Document:

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                                                                    EXHIBIT 10.8

                               FINANCING AGREEMENT

                  FINANCING AGREEMENT, dated as of June 30, 2000, among THE
PATHWAYS GROUP, INC., a Delaware corporation (the "Company"), CAREY F. DALY, II
("Daly"),JOLSON MERCHANT PARTNERS GROUP LLC, a Delaware limited liability
company ("Jolson") and HARVEST OPPORTUNITY PARTNERS LP, a Delaware limited
partnership ("Harvest"; Harvest and Jolson are collectively referred to herein
as the "Lender").

                               W I T N E S S E T H

                  WHEREAS, the Company desires to issue and sell to the Lender
senior secured promissory notes of the Company, and the Lender is willing to
purchase such senior secured promissory notes, on the terms and conditions set
forth in this Agreement;

                  NOW, THEREFORE, in consideration of the premises and of the
mutual representations and covenants contained herein, the parties hereto agree
as follows:

                  Section 1. DEFINITIONS AND ACCOUNTING MATTERS.

                  1.1 CERTAIN DEFINED TERMS. As used herein, the following terms
shall have the following meanings:

                  "ACT" shall mean the Securities Act of 1933, as amended, and
the rules and regulations thereunder as in effect from time to time.

                  "COMMON STOCK" shall mean the Common Stock, par value $0.01
per share, of the Company.

                  "CLOSING DATE" shall mean the date on which the Initial Note
is issued by the Company and purchased by the Lender.

                  "COMMITMENT FEE" shall have the meaning set forth in Section
2.6 hereof.

                  "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time.

                  "EVENT OF DEFAULT" shall have the meaning set forth in the
Note.

                  "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations thereunder as in effect from time to
time.

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                  "EXCHANGE NOTE" shall mean the Note issued pursuant to Section
4.1 hereof.

                  "GAAP" shall mean generally accepted accounting principles as
in effect from time to time in the United States.

                  "GOVERNMENTAL AUTHORITY" shall mean (a) the government of any
federal, state, municipal or other political subdivision in which property of
the Company or any of its Subsidiaries is located and (b) any other government
exercising jurisdiction over the Company or any of its Subsidiaries, including
all agencies and instrumentalities of such government.

                  "GOVERNMENTAL REQUIREMENTS" shall mean laws, ordinances,
statutes, codes, rules, regulations, orders, decrees and judgments of any
Governmental Authority.

                  "INITIAL NOTE" shall have the meaning set forth in Section 2.5
hereof.

                  "INITIAL WARRANT" shall have the meaning set forth in Section
5.2 hereof.

                  "INTELLECTUAL PROPERTY SECURITY AGREEMENT" shall mean the
Intellectual Property Security Agreement, as shall be mutually agreed by the
Company and the Lender, as amended or supplemented from time to time.

                  "LINE OF CREDIT" shall mean the line of credit up to an
aggregate principal amount of $1,350,000, to be provided by the Lender to the
Company.

                  "LINE OF CREDIT NOTE" shall have the meaning set forth in
Section 3.2 hereof.

                  "MATURITY DATE" shall mean the earlier of (i) June 30, 2001,
or (ii) the date on which an Event of Default shall occur.

                  "MJT WARRANT" shall have the meaning set forth in Section 8.8
hereof.

                  "1999 WARRANTS" shall mean the aggregate of 1,250,000
warrants, issued in connection with the Company's issuance and sale of the
Series A Preferred Stock, plus the aggregate of 100,000 dividend warrants
accrued pursuant thereto through the date hereof.

                  "NOTE" or "NOTES" shall mean the Series A Senior Secured Note
or Notes of the Company, in substantially the form of Exhibit A attached hereto,
and shall include the Initial Note, the Line of Credit Note, the Exchange Note
and any notes issued in substitution or exchange therefor.

                  "PENALTY WARRANT" shall have the meaning set forth in
Section 9.2.

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                  "PERMITTED LIENS" shall mean (i) liens for taxes, assessments
or governmental charges or levies on its property, if such taxes, assessments or
governmental charges or levies shall not at the time be due and delinquent or if
the same thereafter can be paid without penalty or if the Company shall
currently be contesting the validity thereof in good faith, provided adequate
reserves therefor have been set aside; and (ii) liens consisting of (A) pledges
or deposits to secure obligations of the Company under workmen's compensation or
other similar laws, (B) pledges or deposits to secure performance in connection
with bids, tenders, contracts or leases entered into in the ordinary course of
business to which the Company is a party, (C) deposits to secure public or
statutory obligations of the Company; or (D) mechanics', carriers', workmen's,
repairmen's or other like liens arising or incurred in the ordinary course of
business or deposits to obtain the release of such liens;

                  "REGISTRABLE SHARES" means, collectively, (i) the Warrant
Shares, (ii) the shares of Common Stock issuable upon exercise of the 1999
Warrants, and (iii) if at the time a registration statement is filed pursuant to
Section 9.1 hereof, any Penalty Warrants have been issued, the shares of Common
Stock issuable upon exercise of the Penalty Warrants.

                  "SECURITY AGREEMENT" shall mean the Security Agreement, in
substantially the form of Exhibit C attached hereto, as amended, modified or
supplemented from time to time.

                  "SERIES A PREFERRED STOCK" shall mean, collectively, the
outstanding 300,000 shares of Series A Preferred Stock, par value $0.01 per
share, of the Company.

                  "TRANSACTION DOCUMENTS" shall mean, collectively, this
Agreement, the Notes, the Security Agreement, the Intellectual Property Security
Agreement and the Warrants.

                  "WARRANT SHARES" shall mean the shares of Common Stock
issuable upon exercise of the Warrants.

                  "WARRANT" shall mean each warrant entitling the holder thereof
to purchase shares of Common Stock on the terms set forth therein, in
substantially the form of Exhibit B attached hereto, which are issued pursuant
to the terms of this Agreement.

                  1.2 ACCOUNTING TERMS. All accounting terms not otherwise
defined herein have the meanings assigned to them in accordance with GAAP and,
except as otherwise herein expressly provided, the term AGAAP" with respect to
any computation required or permitted hereunder shall mean such accounting
principles as are generally accepted in the United States at the date of such
computation.

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                  Section 2. THE NOTES.

                  2.1 THE NOTES. Each Note to be issued and sold by the Company
hereunder shall have the following terms and conditions:

                  (a) each Note shall bear interest at 10.0% per annum, based on
a year of 365 days and actual days elapsed;

                  (b) each Note shall mature and be payable in full on the
Maturity Date; and

                  (c) each Note shall be secured in accordance with the Security
Agreement and the Intellectual Property Security Agreement.

                  2.2 PAYMENTS. Any payments and prepayments made on account of
the principal of the Notes shall be recorded by the Lender on its books and
endorsed by the Lender on the schedule attached to the Notes or any continuation
thereof; but no failure by the Lender to make, or any delay in making, such
recording or endorsement shall affect the obligations of the Company under this
Agreement or the Notes.

                  2.3 REPAYMENT OF THE NOTES. The Company shall pay the unpaid
principal amount of the Notes in full on the Maturity Date. At any time, the
Company may, at its option, prepay the Notes, in whole or in part at any time,
without premium or penalty.

                  2.4 INTEREST. The Company will pay to the holders of the Notes
interest on the unpaid principal amount of the Notes for the period commencing
on the date such principal amount shall have been borrowed by the Company to but
excluding the date on which the principal amount of the Notes shall be paid in
full, at a rate equal to 10 percent per annum. Interest shall be calculated on
the basis of a year of 365 days, and actual days elapsed. So long as no Event of
Default shall have occurred and be continuing, accrued interest shall be due and
payable on the Maturity Date.

                  2.5 INITIAL NOTES. Subject to the terms and conditions of this
Agreement, the Lender agrees to purchase a Note of the Company in an aggregate
principal amount of $650,000 (the "Initial Note") on the Closing Date, upon
satisfaction of the conditions set forth in Section 7.1 hereof. The Initial
Notes shall be issued to Jolson and Harvest in such principal amounts,
aggregating $650,000, as Jolson and Harvest shall notify the Company prior to
the Closing Date. On the Closing Date, the Lender shall purchase the Initial
Notes by transmitting immediately available funds in the amount of $650,000, of
which $600,000 shall be wired to the account of the Company specified to the
Lender in writing prior to the Closing Date, and of which $50,000 shall be
retained by the Lender as payment of the Commitment Fee in accordance with
Section 2.6 hereof.

                  2.6 COMMITMENT FEE. As consideration for the Lender's
agreement to purchase the Notes and provide the Line of Credit, the Company
agrees to pay to the Lender on the Closing Date a commitment fee (the
"Commitment Fee") equal to $50,000. The Company

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acknowledges and agrees that the Lender shall retain the amount of the
Commitment Fee out of the purchase price for the Initial Note.

                  Section 3. LINE OF CREDIT.

                  3.1 LINE OF CREDIT. The Lender hereby agrees to provide to the
Company a Line of Credit in the maximum principal amount of $1,350,000. The Line
of Credit shall be available, in one or more advances, to the Company at any
time prior to the Maturity Date, upon satisfaction of the following conditions:

                  (a) the Company shall have delivered to the Lender the Line of
Credit Note in accordance with Section 3.2 hereof;

                  (b) the Company shall have delivered to the Lender Warrants
for the purchase of up to 1,035,000 shares of Common Stock, in accordance with
Section 5.3 hereof;

                  (c) the Company shall have achieved the following performance
milestones:

                      (i)  the Company shall have reduced its monthly expenses
         to an aggregate amount of less than $500,000, and the Company shall
         have provided evidence thereof which is reasonably satisfactory to the
         Lender; and

                      (ii) the Company shall have earned revenues in an amount
         as shall be reasonably agreed upon by the Company and the Lender;

                  (d) no Event of Default shall have occurred and be continuing;

                  (e) the Company shall have provided to the Lender with a
notice of borrowing, specifying the amount requested to be borrowed, at least
one Business Day prior to the requested borrowing date.

If the Company shall have satisfied the aforesaid conditions precedent, the
Lender shall make advances under the Line of Credit in accordance with the
notices of borrowing received from the Company.

                  3.2 LINE OF CREDIT NOTE. The Line of Credit shall be evidenced
by a Note in the maximum aggregate principal amount of $1,350,000 (the "Line of
Credit Note"). The Company shall issue and deliver the Line of Credit Note prior
to the initial borrowing under the Line of Credit. Any payments and prepayments
made on account of the principal of the Line of Credit Note shall be recorded by
the Lender on its books and endorsed by the Lender on the schedule attached to
the Line of Credit Note or any continuation thereof; but no failure by the
Lender to make, or any delay in making, such recording or endorsement shall
affect the obligations of the Company under this Agreement or the Line of Credit
Note.

                  3.3 INTEREST RESERVE. The Company hereby agrees that the
Lender shall be authorized to reserve out of the available Line of Credit an
amount not to exceed $200,000,

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which amount shall be applied by the Lender to the payment of accrued but unpaid
interest on the outstanding Notes on the Maturity Date to the extent that the
Company shall not have otherwise paid the accrued interest on the Maturity Date.

                  Section 4. EXCHANGE NOTES.

                  4.1 ISSUANCE OF EXCHANGE NOTES. Subject to the terms and
conditions of this Agreement, the Company shall issue Notes (each, an "Exchange
Note") to the holders of the outstanding Series A Preferred Stock in exchange
for the surrender by each such holder of all of the shares of Series A Preferred
Stock held by such holder. The Exchange Notes shall be issued in an aggregate
principal amount equal to the sum of (a) $3,000,000, which is the aggregate
Liquidation Value (as defined in the Certificate of Designations for the Series
A Preferred Stock) of the outstanding shares of Series A Preferred Stock, plus
(b) an amount equal to the accrued but unpaid dividends on the outstanding
Series A Preferred Stock equal to $225,000 through the date hereof. The Exchange
Notes shall be issued to each holder of the Series A Preferred Stock in direct
proportion to the percentage of all outstanding shares of Series A Preferred
Stock held by such holder. The Company shall issue each such Exchange Note to a
holder of Series A Preferred Stock only upon the surrender to the Company for
cancellation of the certificates evidencing the Series A Preferred Stock held by
such holder. Upon the issuance of an exchange note in exchange for the Series A
Preferred Stock, all dividends and warrants issuable pursuant to the terms of
the Series A Preferred Stock shall thereupon cease to accrue. The Company's
failure to issue an Exchange Note because of the failure of a holder of Series A
Preferred Stock to surrender the certificate evidencing such Series A Preferred
Stock shall not constitute a default by the Company hereunder.

                  4.2 TERMS OF EXCHANGE NOTES. Each Exchange Note shall have the
same terms and conditions as the Initial Note and the Line of Credit Note, and
shall be PARI PASSU with such Notes.

                  4.3 REPRICING OF 1999 WARRANTS. Simultaneously with the
issuance of the Exchange Notes or as soon thereafter as practicable, the Company
agrees that it shall amend the terms of the 1999 Warrants to provide that the
exercise price of the 1999 Warrants shall equal the exercise price of the
Initial Warrant. The Company and the Lender shall cooperate with each other to
execute such amendments to the 1999 Warrants as shall be necessary to implement
the foregoing change in the exercise price of the 1999 Warrants. Except for the
foregoing, the terms and provisions of the 1999 Warrants shall remain unmodified
and unaffected.

                  Section 5. ISSUANCE OF WARRANTS.

                  5.1 WARRANTS GENERALLY. In consideration for the agreements of
the Lender set forth herein, the Company agrees to issue Warrants to the Lender
on the terms and conditions set forth in this Agreement. Each Warrant shall have
the following terms and conditions:

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                  (a) each Warrant shall be immediately exercisable, and shall
expire on the date which is the third anniversary of the Closing Date;

                  (b) each Warrant shall be exercisable to purchase one share of
Common Stock at a price equal to the lesser of (i) $1.00, or (ii) the average
closing price of the Company's Common Stock, as reported on the NASDAQ SmallCap
Market for twenty trading days, commencing ten trading days before the Closing
Date and ending on the tenth trading day following the Closing Date;

                  (c) each Warrant shall have the terms and conditions set forth
in the form of Warrant attached hereto;

                  (d) each Warrant may be exercised, in whole or in part, by
payment in cash or by certified or bank check or by wire transfer, or in
accordance with the terms of the Warrant, by a cashless exercise; and

                  (e) the holder of each Warrant shall be entitled, at each
meeting of stockholders of the Company while the Warrants are outstanding and
have not been exercised, a number of votes equal to the number of Warrant Shares
which would be then issuable upon exercise of the Warrants, only to the extent
that such Warrants have not been exercised at such time; each holder of Warrants
shall be eligible to cast such votes with the Common Stock, and the record date
for casting such votes shall be the same as the record date for the record
holders of the Company's Common Stock.

                  5.2 INITIAL WARRANT. On the Closing Date, the Company shall
issue to the Lender a Warrant (the "Initial Warrant") to purchase up to an
aggregate of 965,000 Warrant Shares. Immediately after the tenth trading day
following the Closing Date, the Company and the Lender shall agree as to the
exercise price of such Warrant in accordance with the formula set forth in
Section 5.1(b) hereof.

                  5.3 LINE OF CREDIT WARRANT. Prior to the Company's first
borrowing under the Line of Credit, the Company shall issue to the Lender a
Warrant (the "Line of Credit Warrant") to purchase up to an aggregate of
1,035,000 shares of Common Stock. Such Line of Credit Warrant shall become
exercisable in tranches, in the same proportion as the Company's borrowings
under the Line of Credit bear to the aggregate available principal amount under
the Line of Credit; PROVIDED, HOWEVER, that for purposes of this Section 5.3 the
amount of the Line of Credit reserved for payment of interest pursuant to
Section 3.3 hereof shall be deemed to be outstanding.

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                  Section 6. REPRESENTATIONS AND WARRANTIES.

                  6.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to the Lender as follows:

                  (a) The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware, with full
corporate power and authority to own, lease and operate its respective
properties and to carry on its business in the places and in the manner as
currently conducted and as currently contemplated to be conducted. The Company
is duly qualified to do business and is in good standing as a foreign
corporation in all jurisdictions where the failure to so qualify or be in good
standing would have a material adverse effect on the business or financial
condition of the Company.

                  (b) The execution, delivery and performance by the Company of
the Transaction Documents are within the corporate power of the Company, and the
Transaction Documents have been duly and validly authorized, executed and
delivered by the Company. This Agreement constitutes, and when the other
Transaction Documents are executed and delivered for value such other
Transaction Documents will constitute, the valid and binding obligations of the
Company, enforceable in accordance with their respective terms, except as such
enforceability may be subject to bankruptcy, insolvency, moratorium and other
similar laws affecting creditors' rights generally and to general equitable
principles.

                  (c) The authorized capital stock of the Company is as set
forth in the Company's Annual Report on Form 10-K for its fiscal year ended
December 31, 1999, as further reported in the Company's Quarterly Report on Form
10-Q for its fiscal quarter ended March 31, 2000. All outstanding shares of
Common Stock and Preferred Stock were duly authorized and validly issued, are
fully paid and nonassessable, and were not issued in violation of any preemptive
rights. Upon issuance of the Warrant Shares issuable pursuant to the exercise of
the Warrants against payment therefor in accordance with the Warrants, such
Warrant Shares will have been duly authorized and validly issued and will be
fully paid and nonassessable.

                  (d) The execution and delivery by the Company of this
Agreement and the other Transaction Documents and the consummation of the
transactions contemplated hereby and thereby do not and will not: (i) violate,
constitute a default under, or result in a breach of, any agreement or
understanding to which the Company is a party or any judgment, order, decree,
law, rule or regulation to which the Company is subject; (ii) contravene the
Certificate of Incorporation or By-Laws of the Company; (iii) require the
authorization, approval, order, license, permit or consent of, or filing or
registration with, any court or Governmental Authority, or consent of any other
party; (iv) result in the creation of, or give any party the right to create,
any liens or encumbrances upon any assets of the Company, except as contemplated
hereby; (v) terminate or give any party the right to terminate, abandon or
refuse to perform any agreement, arrangement or commitment to which the Company
is a party or by which any of its assets are bound; or (vi) violate any
Governmental Requirements to which the Company or any of its assets are subject.

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                  (e) There is no claim, action, suit, proceeding, investigation
or criminal proceeding, at law or in equity, before any Governmental Authority
(collectively, "Proceedings") pending or, to the Company's knowledge, threatened
against the Company, which, if adversely determined, would, singly or in the
aggregate, have a material adverse effect on the condition, financial or
otherwise, of the Company, or would materially adversely affect consummation of
the transactions contemplated by the Transaction Documents, or which challenges
the validity or propriety of the transactions contemplated by the Transaction
Documents.

                  (f) The Company has good and marketable title to all of its
principal properties and assets, real and personal, tangible and intangible,
free and clear of all liens, charges and encumbrances except for Permitted Liens
and other liens which do not interfere materially with possession, ownership or
use of any real or personal property of the Company.

                  (g) The consolidated balance sheet of the Company at December
31, 1999, and the related consolidated statement of operations and consolidated
statement of changes in stockholders= equity for the fiscal year then ended,
including the notes thereto, as audited by PricewaterhouseCoopers LLP,
independent public accountants (the "Financial Statement"), as reported on the
Company's Form 10-KSB for the fiscal year ended December 31, 1999, have been
delivered to the Lender. The Financial Statement, together with the notes
thereto, have been prepared in accordance with GAAP applied on a basis
consistent throughout all periods presented; such statement is correct and
complete in all material respects as contemplated by GAAP, is reconcilable to
the books and records of the Company in all material respects, and presents
fairly the financial position of the Company as of the date and for the period
indicated.

                  6.2 REPRESENTATIONS BY THE LENDER. The Lender hereby
represents and warrants to the Company as follows:

                  (a) Jolson is a limited liability company, duly organized
under the laws of the State of Delaware. Harvest is a limited partnership duly
organized under the laws of the State of Delaware. The Lender has the power to
execute, deliver and perform this Agreement and to consummate the transactions
contemplated hereby. This Agreement constitutes the valid and binding obligation
of each of Jolson and Harvest, enforceable against each of them in accordance
with its terms, except as such enforceability may be subject to bankruptcy,
insolvency, moratorium and other similar laws affecting creditors' rights
generally and to general equitable principles.

                  (b) The execution and delivery by the Lender of this Agreement
and the consummation of the transactions contemplated hereby will not violate,
constitute a default under or result in a breach of, its organizational
documents or any agreement or understanding to which the Lender is a party or
any Governmental Requirement to which the Lender or any of its assets is
subject.

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                  (c) Each of Jolson and Harvest is an "accredited investor"
within the meaning of Regulation D under the Act.

                  (d) The Lender acknowledges that the Warrant Shares have not
been registered under the Act and applicable state securities laws, and
accordingly, constitute "restricted securities" for purposes of the Act and such
state securities laws. The Lender further acknowledges and agrees that the
Lender will not be able to transfer such shares except upon compliance with the
registration requirements of the Act and applicable state securities laws or
exemptions therefrom. The Lender agrees that the certificate evidencing the
shares may contain a restrictive legend to such effect.

                  (e) The Lender is not an officer, director or "affiliate" (as
that term is defined in Rule 405 promulgated under the Act) of the Company.

                  (f) The Lender has received and reviewed the following
documents constituting the periodic reports filed by the Company with the SEC:

                      (i)   the Company's Annual Report on Form 10-KSB for its
         fiscal year ended December 31, 1999; and

                      (ii)  the Company's Quarterly Report on Form 10-QSB for
         its fiscal quarter ended March 31, 2000.

                  (g) The Lender has such knowledge and expertise in financial
and business matters that the Lender is capable of evaluating the merits and
risks involved in an investment in the Notes and the Warrants and acknowledges
that an investment in the Notes and the Warrants entails a number of very
significant risks and funds should only be invested if the Lender is able to
withstand the total loss of his investment.

                  (h) Except as set forth in this Agreement or the other
Transaction Documents, no representations or warranties have been made to the
Lender by the Company or any agent, employee or affiliate of the Company. The
Lender has relied solely on the representations, warranties, covenants and
agreements of the Company in this Agreement and the other Transaction Documents,
and on the Lender's independent investigation in making its decision to acquire
the Notes and the Warrants.

                  Section 7. CONDITIONS PRECEDENT TO CLOSING DATE.

                  7.1 CONDITIONS PRECEDENT TO THE CLOSING DATE. The obligation
of the Lender to purchase the Initial Note shall be subject to the satisfaction
of the following conditions on or prior to the Closing Date:

                  (a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in this Agreement shall be true and correct
on and as of the Closing

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Date as though made on and as of the Closing Date, except to the extent that any
such representation and warranty relates solely to a prior date.

                  (b) PERFORMANCE BY THE COMPANY. The Company shall have
performed and complied with all agreements and conditions required by this
Agreement to be performed or complied with by it on or prior to the Closing
Date.

                  (c) NO LITIGATION. There shall be no litigation, investigation
or proceeding of or before any arbitrator or Governmental Authority, pending or,
to the knowledge of the Company, threatened by or against the Company or any of
its properties or revenues with respect to this Agreement or any of the
transactions contemplated hereby, and there shall be no writ, injunction,
preliminary restraining order or any order of any nature issued by any
Governmental Authority directing that the transactions provided for herein not
be consummated as provided herein.

                  (d) CORPORATE DOCUMENTS. The Lender shall have received a true
and complete copies of (i) the Certificate of Incorporation and the By-laws of
the Company, and (ii) the resolutions of the Board of Directors of the Company
authorizing the transactions contemplated by this Agreement and each of the
other Transaction Documents.

                  (e) SECURITY AGREEMENT. The Company shall have executed and
delivered to the Lender the Security Agreement.

                  (f) FURTHER ASSURANCES. The Lender shall have received such
other documents and instruments as the Lender shall reasonably request.

                  Section 8. COVENANTS.

                  8.1 TRANSACTION DOCUMENTS TO BE DELIVERED. As soon as
practicable after the Closing Date, but in no event later than July 12, 2000,
the Company shall deliver to the Lender the following:

                  (a) an executed Intellectual Property Security Agreement, in
form suitable for filing with the Office of Patents and Trademarks, as shall be
mutually acceptable to the Lender and the Company;

                  (b) executed UCC financing statements, in appropriate form for
filing, with respect to all collateral subject to the UCC, as set forth in the
Security Agreement;

                  (c) an opinion of counsel to the Company, reasonably
satisfactory to the Lender, as to the enforceability of the Company's
obligations under the Transaction Documents; and

                  (d) such other instruments and documents as the Lender shall
reasonably request.

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                  8.2 RESERVATION OF SHARES. So long as the Warrants are
outstanding, the Company shall at all times reserve for issuance out of the
authorized but unissued shares of Common Stock of the Company a number of shares
equal to the maximum number of Warrant Shares that may be issued upon exercise
of the Warrants.

                  8.3 SENIOR INDEBTEDENSS. For so long as the Notes are
outstanding, the Company shall maintain the Notes as the senior secured
indebtedness of the Company, and shall not issue any indebtedness having rights
in liquidation senior to the Notes.

                  8.4 ISSUANCE OF EXCHANGE NOTES. As soon as practicable after
the Closing Date, the Company shall issue the Exchange Notes against delivery
for cancellation of the certificates evidencing the Series A Preferred Stock.
The Lender shall cooperate with the Company in effecting the exchange, including
interacting with the other holders of the Series A Preferred Stock.

                  8.5 CONVERSION OF INDEBTEDNESS. As soon as practicable after
the Closing Date, Daly shall convert all loans payable to Daly (including
accrued interest) to the Company which are outstanding on the Closing Date into
shares of Common Stock at the rate of one share of Common Stock for each $1.00
of such indebtedness. The amount of such indebtedness of the Company to Daly as
of the Closing Date shall exclude accrued but unpaid salary (other than accrued
bonuses) and ordinary and reasonable business expenses incurred by Daly on
behalf of the Company in accordance with the Company's customary policies, and
shall be computed by the Company's accounting department and certified to the
Lender prior to the conversion thereof.

                  8.6 ELECTION OF DIRECTORS; VISITATION RIGHTS.

                  (a) Subject to compliance with the requirements of the
Exchange Act, the General Corporation Law of the State of Delaware, and the
Company's Certificate of Incorporation and By-Laws, the Company agrees to
appoint to the Board of Directors such number of independent directors as shall
constitute a majority of the Board of Directors of the Company; PROVIDED,
HOWEVER, that the total number of members of the Board of Directors shall be
nine, and the number of independent directors to be named hereunder shall be
five; and PROVIDED FURTHER, that the Company may propose as an independent
director pursuant to this Section 8.5 any member of the current Board of
Directors who is deemed to be independent under applicable rules and
regulations. The Company shall nominate such persons to be independent directors
and the Lender shall consent to such nominations prior to the election of such
persons as directors of the Company or prior to the submission of such directors
to the stockholders for election in accordance with the Exchange Act. If the
directors to be elected are submitted to the stockholders for approval, the
Lender agrees to cast all of its votes in favor of the slate of nominees to
which the Lender has previously approved.

                  (b) The Company shall provide the Lender with no less than 24
hours' notice (whether in writing, by E-mail, facsimile or telephone) of each
meeting of the Board of

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Directors. The Lender shall have the right to have one representative attend
each such meeting, but such representative shall not have any right to vote on
any matters brought before the Board.

                  (c) The Company agrees that the independent directors on the
Board of Directors shall review and consent to each related party transaction
(as such term is defined in Regulation S-K under the Act and the Exchange Act)
between the Company and any of its executive officers, directors or other
affiliates, including, without limitation, all management fringe benefits, and
specifically, private plane expenses incurred by management.

                  8.7 PREEMPTIVE RIGHT. For so long as any Warrants are
outstanding, in the event that the Company proposes to issue any shares of
Common Stock or shares of any other capital stock of the Company or carrying any
rights or warrants to purchase capital stock of the Company, the holders of the
Warrants shall have a preemptive right to subscribe for or to purchase PRO RATA
additional shares of Common Stock or such shares of other capital stock or such
other securities of the Company. Such preemptive right shall not apply, however,
to any shares of capital stock of the Company issued upon the exercise of any
option granted in connection with the compensation of any employee of the
Company or any consultant retained by the Company or pursuant to any employee
stock option plan established by the Company. The Company shall give notice of
any proposed issuance as aforesaid to each holder of the Warrants at least 15
days prior thereto, and each holder shall be given a reasonable opportunity on
reasonable conditions as fixed by the Company's Board of Directors to subscribe
for or to purchase the same percentage of such shares of Common Stock or other
capital stock or securities as the shares of Common Stock issuable upon exercise
of outstanding Warrants on the date of such notice bear to the then total number
of issued and outstanding shares of Common Stock, at the same price and upon the
same terms and conditions as contained in such proposed issuance.

                  8.8 STRATEGIC ADVISOR. The Company agrees that it shall engage
Mitchum, Jones & Templeton ("MJT"), on a non-exclusive basis, to review
strategic alternatives for the Company, such that MJT will prepare and deliver,
no later than July 31, 2000, to the Board of Directors of the Company a
recommendation on the strategic alternatives facing the Company. The Company
shall execute and deliver to MJT an engagement letter in the customary form used
by MJT for transactions of this kind. As consideration for the services of MJT
in such capacity, the Company agrees to (a) reimburse MJT for its reasonable
out-of-pocket expenses up to a maximum of $50,000 (against reasonable detail
therefor) in preparing such report and review the Company's strategic
alternatives, and (b) issue to MJT a Warrant (the "MJT Warrant"), on the same
terms and conditions as the Initial Warrant, entitling MJT to purchase an
aggregate of 300,000 shares of Common Stock, which includes the 150,000 warrants
already agreed to by the Company in connection with MJT's buy-side advisory work
prior to the date hereof, and 150,000 warrants with respect to the engagement
contemplated by this Section 8.8.

                  8.9 MONTHLY FINANCIAL INFORMATION. For so long as the Notes
are outstanding, the Company shall provide to the Lender an internally-prepared
balance sheet and income

                                      -13-
<PAGE>

statement for each calendar month. Such financial statements shall be delivered
to the Lender no later than the fifteenth day of the next succeeding calendar
month.

                  Section 9. REGISTRATION RIGHTS.

                  9.1 REGISTRATION OF REGISTRABLE SHARES. As soon as practicable
after the Closing Date, the Company will file a registration statement (the
"Registration Statement") under the Act, with respect to all of the Registrable
Shares, and the Company shall use its best efforts to cause such Registration
Statement to become effective as soon as practicable after filing. In connection
therewith, each holder of Warrants and 1999 Warrants will provide in a timely
manner all such information and materials pertaining to it as may be required in
order to permit the Company to comply with all applicable requirements of the
Commission and to obtain the acceleration of the effective date of the
Registration Statement. In connection with such registration, the Company shall
keep the Registration Statement effective until the earliest of (i) when each
holder has sold its Registrable Shares, (ii) one year following the effective
date of the Registration Statement, or (iii) the date the Registrable Shares may
be sold under Rule 144 under the Act.

                  9.2 PENALTY WARRANTS.

                  (a) If the Company shall have failed to file a Registration
Statement with respect to the Registrable Shares by the close of business on
July 17, 2000 (the tenth business day following the Closing Date), the Company
shall issue to the Lender a warrant to purchase up to an additional 200,000
shares of Common Stock, which warrant shall be exercisable at $0.01 per share,
shall expire three years from the date of issuance, and shall otherwise have the
same terms and provisions as the Warrants. On the last business day of each
calendar month following July 2000, during which the Company shall have failed
to file a Registration Statement as required by Section 9.1 hereof, the Company
shall issue to the Lender an additional warrant to purchase 200,000 shares of
Common Stock on the terms and conditions set forth in this Section 9.2(a).

                  (b) If the Company shall have filed a Registration Statement,
and shall thereafter receive comments on such Registration Statement from the
Securities and Exchange Commission, the Company shall respond to such comments
within ten days following the Company's actual receipt of such letter. If the
Company fails to respond to such comments within such 10-day period, the Company
shall issue to the Lender a warrant to purchase up to an additional 200,000
shares of Common Stock, which warrant shall be exercisable at $0.01 per share,
shall expire three years from the date of issuance, and shall otherwise have the
same terms and provisions as the Warrants. On the last business day of each
calendar month following the expiration of such 10-day period, during which the
Company shall have failed to respond to the SEC's comments, the Company shall
issue to the Lender an additional warrant to purchase 200,000 shares of Common
Stock on the terms and conditions set forth in this Section 9.2.

                                      -14-
<PAGE>

                  (c) Each warrant issued by the Company pursuant to this
Section 9.2 is referred to as a "Penalty Warrant".

                  9.3 PIGGYBACK REGISTRATION RIGHTS. If, at any time prior to
the time a Registration Statement is filed and has become effective, the Company
proposes to register any shares of its Common Stock under the Act or similar
federal statute (other than on Form S-8 or any successor form to be offered to
employees of an issuer pursuant to an employee benefit plan), the Company shall
give at least 45 days' prior written notice thereof to the holders of the
Warrants, and, upon the request of such holders, include in such registration,
at the cost and expense of the Company any of the Warrant Shares; PROVIDED,
HOWEVER, that the Company shall not be obligated to do so more than twice; and
PROVIDED, FURTHER, that if any such registration relates to a firmly
underwritten offering for the account of the Company and if the managing
underwriter of such offering advises the Company in writing that, in its
opinion, inclusion of such Warrant Shares as requested would adversely affect
such offering, then such Warrant Shares shall, to such extent, be excluded from
such registration, on such basis as the Company shall deem to be fair and
equitable.

                  9.4 COMPLIANCE WITH THE ACT. In connection with any
Registration Statement referred to herein, the Company shall comply with all
applicable rules and regulations of the Securities and Exchange Commission, or
of any similar federal commission, including the Act, and shall make available
to its security holders, as soon as practicable, an earnings statement (which
need not be audited) covering a period of at least 12 months, but not more than
18 months, beginning with the first month after the effective date of the
registration statement, which earnings statement will satisfy the provisions of
Section 11(a) of the Act.

                  9.5 DELIVERY OF PROSPECTUSES. The Company agrees to furnish to
the holders of the Registrable Shares, at its own expense, such number of
prospectuses conforming to the requirements of the Act or any similar federal
statute, relating to the shares subject thereto as may from time to time be
requested by such holders. Further, the Company shall, at its own expense in
connection with any registration herein:

                  (a) Use its best efforts to register or qualify the securities
covered by such registration statement under the securities or blue sky laws of
such jurisdictions as the holders of the Registrable Shares shall reasonably
request, and do any and all other acts and things which may be necessary or
advisable to enable the Lender or any underwriter to offer such shares for them
to consummate the disposition thereof in such jurisdictions, during a period of
six months subsequent to the effective date of such registration statement;
PROVIDED, HOWEVER, that in no event shall the Company be obligated to qualify to
do business in any jurisdiction where it is not then so qualified or to take any
action which would subject it to the service of process in suits other than
those arising out of the offer or sale of the securities covered by such
registration statement in any jurisdiction where it is not then so subject; and

                  (b) Notify the holders of the Registrable Shares, at any time
when a prospectus relating to the Registrable Shares is required to be delivered
under the Act, of the

                                      -15-
<PAGE>

happening of any event which the Company, in its best judgment, believes would
make a supplement to, or an amendment of, such prospectus necessary or
appropriate, and at the Lender's request, prepare and furnish thereto a
reasonable number of copies of any supplement to, or any amendment of, such
prospectus that may be necessary so that, as thereafter delivered to the
purchasers of any of the Registrable Shares, such prospectus shall not include
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing.

                  9.6 INDEMNIFICATION. In the event of the registration of any
of the Registrable Shares, the Company shall indemnify the initial holders of
the Registrable Shares, and shall hold such holders harmless against any losses,
claims, damages or liabilities, joint or several, to which such holders may
become subject under the Act or any similar federal statute, or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of, or are based upon, any untrue statement or alleged untrue
statement of any material fact contained in any registration statement under
which such Registrable Shares are registered under the Act or similar federal
statute, any preliminary prospectus or final prospectus contained therein, or
any amendment or supplement thereto, or arise out of, or are based upon, the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
shall reimburse such holders for any legal or any other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; PROVIDED, however, that to the extent that
any such loss, claim, damage or liability arises out of, or is based upon, an
actual or alleged untrue statement or omission made in such registration
statement, preliminary prospectus, final prospectus, amendment or supplement in
reliance upon, and in conformity with, written information furnished to the
Company through an instrument duly executed by such holders specifically for use
in the preparation thereof, the Company shall not be so liable to such holders.

                  9.7 INDEMNIFICATION BY HOLDERS. It shall be a condition
precedent to the obligation of the Company to take any action herein relating to
the registration of any of the Registrable Shares that the Company shall have
received from the holders of the Registrable Shares, if such holder wishes to
register any of the Registrable Shares, (i) one or more written statements
setting forth all information with respect to such holder, the Warrant Shares
and the transaction or transactions which such holder contemplates with respect
thereto, which any law, rule or regulation requires to be included in any
registration statement with respect thereto, and (ii) an agreement satisfactory
to the Company to indemnify and hold harmless, in the same manner and to the
same extent as set forth herein, the Company, each director of the Company, each
officer of the Company who signs such registration statement, and any person who
controls the Company within the meaning of the Act, with respect to any actual
or alleged untrue statement in, or omission from, such registration statement,
any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereto, if such actual or alleged untrue statement or
omission was made in reliance upon, and in conformity with, any written
statement furnished to the Company by such holder specifically for use in the
preparation of

                                      -16-
<PAGE>

such registration statement, preliminary prospectus, final prospectus or
amendment or supplement. The liability of any holder of Registrable Shares
pursuant to this Section 9.7 shall be limited to the proceeds received by such
holder from the sale of the Registrable Shares.

                  Section 10. MISCELLANEOUS.

                  10.1 NOTICES. All notices and other communications provided
for herein (including, without limitation, any modifications of, or waivers or
consents under, this Agreement) shall be given or made in writing, and mailed,
delivered, sent by facsimile or sent by E-mail (with confirmation by mail to
follow) to the intended recipient at the "Address for Notices" specified below
its name on the signature pages hereof; or, as to any party, at such other
address as shall be designated by such party in a notice to the other parties.
Except as otherwise provided in this Agreement, all such communications shall be
deemed to have been duly given upon receipt; PROVIDED that any such
communication which is not received during normal business hours of the
recipient shall be deemed to be duly given at the opening of business on its
next business day.

                  10.2 EXPENSES. The Company shall reimburse the Lender for all
of their reasonable out-of-pocket costs and expenses (including reasonable
attorneys' fees) in connection with the negotiation, execution and delivery of
this Agreement and the other Transaction Documents up to a maximum aggregate
amount of $50,000.

                  10.3 AMENDMENTS. Any provision of this Agreement may be
modified, amended or waived, but only in writing signed by the Company, Daly and
the Lender.

                  10.4 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.

                  10.5 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 of the parties hereto may execute this Agreement by
signing any such counterpart.

                  10.6 SEVERABILITY. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or thereof or affecting the
validity or enforceability of such provision in any other jurisdiction.

                  10.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.

                                      -17-
<PAGE>

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

                                   THE PATHWAYS GROUP, INC.

                                   By     /s/ CAREY F. DALY, II
                                        -----------------------------
                                        Carey F. Daly, II
                                        President

                                   1221 North Dutton Avenue
                                   Santa Rosa, California 95401
                                   Telecopier No.: (707) 546-4041
                                   Telephone No.: (707) 546-3010

                                     /s/ CAREY F. DALY, II
                                   ----------------------------------
                                   CAREY F. DALY, II

                                   Address:
                                   1221 North Dutton Avenue
                                   Santa Rosa, California 95401
                                   Telecopier No.: (707) 546-4041
                                   Telephone No.: (707) 546-3010

                                   JOLSON MERCHANT PARTNERS GROUP LLC

                                   By   /s/ JOSEPH A. JOLSON
                                        -----------------------------
                                        Joseph A. Jolson
                                        Managing Member

                                   Address:
                                   One Embarcadero Center, Suite 2150
                                   San Francisco, CA  94111
                                   Telecopier No.: (415) 263-1336
                                   Telephone No.  (415) 263-1333

                                      -18-
<PAGE>

                                   HARVEST OPPORTUNITY PARTNERS L.P.

                                   By  JMP Asset Management Group, LLC
                                            General Partner
                                            By /s/  JOSEPH A. JOLSON
                                               -------------------------------
                                            Joseph A. Jolson
                                            Managing Member
                                            Address:
                                            One Embarcadero Center, Suite 2150
                                            San Francisco, CA  94111
                                            Telecopier No.: (415) 263-1336
                                            Telephone No.  (415) 263-1333

                                      -19-<PAGE>

                                                                    EXHIBIT 10.9

                               SECURITY AGREEMENT

                  SECURITY AGREEMENT, dated as of June 30, 2000 (the "Security
Agreement"), made by THE PATHWAYS GROUP, INC., a Delaware corporation (the
"Company"), in favor of JOLSON MERCHANT PARTNERS GROUP LLC ("Jolson") and
HARVEST OPPORTUNITY PARTNERS LP ("Harvest"; Jolson and Harvest are collectively
referred to herein as the "Lender").

                                    RECITALS

                  WHEREAS, the Company and the Lenders are parties to the
Financing Agreement, dated as of June 30, 2000 (as amended, modified,
supplemented or restated and in effect from time to time, the "Financing
Agreement"), pursuant to which the Lender has agreed to make loans to the
Company from time to time in an aggregate principal amount of up to $2,000,000,
and to purchase additional senior secured notes of the Company upon the exchange
of other securities of the Company held by the Lender;

                  WHEREAS, in order to induce the Lenders to extend credit to
the Company pursuant to the Financing Agreement and to secure the Company's
obligations under the Financing Agreement, the Company has agreed to grant to
the Lender, for the ratable benefit of the holders of the Notes, security
interests in substantially all of its properties as security for the payment and
performance when due of each of the present and future obligations of the
Company under the Financing Agreement and the Transaction Documents;

                  NOW, THEREFORE, in consideration of the premises, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company and the Lender hereby agree as follows:

                  Section 1. DEFINED TERMS.

                  1.1 Unless otherwise defined herein, capitalized terms which
are defined in the Financing Agreement and used herein shall have the meanings
given to them in the Financing Agreement; the following terms which are now or
hereafter defined in the Uniform Commercial Code in effect in the State of New
York from time to time are used herein as so defined: Accounts, Chattel Paper,
Commercial Tort Claims, Documents, Equipment, Farm Products, Fixtures, General
Intangibles, Goods, Instruments, Inventory, Investment Property, Instruments,
Payment Intangibles, Proceeds, Promissory Notes, Software, Supporting
Obligations;

                  "COLLATERAL" has the meaning provided in Section 2.

                  "CONTRACTS" means all material contracts and agreements of the
Company, all contracts giving rise to Intellectual Property Collateral, all
policies of insurance and all other agreements and contracts to which the
Company from time to time may be or become a party or under which the Company
may have rights, as the same may from time to time be amended, supplemented or
otherwise modified, including, without limitation, (a) all rights of the Company
to receive moneys due and to become due to it thereunder or in connection
therewith, (b) all

<PAGE>

rights of the Company to damages arising out of, or for breach or default in
respect thereof and (c) all rights of the Company to perform and to exercise all
remedies thereunder.

                  "INTELLECTUAL PROPERTY COLLATERAL" has the meaning specified
in the Intellectual Property Security Agreement, and in any event shall include,
without limitation, all copyrights, copyright licenses, patents, patent
licenses, trademarks and trademark licenses.

                  "SECURED OBLIGATIONS" means the collective reference to the
obligations of the Company, whether direct or indirect, absolute or contingent,
due or to become due, or now existing or hereafter incurred, which may arise
under, out of or in connection with, the Financing Agreement, this Security
Agreement, the Intellectual Property Security Agreement, any Notes from time to
time issued thereunder, any other Transaction Document and any other document
made, delivered or given in connection therewith, whether on account of
principal, interest, reimbursement obligations, fees, indemnities, costs,
expenses that are required to be paid by the Company pursuant to the terms of
the Financing Agreement.

                  "SECURITIES" means all shares of stock, partnership interests,
membership interests and other ownership units in any Person and all other
"securities" as defined in the UCC; all shares, securities, moneys or other
property representing a dividend on such securities or resulting from a
split-up, revision, reclassification or other like change of such securities or
otherwise received in exchange therefor; in the event of any consolidation or
merger in which the issuer of such securities is not the surviving entity, all
securities of each class of the capital stock (or similar ownership units) of
the successor entity formed or resulting from such consolidation or merger.

                  "SECURITY AGREEMENT" means this Security Agreement, as
amended, supplemented or otherwise modified from time to time.

                  "VEHICLES" means all cars, trucks, trailers, construction and
earth moving equipment and other vehicles whether or not covered by a
certificate of title law of any State and all tires and other appurtenances to
any of the foregoing, whether used by the Company in its business or held in
inventory.

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

                  1.2 The words "hereof", "herein" and "hereunder" and words of
similar import when used in this Security Agreement shall refer to this Security
Agreement as a whole and not to any particular provision of this Security
Agreement. The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.

                  Section 2. GRANT OF SECURITY INTEREST. As collateral security
for the prompt and complete payment and performance when due (whether at the
stated maturity, by acceleration or

                                      -2-
<PAGE>

otherwise) of the Secured Obligations, the Company hereby grants, transfers and
sets over to the Lender for the ratable benefit of all holders of the Notes from
time to time a security interest in, assignment of, general lien on and right of
set-off against, all of the Company's right, title and interest in and to each
and every one of the following, in each case whether now owned or at any time
hereafter acquired by the Company or in which the Company now has or at any time
in the future may acquire any right, title or interest and whether now existing
or hereafter arising:

                  (a) all Accounts;

                  (b) all Chattel Paper (including, without limitation, all
electronic chattel paper);

                  (c) all Contracts;

                  (d) all Documents (including, without limitation, all
warehouse receipts, dock receipts, bills of lading and other documents of
title);

                  (e) all Equipment in all of its forms (including, without
limitation, all machinery, apparatus, fittings and tools, and all parts of and
accessories to any of the foregoing);

                  (f) all Fixtures;

                  (g) all General Intangibles;

                  (h) all Goods;

                  (i) all Instruments;

                  (j) all Intellectual Property Collateral (including, without
limitation, Software);

                  (k) all Inventory in all of its forms (including, without
limitation, all raw materials, works in process, vehicles, vehicle parts, goods
obtained by the Company in exchange for Inventory, any products of, made or
processed from Inventory, and all substances commingled with or added to
Inventory, and all accessories to any of the foregoing);

                  (l) all Investment Property;

                  (m) all prepaid expenses;

                  (n) all rights, claims and benefits of the Company against any
Person arising out of, relating to or in connection with Inventory or Equipment;

                  (o) all rights, claims and benefits of the Company under all
letters of credit;

                                      -3-
<PAGE>

                  (p) all Securities (including, without limitation, all shares
of capital stock and other ownership interests in each Subsidiary of the
Company);

                  (q) all books and records pertaining to the Collateral
(including, without limitation, all ledger cards, files, correspondence,
computer programs, tapes, disks and related data processing software);

                  (r) all policies of insurance related to any of the foregoing;

                  (s) to the extent not otherwise included in the foregoing, all
other personal property of the Company; and

                  (t) to the extent not otherwise included in the foregoing, all
earnings on and all Proceeds and products of any and all of the foregoing

                   (items (a) through (t) collectively, the "COLLATERAL").

                  The Lender Agent hereby acknowledges and agrees that it holds
all of the security interests and other Liens granted herein, and all Collateral
delivered to it, for the ratable benefit of all holders of the Notes.

                  Section 3. RIGHTS OF THE LENDER; LIMITATIONS ON LENDER'S
OBLIGATIONS.

                  3.1 COMPANY REMAINS LIABLE UNDER ACCOUNTS AND CONTRACTS.
Anything herein to the contrary notwithstanding, the Company shall remain liable
under each of the Accounts and Contracts to observe and perform all the
conditions and obligations to be observed and performed by it thereunder, all in
accordance with the terms of such Contracts and any other agreement giving rise
to each such Account and in accordance with and pursuant to the terms and
provisions of each such Contract. Whether or not the Lender has exercised any
rights in any of the Collateral, the Lender shall not have any obligation or
liability under any Account (or any agreement giving rise thereto) or under any
Contract by reason of or arising out of this Security Agreement or the receipt
by the Lender of any payment relating to such Account or Contract pursuant
hereto, nor shall the Lender be obligated in any manner to perform any of the
obligations of the Company under or pursuant to any Account (or any agreement
giving rise thereto) or under or pursuant to any Contract, to make any payment,
to make any inquiry as to the nature or the sufficiency of any payment received
by it or as to the sufficiency of any performance by any party under any Account
(or any agreement giving rise thereto) or under any Contract, to present or file
any claim, to take any action to enforce any performance or to collect the
payment of any amounts which may have been assigned to it or to which it may be
entitled at any time or times.

                  3.2 NOTICE TO ACCOUNT DEBTORS AND CONTRACTING PARTIES. At any
time following the occurrence of any Event of Default, upon the request of the
Lender, the Company shall notify all account debtors on the Accounts and all
parties to the Contracts that the Accounts and the Contracts have been assigned
to the Lender for the ratable benefit of the

                                      -4-
<PAGE>

holders of the Notes and that payments in respect thereof shall be made directly
and exclusively to the Lender or as the Lender may direct.

                  3.3 ANALYSIS OF ACCOUNTS AND CONTRACTS. The Lender shall have
the right, following notice to the Company, to make test verifications of the
Accounts in any reasonable manner and through any medium that it considers
advisable, and the Company shall furnish all such assistance and information as
the Lender may reasonably require in connection therewith. At any time and from
time to time, but no more frequently than once in each calendar year, (but if
any Event of Default has occurred and is continuing, as often as the Lender may
request at any time), upon the Lender's request and at the expense of the
Company, the Company shall cause independent public accountants and other
Persons satisfactory to the Lender to furnish to the Lender reports showing
reconciliations, aging and test verifications of, and trial balances for, the
Accounts. At any time following the occurrence of a Event of Default, the Lender
may in its own name or in the name of others communicate with account debtors on
the Accounts and parties to the Contracts to verify with them to its
satisfaction the existence, amount and terms of any Accounts or Contracts.

                  3.4 COLLECTIONS ON ACCOUNTS. The Lender hereby authorizes the
Company to collect the Accounts, subject to the Lender's direction and control
(which authority the Lender may curtail or terminate upon the occurrence of any
Event of Default). If required by the Lender upon the occurrence of an Event of
Default, any payments of Accounts, when collected by the Company, shall be
forthwith (and, in any event, within two Domestic Business Days) deposited by
the Company in the exact form received, duly endorsed by the Company to the
Lender if required, in a special collateral account maintained by the Lender and
under the Lender's exclusive dominion and control, subject to withdrawal by the
Lender for the account of the holders of the Notes only, as hereinafter
provided, and, until so turned over, shall be held by the Company in trust for
the ratable benefit of the Lender and the other holders of the Notes, segregated
from other funds of the Company. Each deposit of any such Proceeds shall be
accompanied by a report identifying in reasonable detail the nature and source
of the payments included in the deposit. All Proceeds constituting collections
of Accounts while held by the Lender (or by the Company in trust for the Lender
and the other holders of the Notes) shall continue to be collateral security for
all of the Secured Obligations and shall not constitute payment thereof until
applied as hereinafter provided. At any time following the occurrence of any
Event of Default the Lender shall apply all or any part of the funds on deposit
in said collateral account on account of the Secured Obligations in such order
as the Lender may elect, and any part of such funds which the Lender elects not
so to apply and deems not required as collateral security for the Secured
Obligations shall be paid over from time to time by the Lender to the Company or
to whosoever may be lawfully entitled to receive the same. At any time following
the occurrence of any Event of Default, the Company shall deliver to the Lender
all original and other documents evidencing, and relating to, all Contracts and
all agreements and transactions which gave rise to the Accounts, including,
without limitation, all original orders, invoices and shipping receipts.

                  Section 4. REPRESENTATIONS AND WARRANTIES. The Company hereby
represents and warrants that:

                                      -5-
<PAGE>

                  4.1 TITLE; NO OTHER LIENS. Except for the Liens granted to the
Lender for the ratable benefit of the Lender and the other holders of the Notes
pursuant to this Security Agreement, the Company owns each item of the
Collateral free and clear of any and all Liens or claims of others other than
Permitted Liens. No security agreement, financing statement or other public
notice with respect to all or any part of the Collateral is on file or of record
in any public office, except such as may have been filed in favor of the Lender,
for the ratable benefit of the Lender and the other holders of the Notes,
pursuant to this Security Agreement or as may be permitted pursuant to the
Financing Agreement.

                  4.2 PERFECTED FIRST PRIORITY LIENS. When financing statements
have been filed in the offices identified in Schedule I hereto, the Liens
granted pursuant to this Security Agreement will constitute perfected Liens,
with respect to the Collateral as to which perfection can be obtained by the
filing of financing statements under the UCC, in favor of the Lender, for the
ratable benefit of the holders of the Notes, (1) for all Collateral that does
not depend on location for purposes of perfection of security interests therein,
in all such Collateral, and (2) for all Collateral that depends on location or
on possession for purposes of perfection of a security interest therein, in all
of the Collateral located in (or in transit from) such jurisdictions in which
perfection can be achieved by filing financing statements or by possession, in
each case described in subclauses (1) or (2) as collateral security for the
Secured Obligations, which Liens are prior to all other Liens on the Collateral
now or hereafter created or consented to by the Company or otherwise existing
with respect to the Collateral and which are enforceable as such against all
creditors of the Company and against all purchasers from the Company (other than
purchasers of Inventory in the ordinary course of its business) and against any
owner or purchaser of the real property where any of the Equipment or Inventory
is located and any present or future creditor obtaining a Lien on such real
property. There is no financing statement on file or other similar filing in any
registration office with respect to any of the Collateral which would rank prior
to the Liens created hereby.

                  4.3 ACCOUNTS. The amount represented by the Company to the
Lender from time to time as owing by each account debtor or by all account
debtors in respect of the Accounts will at such time be the correct amount
actually owing by such account debtor or debtors thereunder. No amount payable
to the Company under or in connection with any Account is evidenced by any
Instrument or Chattel Paper which has not been delivered to the Lender. The
place where the Company keeps its books and records concerning the Accounts is
1221 North Dutton Avenue, Santa Rosa, California 95401.

                  4.4 CONTRACTS. To the best of the Company's knowledge, no
consent of any party (other than the Company) to any Contract is required, or
purports to be required, in connection with the execution, delivery and
performance of this Security Agreement except those that have been duly obtained
and are in full force and effect. To the best of the Company's knowledge, each
Contract is in full force and effect and constitutes a legal, valid and binding
obligation of each of the parties thereto, enforceable against each of them in
accordance with the terms of such Contract, except as enforceability may be
limited by applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other similar laws affecting the enforcement of
creditor's rights generally and general equitable principles (whether

                                      -6-
<PAGE>

considered in a proceeding in equity or at law). No consent or authorization of,
filing with or other act by or in respect of any governmental authority is
required in connection with the execution, delivery, performance, validity or
enforceability of any of the Contracts by any party thereto other than those
which have been duly obtained, made or performed, are in full force and effect
and do not subject the scope of any such Contract to any material adverse
limitation, either specific or general in nature. Neither the Company nor (to
the best of the Company's knowledge) any other party to any Contract is in
default or is likely to become in default in the performance or observance of
any of the terms thereof, except for defaults which, individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect.
The Company has performed or, before the time when performance is due, will
fully perform all of its material obligations under each Contract. To the best
of the Company's knowledge (after due inquiry), the right, title and interest of
the Company in, to and under each Contract are not subject to any defense,
offset, counterclaim or claim, nor have any of the foregoing been asserted or
alleged against the Company as to any Contract. No amount payable to the Company
under or in connection with any Contract is evidenced by any Instrument or
Chattel Paper which has not been delivered to the Lender.

                  4.5 INVENTORY AND EQUIPMENT. All Inventory and Equipment of
the Company are kept solely at the locations listed on Schedule II hereto, other
than Inventory or Equipment in transit in the ordinary course of business .

                  4.6 CHIEF EXECUTIVE OFFICE. The Company is a corporation duly
organized and incorporated, validly existing and in good standing under the laws
of the State of Delaware. The Company's chief executive office and chief place
of business, and the office at which it keeps its books and records with respect
to all Collateral and holds all original chattel paper, is located at 14201 NE
200th Street, Woodinville, Washington 98072.

                  4.7 FARM PRODUCTS. None of the Collateral constitutes, or is
the Proceeds or products of, Farm Products.

                  4.8 INVESTMENT PROPERTY. The Company is the sole legal and
beneficial owner of all Investment Property in which it now or hereafter
purports to grant a security interest pursuant to this Security Agreement. All
such Investment Property is and will be duly authorized, validly issued, fully
paid and non-assessable, and none of such Investment Property is or will be
subject to any contractual restriction, or any restriction under the charter,
by-laws or other organizing documents of the respective issuer, upon the
transfer of such Investment Property.

                  4.9 NO PROCEEDINGS. There is no action, proceeding or
investigation to which the Company or any of its Subsidiaries or any of their
respective properties is subject, by or before any court or other Governmental
Authority, pending or (to the knowledge of the Company) threatened which, if
adversely determined, could have, individually or in the aggregate, a material
adverse effect on the business, operations, properties, condition (financial or
otherwise) or prospects of the Company, or on the ability of the Company to
perform its obligations under this Security Agreement, or which in any way draws
into question the legality,

                                      -7-
<PAGE>

validity, binding nature, enforceability, perfection or priority of this
Security Agreement or of the Liens granted hereby.

                  4.10 DOCUMENTS OF TITLE. There are no negotiable documents of
title outstanding with respect to any of the Company's Inventory.

                  Section 5. COVENANTS. The Company covenants and agrees with
the Lender, that, from and after the date of this Security Agreement until the
Secured Obligations are paid in full:

                  5.1 MAINTENANCE OF PERFECTED SECURITY INTERESTS; FURTHER
DOCUMENTATION; PLEDGE OF INSTRUMENTS AND CHATTEL PAPER. The Company shall
maintain the security interest created by this Security Agreement as a perfected
security interest having the first and highest priority over any and all other
interests of all other Persons whatsoever (other than Permitted Liens), and
shall defend such security interest against the claims and demands of all
Persons whomsoever. At any time and from time to time, upon the written request
of the Lender, and at the sole expense of the Company, the Company will promptly
and duly execute and deliver such further instruments and documents, give such
notices, obtain such waivers and consents from landlords and other third
parties, and take such further actions as the Lender may reasonably request, for
the purpose of obtaining or preserving the full benefits of this Security
Agreement and of the rights and powers herein granted, including, without
limitation, the filing of any financing or continuation statements under the UCC
or similar law in effect in any jurisdiction with respect to the Liens created
hereby. A carbon, photographic or other reproduction of this Security Agreement
shall be sufficient as a financing statement for filing in any jurisdiction. If
any amount payable under or in connection with any of the Collateral shall be or
become evidenced by any Instrument or Chattel Paper, such Instrument or Chattel
Paper shall be immediately delivered to the Lender, duly endorsed in a manner
satisfactory to the Lender, and accompanied by duly executed instruments of
transfer or assignment, all in form and substance satisfactory to the Lender to
be held as Collateral pursuant to this Security Agreement.

                  5.2 ADDITIONAL FILINGS. Without limiting the generality of the
foregoing, the Company acknowledges that amendments to Article 9 of the Uniform
Commercial Code have been and may become enacted in certain States of the United
States and that the implementation of such amendments may require the Company
and the Lender to, or may make it desirable for the Company and the Lender to,
make additional filings and amendments to this Agreement, and otherwise to take
additional steps, to further effect and preserve the attachment, perfection and
priority of the security interests granted in this Security Agreement. The
Company agrees to make such additional filings and amendments and take such
additional steps as the Lender may request, within the reasonable time limits
requested by the Lender, and that the failure of the Company to do so within
such reasonable time limits shall constitute an Event of Default.

                  5.3 INDEMNIFICATION. The Company agrees to pay, and to save
the Lender and its officers, directors, employees, attorneys or agents harmless
from, any and all liabilities, costs and expenses (including, without
limitation, all legal fees and expenses) (i) with respect to, or resulting from,
any failure to pay or delay in paying any and all excise, sales or other taxes

                                      -8-
<PAGE>

which may be payable or determined to be payable with respect to any of the
Collateral, (ii) with respect to, or resulting from, any failure to comply or
delay in complying with any law, rule, regulation, order or judgment applicable
to any of the Collateral, (iii) in connection with the negotiation, preparation,
execution and delivery of this Security Agreement, the perfection of the
security interests granted hereby and any waiver of or amendment or supplement
to any of the provisions of this Security Agreement, and any preservation or
exercise of any of the rights or benefits of this Security Agreement, (iv) in
connection with the marketing, distribution, use, or manufacture of any Vehicles
or other items constituting Collateral and (iv) otherwise in connection with any
of the transactions contemplated by this Security Agreement, except to the
extent that such liabilities, costs or expenses arise from the Lender's gross
negligence or wilful misconduct. In any suit, proceeding or action brought by or
against the Lender, under any Account, Instrument, Chattel Paper or Contract for
any sum owing thereunder, or to enforce any provisions of any Account,
Instrument, Chattel Paper or Contract, the Company will save, indemnify and keep
the Lender harmless from and against all expense, loss, cost or damage suffered
by reason of any defense, setoff, counterclaim, recoupment or reduction or
liability whatsoever of the account debtor or obligor thereunder, arising out of
a breach by the Company of any obligation thereunder or arising out of any other
agreement, indebtedness or liability at any time owing to or in favor of such
account debtor or obligor or its successors from the Company.

                  5.4 MAINTENANCE OF RECORDS. The Company will keep and maintain
at its own cost and expense satisfactory and complete records of the Collateral,
including, without limitation, a record of all payments received and all credits
granted with respect to the Accounts. The Company will mark its books and
records pertaining to the Collateral to evidence this Security Agreement and the
security interests granted hereby. Upon the occurrence and during the
continuance of an Event of Default, the Company shall turn over any books and
records pertaining to the Collateral to the Lender or to its representatives
during normal business hours at the request of the Lender.

                  5.5 RIGHT OF INSPECTION. The Lender shall at all times have
full and free access during normal business hours to all the books,
correspondence and records of the Company. The Lender or its representatives may
examine the same, take extracts therefrom and make photocopies thereof, and the
Company agrees to render to the Lender, at the Company's cost and expense, such
clerical and other assistance as may be reasonably requested with regard
thereto; PROVIDED that prior to the occurrence of an Event of Default, the
Lender may make no more than one inspection in each calendar year (which
inspection, however, may require visits on more than one day) and such
inspection shall be made after notice thereof is given to the Company, AND
PROVIDED FURTHER that, if a Event of Default has occurred the Lender may perform
unlimited inspections and no prior notice to the Company thereof shall be
required. The Lender and its representatives shall at all times also have the
right to enter into and upon any premises where any of the Inventory, Equipment
or other Collateral is located for the purpose of inspecting the same, observing
its use or otherwise protecting its interests therein.

                                      -9-
<PAGE>

                  5.6 COMPLIANCE WITH LAWS, ETC. The Company will comply in all
material respects with all laws, rules, regulations, orders or judgments
applicable to the Collateral or any part thereof or to the operation of the
Company's business.

                  5.7 COMPLIANCE WITH TERMS OF CONTRACTS, ETC. The Company will
perform and comply in all material respects with all its obligations under the
Contracts and all its other contractual obligations relating to the Collateral.

                  5.8 PAYMENT OF OBLIGATIONS. The Company will pay promptly when
due all taxes, assessments and governmental charges or levies imposed upon the
Collateral or in respect of its income or profits therefrom, as well as all
claims of any kind (including, without limitation, claims for labor, materials
and supplies) against or with respect to the Collateral, except that no such
charge need be paid if (i) the validity thereof is being contested in good faith
by appropriate proceedings, (ii) such proceedings do not involve any material
danger of the sale, forfeiture or loss of any of the Collateral or any interest
therein and (iii) such charge is adequately reserved against on the Company's
books in accordance with generally accepted accounting principles and practices.

                  5.9 LIMITATION ON LIENS ON COLLATERAL. The Company will not
create, incur or permit to exist, will defend the Collateral against, and will
take such other action as is necessary to remove, any Lien or claim on or to the
Collateral, other than Permitted Liens and the Liens created hereby, and will
defend the right, title and interest of the Lender, the other Agents and the
Lenders in and to any of the Collateral against the claims and demands of all
Persons whomsoever (including, without limitation, at the Lender's request, by
appearing in and defending any action or proceeding that may affect the
Company's title to or the Lender's security interest in all or any material part
of the Collateral).

                  5.10 LIMITATIONS ON DISPOSITIONS OF COLLATERAL. The Company
will not sell, transfer, lease or otherwise dispose of any of the Collateral, or
attempt, offer or contract to do so except for sales of Inventory in the
ordinary course of its business

                  5.11 LIMITATIONS ON MODIFICATIONS OF CONTRACTS AND AGREEMENTS
GIVING RISE TO ACCOUNTS; EXERCISE OF RIGHTS; NOTICES. The Company will not (i)
amend, modify, terminate or waive, or grant any consent under, any provision of
any Contract or any agreement giving rise to an Account in any manner which
could reasonably be expected to materially adversely affect the value of such
Contract or such Account as Collateral, (ii) other than in the ordinary course
of business as generally conducted by the Company, fail to exercise promptly and
diligently each and every material right which it may have under each Contract
and each agreement giving rise to an Account (other than any right of
termination) or (iii) fail to deliver to the Lender a copy of each material
demand, notice or document received by it relating in any way to any Contract
that questions the validity or enforceability of such Contract.

                  5.12 SPECIAL COVENANTS WITH RESPECT TO EQUIPMENT AND
INVENTORY. The Company will maintain each item of Equipment in good operating
condition, ordinary wear and tear excepted, and will provide all maintenance,
service and repairs necessary for such purpose

                                      -10-
<PAGE>

in accordance with the Company's reasonable business judgment. The Company will
keep all Equipment and Inventory at the places therefor specified pursuant to
this Agreement, or, upon 30 Business Days' prior written notice to the Lender,
at such other places in jurisdictions where all action that may be necessary or
desirable, or that the Lender may request, in order to perfect and protect any
security interest granted or purported to be granted hereby, or to enable the
Lender to exercise and enforce its rights and remedies hereunder, with respect
to such Equipment and Inventory shall have been taken. The Company will promptly
furnish to the Lender a statement respecting any material loss or damage to any
of the Equipment. The Company will keep correct and accurate records of the
Inventory, in accordance with past practices. Upon the occurrence and during the
continuance of an Event of Default (as defined in the Financing Agreement), at
the request of the Lender, the Company shall instruct such agent or processor to
hold all Inventory for the account of the Lender and subject to the instructions
of the Lender.

                  5.13 MAINTENANCE OF INSURANCE. The Company will maintain, with
financially sound and reputable companies, insurance policies (i) insuring the
Inventory, Equipment and Vehicles against loss by fire, explosion, theft and
such other casualties as may be reasonably satisfactory to the Agents in amounts
comparable to amounts of insurance coverage obtained by similar businesses of
similar size acting prudently and (ii) insuring the Company, the Agents and the
Lenders against all liability for personal injury and property damage relating
to such Inventory, Equipment and Vehicles, such policies to be in such form and
amounts and having such coverage as shall be comparable to forms, amounts and
coverage, respectively, obtained by similar businesses of similar size acting
prudently. The Company will give notice to the Lender of any cancellation or
reduction of any other insurance. In addition, promptly upon request of the
Lender from time to time, the Company will deliver to the Lender such
information with respect to all insurance maintained by the Company as the
Lender may reasonably request.

                  5.14 FURTHER IDENTIFICATION OF COLLATERAL. The Company will
furnish to the Lender from time to time statements and schedules further
identifying and describing the Collateral and such other reports in connection
with the Collateral as the Lender may reasonably request, all in reasonable
detail.

                  5.15 CHANGES IN LOCATIONS, NAME, ETC. The Company will notify
the Lender at least 30 Business Days prior to (i) changing the location of its
chief executive office or chief place of business from that specified in Section
4.6 or remove its books and records concerning the Accounts from the location
specified in Section 4.6, or (ii) changing its name, identity or corporate
structure to such an extent that any financing statement filed in connection
with this Security Agreement would become misleading; PROVIDED that in
conjunction with the provision of such notice, the Company will immediately
provide any documentation (including, without limitation, any financing
statements) requested by the Lender to preserve the validity, perfection or
priority of the Liens created hereunder.

                  5.16 SECURITIES; INVESTMENT PROPERTY.

                                      -11-
<PAGE>

                  (a) Any and all Securities and Investment Property in which a
security interest is purported to be granted hereby may, at the option of the
Lender or its nominee, be registered in the name of the Lender or its nominee,
and at any time after the occurrence of any Event of Default, the Lender or its
nominee may, without notice, exercise all voting and similar rights at any
meeting of any corporation or other entity issuing the shares or similar
ownership interests included in such Securities and Investment Property and
exercise any and all rights of conversion, exchange, subscription or any other
rights, privileges or options pertaining to any such Securities and Investment
Property as if it were the absolute owner thereof, including, without
limitation, the right to receive dividends payable thereon, and the right to
exchange, at its discretion, any and all of the Securities upon the merger,
consolidation, reorganization, recapitalization or other readjustment of the
relevant corporation issuing such shares or similar ownership interests or upon
the exercise by any such issuer of any right, privilege or option pertaining to
such shares or similar ownership interests, and in connection therewith, to
deposit and deliver any and all of the Securities and Investment Property with
any committee, depositary, transfer agent, registrar or other designated agency
upon such terms and conditions as it may determine, all without liability except
to account for property actually received by it, but the Lender shall have no
duty to exercise any of the aforesaid rights, privileges or options and shall
not be responsible for any failure to do so or delay in so doing.

                  (b) At any time after the occurrence and during the
continuance of an Event of Default, the Lender shall have the right to require
that all cash dividends and other distributions payable with respect to any part
of the Securities and Investment Property in which a security interest is
purported to be granted hereunder be paid to the Lender to be held by the Lender
as additional security hereunder until applied to the Secured Obligations.

                  (c) Upon any request by the Lender from time to time, the
Company shall execute and deliver such control agreements and other documents
and instruments (shall cause the applicable financial institution or other party
to do so), as the Lender may reasonably request in order to further perfect and
preserve the priority of the security interests granted hereby in all Investment
Property.

                                      -12-
<PAGE>

                  Section 6. LENDER=S APPOINTMENT AS ATTORNEY-IN-FACT.

                  6.1 POWERS. The Company hereby irrevocably constitutes and
appoints the Lender and any officer or agent thereof, each acting singly and
without the others, with full power of substitution, upon the occurrence and
continuance of an Event of Default, as its true and lawful attorney-in-fact with
full irrevocable power and authority in the place and stead of the Company and
in the name of the Company or in its own name, subject to any limitations set
forth below, from time to time in the Lender's discretion, for the purpose of
carrying out the terms of this Security Agreement, and upon the occurrence and
continuance of an Event of Default, to take any and all appropriate action and
to execute any and all documents and instruments which may be necessary or
desirable to accomplish the purposes of this Security Agreement, and, without
limiting the generality of the foregoing, the Company hereby gives the Lender
the power and right, on behalf of the Company, without notice to or assent by
the Company, to do the following:

                  (a) in the name of the Company or its own name, or otherwise,
to take possession of and endorse and collect any checks, drafts, notes,
acceptances or other instruments for the payment of moneys due under any
Account, Instrument, Contract, Chattel Paper, General Intangible or Contract or
with respect to any other Collateral and to file any claim or to take any other
action or proceeding in any court of law or equity or otherwise deemed
appropriate by the Lender for the purpose of collecting any and all such moneys
due under any Account, Instrument, General Intangible or Contract or with
respect to any other Collateral whenever payable;

                  (b) to pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral, to effect any repairs or any insurance called
for by the terms of this Security Agreement and to pay all or any part of the
premiums therefor and the costs thereof;

                  (c) to execute, in connection with any sale provided for in
Section 9 hereof, any endorsements, assignments or other instruments of
conveyance or transfer with respect to the Collateral; and

                  (d) (i) to direct any party liable for any payment under any
of the Collateral to make payment of any and all moneys due or to become due
thereunder directly to the Lender or as the Lender shall direct; (ii) to ask or
demand for, collect, receive payment of and receipt for, any and all moneys,
claims and other amounts due or to become due at any time in respect of or
arising out of any Collateral; (iii) to sign and endorse any invoices, freight
or express bills, bills of lading, storage or warehouse receipts, drafts against
debtors, assignments, verifications, notices and other documents in connection
with any of the Collateral; (D) to commence and prosecute any suits, actions or
proceedings at law or in equity in any court of competent jurisdiction to
collect the Collateral or any thereof and to enforce any other right in respect
of any Collateral; (E) to defend any suit, action or proceeding brought against
the Company with respect to any Collateral; (F) to settle, compromise or adjust
any such suit, action or proceeding and, in connection therewith, to give such
discharges or releases as the Lender may deem appropriate; and (G) generally, to
sell, transfer, pledge and make any agreement with respect to

                                      -13-
<PAGE>

or otherwise deal with any of the Collateral as fully and completely as though
the Lender were the absolute owner thereof for all purposes, and to do, at the
Lender's option and the Company's expense, at any time, or from time to time,
all acts and things which the Lender deems necessary to protect, preserve or
realize upon the Collateral and the Lender's, Liens thereon for the ratable
benefit of the holders of the Notes and to effect the intent of this Security
Agreement, all as fully and effectively as the Company might do.

                  (e) The Lender agrees that it will not exercise any rights
under the power of attorney provided for in this Section (other than the right
in clause (c) above) unless an Event of Default has occurred and is continuing.

                  (f) The Company hereby ratifies all that said attorneys shall
lawfully do or cause to be done by virtue hereof. This power of attorney is a
power coupled with an interest and is irrevocable.

                  (g) The Lender agrees to use its reasonable efforts to give
notice to the Company after any exercise of its rights under this Section, but
no failure to deliver or delay in delivering such notice, and no failure of the
Company to receive or delay in receiving such notice, shall postpone, discharge
or otherwise affect the validity of the Lender's actions or the obligations of
the Company hereunder.

                  6.2 NO DUTY ON THE LENDER'S PART. The powers conferred on the
Lender hereunder are solely to protect the Lender's interests in the Collateral
and shall not impose any duty upon the Lender to exercise any such powers. The
Lender shall be accountable only for amounts that it actually receives as a
result of the exercise of such powers, and neither they nor any of their
respective officers, directors, employees, attorneys or agents shall be
responsible to the Company for any act or failure to act hereunder, except for
its own gross negligence or willful misconduct.

                  6.3 PERFORMANCE BY LENDER OF COMPANY'S OBLIGATIONS. If the
Company fails to perform or comply with any of its agreements contained herein,
the Lender, at its option, but without any obligation to do so, may itself
perform or comply, or otherwise cause performance or compliance, with such
agreement, and the expenses of the Lender incurred in connection therewith shall
be payable by the Company hereunder. The expenses of the Lender incurred in
connection with such performance or compliance shall constitute Secured
Obligations secured hereby.

                  Section 7. PROCEEDS. At any time following the occurrence of a
Event of Default it is agreed that (a) all Proceeds received by the Company
consisting of cash, checks and other near-cash items shall be held by the
Company in trust for the Lender and the other holders of the Notes, segregated
from other funds of the Company, and shall, forthwith upon receipt by the
Company, be turned over to the Lender in the exact form received by the Company
(duly endorsed by the Company to the Lender, if required), and held by the
Lender in a collateral account maintained under the sole dominion and control of
the Lender. Any and all such Proceeds held by the Lender in a collateral account
(or by the Company in trust for the Lender

                                      -14-
<PAGE>

and the Lenders) shall continue to be held as collateral security for the
Secured Obligations and shall not constitute payment thereof until applied as
provided in this Section. At such intervals as may be agreed upon between the
Lender and the Company or, if an Event of Default shall have occurred and be
continuing, at any time at the Lender's election, the Lender may apply all or
any part of the Proceeds held in any collateral account or otherwise received by
the Lender against the Secured Obligations (whether matured or unmatured), such
application to be in such order as the Lender shall elect. Any balance of such
Proceeds remaining after the Secured Obligations shall have been paid in full
and the Commitments shall have expired or been terminated shall be paid over to
the Company or to whosoever may be lawfully entitled to receive the same.

                  Section 8. REMEDIES.

                  8.1 If an Event of Default shall occur and be continuing, the
Lender, on behalf of the holders of the Notes, may exercise, in addition to all
other rights and remedies granted to it in this Security Agreement and in any
other instrument or agreement securing, evidencing or relating to the Secured
Obligations, all rights and remedies of a secured party under the UCC or any
comparable law of any other jurisdiction and all other rights and remedies under
all other applicable laws. Without limiting the generality of the foregoing, the
Lender, without demand of performance or other demand, presentment, protest,
advertisement or notice of any kind (except any notice required by law referred
to below) to or upon the Company or any other Person (all and each of which
demands, defenses, advertisements and notices are hereby waived), may in such
circumstances forthwith collect, receive, appropriate and realize upon the
Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give
option or options to purchase, or otherwise dispose of and deliver the
Collateral or any part thereof (or contract to do any of the foregoing), in one
or more parcels at public or private sale or sales, at any exchange, broker's
board or office of the Lender or elsewhere upon such terms and conditions as it
may deem advisable and at such prices as it may deem best, for cash or on credit
or for future delivery without assumption of any credit risk. Subject to
applicable law, each purchaser at any such sale shall hold the property sold
absolutely free from any claim or right on the part of the Company. The Lender
shall have the right upon any such public sale or sales, and, to the extent
permitted by law, upon any such private sale or sales, to purchase the whole or
any part of the Collateral so sold, free of any right or equity of redemption in
the Company, which right or equity is hereby waived or released, and shall be
entitled, for the purpose of bidding and making settlement or payment of the
purchase price for all or any portion of the Collateral sold at any such public
sale, to use and apply any of the Secured Obligations as a credit on account of
the purchase price for any Collateral payable by the Lender at such sale. The
Company further agrees, at the Lender's request, to assemble the Collateral and
make it available to the Lender at places which the Lender shall reasonably
select, whether at the Company's premises or elsewhere. The Lender shall apply
the net proceeds of any such collection, recovery, receipt, appropriation,
realization or sale, after deducting all reasonable costs and expenses of every
kind incurred therein or incidental to the care or safekeeping of any of the
Collateral or in any way relating to the Collateral or the rights of the Lender
and the other holders of the Notes arising out of the exercise by the Lender
hereunder, including, without limitation, reasonable attorneys' fees and
disbursements, to the payment in whole or in part of

                                      -15-
<PAGE>

the Secured Obligations, in such order as the Lender may elect, and only after
such application and after the payment by the Lender of any other amount
required by any provision of law, including, without limitation, Section
9-504(1)(c) of the UCC, need the Lender (or any other Agent or Lender) account
for the surplus, if any, to the Company. To the extent permitted by applicable
law, the Company waives all claims, damages and demands it may acquire against
the Lender arising out of the exercise by the Lender of any of its rights
hereunder. If any notice of a proposed sale or other disposition of Collateral
shall be required by law, such notice shall be deemed reasonable and proper if
given at least 15 days before such sale or other disposition. The Company shall
remain liable for any deficiency if the proceeds of any sale or other
disposition of the Collateral are insufficient to pay the Secured Obligations
and the fees and disbursements of any attorneys employed by the Lender to
collect such deficiency.

                  Section 9. LIMITATION ON DUTIES REGARDING PRESERVATION OF
COLLATERAL. The Lender's sole duty with respect to the custody, safekeeping and
physical preservation of the Collateral in its possession, under Section 9-207
of the UCC or otherwise, shall be to deal with it in the same manner as the
Lender deals with similar property for its own account. Except as set forth in
the preceding sentence, the Lender shall have no duty or liability to preserve
rights pertaining to the Collateral and shall be relieved of all responsibility
for the Collateral upon surrendering it to the Company or in accordance with the
Company's instructions. Neither the Lender nor any of its directors, officers,
employees, attorneys or agents shall be liable for failure to demand, collect or
realize upon all or any part of the Collateral or for any delay in doing so or
shall be under any obligation to sell or otherwise dispose of any Collateral
upon the request of the Company or any other Person or to take any other action
whatsoever with regard to the Collateral or any part thereof. The powers
conferred on the Lender hereunder are solely to protect the Lender's interests
in the Collateral and shall not impose any duty upon the Lender to exercise any
such powers. The Lender shall be accountable only for amounts that they actually
receive as a result of the exercise of such powers, and neither they nor any of
their officers, directors, employees, attorneys or agents shall be responsible
to the Company for any act or failure to act hereunder, except for their own
gross negligence or willful misconduct.

                  Section 10. POWERS COUPLED WITH AN INTEREST. All
authorizations and agencies herein contained with respect to the Collateral are
irrevocable and powers coupled with an interest.

                  Section 11. NOTICES. Notices, requests and demands to or upon
the Lender or the Company hereunder shall be effected in the manner set forth in
the Financing Agreement.

                  Section 12. SEVERABILITY. Any provision of this Security
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.

                                      -16-
<PAGE>

                  Section 13. PARAGRAPH HEADINGS. The paragraph headings used in
this Security Agreement are for convenience of reference only and are not to
affect the construction hereof or be taken into consideration in the
interpretation hereof.

                  Section 14. NO WAIVER; CUMULATIVE REMEDIES. The Lender shall
not, by any act (except by a written instrument) delay, indulgence, omission or
otherwise be deemed to have waived any right or remedy hereunder or to have
acquiesced in any Event of Default or in any breach of any of the terms and
conditions hereof. No failure to exercise, nor any delay in exercising, on the
part of the Lender any right, power or privilege hereunder shall operate as a
waiver thereof. No single or partial exercise of any right, power or privilege
hereunder shall preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. A waiver by the Lender of any right or
remedy hereunder on any one occasion shall not be construed as a bar to any
right or remedy which the Lender would otherwise have on any future occasion.
The rights and remedies herein provided are cumulative, may be exercised singly
or concurrently and are not exclusive of any rights or remedies provided by law.

                  Section 15. WAIVERS AND AMENDMENTS; SUCCESSORS AND ASSIGNS.
None of the terms or provisions of this Security Agreement may be waived,
amended, supplemented or otherwise modified except by a written instrument
executed by the Company and the Lender; provided that any provision of this
Security Agreement may be waived by the Lender in a written instrument executed
by the Lender.

                  Section 16. SUCCESSORS AND ASSIGNS. This Security Agreement
shall be binding upon the successors and assigns of the Company and shall inure
to the benefit of the Lender and their respective successors and assigns.

                  Section 17. COUNTERPARTS. This Security Agreement may be
executed in any number of counterparts, all of which taken together shall
constitute one and the same agreement, and any party hereto may execute this
Security Agreement by executing any such counterpart.

                  Section 18. GOVERNING LAW. This Security Agreement shall be
governed by, and construed and interpreted in accordance with, the laws of the
State of New York.

                                      -17-
<PAGE>

                 IN WITNESS WHEREOF, the Company has caused this Security
Agreement to be duly executed and delivered as of the date first above written.

                                            THE PATHWAYS GROUP, INC.

                                            By  /s/ CAREY F. DALY, II
                                               ------------------------------
                                               Carey F. Daly, II
                                               President

                                            JOLSON MERCHANT PARTNERS LLC

                                            By  /s/  JOSEPH A. JOLSON
                                               ------------------------------

                                            HARVEST OPPORTUNITY PARTNERS LP

                                            By _____________________________,
                                               General Partner

                                               By   /s/ JOSEPH A. JOLSON
                                                    -------------------------
                                                    Name:
                                                    Title:

                                      -18-
<PAGE>

                                                                      SCHEDULE I

LOCATIONS OF INVENTORY AND EQUIPMENT

14201 NE 200th Street
Woodinville, Washington 98072

1221 North Dutton Avenue
Santa Rosa, California 95401

Grosvenor Center
2500 Makai Tower
733 Bishop Street
Honolulu, Hawaii 96813

                                      -19-

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