay the
         Term Loan made under Section 2.2 shall be evidenced by the Term Note of
         the  Borrower,  in form and  substance  acceptable  to the Bank, in the
         amount of $1,000,000  and dated as of the date of this  Agreement.  The
         Bank shall enter in its records the payments made on the Term Loan, and
         such records shall be deemed conclusive  evidence of the subject matter
         thereof, absent manifest error.

         ARTICLE 3  INTEREST AND COSTS

         Section 3.1 Interest on Revolving Loan. The unpaid  principal amount of
the  Revolving  Loan  shall  bear  interest  at a rate  per  annum  equal to the
Revolving Interest Rate.

         Section 3.2 Interest on Term Loan. The unpaid  principal  amount of the
Term Loan shall bear  interest  at a rate per annum  equal to the Term  Interest
Rate.

     Section  3.3  Computation.  Interest  on each Note shall be computed on the
basis of actual days elapsed and a year of 360 days.

     Section 3.4 Payment Dates.  Interest accruing on each Note shall be due and
payable as specified  in such Note.

         Section  3.5  Increased  Costs.  If,  as  a  result  of  any  generally
applicable  law,  rule,  regulation,  treaty  or  directive,  or  any  generally
applicable change therein or in the interpretation or administration thereof, or
compliance  by the Bank  with any  generally  applicable  request  or  directive
(whether  or not  having  the  force  of law)  from  any  court,  central  bank,
governmental authority, agency or instrumentality, or comparable agency:

                  (a) any tax,  duty or other  charge with  respect to any Loan,
         any Note or the Commitment is imposed,  modified or deemed  applicable,
         or the  basis  of  taxation  of  payments  to the Bank of  interest  or
         principal  of the Loans  (other  than taxes  imposed on the overall net
         income  of the  Bank by the  jurisdiction  in  which  the  Bank has its
         principal office) is changed;

                  (b)  any  reserve,  special  deposit,  special  assessment  or
         similar requirement against assets of, deposits with or for the account
         of, or credit  extended  by, the Bank is  imposed,  modified  or deemed
         applicable;

                  (c) any increase in the amount of capital required or expected
         to be  maintained  by the Bank or any  Person  controlling  the Bank is
         imposed, modified or deemed applicable; or

                  (d) any other condition affecting this Agreement, the Loans or
         the Commitment is imposed on the Bank or the relevant funding markets;

and the Bank  reasonably and in good faith  determines  that, by reason thereof,
the cost to the Bank of making or  maintaining  the Loans or the  Commitment  is
increased,  or the amount of any sum  receivable by the Bank  hereunder or under
any Note in respect of any Loan is reduced;  then, the Borrower shall pay to the
Bank upon demand (which demand shall include  sufficient  evidence thereof) such
additional  amount or amounts as will  compensate  the Bank (or the  controlling
Person in the  instance of (c) above) for such  additional  costs or  reduction.
Determinations  by the Bank for purposes of this  Section 3.5 of the  additional
amounts required to compensate the Bank shall be presumptive  evidence  thereof.
In  determining  such  amounts,  the  Bank  may  use any  reasonable  averaging,
attribution and allocation methods.

     Section 3.6 Closing Fee.  The Borrower  shall pay the Bank a closing fee in
the amount of $7,500,  which will be due and payable upon the  execution of this
Agreement.

         ARTICLE 4  PAYMENTS AND PREPAYMENTS

     Section 4.1  Repayment.  Principal of each Note shall be due and payable as
specified in such Note.

     Section 4.2 Optional  Prepayments.  The  Borrower may prepay the Loans,  in
whole or in part, at any
time without premium or penalty.

         Section 4.3  Accelerated  Payments.  Upon the occurrence of an Event of
Default and the acceleration of any one or more of the Notes, pursuant to and as
permitted by Section 10.2, all of the Notes and all other Obligations,  shall be
immediately due and payable as provided in Section 10.2 and in the Notes.

         Section 4.4  Payments.  Payments and  prepayments  of principal of, and
interest on, the Notes and all fees,  expenses and other  obligations  under the
Loan  Documents  shall be made without  set-off or  counterclaim  in immediately
available funds not later than 2:00 p.m.,  Minneapolis time, on the dates due at
the main office of the Bank in Edina, Minnesota. Funds received on any day after
such  time  shall be  deemed to have been  received  on the next  Business  Day.
Whenever  any payment to be made  hereunder or on any Note shall be stated to be
due on a day which is not a Business Day, such payment shall be made on the next
succeeding  Business  Day and such  extension  of time shall be  included in the
computation of any interest or fees.

         Section  4.5  Debits;  Advances.  The Bank  shall have the right to pay
accrued  interest and principal on the Notes,  and any and all other amounts due
and payable under the Loan Documents, by debiting any account of the Borrower at
the Bank or by making one or more advances under the Revolving Loan, all without
further authorization of the Borrower.

         Section 4.6 Application of the Payments. Any voluntary prepayment shall
be applied to such Note as the Borrower may direct,  and any prepayment shall be
applied  first to the payment of accrued  interest and then to the  reduction of
principal of such Note in inverse order of maturity.  Any  prepayment  resulting
from an  acceleration  of the Notes shall be applied to any and all of the Notes
in such order and such amounts as the Bank may from time to time  determine  and
direct, notwithstanding any contrary instructions or directions of the Borrower.

         ARTICLE 5  COLLATERAL SECURITY

         Section 5.1  Composition  of the  Collateral.  The  property in which a
security  interest is, or is intended to be, granted pursuant to this Agreement,
the Security Agreement, the Assignment of Life Insurance , the Pledge Agreement,
or any  other  Loan  Document  and  the  provisions  of  Section  5.2 is  herein
collectively  called the  "Collateral."  The  Collateral,  together with all the
Borrower's  other  property  of any kind  held by the Bank,  shall  stand as one
general,  continuing collateral security for all of the Obligations,  and may be
retained by the Bank until all Obligations  have been satisfied in full, and the
Commitment has terminated.

         Section 5.2 Rights in Property  Held by the Bank.  As security  for the
prompt satisfaction of all Obligations,  the Borrower hereby assigns,  transfers
and sets over to the Bank all of its right,  title and  interest  in and to, and
grants to the Bank a lien on and a security  interest in, any amounts  which may
be  owing  from  time to  time by the  Bank  to the  Borrower  in any  capacity,
including,  but  without  limitation,  any  balance  or share  belonging  to the
Borrower of any deposit or other account with the Bank,  which lien and security
interest shall be independent of any right of setoff which the Bank may have.

         Section  5.3  Priority of Liens.  The liens as provided  for under this
Agreement,  the Security Agreement, the Assignment of Life Insurance, the Pledge
Agreement,  and the other Loan Documents shall be first and prior liens, subject
only to Permitted Liens.

         Section 5.4 Financing Statements. The Borrower will authorize,  execute
and  deliver  such  security  agreements,   assignments,   and  UCC-1  financing
statements (including amendments thereto and continuation statements thereof) in
form  satisfactory to the Bank as the Bank may specify and will pay or reimburse
the Bank for all costs of filing or recording the same in such public offices as
the Bank may  designate,  and take such other  steps as the Bank  shall  direct,
including  the  noting of the  Bank's  lien on the  chattel  paper,  in order to
perfect the Bank's interest in the Collateral.

         ARTICLE 6  CONDITIONS PRECEDENT

         Section 6.1  Conditions of Initial Loan.  The obligation of the Bank to
make the initial  Loan  hereunder  shall be subject to the  satisfaction  of the
conditions  precedent,  in addition to the applicable  conditions  precedent set
forth in  Section  6.2  below,  that the Bank  shall  have  received  all of the
following,  in form and substance  satisfactory  to the Bank, each duly executed
and certified or dated the date hereof or such other date as is  satisfactory to
the Bank:

                    (a) The Revolving  Note and the Term Note,  duly executed by
                        the Borrower.

                  (b) The Security Agreement, duly executed by the Borrower.

                  (c) The Financing Statements, duly executed by the Borrower.

                  (d) The Guaranty, duly executed by the Guarantor.

                  (e) The Pledge Agreement, duly executed by the Guarantor.

                  (f) An assignment  separate from  certificate  and a financing
         statement, duly executed by the Guarantor.

                  (g) A  Secretary's  Certificate  certifying  (1) a copy of the
         Bylaws of the Borrower with all amendments  thereto,  (2) a copy of the
         corporate  resolutions  of  the  Borrower  authorizing  the  execution,
         delivery  and  performance  of the Loan  Documents,  and (3) the names,
         titles,  and  signatures of the officers of the Borrower  authorized to
         execute the Loan Documents and to request advances hereunder.

                  (h) A copy of the  Articles of  Incorporation  of the Borrower
         with  all   amendments   thereto,   certified   by  the  state  of  its
         incorporation.

                  (i) Certificates of Good Standing for the Borrower,  certified
         by the state where the Borrower is incorporated and/or doing business.

                  (j) Copies of the  policies  of  insurance  or other  evidence
         acceptable  to the Bank in its  absolute  discretion  showing  that the
         insurance  required  by the  Security  Agreement  and  the  other  Loan
         Documents is in full force and effect.

                  (k) Such  collateral  audits and  equipment  appraisals as the
         Bank  may  request,  each in  form  and  substance,  and  conducted  by
         auditors/appraisers, acceptable to the Bank in its sole discretion.

                  (l) An officer's  solvency  certificate  in form and substance
acceptable to the Bank.

                  (m)  Such  other  documents  or  instruments  as the  Bank may
         request to consummate the transaction contemplated hereby.

         Section 6.2  Conditions  Precedent to all Loans.  The obligation of the
Bank to make any Loan hereunder (including the initial Loan) shall be subject to
the  satisfaction of the following  conditions  precedent (and any request for a
Loan shall be deemed a written certification that such conditions precedent have
been satisfied):

                  (a)  Before  and  after  giving  effect  to  such  Loan,   the
         representations and warranties contained in Article 7 shall be true and
         correct, as though made on the date of such Loan; and

                  (b) Before and after giving effect to such Loan, no Default or
         Event of Default shall have occurred and be continuing.

         ARTICLE 7  REPRESENTATIONS AND WARRANTIES

         To  induce  the  Bank to  enter  into  this  Agreement,  to  grant  the
Commitment and to make Loans hereunder,  the Borrower represents and warrants to
the Bank:

         Section 7.1 Organization,  Standing, Etc. The Borrower is a corporation
duly  incorporated  and validly  existing and in good standing under the laws of
the State of Minnesota,  and has all requisite  corporate power and authority to
carry on its businesses as now  conducted,  to enter into the Loan Documents and
to perform  its  Obligations  under the Loan  Documents.  The  Borrower  is duly
qualified and in good standing as a foreign  corporation in each jurisdiction in
which the  character of the  properties  owned,  leased or operated by it or the
business  conducted  by it makes  such  qualification  necessary,  and where the
failure to so qualify could result in an Adverse Event.

         Section 7.2  Authorization  and Validity.  The execution,  delivery and
performance by the Borrower of the Loan  Documents have been duly  authorized by
all  necessary  corporate  action  by  the  Borrower,  and  the  Loan  Documents
constitute the legal, valid and binding obligations of the Borrower, enforceable
against the  Borrower in  accordance  with their  respective  terms,  subject to
limitations as to enforceability which might result from bankruptcy, insolvency,
moratorium  and other similar laws  affecting  creditors'  rights  generally and
subject to limitations on the availability of equitable remedies.

         Section  7.3 No  Conflict;  No Default.  The  execution,  delivery  and
performance  by the  Borrower  of the Loan  Documents  will not (a)  violate any
provision of any law, statute,  rule or regulation or any order, writ, judgment,
injunction,  decree, determination or award of any court, governmental agency or
arbitrator presently in effect having applicability to the Borrower, (b) violate
or contravene any provisions of the Articles of  Incorporation  or Bylaws of the
Borrower,  or (c)  result  in a breach  of or  constitute  a  default  under any
indenture, loan or credit agreement or any other agreement,  lease or instrument
to which the Borrower is a party or by which it or any of its  properties may be
bound or result in the creation of any Lien on any asset of the Borrower,  other
than Liens in favor of the Bank.  The  Borrower  is not in  default  under or in
violation of any such law, statute,  rule or regulation,  order, writ, judgment,
injunction, decree, determination or award or any such indenture, loan or credit
agreement  or other  agreement,  lease or  instrument  in any case in which  the
consequences of such default or violation could constitute an Adverse Event.

         Section 7.4 Government Consent. No order, consent,  approval,  license,
authorization  or validation of, or filing,  recording or registration  with, or
exemption  by, any  governmental  or public body or authority is required on the
part of the  Borrower  to  authorize,  or is  required  in  connection  with the
execution,  delivery and  performance  of, or the  legality,  validity,  binding
effect or enforceability of, the Loan Documents,  other than the filing of UCC-1
financing statements.

         Section 7.5 Financial Projections. The Borrower's financial projections
as heretofore  furnished to the Bank,  have been prepared based upon  reasonable
assumptions and fairly present the most probable anticipated financial condition
and operating results of the Borrower.

         Section  7.6  Litigation.  There are no actions,  suits or  proceedings
pending or, to the  knowledge of the Borrower,  threatened  against or affecting
the Borrower or any of its  properties  before any court or  arbitrator,  or any
governmental  department,  board,  agency  or other  instrumentality  which,  if
determined adversely to the Borrower, could constitute an Adverse Event.

     Section 7.7 Contingent Payments or Liabilities.  The Borrower does not have
any contingent payments or liabilities which are material to the Borrower.

     Section 7.8 Compliance. The Borrower is in compliance with all statutes and
governmental rules and regulations applicable to it.

         Section 7.9 Environmental, Health and Safety Laws. There does not exist
any  violation by the Borrower of any  applicable  federal,  state or local law,
rule or regulation or order of any government,  governmental department,  board,
agency or other instrumentality relating to environmental,  pollution, health or
safety  matters  which will or threatens  to impose a material  liability on the
Borrower or which would require a material  expenditure by the Borrower to cure.
The  Borrower  has not  received  any notice to the effect  that any part of its
operations or properties is not in material  compliance with any such law, rule,
regulation  or order or notice  that it or its  property  is the  subject of any
governmental  investigation  evaluating whether any remedial action is needed to
respond to any release of any toxic or  hazardous  waste or  substance  into the
environment,  the consequences of which  non-compliance or remedial action could
constitute an Adverse Event.

         Section 7.10 ERISA.  Each Plan  complies  with all material  applicable
requirements of ERISA and the Code and with all material  applicable rulings and
regulations  issued under the  provisions  of ERISA and the Code  setting  forth
those requirements. No Reportable Event, other than a Reportable Event for which
the reporting  requirements  have been waived by  regulations  of the PBGC,  has
occurred and is continuing  with respect to any Plan. All of the minimum funding
standards applicable to such Plans have been satisfied and there exists no event
or condition  which would permit the institution of proceedings to terminate any
Plan under  Section  4042 of ERISA.  The  current  value of the Plans'  benefits
guaranteed  under  Title IV of ERISA does not exceed  the  current  value of the
Plans' assets allocable to such benefits.

         Section 7.11  Regulation U. The Borrower is not engaged in the business
of extending  credit for the purpose of purchasing or carrying  margin stock (as
defined  in  Regulation  U of the  Federal  Reserve  Board)  and no  part of the
proceeds of any Loan will be used to purchase or carry  margin  stock or for any
other purpose which would violate any of the margin  requirements of the Federal
Reserve Board.

         Section 7.12  Ownership of Property;  Liens.  The Borrower has good and
marketable  title to its real  properties and good and  sufficient  title to its
other properties, including all properties and assets referred to as owned by it
in the financial projections referred to in Section 7.5. None of the properties,
revenues or assets of the  Borrower is subject to a Lien,  except for  Permitted
Liens.

         Section 7.13 Taxes. The Borrower has filed all federal, state and local
tax returns  required to be filed and has paid or made provision for the payment
of all taxes due and  payable  pursuant  to such  returns  and  pursuant  to any
assessments made against it or any of its property and all other taxes, fees and
other charges imposed on it or any of its property by any governmental authority
(other than taxes,  fees or charges the amount or validity of which is currently
being  contested in good faith by  appropriate  proceedings  and with respect to
which  reserves in  accordance  with GAAP have been provided on the books of the
Borrower).  No tax  Liens  have  been  filed and no  material  claims  are being
asserted with respect to any such taxes, fees or charges. The charges,  accruals
and  reserves  on the  books of the  Borrower  in  respect  of taxes  and  other
governmental charges are adequate.

         Section 7.14 Licenses and Infringement. The Borrower possesses adequate
licenses, permits, franchises, patents, copyrights,  trademarks and trade names,
or rights thereto, to conduct its business substantially as now conducted and as
presently  proposed to be conducted.  There does not exist and to the Borrower's
knowledge there is no reason to anticipate  that there may exist,  any liability
to the  Borrower  with  respect  to any  claim  of  infringement  regarding  any
franchise,  patent, copyright,  trademark or trade name possessed or used by the
Borrower.

         Section 7.15 Investment Company Act. The Borrower is not an "investment
company" or a company  "controlled" by an investment  company within the meaning
of the Investment Company Act of 1940, as amended.

         Section 7.16 Public Utility  Holding Company Act. The Borrower is not a
"holding  company"  or  a  "subsidiary  company"  of a  holding  company  or  an
"affiliate" of a holding company or of a subsidiary company of a holding company
within  the  meaning of the  Public  Utility  Holding  Company  Act of 1935,  as
amended.

     Section 7.17 Subsidiaries. The Borrower does not have any Subsidiaries.

     Section 7.18 Partnerships and Joint Ventures. The Borrower is not a partner
(limited  or  general)  in any  partnerships  and  the  Borrower  is not a joint
venturer in any joint ventures.

         Section 7.19 Completeness of Disclosures. No representation or warranty
by the  Borrower  contained  herein or in any  other  Loan  Document,  or in any
certificate  or other document  furnished  heretofore or  concurrently  with the
signing of this Agreement or any other Loan Document by the Borrower to the Bank
in connection with the  transactions  contemplated  hereunder or under any other
Loan  Document,  contains any untrue  statement  of a material  fact or omits to
state a material fact which would prevent or materially  inhibit the Borrower or
any Subsidiary from performing its respective  obligations  under this Agreement
or any other Loan Document according to its terms.

         Section 7.20 Survival of  Representations.  All of the  representations
and warranties set forth in the immediately  preceding subsections shall survive
until all the Obligations  shall have been satisfied in full, and the Commitment
has been terminated.

Each of the  foregoing  warranties  and  representations  shall be  deemed to be
repeated and  reaffirmed on and as of the date any Loan is made hereunder by the
Bank to the Borrower pursuant to Article 2.

         ARTICLE 8  AFFIRMATIVE COVENANTS

         From the date of this Agreement and thereafter  until the Commitment is
terminated  or expires and the  Obligations  have been paid in full,  unless the
Bank shall otherwise expressly consent in writing,  the Borrower agrees that the
Borrower will do all of the following:

         Section 8.1     Financial Statements and Reports.  Furnish to the Bank:

                  (a) As soon as available and in any event within 90 days after
         the end of each calendar year, the annual reviewed financial statements
         of the Borrower  prepared in  conformity  with GAAP,  consisting  of at
         least statements of income, cash flow and stockholders' equity for such
         year, and a balance sheet as at the end of such year, all in reasonable
         detail and reviewed by  independent  certified  public  accountants  of
         recognized  standing  selected by the  Borrower and  acceptable  to the
         Bank.

                  (b) As soon as available and in any event within 45 days after
         the end of each quarter, a copy of the compiled financial statements of
         the Borrower  prepared in the same manner as the  financial  statements
         referred to in Section 8.1(a), compiled by independent certified public
         accountants of recognized standing selected by the Borrower, consisting
         of at least statements of income, cash flow,  stockholders'  equity for
         such quarter, and a balance sheet as at the end of such quarter.

                  (c) As soon as available and in any event within 30 days after
         the end of each month, a Borrower's Certificate (along with an aging of
         the Borrower's accounts receivable, listing of the sale/disposal of any
         equipment  and,  if  requested  by  the  Bank,  a  perpetual  inventory
         listing), signed by an officer of the Borrower.

                  (d) Immediately  upon becoming aware of the  occurrence,  with
         respect to any Plan, of any  Reportable  Event (other than a Reportable
         Event for which the  reporting  requirements  have been  waived by PBGC
         regulations)  or any  "prohibited  transaction"  (as defined in Section
         4975 of the Code),  a notice  specifying  the nature  thereof  and what
         action the Borrower  proposes to take with respect  thereto,  and, when
         received,  copies of any notice from PBGC of  intention to terminate or
         have a trustee appointed for any Plan.

                  (e) Immediately upon becoming aware of the occurrence thereof,
         notice of any violation as to any environmental  matter by the Borrower
         and of the  commencement of any judicial or  administrative  proceeding
         relating  to health,  safety or  environmental  matters (i) in which an
         adverse  determination  or result could result in the  revocation of or
         have a material adverse effect on any operating  permits,  air emission
         permits,  water  discharge  permits,  hazardous  waste permits or other
         permits held by the Borrower  which are material to the  operations  of
         the  Borrower,  or (ii)  which will or  threatens  to impose a material
         liability  on the  Borrower  to any  Person  or which  will  require  a
         material  expenditure  by the  Borrower to cure any alleged  problem or
         violation.

                  (f) On or  before  April  30 of  each  year,  the  Guarantor's
         personal   financial   statements  for  the  preceding   calendar  year
         (including a year-end balance sheet and an annual statement of income).

                  (g) From time to time,  such other  information  regarding the
         business, operation and financial condition of the Borrower as the Bank
         may reasonably request.

         Section 8.2       Financial Covenants.

               (a) Maintain its Debt to Tangible Capital Base Ratio at all times
          not greater than 1.25 to 1.0.

                  (b) Obtain a Pre-Tax  Profit equal to or greater than $110,000
         for the year ended February 28, 2001, and each year thereafter.

                  (c) Maintain its Debt Service  Coverage  Ratio  (determined at
         the end of each fiscal year) equal to or greater than 1.4 to 1.0.

         Section 8.3 Corporate  Existence.  Maintain its corporate  existence in
good  standing  under  the laws of its  jurisdiction  of  incorporation  and its
qualification to transact  business in each  jurisdiction in which the character
of the properties owned,  leased or operated by it or the business  conducted by
it makes such qualification necessary.

         Section 8.4 Insurance.  Maintain with  financially  sound and reputable
insurance  companies such insurance in such amounts and against such risks as is
reasonably  requested  by the  Bank  or as may be  required  by law or as may be
customary  in the case of  reputable  Persons  engaged  in the  same or  similar
business  and  similarly  situated,  including,  without  limitation,  property,
hazard,  fire,  wind,  hail,  theft,  collapse,   comprehensive  general  public
liability,  and business  interruption  insurance,  and worker's compensation or
similar  insurance.  The Borrower shall furnish to the Bank full information and
written  evidence  as to the  insurance  maintained  by  the  Borrower  and  its
Subsidiaries. All policies shall contain the insurer's promise not to cancel the
policy without 30 days prior written notice to the Bank at its address set forth
below. All policies shall name the Bank as an additional  insured or loss payee,
as appropriate, as its interests may appear.

         Section  8.5  Payment of Taxes and  Claims.  File all tax  returns  and
reports  which are  required by law to be filed by it and pay before they become
delinquent all taxes,  assessments and  governmental  charges and levies imposed
upon it or its  property  and all  claims  or  demands  of any kind  (including,
without  limitation,  those  of  suppliers,   mechanics,  carriers,  warehouses,
landlords and other like Persons) which, if unpaid, might result in the creation
of a Lien upon its property;  provided that the foregoing items need not be paid
if they are being  contested in good faith by  appropriate  proceedings,  and as
long  as the  Borrower's  title  to its  property  is not  materially  adversely
affected, its use of such property in the ordinary course of its business is not
materially  interfered with and adequate reserves with respect thereto have been
set aside on the  Borrower's  books in accordance  with GAAP.  In addition,  and
without limitation, promptly pay all Trade Accounts Payable.

         Section 8.6  Inspection.  Permit any Person  designated  by the Bank to
visit and inspect any of its properties,  corporate books and financial records,
to  examine  and to make  copies of its books of  accounts  and other  financial
records, and to discuss the affairs, finances and accounts of the Borrower with,
and to be advised as to the same by, its officers at such  reasonable  times and
intervals as the Bank may  designate.  The expenses of the Bank for such visits,
inspections and examinations shall be at the reasonable expense of the Borrower.

         Section 8.7 Maintenance of Properties.  Maintain its properties used or
useful in the  conduct of its  business  in good  condition,  repair and working
order,  and  supplied  with all  necessary  equipment,  and  make all  necessary
repairs,  renewals,  replacements,  betterments and improvements thereto, all as
may be necessary so that the business carried on in connection  therewith may be
properly and advantageously conducted at all times.

         Section 8.8 Books and Records.  Keep  adequate  and proper  records and
books of account in which full and correct entries will be made of its dealings,
business and affairs.

         Section  8.9  Compliance.  Comply  in all  material  respects  with the
requirements  of all  applicable  state  and  federal  laws,  and of all  rules,
regulations,  orders, writs, judgments,  injunctions, decrees or awards to which
it may be subject.

         Section 8.10 ERISA.  Maintain each Plan in compliance with all material
applicable  requirements  of  ERISA  and of  the  Code  and  with  all  material
applicable  rulings and regulations  issued under the provisions of ERISA and of
the Code.

         Section 8.11 Environmental  Matters.  Observe and comply with all laws,
rules, regulations and orders of any government or government agency relating to
health, safety, pollution, hazardous materials or other environmental matters to
the extent  non-compliance  could  result in a material  liability  or otherwise
constitute an Adverse Event.

         Section 8.12 Notice of Litigation.  Promptly  provide written notice to
the Bank of all  litigation,  arbitration or mediation  proceedings,  and of all
proceedings  by or  before  any  court  or  governmental  or  regulatory  agency
affecting  the Borrower  which alone or together with other claims seeks $50,000
or more in the  aggregate,  describing  the nature  thereof  and the steps being
taken with respect to such proceeding(s).

     Section  8.13  Accounts.  Maintain the  Borrower's  primary  operating  and
depository account(s) at the Bank.

         Section 8.14 Notice of Default.  Promptly provide written notice to the
Bank of any Default or Event of Default,  describing the nature thereof and what
action the Borrower proposes to take with respect thereto.

         Section 8.15 Assignment of Life Insurance. Obtain by July 31, 2000, and
maintain  thereafter,  an insurance  policy on the life of James E. Sloane in an
amount equal to or greater than $1,000,000,  and execute and deliver to the Bank
the Assignment of Life Insurance on or before July 31, 2000.

         ARTICLE 9  NEGATIVE COVENANTS

         From the date of this Agreement and thereafter  until the Commitment is
terminated  or expires and the  Obligations  have been paid in full,  unless the
Bank shall otherwise expressly consent in writing,  the Borrower agrees that the
Borrower will not do any of the following:

     Section  9.1  Merger.  Merge or  consolidate  or enter  into any  analogous
reorganization or transaction with any Person.

         Section 9.2 Sale of Assets. Sell, transfer,  assign, lease or otherwise
convey all or any substantial  part of its assets (whether in one transaction or
in a series of  transactions) to any Person other than in the ordinary course of
business.

         Section 9.3 Purchase of Assets.  Purchase or lease or otherwise acquire
any  right,  title or  interest  in or to,  any real or  personal  property  not
directly related to or necessary in connection with its present operations.

         Section 9.4 Plans. Permit any condition to exist in connection with any
Plan which might  constitute  grounds for the PBGC to institute  proceedings  to
have such Plan terminated or a trustee appointed to administer such Plan, permit
any Plan to  terminate  under  any  circumstances  which  would  cause  the lien
provided  for in  Section  4068 of ERISA to attach to any  property,  revenue or
asset of the Borrower or any Subsidiary or permit the underfunded amount of Plan
benefits guaranteed under Title IV of ERISA to exceed $50,000.

     Section 9.5 Change in Nature of Business.  Make any material  change in the
nature of its business
as carried on at the date hereof.

     Section  9.6  Subsidiaries,  Partnerships,  Joint  Ventures.  Do any of the
following:  (a) form or acquire any  corporation  which would  thereby  become a
Subsidiary;  or (b) form or enter into any  partnership  as a limited or general
partner or into any joint venture.

         Section 9.7 Other Agreements.  Enter into any agreement,  bond, note or
other instrument with or for the benefit of any Person other than the Bank which
would:  (a) prohibit the Borrower from granting,  or otherwise limit the ability
of the Borrower to grant,  to the Bank any Lien on any assets or  properties  of
the Borrower;  or (b) be violated or breached by the  Borrower's  performance of
its obligations under the Loan Documents.

         Section 9.8  Restricted  Payments.  Either:  (a)  purchase or redeem or
otherwise acquire for value any shares of the Borrower's  stock,  declare or pay
any dividends thereon (other than stock dividends), make any distribution on, or
payment on account of the purchase, redemption,  defeasance or other acquisition
or retirement for value of, any shares of the Borrower's  stock or set aside any
funds for any such purpose;  or (b) directly or indirectly  make any payment on,
or redeem, repurchase,  defease, or make any sinking fund payment on account of,
or any other provision for, or otherwise pay,  acquire or retire for value,  any
Indebtedness  of the Borrower  that is  subordinated  in right of payment to the
Loans  (whether  pursuant  to its  terms or by  operation  of law),  except  for
regularly-scheduled  payments of interest and principal (which shall not include
payments  contingently  required upon occurrence of a change of control or other
event) that are not  otherwise  prohibited  hereunder  or under the  document or
agreement stating the terms of such subordination.

     Section  9.9  Investments.  Acquire  for  value,  make,  have or  hold  any
Investments, except:

     (a) Investments outstanding on the date hereof and listed on Schedule 9.9;

     (b)      direct obligations of the United States of America;

     (c) travel  advances to officers and  employees  in the ordinary  course of
business;

                  (d) extensions of credit in the nature of accounts  receivable
         or notes receivable  arising from the sale of goods and services in the
         ordinary course of business; and

                  (e) commercial paper issued by U.S.  corporations  rated "A-1"
         by Standard & Poor Corporation or "P-1" by Moody's Investors Service or
         certificates  of deposit or bankers'  acceptances  having a maturity of
         one year or less issued by members of the Federal Reserve System having
         deposits in excess of  $100,000,000  (which  certificates of deposit or
         bankers' acceptances are fully insured by the Federal Deposit Insurance
         Corporation).

     Section 9.10 Indebtedness.  Create, incur, issue, assume or suffer to exist
any Indebtedness, except:

                  (a)      the Obligations;

                  (b)      any Subordinated Debt;

                  (c) Indebtedness  outstanding on the date hereof and listed on
Schedule 9.10.

         Section 9.11 Liens.  Create,  incur, assume or suffer to exist any Lien
with respect to any property,  revenues or assets now owned or hereafter arising
or acquired, except Liens in favor of the Bank and except:

          (a) Liens existing on the date hereof and disclosed on Schedule 9.11;

                  (b)  Deposits  or  pledges  to  secure   payment  of  workers'
         compensation,  unemployment insurance, old age pensions or other social
         security obligations, in the ordinary course of its business;

                  (c)  Liens  for  taxes,  fees,  assessments  and  governmental
         charges not  delinquent or to the extent that payments  therefor  shall
         not at  the  time  be  required  to be  made  in  accordance  with  the
         provisions of Section 8.5; and

                  (d)   Liens   of   carriers,   warehousemen,   mechanics   and
         materialmen,  and other like Liens  arising in the  ordinary  course of
         business, for sums not due or to the extent that payment therefor shall
         not at  the  time  be  required  to be  made  in  accordance  with  the
         provisions of Section 8.5.

         Section 9.12 Contingent  Payments or Liabilities.  Either: (i) endorse,
guarantee,  contingently  agree to purchase or to provide  funds for the payment
of, or otherwise  become  contingently  liable upon, any obligation of any other
Person,  except by the  endorsement  of  negotiable  instruments  for deposit or
collection (or similar transactions) in the ordinary course of business, or (ii)
agree to  maintain  the net worth or working  capital  of, or  provide  funds to
satisfy any other financial test applicable to, any other Person.

         Section 9.13  Unconditional  Purchase  Obligations.  Enter into or be a
party to any contract for the purchase or lease of materials,  supplies or other
property  or  services  if such  contract  requires  that  payment be made by it
regardless of whether or not delivery is ever made of such  materials,  supplies
or other property or services.

         Section 9.14 Transactions with Affiliates.  Enter into or be a party to
any transaction or arrangement,  including,  without  limitation,  the purchase,
sale,  lease or exchange of property or the  rendering of any service,  with any
Affiliate,  except in the  ordinary  course of and  pursuant  to the  reasonable
requirements  of the Borrower's  business and upon fair and reasonable  terms no
less  favorable  to  the  Borrower  than  would  be  obtained  in  a  comparable
arm's-length transaction with a Person not an Affiliate.

         Section  9.15 Use of  Proceeds.  Permit any proceeds of the Loans to be
used,  either  directly  or  indirectly,  for the  purpose,  whether  immediate,
incidental or ultimate,  of "purchasing or carrying any margin stock" within the
meaning of Regulation U of the Federal  Reserve  Board,  as amended from time to
time, and furnish to the Bank, upon its request,  a statement in conformity with
the requirements of Federal Reserve Form U-1 referred to in Regulation U.

         ARTICLE 10  EVENTS OF DEFAULT AND REMEDIES

     Section 10.1 Events of Default.  The  occurrence  of any one or more of the
following events shall constitute an Event of Default:

                  (a) The  Borrower  shall  fail to make  when due,  whether  by
         acceleration or otherwise, any payment of principal of, or interest on,
         any one or more of the Notes or any fee or other amount  required to be
         made to the Bank pursuant to the Loan  Documents and such failure shall
         continue for a period of ten (10) days after notice thereof; or

                  (b) Any representation or warranty made or deemed to have been
         made by or on behalf of the Borrower in the Loan Documents or on behalf
         of the Borrower in any certificate,  statement, report or other writing
         furnished by or on behalf of the  Borrower to the Bank  pursuant to the
         Loan  Documents or any other  instrument,  document or agreement  shall
         prove to have been false or misleading  in any material  respect on the
         date as of which the facts set forth are stated or  certified or deemed
         to have been stated or certified; or

          (c) The  Borrower  shall fail to comply with Section 8.2 hereof or any
     Section of Article 9 hereof; or

                  (d) The  Borrower  or any other  Credit  Party  shall  fail to
         comply  with any  agreement,  covenant,  condition,  provision  or term
         contained  in this  Agreement  or in any other Loan  Document  and such
         failure  shall  continue  for a period of twenty (20) days after notice
         thereof  (and such  failure  shall not  constitute  an Event of Default
         under any of the other provisions of this Section 10.1); or

                  (e) An Act of  Bankruptcy  shall  occur  with  respect  to the
         Borrower or any other Credit Party; or

                  (f) A judgment or judgments for the payment of money in excess
         of the sum of $50,000 in the  aggregate  shall be rendered  against the
         Borrower  or any other  Credit  Party and the  Borrower  or such Credit
         Party shall not pay or discharge  the same or provide for its discharge
         in accordance with its terms,  or procure a stay of execution  thereof,
         prior to any  execution on such  judgments by such  judgment  creditor,
         within 30 days from the date of entry  thereof,  and within said period
         of 30 days,  or such  longer  period  during  which  execution  of such
         judgment  shall be stayed,  appeal  therefrom  and cause the  execution
         thereof to be stayed during such appeal; or

                  (g) Any  property of the  Borrower or any other  Credit  Party
         (including,  without limitation,  the Collateral) shall be garnished or
         attached in any  proceeding and such  garnishment  or attachment  shall
         remain  undischarged  for a period of 30 days during which execution is
         not effectively stayed; or

                  (h) The  institution by the Borrower or any ERISA Affiliate of
         steps to terminate any Plan if in order to effectuate such termination,
         the  Borrower  or any  ERISA  Affiliate  would  be  required  to make a
         contribution  to such Plan, or would incur a liability or obligation to
         such Plan,  in excess of  $50,000,  or the  institution  by the PBGC of
         steps to terminate any Plan; or

                  (i) The maturity of any Indebtedness  (other than Indebtedness
         under this  Agreement and whether owed to the Bank or to others) of the
         Borrower  or any  other  Credit  Party  shall  be  accelerated,  or the
         Borrower or such Credit  Party shall fail to pay any such  Indebtedness
         when due or, in the case of such Indebtedness  payable on demand,  when
         demanded,  or any event shall occur or condition  shall exist and shall
         continue for more than the period of grace, if any,  applicable thereto
         and shall have the effect of causing or permitting (any required notice
         having been given and grace  period  having  expired) the holder of any
         such  Indebtedness  in such  aggregate  amount or any  trustee or other
         Person acting on behalf of such holder to cause,  such  Indebtedness to
         become  due  prior  to its  stated  maturity  or to  realize  upon  any
         collateral given as security therefor; or

                  (j) The Borrower shall fail to pay, withhold, collect or remit
         any tax or tax  deficiency  when assessed or due or notice of any state
         or federal tax lien shall be filed or issued; or

                    (k)  Any   Guarantor   dies  or   purports  to  revoke  such
               Guarantor's Guaranty; or

                    (l) Any Guarantor  purports to revoke his Pledge  Agreement;
               or

                    (m) Any  Event of  Default  shall  occur  under  the  Pledge
               Agreement; or

                  (n)      James E. Sloane  shall fail to own and hold of record
                           at least 51% of the  outstanding  voting stock of the
                           Borrower.

         Section 10.2 Remedies. If (a) any Event of Default described in Section
10.1(e)  shall occur,  the  Commitment  shall  automatically  terminate  and the
outstanding  unpaid principal balance of the Notes, the accrued interest thereon
and all other  obligations  of the Borrower to the Bank under the Loan Documents
shall  automatically  become immediately due and payable; or (b) any other Event
of Default shall occur and be  continuing,  then the Bank may take any or all of
the following  actions:  (i) declare the Commitment to be terminated,  whereupon
the Commitment  shall  terminate,  and (ii) declare that the outstanding  unpaid
principal  balance of one or more of the Notes,  the accrued and unpaid interest
thereon  and all other  obligations  of the  Borrower to the Bank under the Loan
Documents to be forthwith due and payable, whereupon such Notes, all accrued and
unpaid interest thereon and all such obligations  shall  immediately  become due
and payable,  in each case without  further demand or notice of any kind, all of
which are hereby expressly waived, anything in this Agreement or in the Notes to
the contrary notwithstanding. In addition, upon any Event of Default and so long
as such  Event of  Default  continues,  the Bank may  exercise  all  rights  and
remedies under any other instrument,  document or agreement between the Borrower
and the Bank,  and enforce all rights and  remedies  under any  applicable  law,
including without limitation the rights and remedies available upon default to a
secured  party  under the  Uniform  Commercial  Code as  adopted in the State of
Minnesota,  including,  without limitation,  the right to take possession of the
Collateral,  or any evidence thereof,  proceeding without judicial process or by
judicial process (without a prior hearing or notice thereof,  which the Borrower
hereby expressly  waives) and the right to sell,  lease or otherwise  dispose of
any or all of the Collateral, and, in connection therewith, the Borrower will on
demand  assemble the  Collateral and make it available to the Bank at a place to
be designated by the Bank which is reasonably convenient to both parties.

         Section 10.3  Offset.  In addition to the remedies set forth in Section
10.2,  upon the  occurrence  of any Event of Default  or at any time  thereafter
while such Event of Default continues, the Bank or any other holder of the Notes
may offset any and all balances,  credits, deposits (general or special, time or
demand,  provisional  or  final),  accounts  or monies of the  Borrower  then or
thereafter with the Bank or such other holder, or any obligations of the Bank or
such  other  holder of the  Notes,  against  the  Indebtedness  then owed by the
Borrower  to the Bank.  Nothing  in this  Agreement  shall be deemed a waiver or
prohibition  of the Bank's rights of banker's  lien,  offset,  or  counterclaim,
which right the Borrower hereby grants to the Bank.

         ARTICLE 11  MISCELLANEOUS

         Section 11.1 Waiver and  Amendment.  No failure on the part of the Bank
or the holder of the Notes to exercise and no delay in  exercising  any power or
right  hereunder  or under any other  Loan  Document  shall  operate as a waiver
thereof; nor shall any single or partial exercise of any power or right preclude
any other or further  exercise  thereof or the  exercise  of any other  power or
right.  The remedies herein and in any other  instrument,  document or agreement
delivered or to be delivered to the Bank hereunder or in connection herewith are
cumulative  and not  exclusive of any remedies  provided by law. No notice to or
demand on the Borrower  not  required  hereunder or under the Notes shall in any
event  entitle the Borrower to any other or further  notice or demand in similar
or other  circumstances  or  constitute a waiver of the right of the Bank or the
holder of the Notes to any other or further action in any circumstances  without
notice or demand. No amendment,  modification or waiver of any provision of this
Agreement  or  consent  to any  departure  by the  Borrower  therefrom  shall be
effective  unless the same shall be in writing and signed by the Bank,  and then
such amendment,  modifications, waiver or consent shall be effective only in the
specific instances and for the specific purpose for which given.

         Section 11.2 Expenses and Indemnities.  Whether or not any Loan is made
hereunder,  the  Borrower  agrees  to  reimburse  the Bank upon  demand  for all
reasonable  expenses paid or incurred by the Bank  (including  collateral  audit
expenses,  filing and recording costs and fees and expenses of legal counsel) in
connection  with  the  preparation,   review,  execution,  delivery,  amendment,
modification,  interpretation, collection and enforcement of the Loan Documents.
The Borrower  agrees to pay, and save the Bank harmless from all liability  for,
any stamp or other taxes which may be payable with  respect to the  execution or
delivery of the Loan  Documents.  The Borrower  agrees to indemnify and hold the
Bank  harmless  from any loss or  expense  which may arise or be  created by the
acceptance of instructions for making Loans or disbursing the proceeds  thereof.
The  obligations  of the  Borrower  under this  Section  11.2 shall  survive any
termination  or  expiration  of  the  Commitment  and  payment  in  full  of the
Obligations.

         Section  11.3  Notices.  Except  when  telephonic  notice is  expressly
authorized by this Agreement,  any notice or other communication to any party in
connection  with this Agreement  shall be in writing and shall be sent by manual
delivery,  telegram, telex, facsimile transmission,  overnight courier or United
States mail (postage  prepaid)  addressed to such party at the address specified
on the signature page hereof,  or at such other address as such party shall have
specified to the other party  hereto in writing.  All periods of notice shall be
measured from the date of delivery thereof if manually delivered,  from the date
of sending thereof if sent by telegram, telex or facsimile transmission,  from a
first  Business Day after the date of sending if sent by overnight  courier,  or
from four days after the date of mailing if mailed; provided,  however, that any
notice to the Bank  under  Article 2 hereof  shall be deemed to have been  given
only when  received  by the Bank.  If notice  to the  Borrower  of any  intended
disposition of the Collateral or any other intended action is required by law in
a particular  instance,  such notice shall be deemed commercially  reasonable if
given at least ten calendar  days prior to the date of intended  disposition  or
other action.

         Section  11.4  Successors.  This  Agreement  shall  be  binding  on the
Borrower and the Bank and their  respective  successors  and assigns,  and shall
inure to the  benefit  of the  Borrower  and the Bank,  and the  successors  and
assigns  of the  Bank.  The  Borrower  shall  not  assign  its  rights or duties
hereunder without the written consent of the Bank.

         Section  11.5  Participations  and  Information.   The  Bank  may  sell
participation  interests in any or all of the Loans and in all or any portion of
the Commitment to any Person.  The Bank may furnish any  information  concerning
the Borrower in the  possession the Bank from time to time to  participants  and
prospective  participants  and may  furnish  information  in  response to credit
inquiries consistent with general banking practice.

         Section 11.6  Severability.  Any  provision of the  Agreement  which is
prohibited or unenforceable in any jurisdiction shall, in such jurisdiction,  be
ineffective  to the  extent  of such  prohibition  or  unenforceability  without
invalidating  the  remaining  provisions  hereof or  affecting  the  validity or
enforceability of such provision in any other jurisdiction.

     Section 11.7 Captions.  The captions or headings herein are for convenience
only and in no way  define,  limit  or  describe  the  scope  or  intent  of any
provision of this Agreement.

         Section 11.8 Entire  Agreement.  This Agreement and the Notes,  and the
other Loan Documents,  embody the entire agreement and understanding between the
Borrower  and the Bank with  respect to the subject  matter  hereof and thereof.
This Agreement  supersedes all prior agreements and  understandings  relating to
the subject matter hereof.

         Section 11.9 Counterparts. This Agreement may be executed in any number
of  counterparts,  all of which taken together shall constitute one and the same
instrument,  and any party hereto may execute this Agreement by signing any such
counterpart.

         Section   11.10   Governing   Law.  The  validity,   construction   and
enforceability of this Agreement and the Notes shall be governed by the internal
laws of the  State of  Minnesota,  without  giving  effect to  conflict  of laws
principles thereof.

                          (The signature page follows.)

<PAGE>

         THE PARTIES  HERETO have  caused  this  Revolving  Credit and Term Loan
Agreement to be executed as of the date first above written.

             ALPHA CERAMICS, INC.

             By:
             Its:

             5121 Winnetka Avenue North, Suite 100
             Minneapolis, MN 55428-4256
             Attention:  Jim Sloane
             Telephone:  (763) 535-9660
             Fax:  (763) 535-9655

 BANK

             By:
             Its:

             5050 France Avenue South
             Edina, MN 55410
             Attention:  Mr. Wes Beedon
             Telephone:  (612) 836-3162
             Fax:  (612) 836-3170

<PAGE>

2371858-2

         List of Schedules

9.9      Existing Investments

9.10     Existing Indebtedness

9.11     Existing Liens

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