Document:

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                                                                    EXHIBIT 10.3

                               SECURITY AGREEMENT

      This SECURITY AGREEMENT dated as of November 12, 2004 (this "Security
Agreement"), is executed by and between each of those entities listed on
Schedule 1 attached hereto and incorporated herein by this reference (jointly,
severally, and collectively, the "Debtor"), each having its chief executive
office at the address listed opposite its name on Schedule 1, and STANDARD
FEDERAL BANK NATIONAL ASSOCIATION, a national banking association (the
"Administrative Agent", on behalf of itself and the other Lenders [as defined in
the Credit Agreement, referenced below, dated of even date herewith]), whose
address is 2600 West Big Beaver Road, Troy, Michigan 48084.

                                    RECITALS

      A. Meadowbrook Insurance Group, Inc., a Michigan corporation (the
"Borrower"), Administrative Agent and the Lenders are parties to that certain
Credit Agreement, dated of even date herewith (the "Credit Agreement"), pursuant
to which the Lenders have agreed to make certain Loans (as defined in the Credit
Agreement) to Borrower in the maximum amount of Twenty-Five Million and 00/100
Dollars ($25,000,000.00).

      B. As a condition to the Lenders' loaning funds or providing other
financial accommodations to the Borrower pursuant to the Credit Agreement, the
Lenders require that the Debtor enter into this Security Agreement in order to
secure the obligations and performance of the Borrower under the Credit
Agreement, the Revolving Note executed by Borrower in favor of the Lenders dated
of even date herewith (the "Note") and related documents, including, but not
limited to, each of the agreements, documents, instruments and certificates from
time to time executed and delivered to and for the benefit of the Lenders and/or
the Administrative Agent in connection with the Obligations, and all amendments,
restatements, supplements and other modifications thereto. (collectively, the
"Loan Documents").

                                    AGREEMENT

      NOW THEREFORE, in consideration of the foregoing Recitals, and the mutual
covenants and agreements set forth herein, the Debtor and the Lenders (by the
Administrative Agent) hereby agree as follows:

                                   AGREEMENTS:

SECTION 1 DEFINITIONS.

      1.1 Defined Terms. For the purposes of this Security Agreement, the
following capitalized words and phrases shall have the meanings set forth below.
In the event of any conflict in the definition of a capitalized word or phrase
herein and a capitalized word or phrase in the Credit Agreement, the definition
in the Credit Agreement shall control. Capitalized words or phrases not
otherwise defined herein shall have the meanings ascribed to them in the Credit
Agreement.

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            "Bankruptcy Code" shall mean the United States Bankruptcy Code, as
      now existing or hereafter amended.

            "Default Rate" shall mean a per annum rate of interest equal to the
      Prime Rate plus four percent (4%).

            "Letter of Credit" and "Letters of Credit" shall mean, respectively,
      a letter of credit and all such letters of credit issued by any one or
      more of the Lenders, in their sole discretion, for the account of an
      Obligor.

            "Obligor" shall mean the Borrower, the Debtor, any guarantor,
      accommodation endorser, third party pledgor, or any other party liable
      with respect to the Obligations.

            "Organizational Identification Number" means, with respect to
      Debtor, the organizational identification number assigned to Debtor by the
      applicable governmental unit or agency of the jurisdiction of organization
      of the Debtor.

      1.2 Other Terms Defined in UCC. All other capitalized words and phrases
used herein and not otherwise specifically defined herein shall have the
respective meanings assigned to such terms in the UCC, to the extent the same
are used or defined therein.

      1.3 Other Interpretive Provisions.

            (a) The meanings of defined terms are equally applicable to the
      singular and plural forms of the defined terms. Whenever the context so
      requires, the neuter gender includes the masculine and feminine, the
      single number includes the plural, and vice versa, and in particular the
      word "Debtor" shall be so construed.

            (b) Section and Schedule references are to this Security Agreement
      unless otherwise specified. 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

            (c) The term "including" is not limiting, and means "including,
      without limitation".

            (d) In the computation of periods of time from a specified date to a
      later specified date, the word "from" means "from and including"; the
      words "to" and "until" each mean "to but excluding", and the word
      "through" means "to and including".

            (e) Unless otherwise expressly provided herein, (i) references to
      agreements (including this Security Agreement and the other Loan
      Documents) and other contractual instruments shall be deemed to include
      all subsequent amendments, restatements, supplements and other
      modifications thereto, but only to the extent such amendments,
      restatements, supplements and other modifications are not prohibited by
      the terms of any Loan Document, and (ii) references to any statute or
      regulation shall be construed as

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      including all statutory and regulatory provisions amending, replacing,
      supplementing or interpreting such statute or regulation.

            (f) To the extent any of the provisions of the other Loan Documents
      are inconsistent with the terms of this Security Agreement, the provisions
      of this Security Agreement shall govern.

            (g) This Security Agreement and the other Loan Documents may use
      several different limitations, tests or measurements to regulate the same
      or similar matters. All such limitations, tests and measurements are
      cumulative and each shall be performed in accordance with its terms.

SECTION 2 SECURITY FOR THE OBLIGATIONS.

      2.1 Security for Obligations. As security for the payment and performance
of the Obligations, the Debtor does hereby pledge, assign, transfer, deliver and
grant to the Administrative Agent, for its own benefit and as agent for the
Lenders, a continuing and unconditional first priority security interest in and
to any and all property of the Debtor, of any kind or description, tangible or
intangible, wheresoever located and whether now existing or hereafter arising or
acquired, including the following (all of which property, along with the
products and proceeds therefrom, are individually and collectively referred to
as the "Collateral"):

            (a) all property of, or for the account of, the Debtor now or
      hereafter coming into the possession, control or custody of, or in transit
      to, the Administrative Agent or any agent or bailee for the Administrative
      Agent or any parent, affiliate or subsidiary of the Administrative Agent
      or any participant with the Administrative Agent in the Obligations
      (whether for safekeeping, deposit, collection, custody, pledge,
      transmission or otherwise), including all earnings, dividends, interest,
      or other rights in connection therewith and the products and proceeds
      therefrom, including the proceeds of insurance thereon; and

            (b) the additional property of the Debtor, whether now existing or
      hereafter arising or acquired, and wherever now or hereafter located,
      together with all additions and accessions thereto, substitutions,
      betterments and replacements therefor, products and Proceeds therefrom,
      and all of the Debtor's books and records and recorded data relating
      thereto (regardless of the medium of recording or storage), together with
      all of the Debtor's right, title and interest in and to all computer
      software required to utilize, create, maintain and process any such
      records or data on electronic media, identified and set forth as follows:

                  (i) All Accounts and all Goods whose sale, lease or other
            disposition by the Debtor has given rise to Accounts and have been
            returned to, or repossessed or stopped in transit by, the Debtor, or
            rejected or refused by an Account Debtor;

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                  (ii) All Inventory, including raw materials, work-in-process
            and finished goods;

                  (iii) All Goods (other than Inventory), including embedded
            software, Equipment, vehicles, furniture and Fixtures;

                  (iv) All Software and computer programs;

                  (v) All Securities, Investment Property, Financial Assets and
            Deposit Accounts;

                  (vi) All Chattel Paper, Electronic Chattel Paper, Instruments,
            Documents, Letter of Credit Rights, all proceeds of letters of
            credit, Health-Care-Insurance Receivables, Supporting Obligations,
            notes secured by real estate, Commercial Tort Claims and General
            Intangibles, including Payment Intangibles; and

                  (vii) All Proceeds (whether Cash Proceeds or Noncash Proceeds)
            of the foregoing property, including all insurance policies and
            proceeds of insurance payable by reason of loss or damage to the
            foregoing property, including unearned premiums, and of eminent
            domain or condemnation awards.

      Without limiting the generality of the foregoing, the following are
      expressly excluded from the Collateral:

            (A) the certain parcel of real estate owned in fee simple by
      Meadowbrook Insurance Group, Inc., and located in the City of Southfield,
      Oakland County, Michigan, and commonly known as 26255 American Drive,
      Southfield, Michigan 48034;

            (B) any property held by Meadowbrook, Inc., Crest Financial
      Corporation or any of their respective subsidiaries on behalf of or for
      the benefit of any third parties, including, but not limited to, insurance
      premiums, claims payments, cash, letters of credit and/or securities;

            (C) the stock of Liberty Premium Finance, a California corporation,
      held and owned by Crest Financial Corporation; and

            (D) the stock owned by Meadowbrook, Inc. in any insurance companies.

      2.2 Possession and Transfer of Collateral; Release of Collateral. Until an
Event of Default has occurred hereunder, the Debtor shall be entitled to
possession or use of the Collateral (other than Instruments or Documents,
including Tangible Chattel Paper and Investment Property consisting of
certificated securities) and other Collateral required to be delivered to the
Administrative Agent pursuant to this Section 2. The cancellation or surrender
of any promissory note evidencing an Obligation, upon payment or otherwise,
shall not affect the right of the Administrative Agent to retain the Collateral
for any other of the Obligations. The Debtor shall not sell, assign (by
operation of law or otherwise), license, lease or otherwise dispose of, or grant

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any option with respect to any of the Collateral, except that the Debtor may
sell Inventory in the ordinary course of business. At such time as Borrower
achieves an AM Best Rating of B++, Debtor may request a release of any Lender's
lien on the Collateral (a "Request for Release") and, upon receipt of the
Request for Release and satisfactory evidence of an AM Best Rating of B++ of
Borrower, then the Administrative Agent shall cause a termination statement to
be filed; provided, however, that Administrative Agent shall, at all times,
reserve and retain the right to re-file any lien or liens on the Collateral if
Borrower's AM Best Rating falls below B++ at any time while the Obligations
remain outstanding. No Debtor at any time shall be authorized to file any
termination, amendment or other filing related to this Security Agreement. If
Administrative Agent releases all or any of the Collateral, Debtor hereby
acknowledges, covenants, consents and agrees that, from and after the date
hereof, Debtor shall not create, incur, or permit to exist, or permit any
subsidiary to create, incur or, permit to exist, any mortgage, pledge,
encumbrance, lien, security interest or charge in any kind of the Collateral,
except for any liens created by the Loan Documents.

      2.3 Negative Pledge. While any of the Indebtedness remains outstanding,
Debtor hereby acknowledges, covenants, consents and agrees that, from and after
the date hereof, Debtor shall not create, incur, or permit to exist, or permit
any subsidiary to create, incur or, permit to exist, any mortgage, pledge,
encumbrance, lien, security interest or charge in any kind of the Collateral,
including, but not limited to, real estate, except for any liens created by the
Loan Documents, expressly permitted by Section 11.2 of the Credit Agreement or
otherwise approved in writing in advance by the Administrative Agent.

      2.4 Financing Statements. The Administrative Agent and its attorneys and
agents shall have authority to file, and the Debtor shall, at the Administrative
Agent 's request, at any time and from time to time, execute and deliver to the
Administrative Agent such financing statements, amendments and other documents
and do such acts as the Administrative Agent deems necessary in order to
establish and maintain valid, attached and perfected first priority security
interests in the Collateral in favor of the Administrative Agent , for its own
benefit and as agent for its Affiliates, free and clear of all Liens and claims
and rights of third parties whatsoever, except Permitted Liens. The Debtor
hereby irrevocably authorizes the Administrative Agent at any time, and from
time to time, to file in any jurisdiction any initial financing statements and
amendments thereto without the signature of the Debtor that (a) indicate the
Collateral (i) is comprised of all assets of the Debtor or words of similar
effect, regardless of whether any particular asset comprising a part of the
Collateral falls within the scope of Article 9 of the Uniform Commercial Code of
the jurisdiction wherein such financing statement or amendment is filed, or (ii)
as being of an equal or lesser scope or within greater detail as the grant of
the security interest set forth herein, and (b) contain any other information
required by Section 5 of Article 9 of the Uniform Commercial Code of the
jurisdiction wherein such financing statement or amendment is filed regarding
the sufficiency or filing office acceptance of any financing statement or
amendment, including (i) whether the Debtor is an organization, the type of
organization and any Organizational Identification Number issued to the Debtor,
and (ii) in the case of a financing statement filed as a fixture filing or
indicating Collateral as as-extracted collateral or timber to be cut, a
sufficient description of the real property to which the Collateral relates. The
Debtor hereby agrees that a photogenic or other reproduction of this Security
Agreement is sufficient for filing as a financing statement and the Debtor
authorizes the

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Administrative Agent to file this Security Agreement as a financing statement in
any jurisdiction. The Debtor agrees to furnish any such information to the
Administrative Agent promptly upon request. The Debtor further ratifies and
affirms its authorization for any financing statements and/or amendments
thereto, executed and filed by the Administrative Agent in any jurisdiction
prior to the date of this Security Agreement. In addition, the Debtor shall make
appropriate entries on its books and records disclosing the security interests
of the Administrative Agent, for its own benefit and as agent for its
Affiliates, in the Collateral.

      2.5 Preservation of the Collateral. The Administrative Agent may, but is
not required, to take such actions from time to time as the Administrative Agent
deems appropriate to maintain or protect the Collateral. The Administrative
Agent shall have exercised reasonable care in the custody and preservation of
the Collateral if the Administrative Agent takes such action as the Debtor shall
reasonably request in writing which is not inconsistent with the Administrative
Agent 's status as a secured party, but the failure of the Administrative Agent
to comply with any such request shall not be deemed a failure to exercise
reasonable care; provided, however, the Administrative Agent 's responsibility
for the safekeeping of the Collateral shall (i) be deemed reasonable if such
Collateral is accorded treatment substantially equal to that which the
Administrative Agent accords its own property, and (ii) not extend to matters
beyond the control of the Administrative Agent , including acts of God, war,
insurrection, riot or governmental actions. In addition, any failure of the
Administrative Agent to preserve or protect any rights with respect to the
Collateral against prior or third parties, or to do any act with respect to
preservation of the Collateral, not so requested by the Debtor, shall not be
deemed a failure to exercise reasonable care in the custody or preservation of
the Collateral. The Debtor shall have the sole responsibility for taking such
action as may be necessary, from time to time, to preserve all rights of the
Debtor and the Administrative Agent in the Collateral against prior or third
parties. Without limiting the generality of the foregoing, where Collateral
consists in whole or in part of securities, the Debtor represents to, and
covenants with, the Administrative Agent that the Debtor has made arrangements
for keeping informed of changes or potential changes affecting the securities
(including rights to convert or subscribe, payment of dividends, reorganization
or other exchanges, tender offers and voting rights), and the Debtor agrees that
the Administrative Agent shall have no responsibility or liability for informing
the Debtor of any such or other changes or potential changes or for taking any
action or omitting to take any action with respect thereto.

      2.6 Other Actions as to any and all Collateral. The Debtor further agrees
to take any other action reasonably requested by the Administrative Agent to
ensure the attachment, perfection and first priority of, and the ability of the
Administrative Agent to enforce, the security interest of the Administrative
Agent , for its own benefit and as agent for its Affiliates, in any and all of
the Collateral including (a) causing the Administrative Agent 's name to be
noted as secured party on any certificate of title for a titled good if such
notation is a condition to attachment, perfection or priority of, or ability of
the bank to enforce, the security interest of the Administrative Agent , for its
own benefit and as agent for its Affiliates, in such Collateral, (c) complying
with any provision of any statute, regulation or treaty of the United States as
to any Collateral if compliance with such provision is a condition to
attachment, perfection or priority of, or ability of the Administrative Agent to
enforce, the security interest of the Administrative Agent , for its own benefit
and as agent for its Affiliates, in such Collateral, (d) obtaining

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governmental and other third party consents and approvals, including any consent
of any licensor, lessor or other Person obligated on Collateral, (e) obtaining
waivers from mortgagees and landlords in form and substance satisfactory to the
Administrative Agent , and (f) taking all actions required by the UCC in effect
from time to time or by other law, as applicable in any relevant UCC
jurisdiction, or by other law as applicable in any foreign jurisdiction. The
Debtor further agrees to indemnify and hold the Administrative Agent harmless
against claims of any Persons not a party to this Security Agreement concerning
disputes arising over the Collateral.

      2.7 Collateral in the Possession of a Warehouseman or Bailee. If any of
the Collateral at any time is in the possession of a warehouseman or bailee, the
Debtor shall promptly notify the Administrative Agent thereof, and shall
promptly obtain a Collateral Access Agreement. The Administrative Agent agrees
with the Debtor that the Administrative Agent shall not give any instructions to
such warehouseman or bailee pursuant to such Collateral Access Agreement unless
an Event of Default has occurred and is continuing or would occur after taking
into account any action by the Debtor with respect to the warehouseman or
bailee.

      2.8 Letter-of-Credit Rights. If the Debtor at any time is a beneficiary
under a letter of credit now or hereafter issued in favor of the Debtor, the
Debtor shall promptly notify the Administrative Agent thereof and, at the
request and option of the Administrative Agent , the Debtor shall, pursuant to
an agreement in form and substance satisfactory to the Administrative Agent ,
either (i) arrange for the issuer and any confirmer of such letter of credit to
consent to an assignment to the Administrative Agent , for its own benefit and
as agent for its Affiliates, of the proceeds of any drawing under the letter of
credit, or (ii) arrange for the Administrative Agent , for its own benefit and
as agent for its Affiliates, to become the transferee beneficiary of the letter
of credit, with the Administrative Agent agreeing, in each case, that the
proceeds of any drawing under the letter to credit are to be applied as provided
in this Security Agreement.

      2.9 Commercial Tort Claims. If the Debtor shall at any time hold or
acquire a Commercial Tort Claim, the Debtor shall immediately notify the
Administrative Agent in writing signed by the Debtor of the details thereof and
grant to the Administrative Agent , for its own benefit and as agent for its
Affiliates, in such writing a security interest therein and in the proceeds
thereof, all upon the terms of this Security Agreement, in each case in form and
substance satisfactory to the Administrative Agent , and shall execute any
amendments hereto deemed reasonably necessary by the Administrative Agent to
perfect the security interest of the Administrative Agent , for its own benefit
and as agent for its Affiliates, in such Commercial Tort Claim.

      2.10 Electronic Chattel Paper and Transferable Records. If the Debtor at
any time holds or acquires an interest in any electronic chattel paper or any
"transferable record", as that term is defined in Section 201 of the federal
Electronic Signatures in Global and National Commerce Act, or in Section 16 of
the Uniform Electronic Transactions Act as in effect in any relevant
jurisdiction, the Debtor shall promptly notify the Administrative Agent thereof
and, at the request of the Administrative Agent , shall take such action as the
Administrative Agent may reasonably request to vest in the Administrative Agent
control under Section 9-105 of the UCC of such electronic chattel paper or
control under Section 201 of the federal Electronic Signatures in Global and
National Commerce Act or, as the case may be, Section 16 of the Uniform
Electronic

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Transactions Act, as so in effect in such jurisdiction, of such transferable
record. The Administrative Agent agrees with the Debtor that the Administrative
Agent will arrange, pursuant to procedures satisfactory to the Administrative
Agent and so long as such procedures will not result in the Administrative
Agent's loss of control, for the Debtor to make alterations to the electronic
chattel paper or transferable record permitted under Section 9-105 of the UCC
or, as the case may be, Section 201 of the federal Electronic Signatures in
Global and National Commerce Act or Section 16 of the Uniform Electronic
Transactions Act for a party in control to make without loss of control.

SECTION 3 REPRESENTATIONS AND WARRANTIES.

      The Debtor makes the following representations and warranties to the
Administrative Agent:

      3.1 Debtor Organization and Name. Each member of the Debtor is a
corporation, limited liability company, general partnership, limited partnership
or limited liability partnership, duly organized, existing and in good standing
under the laws of the state or country indicated on Schedule 1, with full and
adequate power to carry on and conduct its business as presently conducted. The
Debtor is duly licensed or qualified in all foreign jurisdictions wherein the
nature of its activities requires such qualification or licensing. Each Debtor's
Organizational Identification Number is as listed on Schedule 1. The exact legal
name of the Debtor is as set forth on Schedule 1 of this Security Agreement, and
the Debtor currently does not conduct, nor has it during the last five (5) years
conducted, business under any other name or trade name.

      3.2 Authorization. The Debtor has full right, power and authority to enter
into this Security Agreement and to perform all of its duties and obligations
under this Security Agreement. The execution and delivery of this Security
Agreement and the other Loan Documents will not, nor will the observance or
performance of any of the matters and things herein or therein set forth,
violate or contravene any provision of law or of the articles of organization,
articles of incorporation, bylaws, partnership agreement, certificate of
incorporation, certificate of organization or trust agreement, as the case may
be, of the Debtor. All necessary and appropriate action has been taken on the
part of the Debtor to authorize the execution and delivery of this Security
Agreement.

      3.3 Validity and Binding Nature. This Security Agreement is the legal,
valid and binding obligation of the Debtor, enforceable against the Debtor in
accordance with its terms, subject to bankruptcy, insolvency and similar laws
affecting the enforceability of creditors' rights generally and to general
principles of equity.

      3.4 Consent; Absence of Breach. The execution, delivery and performance of
this Security Agreement and any other documents or instruments to be executed
and delivered by the Debtor in connection herewith, do not and will not (a)
require any consent, approval, authorization, or filings with, notice to or
other act by or in respect of, any governmental authority or any other Person
(other than any consent or approval which has been obtained and is in full force
and effect); (b) conflict with (i) any provision of law or any applicable
regulation, order, writ, injunction or decree of any court or governmental
authority, (ii) the articles of

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incorporation, bylaws, partnership agreement, articles of organization or trust
agreement of the Debtor, or (iii) any material agreement, indenture, instrument
or other document, or any judgment, order or decree, which is binding upon the
Debtor or any of its properties or assets; or (c) require, or result in, the
creation or imposition of any Lien on any asset of Debtor, other than Liens in
favor of the Administrative Agent created pursuant to this Security Agreement.

      3.5 Ownership of Collateral; Liens. The Debtor is the sole owner or has
other rights in all of the Collateral, free and clear of all Liens, charges and
claims (including infringement claims with respect to patents, trademarks,
service marks, copyrights and the like), other than Permitted Liens.

      3.6 Adverse Circumstances. No condition, circumstance, event, agreement,
document, instrument, restriction, litigation or proceeding (or threatened
litigation or proceeding or basis therefor) exists which (a) would have a
Material Adverse Effect upon the Debtor, or (b) would constitute an Event of
Default or an Unmatured Event of Default.

      3.7 Security Interest. This Security Agreement creates a valid security
interest in favor of the Administrative Agent in the Collateral and, when
properly perfected by filing in the appropriate jurisdictions, or by possession
or Control of such Collateral by the Administrative Agent or delivery of such
Collateral to the Administrative Agent, shall constitute a valid, perfected,
first-priority security interest in such Collateral.

      3.8 Place of Business. The principal place of business and books and
records of the Debtor is set forth in the preamble to this Security Agreement,
and the location of all Collateral, if other than at such principal place of
business, is as set forth on Schedule 1 attached hereto and made a part hereof,
and the Debtor shall promptly notify the Administrative Agent of any change in
such locations. The Debtor will not remove or permit the Collateral to be
removed from such locations without the prior written consent of the
Administrative Agent, except for Inventory sold in the usual and ordinary course
of the Debtor's business.

      3.9 Complete Information. This Security Agreement and all financial
statements, schedules, certificates, confirmations, agreements, contracts, and
other materials and information heretofore or contemporaneously herewith
furnished in writing by the Debtor to the Administrative Agent for purposes of,
or in connection with, this Security Agreement and the transactions contemplated
hereby is, and all written information hereafter furnished by or on behalf of
the Debtor to the Administrative Agent pursuant hereto or in connection herewith
will be, true and accurate in every material respect on the date as of which
such information is dated or certified, and none of such information is or will
be incomplete by omitting to state any material fact necessary to make such
information not misleading in light of the circumstances under which made (it
being recognized by the Administrative Agent that any projections and forecasts
provided by the Debtor are based on good faith estimates and assumptions
believed by the Debtor to be reasonable as of the date of the applicable
projections or assumptions and that actual results during the period or periods
covered by any such projections and forecasts may differ from projected or
forecasted results).

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SECTION 4  AFFIRMATIVE COVENANTS.

      4.1 Debtor Existence. The Debtor shall at all times preserve and maintain
its (a) its existence and good standing in the jurisdiction of its organization,
and (b) its qualification to do business and good standing in each jurisdiction
where the nature of its business makes such qualification necessary (other than
such jurisdictions in which the failure to be qualified or in good standing
could not reasonably be expected to have a Material Adverse Effect), and shall
at all times continue as a going concern in the business which the Debtor is
presently conducting. If the Debtor does not have an Organizational
Identification Number and later obtains one, the Debtor shall promptly notify
the Administrative Agent of such Organizational Identification Number.

      4.2 Compliance With Laws. The Debtor shall comply in all respects,
including the conduct of its business and operations and the use of the
Collateral, with all applicable laws, rules, regulations, decrees, orders,
judgments, licenses and permits, except where failure to comply could not
reasonably be expected to have a Material Adverse Effect.

      4.3 Payment of Taxes and Liabilities. The Debtor shall pay and discharge,
prior to delinquency and before penalties accrue thereon, all property and other
taxes, and all governmental charges or levies against it or any of the
Collateral, as well as claims of any kind which, if unpaid, could become a Lien
on any of its property; provided that the foregoing shall not require the Debtor
to pay any such tax or charge so long as it shall contest the validity thereof
in good faith by appropriate proceedings and shall set aside on its books
adequate reserves with respect thereto in accordance with GAAP and, in the case
of a claim which could become a Lien on any of the Collateral, such contest
proceedings stay the foreclosure of such Lien or the sale of any portion of the
Collateral to satisfy such claim.

      4.4 Maintain Property. The Debtor shall at all times maintain, preserve
and keep the Collateral, in good repair, working order and condition and shall
from time to time make all needful and proper repairs, renewals, replacements,
and additions thereto so that at all times the efficiency thereof shall be fully
preserved and maintained. The Debtor shall permit the Administrative Agent to
examine and inspect such Collateral, at all reasonable times.

      4.5 Maintain Insurance. The Debtor shall at all times maintain with
insurance companies reasonably acceptable to the Administrative Agent , such
insurance coverage as may be required by any law or governmental regulation or
court decree or order applicable to it and such other insurance, to such extent
and against such hazards and liabilities, including employers', public and
professional liability risks, as is customarily maintained by companies
similarly situated, and shall have insured amounts no less than, and deductibles
no higher than, are reasonably acceptable to the Administrative Agent . The
Debtor shall furnish to the Administrative Agent a certificate setting forth in
reasonable detail the nature and extent of all insurance maintained by the
Debtor, which shall be reasonably acceptable in all respects to the
Administrative Agent. The Debtor shall cause each issuer of an insurance policy
to provide the Administrative Agent with an endorsement (i) showing the
Administrative Agent as loss payee with respect to each policy of property or
casualty insurance; and (ii) providing that thirty (30)

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days notice will be given to the Administrative Agent prior to any cancellation
of, material reduction or change in coverage provided by or other material
modification to such policy.

      In the event the Debtor either fails to provide the Administrative Agent
with evidence of the insurance coverage required by this Section or at any time
hereafter shall fail to obtain or maintain any of the policies of insurance
required above, or to pay any premium in whole or in part relating thereto, then
the Administrative Agent , without waiving or releasing any obligation or
default by the Debtor hereunder, may at any time (but shall be under no
obligation to so act), obtain and maintain such policies of insurance and pay
such premiums and take any other action with respect thereto, which the
Administrative Agent deems advisable. This insurance coverage (a) may, but need
not, protect the Debtor's interests in such property, including the Collateral,
and (b) may not pay any claim made by, or against, the Debtor in connection with
such property, including the Collateral. The Debtor may later cancel any such
insurance purchased by the Administrative Agent, but only after providing the
Administrative Agent with evidence that the Debtor has obtained the insurance
coverage required by this Section. If the Administrative Agent purchases
insurance for the Collateral, the Debtor will be responsible for the costs of
that insurance, including interest and any other charges that may be imposed
with the placement of the insurance, until the effective date of the
cancellation or expiration of the insurance. The costs of the insurance may be
added to the principal amount of the Loans owing hereunder. The costs of the
insurance may be more than the cost of the insurance the Debtor may be able to
obtain on its own.

      4.6 Field Audits. The Debtor shall permit the Administrative Agent to
inspect the Inventory and other Collateral, to perform appraisals of the
Equipment of the Debtor, and to inspect, audit, check and make copies of, and
extracts from, the books, records, computer data, computer programs, journals,
orders, receipts, correspondence and other data relating to Inventory, Accounts
and any other Collateral, the results of which must be satisfactory to the
Administrative Agent in the Administrative Agent's sole and absolute discretion.
All such inspections or audits by the Administrative Agent shall be at the
Debtor's sole expense.

      4.7 Collateral Records. The Debtor shall keep full and accurate books and
records relating to the Collateral and shall mark such books and records to
indicate the Administrative Agent's Lien in the Collateral, including placing a
legend, in form and content acceptable to the Administrative Agent, on all
Chattel Paper created by the Debtor indicating that the Administrative Agent has
a Lien in such Chattel Paper.

SECTION 5 REMEDIES.

      Upon the occurrence of an event of default under any of the Obligations or
any default in the payment or performance of any of the covenants, conditions
and agreements contained in this Security Agreement (an "Event of Default"), the
Administrative Agent shall have all rights, powers and remedies set forth in
this Security Agreement or the other Loan Documents or in any other written
agreement or instrument relating to any of the Obligations or any security
therefor, as a secured party under the UCC or as otherwise provided at law or in
equity. Without limiting the generality of the foregoing, the Administrative
Agent may, at its option upon the occurrence of an Event of Default, declare its
commitments to the Borrower or the Debtor to be terminated

                                       11
<PAGE>

and all Obligations to be immediately due and payable, or, if provided in the
Loan Documents, all commitments of the Administrative Agent to the Borrower or
the Debtor shall immediately terminate and all Obligations shall be
automatically due and payable, all without demand, notice or further action of
any kind required on the part of the Administrative Agent . The Debtor hereby
waives any and all presentment, demand, notice of dishonor, protest, and all
other notices and demands in connection with the enforcement of Administrative
Agent's rights under the Loan Documents, and hereby consents to, and waives
notice of release, with or without consideration, of any Collateral,
notwithstanding anything contained herein or in the Loan Documents to the
contrary. In addition to the foregoing:

      5.1 Possession and Assembly of Collateral. The Administrative Agent may,
without notice, demand or legal process of any kind, take possession of any or
all of the Collateral (in addition to Collateral of which the Administrative
Agent already has possession), wherever it may be found, and for that purpose
may pursue the same wherever it may be found, and may at any time enter into any
of the Debtor's premises where any of the Collateral may be or is supposed to
be, and search for, take possession of, remove, keep and store any of the
Collateral until the same shall be sold or otherwise disposed of and the
Administrative Agent shall have the right to store and conduct a sale of the
same in any of the Debtor's premises without cost to the Administrative Agent .
At the Administrative Agent's request, the Debtor will, at the Debtor's sole
expense, assemble the Collateral and make it available to the Administrative
Agent at a place or places to be designated by the Administrative Agent which is
reasonably convenient to the Administrative Agent and the Debtor.

      5.2 Sale of Collateral. The Administrative Agent may sell any or all of
the Collateral at public or private sale, upon such terms and conditions as the
Administrative Agent may deem proper, and the Administrative Agent may purchase
any or all of the Collateral at any such sale. The Debtor acknowledges that the
Administrative Agent may be unable to effect a public sale of all or any portion
of the Collateral because of certain legal and/or practical restrictions and
provisions which may be applicable to the Collateral and, therefore, may be
compelled to resort to one or more private sales to a restricted group of
offerees and purchasers. The Debtor consents to any such private sale so made
even though at places and upon terms less favorable than if the Collateral were
sold at public sale. The Administrative Agent shall have no obligation to
clean-up or otherwise prepare the Collateral for sale. The Administrative Agent
may apply the net proceeds, after deducting all costs, expenses, attorneys' and
paralegals' fees incurred or paid at any time in the collection, protection and
sale of the Collateral and the Obligations, to the payment of the Obligations,
returning the excess proceeds, if any, to the Debtor. The Debtor and/or the
Borrower shall remain liable for any amount remaining unpaid after such
application, with interest at the Default Rate. Any notification of intended
disposition of the Collateral required by law shall be conclusively deemed
reasonably and properly given if given by the Administrative Agent at least ten
(10) calendar days before the date of such disposition. The Debtor hereby
confirms, approves and ratifies all acts and deeds of the Administrative Agent
relating to the foregoing, and each part thereof, and expressly waives any and
all claims of any nature, kind or description which it has or may hereafter have
against the Administrative Agent or its representatives, by reason of taking,
selling or collecting any portion of the Collateral. The Debtor consents to
releases of the Collateral at any time (including prior to default) and to sales
of the Collateral in groups, parcels or portions, or as an entirety, as the
Administrative Agent

                                       12
<PAGE>

shall deem appropriate. The Debtor expressly absolves the Administrative Agent
from any loss or decline in market value of any Collateral by reason of delay in
the enforcement or assertion or nonenforcement of any rights or remedies under
this Security Agreement.

      5.3 Standards for Exercising Remedies. To the extent that applicable law
imposes duties on the Administrative Agent to exercise remedies in a
commercially reasonable manner, the Debtor acknowledges and agrees that it is
not commercially unreasonable for the Administrative Agent (a) to fail to incur
expenses reasonably deemed significant by the Administrative Agent to prepare
Collateral for disposition or otherwise to complete raw material or
work-in-process into finished goods or other finished products for disposition,
(b) [intentionally omitted], (c) to remove liens or encumbrances on or any
adverse claims against Collateral, (d) to exercise collection remedies against
Account Debtors and other Persons obligated on Collateral directly or through
the use of collection agencies and other collection specialists, (e) to
advertise dispositions of Collateral through publications or media of general
circulation, whether or not the Collateral is of a specialized nature, (f)
[intentionally omitted], (g) to hire one or more professional auctioneers to
assist in the disposition of Collateral, whether or not the collateral is of a
specialized nature, (h) to dispose of Collateral by utilizing internet sites
that provide for the auction of assets of the types included in the Collateral
or that have the reasonable capability of doing so, or that match buyers and
sellers of assets, (i) to dispose of assets in wholesale rather than retail
markets, (j) to disclaim disposition warranties, including any warranties of
title, (k) to purchase insurance or credit enhancements to insure the
Administrative Agent against risks of loss, collection or disposition of
Collateral or to provide to the Administrative Agent a guaranteed return from
the collection or disposition of Collateral, or (l) to the extent deemed
appropriate by the Administrative Agent, to obtain the services of other
brokers, investment bankers, consultants and other professionals to assist the
Administrative Agent in the collection or disposition of any of the Collateral.
The Debtor acknowledges that the purpose of this section is to provide
non-exhaustive indications of what actions or omissions by the Administrative
Agent would not be commercially unreasonable in the Administrative Agent's
exercise of remedies against the Collateral and that other actions or omissions
by the Administrative Agent shall not be deemed commercially unreasonable solely
on account of not being indicated in this section. Without limitation upon the
foregoing, nothing contained in this section shall be construed to grant any
rights to the Debtor or to impose any duties on the Administrative Agent that
would not have been granted or imposed by this Security Agreement or by
applicable law in the absence of this section.

      5.4 UCC and Offset Rights. The Administrative Agent may exercise, from
time to time, any and all rights and remedies available to it under the UCC or
under any other applicable law in addition to, and not in lieu of, any rights
and remedies expressly granted in this Security Agreement or in any other
agreements between any Obligor and the Administrative Agent , and may, without
demand or notice of any kind, appropriate and apply toward the payment of such
of the Obligations, whether matured or unmatured, including costs of collection
and attorneys' and paralegals' fees, and in such order of application as the
Administrative Agent may, from time to time, elect, any indebtedness of the
Administrative Agent to any Obligor, however created or arising, including
balances, credits, deposits, accounts or moneys of such Obligor in the
possession, control or custody of, or in transit to the Administrative Agent .
The Debtor, on behalf of itself and each Obligor, hereby waives the benefit of
any law that would otherwise

                                       13
<PAGE>

restrict or limit the Administrative Agent in the exercise of its right, which
is hereby acknowledged, to appropriate at any time hereafter any such
indebtedness owing from the Administrative Agent to any Obligor.

      5.5 Additional Remedies. In addition to the foregoing, following the
occurrence and continuance of Event of Default, the Administrative Agent shall
have the right and power to:

            (a) instruct the Debtor, at its own expense, to notify any parties
      obligated on any of the Collateral, including any Account Debtors, to make
      payment directly to the Administrative Agent of any amounts due or to
      become due thereunder, or the Administrative Agent may directly notify
      such obligors of the security interest of the Administrative Agent ,
      and/or of the assignment to the Administrative Agent of the Collateral and
      direct such obligors to make payment to the Administrative Agent of any
      amounts due or to become due with respect thereto, and thereafter, collect
      any such amounts due on the Collateral directly from such Persons
      obligated thereon;

            (b) enforce collection of any of the Collateral, including any
      Accounts, by suit or otherwise, or make any compromise or settlement with
      respect to any of the Collateral, or surrender, release or exchange all or
      any part thereof, or compromise, extend or renew for any period (whether
      or not longer than the original period) any indebtedness thereunder;

            (c) take possession or control of any proceeds and products of any
      of the Collateral, including the proceeds of insurance thereon;

            (d) extend, renew or modify for one or more periods (whether or not
      longer than the original period) the Obligations or any obligation of any
      nature of any other obligor with respect to the Obligations;

            (e) grant releases, compromises or indulgences with respect to the
      Obligations, any extension or renewal of any of the Obligations, any
      security therefor, or to any other obligor with respect to the
      Obligations;

            (f) transfer the whole or any part of securities which may
      constitute Collateral into the name of the Administrative Agent or the
      Administrative Agent 's nominee without disclosing, if the Administrative
      Agent so desires, that such securities so transferred are subject to the
      security interest of the Administrative Agent , and any corporation,
      association, or any of the managers or trustees of any trust issuing any
      of such securities, or any transfer agent, shall not be bound to inquire,
      in the event that the Administrative Agent or such nominee makes any
      further transfer of such securities, or any portion thereof, as to whether
      the Administrative Agent or such nominee has the right to make such
      further transfer, and shall not be liable for transferring the same;

            (g) vote the Collateral;

            (h) make an election with respect to the Collateral under Section
      1111 of the Bankruptcy Code or take action under Section 364 or any other
      section of the Bankruptcy

                                       14
<PAGE>

      Code; provided, however, that any such action of the Administrative Agent
      as set forth herein shall not, in any manner whatsoever, impair or affect
      the liability of the Debtor hereunder, nor prejudice, waive, nor be
      construed to impair, affect, prejudice or waive the Administrative Agent
      's rights and remedies at law, in equity or by statute, nor release,
      discharge, nor be construed to release or discharge, the Debtor, any
      guarantor or other Person liable to the Administrative Agent for the
      Obligations; and

            (i) at any time, and from time to time, accept additions to,
      releases, reductions, exchanges or substitution of the Collateral, without
      in any way altering, impairing, diminishing or affecting the provisions of
      this Security Agreement, the Loan Documents, or any of the other
      Obligations, or the Administrative Agent's rights hereunder, under the
      Obligations.

The Debtor hereby ratifies and confirms whatever the Administrative Agent may do
with respect to the Collateral and agrees that the Administrative Agent shall
not be liable for any error of judgment or mistakes of fact or law with respect
to actions taken in connection with the Collateral.

      5.6 Attorney-in-Fact. The Debtor hereby irrevocably makes, constitutes and
appoints the Administrative Agent (and any officer of the Administrative Agent
or any Person designated by the Administrative Agent for that purpose) as the
Debtor's true and lawful proxy and attorney-in-fact (and agent-in-fact) in the
Debtor's name, place and stead, with full power of substitution, to (i) take
such actions as are permitted in this Security Agreement, (ii) execute such
financing statements and other documents and to do such other acts as the
Administrative Agent may require to perfect and preserve the Administrative
Agent 's security interest in, and to enforce such interests in the Collateral,
and (iii) carry out any remedy provided for in this Security Agreement,
including endorsing the Debtor's name to checks, drafts, instruments and other
items of payment, and proceeds of the Collateral, executing change of address
forms with the postmaster of the United States Post Office serving the address
of the Debtor, changing the address of the Debtor to that of the Administrative
Agent , opening all envelopes addressed to the Debtor and applying any payments
contained therein to the Obligations. The Debtor hereby acknowledges that the
constitution and appointment of such proxy and attorney-in-fact are coupled with
an interest and are irrevocable. The Debtor hereby ratifies and confirms all
that such attorney-in-fact may do or cause to be done by virtue of any provision
of this Security Agreement.

      5.7 No Marshaling. The Administrative Agent shall not be required to
marshal any present or future collateral security (including this Security
Agreement and the Collateral) for, or other assurances of payment of, the
Obligations or any of them or to resort to such collateral security or other
assurances of payment in any particular order. To the extent that it lawfully
may, the Debtor hereby agrees that it will not invoke any law relating to the
marshaling of collateral which might cause delay in or impede the enforcement of
the Administrative Agent 's rights under this Security Agreement or under any
other instrument creating or evidencing any of the Obligations or under which
any of the Obligations is outstanding or by which any of the Obligations is
secured or payment thereof is otherwise assured, and, to the extent that it
lawfully may, the Debtor hereby irrevocably waives the benefits of all such
laws.

                                       15
<PAGE>

      5.8 Application of Proceeds. The Administrative Agent will within three
(3) Business Days after receipt of cash or solvent credits from collection of
items of payment, proceeds of Collateral or any other source, apply the whole or
any part thereof against the Obligations secured hereby. The Administrative
Agent shall further have the exclusive right to determine how, when and what
application of such payments and such credits shall be made on the Obligations,
and such determination shall be conclusive upon the Obligors. Any proceeds of
any disposition by the Administrative Agent of all or any part of the Collateral
may be first applied by the Administrative Agent to the payment of expenses
incurred by the Administrative Agent in connection with the Collateral,
including attorneys' fees and legal expenses as provided for in Section 7
hereof.

      5.9 No Waiver. No Event of Default shall be waived by the Administrative
Agent except in writing. No failure or delay on the part of the Administrative
Agent in exercising any right, power or remedy hereunder shall operate as a
waiver of the exercise of the same or any other right at any other time; nor
shall any single or partial exercise of any such right, power or remedy preclude
any other or further exercise thereof or the exercise of any other right, power
or remedy hereunder. There shall be no obligation on the part of the
Administrative Agent to exercise any remedy available to the Administrative
Agent in any order. The remedies provided for herein are cumulative and not
exclusive of any remedies provided at law or in equity. The Debtor agrees that
in the event that the Debtor fails to perform, observe or discharge any of its
Obligations or liabilities under this Security Agreement or any other agreements
with the Administrative Agent, no remedy of law will provide adequate relief to
the Administrative Agent, and further agrees that the Administrative Agent shall
be entitled to temporary and permanent injunctive relief in any such case
without the necessity of proving actual damages.

SECTION 6  MISCELLANEOUS.

      6.1 Entire Agreement. This Security Agreement and the other Loan Documents
(i) are valid, binding and enforceable against the Debtor and the Administrative
Agent in accordance with their respective provisions and no conditions exist as
to their legal effectiveness; (ii) constitute the entire agreement between the
parties with respect to the subject matter hereof and thereof; and (iii) are the
final expression of the intentions of the Debtor and the Administrative Agent.
No promises, either expressed or implied, exist between the Debtor and the
Administrative Agent, unless contained herein or therein. This Security
Agreement, together with the other Loan Documents, supersedes all negotiations,
representations, warranties, commitments, term sheets, discussions,
negotiations, offers or contracts (of any kind or nature, whether oral or
written) prior to or contemporaneous with the execution hereof with respect to
any matter, directly or indirectly related to the terms of this Security
Agreement and the other Loan Documents. This Security Agreement and the other
Loan Documents are the result of negotiations among the Administrative Agent ,
the Debtor and the other parties thereto, and have been reviewed (or have had
the opportunity to be reviewed) by counsel to all such parties, and are the
products of all parties. Accordingly, this Security Agreement and the other Loan
Documents shall not be construed more strictly against the Administrative Agent
merely because of the Administrative Agent's involvement in their preparation.

                                       16
<PAGE>

      6.2 Amendments; Waivers. No delay on the part of the Administrative Agent
in the exercise of any right, power or remedy shall operate as a waiver thereof,
nor shall any single or partial exercise by the Administrative Agent of any
right, power or remedy preclude other or further exercise thereof, or the
exercise of any other right, power or remedy. No amendment, modification or
waiver of, or consent with respect to, any provision of this Security Agreement
or the other Loan Documents shall in any event be effective unless the same
shall be in writing and acknowledged by the Administrative Agent, and then any
such amendment, modification, waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.

      6.3 WAIVER OF DEFENSES. THE DEBTOR, ON BEHALF OF ITSELF AND ANY GUARANTOR
OF ANY OF THE OBLIGATIONS, WAIVES EVERY PRESENT AND FUTURE DEFENSE, CAUSE OF
ACTION, COUNTERCLAIM OR SETOFF WHICH THE DEBTOR MAY NOW HAVE OR HEREAFTER MAY
HAVE TO ANY ACTION BY THE ADMINISTRATIVE AGENT IN ENFORCING THIS SECURITY
AGREEMENT. PROVIDED THE ADMINISTRATIVE AGENT ACTS IN GOOD FAITH, THE DEBTOR
RATIFIES AND CONFIRMS WHATEVER THE ADMINISTRATIVE AGENT MAY DO PURSUANT TO THE
TERMS OF THIS SECURITY AGREEMENT. THIS PROVISION IS A MATERIAL INDUCEMENT FOR
THE ADMINISTRATIVE AGENT GRANTING ANY FINANCIAL ACCOMMODATION TO THE DEBTOR.

      6.4 FORUM SELECTION AND CONSENT TO JURISDICTION. ANY LITIGATION BASED
HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS SECURITY AGREEMENT
OR ANY OTHER LOAN DOCUMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE
COURTS OF THE STATE OF MICHIGAN OR IN THE UNITED STATES DISTRICT COURT FOR THE
EASTERN DISTRICT OF MICHIGAN; PROVIDED THAT NOTHING IN THIS SECURITY AGREEMENT
SHALL BE DEEMED OR OPERATE TO PRECLUDE THE ADMINISTRATIVE AGENT FROM BRINGING
SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION. THE DEBTOR HEREBY
EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE
OF MICHIGAN AND OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF
MICHIGAN FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. THE DEBTOR
FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL,
POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF MICHIGAN.
THE DEBTOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING
OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND
ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

      6.5 WAIVER OF JURY TRIAL. THE ADMINISTRATIVE AGENT AND THE DEBTOR, AFTER
CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL, EACH
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE IRREVOCABLY, ANY RIGHT TO A TRIAL
BY JURY IN ANY ACTION OR PROCEEDING

                                       17
<PAGE>

TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS SECURITY AGREEMENT, ANY NOTE, ANY
OTHER LOAN DOCUMENT, ANY OF THE OTHER OBLIGATIONS, THE COLLATERAL, OR ANY
AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE
FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY
LENDING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, OR ANY
COURSE OF CONDUCT OR COURSE OF DEALING IN WHICH THE ADMINISTRATIVE AGENT AND THE
DEBTOR ARE ADVERSE PARTIES, AND EACH AGREES THAT ANY SUCH ACTION OR PROCEEDING
SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. THIS PROVISION IS A
MATERIAL INDUCEMENT FOR THE ADMINISTRATIVE AGENT GRANTING ANY FINANCIAL
ACCOMMODATION TO THE DEBTOR.

      6.6 Assignability. The Administrative Agent may at any time assign the
Administrative Agent's rights in this Security Agreement, the other Loan
Documents, the Obligations, or any part thereof and transfer the Administrative
Agent's rights in any or all of the Collateral, and the Administrative Agent
thereafter shall be relieved from all liability with respect to such Collateral.
This Security Agreement shall be binding upon the Administrative Agent and the
Debtor and their respective legal representatives and successors. All references
herein to the Debtor shall be deemed to include any successors, whether
immediate or remote. In the case of a joint venture or partnership, the term
"Debtor" shall be deemed to include all joint venturers or partners thereof, who
shall be jointly and severally liable hereunder.

      6.7 Binding Effect. This Security Agreement shall become effective upon
execution by the Debtor and the Administrative Agent. If this Security Agreement
is not dated or contains any blanks when executed by the Debtor, the
Administrative Agent is hereby authorized, without notice to the Debtor, to date
this Security Agreement as of the date when it was executed by the Debtor, and
to complete any such blanks according to the terms upon which this Security
Agreement is executed.

      6.8 Governing Law. This Security Agreement shall be delivered and accepted
in and shall be deemed to be a contract made under and governed by the internal
laws of the State of Michigan (but giving effect to federal laws applicable to
national banks) applicable to contracts made and to be performed entirely within
such state, without regard to conflict of laws principles.

      6.9 Enforceability. Wherever possible, each provision of this Security
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Security Agreement shall be
prohibited by, unenforceable or invalid under any jurisdiction, such provision
shall as to such jurisdiction, be severable and be ineffective to the extent of
such prohibition or invalidity, without invalidating the remaining provisions of
this Security Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction.

      6.10 Time of Essence. Time is of the essence in making payments of all
amounts due the Administrative Agent under this Security Agreement and in the
performance and observance by the Debtor of each covenant, agreement, provision
and term of this Security Agreement.

                                       18
<PAGE>

      6.11 Counterparts; Facsimile Signatures. This Security Agreement may be
executed in any number of counterparts and by the different parties hereto on
separate counterparts and each such counterpart shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same Security Agreement. Receipt of an executed signature page to this Security
Agreement by facsimile or other electronic transmission shall constitute
effective delivery thereof. Electronic records of executed Loan Documents
maintained by the Administrative Agent shall be deemed to be originals thereof.

      6.12 Notices. Except as otherwise provided herein, the Debtor waives all
notices and demands in connection with the enforcement of the Administrative
Agent's rights hereunder. All notices, requests, demands and other
communications provided for hereunder shall be in writing and addressed as
follows:

      If to the Debtor:               c/o Meadowbrook Insurance Group, Inc.
                                      26600 Telegraph Road
                                      Southfield, Michigan 48034
                                      Attention: Michael Costello

      If to the Administrative Agent: Standard Federal Bank National Association
                                      2600 West Big Beaver Road
                                      Troy, Michigan 48084
                                      Attention: Laura Kalil

or, as to each party, at such other address as shall be designated by such party
in a written notice to each other party complying as to delivery with the terms
of this subsection. All notices addressed as above shall be deemed to have been
properly given (i) if served in person, upon acceptance or refusal of delivery;
(ii) if mailed by certified or registered mail, return receipt requested,
postage prepaid, on the third (3rd) day following the day such notice is
deposited in any post office station or letter box; or (iii) if sent by
recognized overnight courier, on the first (1st) day following the day such
notice is delivered to such carrier. No notice to or demand on the Debtor in any
case shall entitle the Debtor to any other or further notice or demand in
similar or other circumstances.

      6.13 Costs, Fees and Expenses. The Debtor shall pay or reimburse the
Administrative Agent for all reasonable costs, fees and expenses incurred by the
Administrative Agent or for which the Administrative Agent becomes obligated in
connection with the enforcement of this Security Agreement, including reasonable
attorneys' fees and time charges of counsel to the Administrative Agent , which
shall also include attorneys' fees and time charges of attorneys who may be
employees of the Administrative Agent or any Affiliate of the Administrative
Agent , plus costs and expenses of such attorneys or of the Administrative Agent
; search fees, costs and expenses; and all taxes payable in connection with this
Security Agreement. In furtherance of the foregoing, the Debtor shall pay any
and all stamp and other taxes, UCC search fees, filing fees and other costs and
expenses in connection with the execution and delivery of this Security
Agreement and the other Loan Documents to be delivered hereunder, and agrees to
save and hold the Administrative Agent harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or omission to
pay such costs and expenses. That portion of

                                       19
<PAGE>

the Obligations consisting of costs, expenses or advances to be reimbursed by
the Debtor to the Administrative Agent pursuant to this Security Agreement or
the other Loan Documents which are not paid on or prior to the date hereof shall
be payable by the Debtor to the Administrative Agent on demand. If at any time
or times hereafter the Administrative Agent : (a) employs counsel for advice or
other representation (i) with respect to this Security Agreement or the other
Loan Documents, (ii) to represent the Administrative Agent in any litigation,
contest, dispute, suit or proceeding or to commence, defend, or intervene or to
take any other action in or with respect to any litigation, contest, dispute,
suit, or proceeding (whether instituted by the Administrative Agent , the
Debtor, or any other Person) in any way or respect relating to this Security
Agreement, or (iii) to enforce any rights of the Administrative Agent against
the Debtor or any other Person under of this Security Agreement; (b) takes any
action to protect, collect, sell, liquidate, or otherwise dispose of any of the
Collateral; and/or (c) attempts to or enforces any of the Administrative Agent
's rights or remedies under this Security Agreement, the costs and expenses
incurred by the Administrative Agent in any manner or way with respect to the
foregoing, shall be part of the Obligations, payable by the Debtor to the
Administrative Agent on demand.

                  [Remainder of Page Intentionally Left Blank]

                                       20
<PAGE>

      IN WITNESS WHEREOF, the Debtor and the Administrative Agent have executed
this Security Agreement as of the date first above written.

                                      DEBTOR:

                                      MEADOWBROOK INSURANCE
                                      GROUP, INC.,
                                      a Michigan corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                      MEADOWBROOK, INC.,
                                      a Michigan corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                      CREST FINANCIAL CORPORATION,
                                      a Nevada corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                       21
<PAGE>

                                      DEBTOR (continued):

                                      PREFERRED INSURANCE
                                      AGENCY, INC.,
                                      a Massachusetts corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                      PREFERRED COMP INSURANCE
                                      AGENCY OF NEW HAMPSHIRE,
                                      a New Hampshire corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                      TPA INSURANCE AGENCY, INC.,
                                      a Massachusetts corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                      TPA INSURANCE AGENCY OF
                                      NEW HAMPSHIRE, INC.,
                                      a New Hampshire corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                      MEADOWBROOK
                                      INTERMEDIARIES, INC.,
                                      a New York corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                       22
<PAGE>

                                      DEBTOR (continued):

                                      MEADOWBROOK RISK
                                      MANAGEMENT, INC.,
                                      a New York corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                      MEADOWBROOK OF NEVADA, INC.,
                                      d/b/a MEADOWBROOK
                                      INSURANCE SERVICES,
                                      a Nevada corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                      MEADOWBROOK
                                      INSURANCE AGENCY, INC.,
                                      an Ohio corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                      MARKET PLACE RESOURCES, INC.,
                                      a Michigan corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                      MEADOWBROOK OF FLORIDA, INC.,
                                      a Florida corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                       23
<PAGE>

                                      DEBTOR (continued):

                                      MEADOWBROOK INSURANCE, INC.,
                                      an Alabama corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                      NATIONAL OSTEOPATHIC PHYSICIANS
                                      PURCHASING
                                      GROUP, INC.,
                                      a Florida corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                      NATIONAL REALTY LIABILITY ALLIANCE,
                                      INC.,
                                      a Florida corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                      ASSOCIATION SELF INSURANCE SERVICES,
                                      INC.,
                                      an Alabama corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                       24
<PAGE>

                                      DEBTOR (continued):

                                      FLORIDA PREFERRED
                                      ADMINISTRATORS, INC.,
                                      a Florida corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                      CASE MANAGEMENT
                                      RESOURCES, INC.,
                                      a Florida corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                      AMERICAN HIGHWAY
                                      CARRIERS ASSOCIATION,
                                      a California corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                      INTERLINE INSURANCE
                                      SERVICES, INC.,
                                      a California corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                       25
<PAGE>

                                      DEBTOR (continued):

                                      COMMERCIAL CARRIERS
                                      INSURANCE AGENCY, INC.,
                                      a California corporation

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                      Agreed and accepted:

                                      ADMINISTRATIVE AGENT:

                                      STANDARD FEDERAL BANK NATIONAL
                                      ASSOCIATION,
                                      a national banking association

                                      By:    ___________________________________
                                             ___________________________________
                                      Its:   ___________________________________

                                       26
<PAGE>

                                   SCHEDULE 1

   List of Debtors and the Addresses of each of their Chief Executive Offices

<TABLE>
<CAPTION>
                                                    PRINCIPAL PLACE OF
                          ADDRESS OF CHIEF         BUSINESS AND BOOKS AND                    JURISDICTION OF      ORGANIZATIONAL
   NAME OF DEBTOR         EXECUTIVE OFFICE                RECORDS          TYPE OF ENTITY     ORGANIZATION     IDENTIFICATION NUMBER
---------------------  ------------------------   -----------------------  --------------    ---------------  ----------------------
<S>                    <C>                        <C>                      <C>               <C>              <C>
Meadowbrook Insurance    26600 Telegraph Rd.       26600 Telegraph Rd.       corporation        Michigan
     Group, Inc.        Southfield, MI 48034      Southfield, MI 48034

  Meadowbrook, Inc.      26600 Telegraph Rd.        26600 Telegraph Rd.      corporation        Michigan           38-1798156
                        Southfield, MI 48034       Southfield, MI 48034

   Crest Financial       12641 East 166th St       12641 East 166th St       corporation         Nevada            33-0000063
     Corporation        Cerritos, CA 90703        Cerritos, CA 90703

    Market Place         26600 Telegraph Rd.       26600 Telegraph Rd.       corporation        Michigan           38-3476522
   Resources, Inc.      Southfield, Mi 48034      Southfield, Mi 48034

 Preferred Insurance   10 New England Business    10 New England Business    corporation      Massachusetts        04-3279903
    Agency, Inc.          Center, Ste. 303          Center, Ste. 303

                          Andover, MA 01810         Andover, MA 01810

   Preferred Comp      10 New England Business    10 New England Business    corporation      New Hampshire        04-3356998
      Insurance            Center, Ste 303           Center, Ste 303
                          Andover, MA 01810         Andover, MA 01810

TPA Insurance Agency,  10 New England Business    10 New England Business    corporation      Massachusetts        04-3296168
        Inc.               Center, Ste 303           Center, Ste 303
                          Andover, MA 01810         Andover, MA 01810

TPA Insurance Agency   10 New England Business    10 New England Business    corporation      New Hampshire        04-3356996
of New Hampshire, Inc.      Center, Ste 303           Center, Ste 303
                          Andover, MA 01810         Andover, MA 01810
</TABLE>

                                       27
<PAGE>

<TABLE>
<S>                      <C>                        <C>                        <C>                 <C>              <C>
      Meadowbrook           26600 Telegraph Rd.        26600 Telegraph Rd.     corporation         New York         38-2573624
 Intermediaries, Inc.     Southfield, Mi 48034       Southfield, Mi 48034

   Meadowbrook Risk         26600 Telegraph Rd.        26600 Telegraph Rd.     corporation         New York         38-2573592
   Management, Inc.       Southfield, Mi 48034       Southfield, Mi 48034

Meadowbrook of Nevada,   1645 Village Ctr Circle,   1645 Village Ctr Circle,   corporation          Nevada          88-0340758
      Inc., d/b/a                 Ste 180                    Ste 180
 Meadowbrook Insurance     Las Vegas, NV 89134        Las Vegas, NV 89134
       Services

 Meadowbrook Insurance      1300 E. 9th, Street        26600 Telegraph Rd.     corporation          Ohio            38-2725059
     Agency, Inc.           Cleveland, OH 44114       Southfield, MI 48034

    Meadowbrook of           7250 S. Beneva Rd        7250 S. Beneva Rd        corporation         Florida          65-0839780
     Florida, Inc           Sarasota, FL 34238        Sarasota, FL 34238

Meadowbrook Insurance,   2500 Fairlane Dr., Ste     2500 Fairlane Dr., Ste     corporation         Alabama          63-1223412
         Inc.            100                        100
                          Montgomery, AL 36116        Montgomery, AL 36116

 National Osteopathic        7250 S. Beneva Rd        7250 S. Beneva Rd        corporation         Florida          65-0789177
 Physicians Purchasing      Sarasota, FL 34238        Sarasota, FL 34238
      Group, Inc

    National Realty          7250 S. Beneva Rd        7250 S. Beneva Rd        corporation         Florida          65-0082905
  Liability Alliance,       Sarasota, FL 34238         Sarasota, FL 34238
         Inc.

   Association Self      2500 Fairlane Dr., Ste     2500 Fairlane Dr., Ste     corporation         Alabama          57-0847488
  Insurance Services,    100                        100
         Inc.             Montgomery, AL 36116        Montgomery, AL 36116

   Florida Preferred         7250 S. Beneva Rd        7250 S. Beneva Rd        corporation         Florida          65-0150469
 Administrators, Inc.       Sarasota, FL 34238        Sarasota, FL 34238

</TABLE>

                                       28
<PAGE>

<TABLE>
<S>                        <C>                        <C>                      <C>                <C>              <C>
   Case Management          7250 S. Beneva Rd          7250 S. Beneva Rd       corporation         Florida         65-0284549
   Resources, Inc.         Sarasota, FL 34238         Sarasota, FL 34238

  American Highway         12641 East 166th St        12641 East 166th St      corporation        California       33-0000979
Carriers Association        Cerritos, CA 90703         Cerritos, CA 90703

 Interline Insurance       12641 East 166th St        12641 East 166th St      corporation        California       94-2828166
    Services, Inc           Cerritos, CA 90703         Cerritos, CA 90703

 Commercial Carriers       12641 East 166th St        12641 East 166th St      corporation        California       95-3328008
  Insurance Agency          Cerritos, CA 90703         Cerritos, CA 90703

</TABLE>

                                       29<PAGE>

                                                                    EXHIBIT 10.1

                              EMPLOYMENT AGREEMENT

      THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as
of November 12, 2004 (the "Effective Date"), by and between SCOLR Pharma, Inc.,
a Delaware corporation ("the Company"), and Daniel O. Wilds ("Employee").

      The parties agree as follows:

      1. Employment.

            1.1 Title and Duties. Company hereby employs Employee as President
and Chief Executive Officer, and Employee hereby accepts such employment, on the
terms and conditions set forth herein. Employee shall perform such duties as are
customary for the position of President and Chief Executive Officer and any
additional such duties that the Company's Board of Directors ("Board") may
assign from time to time.

            1.2 Full-time and Best Efforts. Employee will expend Employee's best
efforts on behalf of the Company, and will abide by all policies and decisions
made by the Company, as well as all applicable federal, state and local laws,
regulations or ordinances. Employee will act in the best interests of the
Company at all times and, subject to Section 1.3 below, will devote Employee's
full business time and efforts to the performance of Employee's assigned duties
to the Company.

            1.3 Outside Activities. Employee may serve in various capacities for
non-profit, charitable and educational organizations from time to time. Any such
non-profit work that has the potential to interfere to any degree with
Employee's services to the Company must be disclosed to, and approved by, the
Board. Employee agrees that he will not accept any position with, be employed
by, provide any paid services, or serve on any Board of Directors for a profit
organization or entity other than the Company without the written approval of
the Board; provided, that Employee may serve as a director of two companies that
do not compete with the Company and will not materially detract from Employee's
responsibilities hereunder as determined in the sole judgment of the Board.

      2. Compensation.

            2.1 Base Salary. As compensation for Employee's performance of
Employee's duties hereunder, the Company shall pay Employee an initial base
salary ("Base Salary") of Three Hundred Thousand Dollars ($300,000) per year,
payable in accordance with the normal payroll practices of the Company, less any
amounts that the Company is required by applicable federal, state or local law
to withhold therefrom on account of employment, income or other taxes.
Employee's Base Salary will be increased to $320,000 effective as of January 1,
2005. Thereafter, Employee's Base Salary shall be reviewed annually by the
Compensation Committee of the Board and may be increased (but not decreased) and
such increased amount shall hereafter be his "Base Salary". The Compensation
Committee shall periodically review the performance of Employee on not less than
an annual basis.

            2.2 Bonus. In recognition of services performed during 2003 and
2004, Employee shall receive a bonus of Seventy Five Thousand Dollars ($75,000)
upon execution of

<PAGE>

this Agreement. Employee shall be eligible to receive a performance-based annual
cash bonus in a targeted amount of up to 65% of Base Salary (as adjusted from
time to time) based on the achievement of certain objectives approved by the
Board of Directors in its sole discretion; provided that there is a minimum gain
in the Company's market capitalization of 20% for the year under consideration
for payment of a bonus. The terms and amount of such bonus shall be determined
by the Compensation Committee of the Board in its sole discretion, based on
performance factors and objectives that are established no later than ninety
(90) days after the first day of the fiscal year. The bonus payment shall be
determined by the Board and paid not later than thirty (30) days after release
of the Company's audited financial statements. In the event Employee's
employment is terminated as a result of Employee's death or disability, Employee
will receive an amount equal to the prior year's Bonus prorated for the portion
of the year of termination and paid within sixty days of such termination.

            2.3 Stock Options. The Company shall grant to Employee options to
purchase 300,000 shares of the Company's Common Stock under the Company's 2004
Equity Incentive Plan (the "Plan") at an exercise price equal to the fair market
value of that stock on the date of grant. Such options shall vest monthly in 36
equal installments commencing on January 1, 2005. Except as provided in this
Agreement, the option will be subject to the terms and conditions of the Plan
and standard form of stock option agreement, which Employee will be required to
sign as a condition of receiving the options. Notwithstanding anything to the
contrary contained in the Plan, Employee (and his heirs) shall have one year
from the date of termination of employment to exercise any vested stock options.

      3. Benefits.

            3.1 Fringe Benefits. Employee will be eligible for all customary and
usual fringe benefits generally available to employees of the Company, subject
to the terms and conditions of the Company's plan documents. Company reserves
the right to change or eliminate its fringe benefit programs on a prospective
basis, at any time, effective upon notice to Employee.

            3.2 Vacation. Employee will be entitled to accrue vacation of four
(4) weeks per year in accordance with the Company's vacation policy. Vacation
may be carried over from year to year up to a maximum of eight (8) weeks.

            3.3 Other Benefits. Company will pay Employee a monthly
transportation allowance of Five Hundred Dollars ($500) payable as regular
income. The Company shall reimburse Employee for the reasonable professional
fees incurred by Employee to negotiate and prepare this Agreement in an amount
not to exceed Five Thousand Dollars ($5,000).

      4. Business Expenses. Company will reimburse Employee for all reasonable
out-of-pocket expenses incurred in the performance of Employee's duties on
behalf of the Company in accordance with the Company's policies.

      5. Term. The employment relationship formed pursuant to this Agreement
shall continue indefinitely commencing on the Effective Date (the "Term") until
terminated in accordance with the other provisions of this Agreement.

                                       2
<PAGE>

      6. Termination of Employee's Employment.

            6.1 Termination for Cause by the Company. The Company may terminate
Employee's employment immediately at any time for Cause. For purposes of this
Agreement, "Cause" is defined as: (a) Employee's indictment for, or conviction
(or plea of nolo contendere) of fraud, embezzlement, misappropriation, or any
felony or any other act of moral turpitude; (b) acts or omissions constituting
gross negligence, recklessness or willful misconduct on the part of the Employee
with respect to Employee's obligations to the Company or otherwise relating to
the business of the Company that materially harms the Company; (c) Employee's
failure or inability to perform the essential functions of the position, with or
without reasonable accommodation, due to a mental or physical disability, where
such inability continues for a period or periods aggregating ninety (90)
calendar days in any 12-month period; (e) Employee's death; (f) Employee's
material breach of this Agreement, the Company's Code of Conduct or the
Company's Proprietary Information and Invention Agreement, following written
notice and a 30-day opportunity to cure, or (g) any similar or related act or
failure to act which is materially adversely injurious to the Company. In the
event that Employee's employment is terminated in accordance with this
subsection 6.1, Employee shall be entitled to receive only the Base Salary then
in effect, prorated to the date of termination and any benefits and expense
reimbursements to which Employee is entitled by virtue of his prior employment
by Company (collectively, the "Standard Entitlements"). All other Company
obligations to Employee pursuant to this Agreement will become automatically
terminated and completely extinguished except that Employee's Bonus shall be
prorated in the event of termination due to death or disability in accordance
with Section 2.2 above. Employee will not be entitled to receive the Severance
Package described in Section 6.2 below or any part thereof.

            6.2 Termination Without Cause by Company/Severance. The Company may
terminate Employee's employment under this Agreement without Cause at any time
upon written notice to Employee. In the event of such termination, Employee will
receive the Standard Entitlements (as defined in Section 6.1 hereof), and a
"Severance Package" consisting of (a) a lump sum cash payment equal to 87.5% of
one year of Employee's Base Salary in effect on the date of termination, (b) a
prorated Bonus payment of 65% of Employee's Base Salary for the portion of the
year of termination; provided that there has been a minimum gain in the
Company's market capitalization of 20% during the applicable portion of such
year, together with (c) full accelerated vesting of any and all unvested stock
options held by Employee, and (d) continued medical coverage at the Company's
expense pursuant to COBRA at existing levels as of the date of termination for
up to one year. The payment of the Severance Package is contingent upon
Employee's compliance with the surviving provisions of this Agreement and
execution of a full and general release, releasing all claims, known or unknown,
that Employee may have against Company arising out of or related to Employee's
employment or termination of employment with the Company. All other Company
obligations to Employee pursuant to this Agreement will be automatically
terminated and completely extinguished.

            6.3 Voluntary Resignation by Employee Without Reason. Employee may
voluntarily resign Employee's position with Company for any reason or no reason
on sixty (60) days' advance written notice to the Company. In the event of
Employee's resignation under such circumstances, Employee will be entitled to
receive the Standard Entitlements, including salary and benefits for the sixty
(60) day notice period, but no other salary or benefits for the remaining

                                       3
<PAGE>

months of the current term, if any. All other Company obligations to Employee
pursuant to this Agreement will become automatically terminated and completely
extinguished. In addition, Employee will not be entitled to receive the
Severance Package described in subsection 6.2 above.

            6.4 Resignation For Good Reason.

                  (a) Severance Package. If Employee resigns for Good Reason (as
defined below), Employee shall be entitled to receive the Severance Package
described in subsection 6.2 above, provided Employee complies with all the
conditions described in subsection 6.2 above.

                  (b) Section 280G. If, due to the benefits provided under
subsection 6.4(a) above, Employee is subject to any excise tax due to
characterization of any amounts payable under subsection 6.4(a) as excess
parachute payments pursuant to Section 4999 of the Internal Revenue Code of
1986, as amended (the "Code"), Employee may elect, in Employee's sole
discretion, to reduce the amounts payable under subsection 6.4(a) in order to
avoid any "excess parachute payment" under Section 280G(b)(1) of the Code.

                  (c) Good Reason. "Good Reason" shall mean the occurrence of
one of the following without Employee's express written consent: (i) a material
reduction in the level of Employee's responsibilities for the Company; (ii) the
assignment to Employee of any duties inconsistent with Employee's position as
President and Chief Executive Officer; (iii) a material reduction in the overall
level of employee compensation, benefits or perquisites available to Employee or
Employee's right to participate therein, unless such reduction is
nondiscriminatory as to Employee; or (iv) the Company's requiring Employee to be
based anywhere more than fifty (50) miles from its current business location. No
event shall constitute "Good Reason" unless the Employee shall have notified the
Company of the conduct allegedly constituting "Good Reason" and the Company
shall have failed to correct such conduct within thirty days of the date of its
receipt of such notice. The appointment of a non-executive Chairman of the Board
of Directors shall not constitute "Good Reason" under this Agreement.

      7. No Conflict of Interest. During the term of Employee's employment with
Company, Employee must not engage in any work, paid or unpaid, that creates an
actual or potential conflict of interest with Company. Such work shall include,
but is not limited to, directly or indirectly competing with Company in any way,
or acting as an officer, director, employee, consultant, stockholder, volunteer,
lender, or agent of any business enterprise of the same nature as, or which is
in direct competition with, the business in which Company is now engaged or in
which Company becomes engaged during the term of Employee's employment with
Company, as may be determined by the Board in its sole discretion.

      8. Proprietary Information. Employee agrees to sign, and abide by the
Company's Proprietary Information and Invention Agreement, which is provided
with this Agreement and incorporated herein by reference. Execution of this
Agreement and the Proprietary Information and Invention Agreement supersedes,
cancels and renders void the Nutraceutrix, Inc. Proprietary Information and
Invention Agreement executed by Employee on August 16, 2003.

                                       4
<PAGE>

      9. Post-Termination Non-Competition.

            9.1 Consideration For Promise To Refrain From Competing. Employee
agrees that Employee's services are special and unique, that the Company's
disclosure of confidential, proprietary information and specialized training and
knowledge to Employee, and that Employee's compensation and benefits and
severance, as applicable, are partly in consideration of and conditioned upon
Employee not competing with the Company. Employee acknowledges that such
consideration for Employee's services under this Agreement is adequate
consideration for Employee's promises contained within this Section 9.

            9.2 Promise To Refrain From Competing. In exchange for the
consideration described in subsection 9.1 above, Employee agrees that for the
period of one (1) year following the date Employee ceases to render services to
the Company, Employee will not either directly or indirectly, whether as a
owner, director, officer, manager, consultant, agent or employee: (i) work for a
competitor, which is defined to include any company directly or indirectly
engaged, or known to Employee to be preparing to engage, in the development of
over-the-counter products, prescription drugs or nutraceutrical products
employing extended release formulations, or engaged in any business that is
directly competitive with any business the Company is engaged, or is known to
Employee to be preparing to engage, at the time the Employee's employment with
the Company terminates ("Restricted Business"); or (ii) make or hold any
investment in any Restricted Business, whether such investment be by way of
loan, purchase of stock or otherwise, provided that there shall be excluded from
the foregoing the ownership of not more than 1% of the listed or traded stock of
any publicly held corporation. For purposes of this section 9, the term "the
Company" shall mean and include the Company, any subsidiary or affiliate of the
Company, any successor to the business of the Company (by merger, consolidation,
sale of assets or stock or otherwise) and any other corporation or entity of
which Employee may serve as a director, officer or employee at the request of
the Company or any successor of the Company.

            9.3 Reasonableness of Restrictions. Employee represents and agrees
that the restrictions on competition, as to time, geographic area, and scope of
activity, required by this section 9 are reasonable, do not impose a greater
restraint than is necessary to protect the goodwill and business interests of
the Company, and are not unduly burdensome to Employee. Employee expressly
acknowledges that the Company competes on a nationwide basis and that the
geographical scope of these limitations is reasonable and necessary for the
protection of the Company's trade secrets and other confidential and proprietary
information.

            9.4 Reformation if Necessary. In the event a court of competent
jurisdiction determines that the geographic area, duration, or scope of activity
of any restriction under this section 9 and its subsections is unenforceable,
the restrictions under this section and its subsections shall not be terminated
but shall be reformed and modified to the extent required to render them valid
and enforceable.

                                       5
<PAGE>

      10. Non-Solicitation. Employee agrees that during the term of this
Agreement and for a period of one (1) year after the termination of this
Agreement, Employee will not, either directly or indirectly, separately or in
association with others, interfere with, impair, disrupt or damage the Company's
business by soliciting, encouraging or recruiting any of the Company's employees
or causing others to solicit or encourage or recruit any of the Company's
employees to discontinue their employment with the Company.

      11. Nondisparagement. Upon termination of Employee's employment
relationship hereunder, the Company and Employee agree that, unless otherwise
legally required to do so, they will each at all times thereafter refrain from
discussing the circumstances relating to such termination and from disparaging,
or describing in a derogatory light, the performance, capabilities, services,
business practices, or ethics of the other (or of the officers, directors or
controlling shareholders of the other). This provision does not apply to
statements made by Employee to Employee's immediate family or attorneys, or to
statements made by either party in legal proceedings in conjunction with legal
actions to pursue rights and/or remedies under this Agreement.

      12. Right To Injunction/Costs Of Enforcement. Employee acknowledges that
the Company will suffer immediate and irreparable harm that will not be
compensable by damages alone in the event Employee repudiates or breaches
Section 7, 8, 9, 10 or 11 or threatens or attempts to do so. In the event of any
such breach or any threatened or attempted breach, Employee agrees that the
Company, in addition to and not in limitation of any other rights, remedies or
damages available to it at law or in equity, shall be entitled to obtain
temporary, preliminary and permanent injunctions to prevent or restrain any such
breach, and the Company shall not be required to post a bond as a condition for
the granting of such relief.

      13. Agreement to Arbitrate. To the fullest extent permitted by law,
Employee and Company agree to arbitrate any controversy, claim or dispute
between them arising out of or in any way related to this Agreement, the
employment relationship between Company and Employee and any disputes upon
termination of employment. Claims for workers' compensation, unemployment
insurance benefits and Company's right to obtain injunctive relief pursuant to
Section 13 above are excluded. The arbitration will be conducted in Seattle,
Washington by a single neutral arbitrator and in accordance with the then
current rules for resolution of employment disputes of the American Arbitration
Association ("AAA"). The parties are entitled to representation by an attorney
or other representative of their choosing. The arbitrator shall have the power
to enter any award that could be entered by a judge of the trial court of the
State of Washington, and only such power, and shall follow the law. In the event
the arbitrator does not follow the law, the arbitrator will have exceeded the
scope of his or her authority and the parties may, at their option, file a
motion to vacate the award in court. The parties agree to abide by and perform
any award rendered by the arbitrator. Judgment on the award may be entered in
any court having jurisdiction thereof. Each party shall bear one half the cost
of the arbitration filing and hearing fees, and the cost of the arbitrator.

      14. General Provisions.

            14.1 Assignment. The rights and obligations of the Company under
this Agreement shall inure to the benefit of, and be binding upon, the
successors and assigns of the

                                       6
<PAGE>

Company. Employee shall not be entitled to assign any of Employee's rights or
obligations under this Agreement.

            14.2 Waiver. Either party's failure to enforce any provision of this
Agreement shall not in any way be construed as a waiver of any such provision,
or prevent that party thereafter from enforcing each and every other provision
of this Agreement.

            14.3 Severability. In the event any provision of this Agreement is
found to be unenforceable by an arbitrator or court of competent jurisdiction,
such provision shall be deemed modified to the extent necessary to allow
enforceability of the provision as so limited, it being intended that the
parties shall receive the benefit contemplated herein to the fullest extent
permitted by law. If a deemed modification is not satisfactory in the judgment
of such arbitrator or court, the unenforceable provision shall be deemed
deleted, and the validity and enforceability of the remaining provisions shall
not be affected thereby.

            14.4 Interpretation; Construction. The headings set forth in this
Agreement are for convenience only and shall not be used in interpreting this
Agreement. Legal counsel representing Company has drafted this Agreement and
Employee has been represented by independent counsel. Therefore, the normal rule
of construction to the effect that any ambiguities are to be resolved against
the drafting party shall not be employed in the interpretation of this
Agreement.

            14.5 Governing Law. This Agreement will be governed by and construed
in accordance with the laws of the United States and the State of Washington.
Each party consents to the jurisdiction and venue of the state or federal courts
in Seattle, Washington, if applicable, in any action, suit, or proceeding
arising out of or relating to this Agreement.

            14.6 Attorneys' Fees. The prevailing party in any action to enforce
its rights under this Agreement shall be entitled to recover from the other
party its reasonable attorneys' fees and costs, including any costs incurred on
appeal.

            14.7 Notices. Any notice required or permitted by this Agreement
shall be in writing and shall be delivered as follows with notice deemed given
as indicated: (a) by personal delivery when delivered personally; (b) by
overnight courier upon written verification of receipt; (c) by telecopy or
facsimile transmission upon acknowledgment of receipt of electronic
transmission; or (d) five (5) days following deposit in the U.S. Mail, certified
or registered mail, postage prepaid and return receipt requested. Notice shall
be sent to the addresses set forth below, or such other address as either party
may specify in writing.

      IF TO THE COMPANY, TO:          SCOLR Pharma, Inc.
                                      3625 132nd Avenue NE
                                      Bellevue, WA 98006

      IF TO EMPLOYEE, TO:             Daniel O. Wilds
                                      9233 Olympic View Drive
                                      Edmonds, WA 98020

                                       7
<PAGE>

            14.8 Survival. Sections 7 ("No Conflict of Interest"), 8
("Confidentiality and Proprietary Information"), 9 ("Post-Termination
Non-Competition"), 10 ("Nonsolicitation"), 11 ("Nondisparagement"), 14 ("General
Provisions") and 15 ("Entire Agreement") of this Agreement shall survive
Employee's employment by Company.

      15. Entire Agreement. This Agreement, including the Employee's Proprietary
Information and Invention Agreement incorporated herein by reference and the
Plan and related option documents described in Subsection 2.3, constitutes the
entire agreement between the parties relating to this subject matter and
supersedes all prior or simultaneous representations, discussions, negotiations,
and agreements, whether written or oral. This Agreement may be amended or
modified only with the written consent of Employee and the Board. No oral
waiver, amendment or modification will be effective under any circumstances
whatsoever.

THE PARTIES TO THIS AGREEMENT HAVE READ THIS AGREEMENT, AND FULLY UNDERSTAND
EACH AND EVERY PROVISION. WHEREFORE, THE PARTIES HAVE EXECUTED AND MADE THIS
AGREEMENT EFFECTIVE AS OF THE DATE SET FORTH ABOVE.

"The Company"             SCOLR Pharma, Inc.

                          By   /s/ Randall L-W. Caudill
                               ----------------------------------------------
                               Randall L-W. Caudill, Director and Chairman
                               of the Compensation Committee

                               /s/ Herbert L. Lucas
                               ----------------------------------------------
                               Herbert L. Lucas, Director and Member of the
                               Compensation Committee

                               /s/ Michael N. Taglich
                               ----------------------------------------------
                               Michael N. Taglich, Director and Member of
                               the Compensation Committee

"Employee"                /s/ Daniel O. Wilds
                          -----------------------------------------------------
                          Daniel O. Wilds

                                       8

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00074-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00074-of-00352.parquet"}]]