Document:

Exhibit 10.30

EXECUTION COPY

 

  

	
  

  CREDIT AND SECURITY AGREEMENT

  

  BY AND BETWEEN

  

  MICRO MOTORS, INC.

  

  AND

  

  WELLS FARGO BUSINESS CREDIT, INC.

   

  
	
  May 28,
  2002

 

  

  

Table of Contents

 

  	
      Page

	 	 
	ARTICLE I   DEFINITIONS  
      	1
	 	 	 
	Section 1.1   	 Definitions   	1
	Section 1.2   	 Other Definitional Terms; Rules of
      Interpretation   	11
	 	 
	ARTICLE II   AMOUNT AND
      TERMS OF THE CREDIT FACILITY   	12
	 	 	 
	Section 2.1  
      	 Revolving Advances   	12
	Section 2.2  
      	 Procedures for Requesting Advances  
      	12
	Section 2.3  
      	 Letters of Credit   	13
	Section 2.4  
      	 Special Account   	13
	Section 2.5  
      	 Payment of Amounts Drawn Under Letters
      of Credit; Obligation of

 Reimbursement   	13
	Section 2.6  
      	Obligations Absolute   	14
	Section 2.7  
      	Interest; Minimum Interest Charge; Default
      Interest; Participations; 

      Clearance Days; Usury   	15
	Section 2.8  
      	Fees   	16
	Section 2.9  
      	Time for Interest Payments; Payment on
      Non-Banking Days; Computation of 

      Interest and Fees   	17
	Section 2.10  
      	Lockbox; Collateral Account; Application of
      Payments   	18
	Section 2.11  
      	Voluntary Prepayment; Termination of the
      Credit Facility by the Borrower   	18
	Section 2.12  
      	Mandatory Prepayment   	19
	Section 2.13  
      	Revolving Advances to Pay Obligations  
      	19
	Section 2.14  
      	Use of Proceeds   	19
	Section 2.15  
      	Liability Records   	19
	 	 
	ARTICLE III   SECURITY INTEREST; OCCUPANCY; SETOFF  
      	19
	 	 	 
	Section 3.1   	Grant of Security Interest   	19
	Section 3.2   	Notification of Account Debtors and Other Obligors  
      	19
	Section 3.3   	Assignment of Insurance   	20
	Section 3.4   	Occupancy   	20
	Section 3.5   	License   	21
	Section 3.6   	Financing Statement   	21
	Section 3.7   	Setoff   	21
	Section 3.8   	Power of Attorney   	21
	 	 
	ARTICLE IV  CONDITIONS OF LENDING  
      	22
	 	 	 
	Section 4.1   	Conditions Precedent to the Initial Advances and Letter of
Credit   	22
	Section 4.2   	Conditions Precedent to All Advances and Letters of
Credit   	25
	 	 
	ARTICLE V  REPRESENTATIONS AND WARRANTIES  
      	25
			
	Section 5.1  
      	Existence and Power; Name; Chief Executive Office;
Inventory and 

      Equipment Locations; Federal Employer Identification Number  
      	25

 

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	Section 5.2   	Capitalization   	25
	Section 5.3   	Authorization of Borrowing; No Conflict as to Law or
Agreements   	26
	Section 5.4   	Legal Agreements   	26
	Section 5.5   	Subsidiaries   	26
	Section 5.6   	Financial Condition; No Adverse Change   	26
	Section 5.7   	Litigation   	26
	Section 5.8   	Regulation U   	27
	Section 5.9   	Taxes   	27
	Section 5.10   	Titles and Liens   	27
	Section 5.11   	Intellectual Property Rights   	27
	Section 5.12   	Plans   	28
	Section 5.13   	Default   	29
	Section 5.14   	Environmental Matters   	29
	Section 5.15   	Submissions to Lender   	30
	Section 5.16   	Financing Statements   	30
	Section 5.17   	Rights to Payment   	30
	Section 5.18   	Eligible Accounts   	30
	Section 5.19   	Eligible Inventory   	31
	Section 5.20   	Equipment   	31
	Section 5.21   	Fraudulent
Transfer   	31
	 	 
	ARTICLE VI  COVENANTS   	32
	 	 	 
	Section 6.1   	Reporting Requirements   	32
	Section 6.2   	Financial
Covenants   	36
	Section 6.3   	Permitted
Liens; Financing Statements   	36
	Section 6.4   	Indebtedness   	37
	Section 6.5   	Guaranties   	37
	Section 6.6   	Investments and Subsidiaries   	37
	Section 6.7   	Dividends and Distributions   	38
	Section 6.8   	Salaries   	38
	Section 6.9   	Books and
Records; Inspection and Examination   	38
	Section 6.10   	Account Verification   	39
	Section 6.11   	Compliance with Laws   	39
	Section 6.12   	Payment of Taxes and Other Claims   	39
	Section 6.13   	Maintenance of Properties   	39
	Section 6.14   	Insurance   	40
	Section 6.15   	Preservation of Existence   	40
	Section 6.16   	Delivery of Instruments, etc   	40
	Section 6.17   	Sale or Transfer of Assets; Suspension of Business
Operations   	40
	Section 6.18   	Consolidation and Merger; Asset Acquisitions  
    	41
	Section 6.19   	Sale and Leaseback   	41
	Section 6.20   	Restrictions on Nature of Business   	41
	Section 6.21   	Accounting   	41
	Section 6.22   	Discounts,
etc   	41
	Section 6.23   	Plans   	41
	Section 6.24   	Place of Business; Name   	41

 

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	Section 6.25   	Constituent
Documents; S Corporation Status   	42
	Section 6.26   	Transactions
With Affiliates   	42
	Section 6.27   	Performance by the Lender   	42
	 	 	 
	ARTICLE VII  EVENTS OF DEFAULT, RIGHTS AND REMEDIES  
    	43
	 	 	 
	Section 7.1   	Events of Default   	43
	Section 7.2   	Rights and Remedies   	45
	Section 7.3   	Disclaimer of Warranties   	48
	Section 7.4   	Compliance With Laws   	48
	Section 7.5   	No Marshalling   	48
	Section 7.6   	Borrower to Cooperate   	48
	Section 7.7   	Application of Proceeds   	48
	Section 7.8   	Remedies Cumulative   	48
	Section 7.9   	Lender Not Liable For The Collateral   	49
	 	 	 
	ARTICLE VIII  MISCELLANEOUS  
    	49
	 	 	 
	Section 8.1   	No Waiver   	49
	Section 8.2   	Amendments, Etc   	49
	Section 8.3   	Addresses for Notices; Requests for Accounting  
    	49
	Section 8.4   	Further Documents   	50
	Section 8.5   	Costs and Expenses   	50
	Section 8.6   	Indemnity   	50
	Section 8.7   	Participants   	51
	Section 8.8   	Advertising and Promotion   	51
	Section 8.9   	Execution in Counterparts; Telefacsimile Execution  
    	51
	Section 8.10   	Retention of Borrower's Records   	52
	Section 8.11   	Binding Effect; Assignment; Complete Agreement; Exchanging
Information   	52
	Section 8.12   	Severability of Provisions   	52
	Section 8.13   	Revival and Reinstatement of Obligations   	52
	Section 8.14   	Headings   	53
	Section 8.15   	Governing Law; Jurisdiction, Venue; Waiver of Jury
Trial   	53
	 	 	 
	ARTICLE IX  JOINT AND SEVERAL LIABILITY  
    	53
	 	 	 
	Section 9.1   	Joint and Several Liability   	53
	Section 9.2   	Primary Obligation; Waiver of Marshalling   	53
	Section 9.3   	Continuing Liability   	54
	Section 9.4   	Additional Waivers   	54
	Section 9.5   	Settlement or Releases   	56
	Section 9.6   	No Election   	56
	Section 9.7   	Indefeasible Payment   	57
	Section 9.8   	Financial Condition of the Affiliate Borrower  
    	57

 

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CREDIT AND SECURITY AGREEMENT

Dated as of May 28, 2002

                MICRO MOTORS, INC., a Colorado corporation (the "Borrower"), and WELLS FARGO
BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), hereby agree as
follows:

ARTICLE I

DEFINITIONS

Section
1.1             
Definitions.         For all purposes of this Agreement, except as otherwise expressly
provided, the following terms shall have the meanings assigned to them in this
Section or in the Section referenced after such term:

                "Account Debtor" means any Person who is or who may become obligated under,
with respect to, or on account of, an Account, chattel paper, or a General
Intangible.

                "Accounts" means all of Borrower's now owned or hereafter acquired right,
title, and interest with respect to "accounts" (as that term is defined in the
UCC), and any and all supporting obligations in respect thereof.

                "Advance" means a Revolving Advance.

                "Affiliate" means, as applied to any Person, any other Person who, directly
or indirectly, controls, is controlled by, or is under common control with,
such Person.  For purposes of this definition, "control" means the
possession, directly or indirectly, of the power to direct the management and
policies of a Person, whether through the ownership of stock, by contract, or
otherwise; provided, however, that, in any event: (a) any Person
which owns directly or indirectly 10% or more of the securities having ordinary
voting power for the election of directors or other members of the governing
body of a Person or 10% or more of the partnership or other ownership interests
of a Person (other than as a limited partner of such Person) shall be deemed to
control such Person, (b) each director (or comparable manager) of a Person
shall be deemed to be an Affiliate of such Person, and (c) each partnership or
joint venture in which a Person is a partner or joint venturer shall be deemed
to be an Affiliate of such Person.

                "Agreement" means this Credit and Security Agreement.

                "Affiliate Borrower" means Oregon Micro Systems, Inc., an Oregon
corporation.

                "Affiliate Credit Agreement" means that certain Credit and Security
Agreement, dated as of even date herewith, between the Affiliate Borrower and
the Lender, as the same may be amended or restated from time to time.

 

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                "Affiliate Loan Documents" means the "Loan Documents" as such term is
defined in the Affiliate Credit Agreement.

                "Affiliate Obligations" means the "Obligations" as such term is defined in
the Affiliate Credit Agreement.

                "Applicable Margin" means the margin set forth in the table below opposite
the applicable average outstanding Advances, calculated as of the date of
determination:

	
  Average Outstanding Advances

  	
  Applicable Margin

  
	
  $2,100,000 for 60 consecutive days

  	
  1.50 percentage points (150 basis points)

  
	
  $2,400,000 for 60 consecutive days

  	
  1.25 percentage points (125 basis points)

  
	
  $3,000,000 for 60 consecutive days

  	
  1.00 percentage points (100 basis points)

  

                "Availability" means the difference of (i) the Borrowing Base and (ii) the
sum of (A) the outstanding principal balance of the Revolving Note, (B) the L/C
Amount, and (C) the Affiliate Obligations.

                "Banking Day" means a day on which the Federal Reserve Bank of New York is
open for Business.

                "Bankruptcy Code" means the United States Bankruptcy Code, as in effect from
time to time.

                "Base Rate" means the rate of interest publicly announced from time to time
by Wells Fargo Bank National Association at its principal office in San
Francisco as its "prime rate", with the understanding that the
"prime rate" is one of Wells Fargo's base rates (not necessarily the
lowest of such rates) and serves as the basis upon which effective rates of
interest are calculated for loans making reference thereto.

                "Book Net Worth" means the aggregate of the common and preferred
stockholders' equity in the Borrower, determined in accordance with GAAP.

                "Borrowing Base" means at any time the lesser of:

                                (a)               
the Maximum Line; or

                                (b)              
80% of Eligible Accounts less the amount, if any, of the Dilution
Reserve.

Provided, however, the Lender may reduce the advance rates or
create additional reserves against the Eligible Accounts, in its sole and
absolute discretion, without declaring an Event of Default if it reasonably
determines that there has occurred a Material Adverse Effect.

                "Capital Expenditures" means for a period, any expenditure of money during
such period for the purchase or construction of assets, or for improvements or
additions thereto, which are capitalized on the Borrower's balance sheet.

                

2

                "Change of Control" means the occurrence of any of the following events:

                                (a)               
any Person or "group" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934) is or becomes the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934,
except that a Person will be deemed to have "beneficial ownership" of all
securities that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 25% of the voting power of all classes of voting stock
of the Borrower.

                                (b)              
During any consecutive two-year period, individuals who at the beginning of
such period constituted the board of Directors of the Borrower (together with
any new Directors whose election to such board of Directors, or whose
nomination for election by the owners of the Borrower, was approved by a vote
of 66-2/3% of the Directors then still in office who were either Directors at
the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
board of Directors of the Borrower then in office.

                                (c)               
Frank A. Zagar shall cease to actively manage the Borrower's day-to-day
business activities.

                "Collateral" means all of the Borrower's Accounts, chattel paper, deposit
accounts, documents, Equipment, General Intangibles, goods, instruments,
Inventory, Investment Property, letter-of-credit rights, letters of credit, all
sums on deposit in any Collateral Account, and any items in any Lockbox;
together with (i) all substitutions and replacements for and products of any of
the foregoing; (ii) in the case of all goods, all accessions; (iii) all
accessories, attachments, parts, equipment and repairs now or hereafter
attached or affixed to or used in connection with any goods; (iv) all warehouse
receipts, bills of lading and other documents of title now or hereafter
covering such goods; (v) all collateral subject to the Lien of any Security
Document; (vi) any money, or other assets of the Borrower that now or hereafter
come into the possession, custody, or control of the Lender; (vii) all sums on
deposit in the Special Account; and (viii) proceeds of any and all of the
foregoing.

                "Collateral Account" means the "Lender Account" as defined in the Lockbox
and Collection Account Agreement.

                "Commitment" means the Lender's commitment to make Advances to, and to cause
the Issuer to issue Letters of Credit for the account of, the Borrower pursuant
to Article II.

                "Constituent Documents" means with respect to any Person, as applicable, such
Person's certificate of incorporation, articles of incorporation, by-laws,
certificate of formation, articles of organization, limited liability company
agreement, management agreement, operating agreement, shareholder agreement,
partnership agreement or similar document or agreement governing such Person's
existence, organization or management or concerning disposition of ownership
interests of such Person or voting rights among such Person's owners.

                "Copyright Security Agreement" means the Copyright Security Agreement by the
Borrower in favor of the Lender of even date herewith.

 

3

 

                "Daily Balance" means, with respect to each day during the term of this
Agreement, the amount of an Obligation owed at the end of such day.

                "Default" means an event that, with giving of notice or passage of time or
both, would constitute an Event of Default.

                "Default Period" means any period of time beginning on the day a Default or
Event of Default occurs and ending on the date the Lender notifies the Borrower
in writing that such Default or Event of Default has been cured or waived.

                "Default Rate" means an annual interest rate equal to three percent (3%)
over the Floating Rate, which interest rate shall change when and as the
Floating Rate changes.

                "Dilution" means, as of any date of determination, a percentage, based upon
the experience of the calendar year-to-date period ending on the date of
determination, that is the result of dividing the Dollar amount of (a) bad
debt write‐downs, discounts, advertising allowances, credits, or other
dilutive items with respect to the Accounts during such period, by
(b) Borrower's sales during such period (excluding extraordinary items)
plus the Dollar amount of clause (a).

                "Dilution Reserve" means, as of any date of determination, an amount sufficient
to reduce the advance rate against Eligible Accounts by one percentage point
for each percentage point by which Dilution is in excess of 5%.

                "Director" means a director if the Borrower is a corporation, a manager if
the Borrower is a limited liability company, or a general partner if the
Borrower is a partnership.

                "Dollars" or "$" means lawful currency of the United States of America.

                "ERISA" means the Employee Retirement Income Security Act of 1974.

                "ERISA Affiliate" means any trade or business (whether or not incorporated)
that is a member of a group which includes the Borrower and which is treated as
a single employer under Section 414 of the IRC.

                "Earnings Before Taxes" means from operations but including extraordinary
losses.

                "Eligible Accounts" means those Accounts created by the Borrower in the
ordinary course of its business, that arise out of the Borrower's sale of goods
or rendition of services, that comply with each of the representations and
warranties respecting Eligible Accounts made by the Borrower in the Loan
Documents, and that are not excluded as ineligible by virtue of one or more of
the criteria set forth below; provided, however, that such criteria may be
fixed and revised from time to time by the Lender in the Lender's sole and
absolute discretion to address the results of any audit performed by the Lender
from time to time after the Closing Date.  In determining the amount to be
included, Eligible Accounts shall be calculated net of customer deposits and
unapplied cash remitted to the Borrower.  Eligible Accounts shall not
include the following:

 

4

 

                                (i)                 
That portion of Accounts unpaid 90 days or more after the invoice date;

                                (ii)               
That portion of Accounts that is disputed or subject to a claim of offset or a
contra account;

                                (iii)              
That portion of Accounts not yet earned by the final delivery of goods or
rendition of services, as applicable, by the Borrower to the customer,
including progress billings;

                                (iv)             
Accounts constituting proceeds of copyrightable material unless such
copyrightable material shall have been registered with the United States
Copyright Office and shall be covered by a duly executed copyright security
agreement, in form and substance satisfactory to the Lender, and filed in the
United States Copyright Office;

                                (v)               
Accounts owed by an Account Debtor that is not Solvent, the subject of an
Insolvency Proceeding or has gone out of business;

                                (vi)             
Accounts owed by an Owner, Subsidiary, Affiliate, Officer or employee of the
Borrower;

                                (vii)            
Accounts not subject to a duly perfected security interest in the Lender's
favor or which are subject to any Lien other than a Permitted Lien;

                                (viii)           That
portion of Accounts that has been restructured, extended, amended or modified;

                                (ix)             
That portion of Accounts that constitutes advertising, finance charges, service
charges or sales or excise taxes;

                                (x)               
Accounts owed by an Account Debtor (or an Affiliate of such Account Debtor),
regardless of whether otherwise eligible, to the extent that the balance of
such Accounts exceed 15% of the aggregate amount of all Accounts (or 25% if the
Account Debtor is Natural White, Inc.);

                                (xi)             
Accounts owed by an Account Debtor (or an Affiliate of such Account Debtor),
regardless of whether otherwise eligible, if 25% or more of the total amount
due under Accounts from such Account Debtor is ineligible under clauses (i),
(ii)or (x) above; 

                                (xii)            
Accounts arising in a transaction wherein goods are placed on consignment or
are sold pursuant to a guaranteed sale, a sale or return, a sale on approval, a
bill and hold, or any other terms by reason of which the payment by the Account
Debtor may be conditional;

                                (xiii)           Accounts
that are not payable in Dollars;

                                (xiv)           Accounts
with respect to which the Account Debtor either (i) does not maintain its chief
executive office in the United States, or (ii) is not organized under the laws
of the United States or any state thereof, or (iii) is the government of any
foreign country or sovereign state, or of any state, province, municipality, or
other political subdivision thereof, or of any department, agency, public
corporation, or other instrumentality thereof, unless (y) the Account is
supported by an irrevocable letter of credit satisfactory to the Lender (as to
form, substance, and issuer or domestic confirming bank) that has been
delivered to Lender and is directly drawable by the Lender, or (z) the Account
is covered by credit insurance in form, substance, and amount, and by an
insurer, satisfactory to the Lender;

 

5

 

                                (xv)           
Accounts with respect to which the Account Debtor is either (i) the United
States or any department, agency, or instrumentality of the United States
(exclusive, however, of Accounts with respect to which the Borrower has
complied, to the reasonable satisfaction of the Lender, with the Assignment of
Claims Act, 31 USC § 3727), or (ii) any state of the United States (exclusive,
however, of (y) Accounts owed by any state that does not have a statutory
counterpart to the Assignment of Claims Act, or (z) Accounts owed by any state
that does have a statutory counterpart to the Assignment of Claims Act as to
which the Borrower has complied to the Lender's satisfaction);

                                (xvi)           Accounts
with respect to which the Account Debtor is located in the states of New
Jersey, Minnesota, or West Virginia (or any other state that requires a
creditor to file a business activity report or similar document in order to
bring suit or otherwise enforce its remedies against such Account Debtor in the
courts or through any judicial process of such state), unless Borrower has
qualified to do business in New Jersey, Minnesota, West Virginia, or such other
states, or has filed a business activities report with the applicable division
of taxation, the department of revenue, or with such other state offices, as
appropriate, for the then-current year, or is exempt from such filing requirement;
and

                                (xvii)         Accounts, or portions
thereof, of poor quality credit or otherwise deemed ineligible by the Lender in
its sole discretion.

                "Environmental Law" means any federal, state, local or other governmental
statute, regulation, law or ordinance dealing with the protection of human
health and the environment.

                "Equipment" means all of the Borrower's equipment, as such term is defined
in the UCC, whether now owned or hereafter acquired, including but not limited
to all present and future machinery, vehicles, furniture, fixtures,
manufacturing equipment, shop equipment, office and recordkeeping equipment,
parts, tools, supplies, and including specifically the goods described in any
equipment schedule or list herewith or hereafter furnished to the Lender by the
Borrower.

                "Event of Default" has the meaning specified in Section 7.1.

                "Financial Covenants" means the covenants set forth in Section 6.2.

                "Floating Rate" means an annual interest rate equal to the sum of the Base
Rate plus (i) so long as there has not existed a Default Period for
the prior six (6) month period, the Applicable Margin, and (ii) in all
other cases, 1.75 percentage points (175 basis points), which interest rate
shall, in each case, change when and as the Base Rate changes.

                "Funding Date" has the meaning given in Section 2.1.

 

6

 

                "GAAP" means generally accepted accounting principles, applied on a basis
consistent with the accounting practices applied in the financial statements
described in Section 5.6.

                "General Intangibles" means all of the Borrower's general intangibles, as
such term is defined in the UCC, whether now owned or hereafter acquired,
including all present and future Intellectual Property Rights, customer or
supplier lists and contracts, manuals, operating instructions, permits,
franchises, the right to use the Borrower's name, and the goodwill of the
Borrower's business.

                "Governmental Authority" means any federal, state, local, or other
governmental or administrative body, instrumentality, department, or agency or
any court, tribunal, administrative hearing body, arbitration panel,
commission, or other similar dispute-resolving panel or body.

                "Guarantor(s)" means Pro‐Dex, Inc., a Colorado corporation, and any
other Person now or hereafter guarantying the Obligations.

                "Guaranty" means that certain Continuing Guaranty, dated as of even date
herewith, by the Guarantor in favor of the Lender.

                "Guaranty Security Agreement" means that certain Security Agreement, dated
as of even date herewith, between the Guarantor and the Lender.

                "Hazardous Substances" means pollutants, contaminants, hazardous substances,
hazardous wastes, petroleum and fractions thereof, and all other chemicals,
wastes, substances and materials listed in, regulated by or identified in any
Environmental Law.

                "Indebtedness" means of a Person as of a given date, all items of
indebtedness or liability which in accordance with GAAP would be included in
determining total liabilities as shown on the liabilities side of a balance
sheet for such Person and shall also include the aggregate payments required to
be made by such Person at any time under any lease that is considered a
capitalized lease under GAAP.

                "IRC" means the Internal Revenue Code of 1986.

                "Infringe" means when used with respect to Intellectual Property Rights
means any infringement or other violation of Intellectual Property Rights.

                "Insolvency Proceeding" means any proceeding commenced by or against any
Person under any provision of the Bankruptcy Code or under any other state or
federal bankruptcy or insolvency law, assignments for the benefit of creditors,
formal or informal moratoria, compositions, extensions generally with
creditors, or proceedings seeking reorganization, arrangement, or other similar
relief.

                "Intangible Assets" means all intangible assets as determined in accordance
with GAAP and including Intellectual Property Rights, goodwill, accounts due
from Affiliates, Directors, Officers or employees, prepaid expenses, deposits,
deferred charges or treasury stock or any securities or Indebtedness of the
Borrower or any other securities unless the same are readily marketable in the
United States of America, or entitled to be used as a credit against federal
income tax liabilities, non-compete agreements and any other assets designated
from time to time by the Lender, in its sole discretion.

 

7

 

                "Intellectual Property Rights" means all actual or prospective rights
arising in connection with any intellectual property or other proprietary
rights, including all rights arising in connection with copyrights, patents,
service marks, trade dress, trade secrets, trademarks, trade names or mask
works.

                "Inventory" means all of the Borrower's inventory, as such term is defined
in the UCC, whether now owned or hereafter acquired, whether consisting of
whole goods, spare parts or components, supplies or materials, whether
acquired, held or furnished for sale, for lease or under service contracts or
for manufacture or processing, and wherever located.

                "Investment Property" means all of the Borrower's investment property, as
such term is defined in the UCC, whether now owned or hereafter acquired,
including but not limited to all securities, security entitlements, securities
accounts, commodity contracts, commodity accounts, stocks, bonds, mutual fund
shares, money market shares and U.S. Government securities.

                "Issuer" means the issuer of any Letter of Credit.

                "L/C Amount" means the sum of (i) the aggregate face amount of any issued
and outstanding Letters of Credit and (ii) the unpaid amount of the Obligation
of Reimbursement.

                "L/C Application" means an application and agreement for letters of credit
in a form acceptable to the Issuer and the Lender.

                "Letter of Credit" has the meaning specified in Section 2.3.

                "Licensed Intellectual Property" has the meaning given in
Section 5.11(c).

                "Lien" means any security interest, mortgage, deed of trust, pledge, lien,
charge, encumbrance, title retention agreement or analogous instrument or
device, including the interest of each lessor under any capitalized lease and
the interest of any bondsman under any payment or performance bond, in, of or
on any assets or properties of a Person, whether now owned or hereafter
acquired and whether arising by agreement or operation of law.

                "Loan Documents" means this Agreement, the Note, the Guaranty, the Guaranty
Security Agreement, the Security Documents, the Subordination Agreements and
any L/C Application.

                "Lockbox" means as defined in the Lockbox and Collection Account Agreement.

                "Lockbox and Collection Account Agreement" means the Lockbox and Collection
Account Agreement by and among the Borrower, Wells Fargo Bank, N.A., Regulus
West, LLC and the Lender, of even date herewith.

 

8

                "Material Adverse Effect" means any of the following:

                                (i)                 
a material adverse effect on the business, operations, results of operations,
prospects, assets, liabilities or financial condition of the Borrower or the
Guarantor;

                                (ii)               
a material adverse effect on the ability of the Borrower or the Guarantor to
perform its obligations under the Loan Documents;

                                (iii)              
a material adverse effect on the ability of the Lender to enforce the
Obligations or to realize the intended benefits of the Security Documents,
including a material adverse effect on the validity or enforceability of any
Loan Document or of any rights against the Guarantor, or on the status,
existence, perfection, priority (subject to Permitted Liens) or enforceability
of any Lien securing payment or performance of the Obligations (other than any
such material adverse effect caused solely by any act or omission by the
Lender); or

                                (iv)             
any claim against the Borrower or the Guarantor or threat of litigation which
if determined adversely to the Borrower or the Guarantor would cause the Borrower
or the Guarantor to be liable to pay an amount exceeding $200,000 or would be
an event described in clauses (i), (ii) and (iii) above.

                "Maturity Date" means May 28, 2004.

                "Maximum Line" means $3,000,000.

                "Minimum Interest Charge" has the meaning given in Section 2.7(b).

                "Multiemployer Plan" means a multiemployer plan (as defined in
Section 4001(a)(3) of ERISA) to which the Borrower or any ERISA Affiliate
contributes or is obligated to contribute.

                "Net Income" and "Net Loss" mean fiscal year-to-date after-tax net income,
or loss, as applicable, from continuing operations as determined in accordance
with GAAP.

                "Note" means the Revolving Note.

                "Obligation of Reimbursement" has the meaning given in Section 2.5(a).

                "Obligations" means (i) the Note, the Obligation of Reimbursement and
each and every other debt, liability and obligation of every type and
description which the Borrower may now or at any time hereafter owe to the
Lender, whether such debt, liability or obligation now exists or is hereafter
created or incurred, whether it arises in a transaction involving the Lender
alone or in a transaction involving other creditors of the Borrower, and
whether it is direct or indirect, due or to become due, absolute or contingent,
primary or secondary, liquidated or unliquidated, or sole, joint, several or
joint and several, and including all indebtedness of the Borrower arising under
any Credit Document or guaranty between the Borrower and the Lender, whether
now in effect or hereafter entered into, and (ii) the "Obligations" as
such term is defined in the Affiliate Credit Agreement.

 

9

 

                "Officer" means with respect to the Borrower, an officer if the Borrower is
a corporation, a manager if the Borrower is a limited liability company, or a
partner if the Borrower is a partnership.

                "Owned Intellectual Property" has the meaning given in Section 5.11(a).

                "Owner" means with respect to the Borrower, each Person having legal or
beneficial title to an ownership interest in the Borrower or a right to acquire
such an interest.

                "Patent and Trademark Security Agreement" means the Patent and Trademark
Security Agreement by the Borrower in favor of the Lender of even date
herewith.

                "Pension Plan" means a pension plan (as defined in Section 3(2) of ERISA)
maintained for employees of the Borrower or any ERISA Affiliate and covered by
Title IV of ERISA.

                "Permitted Lien" has the meaning given in Section 6.3(a).

                "Person" means any individual, corporation, partnership, joint venture,
limited liability company, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.

                "Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA)
maintained for employees of the Borrower or any ERISA Affiliate.

                "Premises" means all premises where the Borrower conducts its business and
has any rights of possession, including the premises legally described in
Exhibit D attached hereto.

                "Reportable Event" means a reportable event (as defined in Section 4043 of
ERISA), other than an event for which the 30-day notice requirement under ERISA
has been waived in regulations issued by the Pension Benefit Guaranty
Corporation.

                "Revolving Advance" has the meaning given in Section 2.1.

                "Revolving Note" means the Borrower's revolving promissory note, payable to
the order of the Lender in substantially the form of Exhibit A hereto.

                "Security Documents" means this Agreement, the Lockbox and Collection
Account Agreement, the Patent and Trademark Security Agreement, and the Copyright
Security Agreement, and any other document delivered to the Lender from time to
time to secure the Obligations.

                "Security Interest" has the meaning given in Section 3.1.

                "Solvent" means, with respect to any Person on a particular date, that such
Person is not insolvent (as such term is defined in the Uniform Fraudulent
Transfer Act).

 

10

 

                "Special Account" means a specified cash collateral account maintained by a
financial institution acceptable to the Lender in connection with Letters of
Credit, as contemplated by Section 2.4.

                "Subordinated Indebtedness" has the meaning given to such term in the
Subordination Agreement.

                "Subordination Agreements" means (i) the Subordination Agreement of even
date herewith, executed by the Guarantor in the Lender's favor and acknowledged
by the Borrower, (ii) the Subordination Agreement of even date herewith,
executed by Ronald G. Coss in the Lender's favor and acknowledged by the
Borrower, and (iii) and any other subordination agreement accepted by the
Lender from time to time.

                "Subsidiary" means any corporation of which more than 50% of the outstanding
shares of capital stock having general voting power under ordinary
circumstances to elect a majority of the board of Directors of such
corporation, irrespective of whether or not at the time stock of any other
class or classes shall have or might have voting power by reason of the
happening of any contingency, is at the time directly or indirectly owned by
the Borrower, by the Borrower and one or more other Subsidiaries, or by one or
more other Subsidiaries.

                "Tangible Net Worth" means the result of (i) Book Net Worth, plus (ii)
amounts due from the Borrower to its Affiliates, minus (iii) Intangible
Assets, and minus (iv) amounts due to the Borrower from its Affiliates.

                "Termination Date" means the earliest of (i) the Maturity Date, (ii) the
date the Borrower terminates the Credit Facility, or (iii) the date the Lender
demands payment of the Obligations after an Event of Default pursuant to
Section 7.2.

                "UCC" means the Uniform Commercial Code as in effect in the state designated
in Section 8.15 as the state whose laws shall govern this Agreement, or in
any other state whose laws are held to govern this Agreement or any portion
hereof.

                "Wells Fargo Bank Minnesota" means Wells Fargo Bank Minnesota, National
Association.

                Section
1.2             
Other Definitional Terms; Rules of Interpretation.  The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement.  All accounting terms
not otherwise defined herein have the meanings assigned to them in accordance
with GAAP. All terms defined in the UCC and not otherwise defined herein have
the meanings assigned to them in the UCC. References to Articles, Sections,
subsections, Exhibits, Schedules and the like, are to Articles, Sections and
subsections of, or Exhibits or Schedules attached to, this Agreement unless
otherwise expressly provided.  The words "include", "includes" and
"including" shall be deemed to be followed by the phrase "without
limitation".  Unless the context in which used herein otherwise clearly
requires, "or" has the inclusive meaning represented by the phrase
"and/or".  Defined terms include in the singular number the plural and in
the plural number the singular.  Reference to any agreement (including the
Loan Documents), document or instrument means such agreement, document or
instrument as amended or modified and in effect from time to time in accordance
with the terms thereof (and, if applicable, in accordance with the terms hereof
and the other Loan Documents), except where otherwise explicitly provided, and
reference to any promissory note includes any promissory note which is an
extension or renewal thereof or a substitute or replacement therefor. Reference
to any law, rule, regulation, order, decree, requirement, policy, guideline,
directive or interpretation means as amended, modified, codified, replaced or
reenacted, in whole or in part, and in effect on the determination date,
including rules and regulations promulgated thereunder.

 

11

 

ARTICLE II

AMOUNT AND TERMS OF THE CREDIT FACILITY

                Section
2.1             
Revolving Advances.  The Lender agrees, on the terms and subject to the conditions herein
set forth, to make advances to the Borrower from time to time from the date all
of the conditions set forth in Section 4.1 are satisfied (the "Funding
Date") to the Termination Date (the "Revolving Advances").  The Lender
shall have no obligation to make a Revolving Advance to the extent the amount
of the requested Revolving Advance exceeds Availability.  The Borrower's
obligation to pay the Revolving Advances shall be evidenced by the Revolving
Note and shall be secured by the Collateral.  Within the limits set forth
in this Section 2.1, the Borrower may borrow, prepay pursuant to
Section 2.11 and reborrow.

                Section
2.2             
Procedures for Requesting Advances.  The Borrower shall comply with the following procedures in
requesting Revolving Advances:

                                (a)               
Time for Requests.  The Borrower shall request each Advance
not later than 10:00 a.m., Pacific time on the Banking Day which is the
date the Advance is to be made.  Each such request shall be effective upon
receipt by the Lender, shall be in writing or by telephone, telecopy
transmission or email, to be confirmed in writing by the Borrower if so
requested by the Lender (in the form of Exhibit E), shall be by (i) an Officer
of the Borrower; or (ii) a person designated as the Borrower's agent by an
Officer of the Borrower in a writing delivered to the Lender; or (iii) a person
whom the Lender reasonably believes to be an Officer of the Borrower or such a
designated agent.  The Borrower shall repay all Advances even if the Lender
does not receive such confirmation and even if the person requesting an Advance
was not in fact authorized to do so.  Any request for an Advance, whether
written or telephonic, shall be deemed to be a representation by the Borrower
that the conditions set forth in Section 4.2 have been satisfied as of the
time of the request.

                                (b)              
Disbursement.  Upon fulfillment of the applicable conditions
set forth in Article IV, the Lender shall disburse the proceeds of the
requested Advance by crediting the same to the Borrower's demand deposit
account maintained with Wells Fargo Bank, N.A., unless the Lender and the
Borrower shall agree in writing to another manner of disbursement.

 

12

 

Section
2.3             
Letters of Credit.1

                                (a)               
The Lender agrees, on the terms and subject to the conditions herein set forth,
to cause an Issuer to issue, from the Funding Date to the Termination Date, one
or more irrevocable standby or documentary letters of credit (each, a "Letter
of Credit") for the Borrower's account by guaranteeing payment of the
Borrower's obligations or being a co-applicant. The Lender shall have no
obligation to cause an Issuer to issue any Letter of Credit if the face amount
of the Letter of Credit to be issued would exceed the lesser of:

                                                (i)                 
$0 less the L/C Amount, or

                                                (ii)               
Availability.

Each Letter of Credit, if any, shall be issued pursuant to a separate L/C
Application entered into between the Borrower and the Lender for the benefit of
the Issuer, completed in a manner satisfactory to the Lender and the Issuer.
The terms and conditions set forth in each such L/C Application shall
supplement the terms and conditions hereof, but if the terms of any such L/C
Application and the terms of this Agreement are inconsistent, the terms hereof
shall control.

                                (b)              
No Letter of Credit shall be issued with an expiry date later than the
Termination Date in effect as of the date of issuance.

                                (c)               
Any request to cause an Issuer to issue a Letter of Credit shall be deemed to
be a representation by the Borrower that the conditions set forth in
Section 4.2 have been satisfied as of the date of the request.

                Section
2.4             
Special Account.  If the Credit Facility is terminated for any reason while any Letter
of Credit is outstanding, the Borrower shall thereupon pay the Lender in
immediately available funds for deposit in the Special Account an amount equal
to the L/C Amount. The Special Account shall be an interest bearing account
maintained for the Lender by any financial institution acceptable to the
Lender. Any interest earned on amounts deposited in the Special Account shall
be credited to the Special Account. The Lender may apply amounts on deposit in
the Special Account at any time or from time to time to the Obligations in the
Lender's sole discretion. The Borrower may not withdraw any amounts on deposit
in the Special Account as long as the Lender maintains a security interest
therein. The Lender agrees to transfer any balance in the Special Account to
the Borrower when the Lender is required to release its security interest in
the Special Account under applicable law.

                Section
2.5             
Payment of Amounts Drawn Under Letters of Credit; Obligation of
Reimbursement.  The Borrower acknowledges that the Lender, as co-applicant, will be
liable to the Issuer for reimbursement of any and all draws under Letters of
Credit and for all other amounts required to be paid under the applicable L/C
Application. Accordingly, the Borrower shall pay to the Lender any and all
amounts required to be paid under the applicable L/C Application, when and as
required to be paid thereby, and the amounts designated below, when and as
designated:

1            
As of the Closing Date, the Lender has not agreed to cause the Issuer to issue
any Letters of Credit.  The terms of Sections 2.3, 2.4, 2.5 and 2.6
(and the related definitions) shall not be effective until the Lender gives
written notice to the Borrower that such Sections shall be effective.

13

                                (a)               
The Borrower shall pay to the Lender on the day a draft is honored under any
Letter of Credit a sum equal to all amounts drawn under such Letter of Credit
plus any and all reasonable charges and expenses that the Issuer or the Lender
may pay or incur relative to such draw and the applicable L/C Application, plus
interest on all such amounts, charges and expenses as set forth below (the
Borrower's obligation to pay all such amounts is herein referred to as the
"Obligation of Reimbursement").

                                (b)              
Whenever a draft is submitted under a Letter of Credit, the Borrower authorizes
the Lender to make a Revolving Advance in the amount of the Obligation of
Reimbursement and to apply the proceeds of such Revolving Advance thereto. Such
Revolving Advance shall be repayable in accordance with and be treated in all
other respects as a Revolving Advance hereunder.

                                (c)               
If a draft is submitted under a Letter of Credit when the Borrower is unable,
because a Default Period exists or for any other reason, to obtain a Revolving
Advance to pay the Obligation of Reimbursement, the Borrower shall pay to the
Lender on demand and in immediately available funds, the amount of the
Obligation of Reimbursement together with interest, accrued from the date of
the draft until payment in full at the Default Rate. Notwithstanding the
Borrower's inability to obtain a Revolving Advance for any reason, the Lender
is irrevocably authorized, in its sole discretion, to make a Revolving Advance
in an amount sufficient to discharge the Obligation of Reimbursement and all
accrued but unpaid interest thereon.

                                (d)              
The Borrower's obligation to pay any Revolving Advance made under this
Section 2.5, shall be evidenced by the Revolving Note and shall bear
interest as provided in Section 2.7.

                Section
2.6             
Obligations Absolute.  The Borrower's obligations arising under Section 2.5 shall be
absolute, unconditional and irrevocable, and shall be paid strictly in
accordance with the terms of Section 2.5, under all circumstances
whatsoever, including (without limitation) the following circumstances:

                                (a)               
any lack of validity or enforceability of any Letter of Credit or any other
agreement or instrument relating to any Letter of Credit (collectively the
"Related Documents");

                                (b)              
any amendment or waiver of or any consent to departure from all or any of the
Related Documents;

                                (c)               
the existence of any claim, setoff, defense or other right which the Borrower
may have at any time, against any beneficiary or any transferee of any Letter
of Credit (or any persons or entities for whom any such beneficiary or any such
transferee may be acting), or other person or entity, whether in connection
with this Agreement, the transactions contemplated herein or in the Related
Documents or any unrelated transactions;

 

14

                                (d)              
any statement or any other document presented under any Letter of Credit
proving to be forged, fraudulent, invalid or insufficient in any respect or any
statement therein being untrue or inaccurate in any respect whatsoever;

                                (e)               
payment by or on behalf of the Issuer under any Letter of Credit against
presentation of a draft or certificate which does not strictly comply with the
terms of such Letter of Credit; or

                                (f)                
any other circumstance or happening whatsoever, whether or not similar to any
of the foregoing.

Section
2.7             
Interest; Minimum Interest Charge; Default Interest; Participations;
Clearance Days; Usury.

                                (a)               
Note.  Except as set forth in Subsections (c) and (f), the
outstanding principal balance of the Note shall bear interest at the Floating
Rate.

                                (b)              
Minimum Interest Charge.  Notwithstanding the interest
payable pursuant to subsection (a), the Borrower shall pay to the Lender
interest of not less than $12,500 per quarter (the "Minimum Interest Charge")
during the term of this Agreement, and the Borrower shall pay any deficiency
between the Minimum Interest Charge and the amount of interest otherwise
calculated under subsection (a) on the first day of each quarter and on the
Termination Date.

                                (c)               
Default Interest Rate.  Upon notice to the Borrower from the
Lender from time to time, the principal of the Advances outstanding from time
to time shall bear interest at the Default Rate, effective as of the first day
of the month during which any Default Period begins through the last day of
such Default Period. The Lender's election to charge the Default Rate shall be
in its sole discretion and shall not be a waiver of any of its other rights and
remedies. The Lender's election to charge interest at the Default Rate for less
than the entire period during which the Default Rate may be charged shall not
be a waiver of its right to later charge the Default Rate for the entire such
period.

                                (d)              
Clearance Days.  Notwithstanding Section 2.10(b)(ii),
interest at the interest rate applicable under this Section 2.7 shall accrue on
the amount of all payments (even if in the form of immediately available
federal funds) for two (2) Banking Days for clearance.

                                (e)               
Participations.  If any Person shall acquire a participation
in the Advances or the Obligation of Reimbursement, the Borrower shall be
obligated to the Lender to pay the full amount of all interest calculated under
this Section 2.7, along with all other fees, charges and other amounts due
under this Agreement, regardless if such Person elects to accept interest with
respect to its participation at a lower rate than that calculated under this
Section 2.7, or otherwise elects to accept less than its prorata share of such
fees, charges and other amounts due under this Agreement.

 

15

                                (f)                
Usury.  In any event no rate change shall be put into effect
which would result in a rate greater than the highest rate permitted by
law.  Notwithstanding anything to the contrary contained in any Loan
Document, all agreements which either now are or which shall become agreements
between the Borrower and the Lender are hereby limited so that in no
contingency or event whatsoever shall the total liability for payments in the
nature of interest, additional interest and other charges exceed the applicable
limits imposed by any applicable usury laws. If any payments in the nature of
interest, additional interest and other charges made under any Loan Document
are held to be in excess of the limits imposed by any applicable usury laws, it
is agreed that any such amount held to be in excess shall be considered payment
of principal hereunder, and the indebtedness evidenced hereby shall be reduced
by such amount so that the total liability for payments in the nature of
interest, additional interest and other charges shall not exceed the applicable
limits imposed by any applicable usury laws, in compliance with the desires of
the Borrower and the Lender. This provision shall never be superseded or waived
and shall control every other provision of the Loan Documents and all
agreements between the Borrower and the Lender, or their successors and
assigns.

                Section
2.8             
Fees.

                                (a)               
Origination Fee.  The Borrower and the Affiliate Borrower
shall jointly pay the Lender a fully earned and non-refundable origination fee
of $37,500, due and payable upon the execution of this Agreement.

                                (b)              
Audit Fees.  The Borrower shall pay the Lender, on demand,
audit fees in connection with any audits or inspections conducted by or on
behalf of the Lender of any Collateral or the Borrower's operations or business
at the rates established from time to time by the Lender as its audit fees
(which fees are currently $90 per hour per auditor), together with all actual
out-of-pocket costs and expenses incurred in conducting any such audit or
inspection.

                                (c)               
Letter of Credit Fees.  The Borrower shall pay to the Lender
a fee with respect to each Letter of Credit, if any, accruing on a daily basis
and computed at the annual rate of one and one quarter percent (1.25%), of the
aggregate amount that may then be drawn under it assuming compliance with all
conditions for drawing (the "Aggregate Face Amount"), from and including the
date of issuance of such Letter of Credit until such date as such Letter of
Credit shall terminate by its terms or be returned to the Lender, due and
payable monthly in arrears on the first day of each month and on the
Termination Date; provided, however that during Default Periods,
in the Lender's sole discretion and without waiving any of its other rights and
remedies, such fee shall increase to four and one quarter percent (4.25%) of
the Aggregate Face Amount.  The foregoing fee shall be in addition to any
and all fees, commissions and charges of the Issuer with respect to or in
connection with such Letter of Credit.

                                (d)              
Letter of Credit Administrative Fees.  The Borrower shall
pay to the Lender, on written demand, the administrative fees charged by the
Issuer in connection with the honoring of drafts under any Letter of Credit,
amendments thereto, transfers thereof and all other activity with respect to
the Letters of Credit at the then-current rates published by the Issuer for
such services rendered on behalf of customers of the Issuer generally.

                                (e)               
Termination Fees.  If the Credit Facility is
terminated (i) by the Lender during a Default Period that begins before a
Maturity Date, (ii) by the Borrower (A) as of a date other than a Maturity Date
or (B) as of a Maturity Date but without the Lender having received written
notice of such termination at least 90 days before such Maturity Date, the
Borrower shall pay to the Lender a fee in an amount equal to a percentage of
the Maximum Line as follows: (A) three percent (3.0%) if the termination occurs
on or before the first anniversary of the Funding Date; and (B) one percent
(1.0%) if the termination occurs after the first anniversary of the Funding
Date.

 

16

                                (f)                
Waiver of Termination.  The Borrower will not be required to
pay the termination and prepayment fees otherwise due under subsection (e)
if such termination or prepayment is made because of refinancing by an
affiliate of the Lender.

                                (g)               
Unused Line Fee.  On the first day of each calendar quarter
during the term of this Agreement, an unused line fee in an amount equal to
0.25% per annum times the result of (a) the Maximum Line, less (b) the sum of
(i) the average Daily Balance of Advances that were outstanding during the
immediately preceding calendar quarter, plus (ii) the average Daily Balance of
the L/C Amount during the immediately preceding calendar quarter, and plus
(iii) the average Affiliate Obligations during the immediately preceding
calendar quarter.

                                (h)               
Other Fees.  The Lender may from time to time, upon five (5)
days prior notice to the Borrower during a Default Period, charge additional
fees for Revolving Advances made and Letters of Credit issued in excess of
Availability, for late delivery of reports, in lieu of imposing interest at the
Default Rate, and for other commercially reasonable reasons.  The
Borrower's request for a Revolving Advance or the issuance of a Letter of
Credit at any time after such notice is given and such five (5) day period has
elapsed shall constitute the Borrower's agreement to pay the fees described in
such notice.

                Section
2.9             
Time for Interest Payments; Payment on Non-Banking Days; Computation of
Interest and Fees

                                (a)               
Time For Interest Payments.  Interest shall be due and payable
in arrears on the first day of each month and on the Termination Date.

                                (b)              
Payment on Non-Banking Days.  Whenever any payment to be
made hereunder shall be stated to be due on a day which is not a Banking Day,
such payment may be made on the next succeeding Banking Day, and such extension
of time shall in such case be included in the computation of interest on the
Advances or the fees hereunder, as the case may be.

                                (c)               
Computation of Interest and Fees.  Interest accruing on the
outstanding principal balance of the Advances and fees hereunder outstanding
from time to time shall be computed on the basis of actual number of days
elapsed in a year of 360 days.

                Section
2.10          Lockbox;
Collateral Account; Application of Payments.

                                (a)               
Lockbox and Collateral Account.

                                                (i)                 
The Borrower shall instruct all Account Debtors to pay all Accounts directly to
the Lockbox. If, notwithstanding such instructions, the Borrower receives any
payments on Accounts, the Borrower shall deposit such payments into the
Collateral Account. The Borrower shall also deposit all other cash proceeds of
Collateral directly to the Collateral Account. Until so deposited, the Borrower
shall hold all such payments and cash proceeds in trust for and as the property
of the Lender and shall not commingle such property with any of its other funds
or property. All deposits in the Collateral Account shall constitute proceeds
of Collateral and shall not constitute payment of the Obligations.

 

17

                                                (ii)               
All items deposited in the Collateral Account shall be subject to final
payment. If any such item is returned uncollected, the Borrower will
immediately pay the Lender, or, for items deposited in the Collateral Account,
the bank maintaining such account, the amount of that item, or such bank at its
discretion may charge any uncollected item to the Borrower's commercial account
or other account. The Borrower shall be liable as an endorser on all items
deposited in the Collateral Account, whether or not in fact endorsed by the
Borrower.

                                (b)              
Application of Payments.

                                                (i)                 
The Borrower may, from time to time, in accordance with the Lockbox and
Collection Account Agreement, cause funds in the Collateral Account to be
transferred to the Lender's general account for payment of the Obligations.
Except as provided in the preceding sentence, amounts deposited in the
Collateral Account shall not be subject to withdrawal by the Borrower, except
after full payment and discharge of all Obligations.

                                                (ii)               
All payments to the Lender shall be made in immediately available funds and
shall be applied to the Obligations upon receipt by the Lender. Funds received
from the Collateral Account shall be deemed to be immediately available. The
Lender may hold all payments not constituting immediately available funds for
two (2) additional Banking Days before applying them to the Obligations.
Subject to Section 7.7 of this Agreement, all payments with respect to the
Obligations may be applied, and in the Lender's sole discretion reversed and
re-applied, to the Obligations, in such order and manner as the Lender shall
determine in its sole discretion.

                Section
2.11          Voluntary
Prepayment; Termination of the Credit Facility by the Borrower.  Except as otherwise provided herein, the Borrower may prepay the
Advances in whole at any time or from time to time in part.  The Borrower
may terminate the Credit Facility at any time if it (i) gives the Lender at
least 30 days' prior written notice and (ii) pays the Lender termination,
prepayment and Maximum Line reduction fees in accordance with
Section 2.8(e). Subject to termination of the Credit Facility and payment
and performance of all Obligations, the Lender shall, at the Borrower's
expense, release or terminate the Security Interest and the Security Documents
to which the Borrower is entitled by law.

                Section
2.12          Mandatory
Prepayment.  Without notice or demand, if the sum of the outstanding principal
balance of the Revolving Advances plus the L/C Amount shall at any time exceed
the Borrowing Base, the Borrower shall (i) first, immediately prepay the
Revolving Advances to the extent necessary to eliminate such excess; and (ii)
if prepayment in full of the Revolving Advances is insufficient to eliminate
such excess, pay to the Lender in immediately available funds for deposit in
the Special Account an amount equal to the remaining excess. Any payment
received by the Lender under this Section 2.12 or under Section 2.11
may be applied to the Obligations, in such order and in such amounts as the
Lender, in its discretion, may from time to time determine.

 

18

                Section
2.13          Revolving
Advances to Pay Obligations.  Notwithstanding anything in Section 2.1, the Lender may, in its
discretion at any time or from time to time, without the Borrower's request and
even if the conditions set forth in Section 4.2 would not be satisfied,
make a Revolving Advance in an amount equal to the portion of the Obligations
from time to time due and payable.

                Section
2.14          Use of Proceeds.  The Borrower shall use the proceeds of Advances and each Letter of
Credit for ordinary working capital purposes.

                Section
2.15          Liability Records.  The Lender may maintain from time to time, at its discretion,
records as to the Obligations.  All entries made on any such record shall
be presumed correct until the Borrower establishes the contrary.  Upon the
Lender's demand, the Borrower will admit and certify in writing the exact
principal balance of the Obligations that the Borrower then asserts to be
outstanding.  Any billing statement or accounting rendered by the Lender
shall be conclusive and fully binding on the Borrower unless the Borrower gives
the Lender specific written notice of exception within 30 days after receipt.

ARTICLE III

SECURITY INTEREST; OCCUPANCY; SETOFF

                Section
3.1             
Grant of Security Interest.  The Borrower hereby pledges, assigns and grants to the Lender a lien
and security interest (collectively referred to as the "Security Interest") in
the Collateral, as security for the payment and performance of the
Obligations.  Upon request by the Lender, the Borrower will grant the
Lender a security interest in all commercial tort claims it may have against
any Person.

               
Section
3.2             
Notification of Account Debtors and Other Obligors.  The Lender may at any time (whether or not a Default Period then
exists) notify any Account Debtor or other person obligated to pay the amount
due that such right to payment has been assigned or transferred to the Lender
for security and shall be paid directly to the Lender.  The Borrower will
join in giving such notice if the Lender so requests.  At any time after
the Borrower or the Lender gives such notice to an Account Debtor or other
obligor, the Lender may, but need not, in the Lender's name or in the
Borrower's name, demand, sue for, collect or receive any money or property at
any time payable or receivable on account of, or securing, any such right to
payment, or grant any extension to, make any compromise or settlement with or
otherwise agree to waive, modify, amend or change the obligations (including
collateral obligations) of any such Account Debtor or other obligor.

                Section
3.3             
Assignment of Insurance.  As additional security for the payment and performance of the
Obligations, the Borrower hereby assigns to the Lender any and all monies
(including proceeds of insurance and refunds of unearned premiums) due or to
become due under, and all other rights of the Borrower with respect to, any and
all policies of insurance now or at any time hereafter covering the Collateral
or any evidence thereof or any business records or valuable papers pertaining
thereto, and the Borrower hereby directs the issuer of any such policy to pay
all such monies directly to the Lender.  At any time, whether or not a
Default Period then exists, the Lender may (but need not), in the Lender's name
or in the Borrower's name, execute and deliver proof of claim, receive all such
monies, endorse checks and other instruments representing payment of such
monies, and adjust, litigate, compromise or release any claim against the
issuer of any such policy.

 

19

                Section
3.4             
Occupancy.

                                (a)               
The Borrower hereby irrevocably grants to the Lender the right to take
exclusive possession of the Premises at any time during a Default Period.

                                (b)              
The Lender may use the Premises only to hold, process, manufacture, sell, use,
store, liquidate, realize upon or otherwise dispose of goods that are
Collateral and for other purposes that the Lender may in good faith deem to be
related or incidental purposes.

                                (c)               
The Lender's right to hold the Premises shall cease and terminate upon the
earlier of (i) payment in full and discharge of all Obligations and termination
of the Credit Facility, and (ii) final sale or disposition of all goods
constituting Collateral and delivery of all such goods to purchasers.

                                (d)              
The Lender shall not be obligated to pay or account for any rent or other
compensation for the possession, occupancy or use of any of the Premises;
provided, however, that if the Lender does pay or account for any rent or other
compensation for the possession, occupancy or use of any of the Premises, the
Borrower shall reimburse the Lender promptly for the full amount thereof. In
addition, the Borrower will pay, or reimburse the Lender for, all taxes, fees,
duties, imposts, charges and expenses at any time incurred by or imposed upon
the Lender by reason of the execution, delivery, existence, recordation,
performance or enforcement of this Agreement or the provisions of this
Section 3.4.

                Section
3.5             
License.  Without limiting the generality of any other Security Document, the
Borrower hereby grants to the Lender a non-exclusive, worldwide and
royalty-free license to use or otherwise exploit all Intellectual Property
Rights of the Borrower for the purpose of: (a) completing the manufacture of
any in-process materials during any Default Period so that such materials
become saleable Inventory, all in accordance with the same quality standards
previously adopted by the Borrower for its own manufacturing and subject to the
Borrower's reasonable exercise of quality control; and (b) selling, leasing or
otherwise disposing of any or all Collateral during any Default Period.

                Section
3.6             
Financing Statement.  The Borrower authorizes the Lender to file from time to time where
permitted by law, such financing statements against collateral described as
"all personal property" or describing specific items of collateral including
commercial tort claims as the Lender deems necessary or useful to perfect the
Security Interest.  A carbon, photographic or other reproduction of this
Agreement or of any financing statements signed by the Borrower is sufficient
as a financing statement and may be filed as a financing statement in any state
to perfect the security interests granted hereby. For this purpose, the
following information is set forth:

 

20

  
    	Name and address of Debtor:
	 
	Micro Motors, Inc.
	151 E. Columbine
	Santa Ana, CA  92707
	Federal Employer Identification No. 95-1027922
	Organizational Identification No. 951027922
	 
	Name and address of Secured Party:
	 
	Wells Fargo Business Credit, Inc.
	245 S. Los Robles Avenue, Suite 600
	Pasadena, CA  91101
	Federal Employer Identification No. 41-1237652

  

                Section
3.7             
Setoff.  The Lender may at any time or from time to time, at its sole
discretion and without demand and without notice to anyone, setoff any
liability owed to the Borrower by the Lender, whether or not due, against any
Obligation, whether or not due. In addition, each other Person holding a
participating interest in any Obligations shall have the right to appropriate
or setoff any deposit or other liability then owed by such Person to the
Borrower, whether or not due, and apply the same to the payment of said
participating interest, as fully as if such Person had lent directly to the
Borrower the amount of such participating interest.

                Section
3.8             
Power of Attorney.  The Borrower hereby irrevocably makes, constitutes, and appoints the
Lender (and any of the Lender's officers, employees, or agents designated by
the Lender) as the Borrower's true and lawful attorney, with power to (a) if
the Borrower refuses to, or fails timely to execute and deliver any of the
documents required to be described in Section 8.4, sign the name of the
Borrower on any of the documents described in Section 8.4, (b) at any time that
an Event of Default has occurred and is continuing, sign the Borrower's name on
any invoice or bill of lading relating to the Collateral, drafts against
Account Debtors, or notices to Account Debtors, (c) send requests for verification
of Accounts, (d) endorse the Borrower's name on any collection item that may
come into the Lender's possession, (e) at any time that an Event of Default has
occurred and is continuing, make, settle, and adjust all claims under
Borrower's policies of insurance and make all determinations and decisions with
respect to such policies of insurance, (f) at any time that an Event of Default
has occurred and is continuing, settle and adjust disputes and claims
respecting the Accounts, chattel paper, or General Intangibles directly with
Account Debtors, for amounts and upon terms that the Lender determines to be
reasonable, and the Lender may cause to be executed and delivered any documents
and releases that the Lender determines to be necessary, and (g) notify the
United States Postal Service to change the address for delivery of the
Borrower's mail to any address designated by the Lender, otherwise intercept
the Borrower's mail, and receive, open and dispose of the Borrower's mail,
applying all Collateral as permitted under this Agreement and holding all other
mail for the Borrower's account or forwarding such mail to the Borrower's last
known address.  The appointment of the Lender as the Borrower's attorney,
and each and every one of its rights and powers, being coupled with an
interest, is irrevocable until all of the Obligations have been fully and
finally repaid and performed and the Lender's obligations to extend credit
hereunder are terminated.

 

21

ARTICLE IV

CONDITIONS OF LENDING

                Section
4.1             
Conditions Precedent to the Initial Advances and Letter of Credit.  The Lender's obligation to make the initial Advances or to cause any
Letters of Credit to be issued shall be subject to the condition precedent that
the Lender shall have received all of the following, each in form and substance
satisfactory to the Lender:

                                (a)               
This Agreement, duly executed by the Borrower.

                                (b)              
The Note, duly executed by the Borrower.

                                (c)               
A true and correct copy of any and all leases pursuant to which the Borrower is
leasing the Premises, together with a landlord's disclaimer and consent with
respect to each such lease.

                                (d)              
A true and correct copy of any and all mortgages pursuant to which the Borrower
has mortgaged the Premises, together with a mortgagee's disclaimer and consent
with respect to each such mortgage.

                                (e)               
A true and correct copy of any and all agreements pursuant to which the
Borrower's property is in the possession of any Person other than the Borrower,
together with, in the case of any goods held by such Person for resale, (i) a
consignee's acknowledgment and waiver of Liens, (ii) UCC financing statements
sufficient to protect the Borrower's and the Lender's interests in such goods,
and (iii) UCC searches showing that no other secured party has filed a
financing statement against such Person and covering property similar to the
Borrower's other than the Borrower, or if there exists any such secured party,
evidence that each such secured party has received notice from the Borrower and
the Lender sufficient to protect the Borrower's and the Lender's interests in
the Borrower's goods from any claim by such secured party.

                                (f)                
An acknowledgment and waiver of Liens from each warehouse in which the Borrower
is storing Inventory.

                                (g)               
A true and correct copy of any and all agreements pursuant to which the
Borrower's property is in the possession of any Person other than the Borrower,
together with, (i) an acknowledgment and waiver of Liens from each
subcontractor who has possession of the Borrower's goods from time to time,
(ii) UCC financing statements sufficient to protect the Borrower's and the
Lender's interests in such goods, and (iii) UCC searches showing that no other
secured party has filed a financing statement covering such Person's property
other than the Borrower, or if there exists any such secured party, evidence
that each such secured party has received notice from the Borrower and the
Lender sufficient to protect the Borrower's and the Lender's interests in the
Borrower's goods from any claim by such secured party.

 

22

                                (h)               
The Lockbox and Collection Account Agreement, duly executed by the Borrower and
Wells Fargo Bank, N.A.

                                (i)                 
Control agreements, duly executed by the Borrower and each bank at which the
Borrower maintains deposit accounts.

                                (j)                
The Patent and Trademark Security Agreement, duly executed by the Borrower.

                                (k)              
The Guaranty and the Guaranty Security Agreement, each duly executed by the
Guarantor, 

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

                                (m)             
The Subordination Agreements, duly executed by the Guarantor and Ronald G.
Coss, respectively, and acknowledged by the Borrower.

                                (n)               
Current searches of appropriate filing offices showing that (i) no Liens have
been filed and remain in effect against the Borrower except Permitted Liens or
Liens held by Persons who have agreed in writing that upon receipt of proceeds
of the initial Advances, they will satisfy, release or terminate such Liens in
a manner satisfactory to the Lender, and (ii) the Lender has duly filed all
financing statements necessary to perfect the Security Interest, to the extent
the Security Interest is capable of being perfected by filing.

                                (o)              
A certificate of the Borrower's Secretary or Assistant Secretary certifying
that attached to such certificate are (i) the resolutions of the Borrower's
Directors and, if required, Owners, authorizing the execution, delivery and
performance of the Loan Documents, (ii) true, correct and complete copies of
the Borrower's Constituent Documents, and (iii) examples of the signatures of
the Borrower's Officers or agents authorized to execute and deliver the Loan
Documents and other instruments, agreements and certificates, including Advance
requests, on the Borrower's behalf.

                                (p)              
A current certificate issued by the Secretary of State of Colorado, certifying
that the Borrower is in compliance with all applicable organizational
requirements of the State of Colorado.

                                (q)              
Evidence that the Borrower is duly licensed or qualified to transact business
in all jurisdictions where the character of the property owned or leased or the
nature of the business transacted by it makes such licensing or qualification
necessary.

                                (r)                
A certificate of an Officer of the Borrower confirming, in his personal
capacity, the representations and warranties set forth in Article V.

                                (s)               
An opinion of counsel to the Borrower and the Guarantor, addressed to the
Lender.

 

23

                                (t)                
Certificates of the insurance required hereunder, with all hazard insurance
containing a lender's loss payable endorsement in the Lender's favor and with
all liability insurance naming the Lender as an additional insured.

                                (u)               
Payment of the fees and commissions due under Section 2.13 through the date of
the initial Advance or Letter of Credit and expenses incurred by the Lender
through such date and required to be paid by the Borrower under Section 8.6,
including all legal expenses incurred through the date of this Agreement.

                                (v)               
Evidence that after making the initial Revolving Advance, satisfying all trade
payables older than 60 days from invoice date, book overdrafts and closing
costs, Availability shall be not less than $500,000.

                                (w)             
Evidence satisfactory to the Lender that there has been no Material Adverse
Effect since the date of the last financial statements provided by the Borrower
to the Lender, or any material variance from the Borrower's projections
previously provided by the Borrower to the Lender.

                                (x)               
A Collateral audit, satisfactory to the Lender.

                                (y)               
The results of the Lender's due diligence with respect to the Borrower,
including background checks on the senior officers of the Borrower,
satisfactory to the Lender.

                                (z)               
True and complete copies of all license agreements pursuant to which the
Borrower licenses any Intellectual Property Rights, together with a consent to
assignment to the Lender or its nominee from each licensor thereof (including
without limitation, from Ronald G. Coss).

                                (aa)            Such
other documents as the Lender in its sole discretion may require.

                Section
4.2             
Conditions Precedent to All Advances and Letters of Credit.  The Lender's obligation to make each Advance and to cause each
Letter of Credit to be issued shall be subject to the further conditions
precedent that:

                                (a)               
the representations and warranties contained in Article V are correct on and as
of the date of such Advance or issuance of a Letter of Credit as though made on
and as of such date, except to the extent that such representations and
warranties relate solely to an earlier date;

                                (b)              
no event has occurred and is continuing, or would result from such Advance or
issuance of a Letter of Credit which constitutes a Default or an Event of
Default; and

                                (c)               
no injunction, writ, restraining order, or other order of any nature
prohibiting, directly or indirectly, the extending of such credit shall have
been issued and remain in force by any Governmental Authority against the
Borrower, the Lender, or any of their Affiliates.

 

24

ARTICLE V

REPRESENTATIONS AND WARRANTIES

                The Borrower represents and warrants to the Lender as follows:

                Section
5.1             
Existence and Power; Name; Chief Executive Office; Inventory and Equipment
Locations; Federal Employer Identification Number.  The Borrower is a corporation duly organized, validly existing and
in good standing under the laws of the State of Colorado and is duly licensed
or qualified to transact business in all jurisdictions where the character of
the property owned or leased or the nature of the business transacted by it
makes such licensing or qualification necessary. The Borrower has all requisite
power and authority to conduct its business, to own its properties and to
execute and deliver, and to perform all of its obligations under, the Loan
Documents.  During its existence, the Borrower has done business solely
under the names set forth in Schedule 5.1 and all of the Borrower's
records relating to its business or the Collateral are kept at that
location.  The Borrower's chief executive office and principal place of
business is located at the address set forth in Schedule 5.1.  All
Inventory and Equipment is located at that location or at one of the other
locations listed in Schedule 5.1.  The Borrower's federal employer
identification number is correctly set forth in Section 3.6.

                Section
5.2             
Capitalization.  Schedule 5.2 constitutes a correct and complete list of all
ownership interests of the Borrower and rights to acquire ownership interests
including the record holder, number of interests and percentage interests on a
fully diluted basis, and an organizational chart showing the ownership
structure of all Subsidiaries of the Borrower.

                Section
5.3             
Authorization of Borrowing; No Conflict as to Law or Agreements.  The execution, delivery and performance by the Borrower of the Loan
Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (i)
require any consent or approval of the Borrower's Owners; (ii) require any
authorization, consent or approval by, or registration, declaration or filing
with, or notice to, any Governmental Authority, or any third Person, except such
authorization, consent, approval, registration, declaration, filing or notice
as has been obtained, accomplished or given prior to the date hereof; (iii)
violate any provision of any law, rule or regulation (including Regulation X of
the Board of Governors of the Federal Reserve System) or of any order, writ,
injunction or decree presently in effect having applicability to the Borrower
or of the Borrower's Constituent Documents; (iv) result in a breach of or
constitute a default under any indenture or loan or credit agreement or any
other material agreement, lease or instrument to which the Borrower is a party
or by which it or its properties may be bound or affected; or (v) result in, or
require, the creation or imposition of any Lien (other than the Security
Interest) upon or with respect to any of the properties now owned or hereafter
acquired by the Borrower.

                Section
5.4             
Legal Agreements.  This Agreement constitutes and, upon due execution by the Borrower,
the other Loan Documents will constitute the legal, valid and binding
obligations of the Borrower, enforceable against the Borrower in accordance
with their respective terms, except as enforcement may be limited by equitable
principles or by bankruptcy, insolvency, reorganization, moratorium, or similar
laws relating to or limiting creditors' rights generally.

 

25

                Section
5.5             
Subsidiaries.  Except as set forth in Schedule 5.5 hereto, the Borrower has no
Subsidiaries.

                Section
5.6             
Financial Condition; No Adverse Change.  The Borrower has furnished to the Lender its audited financial
statements for its fiscal year ended June 30, 2001 and unaudited financial
statements for the fiscal-year-to-date period ended March 31, 2002, and
those statements fairly present the Borrower's financial condition on the dates
thereof and the results of its operations and cash flows for the periods then
ended and were prepared in accordance with generally accepted accounting
principles.  Since the date of the most recent financial statements, there
has been no change in the Borrower's business, properties or condition
(financial or otherwise) which has had a Material Adverse Effect.

                Section
5.7             
Litigation.  There are no actions, suits or proceedings pending or, to the
Borrower's knowledge, threatened against or affecting the Borrower or any of
its Affiliates or the properties of the Borrower or any of its Affiliates
before any court or governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign, which, if determined adversely to the
Borrower or any of its Affiliates, would have a Material Adverse Effect.

                Section
5.8             
Regulation U.  The Borrower is not engaged in the business of extending credit for
the purpose of purchasing or carrying margin stock (within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System), and no
part of the proceeds of any Advance will be used to purchase or carry any
margin stock or to extend credit to others for the purpose of purchasing or
carrying any margin stock.

                Section
5.9             
Taxes.  The Borrower and its Affiliates have paid or caused to be paid to
the proper authorities when due all federal, state and local taxes required to
be withheld by each of them.  The Borrower and its Affiliates have filed
all federal, state and local tax returns which to the knowledge of the Officers
of the Borrower or any Affiliate, as the case may be, are required to be filed,
and the Borrower and its Affiliates have paid or caused to be paid to the
respective taxing authorities all taxes as shown on said returns or on any
assessment received by any of them to the extent such taxes have become due.

                Section
5.10          Titles and Liens.  The Borrower has good and absolute title to all Collateral free and
clear of all Liens other than Permitted Liens.  No financing statement
naming the Borrower as debtor is on file in any office except to perfect only
Permitted Liens.

                Section
5.11          Intellectual Property
Rights.

                                (a)               
Owned Intellectual Property.  Schedule 5.11 is a complete
list of all patents, applications for patents, trademarks, applications for
trademarks, service marks, applications for service marks, mask works, trade
dress and copyrights for which the Borrower is the registered owner (the "Owned
Intellectual Property"). Except as disclosed on Schedule 5.11, (i) the Borrower
owns the Owned Intellectual Property free and clear of all restrictions
(including covenants not to sue a third party), court orders, injunctions,
decrees, writs or Liens, whether by written agreement or otherwise, (ii) no
Person other than the Borrower owns or has been granted any right in the Owned
Intellectual Property, (iii) all Owned Intellectual Property is valid,
subsisting and enforceable and (iv) the Borrower has taken all commercially
reasonable action necessary to maintain and protect the Owned Intellectual
Property.

 

26

                                (b)              
Agreements with Employees and Contractors.  The Borrower has
entered into a legally enforceable agreement with each of its employees and
subcontractors obligating each such Person to assign to the Borrower, without
any additional compensation, any Intellectual Property Rights created,
discovered or invented by such Person in the course of such Person's employment
or engagement with the Borrower (except to the extent prohibited by law), and
further requiring such Person to cooperate with the Borrower, without any
additional compensation, in connection with securing and enforcing any
Intellectual Property Rights therein; provided, however, that the foregoing
shall not apply with respect to employees and subcontractors whose job
descriptions are of the type such that no such assignments are reasonably
foreseeable.

                                (c)               
Intellectual Property Rights Licensed from Others. 
Schedule 5.11 is a complete list of all agreements under which the
Borrower has licensed Intellectual Property Rights from another Person
("Licensed Intellectual Property") other than readily available, non-negotiated
licenses of computer software and other intellectual property used solely for
performing accounting, word processing and similar administrative tasks
("Off-the-shelf Software") and a summary of any ongoing payments the Borrower
is obligated to make with respect thereto.  Except as disclosed on
Schedule 5.11 and in written agreements copies of which have been given to
the Lender, the Borrower's licenses to use the Licensed Intellectual Property
are free and clear of all restrictions, Liens, court orders, injunctions,
decrees, or writs, whether by written agreement or otherwise.  Except as
disclosed on Schedule 5.11, the Borrower is not obligated or under any
liability whatsoever to make any payments of a material nature by way of
royalties, fees or otherwise to any owner of, licensor of, or other claimant
to, any Intellectual Property Rights.

                                (d)              
Other Intellectual Property Needed for Business.  Except for
Off-the-shelf Software and as disclosed on Schedule 5.11, the Owned Intellectual
Property and the Licensed Intellectual Property constitute all Intellectual
Property Rights used or necessary to conduct the Borrower's business as it is
presently conducted or as the Borrower reasonably foresees conducting it.

                                (e)               
Infringement.  Except as disclosed on Schedule 5.11,
the Borrower has no knowledge of, and has not received any written claim or
notice alleging, any Infringement of another Person's Intellectual Property
Rights (including any written claim that the Borrower must license or refrain
from using the Intellectual Property Rights of any third party) nor, to the
Borrower's knowledge, is there any threatened claim or any reasonable basis for
any such claim.

                Section
5.12          Plans.  Except as disclosed to the Lender in writing prior to the date
hereof, neither the Borrower nor any ERISA Affiliate (i) maintains or has
maintained any Pension Plan, (ii) contributes or has contributed to any
Multiemployer Plan or (iii) provides or has provided post-retirement medical or
insurance benefits with respect to employees or former employees (other than
benefits required under Section 601 of ERISA, Section 4980B of the IRC or
applicable state law). Neither the Borrower nor any ERISA Affiliate has
received any notice or has any knowledge to the effect that it is not in full
compliance with any of the requirements of ERISA, the IRC or applicable state
law with respect to any Plan. No Reportable Event exists in connection with any
Pension Plan. Each Plan which is intended to qualify under the IRC is so
qualified, and no fact or circumstance exists which may have an adverse effect
on the Plan's tax-qualified status.  Neither the Borrower nor any ERISA
Affiliate has (i) any accumulated funding deficiency (as defined in Section 302
of ERISA and Section 412 of the IRC) under any Plan, whether or not
waived, (ii) any liability under Section 4201 or 4243 of ERISA for
any withdrawal, partial withdrawal, reorganization or other event under any
Multiemployer Plan or (iii) any liability or knowledge of any facts or
circumstances which could result in any liability to the Pension Benefit
Guaranty Corporation, the Internal Revenue Service, the Department of Labor or
any participant in connection with any Plan (other than routine claims for benefits
under the Plan).

 

27

                Section
5.13          Default.  The Borrower is in compliance with all provisions of all agreements,
instruments, decrees and orders to which it is a party or by which it or its
property is bound or affected, the breach or default of which could have a
Material Adverse Effect.

                Section
5.14          Environmental
Matters.

                                (a)               
To the Borrower's best knowledge, there are not present in, on or under the
Premises any Hazardous Substances in such form or quantity as to create any
material liability or obligation for either the Borrower or the Lender under
common law of any jurisdiction or under any Environmental Law, and no Hazardous
Substances have ever been stored, buried, spilled, leaked, discharged, emitted
or released in, on or under the Premises in such a way as to create any such
material liability.

                                (b)              
To the Borrower's best knowledge, the Borrower has not disposed of Hazardous
Substances in such a manner as to create any material liability under any Environmental
Law.

                                (c)               
There are not and there never have been any requests, claims, notices,
investigations, demands, administrative proceedings, hearings or litigation,
relating in any way to the Premises or the Borrower, alleging material liability
under, violation of, or noncompliance with any Environmental Law or any
license, permit or other authorization issued pursuant thereto.  To the
Borrower's best knowledge, no such matter is threatened or impending.

                                (d)              
To the Borrower's best knowledge, the Borrower's businesses are and have in the
past always been conducted in accordance with all Environmental Laws and all
licenses, permits and other authorizations required pursuant to any
Environmental Law and necessary for the lawful and efficient operation of such
businesses are in the Borrower's possession and are in full force and effect.
No permit required under any Environmental Law is scheduled to expire within 12
months and there is no threat that any such permit will be withdrawn,
terminated, limited or materially changed.

 

28

                                (e)               
To the Borrower's best knowledge, the Premises are not and never have been
listed on the National Priorities List, the Comprehensive Environmental
Response, Compensation and Liability Information System or any similar federal,
state or local list, schedule, log, inventory or database.

                                (f)                
The Borrower has delivered to Lender all environmental assessments, audits,
reports, permits, licenses and other documents describing or relating in any
way to the Premises or Borrower's businesses.

                Section
5.15          Submissions to
Lender.  All financial and other information provided to the Lender by or on
behalf of the Borrower in connection with the Borrower's request for the credit
facilities contemplated hereby is (i) true and correct in all material
respects, (ii) does not omit any material fact necessary to make such
information not misleading and, (iii) as to projections, valuations or proforma
financial statements, present a good faith opinion as to such projections,
valuations and proforma condition and results.

                Section
5.16          Financing
Statements.  The Borrower has authorized the filing of financing statements
sufficient when filed to perfect the Security Interest and the other security
interests created by the Security Documents. When such financing statements are
filed in the offices noted therein, the Lender will have a valid and perfected
security interest in all Collateral which is capable of being perfected by filing
financing statements. None of the Collateral is or will become a fixture on
real estate, unless a sufficient fixture filing is in effect with respect
thereto.

                Section
5.17          Rights to Payment.  Each right to payment and each instrument, document, chattel paper
and other agreement constituting or evidencing Collateral is (or, in the case
of all future Collateral, will be when arising or issued) the valid, genuine
and legally enforceable obligation, subject to no defense, setoff or
counterclaim, of the Account Debtor or other obligor named therein or in the
Borrower's records pertaining thereto as being obligated to pay such
obligation.

                Section
5.18          Eligible Accounts.  The Eligible Accounts are bona fide existing payment obligations of
Account Debtors created by the sale and delivery of Inventory or the rendition
of services to such Account Debtors in the ordinary course of the Borrower's
business, owed to the Borrower without defenses, disputes, offsets,
counterclaims, or rights of return or cancellation.  As to each Eligible
Account, such Account is not:

                                                (i)                 
owed by an employee, Affiliate, or agent of Borrower, 

                                                (ii)               
on account of a transaction wherein goods were placed on consignment or were
sold pursuant to a guaranteed sale, a sale or return, a sale on approval, a
bill and hold, or on any other terms by reason of which the payment by the
Account Debtor may be conditional;

                                                (iii)              
 payable in a currency other than Dollars,

 

29

                                                (iv)             
owed by an Account Debtor that has or has asserted a right of setoff, has
disputed its liability, or has made any claim with respect to its obligation to
pay the Account,

                                                (v)               
owed by an Account Debtor that is subject to any Insolvency Proceeding or is
not Solvent or as to which Borrower has received notice of an imminent
Insolvency Proceeding or a material impairment of the financial condition of
such Account Debtor,

                                                (vi)             
on account of a transaction as to which the goods giving rise to such Account
have not been shipped and billed to the Account Debtor or the services giving
rise to such Account have not been performed and accepted by the Account
Debtor, 

                                                (vii)            
a right to receive progress payments or other advance billings that are due
prior to the completion of performance by Borrower of the subject contract for
goods or services, and

                                                (viii)           an
Account that has not been billed to the customer. 

                Section
5.19          Eligible
Inventory.  All Eligible Inventory is of good and merchantable quality, free from
defects.  As to each item of Eligible Inventory, such Inventory is 

                                                (i)                 
owned by the Borrower free and clear of all Liens other than Liens in favor of
the Lender or Permitted Liens,

                                                (ii)               
not goods that have been returned or rejected by the Borrower's customers, and

                                                (iii)              
goods that are obsolete or slow moving, restrictive or custom items,
work-in-process, or that constitute spare parts, packaging and shipping materials,
supplies used or consumed in Borrower's business, bill and hold goods,
defective goods, "seconds," or Inventory acquired on consignment.

                Section
5.20          Equipment.  All of the Equipment is used or held for use in the Borrower's
business and is fit for such purposes.

                Section
5.21          Fraudulent
Transfer.  The Borrower is Solvent.  No transfer of property is being made
by The Borrower and no obligation is being incurred by the Borrower in
connection with the transactions contemplated by this Agreement or the other
Loan Documents with the intent to hinder, delay, or defraud either present or
future creditors of the Borrower.

 

30

 

ARTICLE VI

COVENANTS

                So long as the Obligations shall remain unpaid, or the Credit Facility shall
remain outstanding, the Borrower will comply with the following requirements,
unless the Lender shall otherwise consent in writing:

                Section
6.1             
Reporting Requirements.  The Borrower will deliver, or cause to be delivered, to the Lender
each of the following, which shall be in form and detail acceptable to the
Lender:

                                (a)               
Annual Financial Statements.  As soon as available, and in
any event within 90 days after the end of each fiscal year of the Borrower, the
Borrower will deliver, or cause to be delivered, to the Lender, the Borrower's
audited financial statements with the unqualified opinion of independent
certified public accountants selected by the Borrower and acceptable to the
Lender, which annual financial statements shall include the Borrower's balance
sheet as at the end of such fiscal year and the related statements of the
Borrower's income, retained earnings and cash flows for the fiscal year then
ended, prepared on a consolidating and consolidated basis to include the
Affiliate Borrower and the Guarantor, all in reasonable detail and prepared in
accordance with GAAP, together with (i) copies of all management letters
prepared by such accountants; (ii) a report signed by such accountants stating
that in making the investigations necessary for said opinion they obtained no
knowledge, except as specifically stated, of any Default or Event of Default
and all relevant facts in reasonable detail to evidence, and the computations
as to, whether or not the Borrower is in compliance with the Financial
Covenants; and (iii) a certificate of the Borrower's chief financial officer
stating that such financial statements have been prepared in accordance with
GAAP, fairly represent the Borrower's financial position and the results of its
operations, and whether or not such officer has knowledge of the occurrence of
any Default or Event of Default and, if so, stating in reasonable detail the
facts with respect thereto.

                                (b)              
Monthly Financial Statements.  As soon as available and in
any event within 25 days after the end of each month, the Borrower will deliver
to the Lender an unaudited/internal balance sheet and statements of income and
retained earnings of the Borrower as at the end of and for such month and for
the year to date period then ended, prepared on a consolidating and
consolidated basis to include the Affiliate Borrower and the Guarantor, in
reasonable detail and stating in comparative form the figures for the
corresponding date and periods in the previous year, all prepared in accordance
with GAAP, subject to year-end audit adjustments and fairly represent the
Borrower's financial position and the results of its operations; and
accompanied by a certificate of the Borrower's chief financial Officer,
substantially in the form of Exhibit C hereto stating (i) that such financial
statements have been prepared in accordance with GAAP, subject to year-end
audit adjustments, (ii) whether or not such officer has knowledge of the
occurrence of any Default or Event of Default not theretofore reported and
remedied and, if so, stating in reasonable detail the facts with respect
thereto, and (iii) all relevant facts in reasonable detail to evidence, and the
computations as to, whether or not the Borrower is in compliance with the
Financial Covenants.

 

31

                                (c)               
Collateral Reports.  The Borrower will deliver to the Lender
the following documents at the following times in form satisfactory to Lender:

	
  Daily 

  	
  (a)  a report of cash collections, sales assignments, credit
  memos/adjustments and deposits, and a calculation of the Borrowing Base as of
  such date, and

  (b)  notice of all returns, disputes, or claims.

 

  
	
  Monthly (not later than the 15th day of each month)

  	
  (c)   a detailed calculation of the Borrowing Base (including
  detail regarding those Accounts that are not Eligible Accounts or Eligible
  Foreign Accounts, and Inventory that is not Eligible Inventory),

  (d)   a detailed listing and aging, by total, of the Accounts,
  together with a reconciliation to the detailed calculation of the Borrowing
  Base  previously provided to Lender,

  (e)   a summary aging, by vendor, of Borrower's accounts payable and
  any book overdraft, together with a reconciliation to the Borrower's general
  ledger and monthly financial statements delivered pursuant to Section 6.1(b),

  (f)    an Inventory stock status report, by type and by
  location,

 

  
	

  	
  (g)   an Inventory slow moving report, and

  (h)   an Inventory certification and perpetual report by location,
  including Inventory turnover by item number, together with a reconciliation
  to the Borrower's general ledger and monthly financial statements delivered
  pursuant to Section 6.1(b).

 

  
	
  Semi-Annually

  	
  (i)    a detailed list of Borrower's customers

 

  
	
  Upon request by Lender 

  	
  (j)    copies of invoices in connection with the Accounts,
  credit memos, remittance advices, deposit slips, shipping and delivery
  documents in connection with the Accounts and, for Inventory and Equipment
  acquired by Borrower, purchase orders and invoices, and

  (k)   such other reports as to the Collateral, or the financial
  condition of Borrower, as Lender may request.

  

                                (d)              
Projections.  At least 30 days before the beginning of each
fiscal year of the Borrower, the Borrower will deliver to the Lender the
projected balance sheets and income statements for each month of such year,
each in reasonable detail, representing the Borrower's good faith projections
and certified by the Borrower's chief financial Officer as being the most
accurate projections available and identical to the projections used by the
Borrower for internal planning purposes, together with a statement of
underlying assumptions and such supporting schedules and information as the
Lender may in its discretion require.

 

32

                                (e)               
Litigation.  Immediately after the commencement thereof, the
Borrower will deliver to the Lender notice in writing of all litigation and of
all proceedings before any governmental or regulatory agency affecting the
Borrower (i) of the type described in Section 5.14(c) or (ii) which seek a
monetary recovery against the Borrower in excess of $100,000.

                                (f)                
Defaults.  As promptly as practicable (but in any event not
later than five business days) after an Officer of the Borrower obtains
knowledge of the occurrence of any Default or Event of Default, the Borrower
will deliver to the Lender notice of such occurrence, together with a detailed
statement by a responsible Officer of the Borrower of the steps being taken by
the Borrower to cure the effect thereof.

                                (g)               
Plans.  As soon as possible, and in any event within 30 days
after the Borrower knows or has reason to know that any Reportable Event with
respect to any Pension Plan has occurred, the Borrower will deliver to the
Lender a statement of the Borrower's chief financial Officer setting forth
details as to such Reportable Event and the action which the Borrower proposes
to take with respect thereto, together with a copy of the notice of such
Reportable Event to the Pension Benefit Guaranty Corporation. As soon as
possible, and in any event within 10 days after the Borrower fails to make any
quarterly contribution required with respect to any Pension Plan under Section
412(m) of the IRC, the Borrower will deliver to the Lender a statement of the
Borrower's chief financial Officer setting forth details as to such failure and
the action which the Borrower proposes to take with respect thereto, together
with a copy of any notice of such failure required to be provided to the
Pension Benefit Guaranty Corporation. As soon as possible, and in any event
with 10 days after the Borrower knows or has reason to know that it has or is
reasonably expected to have any liability under Section 4201 or 4243 of ERISA
for any withdrawal, partial withdrawal, reorganization or other event under any
Multiemployer Plan, the Borrower will deliver to the Lender a statement of the
Borrower's chief financial Officer setting forth details as to such liability
and the action which Borrower proposes to take with respect thereto.

                                (h)               
Disputes.  Promptly upon knowledge thereof, the Borrower
will deliver to the Lender notice of (i) any disputes or claims by the
Borrower's customers exceeding $10,000 individually or $50,000 in the aggregate
during any fiscal year; (ii) credit memos; (iii) any goods returned to or
recovered by the Borrower.

                                (i)                 
Officers and Directors.  Promptly upon knowledge thereof,
the Borrower will deliver to the Lender notice any change in the persons
constituting the Borrower's Officers and Directors.

                                (j)                
Collateral.  Promptly upon knowledge thereof, the Borrower
will deliver to the Lender notice of any loss of or material damage to any
Collateral or of any substantial adverse change in any Collateral or the
prospect of payment thereof.

 

33

                                (k)              
Commercial Tort Claims.  Promptly upon knowledge thereof,
the Borrower will deliver to the Lender notice of any commercial tort claims it
may bring against any person, including the name and address of each defendant,
a summary of the facts, an estimate of the Borrower's damages, copies of any
complaint or demand letter submitted by the Borrower, and such other
information as the Lender may request.

                                (l)                 
Intellectual Property.

                                                (i)                 
The Borrower will give the Lender 30 days prior written notice of its intent to
acquire material Intellectual Property Rights; except for transfers permitted
under Section 6.17, the Borrower will give the Lender 30 days prior written
notice of its intent to dispose of material Intellectual Property Rights; and
upon request, shall provide the Lender with copies of all applicable documents
and agreements.

                                                (ii)               
Promptly upon knowledge thereof, the Borrower will deliver to the Lender notice
of (A) any material Infringement of its Intellectual Property Rights by others,
(B) claims that the Borrower is Infringing another Person's Intellectual
Property Rights and (C) any threatened cancellation, termination or material
limitation of its Intellectual Property Rights.

                                                (iii)              
Promptly upon receipt, the Borrower will give the Lender copies of all
registrations and filings with respect to its Intellectual Property Rights.

                                (m)             
Reports to Owners.  Promptly upon their distribution, the
Borrower will deliver to the Lender copies of all financial statements, reports
and proxy statements which the Borrower shall have sent to its Owners.

                                (n)               
SEC Filings.  Promptly after the sending or filing thereof,
the Borrower will deliver to the Lender copies of all regular and periodic
reports which the Borrower shall file with the Securities and Exchange
Commission or any national securities exchange.

                                (o)              
Tax Returns.  As soon as possible, and in any event by not
later five days after they are due, copies of the Guarantor's consolidated
state and federal tax returns and all schedules thereto.

                                (p)              
Violations of Law.  Promptly upon knowledge thereof, the
Borrower will deliver to the Lender notice of the Borrower's violation of any
law, rule or regulation, the non-compliance with which could materially and
adversely affect the Borrower's business or its financial condition.

                                (q)              
Other Reports.  From time to time, with reasonable
promptness, the Borrower will deliver to the Lender any and all receivables
schedules, collection reports, deposit records, equipment schedules, copies of
invoices to Account Debtors, shipment documents and delivery receipts for goods
sold, and such other material, reports, records or information as the Lender
may reasonably request.

 

34

                Section
6.2             
Financial Covenants.

                                (a)               
Minimum Tangible Net Worth.  The Borrower will maintain its
Tangible Net Worth, as at the end of each month, at an amount not less than the
amount set forth in the table below opposite the applicable period:

	
  Test Date/Period
	
  Minimum Tangible Net Worth

  
	
  4/30/2002

  	
  $2,842,000

  
	
  5/31/2002

  	
  $2,646,000

  
	
  6/30/2002 and each month end
  thereafter

  	
  $2,737,000

  

                                (b)              
Minimum Net Income. The Borrower will achieve during each period
described below, measured quarterly on a fiscal-year-to-date basis, minimum Net
Income (or maximum Net Loss, as applicable), of not less than the amount set
forth in the table below opposite the applicable period:

	
   Fiscal Year to Date
   Period Ending

   	
   Minimum Net Income (or Maximum
   Net Loss)

   
	
  6/30/2002

  	
  $850,000

  

                                (c)               
Maximum Net Loss.  The Borrower shall not have a Net Loss in
excess of $75,000 as at the end of any month, commencing with the month ending
July 31, 2002.

                                (d)              
Capital Expenditures.  The Borrower and the Affiliate
Borrower will not incur or contract to incur Capital Expenditures of more than
$150,000 in the aggregate during any fiscal year, or more than $50,000 in the
aggregate for the fiscal quarter ending June 30, 2002.

                Section
6.3             
Permitted Liens; Financing Statements.

                                (a)               
The Borrower will not create, incur or suffer to exist any Lien upon or of any
of its assets, now owned or hereafter acquired, to secure any indebtedness; excluding,
however, from the operation of the foregoing, the following
(collectively, "Permitted Liens"):

                                                (i)                 
in the case of any of the Borrower's property which is not Collateral,
covenants, restrictions, rights, easements and minor irregularities in title
which do not materially interfere with the Borrower's business or operations as
presently conducted;

                                                (ii)               
Liens in existence on the date hereof and listed in Schedule 6.3 hereto,
securing indebtedness for borrowed money permitted under Section 6.4;

 

35

                                                (iii)              
the Security Interest and Liens created by the Security Documents; and

                                                (iv)             
purchase money Liens relating to the acquisition of machinery and equipment of
the Borrower not exceeding the lesser of cost or fair market value thereof, not
exceeding $50,000 for any one purchase or $100,000 in the aggregate during any
fiscal year, and so long as no Default Period is then in existence and none
would exist immediately after such acquisition.

                                (b)              
The Borrower will not amend any financing statements in favor of the Lender
except as permitted by law. Any authorization by the Lender to any Person to
amend financing statements in favor of the Lender shall be in writing.

                Section 6.4             
Indebtedness.  The Borrower will not incur, create, assume or permit to exist any
Indebtedness or liability on account of deposits or advances or any
Indebtedness for borrowed money or letters of credit issued on the Borrower's
behalf, or any other Indebtedness or liability evidenced by notes, bonds,
debentures or similar obligations, except:

                                (a)               
Indebtedness arising hereunder;

                                (b)              
Indebtedness of the Borrower in existence on the date hereof and listed in
Schedule 6.4 hereto; and

                                (c)               
Indebtedness relating to Permitted Liens.

                Section
6.5             
Guaranties.  The Borrower will not assume, guarantee, endorse or otherwise become
directly or contingently liable in connection with any obligations of any other
Person, except:

                                (a)               
the endorsement of negotiable instruments by the Borrower for deposit or
collection or similar transactions in the ordinary course of business; and

                                (b)              
guaranties, endorsements and other direct or contingent liabilities in
connection with the obligations of other Persons, in existence on the date
hereof and listed in Schedule 6.4 hereto.

                Section
6.6             
Investments and Subsidiaries.  The Borrower will not purchase or hold beneficially any stock or
other securities or evidences of indebtedness of, make or permit to exist any
loans or advances to, or make any investment or acquire any interest whatsoever
in, any other Person, including any partnership or joint venture, except:

                                (a)               
investments in direct obligations of the United States of America or any agency
or instrumentality thereof whose obligations constitute full faith and credit
obligations of the United States of America having a maturity of one year or
less, commercial paper issued by U.S. corporations rated "A-1" or "A-2" by
Standard & Poors Corporation or "P-1" or "P-2" by Moody's Investors Service
or certificates of deposit or bankers' acceptances having a maturity of one
year or less issued by members of the Federal Reserve System having deposits in
excess of $100,000,000 (which certificates of deposit or bankers' acceptances
are fully insured by the Federal Deposit Insurance Corporation);

 

36

                                (b)              
travel advances or loans to the Borrower's Officers and employees not exceeding
at any one time an aggregate of $5,000;

                                (c)               
advances in the form of progress payments, prepaid rent not exceeding three (3)
months or security deposits; and

                                (d)              
current investments in the Subsidiaries in existence on the date hereof and
listed in Schedule 5.5 hereto.

                Section
6.7             
Dividends and Distributions.  Except as set forth in this Section 6.7, the Borrower will not
declare or pay any dividends (other than dividends payable solely in stock of
the Borrower) on any class of its stock or make any payment on account of the
purchase, redemption or other retirement of any shares of such stock or make
any distribution in respect thereof, either directly or indirectly. 
Notwithstanding the foregoing, provided that a Default Period is not continuing
or would result therefrom, the Borrower and the Affiliate Borrower may declare
and pay dividends to the Guarantor in an aggregate amount to cover the
Guarantor's corporate overhead expenses.

                Section
6.8             
Salaries.  The Borrower will not pay excessive or unreasonable salaries,
bonuses, commissions, consultant fees or other compensation.

               
Section
6.9             
Books and Records; Inspection and Examination.  The Borrower will keep accurate books of record and account for
itself pertaining to the Collateral and pertaining to the Borrower's business
and financial condition and such other matters as the Lender may from time to
time request in which true and complete entries will be made in accordance with
GAAP and, upon the Lender's request, will permit any officer, employee,
attorney or accountant for the Lender to audit, review, make extracts from or
copy any and all company and financial books and records of the Borrower at all
times during ordinary business hours, to send and discuss with Account Debtors
and other obligors requests for verification of amounts owed to the Borrower,
and to discuss the Borrower's affairs with any of its Directors, Officers,
employees or agents. The Borrower hereby irrevocably authorizes all accountants
and third parties to disclose and deliver to Lender, at the Borrower's expense,
all financial information, books and records, work papers, management reports
and other information in their possession regarding the Borrower. The Borrower
will permit the Lender, or its employees, accountants, attorneys or agents, to
examine and inspect any Collateral or any other property of the Borrower at any
time during ordinary business hours.

                Section
6.10          Account
Verification.  The Lender may at any time and from time to time send or require the
Borrower to send requests for verification of accounts or notices of assignment
to Account Debtors and other obligors. The Lender may also at any time and from
time to time telephone Account Debtors and other obligors to verify accounts.

 

37

                Section
6.11          Compliance with
Laws.

                                (a)               
The Borrower will (i) comply with the requirements of applicable laws and
regulations, the non-compliance with which would materially and adversely
affect its business or its financial condition and (ii) use and keep the
Collateral, and require that others use and keep the Collateral, only for
lawful purposes, without violation of any federal, state or local law, statute
or ordinance.

                                (b)              
Without limiting the foregoing undertakings, the Borrower specifically agrees
that it will comply with all applicable Environmental Laws and obtain and
comply with all permits, licenses and similar approvals required by any
Environmental Laws, and will not generate, use, transport, treat, store or
dispose of any Hazardous Substances in such a manner as to create any material
liability or obligation under the common law of any jurisdiction or any
Environmental Law.

                Section
6.12          Payment of Taxes
and Other Claims.  The Borrower will pay or discharge, when due, (a) all taxes,
assessments and governmental charges levied or imposed upon it or upon its
income or profits, upon any properties belonging to it (including the
Collateral) or upon or against the creation, perfection or continuance of the
Security Interest, prior to the date on which penalties attach thereto, (b) all
federal, state and local taxes required to be withheld by it, and (c) all
lawful claims for labor, materials and supplies which, if unpaid, might by law
become a Lien upon any properties of the Borrower; provided, that the Borrower
shall not be required to pay any such tax, assessment, charge or claim whose
amount, applicability or validity is being contested in good faith by appropriate
proceedings and for which proper reserves have been made.

                Section
6.13          Maintenance of
Properties.

                                (a)               
The Borrower will keep and maintain the Collateral and all of its other
properties necessary or useful in its business in good condition, repair and
working order (normal wear and tear excepted) and will from time to time
replace or repair any worn, defective or broken parts; provided, however, that
nothing in this Section 6.13 shall prevent the Borrower from discontinuing
the operation and maintenance of any of its properties if such discontinuance
is, in the Borrower's judgment, desirable in the conduct of the Borrower's
business and not disadvantageous in any material respect to the Lender. 
The Borrower will take all commercially reasonable steps necessary to protect
and maintain its Intellectual Property Rights.

                                (b)              
The Borrower will defend the Collateral against all Liens, claims or demands of
all Persons (other than the Lender) claiming the Collateral or any interest
therein. The Borrower will keep all Collateral free and clear of all Liens
except Permitted Liens. The Borrower will take all commercially reasonable
steps necessary to prosecute any Person Infringing its Intellectual Property
Rights and to defend itself against any Person accusing it of Infringing any
Person's Intellectual Property Rights.

                Section
6.14          Insurance.  The Borrower will obtain and at all times maintain insurance with
insurers believed by the Borrower to be responsible and reputable, in such
amounts and against such risks as may from time to time be required by the
Lender, but in all events in such amounts and against such risks as is usually
carried by companies engaged in similar business and owning similar properties
in the same general areas in which the Borrower operates. Without limiting the
generality of the foregoing, the Borrower will at all times maintain business
interruption insurance including coverage for force majeure and keep all
tangible Collateral insured against risks of fire (including so-called extended
coverage), theft, collision (for Collateral consisting of motor vehicles) and
such other risks and in such amounts as the Lender may reasonably request, with
any loss payable to the Lender to the extent of its interest, and all policies
of such insurance shall contain a lender's loss payable endorsement for the
Lender's benefit. All policies of liability insurance required hereunder shall
name the Lender as an additional insured.

 

38

                Section
6.15          Preservation of
Existence.  The Borrower will preserve and maintain its existence and all of its
rights, privileges and franchises necessary or desirable in the normal conduct
of its business and shall conduct its business in an orderly, efficient and
regular manner.

                Section
6.16          Delivery of
Instruments, etc.  Upon request by the Lender, the Borrower will promptly deliver to the
Lender in pledge all instruments, documents and chattel paper constituting
Collateral, duly endorsed or assigned by the Borrower.

                Section
6.17          Sale or Transfer
of Assets; Suspension of Business Operations.  The Borrower will not sell, lease, assign, transfer or otherwise
dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of
its assets, or (iii) any Collateral or any interest therein (whether in one
transaction or in a series of transactions) to any other Person other than (x)
the sale of Inventory in the ordinary course of business, and (y) dispositions
of obsolete, worn or nonfunctional equipment.  The Borrower will not
liquidate, dissolve or suspend business operations. The Borrower will not
transfer any part of its ownership interest in any Intellectual Property Rights
and will not permit any agreement under which it has licensed Licensed Intellectual
Property to lapse, except that the Borrower may transfer such rights or permit
such agreements to lapse if it shall have reasonably determined that the
applicable Intellectual Property Rights are no longer useful in its business.
If the Borrower transfers any Intellectual Property Rights for value, the
Borrower will pay over the proceeds to the Lender for application to the
Obligations. The Borrower will not license any other Person to use any of the
Borrower's Intellectual Property Rights, except that the Borrower may grant
licenses in the ordinary course of its business in connection with sales of
Inventory or provision of services to its customers.

                Section
6.18          Consolidation and
Merger; Asset Acquisitions.  The Borrower will not consolidate with or merge into any Person, or
permit any other Person to merge into it, or acquire (in a transaction
analogous in purpose or effect to a consolidation or merger) all or
substantially all the assets of any other Person.

                Section 6.19         
Sale and Leaseback.  The Borrower will not enter into any arrangement, directly or
indirectly, with any other Person whereby the Borrower shall sell or transfer
any real or personal property, whether now owned or hereafter acquired, and
then or thereafter rent or lease as lessee such property or any part thereof or
any other property which the Borrower intends to use for substantially the same
purpose or purposes as the property being sold or transferred.

 

39

                Section
6.20          Restrictions on
Nature of Business.  The Borrower will not engage in any line of business materially
different from that presently engaged in by the Borrower and will not purchase,
lease or otherwise acquire assets not related to its business.

                Section
6.21          Accounting.  The Borrower will not adopt any material change in accounting
principles other than as required by GAAP.  The Borrower will not adopt,
permit or consent to any change in its fiscal year.

                Section
6.22          Discounts, etc.  After notice from the Lender, the Borrower will not grant any
discount, credit or allowance to any customer of the Borrower or accept any
return of goods sold.  The Borrower will not at any time modify, amend,
subordinate, cancel or terminate the obligation of any Account Debtor or other
obligor of the Borrower.

                Section
6.23          Plans.  Unless disclosed to the Lender pursuant to Section 5.12, neither the
Borrower nor any ERISA Affiliate will (i) adopt, create, assume or become a
party to any Pension Plan, (ii) incur any obligation to contribute to any
Multiemployer Plan, (iii) incur any obligation to provide post-retirement
medical or insurance benefits with respect to employees or former employees
(other than benefits required by law) or (iv) amend any Plan in a manner that
would materially increase its funding obligations.

                Section
6.24          Place of
Business; Name.  The Borrower will not transfer its chief executive office or
principal place of business, or move, relocate, close or sell any business
location.  The Borrower will not permit any tangible Collateral or any
records pertaining to the Collateral to be located in any state or area in
which, in the event of such location, a financing statement covering such
Collateral would be required to be, but has not in fact been, filed in order to
perfect the Security Interest.  The Borrower will not change its name or
jurisdiction of organization.

                Section
6.25          Constituent
Documents; S Corporation Status.  The Borrower will not amend its Constituent Documents.  The
Borrower will not become an S Corporation.

                Section
6.26          Transactions With
Affiliates.  The Borrower will not directly or indirectly enter into or permit to
exist any transaction with any Affiliate of the Borrower except for
transactions that are in the ordinary course of the Borrower's business, upon
fair and reasonable terms, that are fully disclosed to the Lender, and that are
no less favorable to the Borrower than would be obtained in an arm's length
transaction with a non-Affiliate.

                Section
6.27          Performance by
the Lender.  If the Borrower at any time fails to perform or observe any of the
foregoing covenants contained in this Article VI or elsewhere herein, and
if such failure shall continue for a period of ten calendar days after the
Lender gives the Borrower written notice thereof (or in the case of the
agreements contained in Sections 6.13 and 6.15, immediately upon the
occurrence of such failure, without notice or lapse of time), the Lender may,
but need not, perform or observe such covenant on behalf and in the name, place
and stead of the Borrower (or, at the Lender's option, in the Lender's name)
and may, but need not, take any and all other actions which the Lender may
reasonably deem necessary to cure or correct such failure (including the
payment of taxes, the satisfaction of Liens, the performance of obligations
owed to Account Debtors or other obligors, the procurement and maintenance of
insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments); and the Borrower shall
thereupon pay to the Lender on demand the amount of all monies expended and all
costs and expenses (including reasonable attorneys' fees and legal expenses)
incurred by the Lender in connection with or as a result of the performance or
observance of such agreements or the taking of such action by the Lender,
together with interest thereon from the date expended or incurred at the
Default Rate.  To facilitate the Lender's performance or observance of
such covenants of the Borrower, the Borrower hereby irrevocably appoints the
Lender, or the Lender's delegate, acting alone, as the Borrower's attorney in
fact (which appointment is coupled with an interest) with the right (but not
the duty) from time to time to create, prepare, complete, execute, deliver,
endorse or file in the name and on behalf of the Borrower any and all
instruments, documents, assignments, security agreements, financing statements,
applications for insurance and other agreements and writings required to be
obtained, executed, delivered or endorsed by the Borrower under this
Section 6.27.

 

40

ARTICLE VII

EVENTS OF DEFAULT, RIGHTS AND REMEDIES

                Section
7.1             
Events of Default.  "Event of Default", wherever used herein, means any one of the
following events:

                                (a)               
Default in the payment of any Obligations when they become due and payable;

                                (b)              
Default in the performance, or breach, of any covenant or agreement of the
Borrower contained in this Agreement

                                (c)               
A Change of Control shall occur;

                                (d)              
Any Financial Covenant shall become inapplicable due to the lapse of time and
the failure to amend any such covenant to cover future periods;

                                (e)               
An Insolvency Proceeding is commenced by the Borrower or any Guarantor;

                                (f)                
An Insolvency Proceeding is commenced against the Borrower, or any Guarantor,
and any of the following events occur:  (a) the Borrower or such Guarantor
consents to the institution of such Insolvency Proceeding against it,
(b) the petition commencing the Insolvency Proceeding is not timely
controverted, (c) the petition commencing the Insolvency Proceeding is not
dismissed within 45 calendar days of the date of the filing thereof; provided,
however, that, during the pendency of
such period, the Lender shall be relieved of its obligations to extend credit
hereunder, (d) an interim trustee is appointed to take possession of all
or any substantial portion of the properties or assets of, or to operate all or
any substantial portion of the business of, the Borrower or any such Guarantor,
or (e) an order for relief shall have been entered therein;

 

41

                                (g)               
Any material portion of the Borrower's or any Guarantor's assets is attached,
seized, subjected to a writ or distress warrant, levied upon, or comes into the
possession of any third Person;

                                (h)               
The Borrower or any Guarantor is enjoined, restrained, or in any way prevented
by court order from continuing to conduct all or any material part of its
business affairs;

                                (i)                 
A notice of Lien, levy, or assessment is filed of record with respect to any of
the Borrower's or any Guarantor's assets by the United States, or any
department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, or if any taxes or debts owing at any time
hereafter to any one or more of such entities becomes a Lien, whether choate or
otherwise, upon any of the Borrower's or any Guarantor's assets and the same is
not paid before such payment is delinquent;

                                (j)                
This Agreement or any other Loan Document that purports to create a Lien,
shall, for any reason, fail or cease to create a valid and perfected and,
except to the extent permitted by the terms hereof or thereof, first priority
Lien on or security interest in the Collateral covered hereby or thereby; 

                                (k)              
Any provision of any Loan Document shall at any time for any reason be declared
to be null and void, or the validity or enforceability thereof shall be
contested by Borrower, or a proceeding shall be commenced by Borrower, or by
any Governmental Authority having jurisdiction over Borrower, seeking to establish
the invalidity or unenforceability thereof, or Borrower shall deny that
Borrower has any liability or obligation purported to be created under any Loan
Document.

                                (l)                 
Any representation or warranty made by the Borrower in this Agreement, by any
Guarantor in any guaranty delivered to the Lender, or by the Borrower (or any
of its Officers) or any Guarantor in any agreement, certificate, instrument or
financial statement or other statement contemplated by or made or delivered
pursuant to or in connection with this Agreement or any such guaranty shall
prove to have been incorrect in any material respect when deemed to be
effective;

                                (m)             
The rendering against the Borrower of an arbitration award, final judgment,
decree or order for the payment of money in excess of $200,000 and the
continuance of such arbitration award, judgment, decree or order unsatisfied
and in effect for any period of 30 consecutive days without a stay of
execution;

                                (n)               
A default under any bond, debenture, note or other evidence of material
Indebtedness of the Borrower owed to any Person other than the Lender, or under
any indenture or other instrument under which any such evidence of Indebtedness
has been issued or by which it is governed, or under any material lease or
other contract, and the expiration of the applicable period of grace, if any,
specified in such evidence of Indebtedness, indenture, other instrument, lease
or contract;

 

42

                                (o)              
Any Reportable Event, which the Lender determines in good faith might
constitute grounds for the termination of any Pension Plan or for the
appointment by the appropriate United States District Court of a trustee to
administer any Pension Plan, shall have occurred and be continuing 30 days after
written notice to such effect shall have been given to the Borrower by the
Lender; or a trustee shall have been appointed by an appropriate United States
District Court to administer any Pension Plan; or the Pension Benefit Guaranty
Corporation shall have instituted proceedings to terminate any Pension Plan or
to appoint a trustee to administer any Pension Plan; or the Borrower or any
ERISA Affiliate shall have filed for a distress termination of any Pension Plan
under Title IV of ERISA; or the Borrower or any ERISA Affiliate shall have
failed to make any quarterly contribution required with respect to any Pension
Plan under Section 412(m) of the IRC, which the Lender determines in good faith
may by itself, or in combination with any such failures that the Lender may
determine are likely to occur in the future, result in the imposition of a Lien
on the Borrower's assets in favor of the Pension Plan; or any withdrawal,
partial withdrawal, reorganization or other event occurs with respect to a
Multiemployer Plan which results or could reasonably be expected to result in a
material liability of the Borrower to the Multiemployer Plan under Title IV of
ERISA.

                                 (p)              
An event of default shall occur under any Security Document;

                               (q)              
The Borrower shall liquidate, dissolve, terminate or suspend its business
operations or otherwise fail to operate its business in the ordinary course, or
sell or attempt to sell all or substantially all of its assets;

                                (r)                
Default in the payment of any amount owed by the Borrower to the Lender other
than any Indebtedness arising hereunder;

                                (s)               
Any Guarantor or person signing a support agreement in favor of the Lender
shall repudiate, purport to revoke or fail to perform his obligations under his
guaranty or support agreement in favor of the Lender, any individual Guarantor
shall die or any other Guarantor shall cease to exist;

                                (t)                
The Borrower shall take or participate in any action which would be prohibited
under the provisions of any Subordination Agreement or make any payment on the
Subordinated Indebtedness that any Person was not entitled to receive under the
provisions of the applicable Subordination Agreement;

                                (u)               
Any event or circumstance with respect to the Borrower shall occur such that
the Lender shall believe in good faith that the prospect of payment of all or
any part of the Obligations or the performance by the Borrower under the Loan
Documents is impaired or any material adverse change in the business or
financial condition of the Borrower shall occur;

                                (v)               
Any Event of Default under the Affiliate Credit Agreement shall occur, or any
other breach, default or event of default by or attributable to any Affiliate
under any agreement between such Affiliate and the Lender shall occur; or

                                (w)             
Any other Material Adverse Effect shall occur.

 

43

                Section
7.2             
Rights and Remedies.  During any Default Period, the Lender may exercise any or all of the
following rights and remedies, all of which the Borrower acknowledges and
agrees are commercially reasonable:

                                (a)               
the Lender may, by notice to the Borrower, declare the Commitment to be
terminated, whereupon the same shall forthwith terminate;

                                (b)              
the Lender may, by notice to the Borrower, declare the Obligations to be
forthwith due and payable, whereupon all Obligations shall become and be
forthwith due and payable, without presentment, notice of dishonor, protest or
further notice of any kind, all of which the Borrower hereby expressly waives;

                                (c)               
the Lender may, without notice to the Borrower and without further action,
apply any and all money owing by the Lender to the Borrower to the payment of
the Obligations;

                                (d)              
the Lender may settle or adjust disputes and claims directly with Account
Debtors for amounts and upon terms which the Lender considers advisable, and in
such cases, the Lender will credit the Obligations with only the net amounts
received by the Lender in payment of such disputed Accounts after deducting all
expenses incurred or expended by the Lender in connection therewith;

                                (e)               
the Lender may cause the Borrower to hold all returned Inventory in trust for
the Lender, segregate all returned Inventory from all other assets of the
Borrower or in the Borrower's possession and conspicuously label said returned
Inventory as the property of the Lender;

                                (f)                
without notice to or demand upon the Borrower or any Guarantor, the Lender may make
such payments and do such acts as the Lender considers necessary or reasonable
to protect its security interests in the Collateral.  The Borrower agrees
to assemble the Collateral if the Lender so requires, and to make the
Collateral available to the Lender at a place that the Lender may designate
which is reasonably convenient to both parties.  The Borrower authorizes
Lender to enter the premises where the Collateral is located, to take and
maintain possession of the Collateral, or any part of it, and to pay, purchase,
contest, or compromise any Lien that in the Lender's determination appears to
conflict with the Lender's Liens and to pay all expenses incurred in connection
therewith and to charge the Obligations therefor.  With respect to any of
the Borrower's owned or leased premises, the Borrower hereby grants the Lender
a license to enter into possession of such premises and to occupy the same,
without charge, in order to exercise any of the Lender's rights or remedies
provided herein, at law, in equity, or otherwise;

                                (g)               
without notice to Borrower (such notice being expressly waived), and without
constituting a retention of any collateral in satisfaction of an obligation
(within the meaning of the UCC), the Lender may set off and apply to the
Obligations any and all (i) balances and deposits of the Borrower held by the
Lender (including any amounts received in the Lockbox), or (ii) Indebtedness at
any time owing to or for the credit or the account of the Borrower held by
Lender;

 

44

                                (h)               
the Lender may hold, as cash collateral, any and all balances and deposits of
the Borrower held by the Lender, and any amounts received in the Lockbox, to
secure the full and final repayment of all of the Obligations;

                                (i)                 
the Lender may ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein) the
Collateral;

                                (j)                
the Lender may sell the Collateral at either a public or private sale, or both,
by way of one or more contracts or transactions, for cash or on terms, in such
manner and at such places (including the Borrower's premises) as the Lender
determines is commercially reasonable.  It is not necessary that the
Collateral be present at any such sale;

                                (k)              
the Lender shall give notice of the disposition of the Collateral as follows:

                                                (i)                 
The Lender shall give the Borrower a notice in writing of the time and place of
public sale, or, if the sale is a private sale or some other disposition other
than a public sale is to be made of the Collateral, the time on or after which
the private sale or other disposition is to be made; and

                                                (ii)               
The notice shall be personally delivered or mailed, postage prepaid, to the
Borrower as provided in Section 8.3, at least 10 days before the
earliest time of disposition set forth in the notice; no notice needs to be
given prior to the disposition of any portion of the Collateral that is
perishable or threatens to decline speedily in value or that is of a type
customarily sold on a recognized market;

                                (l)                 
the Lender may credit bid and purchase at any public sale; 

                                (m)             
the Lender may seek the appointment of a receiver or keeper to take possession
of all or any portion of the Collateral or to operate same and, to the maximum
extent permitted by law, may seek the appointment of such a receiver without
the requirement of prior notice or a hearing;

                                (n)               
If the Lender sells any of the Collateral on credit, the Obligations will be
reduced only to the extent of payments actually received. If the purchaser
fails to pay for the Collateral, the Lender may resell the Collateral and shall
apply any proceeds actually received to the Obligations;

                                (o)              
the Lender shall have no obligation to attempt to satisfy the Obligations by
collecting them from any third Person which may be liable for them or any
portion thereof, and the Lender may release, modify or  waive any
collateral provided by any other Person as security for the Obligations or any
portion thereof, all without affecting the Lender's rights against the
Borrower.  The Borrower waives any right it may have to require the Lender
to pursue any third Person for any of the Obligations;

                                (p)              
the Lender may make demand upon the Borrower and, forthwith upon such demand,
the Borrower will pay to the Lender in immediately available funds for deposit
in the Special Account pursuant to Section 2.4 an amount equal to the aggregate
maximum amount available to be drawn under all Letters of Credit then
outstanding, assuming compliance with all conditions for drawing thereunder;

 

45

                                (q)              
the Lender may exercise and enforce its rights and remedies under the Loan
Documents; and

                                (r)                
the Lender may exercise any other rights and remedies available to it by law or
agreement.

Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in subsections (e) or (f) of Section 7.1, the Obligations shall be
immediately due and payable automatically without presentment, demand, protest
or notice of any kind.

                Section
7.3             
Disclaimer of Warranties.  The Lender may sell the Collateral without giving any warranties as to the
Collateral.  The Lender may specifically disclaim any warranties of title
or the like.  This procedure will not be considered to adversely affect
the commercial reasonableness of any sale of the Collateral.

                Section
7.4             
Compliance With Laws.  The Lender may comply with any applicable state or federal law requirements
in connection with a disposition of the Collateral, and the Lender's compliance
therewith will not be considered to adversely affect the commercial
reasonableness of any sale of the Collateral.

                Section
7.5             
No Marshalling.  The Lender shall be under no obligation to marshal any assets in favor of
the Borrower, or against or in payment of the Obligations or any other
obligation owned to the Lender by the Borrower or any other Person.

                Section
7.6             
Borrower to Cooperate.  Upon the exercise by the Lender of any power, right, privilege, or remedy
pursuant to this Agreement which requires any consent, approval, registration,
qualification, or authorization of any Governmental Authority, the Borrower
agrees to execute and deliver, or will cause the execution and delivery of, all
applications, certificates, instruments, assignments, and other documents and
papers that the Lender or any purchaser of the Collateral may be required to
obtain for such governmental consent, approval, registration, qualification, or
authorization.

                Section
7.7             
Application of Proceeds.  All proceeds realized as the result of any sale of the Collateral shall be
applied by the Lender:

                              
FIRST to the costs, expenses, liabilities, obligations and attorneys' fees
incurred by the Lender in the exercise of its rights under this Agreement;

                               
SECOND to the interest and fees due upon any of the Obligations; and

                             
THIRD to the principal of the Obligations, in such order as the Lender shall
determine in its sole discretion.  Any surplus shall be paid to the
Borrower or other Persons legally entitled thereto; the Borrower shall remain
liable to the Lender for any deficiency.

 

46

                Section
7.8             
Remedies Cumulative.  The rights and remedies of the Lender under this Agreement, the other Loan
Documents, and all other agreements contemplated hereby and thereby shall be
cumulative.  The Lender shall have all other rights and remedies not
inconsistent herewith as provided under the UCC, by law, or in equity.  No
exercise by the Lender of any one right or remedy shall be deemed an election
of remedies, and no waiver by the Lender of any default on the Borrower's part
shall be deemed a continuing waiver of any further defaults.

                Section
7.9             
Lender Not Liable For The Collateral.  So long as the Lender complies with the obligations, if any, imposed by the
UCC,  the Lender shall not otherwise be liable or responsible in any way
or manner for:  (a) the safekeeping of the Collateral; (b) any loss or
damage thereto occurring or arising in any manner or fashion or from any cause;
(c) any diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever.  The
Borrower bears the risk of loss or damage of the Collateral.

ARTICLE VIII

MISCELLANEOUS

                Section
8.1             
No Waiver.  No failure or delay by the Lender in exercising any right, power or
remedy under the Loan Documents shall operate as a waiver thereof; 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 under the Loan Documents.

                Section
8.2             
Amendments, Etc.   No amendment, modification, termination or waiver of any provision of
any Loan Document or consent to any departure by the Borrower therefrom or any
release of a Security Interest shall be effective unless the same shall be in
writing and signed by the Lender, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given. No notice to or demand on the Borrower in any case shall entitle the
Borrower to any other or further notice or demand in similar or other
circumstances.

                Section
8.3             
Addresses for Notices; Requests for Accounting.  Except as otherwise expressly provided herein, all notices, requests,
demands and other communications provided for under the Loan Documents shall be
in writing and shall be (a) personally delivered, (b) sent by first class
United States mail, (c) sent by overnight courier of national reputation, or (d)
transmitted by telecopy, in each case addressed or telecopied to the party to
whom notice is being given at its address or telecopier number as set forth
below next to its signature or, as to each party, at such other address or
telecopier number as may hereafter be designated by such party in a written
notice to the other party complying as to delivery with the terms of this
Section. All such notices, requests, demands and other communications shall be
deemed to have been given on (a) the date received if personally delivered, (b)
when deposited in the mail if delivered by mail, (c) the date sent if sent by
overnight courier, or (d) the date of transmission if delivered by telecopy,
except that notices or requests to the Lender pursuant to any of the provisions
of Article II shall not be effective until received by the Lender. All requests
under Section 9210 of the UCC (i) shall be made in a writing signed by a person
authorized under Section 2.2(a), (ii) shall be personally delivered, sent by
registered or certified mail, return receipt requested, or by overnight courier
of national reputation (iii) shall be deemed to be sent when received by the
Lender and (iv) shall otherwise comply with the requirements of
Section 9210. The Borrower requests that the Lender respond to all such
requests which on their face appear to come from an authorized individual and
releases the Lender from any liability for so responding. The Borrower shall
pay Lender the maximum amount allowed by law for responding to such requests.

 

47

                Section
8.4             
Further Documents.  The Borrower will from time to time execute and deliver or endorse
any and all instruments, documents, conveyances, assignments, security
agreements, financing statements, control agreements and other agreements and
writings that the Lender may reasonably request in order to secure, protect,
perfect or enforce the Security Interest or the Lender's rights under the Loan
Documents (but any failure to request or assure that the Borrower executes,
delivers or endorses any such item shall not affect or impair the validity,
sufficiency or enforceability of the Loan Documents and the Security Interest,
regardless of whether any such item was or was not executed, delivered or
endorsed in a similar context or on a prior occasion).

                Section
8.5             
Costs and Expenses.  The Borrower shall pay on demand all costs and expenses, including
reasonable attorneys' fees, incurred by the Lender in connection with the
Obligations, this Agreement, the Loan Documents, any Letter of Credit and any
other document or agreement related hereto or thereto, and the transactions
contemplated hereby, including all such costs, expenses and fees incurred in
connection with the negotiation, preparation, execution, amendment, administration,
performance, collection and enforcement of the Obligations and all such
documents and agreements and the creation, perfection, protection,
satisfaction, foreclosure or enforcement of the Security Interest.

               
Section
8.6             
Indemnity.  In addition to the payment of expenses pursuant to Section 8.5, the
Borrower shall indemnify, defend and hold harmless the Lender, and any of its
participants, parent corporations, subsidiary corporations, affiliated
corporations, successor corporations, and all present and future officers,
directors, employees, attorneys and agents of the foregoing (the "Indemnitees")
from and against any of the following (collectively, "Indemnified
Liabilities"):

                                                (i)                 
any and all transfer taxes, documentary taxes, assessments or charges made by
any governmental authority by reason of the execution and delivery of the Loan
Documents or the making of the Advances;

                                                (ii)               
any claims, loss or damage to which any Indemnitee may be subjected if any
representation or warranty contained in Section 5.14 proves to be incorrect in
any respect or as a result of any violation of the covenant contained in
Section 6.11(b); and

                                                (iii)              
any and all other liabilities, losses, damages, penalties, judgments, suits,
claims, costs and expenses of any kind or nature whatsoever (including the
reasonable fees and disbursements of counsel) in connection with the foregoing
and any other investigative, administrative or judicial proceedings, whether or
not such Indemnitee shall be designated a party thereto, which may be imposed
on, incurred by or asserted against any such Indemnitee, in any manner related
to or arising out of or in connection with the making of the Advances and the
Loan Documents or the use or intended use of the proceeds of the Advances.

 

48

If any investigative, judicial or administrative proceeding arising from any
of the foregoing is brought against any Indemnitee, upon such Indemnitee's
request, the Borrower, or counsel designated by the Borrower and satisfactory
to the Indemnitee, will resist and defend such action, suit or proceeding to
the extent and in the manner directed by the Indemnitee, at the Borrower's sole
costs and expense. Each Indemnitee will use its best efforts to cooperate in
the defense of any such action, suit or proceeding. If the foregoing
undertaking to indemnify, defend and hold harmless may be held to be
unenforceable because it violates any law or public policy, the Borrower shall
nevertheless make the maximum contribution to the payment and satisfaction of
each of the Indemnified Liabilities which is permissible under applicable law.
The Borrower's obligation under this Section 8.6 shall survive the termination
of this Agreement and the discharge of the Borrower's other obligations
hereunder.

                Section
8.7             
Participants. The Borrower hereby authorizes the Lender to disclose to any assignee
or any participant (either, a "Transferee") and any prospective Transferee any
and all financial information in the Lender's possession concerning Borrower
which has been delivered to the Lender by the Borrower pursuant to this
Agreement or which has been delivered to the Lender by the Borrower in
connection with the Lender's credit evaluation prior to entering into this
Agreement.  The Lender and its participants, if any, are not partners or
joint venturers, and the Lender shall not have any liability or responsibility
for any obligation, act or omission of any of its participants. All rights and
powers specifically conferred upon the Lender may be transferred or delegated
to any of the Lender's participants, successors or assigns.

                Section
8.8             
Advertising and Promotion.  The Borrower agrees that the Lender may use the Borrower's name(s) in
advertising and promotional materials, and in conjunction therewith, the Lender
may disclose the amount of the Commitment and the purpose thereof.

                Section
8.9             
Execution in Counterparts; Telefacsimile Execution.  This Agreement and other Loan Documents may be executed in any number
of counterparts, each of which when so executed and delivered shall be deemed
to be an original and all of which counterparts, taken together, shall
constitute but one and the same instrument. Delivery of an executed counterpart
of this Agreement by telefacsimile shall be equally as effective as delivery of
an original executed counterpart of this Agreement. Any party delivering an
executed counterpart of this Agreement by telefacsimile also shall deliver an
original executed counterpart of this Agreement but the failure to deliver an
original executed counterpart shall not affect the validity, enforceability,
and binding effect of this Agreement.

                Section
8.10          Retention of
Borrower's Records.  The Lender shall have no obligation to maintain any electronic
records or any documents, schedules, invoices, agings, or other papers
delivered to the Lender by the Borrower or in connection with the Loan
Documents for more than four months after receipt by the Lender.

 

49

                Section
8.11          Binding Effect;
Assignment; Complete Agreement; Exchanging Information.  The Loan Documents shall be binding upon and inure to the benefit of
the Borrower and the Lender and their respective successors and assigns, except
that the Borrower shall not have the right to assign its rights thereunder or
any interest therein without the Lender's prior written consent. To the extent
permitted by law, the Borrower waives and will not assert against any assignee
any claims, defenses or set-offs which the Borrower could assert against the
Lender. This Agreement shall also bind all Persons who become a party to this
Agreement as a borrower. This Agreement, together with the Loan Documents,
comprises the complete and integrated agreement of the parties on the subject
matter hereof and supersedes all prior agreements, written or oral, on the
subject matter hereof. Without limiting the Lender's right to share information
regarding the Borrower and its Affiliates with the Lender's participants,
accountants, lawyers and other advisors, the Lender, Wells Fargo & Company,
and all direct and indirect subsidiaries of Wells Fargo & Company, may
exchange any and all information they may have in their possession regarding
the Borrower and its Affiliates, and the Borrower waives any right of confidentiality
it may have with respect to such exchange of such information.

                Section
8.12          Severability of
Provisions.  Any provision of this Agreement which is prohibited or unenforceable
shall be ineffective to the extent of such prohibition or unenforceability
without invalidating the remaining provisions hereof.

                Section
8.13          Revival and
Reinstatement of Obligations.  If the incurrence or payment of the Obligations by the Borrower or
the Guarantor or the transfer to the Lender of any property should for any
reason subsequently be declared to be void or voidable under any state or
federal law relating to creditors' rights, including provisions of the
Bankruptcy Code relating to fraudulent conveyances, preferences, or other
voidable or recoverable payments of money or transfers of property
(collectively, a "Voidable Transfer"), and if the Lender is required to repay
or restore, in whole or in part, any such Voidable Transfer, or elects to do so
upon the reasonable advice of its counsel, then, as to any such Voidable
Transfer, or the amount thereof that the Lender is required or elects to repay
or restore, and as to all reasonable costs, expenses, and attorneys fees of the
Lender related thereto, the liability of the Borrower or the Guarantor
automatically shall be revived, reinstated, and restored and shall exist as
though such Voidable Transfer had never been made.

                Section
8.14          Headings.  Article, Section and subsection headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.

                Section
8.15          Governing Law;
Jurisdiction, Venue; Waiver of Jury Trial.  The Loan Documents shall be governed by and construed in accordance
with the substantive laws (other than conflict laws) of the State of
California. The parties hereto hereby (i) consent to the personal jurisdiction
of the state and federal courts located in the State of California in
connection with any controversy related to this Agreement; (ii) waive any
argument that venue in any such forum is not convenient, (iii) agree that any
litigation initiated by the Lender or the Borrower in connection with this
Agreement or the other Loan Documents may be venued in either the State or Federal
courts located in Los Angeles County, California; and (iv) agree that a
final judgment in any such suit, action or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law.

 

50

THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING
BASED ON OR PERTAINING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT.

ARTICLE IX

JOINT AND SEVERAL LIABILITY

                Section
9.1             
Joint and Several Liability.  The Borrower agrees that it is jointly and severally, directly and
primarily liable to the Lender for payment, performance and satisfaction in
full of the Obligations and that such liability is independent of the duties,
obligations, and liabilities of the Affiliate Borrower.  The Lender may
bring a separate action or actions on each, any, or all of the Obligations
against the Borrower, whether action is brought against the Affiliate Borrower
or whether the Affiliate Borrower is joined in such action.  In the event
that the Affiliate Borrower fails to make any payment of any Obligation on or
before the due date thereof, the Borrower immediately shall cause such payment
to be made or each of such obligations to be made or each of such Obligations
to be performed, kept, observed, or fulfilled.

                Section
9.2             
Primary Obligation; Waiver of Marshalling.  This Agreement and the Loan Documents to which the Borrower is a
party are a primary and original obligation of the Borrower, are not the
creation of a surety relationship, and are an absolute, unconditional, and
continuing promise of payment and performance which shall remain in full force
and effect without respect to future changes in conditions, including any
change of law or any invalidity or irregularity with respect to this Agreement
or the Loan Documents to which the Borrower is a party.  The Borrower
agrees that its liability under this Agreement and the Loan Documents to which
the Borrower is a party shall be immediate and shall not be contingent upon the
exercise or enforcement by the Lender of whatever remedies it may have against
the Affiliate Borrower, or the enforcement of any lien or realization upon any
security the Lender may at any time possess. The Borrower consents and agrees
that the Lender shall be under no obligation to marshal any assets of the
Borrower or the Affiliate Borrower against or in payment of any or all of the
Obligations.

                Section
9.3             
Continuing Liability.  The liability of the Borrower under this Agreement and the Loan
Documents to which the Borrower is a party includes Obligations arising under
successive transactions continuing, compromising, extending, increasing,
modifying, releasing, or renewing the Obligations, changing the interest rate,
payment terms, or other terms and conditions thereof, or creating new or
additional Obligations after prior Obligations have been satisfied in whole or
in part.  To the maximum extent permitted by law, the Borrower hereby
waives any right to revoke its liability under this Agreement and the Loan
Documents as to future indebtedness.

 

51

                Section
9.4             
Additional Waivers.

                                (a)               
The Borrower absolutely, unconditionally, knowingly, and expressly waives:

                                                (i)                 
(1) notice of acceptance hereof; (2) notice of any Advances or other financial
accommodations made or extended under the Affiliate Credit Agreement or the
Affiliate Loan Documents or the creation or existence of any Obligations; (3)
notice of the amount of the Obligations, subject, however, to the Borrower's
right to make inquiry of the Lender to ascertain the amount of the Obligations
at any reasonable time; (4) notice of any adverse change in the financial
condition of the Affiliate Borrower or of any fact that might increase the
Borrower's risk hereunder; (5) notice of presentment for payment, demand,
protest, and notice thereof as to any instruments among the Affiliate Loan
Documents; (6) notice of any Event of Default or Default under the Affiliate
Credit Agreement; and (7) all other notices (except if such notice is
specifically required to be given to the Borrower hereunder or under the Loan
Documents to which the Borrower is a party) and demands to which the Borrower
might otherwise be entitled.

                                                (ii)               
its right, under Sections 2845 or 2850 of the California Civil Code, or
otherwise, to require the Lender to institute suit against, or to exhaust any
rights and remedies which the Lender has or may have against the Affiliate
Borrower or any third Person, or against any collateral for the Obligations
provided by the Affiliate Borrower or any third Person.  The Borrower
further waives any defense arising by reason of any disability or other defense
(other than the defense that the Obligations shall have been fully and finally
performed and indefeasibly paid) of any third party or by reason of the
cessation from any cause whatsoever of the liability of any third party in
respect thereof.

                                                (iii)              
any rights to assert against the Lender any defense (legal or equitable),
set-off, counterclaim, or claim which the Borrower may now or at any time
hereafter have against the Affiliate Borrower or any other party liable to the
Lender; (2)  any defense, set-off, counterclaim, or claim, of any kind or
nature, arising directly or indirectly from the present or future lack of
perfection, sufficiency, validity, or enforceability of the Obligations or any
security therefor; (3) any defense the Borrower has to performance hereunder,
and any right The Borrower has to be exonerated, provided by Sections 2819,
2822, or 2825 of the California Civil Code, or otherwise, arising by reason
of:  the impairment or suspension of the Lender's rights or remedies
against the Affiliate Borrower or any third Person; the alteration by the
Lender of the Obligations; any discharge of the Affiliate Borrower or any third
Person's obligations to the Lender by operation of law as a result of the
Lender's intervention or omission; or the acceptance by the Lender of anything
in partial satisfaction of the Obligations; and (4) the benefit of any statute
of limitations affecting the Affiliate Borrower or such third Person's
liability hereunder or the enforcement thereof, and any act which shall defer
or delay the operation of any statute of limitations applicable to the Obligations
shall similarly operate to defer or delay the operation of such statute of
limitations applicable to the Borrower's liability hereunder.

                                                (iv)             
The Borrower hereby absolutely, unconditionally, knowingly, and expressly
waives: (i) any right of subrogation the Borrower has or may have as against
the Affiliate Borrower or any third Person with respect to the Obligations;
(ii) any right to proceed against the Affiliate Borrower or any third Person,
now or hereafter, for contribution, indemnity, reimbursement, or any other
suretyship rights and claims, whether direct or indirect, liquidated or
contingent, whether arising under express or implied contract or by operation
of law, which the Borrower may now have or hereafter have as against the Affiliate
Borrower or any third Person with respect to the Obligations; and (iii) any
right to proceed or seek recourse against or with respect to any property or
asset of the Affiliate Borrower or any third Person.

 

52

                                                (v)               
The Borrower absolutely, unconditionally, knowingly, and expressly waives any
defense arising by reason of or deriving from (i) any claim or defense based
upon an election of remedies by the Lender including any defense based upon an
election of remedies by the Lender under the provisions of Sections 580a, 580b,
580d, and 726 of the California Code of Civil Procedure or any similar law of
California or any other jurisdiction; or (ii) any election by the Lender under
Section 1111(b) of the Bankruptcy Code to limit the amount of, or any collateral
securing, its claim against the Affiliate Borrower.  Pursuant to
California Civil Code Section 2856(b):

                                                The Borrower waives all rights and defenses arising out of an election of
remedies by the Lender, even though that election of remedies, such as a
nonjudicial foreclosure with respect to security for the Obligations, has
destroyed the Borrower's rights of subrogation and reimbursement against the
Affiliate Borrower by the operation of Section 580(d) of the California Code of
Civil Procedure or otherwise.

                                                The Borrower waives all rights and defenses that the Borrower may have
because the Obligations are secured by real property.  This means, among
other things:  (1) the Lender may collect from the Borrower without first
foreclosing on any real or personal property collateral pledged by the
Affiliate Borrower; and (2) if the Lender forecloses on any real property
collateral pledged by the Affiliate Borrower:  (A) the amount of the
Obligations may be reduced only by the price for which that collateral is sold
at the foreclosure sale, even if the collateral is worth more than the sale
price; and (B) the Lender may collect from the Borrower even if the Lender, by
foreclosing on the real property collateral, has destroyed any right The
Borrower may have to collect from the Affiliate Borrower.  This is an
unconditional and irrevocable waiver of any rights and defenses the Borrower
may have because the Obligations are secured by real property.  These
rights and defenses include, but are not limited to, any rights or defenses
based upon Section 580a, 580b, 580d, or 726 of the California Code of Civil
Procedure.

                                (b)              
The Borrower also agrees that the "fair market value" provisions of Section
580a of the California Code of Civil Procedure shall have no applicability with
respect to the determination of the Borrower's liability under this Agreement
and the Loan Documents to which the Borrower is a party.

                                (c)               
WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER PROVISION SET
FORTH IN THIS AGREEMENT, THE BORROWER HEREBY ABSOLUTELY, KNOWINGLY,
UNCONDITIONALLY, AND EXPRESSLY WAIVES AND AGREES NOT TO ASSERT ANY AND ALL
BENEFITS OR DEFENSES ARISING DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE OF
CALIFORNIA CIVIL CODE SECTIONS 2799, 2808, 2809, 2810, 2815, 2819, 2820, 2821,
2822, 2825, 2839, 2845, 2848, 2849, AND 2850, CALIFORNIA CODE OF CIVIL
PROCEDURE SECTIONS 580a, 580b, 580c, 580d AND 726, CALIFORNIA UNIFORM
COMMERCIAL CODE SECTIONS 3116, 3118, 3119, 3419, AND 3605, AND CHAPTER 2 OF
TITLE 14 OF PART 4 OF DIVISION 3 OF THE CALIFORNIA CIVIL CODE.

 

53

                Section
9.5             
Settlement or Releases.  The Borrower consents and agrees that, without notice to or by the
Borrower, and without affecting or impairing the liability of the Borrower
hereunder, the Lender may, by action or inaction:

                                (a)               
compromise, settle, extend the duration or the time for the payment of, or
discharge the performance of, or may refuse to or otherwise not enforce the
Affiliate Credit Agreement or the Affiliate Loan Documents, or any part
thereof, with respect to the Affiliate Borrower or any third Person;

                                (b)              
release the Affiliate Borrower any third Person or grant other indulgences to
the Affiliate Borrower or any guarantor of the Obligations in respect thereof;

                                (c)               
amend or modify in any manner and at any time (or from time to time) any of the
Affiliate Loan Documents or the Affiliate Credit Agreement; or

                                (d)              
release or substitute any guarantor, if any, of the Obligations, or enforce,
exchange, release, or waive any security for the Obligations or any other
guaranty of the Obligations, or any portion thereof.

                Section
9.6             
No Election.  The Lender shall have the right to seek recourse against the
Borrower to the fullest extent provided for herein, and no election by the
Lender to proceed in one form of action or proceeding, or against any party, or
on any obligation, shall constitute a waiver of the Lender's right to proceed
in any other form of action or proceeding or against other parties unless the
Lender has expressly waived such right in writing.  Specifically, but
without limiting the generality of the foregoing, no action or proceeding by
the Lender under this Agreement, the Loan Documents, the Affiliate Loan
Documents or the Affiliate Credit Agreement, shall serve to diminish the
liability of the Borrower under this Agreement and the Loan Documents to which
the Borrower is a party except to the extent that the Lender finally and
unconditionally shall have realized indefeasible payment by such action or
proceeding.

 

54

                Section
9.7             
Indefeasible Payment.  The Obligations shall not be considered indefeasibly paid unless and
until all payments to the Lender are no longer subject to any right on the part
of any Person, including the Affiliate Borrower, the Affiliate Borrower as a
debtor in possession, or any trustee (whether appointed pursuant to the
Bankruptcy Code, or otherwise) of the Affiliate Borrower's assets to invalidate
or set aside such payments or to seek to recoup the amount of such payments or
any portion thereof, or to declare same to be fraudulent or preferential. 
In the event that, for any reason, any portion of such payments to the Lender
is set aside or restored, whether voluntarily or involuntarily, after the
making thereof, then the obligation intended to be satisfied thereby shall be
revived and continued in full force and effect as if said payment or payments
had not been made, and the Borrower shall be liable for the full amount the
Lender is required to repay plus any and all costs and expenses (including
attorneys' fees and attorneys' fees incurred in proceedings brought under the
Bankruptcy Code) paid by the Lender in connection therewith.

                Section
9.8             
Financial Condition of the Affiliate Borrower.  The Borrower acknowledges that it is presently informed as to the
financial condition of the Affiliate Borrower and of all other circumstances
which a diligent inquiry would reveal and which bear upon the risk of
nonpayment of the Obligations.  The Borrower hereby covenants that it will
continue to keep informed as to the financial condition the Affiliate Borrower,
the status of the other the Affiliate Borrower and of all circumstances which
bear upon the risk of nonpayment.  Absent a written request from the
Borrower to the Lender for information, the Borrower hereby waives any and all
rights it may have to require the Lender to disclose to the Borrower any
information which the Lender may now or hereafter acquire concerning the
condition or circumstances of the Affiliate Borrower.

 

*   *    *

[remainder of this page intentionally
left blank]

*    *    *

 

55

                IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.

	
  Micro Motors, Inc.

  151 E. Columbine

  Santa Ana, CA  92707

  Telecopier:  (714) 433-7200

  Attention:  Jeffrey J. Ritchey

  e-mail:  jefrit@micromotorsinc.com

   

   

  	
  MICRO MOTORS, INC.

  By:                                                                  
  

            Patrick Johnson,
  President

  
	
  Wells Fargo Business Credit, Inc.

  245 S. Los Robles Avenue, Suite 600

  Pasadena, California  91101

  Telecopier:  (626) 844‐9063

  Attention:  Harry L. Joe

  e-mail:  joeharry@wellsfargo.com

   

  	
  WELLS FARGO BUSINESS CREDIT, INC.

  By:                                                                  
  

            Jeffrey A.
  Heisinger, Vice President

  

56

 

  
  	Table of Exhibits and Schedules
	 	 
	

Exhibit A   

      	

Form of Revolving Note

      
	

Exhibit B   

      	

[Intentionally Omitted]

      
	

Exhibit C   

      	

Compliance Certificate

      
	

Exhibit D   

      	

Premises

      
	

Exhibit E   

      	

Form of Notice of Borrowing

      
	

Schedule 5.1   

      	

Trade Names, Chief Executive Office, Principal Place

of Business, and Locations of Collateral 

      
	

Schedule 5.2   

      	

Capitalization and Organizational Chart

      
	

Schedule 5.5   

      	

Subsidiaries

      
	

Schedule 5.11   

      	

Intellectual Property Disclosures

      
	

Schedule 6.3   

      	

Permitted Liens

      
	

Schedule 6.4   

      	

Permitted Indebtedness and Guaranties

      

  

 

 

Exhibit A to Credit and Security Agreement

REVOLVING NOTE

	

$3,000,000   

    	Santa Ana, California
	

   

    	May 28, 2002

                For value received, the undersigned, MICRO MOTORS, INC., a Colorado
corporation (the "Borrower"), jointly and severally with Oregon Micro Systems,
Inc., an Oregon corporation, hereby promises to pay on the Termination Date
under the Credit Agreement (defined below), to the order of WELLS FARGO
BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), at its main
office in Minneapolis, Minnesota, or at any other place designated at any time
by the holder hereof, in lawful money of the United States of America and in
immediately available funds, the principal sum of Three Million Dollars ($3,000,000)
or, if less, the aggregate unpaid principal amount of all Revolving Advances
made by the Lender to the Borrower under the Credit Agreement (defined below)
together with interest on the principal amount hereunder remaining unpaid from
time to time, computed on the basis of the actual number of days elapsed and a
360-day year, from the date hereof until this Note is fully paid at the rate
from time to time in effect under the Credit and Security Agreement of even
date herewith (the "Credit Agreement") by and between the Lender and the
Borrower. The principal hereof and interest accruing thereon shall be due and
payable as provided in the Credit Agreement. This Note may be prepaid only in
accordance with the Credit Agreement.

                This Note is issued pursuant, and is subject, to the Credit Agreement, which
provides, among other things, for acceleration hereof. This Note is the
Revolving Note referred to in the Credit Agreement. This Note is secured, among
other things, pursuant to the Credit Agreement and the Security Documents as
therein defined, and may now or hereafter be secured by one or more other
security agreements, mortgages, deeds of trust, assignments or other
instruments or agreements.

                The Borrower shall pay all costs of collection, including reasonable
attorneys' fees and legal expenses if this Note is not paid when due, whether
or not legal proceedings are commenced.

                Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.

	MICRO MOTORS, INC.
	By           
           
           
           
           
            
	            Its
President

Exhibit C to Credit and Security Agreement

Compliance Certificate

To:      
           
Harry L. Joe

           
            Wells Fargo
Business Credit, Inc.

Date:   
           
__________________, 200___

Subject:           
Micro Motors, Inc.

            Financial
Statements

                In accordance with our Credit and Security Agreement dated as of
May 28, 2002 (the "Credit Agreement"), attached are the financial statements
of Micro Motors, Inc. (the "Borrower") as of and for ________________, 20___
(the "Reporting Date") and the year-to-date period then ended (the "Current
Financials"). All terms used in this certificate have the meanings given in the
Credit Agreement.

                I certify that the Current Financials have been prepared in accordance with
GAAP, subject to year-end audit adjustments, and fairly present the Borrower's
financial condition as of the date thereof.

Events of Default. (Check one):

                 
The undersigned does not have knowledge of the occurrence of a Default or Event
of Default under the Credit Agreement except as previously reported in writing
to the Lender.

                 
The undersigned has knowledge of the occurrence of a Default or Event of
Default under the Credit Agreement not previously reported in writing to the
Lender and attached hereto is a statement of the facts with respect to thereto.
The Borrower acknowledges that pursuant to Section 2.12(d) of the Credit
Agreement, the Lender may impose the Default Rate at any time during the
resulting Default Period.

Financial Covenants. I further hereby certify as follows:

                1.                 
Minimum Tangible Net Worth.  Pursuant to Section 6.2(a) of the
Credit Agreement, as of the Reporting Date, the Borrower's Tangible Net Worth
was $____________, which  satisfies  does not satisfy the requirement that
such amount be not less than $_____________ on the Reporting Date as set forth
in table below:

1

	
  Test Date/Period
	
  Minimum Tangible Net Worth

  
	
  4/30/2002

  	
  $2,842,000

  
	
  5/31/2002

  	
  $2,646,000

  
	
  6/30/2002 and each month end
  thereafter

  	
  $2,737,000

  

                2.                 
Minimum Net Income.  Pursuant to Section 6.2(b) of the Credit
Agreement, the Borrower's Net Income (Net Loss) for the fiscal year-to-date
period ending on the Reporting Date, was $____________, which  satisfies 
does not satisfy the requirement that such amount be not less than
$____________, as set forth in the table below:

	
   Fiscal Year to Date
   Period Ending

   	
   Minimum Net Income (or Maximum
   Net Loss)

   
	
  6/30/2002

  	
  $850,000

  
	
   

  	
   

  

                3.                 
Maximum Net Loss.  Pursuant to Section 6.2(c) of the Credit
Agreement, the Borrower's Net Income (Net Loss) for the month ending on the
Reporting Date was $____________, which  satisfies  does not satisfy the
requirement that such amount be not less than -$75,000, commencing with the
month ending July 31, 2002.

                4.                 
Capital Expenditures. Pursuant to Section 6.2(i) of the Credit
Agreement, for the year-to-date period ending on the Reporting Date, the
Borrower has expended or contracted to expend during the _____________ year
ended ______________, 200___, for Capital Expenditures, $___________ in the
aggregate, which  satisfies  does not satisfy the requirement that such
expenditures not exceed $150,00 in the aggregate during such year, or $50,000
for the fiscal quarter ended June 30, 2002.

                5.                 
Salaries. As of the Reporting Date, the Borrower  is  is not in
compliance with Section 6.8 of the Credit Agreement concerning salaries.

2

                Attached hereto are all relevant facts in reasonable detail to evidence, and
the computations of the financial covenants referred to above. These
computations were made in accordance with GAAP.

	MICRO MOTORS, INC. 

By           
           
           
           
           
           
            

            Its
Chief Financial Officer

 

 

 

 

3

Exhibit D to Credit and Security Agreement

Premises

                The Premises referred to in the Credit and Security Agreement are legally
described as follows:

[_To be completed by Borrower_]

Exhibit E to Credit and Security Agreement

NOTICE OF BORROWING

_____________, _______

TO:      Wells Fargo Business Credit, Inc.

            245 S.
Los Robles Avenue, Suite 600

            Pasadena,
California  91101

           
Telecopier:  (626) 844‐9063

           
Attention:  Harry L. Joe

                We refer to that certain Credit and Security Agreement dated as of
May 28, 2002 (as amended or modified to date, the "Credit Agreement") by
and between Micro Motors, Inc. and Wells Fargo Business Credit, Inc.
Capitalized terms used herein but not otherwise defined shall have the same
meanings assigned to them in the Credit Agreement.

                Pursuant to Section 2.2(a) of the Credit Agreement, we hereby request or
confirm our request for an Advance on the date, of the type(s) and in the
amount(s) specified below.

	
  Amount of Advance

  	
  Date of Borrowing

  
	
  $

  	

  
	

  	

  

 

 

	MICRO MOTORS, INC. 
	

    By                                                                        

            Its                                                            
    

 

 

Schedule 5.1 to Credit and Security Agreement

Trade Names, Chief Executive Office, Principal Place of Business,

and Locations of Collateral

Trade Names

[_to be completed by Borrower_]

Chief Executive Office/Principal Place of Business

  
                       
                       
            

  
                       
                       
            

  
                       
                       
            

Other Inventory and Equipment Locations

[_to be completed by Borrower_]

Schedule 5.2 to Credit and Security Agreement

Capitalization and Organizational Chart

  

	

  Holder

  	

  Type of

  Rights/Stock

  	
  No. of shares (after

  Exercise of all rights

  to acquire shares)

  	

  Percent interest on

  a fully diluted basis

  
	

  	

  	

  	

  
	

  	

  	

  	

  

  

Attach organizational chart showing the ownership structure of all
Subsidiaries of the Borrower.

[_to be completed by Borrower_]

Schedule 5.5  to Credit and Security Agreement

Subsidiaries

[_to be completed by Borrower_]

Schedule 5.11 to Credit and Security Agreement

Intellectual Property Disclosures

[_to be completed by Borrower_]

Schedule 6.3 to Credit and Security Agreement

Permitted Liens

  

	
  Creditor

  	
  Collateral

  	
  Jurisdiction

  	
  Filing Date

  	
  Filing No.

  
	

  

  
	

  

  
	

  

  
	

  

  
	

  

  

	

  	

  	

  	

  	

  

  

[_to be completed by Borrower_]

Schedule 6.4 to Credit and Security Agreement

Permitted Indebtedness and Guaranties

  

	
  Indebtedness

  
	

  Creditor

  	
  Principal

  Amount

  	
  Maturity

  Date

  	
  Monthly

  Payment

  	

  Collateral

  
	

  	

  	

  	

  	

  
	

  	

  	

  	

  	

  

  

[_to be completed by Borrower_]

  

	
  Guaranties

  
	

  Primary Obligor

  	
  Amount and Description of

  Obligation Guaranteed

  	

  Beneficiary of Guaranty

  
	

  	

  	

  
	

  	

  	

  

  

[_To be completed by Borrower_]

 

 

DRAFT

SEPTEMBER
6, 2002

FIRST AMENDMENT TO
CREDIT AND SECURITY

AGREEMENT 

                This Amendment, dated as of  September __, 2002, is made by and between MICRO MOTORS, INC., a
Colorado corporation (the "Borrower"), and WELLS FARGO BUSINESS CREDIT,
INC., a Minnesota corporation (the "Lender").

Recitals

                The Borrower and the Lender are parties to a Credit and
Security Agreement, dated as of May 28, 2002 (the "Credit Agreement").
Capitalized terms used in these recitals have the meanings given to them in the
Credit Agreement unless otherwise specified.

                The Borrower has requested that certain amendments be made
to the Credit Agreement, which the Lender is willing to make pursuant to the
terms and conditions set forth herein.

                NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements herein contained, it is agreed as follows:

                1.                 
Defined Terms. Capitalized terms used in this Amendment
which are defined in the Credit Agreement shall have the same meanings as
defined therein, unless otherwise defined herein.

                                (a)               
In addition, Section 1.1 of the Credit Agreement is
amended by amending the definition of "Change of Control" to read as follows:

                "Change of Control" means
the occurrence of any of the following events:

                                (a)               
any Person or "group" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) is or
becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Securities Exchange Act of 1934, except that a Person will be deemed to have
"beneficial ownership" of all securities that such Person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 25% of the voting power
of all classes of voting stock of the Borrower.

                                (b)              
During any consecutive two-year period, individuals who at the
beginning of such period constituted the board of Directors of the Borrower
(together with any new Directors whose election to such board of Directors, or
whose nomination for election by the owners of the Borrower, was approved by a
vote of 66-2/3% of the Directors then still in office who were either Directors
at the beginning of such period or whose election or nomination for election
was previously so approved) cease for any reason to constitute a majority of
the board of Directors of the Borrower then in office.

                                (c)               
Either or both of Patrick L. Johnson and Jeffrey J. Ritchey
shall cease to actively manage the Borrower's day-to-day business activities.

                2.                 
No Other Changes. All of the terms and conditions of
the Credit Agreement and the Loan Documents as amended by this Amendment shall
remain in full force and effect.

                3.                 
Amendment Fee. The Borrower shall pay the Lender as of
the date hereof a fully earned, non-refundable fee (the "Amendment Fee")
in the amount of $1,000 in consideration of the Lender's execution and delivery
of this Amendment.

                4.                 
Conditions Precedent. This Amendmentshall be effective when the Lender
shall have received an executed original hereof, together with each of the
following, each in substance and form acceptable to the Lender in its sole
discretion:

                                (a)               
Payment of the Amendment Fee.

                                (b)              
The Acknowledgment and Agreement of the Guarantor, The
Acknowledgment and Agreement of the Affiliate Borrower and The Acknowledgment
and Agreement of Subordinated Creditors set forth at the end of this Amendment,
duly executed by the Guarantor, the Affiliate Borrower and Subordinated
Creditors.

                                (c)               
Such other matters as the Lender may require.

                5.                 
Representations and Warranties. The Borrower hereby
represents and warrants to the Lender as follows:

                                (a)               
The Borrower has all requisite power and authority to execute
this Amendment and to perform all of its obligations hereunder, and this
Amendment has been duly executed and delivered by the Borrower and constitutes
the legal, valid and binding obligation of the Borrower, enforceable in
accordance with its terms.

                                (b)              
The execution, delivery and performance by the Borrower of
this Amendment has been duly authorized by all necessary corporate action and
do not (i) require any authorization, consent or approval by any
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, (ii) violate any provision of any law, rule or
regulation or of any order, writ, injunction or decree presently in effect, having
applicability to the Borrower, or the articles of incorporation or by-laws of
the Borrower, or (iii) result in a breach of or constitute a default under
any indenture or loan or credit agreement or any other agreement, lease or
instrument to which the Borrower is a party or by which it or its properties
may be bound or affected.

                                (c)               
All of the representations and warranties contained in
Article V of the Credit Agreement are correct on and as of the date hereof
as though made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date.

                6.                 
References. All references in the Credit Agreement to
"this Agreement" shall be deemed to refer to the Credit Agreement as amended
hereby; and any and all references in the Security Documents to the Credit
Agreement shall be deemed to refer to the Credit Agreement as amended hereby.

                7.                 
No Waiver. The execution of this Amendment and
acceptance of any documents related hereto shall not be deemed to be a waiver
of any Default or Event of Defaultunder
the Credit Agreement or breach, default or event of default under any Security
Document or other document held by the Lender, whether or not known to the
Lender and whether or not existing on the date of this Amendment.

                8.                 
Release. The Borrower, Guarantor by signing the
Acknowledgment and Agreement of Guarantor set forth below, the Affiliate
Borrower by signing the Acknowledgment and Agreement of Affiliate Borrower set
forth below and each Subordinated Creditor by signing the Acknowledgment and
Agreement of Subordinated Creditors set forth below, each hereby absolutely and
unconditionally releases and forever discharges the Lender, and any and all
participants, parent corporations, subsidiary corporations, affiliated
corporations, insurers, indemnitors, successors and assigns thereof, together
with all of the present and former directors, officers, agents and employees of
any of the foregoing, from any and all claims, demands or causes of action of
any kind, nature or description, whether arising in law or equity or upon
contract or tort or under any state or federal law or otherwise, which the
Borrower, Guarantor, Affiliate Borrower or such Subordinated Creditorhas had, now has or has made claim to
have against any such person for or by reason of any act, omission, matter,
cause or thing whatsoever arising from the beginning of time to and including
the date of this Amendment, whether such claims, demands and causes of action
are matured or unmatured or known or unknown.

                9.                 
Costs and Expenses. The Borrower hereby reaffirms its
agreement under the Credit Agreement to pay or reimburse the Lender on demand
for all costs and expenses incurred by the Lender in connection with the Loan
Documents, including without limitation all reasonable fees and disbursements
of legal counsel. Without limiting the generality of the foregoing, the
Borrower specifically agrees to pay all fees and disbursements of counsel to
the Lender for the services performed by such counsel in connection with the
preparation of this Amendment and the documents and instruments incidental
hereto. The Borrower hereby agrees that the Lender may, at any time or from
time to time in its sole discretion and without further authorization by the
Borrower, make a loan to the Borrower under the Credit Agreement, or apply the
proceeds of any loan, for the purpose of paying any such fees, disbursements,
costs and expenses and the Amendment Fee.

                10.             
Miscellaneous. This Amendment, the Acknowledgment and
Agreement of Guarantor, the Acknowledgment and Agreement of Affiliate Borrower
and the Acknowledgment and Agreement of Subordinated Creditors may be executed
in any number of counterparts, each of which when so executed and delivered
shall be deemed an original and all of which counterparts, taken together,
shall constitute one and the same instrument.

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

                                                            

  	WELLS FARGO BUSINESS CREDIT, INC.
	 
	 
	By                                                                    
      
	             Tony
S. Lee
	             Its Senior Vice President
	 
	 
	MICRO
MOTORS, INC.
	

 

      
	

 

      
	By                                                                    
      
	              Patrick
L. Johnson
	              Its
President

 

 

ACKNOWLEDGMENT
AND AGREEMENT OF GUARANTOR

                The undersigned, a guarantor of the indebtedness of Micro
Motors, Inc. (the "Borrower") to Wells Fargo Business Credit, Inc. (the
"Lender") pursuant to a Continuing Guaranty, dated as of May 28, 2002
(the "Guaranty"), hereby (i) acknowledges receipt of the foregoing
Amendment; (ii) consents to the terms (including without limitation the
release set forth in paragraph 8 of the Amendment) and execution thereof;
(iii) reaffirms its obligations to the Lender pursuant to the terms of its
Guaranty; and (iv) acknowledges that the Lender may amend, restate,
extend, renew or otherwise modify the Credit Agreement and any indebtedness or
agreement of the Borrower, or enter into any agreement or extend additional or
other credit accommodations, without notifying or obtaining the consent of the
undersigned and without impairing the liability of the undersigned under its
Guaranty for all of the Borrower's present and future indebtedness to the
Lender.

                                                             

  	PRO-DEX,
INC.
	 
	 
	By                                                                    
      
	Patrick
L. Johnson
	Its
President and Chief Executive Officer

 

 

ACKNOWLEDGMENT
AND AGREEMENT OF AFFILIATE BORROWER

                Reference is hereby made to: (i) that certain Credit and
Security Agreement (the "OMS Credit Agreement"), dated as of May 28,
2002, between the undersigned and Wells Fargo Business Credit, Inc. ("Lender"),
and (ii) that certain Credit and Security Agreement (the "Credit Agreement"),
dated as of May 28, 2002, between Micro Motors, Inc. (the "Borrower")
and Lender.  Pursuant to the OMS Credit
Agreement, the obligations of the undersigned under the OMS Credit Agreement
are cross-defaulted with the obligations of Borrower under the Credit
Agreement.  In light of the foregoing,
the undersigned hereby (i) acknowledges receipt of the foregoing
Amendment; (ii) consents to the terms (including without limitation the
release set forth in paragraph 8 of the Amendment) and execution thereof;
(iii) reaffirms its obligations to the Lender pursuant to the terms of its
OMS Credit Agreement; and (iv) acknowledges that the Lender may amend,
restate, extend, renew or otherwise modify the Credit Agreement and any
indebtedness or agreement of the Borrower, or enter into any agreement or
extend additional or other credit accommodations, without notifying or
obtaining the consent of the undersigned and without impairing the liability of
the undersigned under its OMS Credit Agreement for all of the Borrower's
present and future indebtedness to the Lender.

                                                            

  	OREGON MICRO SYSTEMS, INC.
	 
	 
	By                                                                    
      
	                                                                     
      
	         Its                                            
      

 

 

ACKNOWLEDGMENT
AND AGREEMENT OF SUBORDINATED CREDITORS

                The undersigned, each a subordinated creditor of Micro
Motors, Inc. (the "Borrower") to Wells Fargo Business Credit, Inc. (the
"Lender") pursuant to a separateSubordination
Agreement, each dated as of May 28, 2002 (each a "Subordination Agreement"),
hereby (i) acknowledges receipt of the foregoing Amendment;
(ii) consents to the terms (including without limitation the release set
forth in paragraph 8 of the Amendment) and execution thereof;
(iii) reaffirms his or itsobligations
to the Lender pursuant to the terms of his or its Subordination Agreement; and
(iv) acknowledges that the Lender may amend, restate, extend, renew or
otherwise modify the Loan Documents and any indebtedness or agreement of the
Borrower, or enter into any agreement or extend additional or other credit
accommodations, without notifying or obtaining the consent of the undersigned
and without impairing the obligations of the undersigned underhis or its Subordination Agreement.

 

                                                            

  	                                                                         
      
	RONALD
G. COSS, an individual
	 
	 
	PRO-DEX,
INC.
	 
	 
	By                                                                    
      
	              Patrick
L. Johnson
	             
      Its President and Chief Executive OfficerExhibit 10.31

                                                                                                                      EXECUTION COPY

 

CREDIT AND SECURITY AGREEMENT

  

  BY AND BETWEEN

  

  OREGON MICRO SYSTEMS, INC.

  
AND

  

  WELLS FARGO BUSINESS CREDIT, INC.

May 28, 2002

 

 Table of Contents

 

	 	Page
	ARTICLE I DEFINITIONS....................................................................................................
    	1
	Section 1.1        
    Definitions.........................................................................................................
    	1
	Section 1.2        
    Other Definitional Terms; Rules of
    Interpretation................................................ 	11
	  	 
	ARTICLE II AMOUNT AND
TERMS OF THE CREDIT FACILITY............................... 	12
	Section 2.1        
    Revolving
    Advances..........................................................................................
    	12
	Section 2.2        
    Procedures for Requesting
    Advances................................................................
    	12
	Section 2.3        
    Letters of
    Credit...............................................................................................
    	12
	Section 2.4        
    Special
    Account................................................................................................
    	13
	Section 2.5        
    Payment of Amounts Drawn Under Letters of Credit; Obligation 

                         
    of
    Reimbursement...............................................................................................	13
	Section 2.6        
    Obligations
    Absolute.........................................................................................
    	14
	Section 2.7        
    Interest; Minimum Interest Charge; Default Interest; Participations; 

                         
    Clearance Days;
    Usury.......................................................................................	15
	Section 2.8        
    Fees..................................................................................................................
    	16
	Section 2.9        
    Time for Interest Payments; Payment on Non-Banking Days; Computation 

                          
    of Interest and
    Fees...........................................................................................	17
	Section 2.10       Lockbox;
    Collateral Account; Application of
    Payments...................................... 	17
	Section 2.11       Voluntary
    Prepayment; Termination of the Credit Facility by the Borrower..........
    	18
	Section 2.12       Mandatory
    Prepayment.....................................................................................
    	18
	Section 2.13       Revolving
    Advances to Pay
    Obligations.............................................................
    	18
	Section 2.14       Use of
    Proceeds................................................................................................
    	19
	Section 2.15       Liability
    Records...............................................................................................
    	19
	 
    	 
	ARTICLE III SECURITY
INTEREST; OCCUPANCY; SETOFF....................................... 	19
	Section 3.1        
    Grant of Security
    Interest...................................................................................
    	19
	Section 3.2        
    Notification of Account Debtors and Other
    Obligors.......................................... 	19
	Section 3.3        
    Assignment of
    Insurance....................................................................................
    	19
	Section 3.4        
    Occupancy........................................................................................................
    	20
	Section 3.5        
    License.............................................................................................................
    	20
	Section 3.6        
    Financing
    Statement...........................................................................................
    	20
	Section 3.7        
    Setoff................................................................................................................
    	21
	Section 3.8        
    Power of
    Attorney.............................................................................................
    	21
	 	 
	ARTICLE IV CONDITIONS
OF LENDING........................................................................
    	22
	Section 4.1        
    Conditions Precedent to the Initial Advances and Letter of
    Credit....................... 	22
	Section 4.2        
    Conditions Precedent to All Advances and Letters of
    Credit............................... 	24
	 	 
	ARTICLE V
REPRESENTATIONS AND WARRANTIES.................................................
    	25
	Section 5.1        
    Existence and Power; Name; Chief Executive Office; Inventory and Equipment
    

                         
    Locations; Federal Employer Identification
    Number............................................ 	25

 

i

 

	Section 5.2        
    Capitalization.....................................................................................................
    	25
	Section 5.3        
    Authorization of Borrowing; No Conflict as to Law or
    Agreements..................... 	25
	Section 5.4        
    Legal
    Agreements..............................................................................................
    	25
	Section 5.5        
    Subsidiaries.......................................................................................................
    	26
	Section 5.6        
    Financial Condition; No Adverse
    Change........................................................... 	26
	Section 5.7        
    Litigation...........................................................................................................
    	26
	Section 5.8        
    Regulation
    U.....................................................................................................
    	26
	Section 5.9        
    Taxes................................................................................................................
    	26
	Section 5.10       Titles and
    Liens.................................................................................................
    	26
	Section 5.11      
    Intellectual Property
    Rights................................................................................
    	26
	Section 5.12      
    Plans.................................................................................................................
    	27
	Section 5.13      
    Default..............................................................................................................
    	28
	Section 5.14      
    Environmental
    Matters.......................................................................................
    	28
	Section 5.15       Submissions
    to
    Lender.......................................................................................
    	29
	Section 5.16       Financing
    Statements.........................................................................................
    	29
	Section 5.17       Rights to
    Payment..............................................................................................
    	29
	Section 5.18       Eligible
    Accounts...............................................................................................
    	29
	Section 5.19       Eligible
    Inventory...............................................................................................
    	30
	Section 5.20      
    Equipment.........................................................................................................
    	30
	Section 5.21       Fraudulent
    Transfer...........................................................................................
    	30
	 
    	 
	ARTICLE VI COVENANTS...................................................................................................
    	31
	Section 6.1        
    Reporting
    Requirements.....................................................................................
    	31
	Section 6.2        
    Financial
    Covenants...........................................................................................
    	35
	Section 6.3        
    Permitted Liens; Financing
    Statements................................................................
    	35
	Section 6.4        
    Indebtedness.....................................................................................................
    	36
	Section 6.5        
    Guaranties.........................................................................................................
    	36
	Section 6.6        
    Investments and
    Subsidiaries..............................................................................
    	36
	Section 6.7        
    Dividends and
    Distributions................................................................................
    	37
	Section 6.8        
    Salaries.............................................................................................................
    	37
	Section 6.9        
    Books and Records; Inspection and
    Examination............................................... 	37
	Section 6.10       Account
    Verification..........................................................................................
    	37
	Section 6.11       Compliance
    with
    Laws......................................................................................
    	38
	Section 6.12       Payment of
    Taxes and Other
    Claims..................................................................
    	38
	Section 6.13       Maintenance
    of
    Properties.................................................................................
    	38
	Section 6.14      
    Insurance..........................................................................................................
    	38
	Section 6.15      
    Preservation of
    Existence...................................................................................
    	39
	Section 6.16       Delivery of
    Instruments,
    etc................................................................................
    	39
	Section 6.17       Sale or
    Transfer of Assets; Suspension of Business
    Operations........................... 	39
	Section 6.18      
    Consolidation and Merger; Asset
    Acquisitions.................................................... 	39
	Section 6.19       Sale and
    Leaseback..........................................................................................
    	39
	Section 6.20      
    Restrictions on Nature of
    Business.....................................................................
    	40
	Section 6.21      
    Accounting........................................................................................................
    	40
	Section 6.22       Discounts,
    etc....................................................................................................
    	40
	Section 6.23      
    Plans.................................................................................................................
    	40
	Section 6.24       Place of
    Business;
    Name...................................................................................
    	40

 

ii

 

	Section 6.25       Constituent
    Documents; S Corporation
    Status.................................................... 	40
	Section 6.26      
    Transactions With
    Affiliates................................................................................
    	40
	Section 6.27       Performance
    by the
    Lender................................................................................
    	40
	 
    	 
	ARTICLE VII EVENTS OF
DEFAULT, RIGHTS AND REMEDIES................................ 	41
	Section 7.1        
    Events of
    Default...............................................................................................
    	41
	Section 7.2        
    Rights and
    Remedies.........................................................................................
    	44
	Section 7.3        
    Disclaimer of
    Warranties....................................................................................
    	46
	Section 7.4        
    Compliance With
    Laws.....................................................................................
    	46
	Section 7.5        
    No
    Marshalling..................................................................................................
    	46
	Section 7.6        
    Borrower to
    Cooperate.....................................................................................
    	46
	Section 7.7        
    Application of
    Proceeds....................................................................................
    	46
	Section 7.8        
    Remedies
    Cumulative........................................................................................
    	47
	Section 7.9        
    Lender Not Liable For The
    Collateral................................................................
    	47
	 
    	 
	ARTICLE VIII
MISCELLANEOUS......................................................................................
    	47
	Section 8.1        
    No
    Waiver........................................................................................................
    	47
	Section 8.2        
    Amendments,
    Etc..............................................................................................
    	47
	Section 8.3        
    Addresses for Notices; Requests for
    Accounting................................................ 	47
	Section 8.4        
    Further
    Documents............................................................................................
    	48
	Section 8.5        
    Costs and
    Expenses..........................................................................................
    	48
	Section 8.6        
    Indemnity..........................................................................................................
    	48
	Section 8.7        
    Participants.................................................................................................
    ...... 	49
	Section 8.8        
    Advertising and
    Promotion.................................................................................
    	49
	Section 8.9         Execution
in Counterparts; Telefacsimile
    Execution............................................. 	49
	Section 8.10       Retention
    of Borrower's
    Records...................................................................
    ... 	49
	Section 8.11       Binding
    Effect; Assignment; Complete Agreement; Exchanging Information.........
    	50
	Section 8.12      
    Severability of
    Provisions...................................................................................
    	50
	Section 8.13       Revival and
    Reinstatement of
    Obligations........................................................... 	50
	Section 8.14      
    Headings...........................................................................................................
    	50
	Section 8.15       Governing
    Law; Jurisdiction, Venue; Waiver of Jury
    Trial................................... 	50
	  	 
	ARTICLE IX JOINT AND
SEVERAL LIABILITY..............................................................	 51
	Section 9.1        
    Joint and Several
    Liability..................................................................................
    	51
	Section 9.2        
    Primary Obligation; Waiver of
    Marshalling......................................................... 	51
	Section 9.3        
    Continuing
    Liability............................................................................................
    	51
	Section 9.4        
    Additional
    Waivers............................................................................................
    	52
	Section 9.5        
    Settlement or
    Releases.......................................................................................
    	54
	Section 9.6        
    No
    Election.......................................................................................................
    	54
	Section 9.7        
    Indefeasible
    Payment.........................................................................................
    	54
	Section 9.8        
    Financial Condition of the Affiliate
    Borrower...................................................... 	55
	

    	 

 

iii

 

CREDIT AND
SECURITY AGREEMENT

Dated as of May 28, 2002

        OREGON MICRO SYSTEMS, INC., an Oregon corporation (the
"Borrower"), and WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation
(the "Lender"), hereby agree as follows:

ARTICLE I

DEFINITIONS

        Section 1.1             
Definitions.  For all purposes of
this Agreement, except as otherwise expressly provided, the following terms
shall have the meanings assigned to them in this Section or in the Section
referenced after such term:

        "Account Debtor" means any Person who is or who may become
obligated under, with respect to, or on account of, an Account, chattel paper,
or a General Intangible.

        "Accounts" means all of Borrower's now owned or hereafter
acquired right, title, and interest with respect to "accounts" (as that term is
defined in the UCC), and any and all supporting obligations in respect thereof.

        "Advance" means a Revolving Advance.

        "Affiliate" means, as applied to any Person, any other
Person who, directly or indirectly, controls, is controlled by, or is under
common control with, such Person.  For
purposes of this definition, "control" means the possession, directly or
indirectly, of the power to direct the management and policies of a Person,
whether through the ownership of stock, by contract, or otherwise; provided,
however, that, in any event: (a) any Person which owns directly or
indirectly 10% or more of the securities having ordinary voting power for the
election of directors or other members of the governing body of a Person or 10%
or more of the partnership or other ownership interests of a Person (other than
as a limited partner of such Person) shall be deemed to control such Person,
(b) each director (or comparable manager) of a Person shall be deemed to be an
Affiliate of such Person, and (c) each partnership or joint venture in which a
Person is a partner or joint venturer shall be deemed to be an Affiliate of
such Person.

        "Agreement" means this Credit and Security Agreement.

        "Affiliate Borrower" means Micro Motors, Inc., a Colorado
corporation.

        "Affiliate Credit Agreement" means that certain Credit and
Security Agreement, dated as of even date herewith, between the Affiliate
Borrower and the Lender, as the same may be amended or restated from time to
time.

 

1

 

        "Affiliate Loan Documents" means the "Loan Documents" as
such term is defined in the Affiliate Credit Agreement.

        "Affiliate Obligations" means the "Obligations" as such
term is defined in the Affiliate Credit Agreement.

        "Applicable Margin" means the margin set forth in the table
below opposite the applicable average outstanding Advances, calculated as of
the date of determination:

	
  Average Outstanding
  Advances

  	
  Applicable Margin

  
	
  $2,100,000 for 60 consecutive days

  	
  1.50 percentage points (150 basis points)

  
	
  $2,400,000 for 60 consecutive days

  	
  1.25 percentage points (125 basis points)

  
	
  $3,000,000 for 60 consecutive days

  	
  1.00 percentage points (100 basis points)

  

        "Availability" means the difference of (i) the Borrowing
Base and (ii) the sum of (A) the outstanding principal balance of the Revolving
Note, (B) the L/C Amount, and (C) the Affiliate Obligations.

        "Banking Day" means a day on which the Federal Reserve Bank
of New York is open for Business.

        "Bankruptcy Code" means the United States Bankruptcy Code,
as in effect from time to time.

        "Base Rate" means the rate of interest publicly announced
from time to time by Wells Fargo Bank National Association at its principal
office in San Francisco as its "prime rate", with the understanding
that the "prime rate" is one of Wells Fargo's base rates (not
necessarily the lowest of such rates) and serves as the basis upon which
effective rates of interest are calculated for loans making reference thereto.

        "Book Net Worth" means the aggregate of the common and
preferred stockholders' equity in the Borrower, determined in accordance with
GAAP.

        "Borrowing Base" means at
any time the lesser of:

            (a)               
the Maximum Line; or

            (b)              
85% of Eligible Accounts less the amount, if
any, of the Dilution Reserve.

Provided, however, the Lender may reduce the
advance rates or create additional reserves against the Eligible Accounts, in
its sole and absolute discretion, without declaring an Event of Default if it
reasonably determines that there has occurred a
Material Adverse Effect.

        "Capital Expenditures" means for a period, any expenditure
of money during such period for the purchase or construction of assets, or for
improvements or additions thereto, which are capitalized on the Borrower's
balance sheet.

 

2

 

        "Change of Control" means
the occurrence of any of the following events:

        (a)               
any Person or "group" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) is or
becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Securities Exchange Act of 1934, except that a Person will be deemed to have
"beneficial ownership" of all securities that such Person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 25% of the voting power of all
classes of voting stock of the Borrower.

        (b)              
During any consecutive two-year period, individuals who
at the beginning of such period constituted the board of Directors of the
Borrower (together with any new Directors whose election to such board of
Directors, or whose nomination for election by the owners of the Borrower, was
approved by a vote of 66-2/3% of the Directors then still in office who were
either Directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the board of Directors of the Borrower then in office.

        (c)               
Frank A. Zagar shall cease to actively manage the
Borrower's day-to-day business activities.

        "Collateral" means all of the Borrower's Accounts, chattel
paper, deposit accounts, documents, Equipment, General Intangibles, goods,
instruments, Inventory, Investment Property, letter-of-credit rights, letters
of credit, all sums on deposit in any Collateral Account, and any items in any
Lockbox; together with (i) all substitutions and replacements for and products
of any of the foregoing; (ii) in the case of all goods, all accessions; (iii)
all accessories, attachments, parts, equipment and repairs now or hereafter
attached or affixed to or used in connection with any goods; (iv) all warehouse
receipts, bills of lading and other documents of title now or hereafter
covering such goods; (v) all collateral subject to the Lien of any Security
Document; (vi) any money, or other assets of the Borrower that now or hereafter
come into the possession, custody, or control of the Lender; (vii) all sums on
deposit in the Special Account; and (viii) proceeds of any and all of the
foregoing.

        "Collateral Account" means the "Lender Account" as defined
in the Lockbox and Collection Account Agreement.

        "Commitment" means the Lender's commitment to make Advances
to, and to cause the Issuer to issue Letters of Credit for the account of, the
Borrower pursuant to Article II.

        "Constituent Documents" means with respect to any Person,
as applicable, such Person's certificate of incorporation, articles of
incorporation, by-laws, certificate of formation, articles of organization,
limited liability company agreement, management agreement, operating agreement,
shareholder agreement, partnership agreement or similar document or agreement
governing such Person's existence, organization or management or concerning
disposition of ownership interests of such Person or voting rights among such
Person's owners.

        "Copyright Security Agreement" means the Copyright Security
Agreement by the Borrower in favor of the Lender of even date herewith.

 

3

 

        "Daily Balance" means, with respect to each day during the
term of this Agreement, the amount of an Obligation owed at the end of such
day.

        "Default" means an event that, with giving of notice or
passage of time or both, would constitute an Event of
Default.

        "Default Period" means any period of time beginning on the
day a Default or Event of Default occurs and ending on the date the Lender
notifies the Borrower in writing that such Default or Event of Default has been
cured or waived.

        "Default Rate" means an annual interest rate equal to three
percent (3%) over the Floating Rate, which interest rate shall change when and
as the Floating Rate changes.

        "Dilution" means, as of any date of determination, a
percentage, based upon the experience of the calendar year-to-date period
ending on the date of determination, that is the result of dividing the Dollar
amount of (a) bad debt write‐downs, discounts, advertising
allowances, credits, or other dilutive items with respect to the Accounts
during such period, by (b) Borrower's sales during such period (excluding
extraordinary items) plus the Dollar amount of clause (a).

        "Dilution Reserve" means, as of any date of determination,
an amount sufficient to reduce the advance rate against Eligible Accounts by
one percentage point for each percentage point by which Dilution is in excess
of 5%.

        "Director" means a director if the Borrower is a
corporation, a manager if the Borrower is a limited liability company, or a general partner if the Borrower is a
partnership.

        "Dollars" or "$" means lawful currency of the United States
of America.

        "ERISA" means the Employee Retirement Income Security Act
of 1974.

        "ERISA Affiliate" means any trade or business (whether or
not incorporated) that is a member of a group which includes the Borrower and
which is treated as a single employer under Section 414 of the IRC.

        "Earnings Before Taxes" means from
operations but including extraordinary losses.

        "Eligible Accounts" means those Accounts created by the
Borrower in the ordinary course of its business, that arise out of the
Borrower's sale of goods or rendition of services, that comply with each of the
representations and warranties respecting Eligible Accounts made by the
Borrower in the Loan Documents, and that are not excluded as ineligible by
virtue of one or more of the criteria set forth below; provided, however, that
such criteria may be fixed and revised from time to time by the Lender in the
Lender's sole and absolute discretion to address the results of any audit
performed by the Lender from time to time after the Closing Date.  In determining the amount to be included,
Eligible Accounts shall be calculated net of customer deposits and unapplied
cash remitted to the Borrower.  Eligible
Accounts shall not include the following:

 

4

 

        (i)                 
That portion of Accounts unpaid 90 days or more after
the invoice date;

        (ii)               
That portion of Accounts that is disputed or subject to
a claim of offset or a contra account;

        (iii)              
That portion of Accounts not yet earned by the final
delivery of goods or rendition of services, as applicable, by the Borrower to
the customer, including progress billings;

        (iv)             
Accounts constituting proceeds of copyrightable
material unless such copyrightable material shall have been registered with the
United States Copyright Office and shall be covered by a duly executed
copyright security agreement, in form and substance satisfactory to the Lender,
and filed in the United States Copyright Office;

        (v)               
Accounts owed by an Account Debtor that is not Solvent,
the subject of an Insolvency Proceeding or has gone out of business;

        (vi)             
Accounts owed by an Owner, Subsidiary, Affiliate,
Officer or employee of the Borrower;

        (vii)            
Accounts not subject to a duly perfected security
interest in the Lender's favor or which are subject to any Lien other than a
Permitted Lien;

        (viii)          
That portion of Accounts that has been restructured,
extended, amended or modified;

        (ix)             
That portion of Accounts that constitutes advertising,
finance charges, service charges or sales or excise taxes;

        (x)               
Accounts owed by an Account Debtor (or an Affiliate of
such Account Debtor), regardless of whether otherwise eligible, to the extent
that the balance of such Accounts exceeds 15% of the aggregate amount of all
Accounts (or 25% if the Account Debtor is Applied Materials);

        (xi)             
Accounts owed by an Account Debtor (or an Affiliate of
such Account Debtor), regardless of whether otherwise eligible, if 25% or more
of the total amount due under Accounts from such Account Debtor is ineligible
under clauses (i), (ii)or (x) above; 

        (xii)            
Accounts arising in a transaction wherein goods are
placed on consignment or are sold pursuant to a guaranteed sale, a sale or
return, a sale on approval, a bill and hold, or any other terms by reason of
which the payment by the Account Debtor may be conditional;

        (xiii)          
Accounts that are not payable in Dollars;

        (xiv)          
Accounts with respect to which the Account Debtor
either (i) does not maintain its chief executive office in the United States,
or (ii) is not organized under the laws of the United States or any state
thereof, or (iii) is the government of any foreign country or sovereign state,
or of any state, province, municipality, or other political subdivision
thereof, or of any department, agency, public corporation, or other
instrumentality thereof, unless (y) the Account is supported by an irrevocable
letter of credit satisfactory to the Lender (as to form, substance, and issuer
or domestic confirming bank) that has been delivered to Lender and is directly
drawable by the Lender, or (z) the Account is covered by credit insurance in
form, substance, and amount, and by an insurer, satisfactory to the Lender;

 

5

 

        (xv)           
Accounts with respect to which the Account Debtor is
either (i) the United States or any department, agency, or instrumentality of
the United States (exclusive, however, of Accounts with respect to which the
Borrower has complied, to the reasonable satisfaction of the Lender, with the
Assignment of Claims Act, 31 USC § 3727), or (ii) any state of the United
States (exclusive, however, of (y) Accounts owed by any state that does not
have a statutory counterpart to the Assignment of Claims Act, or (z) Accounts
owed by any state that does have a statutory counterpart to the Assignment of
Claims Act as to which the Borrower has complied to the Lender's satisfaction);

        (xvi)          
Accounts with respect to which the Account Debtor is
located in the states of New Jersey, Minnesota, or West Virginia (or any other
state that requires a creditor to file a business activity report or similar
document in order to bring suit or otherwise enforce its remedies against such
Account Debtor in the courts or through any judicial process of such state),
unless Borrower has qualified to do business in New Jersey, Minnesota, West
Virginia, or such other states, or has filed a business activities report with
the applicable division of taxation, the department of revenue, or with such
other state offices, as appropriate, for the then-current year, or is exempt
from such filing requirement; and

        (xvii)        
Accounts, or portions thereof, of poor quality credit
or otherwise deemed ineligible by the Lender in its sole discretion.

        "Environmental Law" means any federal, state, local or
other governmental statute, regulation, law or ordinance dealing with the
protection of human health and the environment.

        "Equipment" means all of the Borrower's equipment, as such
term is defined in the UCC, whether now owned or hereafter acquired, including
but not limited to all present and future machinery, vehicles, furniture,
fixtures, manufacturing equipment, shop equipment, office and recordkeeping
equipment, parts, tools, supplies, and including specifically the goods
described in any equipment schedule or list herewith or hereafter furnished to
the Lender by the Borrower.

        "Event of Default" has the meaning specified in
Section 7.1.

        "Financial Covenants" means the covenants set forth in
Section 6.2.

        "Floating Rate" means an annual interest rate equal to the
sum of the Base Rate plus (i) so long as there has not existed a
Default Period for the prior six (6) month period, the Applicable Margin, and
(ii) in all other cases, 1.75 percentage points (175 basis points), which
interest rate shall, in each case, change when and as the Base Rate changes.

        "Funding Date" has the meaning given in Section 2.1.

 

6

 

        "GAAP" means generally accepted accounting principles,
applied on a basis consistent with the accounting practices applied in the
financial statements described in Section 5.6.

        "General Intangibles" means all of the Borrower's general
intangibles, as such term is defined in the UCC, whether now owned or hereafter
acquired, including all present and future Intellectual Property Rights,
customer or supplier lists and contracts, manuals, operating instructions,
permits, franchises, the right to use the Borrower's name, and the goodwill of
the Borrower's business.

        "Governmental Authority" means any
federal, state, local, or other governmental or administrative body,
instrumentality, department, or agency or any court, tribunal, administrative
hearing body, arbitration panel, commission, or other similar dispute-resolving
panel or body.

        "Guarantor(s)" means Pro‐Dex, Inc.,
a Colorado corporation, and any other Person now or hereafter
guarantying the Obligations.

        "Guaranty" means that certain Continuing Guaranty, dated as
of even date herewith, by the Guarantor in favor of the Lender.

        "Guaranty Security Agreement" means that certain Security
Agreement, dated as of even date herewith, between the Guarantor and the
Lender.

        "Hazardous Substances" means pollutants, contaminants,
hazardous substances, hazardous wastes, petroleum and fractions thereof, and
all other chemicals, wastes, substances and materials listed in, regulated by
or identified in any Environmental Law.

        "Indebtedness" means of a Person as of a given date, all
items of indebtedness or liability which in accordance with GAAP would be
included in determining total liabilities as shown on the liabilities side of a
balance sheet for such Person and shall also include the aggregate payments
required to be made by such Person at any time under any lease that is
considered a capitalized lease under GAAP.

        "IRC" means the Internal Revenue Code of 1986.

        "Infringe" means when used with respect to Intellectual
Property Rights means any infringement or other violation of Intellectual
Property Rights.

        "Insolvency Proceeding" means any proceeding commenced by
or against any Person under any provision of the Bankruptcy Code or under any
other state or federal bankruptcy or insolvency law, assignments for the
benefit of creditors, formal or informal moratoria, compositions, extensions
generally with creditors, or proceedings seeking reorganization, arrangement,
or other similar relief.

        "Intangible Assets" means all
intangible assets as determined in accordance with GAAP and including
Intellectual Property Rights, goodwill, accounts due from Affiliates,
Directors, Officers or employees, prepaid expenses, deposits, deferred charges
or treasury stock or any securities or Indebtedness of the Borrower or any
other securities unless the same are readily marketable in the United States of
America, or entitled to be used as a credit against federal income tax
liabilities, non-compete agreements and any other assets designated from time
to time by the Lender, in its sole discretion.

 

7

 

        "Intellectual Property Rights" means all actual or
prospective rights arising in connection with any intellectual property or
other proprietary rights, including all rights arising in connection with
copyrights, patents, service marks, trade dress, trade secrets, trademarks,
trade names or mask works.

        "Inventory" means all of the Borrower's inventory, as such
term is defined in the UCC, whether now owned or hereafter acquired, whether
consisting of whole goods, spare parts or components, supplies or materials,
whether acquired, held or furnished for sale, for lease or under service
contracts or for manufacture or processing, and wherever located.

        "Investment Property" means all of the Borrower's
investment property, as such term is defined in the UCC, whether now owned or
hereafter acquired, including but not limited to all securities, security
entitlements, securities accounts, commodity contracts, commodity accounts,
stocks, bonds, mutual fund shares, money market shares and U.S. Government
securities.

        "Issuer" means the issuer of any Letter of Credit.

        "L/C Amount" means the sum of (i) the aggregate face amount
of any issued and outstanding Letters of Credit and (ii) the unpaid amount of
the Obligation of Reimbursement.

        "L/C Application" means an application and agreement for
letters of credit in a form acceptable to the Issuer and the Lender.

        "Letter of Credit" has the meaning specified in
Section 2.3.

        "Licensed Intellectual Property" has the meaning given in
Section 5.11(c).

        "Lien" means any security interest, mortgage, deed of
trust, pledge, lien, charge, encumbrance, title retention agreement or
analogous instrument or device, including the interest of each lessor under any
capitalized lease and the interest of any bondsman under any payment or
performance bond, in, of or on any assets or properties of a Person, whether
now owned or hereafter acquired and whether arising by agreement or operation
of law.

        "Loan Documents" means this Agreement, the Note, the
Guaranty, the Guaranty Security Agreement, the Security Documents, the
Subordination Agreement and any L/C Application.

        "Lockbox" means as defined in the Lockbox and Collection
Account Agreement.

        "Lockbox and Collection Account Agreement" means the
Lockbox and Collection Account Agreement by and among the Borrower, Wells Fargo
Bank, N.A., Regulus West, LLC and the Lender, of even date herewith.

 

8

 

        "Material Adverse Effect"
means any of the following:

            (i)                 
a material adverse effect on the business, operations,
results of operations, prospects, assets, liabilities or financial condition of
the Borrower or the Guarantor;

            (ii)               
a material adverse effect on the ability of the Borrower
or the Guarantor to perform its obligations under the Loan Documents;

            (iii)              
a material adverse effect on the ability of the Lender
to enforce the Obligations or to realize the intended benefits of the Security
Documents, including a material adverse effect on the validity or
enforceability of any Loan Document or of any rights against the Guarantor, or
on the status, existence, perfection, priority (subject to Permitted Liens) or
enforceability of any Lien securing payment or performance of the Obligations
(other than any such material adverse effect caused solely by any act or
omission by the Lender); or

            (iv)             
any claim against the Borrower
or the Guarantor or threat of litigation which if determined adversely to the
Borrower or the Guarantor would cause the Borrower or the Guarantor to be
liable to pay an amount exceeding $200,000 or would be an event described in
clauses (i), (ii) and (iii) above.

        "Maturity Date" means May 28, 2004.

        "Maximum Line" means $3,000,000.

        "Minimum Interest Charge" has the meaning given in Section
2.7(b).

        "Multiemployer Plan" means a multiemployer plan (as defined
in Section 4001(a)(3) of ERISA) to which the
Borrower or any ERISA Affiliate contributes or is obligated to contribute.

        "Net Income" and "Net Loss" mean fiscal year-to-date after-tax
net income, or loss, as applicable, from continuing operations as determined in
accordance with GAAP.

        "Note" means the Revolving Note.

        "Obligation of Reimbursement" has the meaning given in
Section 2.5(a).

        "Obligations" means (i) the Note, the Obligation of
Reimbursement and each and every other debt, liability and obligation of every
type and description which the Borrower may now or at any time hereafter owe to
the Lender, whether such debt, liability or obligation now exists or is
hereafter created or incurred, whether it arises in a transaction involving the
Lender alone or in a transaction involving other creditors of the Borrower, and
whether it is direct or indirect, due or to become due, absolute or contingent,
primary or secondary, liquidated or unliquidated, or sole, joint, several or
joint and several, and including all indebtedness of the Borrower arising under
any Credit Document or guaranty between the Borrower and the Lender, whether
now in effect or hereafter entered into, and (ii) the "Obligations" as
such term is defined in the Affiliate Credit Agreement.

 

9

 

        "Officer" means with respect to the Borrower, an officer if
the Borrower is a corporation, a manager if the Borrower is a limited liability
company, or a partner if the Borrower is a
partnership.

        "Owned Intellectual Property" has the meaning given in
Section 5.11(a).

        "Owner" means with respect to the Borrower, each Person
having legal or beneficial title to an ownership interest in the Borrower or a
right to acquire such an interest.

        "Patent and Trademark Security Agreement" means the Patent
and Trademark Security Agreement by the Borrower in favor of the Lender of even
date herewith.

        "Pension Plan" means a pension plan (as defined in Section
3(2) of ERISA) maintained for employees of the Borrower or any ERISA Affiliate
and covered by Title IV of ERISA.

        "Permitted Lien" has the meaning given in
Section 6.3(a).

        "Person" means any individual, corporation, partnership,
joint venture, limited liability company, association,
joint-stock company, trust, unincorporated organization or government or any
agency or political subdivision thereof.

        "Plan" means an employee benefit plan (as defined in
Section 3(3) of ERISA) maintained for employees of the Borrower or any ERISA
Affiliate.

        "Premises" means all premises where the Borrower conducts
its business and has any rights of possession, including the premises legally
described in Exhibit D attached hereto.

        "Reportable Event" means a reportable event (as defined in
Section 4043 of ERISA), other than an event for which the 30-day notice
requirement under ERISA has been waived in regulations issued by the Pension
Benefit Guaranty Corporation.

        "Revolving Advance" has the meaning given in
Section 2.1.

        "Revolving Note" means the Borrower's revolving promissory
note, payable to the order of the Lender in substantially the form of Exhibit A
hereto.

        "Security Documents" means this Agreement, the Lockbox and
Collection Account Agreement, the Patent and Trademark Security Agreement, and
the Copyright Security Agreement, and any other document delivered to the
Lender from time to time to secure the Obligations.

        "Security Interest" has the meaning given in Section 3.1.

        "Solvent" means, with respect to any Person on a particular
date, that such Person is not insolvent (as such term is defined in the Uniform
Fraudulent Transfer Act).

 

10

 

        "Special Account" means a specified cash collateral account
maintained by a financial institution acceptable to the Lender in connection
with Letters of Credit, as contemplated by Section 2.4.

        "Subsidiary" means any corporation of which more than 50%
of the outstanding shares of capital stock having general voting power under
ordinary circumstances to elect a majority of the board of Directors of such
corporation, irrespective of whether or not at the time stock of any other
class or classes shall have or might have voting power by reason of the
happening of any contingency, is at the time directly or indirectly owned by
the Borrower, by the Borrower and one or more other Subsidiaries, or by one or
more other Subsidiaries.

        "Tangible Net Worth" means the result of (i) Book Net
Worth, plus (ii) amounts due from the Borrower to its Affiliates, minus
(iii) Intangible Assets, and minus (iv) amounts
due to the Borrower from its Affiliates.

        "Termination Date" means the earliest of (i) the Maturity
Date, (ii) the date the Borrower terminates the Credit Facility, or (iii) the
date the Lender demands payment of the Obligations after an Event of Default
pursuant to Section 7.2.

        "UCC" means the Uniform Commercial Code as in effect in the
state designated in Section 8.15 as the state whose laws shall govern this
Agreement, or in any other state whose laws are held to govern this Agreement
or any portion hereof.

        "Wells Fargo Bank Minnesota" means Wells Fargo Bank
Minnesota, National Association.

        Section 1.2             
Other Definitional Terms; Rules of
Interpretation.  The words "hereof",
"herein" and "hereunder" and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular
provision of this Agreement.  All
accounting terms not otherwise defined herein have the meanings assigned to
them in accordance with GAAP. All terms defined in the UCC and not otherwise
defined herein have the meanings assigned to them in the UCC. References to
Articles, Sections, subsections, Exhibits, Schedules and the like, are to
Articles, Sections and subsections of, or Exhibits or Schedules attached to,
this Agreement unless otherwise expressly provided.  The words "include", "includes" and "including"
shall be deemed to be followed by the phrase "without limitation".  Unless the context in which used herein
otherwise clearly requires, "or" has the inclusive meaning represented by the
phrase "and/or".  Defined terms include
in the singular number the plural and in the plural number the singular.  Reference to any agreement (including the
Loan Documents), document or instrument means such agreement, document or
instrument as amended or modified and in effect from time to time in accordance
with the terms thereof (and, if applicable, in accordance with the terms hereof
and the other Loan Documents), except where otherwise explicitly provided, and
reference to any promissory note includes any promissory note which is an
extension or renewal thereof or a substitute or replacement therefor. Reference
to any law, rule, regulation, order, decree, requirement, policy, guideline,
directive or interpretation means as amended, modified, codified, replaced or
reenacted, in whole or in part, and in effect on the determination date,
including rules and regulations promulgated thereunder.

 

11

 

ARTICLE II

AMOUNT AND
TERMS OF THE CREDIT FACILITY

        Section 2.1             
Revolving Advances.  The Lender agrees,
on the terms and subject to the conditions herein set forth, to make advances
to the Borrower from time to time from the date all of the conditions set forth
in Section 4.1 are satisfied (the "Funding Date") to the Termination Date
(the "Revolving Advances").  The Lender
shall have no obligation to make a Revolving Advance to the extent the amount
of the requested Revolving Advance exceeds Availability.  The Borrower's obligation to pay the
Revolving Advances shall be evidenced by the Revolving Note and shall be
secured by the Collateral.  Within the
limits set forth in this Section 2.1, the Borrower may borrow, prepay
pursuant to Section 2.11 and reborrow.

        Section 2.2             
Procedures for Requesting Advances.  The Borrower shall comply with the following
procedures in requesting Revolving Advances:

        (a)               
Time for Requests.  The Borrower shall request each Advance not
later than 10:00 a.m., Pacific time on the
Banking Day which is the date the Advance is to be made.  Each such request shall be effective upon
receipt by the Lender, shall be in writing or by telephone, telecopy
transmission or email, to be confirmed in writing by the Borrower if so
requested by the Lender (in the form of Exhibit E), shall be by (i) an Officer
of the Borrower; or (ii) a person designated as the Borrower's agent by an
Officer of the Borrower in a writing delivered to the Lender; or (iii) a person
whom the Lender reasonably believes to be an Officer of the Borrower or such a
designated agent.  The Borrower shall
repay all Advances even if the Lender does not receive such confirmation and
even if the person requesting an Advance was not in fact authorized to do
so.  Any request for an Advance, whether
written or telephonic, shall be deemed to be a representation by the Borrower
that the conditions set forth in Section 4.2 have been satisfied as of the
time of the request.

        (b)              
Disbursement.  Upon fulfillment of the applicable conditions
set forth in Article IV, the Lender shall disburse the proceeds of the
requested Advance by crediting the same to the Borrower's demand deposit
account maintained with Wells Fargo Bank, N.A., unless the Lender and the Borrower
shall agree in writing to another manner of disbursement.

Section
2.3             
Letters of Credit.[1]

(a)               
The Lender agrees, on the terms and subject to the
conditions herein set forth, to cause an Issuer to issue, from the Funding Date
to the Termination Date, one or more irrevocable standby or documentary letters
of credit (each, a "Letter of Credit") for the Borrower's account by
guaranteeing payment of the Borrower's obligations or being a co-applicant. The
Lender shall have no obligation to cause an Issuer to issue any Letter of
Credit if the face amount of the Letter of Credit to be issued would exceed the
lesser of:

____________________________________

[1]               As of the Closing Date, the
Lender has not agreed to cause the Issuer to issue any Letters of Credit.  The terms of Sections 2.3, 2.4, 2.5 and
2.6 (and the related definitions) shall not be effective until the Lender gives
written notice to the Borrower that such Sections shall be effective.

 

12

 

            (i)                 
$0 less the L/C Amount, or

            (ii)               
Availability.

Each Letter of Credit, if any, shall be issued pursuant to a
separate L/C Application entered into between the Borrower and the Lender for
the benefit of the Issuer, completed in a manner satisfactory to the Lender and
the Issuer. The terms and conditions set forth in each such L/C Application
shall supplement the terms and conditions hereof, but if the terms of any such
L/C Application and the terms of this Agreement are inconsistent, the terms
hereof shall control.

        (b)              
No Letter of Credit shall be issued with an expiry date
later than the Termination Date in effect as of the date of issuance.

        (c)               
Any request to cause an Issuer to issue a Letter of
Credit shall be deemed to be a representation by the Borrower that the
conditions set forth in Section 4.2 have been satisfied as of the date of
the request.

        Section 2.4             
Special Account.  If the Credit
Facility is terminated for any reason while any Letter of Credit is
outstanding, the Borrower shall thereupon pay the Lender in immediately
available funds for deposit in the Special Account an amount equal to the L/C
Amount. The Special Account shall be an interest bearing account maintained for
the Lender by any financial institution acceptable to the Lender. Any interest
earned on amounts deposited in the Special Account shall be credited to the
Special Account. The Lender may apply amounts on deposit in the Special Account
at any time or from time to time to the Obligations in the Lender's sole
discretion. The Borrower may not withdraw any amounts on deposit in the Special
Account as long as the Lender maintains a security interest therein. The Lender
agrees to transfer any balance in the Special Account to the Borrower when the
Lender is required to release its security interest in the Special Account
under applicable law.

        Section 2.5             
Payment of Amounts Drawn Under Letters of
Credit; Obligation of Reimbursement.  The Borrower
acknowledges that the Lender, as co-applicant, will be liable to the Issuer for
reimbursement of any and all draws under Letters of Credit and for all other
amounts required to be paid under the applicable L/C Application. Accordingly,
the Borrower shall pay to the Lender any and all amounts required to be paid
under the applicable L/C Application, when and as required to be paid thereby,
and the amounts designated below, when and as designated:

        (a)               
The Borrower shall pay to the Lender on the day a draft
is honored under any Letter of Credit a sum equal to all amounts drawn under
such Letter of Credit plus any and all reasonable charges and expenses that the
Issuer or the Lender may pay or incur relative to such draw and the applicable
L/C Application, plus interest on all such amounts, charges and expenses as set
forth below (the Borrower's obligation to pay all such amounts is herein
referred to as the "Obligation of Reimbursement").

 

13

 

        (b)              
Whenever a draft is submitted under a Letter of Credit,
the Borrower authorizes the Lender to make a Revolving Advance in the amount of
the Obligation of Reimbursement and to apply the proceeds of such Revolving
Advance thereto. Such Revolving Advance shall be repayable in accordance with
and be treated in all other respects as a Revolving Advance hereunder.

        (c)               
If a draft is submitted under a Letter of Credit when
the Borrower is unable, because a Default Period exists or for any other
reason, to obtain a Revolving Advance to pay the Obligation of Reimbursement,
the Borrower shall pay to the Lender on demand and in immediately available
funds, the amount of the Obligation of Reimbursement together with interest,
accrued from the date of the draft until payment in full at the Default Rate.
Notwithstanding the Borrower's inability to obtain a Revolving Advance for any reason,
the Lender is irrevocably authorized, in its sole discretion, to make a
Revolving Advance in an amount sufficient to discharge the Obligation of
Reimbursement and all accrued but unpaid interest thereon.

        (d)              
The Borrower's obligation to pay any Revolving Advance
made under this Section 2.5, shall be evidenced
by the Revolving Note and shall bear interest as provided in Section 2.7.

        Section 2.6             
Obligations Absolute.  The Borrower's
obligations arising under Section 2.5 shall be absolute, unconditional and
irrevocable, and shall be paid strictly in accordance with the terms of
Section 2.5, under all circumstances whatsoever, including (without
limitation) the following circumstances:

        (a)               
any lack of validity or enforceability of any Letter of
Credit or any other agreement or instrument relating to any Letter of Credit
(collectively the "Related Documents");

        (b)              
any amendment or waiver of or any consent to departure
from all or any of the Related Documents;

        (c)               
the existence of any claim, setoff, defense or other
right which the Borrower may have at any time, against any beneficiary or any
transferee of any Letter of Credit (or any persons or entities for whom any
such beneficiary or any such transferee may be acting), or other person or
entity, whether in connection with this Agreement, the transactions
contemplated herein or in the Related Documents or any unrelated transactions;

        (d)              
any statement or any other document presented under any
Letter of Credit proving to be forged, fraudulent, invalid or insufficient in
any respect or any statement therein being untrue or inaccurate in any respect
whatsoever;

        (e)               
payment by or on behalf of the Issuer under any Letter
of Credit against presentation of a draft or certificate which does not
strictly comply with the terms of such Letter of Credit; or

        (f)                
any other circumstance or
happening whatsoever, whether or not similar to any of the foregoing.

 

14

 

        Section
2.7             
Interest; Minimum Interest Charge; Default Interest;
Participations; Clearance Days; Usury.

        (a)               
Note.  Except as set forth in Subsections (c) and
(f), the outstanding principal balance of the Note shall bear interest at the
Floating Rate.

        (b)              
Minimum Interest Charge.  Notwithstanding the interest payable pursuant
to subsection (a), the Borrower shall pay to the Lender interest of not less
than $12,500 per quarter (the "Minimum Interest Charge") during the term of
this Agreement, and the Borrower shall pay any deficiency between the Minimum
Interest Charge and the amount of interest otherwise calculated under
subsection (a) on the first day of each quarter and on the Termination Date.

        (c)               
Default Interest Rate.  Upon notice to the Borrower from the Lender
from time to time, the principal of the Advances outstanding from time to time
shall bear interest at the Default Rate, effective as of the first day of the
month during which any Default Period begins through the last day of such
Default Period. The Lender's election to charge the Default Rate shall be in
its sole discretion and shall not be a waiver of any of its other rights and
remedies. The Lender's election to charge interest at the Default Rate for less
than the entire period during which the Default Rate may be charged shall not
be a waiver of its right to later charge the Default Rate for the entire such
period.

        (d)              
Clearance Days.  Notwithstanding Section 2.10(b)(ii), interest at the interest rate applicable under this
Section 2.7 shall accrue on the amount of all payments (even if in the form of
immediately available federal funds) for two (2) Banking Days for clearance.

        (e)               
Participations.  If any Person shall acquire a participation
in the Advances or the Obligation of Reimbursement, the Borrower shall be
obligated to the Lender to pay the full amount of all interest calculated under
this Section 2.7, along with all other fees, charges and other amounts due
under this Agreement, regardless if such Person elects to accept interest with
respect to its participation at a lower rate than that calculated under this
Section 2.7, or otherwise elects to accept less than its prorata share of such
fees, charges and other amounts due under this Agreement.

        (f)                
Usury.  In any event no rate change shall be put into
effect which would result in a rate greater than the highest rate permitted by
law.  Notwithstanding anything to the
contrary contained in any Loan Document, all agreements which either now are or
which shall become agreements between the Borrower and the Lender are hereby
limited so that in no contingency or event whatsoever shall the total liability
for payments in the nature of interest, additional interest and other charges
exceed the applicable limits imposed by any applicable usury laws. If any
payments in the nature of interest, additional interest and other charges made
under any Loan Document are held to be in excess of the limits imposed by any
applicable usury laws, it is agreed that any such amount held to be in excess
shall be considered payment of principal hereunder, and the indebtedness
evidenced hereby shall be reduced by such amount so that the total liability
for payments in the nature of interest, additional interest and other charges
shall not exceed the applicable limits imposed by any applicable usury laws, in
compliance with the desires of the Borrower and the Lender. This provision
shall never be superseded or waived and shall control every other provision of
the Loan Documents and all agreements between the Borrower and the Lender, or
their successors and assigns.

 

15

 

        Section
2.8             
Fees.

        (a)               
Origination Fee.  The Borrower and the Affiliate Borrower shall
jointly pay the Lender a fully earned and non-refundable origination fee of
$37,500, due and payable upon the execution of this Agreement.

        (b)              
Audit Fees.  The Borrower shall pay the Lender, on demand,
audit fees in connection with any audits or inspections conducted by or on
behalf of the Lender of any Collateral or the Borrower's operations or business
at the rates established from time to time by the Lender as its audit fees
(which fees are currently $90 per hour per auditor), together with all actual
out-of-pocket costs and expenses incurred in conducting any such audit or
inspection.

        (c)               
Letter of Credit Fees.  The Borrower shall pay to the Lender a fee
with respect to each Letter of Credit, if any, accruing on a daily basis and
computed at the annual rate of one and one quarter percent (1.25%), of the
aggregate amount that may then be drawn under it assuming compliance with all
conditions for drawing (the "Aggregate Face Amount"), from and including the
date of issuance of such Letter of Credit until such date as such Letter of
Credit shall terminate by its terms or be returned to the Lender, due and
payable monthly in arrears on the first day of each month and on the
Termination Date; provided, however that during Default Periods,
in the Lender's sole discretion and without waiving any of its other rights and
remedies, such fee shall increase to four and one quarter percent (4.25%) of
the Aggregate Face Amount.  The foregoing
fee shall be in addition to any and all fees, commissions and charges of the
Issuer with respect to or in connection with such Letter of Credit.

        (d)              
Letter of Credit Administrative Fees.  The Borrower shall pay to the Lender, on
written demand, the administrative fees charged by the Issuer in connection
with the honoring of drafts under any Letter of Credit, amendments thereto,
transfers thereof and all other activity with respect to the Letters of Credit
at the then-current rates published by the Issuer for such services rendered on
behalf of customers of the Issuer generally.

        (e)               
Termination Fees.  If the Credit Facility is terminated (i) by
the Lender during a Default Period that begins before a Maturity Date, (ii) by
the Borrower (A) as of a date other than a Maturity Date or (B) as of a
Maturity Date but without the Lender having received written notice of such
termination at least 90 days before such Maturity Date, the Borrower shall pay
to the Lender a fee in an amount equal to a percentage of the Maximum Line as
follows: (A) three percent (3.0%) if the termination occurs on or before the
first anniversary of the Funding Date; and (B) one percent (1.0%) if the
termination occurs after the first anniversary of the Funding Date.

        (f)                
Waiver of Termination.  The Borrower will not be required to pay the
termination and prepayment fees otherwise due under subsection (e) if such
termination or prepayment is made because of refinancing by an affiliate of the
Lender.

 

16

 

        (g)               
Unused Line Fee.  On the first day of each calendar quarter
during the term of this Agreement, an unused line fee in an amount equal to
0.25% per annum times the result of (a) the Maximum Line, less (b) the sum of
(i) the average Daily Balance of Advances that were outstanding during the
immediately preceding calendar quarter, plus (ii) the average Daily Balance of
the L/C Amount during the immediately preceding calendar quarter, and plus
(iii) the average Affiliate Obligations during the immediately preceding
calendar quarter.

        (h)               
Other Fees.  The Lender may from time to time, upon five
(5) days prior notice to the Borrower during a Default Period, charge
additional fees for Revolving Advances made and Letters of Credit issued in excess
of Availability, for late delivery of reports, in lieu of imposing interest at
the Default Rate, and for other commercially reasonable reasons.  The Borrower's request for a Revolving
Advance or the issuance of a Letter of Credit at any time after such notice is
given and such five (5) day period has elapsed shall constitute the Borrower's
agreement to pay the fees described in such notice.

        Section
2.9             
Time for Interest Payments; Payment on Non-Banking
Days; Computation of Interest and Fees

        (a)               
Time For Interest
Payments.  Interest shall be due
and payable in arrears on the first day of each month and on the Termination
Date.

        (b)              
Payment on Non-Banking Days.  Whenever any payment to be made hereunder
shall be stated to be due on a day which is not a Banking Day, such payment may
be made on the next succeeding Banking Day, and such extension of time shall in
such case be included in the computation of interest on the Advances or the
fees hereunder, as the case may be.

        (c)               
Computation of Interest and Fees.  Interest accruing on the outstanding
principal balance of the Advances and fees hereunder outstanding from time to
time shall be computed on the basis of actual number of days elapsed in a year
of 360 days.

        Section
2.10         
Lockbox; Collateral Account; Application of Payments.

        (a)               
Lockbox and Collateral Account.

            (i)                 
The Borrower shall instruct all Account Debtors to pay
all Accounts directly to the Lockbox. If, notwithstanding such instructions,
the Borrower receives any payments on Accounts, the Borrower shall deposit such
payments into the Collateral Account. The Borrower shall also deposit all other
cash proceeds of Collateral directly to the Collateral Account. Until so
deposited, the Borrower shall hold all such payments and cash proceeds in trust
for and as the property of the Lender and shall not commingle such property
with any of its other funds or property. All deposits in the Collateral Account
shall constitute proceeds of Collateral and shall not constitute payment of the
Obligations.

            (ii)               
All items deposited in the Collateral Account shall be
subject to final payment. If any such item is returned uncollected, the
Borrower will immediately pay the Lender, or, for items deposited in the
Collateral Account, the bank maintaining such account, the amount of that item, or such bank at its discretion may charge any
uncollected item to the Borrower's commercial account or other account. The
Borrower shall be liable as an endorser on all items deposited in the
Collateral Account, whether or not in fact endorsed by the Borrower.

 

17

 

        (b)              
Application of Payments.

            (i)                 
The Borrower may, from time to time, in accordance with
the Lockbox and Collection Account Agreement, cause funds in the Collateral
Account to be transferred to the Lender's general account for payment of the
Obligations. Except as provided in the preceding sentence, amounts deposited in
the Collateral Account shall not be subject to withdrawal by the Borrower,
except after full payment and discharge of all Obligations.

            (ii)               
All payments to the Lender shall be made in immediately
available funds and shall be applied to the Obligations upon receipt by the
Lender. Funds received from the Collateral Account shall be deemed to be
immediately available. The Lender may hold all payments not constituting
immediately available funds for two (2) additional Banking Days before applying
them to the Obligations. Subject to Section 7.7 of this Agreement, all
payments with respect to the Obligations may be applied, and in the Lender's
sole discretion reversed and re-applied, to the Obligations, in such order and
manner as the Lender shall determine in its sole discretion.

        Section 2.11         
Voluntary Prepayment; Termination of the
Credit Facility by the Borrower.  Except
as otherwise provided herein, the Borrower may prepay the Advances in whole at
any time or from time to time in part. 
The Borrower may terminate the Credit Facility at any time if it (i)
gives the Lender at least 30 days' prior written notice and (ii) pays the
Lender termination, prepayment and Maximum Line reduction fees in accordance
with Section 2.8(e). Subject to termination of the Credit Facility and
payment and performance of all Obligations, the Lender shall, at the Borrower's
expense, release or terminate the Security Interest and the Security Documents
to which the Borrower is entitled by law.

        Section 2.12         
Mandatory Prepayment.  Without notice or
demand, if the sum of the outstanding principal balance of the Revolving
Advances plus the L/C Amount shall at any time exceed the Borrowing Base, the
Borrower shall (i) first, immediately prepay the Revolving Advances to the
extent necessary to eliminate such excess; and (ii) if prepayment in full of
the Revolving Advances is insufficient to eliminate such excess, pay to the
Lender in immediately available funds for deposit in the Special Account an
amount equal to the remaining excess. Any payment received by the Lender under
this Section 2.12 or under Section 2.11 may be applied to the
Obligations, in such order and in such amounts as the Lender, in its
discretion, may from time to time determine.

        Section 2.13         
Revolving Advances to Pay Obligations.  Notwithstanding
anything in Section 2.1, the Lender may, in its discretion at any time or
from time to time, without the Borrower's request and even if the conditions
set forth in Section 4.2 would not be satisfied, make a Revolving Advance
in an amount equal to the portion of the Obligations from time to time due and
payable.

 

18

 

        Section 2.14         
Use of Proceeds.  The Borrower shall
use the proceeds of Advances and each Letter of Credit for ordinary working
capital purposes.

        Section 2.15         
Liability Records.  The Lender may
maintain from time to time, at its discretion, records as to the
Obligations.  All entries made on any
such record shall be presumed correct until the Borrower establishes the
contrary.  Upon the Lender's demand, the
Borrower will admit and certify in writing the exact principal balance of the
Obligations that the Borrower then asserts to be outstanding.  Any billing statement or accounting rendered
by the Lender shall be conclusive and fully binding on the Borrower unless the
Borrower gives the Lender specific written notice of exception within 30 days
after receipt.

ARTICLE III

SECURITY
INTEREST; OCCUPANCY; SETOFF

        Section 3.1             
Grant of Security Interest.  The Borrower hereby
pledges, assigns and grants to the Lender a lien and security interest
(collectively referred to as the "Security Interest") in the Collateral, as
security for the payment and performance of the Obligations.  Upon request by the Lender, the Borrower will
grant the Lender a security interest in all commercial tort claims it may have
against any Person.

        Section 3.2             
Notification of Account Debtors and Other
Obligors.  The Lender may at
any time (whether or not a Default Period then exists) notify any Account
Debtor or other person obligated to pay the amount due that such right to
payment has been assigned or transferred to the Lender for security and shall
be paid directly to the Lender.  The
Borrower will join in giving such notice if the Lender so requests.  At any time after the Borrower or the Lender
gives such notice to an Account Debtor or other obligor, the Lender may, but
need not, in the Lender's name or in the Borrower's name, demand, sue for,
collect or receive any money or property at any time payable or receivable on
account of, or securing, any such right to payment, or grant any extension to,
make any compromise or settlement with or otherwise agree to waive, modify,
amend or change the obligations (including collateral obligations) of any such
Account Debtor or other obligor.

        Section 3.3             
Assignment of Insurance.  As additional
security for the payment and performance of the Obligations, the Borrower
hereby assigns to the Lender any and all monies (including proceeds of
insurance and refunds of unearned premiums) due or to become due under, and all
other rights of the Borrower with respect to, any and all policies of insurance
now or at any time hereafter covering the Collateral or any evidence thereof or
any business records or valuable papers pertaining thereto, and the Borrower
hereby directs the issuer of any such policy to pay all such monies directly to
the Lender.  At any time, whether or not
a Default Period then exists, the Lender may (but need not), in the Lender's
name or in the Borrower's name, execute and deliver proof of claim, receive all
such monies, endorse checks and other instruments representing payment of such
monies, and adjust, litigate, compromise or release any claim against the
issuer of any such policy.

 

19

 

        Section
3.4             
Occupancy.

        (a)               
The Borrower hereby irrevocably grants to the Lender
the right to take exclusive possession of the Premises at any time during a
Default Period.

        (b)              
The Lender may use the Premises only to hold, process,
manufacture, sell, use, store, liquidate, realize upon
or otherwise dispose of goods that are Collateral and for other purposes that
the Lender may in good faith deem to be related or incidental purposes.

        (c)               
The Lender's right to hold the Premises shall cease and
terminate upon the earlier of (i) payment in full and discharge of all
Obligations and termination of the Credit Facility, and (ii) final sale or
disposition of all goods constituting Collateral and delivery of all such goods
to purchasers.

        (d)              
The Lender shall not be obligated to pay or account for
any rent or other compensation for the possession, occupancy or use of any of
the Premises; provided, however, that if the Lender does pay or account for any
rent or other compensation for the possession, occupancy or use of any of the
Premises, the Borrower shall reimburse the Lender promptly for the full amount
thereof. In addition, the Borrower will pay, or reimburse the Lender for, all
taxes, fees, duties, imposts, charges and expenses at any time incurred by or
imposed upon the Lender by reason of the execution, delivery, existence,
recordation, performance or enforcement of this Agreement or the provisions of
this Section 3.4.

        Section 3.5             
License.  Without limiting
the generality of any other Security Document, the Borrower hereby grants to
the Lender a non-exclusive, worldwide and royalty-free license to use or
otherwise exploit all Intellectual Property Rights of the Borrower for the
purpose of: (a) completing the manufacture of any in-process materials during
any Default Period so that such materials become saleable Inventory, all in
accordance with the same quality standards previously adopted by the Borrower
for its own manufacturing and subject to the Borrower's reasonable exercise of
quality control; and (b) selling, leasing or otherwise disposing of any or all
Collateral during any Default Period.

        Section 3.6             
Financing Statement.  The Borrower
authorizes the Lender to file from time to time where permitted by law, such
financing statements against collateral described as "all personal property" or
describing specific items of collateral including commercial tort claims as the
Lender deems necessary or useful to perfect the Security Interest.  A carbon, photographic or other reproduction
of this Agreement or of any financing statements signed by the Borrower is
sufficient as a financing statement and may be filed as a financing statement
in any state to perfect the security interests granted hereby. For this
purpose, the following information is set forth:

 

20

 

Name and address of Debtor:

Oregon Micro Systems, Inc.

1800 NW 169th Place, Bldg. C100

Beaverton, Oregon 97006

Federal Employer Identification No. 93‐0894151

Organizational Identification No. 208152

Name and address of Secured Party:

Wells Fargo Business Credit, Inc.

245 S. Los Robles Avenue, Suite 600

Pasadena, CA  91101

Federal Employer Identification No. 41-1237652

        Section 3.7             
Setoff.  The Lender may at
any time or from time to time, at its sole discretion and without demand and
without notice to anyone, setoff any liability owed to the Borrower by the
Lender, whether or not due, against any Obligation, whether or not due. In
addition, each other Person holding a participating interest in any Obligations
shall have the right to appropriate or setoff any deposit or other liability
then owed by such Person to the Borrower, whether or not due, and apply the
same to the payment of said participating interest, as fully as if such Person
had lent directly to the Borrower the amount of such participating interest.

        Section 3.8             
Power of Attorney.  The Borrower hereby
irrevocably makes, constitutes, and appoints the Lender (and any of the
Lender's officers, employees, or agents designated by the Lender) as the
Borrower's true and lawful attorney, with power to (a) if the Borrower refuses
to, or fails timely to execute and deliver any of the documents required to be
described in Section 8.4, sign the name of the Borrower on any of the documents
described in Section 8.4, (b) at any time that an Event of Default has occurred
and is continuing, sign the Borrower's name on any invoice or bill of lading
relating to the Collateral, drafts against Account Debtors, or notices to
Account Debtors, (c) send requests for verification of Accounts, (d) endorse
the Borrower's name on any collection item that may come into the Lender's
possession, (e) at any time that an Event of Default has occurred and is
continuing, make, settle, and adjust all claims under Borrower's policies of
insurance and make all determinations and decisions with respect to such
policies of insurance, (f) at any time that an Event of Default has occurred
and is continuing, settle and adjust disputes and claims respecting the
Accounts, chattel paper, or General Intangibles directly with Account Debtors,
for amounts and upon terms that the Lender determines to be reasonable, and the
Lender may cause to be executed and delivered any documents and releases that
the Lender determines to be necessary, and (g) notify the United States Postal
Service to change the address for delivery of the Borrower's mail to any
address designated by the Lender, otherwise intercept the Borrower's mail, and
receive, open and dispose of the Borrower's mail, applying all Collateral as
permitted under this Agreement and holding all other mail for the Borrower's
account or forwarding such mail to the Borrower's last known address.  The appointment of the Lender as the
Borrower's attorney, and each and every one of its rights and powers, being
coupled with an interest, is irrevocable until all of the Obligations have been
fully and finally repaid and performed and the Lender's obligations to extend
credit hereunder are terminated.

 

21

 

ARTICLE IV

CONDITIONS OF
LENDING

        Section 4.1             
Conditions Precedent to the Initial Advances
and Letter of Credit.  The Lender's obligation
to make the initial Advances or to cause any Letters of Credit to be issued
shall be subject to the condition precedent that the Lender shall have received
all of the following, each in form and substance satisfactory to the Lender:

            (a)               
This Agreement, duly executed by the Borrower.

            (b)              
The Note, duly executed by the Borrower.

            (c)               
A true and correct copy of any and all leases pursuant
to which the Borrower is leasing the Premises, together with a landlord's
disclaimer and consent with respect to each such lease.

            (d)              
A true and correct copy of any and all mortgages
pursuant to which the Borrower has mortgaged the Premises, together with a
mortgagee's disclaimer and consent with respect to each such mortgage.

            (e)               
A true and correct copy of any and all agreements
pursuant to which the Borrower's property is in the possession of any Person
other than the Borrower, together with, in the case of any goods held by such
Person for resale, (i) a consignee's acknowledgment and waiver of Liens, (ii)
UCC financing statements sufficient to protect the Borrower's and the Lender's
interests in such goods, and (iii) UCC searches showing that no other secured
party has filed a financing statement against such Person and covering property
similar to the Borrower's other than the Borrower, or if there exists any such
secured party, evidence that each such secured party has received notice from
the Borrower and the Lender sufficient to protect the Borrower's and the
Lender's interests in the Borrower's goods from any claim by such secured party.

            (f)                
An acknowledgment and waiver of Liens from each
warehouse in which the Borrower is storing Inventory.

            (g)               
A true and correct copy of any and all agreements
pursuant to which the Borrower's property is in the possession of any Person
other than the Borrower, together with, (i) an acknowledgment and waiver of
Liens from each subcontractor who has possession of the Borrower's goods from
time to time, (ii) UCC financing statements sufficient to protect the
Borrower's and the Lender's interests in such goods, and (iii) UCC searches
showing that no other secured party has filed a financing statement covering
such Person's property other than the Borrower, or if there exists any such
secured party, evidence that each such secured party has received notice from
the Borrower and the Lender sufficient to protect the Borrower's and the
Lender's interests in the Borrower's goods from any claim by such secured
party.

 

22

 

            (h)               
The Lockbox and Collection Account Agreement, duly
executed by the Borrower and Wells Fargo Bank, N.A.

            (i)                 
Control agreements, duly executed by the Borrower and
each bank at which the Borrower maintains deposit accounts.

            (j)                
The Patent and Trademark Security Agreement, duly
executed by the Borrower.

            (k)              
The Guaranty and the Guaranty Security Agreement, each
duly executed by the Guarantor, 

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

            (m)             
The Subordination Agreement,
duly executed by the Guarantor and acknowledged by the Borrower.

            (n)               
Current searches of appropriate filing offices showing
that (i) no Liens have been filed and remain in effect against the Borrower
except Permitted Liens or Liens held by Persons who have agreed in writing that
upon receipt of proceeds of the initial Advances, they will satisfy, release or
terminate such Liens in a manner satisfactory to the Lender, and (ii) the
Lender has duly filed all financing statements necessary to perfect the
Security Interest, to the extent the Security Interest is capable of being
perfected by filing.

            (o)              
A certificate of the Borrower's Secretary or Assistant
Secretary certifying that attached to such certificate are (i) the resolutions
of the Borrower's Directors and, if required, Owners, authorizing the
execution, delivery and performance of the Loan Documents, (ii) true, correct
and complete copies of the Borrower's Constituent Documents, and (iii) examples
of the signatures of the Borrower's Officers or agents authorized to execute
and deliver the Loan Documents and other instruments, agreements and
certificates, including Advance requests, on the Borrower's behalf.

            (p)              
A current certificate issued by the Secretary of State
of Oregon, certifying that the Borrower is in compliance with all applicable
organizational requirements of the State of Oregon.

            (q)              
Evidence that the Borrower is duly licensed or
qualified to transact business in all jurisdictions where the character of the
property owned or leased or the nature of the business transacted by it makes
such licensing or qualification necessary.

            (r)                
A certificate of an Officer of the Borrower confirming,
in his personal capacity, the representations and warranties set forth in
Article V.

            (s)               
An opinion of counsel to the Borrower and the
Guarantor, addressed to the Lender.

 

23

 

            (t)                
Certificates of the insurance required hereunder, with
all hazard insurance containing a lender's loss payable endorsement in the
Lender's favor and with all liability insurance naming the Lender as an
additional insured.

            (u)               
Payment of the fees and commissions due under Section
2.13 through the date of the initial Advance or Letter of Credit and expenses
incurred by the Lender through such date and required to be paid by the
Borrower under Section 8.6, including all legal expenses incurred through the
date of this Agreement.

            (v)               
Evidence that after making the initial Revolving
Advance, satisfying all trade payables older than 60 days from invoice date,
book overdrafts and closing costs, Availability shall be not less than
$500,000.

            (w)             
Evidence satisfactory to the Lender that there has been
no Material Adverse Effect since the date of the last financial statements
provided by the Borrower to the Lender, or any material variance from the
Borrower's projections previously provided by the Borrower to the Lender.

            (x)               
A Collateral audit, satisfactory to the Lender.

            (y)               
The results of the Lender's due diligence with respect
to the Borrower, including background checks on the senior officers of the
Borrower, satisfactory to the Lender.

            (z)               
True and complete copies of all license agreements
pursuant to which the Borrower licenses any Intellectual Property Rights,
together with a consent to assignment to the Lender or
its nominee from each licensor thereof (including without limitation, from
Ronald G. Coss).

            (aa)           
Such other documents as the Lender in its sole
discretion may require.

        Section 4.2             
Conditions Precedent to All Advances and
Letters of Credit.  The Lender's obligation to make each Advance
and to cause each Letter of Credit to be issued shall be subject to the further
conditions precedent that:

        (a)               
the representations and warranties contained in Article
V are correct on and as of the date of such Advance or issuance of a Letter of
Credit as though made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date;

        (b)              
no event has occurred and is continuing, or would
result from such Advance or issuance of a Letter of Credit which constitutes a
Default or an Event of Default; and

        (c)               
no injunction, writ,
restraining order, or other order of any nature prohibiting, directly or
indirectly, the extending of such credit shall have been issued and remain in
force by any Governmental Authority against the Borrower, the Lender, or any of
their Affiliates.

 

24

 

ARTICLE V

REPRESENTATIONS
AND WARRANTIES

        The Borrower represents and
warrants to the Lender as follows:

        Section 5.1             
Existence and Power; Name; Chief Executive
Office; Inventory and Equipment Locations; Federal Employer Identification
Number.  The Borrower is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Oregon and is duly licensed or qualified to transact
business in all jurisdictions where the character of the property owned or
leased or the nature of the business transacted by it makes such licensing or
qualification necessary. The Borrower has all requisite power and authority to
conduct its business, to own its properties and to execute and deliver, and to
perform all of its obligations under, the Loan Documents.  During its existence, the Borrower has done
business solely under the names set forth in Schedule 5.1 and all of the
Borrower's records relating to its business or the Collateral are kept at that
location.  The Borrower's chief executive
office and principal place of business is located at the address set forth in
Schedule 5.1.  All Inventory and Equipment
is located at that location or at one of the other locations listed in Schedule 5.1.  The Borrower's federal employer
identification number is correctly set forth in Section 3.6.

        Section 5.2             
Capitalization.  Schedule 5.2
constitutes a correct and complete list of all ownership interests of the
Borrower and rights to acquire ownership interests including the record holder,
number of interests and percentage interests on a fully diluted basis, and an
organizational chart showing the ownership structure of all Subsidiaries of the
Borrower.

        Section 5.3             
Authorization of Borrowing; No Conflict as to
Law or Agreements.  The execution,
delivery and performance by the Borrower of the Loan Documents and the
borrowings from time to time hereunder have been duly authorized by all
necessary corporate action and do not and will not (i) require any consent or
approval of the Borrower's Owners; (ii) require any authorization, consent or
approval by, or registration, declaration or filing with, or notice to, any
Governmental Authority, or any third Person, except such authorization,
consent, approval, registration, declaration, filing or notice as has been
obtained, accomplished or given prior to the date hereof; (iii) violate any
provision of any law, rule or regulation (including Regulation X of the Board
of Governors of the Federal Reserve System) or of any order, writ, injunction
or decree presently in effect having applicability to the Borrower or of the
Borrower's Constituent Documents; (iv) result in a breach of or constitute a
default under any indenture or loan or credit agreement or any other material
agreement, lease or instrument to which the Borrower is a party or by which it
or its properties may be bound or affected; or (v) result in, or require, the
creation or imposition of any Lien (other than the Security Interest) upon or
with respect to any of the properties now owned or hereafter acquired by the
Borrower.

        Section 5.4             
Legal Agreements.  This Agreement
constitutes and, upon due execution by the Borrower, the other Loan Documents
will constitute the legal, valid and binding obligations of the Borrower,
enforceable against the Borrower in accordance with their respective terms,
except as enforcement may be limited by equitable principles or by bankruptcy,
insolvency, reorganization, moratorium, or similar laws relating to or limiting
creditors' rights generally.

 

25

 

        Section 5.5             
Subsidiaries.  Except as set forth
in Schedule 5.5 hereto, the Borrower has no Subsidiaries.

        Section 5.6             
Financial Condition; No Adverse Change.  The Borrower has
furnished to the Lender its audited financial statements for its fiscal year
ended June 30, 2001 and unaudited financial statements for the
fiscal-year-to-date period ended March 31, 2002, and those statements
fairly present the Borrower's financial condition on the dates thereof and the
results of its operations and cash flows for the periods then ended and were
prepared in accordance with generally accepted accounting principles.  Since the date of the most recent financial
statements, there has been no change in the Borrower's business, properties or
condition (financial or otherwise) which has had a Material Adverse Effect.

        Section 5.7             
Litigation.  There are no
actions, suits or proceedings pending or, to the Borrower's knowledge,
threatened against or affecting the Borrower or any of its Affiliates or the
properties of the Borrower or any of its Affiliates before any court or
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, which, if determined adversely to the Borrower or any of
its Affiliates, would have a Material Adverse Effect.

        Section 5.8             
Regulation U.  The Borrower is not
engaged in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System), and no part of the proceeds of any
Advance will be used to purchase or carry any margin stock or to extend credit
to others for the purpose of purchasing or carrying any margin stock.

        Section 5.9             
Taxes.  The Borrower and
its Affiliates have paid or caused to be paid to the proper authorities when
due all federal, state and local taxes required to be withheld by each of
them.  The Borrower and its Affiliates
have filed all federal, state and local tax returns which to the knowledge of
the Officers of the Borrower or any Affiliate, as the case may be, are required
to be filed, and the Borrower and its Affiliates have paid or caused to be paid
to the respective taxing authorities all taxes as shown on said returns or on
any assessment received by any of them to the extent such taxes have become
due.

        Section 5.10         
Titles and Liens.  The Borrower has
good and absolute title to all Collateral free and
clear of all Liens other than Permitted Liens. 
No financing statement naming the Borrower as debtor is on file in any
office except to perfect only Permitted Liens.

        Section
5.11         
Intellectual Property Rights.

        (a)               
Owned Intellectual Property.  Schedule 5.11 is a complete list of all
patents, applications for patents, trademarks, applications for trademarks,
service marks, applications for service marks, mask works, trade dress and
copyrights for which the Borrower is the registered owner (the "Owned
Intellectual Property"). Except as disclosed on Schedule 5.11, (i) the Borrower
owns the Owned Intellectual Property free and clear of all restrictions
(including covenants not to sue a third party), court orders, injunctions, decrees,
writs or Liens, whether by written agreement or otherwise, (ii) no Person other
than the Borrower owns or has been granted any right in the Owned Intellectual
Property, (iii) all Owned Intellectual Property is valid, subsisting and
enforceable and (iv) the Borrower has taken all commercially reasonable action
necessary to maintain and protect the Owned Intellectual Property.

 

26

 

        (b)              
Agreements with Employees and Contractors.  The Borrower has entered into a legally
enforceable agreement with each of its employees and subcontractors obligating
each such Person to assign to the Borrower, without any additional
compensation, any Intellectual Property Rights created, discovered or invented
by such Person in the course of such Person's employment or engagement with the
Borrower (except to the extent prohibited by law), and further requiring such
Person to cooperate with the Borrower, without any additional compensation, in
connection with securing and enforcing any Intellectual Property Rights
therein; provided, however, that the foregoing shall not apply with respect to
employees and subcontractors whose job descriptions are of the type such that
no such assignments are reasonably foreseeable.

        (c)               
Intellectual Property Rights Licensed from
Others.  Schedule 5.11 is a
complete list of all agreements under which the Borrower has licensed
Intellectual Property Rights from another Person ("Licensed Intellectual
Property") other than readily available, non-negotiated licenses of computer
software and other intellectual property used solely for performing accounting,
word processing and similar administrative tasks ("Off-the-shelf Software") and
a summary of any ongoing payments the Borrower is obligated to make with
respect thereto.  Except as disclosed on
Schedule 5.11 and in written agreements copies of which have been given to
the Lender, the Borrower's licenses to use the Licensed Intellectual Property
are free and clear of all restrictions, Liens, court orders, injunctions,
decrees, or writs, whether by written agreement or otherwise.  Except as disclosed on Schedule 5.11,
the Borrower is not obligated or under any liability whatsoever to make any
payments of a material nature by way of royalties, fees or otherwise to any
owner of, licensor of, or other claimant to, any Intellectual Property Rights.

        (d)              
Other Intellectual Property Needed for
Business.  Except for
Off-the-shelf Software and as disclosed on Schedule 5.11, the Owned
Intellectual Property and the Licensed Intellectual Property constitute all
Intellectual Property Rights used or necessary to conduct the Borrower's
business as it is presently conducted or as the Borrower reasonably foresees
conducting it.

        (e)               
Infringement.  Except as disclosed on Schedule 5.11,
the Borrower has no knowledge of, and has not received any written claim or
notice alleging, any Infringement of another Person's Intellectual Property
Rights (including any written claim that the Borrower must license or refrain
from using the Intellectual Property Rights of any third party) nor, to the
Borrower's knowledge, is there any threatened claim or any reasonable basis for
any such claim.

 

27

 

        Section 5.12         
Plans.  Except as disclosed
to the Lender in writing prior to the date hereof, neither the Borrower nor any
ERISA Affiliate (i) maintains or has maintained any Pension Plan, (ii)
contributes or has contributed to any Multiemployer Plan or (iii) provides or
has provided post-retirement medical or insurance benefits with respect to
employees or former employees (other than benefits required under
Section 601 of ERISA, Section 4980B of the IRC or applicable state law).
Neither the Borrower nor any ERISA Affiliate has received any notice or has any
knowledge to the effect that it is not in full compliance with any of the
requirements of ERISA, the IRC or applicable state law with respect to any
Plan. No Reportable Event exists in connection with any Pension Plan. Each Plan
which is intended to qualify under the IRC is so qualified, and no fact or
circumstance exists which may have an adverse effect on the Plan's
tax-qualified status.  Neither the
Borrower nor any ERISA Affiliate has (i) any accumulated funding deficiency (as
defined in Section 302 of ERISA and Section 412 of the IRC) under any
Plan, whether or not waived, (ii) any liability under Section 4201 or
4243 of ERISA for any withdrawal, partial withdrawal, reorganization or other
event under any Multiemployer Plan or (iii) any liability or knowledge of any
facts or circumstances which could result in any liability to the Pension
Benefit Guaranty Corporation, the Internal Revenue Service, the Department of
Labor or any participant in connection with any Plan (other than routine claims
for benefits under the Plan).

        Section 5.13         
Default.  The Borrower is in
compliance with all provisions of all agreements, instruments, decrees and
orders to which it is a party or by which it or its property is bound or
affected, the breach or default of which could have a Material Adverse Effect.

        Section
5.14         
Environmental Matters.

        (a)               
To the Borrower's best knowledge, there are not present
in, on or under the Premises any Hazardous Substances in such form or quantity
as to create any material liability or obligation for either the Borrower or
the Lender under common law of any jurisdiction or under any Environmental Law,
and no Hazardous Substances have ever been stored, buried, spilled, leaked,
discharged, emitted or released in, on or under the Premises in such a way as
to create any such material liability.

        (b)              
To the Borrower's best knowledge, the Borrower has not
disposed of Hazardous Substances in such a manner as to create any material
liability under any Environmental Law.

        (c)               
There are not and there never have been any requests,
claims, notices, investigations, demands, administrative proceedings, hearings
or litigation, relating in any way to the Premises or the Borrower, alleging
material liability under, violation of, or noncompliance with any Environmental
Law or any license, permit or other authorization issued pursuant thereto.  To the Borrower's best knowledge, no such
matter is threatened or impending.

        (d)              
To the Borrower's best knowledge, the Borrower's
businesses are and have in the past always been conducted in accordance with
all Environmental Laws and all licenses, permits and other authorizations
required pursuant to any Environmental Law and necessary for the lawful and
efficient operation of such businesses are in the Borrower's possession and are
in full force and effect. No permit required under any Environmental Law is
scheduled to expire within 12 months and there is no threat that any such
permit will be withdrawn, terminated, limited or materially changed.

 

28

 

        (e)               
To the Borrower's best knowledge, the Premises are not
and never have been listed on the National Priorities List, the Comprehensive
Environmental Response, Compensation and Liability Information System or any
similar federal, state or local list, schedule, log, inventory or database.

        (f)                
The Borrower has delivered to Lender all environmental
assessments, audits, reports, permits, licenses and other documents describing
or relating in any way to the Premises or Borrower's businesses.

        Section 5.15         
Submissions to Lender.  All financial and
other information provided to the Lender by or on behalf of the Borrower in
connection with the Borrower's request for the credit facilities contemplated
hereby is (i) true and correct in all material respects, (ii) does not omit any
material fact necessary to make such information not misleading and, (iii) as
to projections, valuations or proforma financial statements, present a good
faith opinion as to such projections, valuations and proforma condition and
results.

        Section 5.16         
Financing Statements.  The Borrower has
authorized the filing of financing statements sufficient when filed to perfect
the Security Interest and the other security interests created by the Security
Documents. When such financing statements are filed in the offices noted
therein, the Lender will have a valid and perfected security interest in all
Collateral which is capable of being perfected by filing financing statements.
None of the Collateral is or will become a fixture on real estate, unless a
sufficient fixture filing is in effect with respect thereto.

        Section 5.17         
Rights to Payment.  Each right to
payment and each instrument, document, chattel paper and other agreement
constituting or evidencing Collateral is (or, in the case of all future
Collateral, will be when arising or issued) the valid, genuine and legally
enforceable obligation, subject to no defense, setoff or counterclaim, of the
Account Debtor or other obligor named therein or in the Borrower's records
pertaining thereto as being obligated to pay such obligation.

        Section 5.18         
Eligible Accounts.    The Eligible
Accounts are bona fide existing payment obligations of Account Debtors created
by the sale and delivery of Inventory or the rendition of services to such
Account Debtors in the ordinary course of the Borrower's business, owed to the
Borrower without defenses, disputes, offsets, counterclaims, or rights of
return or cancellation.  As to each
Eligible Account, such Account is not:

            (i)                 
owed by an employee, Affiliate, or agent of Borrower, 

          (ii)               
on account of a transaction wherein goods were placed
on consignment or were sold pursuant to a guaranteed sale, a sale or return, a
sale on approval, a bill and hold, or on any other terms by reason of which the
payment by the Account Debtor may be conditional;

            (iii)              
 payable in a
currency other than Dollars,

 

29

 

            (iv)             
owed by an Account Debtor that has or has asserted a
right of setoff, has disputed its liability, or has made any claim with respect
to its obligation to pay the Account,

            (v)               
owed by an Account Debtor that is subject to any
Insolvency Proceeding or is not Solvent or as to which Borrower has received
notice of an imminent Insolvency Proceeding or a material impairment of the
financial condition of such Account Debtor,

            (vi)             
on account of a transaction as to which the goods
giving rise to such Account have not been shipped and billed to the Account
Debtor or the services giving rise to such Account have not been performed and
accepted by the Account Debtor, 

            (vii)            
a right to receive progress payments or other advance
billings that are due prior to the completion of performance by Borrower of the
subject contract for goods or services, and

            (viii)          
an Account that has not been
billed to the customer. 

        Section 5.19         
Eligible Inventory.    All Eligible
Inventory is of good and merchantable quality, free from defects.  As to each item of Eligible Inventory, such
Inventory is 

            (i)                 
owned by the Borrower free and clear of all Liens other
than Liens in favor of the Lender or Permitted Liens,

            (ii)               
not goods that have been returned or rejected by the
Borrower's customers, and

            (iii)              
goods that are obsolete or slow moving, restrictive or
custom items, work-in-process, or that constitute spare parts, packaging and
shipping materials, supplies used or consumed in Borrower's business, bill and
hold goods, defective goods, "seconds," or Inventory acquired on consignment.

        Section 5.20         
Equipment.    All of the Equipment
is used or held for use in the Borrower's business and is fit for such
purposes.

        Section 5.21         
Fraudulent Transfer.    The Borrower is
Solvent.  No transfer of property is
being made by The Borrower and no obligation is being incurred by the Borrower
in connection with the transactions contemplated by this Agreement or the other
Loan Documents with the intent to hinder, delay, or defraud either present or
future creditors of the Borrower.

 

30

 

ARTICLE VI

COVENANTS

        So long as the Obligations shall remain unpaid, or the
Credit Facility shall remain outstanding, the Borrower will comply with the
following requirements, unless the Lender shall otherwise consent in writing:

        Section 6.1             
Reporting Requirements.  The Borrower will deliver, or cause to be
delivered, to the Lender each of the following, which shall be in form and
detail acceptable to the Lender:

        (a)               
Annual Financial Statements.  As soon as available, and in any event within
90 days after the end of each fiscal year of the Borrower, the Borrower will
deliver, or cause to be delivered, to the Lender, the Borrower's audited
financial statements with the unqualified opinion of independent certified
public accountants selected by the Borrower and acceptable to the Lender, which
annual financial statements shall include the Borrower's balance sheet as at
the end of such fiscal year and the related statements of the Borrower's
income, retained earnings and cash flows for the fiscal year then ended,
prepared on a consolidating and consolidated basis to include the Affiliate
Borrower and the Guarantor, all in reasonable detail and prepared in accordance
with GAAP, together with (i) copies of all management letters prepared by such
accountants; (ii) a report signed by such accountants stating that in making
the investigations necessary for said opinion they obtained no knowledge,
except as specifically stated, of any Default or Event of Default and all
relevant facts in reasonable detail to evidence, and the computations as to,
whether or not the Borrower is in compliance with the Financial Covenants; and
(iii) a certificate of the Borrower's chief financial officer stating that such
financial statements have been prepared in accordance with GAAP, fairly
represent the Borrower's financial position and the results of its operations,
and whether or not such officer has knowledge of the occurrence of any Default
or Event of Default and, if so, stating in reasonable detail the facts with
respect thereto.

        (b)              
Monthly Financial Statements.  As soon as available and in any event within
25 days after the end of each month, the Borrower will deliver to the Lender an
unaudited/internal balance sheet and statements of income and retained earnings
of the Borrower as at the end of and for such month and for the year to date
period then ended, prepared on a consolidating and consolidated basis to
include the Affiliate Borrower and the Guarantor, in reasonable detail and
stating in comparative form the figures for the corresponding date and periods
in the previous year, all prepared in accordance with GAAP, subject to year-end
audit adjustments and fairly represent the Borrower's financial position and
the results of its operations; and accompanied by a certificate of the
Borrower's chief financial Officer, substantially in the form of Exhibit C
hereto stating (i) that such financial statements have been prepared in
accordance with GAAP, subject to year-end audit adjustments, (ii) whether or
not such officer has knowledge of the occurrence of any Default or Event of
Default not theretofore reported and remedied and, if so, stating in reasonable
detail the facts with respect thereto, and (iii) all relevant facts in
reasonable detail to evidence, and the computations as to, whether or not the
Borrower is in compliance with the Financial Covenants.

 

31

 

        (c)               
Collateral Reports.  The Borrower will deliver to the Lender the
following documents at the following times in form satisfactory to Lender:

	
  Daily 

  	
  (a)  a report of cash collections, sales
  assignments, credit memos/adjustments and deposits, and a calculation of the
  Borrowing Base as of such date, and

  (b)  notice of all returns, disputes, or claims.

    

  
	
  Monthly (not later than the 15th day of each
  month)

  	
  (c)   a detailed calculation of the Borrowing
  Base (including detail regarding those Accounts that are not Eligible
  Accounts or Eligible Foreign Accounts, and Inventory that is not Eligible
  Inventory),

  (d)   a detailed listing and aging, by total, of
  the Accounts, together with a reconciliation to the detailed calculation of
  the Borrowing Base  previously provided
  to Lender,

  
	
   

  	
  (e)   a summary aging, by vendor, of Borrower's
  accounts payable and any book overdraft, together with a reconciliation to
  the Borrower's general ledger and monthly financial statements delivered
  pursuant to Section 6.1(b),

  (f)    an Inventory stock status report, by type
  and by location,

  
	
   

  	
  (g)   an Inventory slow moving report, and

  (h)   an Inventory
  certification and perpetual report by location, including Inventory turnover
  by item number, together with a reconciliation to the Borrower's general
  ledger and monthly financial statements delivered pursuant to Section 6.1(b).

    

  
	
  Semi-Annually

  	
  (i)    a detailed list of Borrower's customers

   

  
	
  Upon request by Lender 

  	
  (j)    copies of invoices in connection with the
  Accounts, credit memos, remittance advices, deposit slips, shipping and
  delivery documents in connection with the Accounts and, for Inventory and
  Equipment acquired by Borrower, purchase orders and invoices, and

  (k)   such other reports
  as to the Collateral, or the financial condition of Borrower, as Lender may
  request.

  

 

        (d)              
Projections.  At least 30 days before the beginning of each
fiscal year of the Borrower, the Borrower will deliver to the Lender the
projected balance sheets and income statements for each month of such year,
each in reasonable detail, representing the Borrower's good faith projections
and certified by the Borrower's chief financial Officer as being the most
accurate projections available and identical to the projections used by the
Borrower for internal planning purposes, together with a statement of
underlying assumptions and such supporting schedules and information as the
Lender may in its discretion require.

 

32

 

        (e)               
Litigation.  Immediately after the commencement thereof,
the Borrower will deliver to the Lender notice in writing of all litigation and
of all proceedings before any governmental or regulatory agency affecting the
Borrower (i) of the type described in Section 5.14(c) or (ii) which seek a
monetary recovery against the Borrower in excess of $100,000.

        (f)                
Defaults.  As promptly as practicable (but in any event
not later than five business days) after an Officer of the Borrower obtains
knowledge of the occurrence of any Default or Event of Default, the Borrower
will deliver to the Lender notice of such occurrence, together with a detailed
statement by a responsible Officer of the Borrower of the steps being taken by
the Borrower to cure the effect thereof.

        (g)               
Plans.  As soon as possible, and in any event within
30 days after the Borrower knows or has reason to know that any Reportable
Event with respect to any Pension Plan has occurred, the Borrower will deliver
to the Lender a statement of the Borrower's chief financial Officer setting
forth details as to such Reportable Event and the action which the Borrower
proposes to take with respect thereto, together with a copy of the notice of
such Reportable Event to the Pension Benefit Guaranty Corporation. As soon as
possible, and in any event within 10 days after the Borrower fails to make any
quarterly contribution required with respect to any Pension Plan under Section
412(m) of the IRC, the Borrower will deliver to the Lender a statement of the
Borrower's chief financial Officer setting forth details as to such failure and
the action which the Borrower proposes to take with respect thereto, together
with a copy of any notice of such failure required to be provided to the
Pension Benefit Guaranty Corporation. As soon as possible, and in any event
with 10 days after the Borrower knows or has reason to know that it has or is
reasonably expected to have any liability under Section 4201 or 4243 of ERISA
for any withdrawal, partial withdrawal, reorganization or other event under any
Multiemployer Plan, the Borrower will deliver to the Lender a statement of the
Borrower's chief financial Officer setting forth details as to such liability
and the action which Borrower proposes to take with respect thereto.

        (h)               
Disputes.  Promptly upon knowledge thereof, the Borrower
will deliver to the Lender notice of (i) any disputes or claims by the
Borrower's customers exceeding $10,000 individually or $50,000 in the aggregate
during any fiscal year; (ii) credit memos; (iii) any goods returned to or
recovered by the Borrower.

        (i)                 
Officers and Directors.  Promptly upon knowledge thereof, the Borrower
will deliver to the Lender notice any change in the persons constituting the
Borrower's Officers and Directors.

        (j)                
Collateral.  Promptly upon knowledge thereof, the Borrower
will deliver to the Lender notice of any loss of or material damage to any
Collateral or of any substantial adverse change in any Collateral or the
prospect of payment thereof.

 

33

 

        (k)              
Commercial Tort Claims.  Promptly upon knowledge thereof, the Borrower
will deliver to the Lender notice of any commercial tort claims it may bring
against any person, including the name and address of each defendant, a summary
of the facts, an estimate of the Borrower's damages, copies of any complaint or
demand letter submitted by the Borrower, and such other information as the
Lender may request.

        (l)                 
Intellectual Property.

            (i)                 
The Borrower will give the Lender 30 days prior written
notice of its intent to acquire material Intellectual Property Rights; except
for transfers permitted under Section 6.17, the Borrower will give the Lender
30 days prior written notice of its intent to dispose of material Intellectual
Property Rights; and upon request, shall provide the Lender with copies of all
applicable documents and agreements.

            (ii)               
Promptly upon knowledge thereof, the Borrower will
deliver to the Lender notice of (A) any material Infringement of its
Intellectual Property Rights by others, (B) claims that the Borrower is Infringing another Person's Intellectual Property Rights and
(C) any threatened cancellation, termination or material limitation of its
Intellectual Property Rights.

            (iii)              
Promptly upon receipt, the Borrower will give the
Lender copies of all registrations and filings with respect to its Intellectual
Property Rights.

        (m)             
Reports to Owners.  Promptly upon their distribution, the
Borrower will deliver to the Lender copies of all financial statements, reports
and proxy statements which the Borrower shall have sent to its Owners.

        (n)               
SEC Filings.  Promptly after the sending or filing thereof,
the Borrower will deliver to the Lender copies of all regular and periodic
reports which the Borrower shall file with the Securities and Exchange
Commission or any national securities exchange.

        (o)              
Tax Returns.  As soon as possible, and in any event by not
later five days after they are due, copies of the Guarantor's consolidated
state and federal tax returns and all schedules thereto.

        (p)              
Violations of Law.  Promptly upon knowledge thereof, the Borrower
will deliver to the Lender notice of the Borrower's violation of any law, rule
or regulation, the non-compliance with which could materially and adversely
affect the Borrower's business or its financial condition.

        (q)              
Other Reports.  From time to time, with reasonable
promptness, the Borrower will deliver to the Lender any and all receivables
schedules, collection reports, deposit records, equipment schedules, copies of
invoices to Account Debtors, shipment documents and delivery receipts for goods
sold, and such other material, reports, records or information as the Lender
may reasonably request.

 

34

 

        Section
6.2             
Financial Covenants.

        (a)               
Minimum Tangible Net Worth.  The Borrower will maintain its Tangible Net
Worth, as at the end of each month, at an amount not less than the amount set
forth in the table below opposite the applicable period:

	
  Test
  Date/Period
	
  Minimum
  Tangible Net Worth

  
	
  4/30/2002

  	
  $950,000

  
	
  5/31/2002

  	
  $950,000

  
	
  6/30/2002
  and each month end thereafter

  	
  $950,000

  
	
   

  	
   

  

        (b)              
Minimum Net Income. The Borrower
will achieve during each period described below, measured quarterly on a
fiscal-year-to-date basis, minimum Net Income (or maximum Net Loss, as
applicable), of not less than the amount set forth in the table below opposite
the applicable period:

	
   Fiscal Year to Date Period Ending

   	
   Minimum Net Income  (or Maximum Net Loss)

   
	
  6/30/2002

  	
  -$800,000

  
	
   

  	
   

  

        (c)               
Maximum Net Loss.  The Borrower shall not have a Net Loss in
excess of $75,000 as at the end of any month, commencing with the month ending
July 31, 2002.

        (d)              
Capital Expenditures.  The Borrower and the Affiliate Borrower will
not incur or contract to incur Capital Expenditures of more than $150,000 in
the aggregate during any fiscal year, or more than $50,000 in the aggregate for
the fiscal quarter ending June 30, 2002.

        Section
6.3             
Permitted Liens; Financing Statements.

        (a)               
The Borrower will not create, incur or suffer to exist
any Lien upon or of any of its assets, now owned or hereafter acquired, to secure
any indebtedness; excluding, however, from the operation of the
foregoing, the following (collectively, "Permitted Liens"):

            (i)                 
in the case of any of the Borrower's property which is
not Collateral, covenants, restrictions, rights, easements and minor irregularities
in title which do not materially interfere with the Borrower's business or
operations as presently conducted;

            (ii)               
Liens in existence on the date hereof and listed in
Schedule 6.3 hereto, securing indebtedness for borrowed money permitted
under Section 6.4;

 

35

 

            (iii)              
the Security Interest and Liens created by the Security
Documents; and

            (iv)             
purchase money Liens relating
to the acquisition of machinery and equipment of the Borrower not exceeding the
lesser of cost or fair market value thereof, not exceeding $50,000 for any one
purchase or $100,000 in the aggregate during any fiscal year, and so long as no
Default Period is then in existence and none would exist immediately after such
acquisition.

        (b)              
The Borrower will not amend any financing statements in
favor of the Lender except as permitted by law. Any authorization by the Lender
to any Person to amend financing statements in favor of the Lender shall be in
writing.

        Section 6.4             
Indebtedness.  The Borrower will
not incur, create, assume or permit to exist any Indebtedness or liability on
account of deposits or advances or any Indebtedness for borrowed money or
letters of credit issued on the Borrower's behalf, or any other Indebtedness or
liability evidenced by notes, bonds, debentures or similar obligations, except:

        (a)               
Indebtedness arising hereunder;

        (b)              
Indebtedness of the Borrower in existence on the date
hereof and listed in Schedule 6.4 hereto; and

        (c)               
Indebtedness relating to Permitted Liens.

        Section 6.5             
Guaranties.  The Borrower will not assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
any obligations of any other Person, except:

        (a)               
the endorsement of negotiable instruments by the
Borrower for deposit or collection or similar transactions in the ordinary
course of business; and

        (b)              
guaranties, endorsements and
other direct or contingent liabilities in connection with the obligations of
other Persons, in existence on the date hereof and listed in Schedule 6.4
hereto.

        Section 6.6             
Investments and Subsidiaries.  The Borrower will
not purchase or hold beneficially any stock or other securities or evidences of
indebtedness of, make or permit to exist any loans or advances to, or make any
investment or acquire any interest whatsoever in, any other Person, including
any partnership or joint venture, except:

        (a)               
investments in direct obligations of the United States
of America or any agency or instrumentality thereof whose obligations
constitute full faith and credit obligations of the United States of America
having a maturity of one year or less, commercial paper issued by U.S. corporations
rated "A-1" or "A-2" by Standard & Poors Corporation or "P-1" or "P-2" by
Moody's Investors Service or certificates of deposit or bankers' acceptances
having a maturity of one year or less issued by members of the Federal Reserve
System having deposits in excess of $100,000,000 (which certificates of deposit
or bankers' acceptances are fully insured by the Federal Deposit Insurance
Corporation);

 

36

 

        (b)              
travel advances or loans to the Borrower's Officers and
employees not exceeding at any one time an aggregate of $5,000;

        (c)               
advances in the form of progress payments, prepaid rent
not exceeding three (3) months or security deposits; and

        (d)              
current investments in the
Subsidiaries in existence on the date hereof and listed in Schedule 5.5
hereto.

        Section 6.7             
Dividends and Distributions.  Except as set forth
in this Section 6.7, the Borrower will not declare or pay any dividends (other
than dividends payable solely in stock of the Borrower) on any class of its
stock or make any payment on account of the purchase, redemption or other
retirement of any shares of such stock or make any distribution in respect
thereof, either directly or indirectly. 
Notwithstanding the foregoing, provided that a Default Period is not
continuing or would result therefrom, the Borrower and the Affiliate Borrower
may declare and pay dividends to the Guarantor in an aggregate amount to cover
the Guarantor's corporate overhead expenses.

        Section 6.8             
Salaries.  The Borrower will
not pay excessive or unreasonable salaries, bonuses, commissions, consultant
fees or other compensation.

        Section 6.9             
Books and Records; Inspection and Examination.  The Borrower will
keep accurate books of record and account for itself pertaining to the
Collateral and pertaining to the Borrower's business and financial condition
and such other matters as the Lender may from time to time request in which
true and complete entries will be made in accordance with GAAP and, upon the
Lender's request, will permit any officer, employee, attorney or accountant for
the Lender to audit, review, make extracts from or copy any and all company and
financial books and records of the Borrower at all times during ordinary
business hours, to send and discuss with Account Debtors and other obligors
requests for verification of amounts owed to the Borrower, and to discuss the
Borrower's affairs with any of its Directors, Officers, employees or agents.
The Borrower hereby irrevocably authorizes all accountants and third parties to
disclose and deliver to Lender, at the Borrower's expense, all financial
information, books and records, work papers, management reports and other
information in their possession regarding the Borrower. The Borrower will
permit the Lender, or its employees, accountants, attorneys or agents, to
examine and inspect any Collateral or any other property of the Borrower at any
time during ordinary business hours.

        Section 6.10         
Account Verification.  The Lender may at
any time and from time to time send or require the Borrower to send requests
for verification of accounts or notices of assignment to Account Debtors and other
obligors. The Lender may also at any time and from time to time telephone
Account Debtors and other obligors to verify accounts.

 

37

 

        Section
6.11         
Compliance with Laws.

        (a)               
The Borrower will (i) comply with the requirements of
applicable laws and regulations, the non-compliance with which would materially
and adversely affect its business or its financial condition and (ii) use and
keep the Collateral, and require that others use and keep the Collateral, only
for lawful purposes, without violation of any federal, state or local law,
statute or ordinance.

        (b)              
Without limiting the foregoing undertakings, the
Borrower specifically agrees that it will comply with all applicable
Environmental Laws and obtain and comply with all permits, licenses and similar
approvals required by any Environmental Laws, and will not generate, use,
transport, treat, store or dispose of any Hazardous Substances in such a manner
as to create any material liability or obligation under the common law of any
jurisdiction or any Environmental Law.

        Section 6.12         
Payment of Taxes and Other Claims.  The Borrower will
pay or discharge, when due, (a) all taxes, assessments and governmental charges
levied or imposed upon it or upon its income or profits, upon any properties
belonging to it (including the Collateral) or upon or against the creation,
perfection or continuance of the Security Interest, prior to the date on which
penalties attach thereto, (b) all federal, state and local taxes required to be
withheld by it, and (c) all lawful claims for labor, materials and supplies which,
if unpaid, might by law become a Lien upon any properties of the Borrower;
provided, that the Borrower shall not be required to pay any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings and for which proper
reserves have been made.

        Section
6.13         
Maintenance of Properties.

        (a)               
The Borrower will keep and maintain the Collateral and
all of its other properties necessary or useful in its business in good
condition, repair and working order (normal wear and tear excepted) and will
from time to time replace or repair any worn, defective or broken parts;
provided, however, that nothing in this Section 6.13 shall prevent the
Borrower from discontinuing the operation and maintenance of any of its
properties if such discontinuance is, in the Borrower's judgment, desirable in
the conduct of the Borrower's business and not disadvantageous in any material
respect to the Lender.  The Borrower will
take all commercially reasonable steps necessary to protect and maintain its
Intellectual Property Rights.

        (b)              
The Borrower will defend the Collateral against all
Liens, claims or demands of all Persons (other than the Lender) claiming the
Collateral or any interest therein. The Borrower will keep all Collateral free and clear of all Liens except Permitted
Liens. The Borrower will take all commercially reasonable steps necessary to
prosecute any Person Infringing its Intellectual Property Rights and to defend
itself against any Person accusing it of Infringing
any Person's Intellectual Property Rights.

        Section 6.14         
Insurance.  The Borrower will
obtain and at all times maintain insurance with insurers believed by the
Borrower to be responsible and reputable, in such amounts and against such
risks as may from time to time be required by the Lender, but in all events in
such amounts and against such risks as is usually carried by companies engaged
in similar business and owning similar properties in the same general areas in
which the Borrower operates. Without limiting the generality of the foregoing,
the Borrower will at all times maintain business interruption insurance
including coverage for force majeure and keep all tangible Collateral insured
against risks of fire (including so-called extended coverage), theft, collision
(for Collateral consisting of motor vehicles) and such other risks and in such
amounts as the Lender may reasonably request, with any loss payable to the
Lender to the extent of its interest, and all policies of such insurance shall
contain a lender's loss payable endorsement for the Lender's benefit. All
policies of liability insurance required hereunder shall name the Lender as an
additional insured.

 

38

 

        Section 6.15         
Preservation of Existence.  The Borrower will
preserve and maintain its existence and all of its rights, privileges and
franchises necessary or desirable in the normal conduct of its business and
shall conduct its business in an orderly, efficient and regular manner.

        Section 6.16         
Delivery of Instruments, etc.    Upon request by the
Lender, the Borrower will promptly deliver to the Lender in pledge all
instruments, documents and chattel paper constituting Collateral, duly endorsed
or assigned by the Borrower.

        Section 6.17         
Sale or Transfer of Assets; Suspension of
Business Operations.  The Borrower will
not sell, lease, assign, transfer or otherwise dispose of (i) the stock of any
Subsidiary, (ii) all or a substantial part of its assets, or (iii) any
Collateral or any interest therein (whether in one transaction or in a series
of transactions) to any other Person other than (x) the sale of Inventory in
the ordinary course of business, and (y) dispositions of obsolete, worn or
nonfunctional equipment.  The Borrower
will not liquidate, dissolve or suspend business operations. The Borrower will
not transfer any part of its ownership interest in any Intellectual Property
Rights and will not permit any agreement under which it has licensed Licensed
Intellectual Property to lapse, except that the Borrower may transfer such
rights or permit such agreements to lapse if it shall have reasonably determined
that the applicable Intellectual Property Rights are no longer useful in its
business. If the Borrower transfers any Intellectual Property Rights for value,
the Borrower will pay over the proceeds to the Lender for application to the
Obligations. The Borrower will not license any other Person to use any of the
Borrower's Intellectual Property Rights, except that the Borrower may grant
licenses in the ordinary course of its business in connection with sales of
Inventory or provision of services to its customers.

        Section 6.18         
Consolidation and Merger; Asset Acquisitions.  The Borrower will
not consolidate with or merge into any Person, or permit any other Person to
merge into it, or acquire (in a transaction analogous in purpose or effect to a
consolidation or merger) all or substantially all the assets of any other
Person.

        Section 6.19         
Sale and Leaseback.  The Borrower will
not enter into any arrangement, directly or indirectly, with any other Person
whereby the Borrower shall sell or transfer any real or personal property, whether
now owned or hereafter acquired, and then or thereafter rent or lease as lessee
such property or any part thereof or any other property which the Borrower
intends to use for substantially the same purpose or purposes as the property
being sold or transferred.

 

39

 

        Section 6.20         
Restrictions on Nature of Business.  The Borrower will
not engage in any line of business materially different from that presently
engaged in by the Borrower and will not purchase, lease or otherwise acquire
assets not related to its business.

        Section 6.21         
Accounting.  The Borrower will
not adopt any material change in accounting principles other than as required
by GAAP.  The Borrower will not adopt,
permit or consent to any change in its fiscal year.

        Section 6.22         
Discounts, etc.

  After notice from
the Lender, the Borrower will not grant any discount, credit or allowance to
any customer of the Borrower or accept any return of goods sold.  The Borrower will not at any time modify,
amend, subordinate, cancel or terminate the obligation of any Account Debtor or
other obligor of the Borrower.

        Section 6.23         
Plans.  Unless disclosed to
the Lender pursuant to Section 5.12, neither the Borrower nor any ERISA
Affiliate will (i) adopt, create, assume or become a party to any Pension Plan,
(ii) incur any obligation to contribute to any Multiemployer Plan, (iii) incur
any obligation to provide post-retirement medical or insurance benefits with
respect to employees or former employees (other than benefits required by law)
or (iv) amend any Plan in a manner that would materially increase its funding
obligations.

        Section 6.24         
Place of Business; Name.  The Borrower will
not transfer its chief executive office or principal place of business, or
move, relocate, close or sell any business location.  The Borrower will not permit any tangible
Collateral or any records pertaining to the Collateral to be located in any
state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interest.  The Borrower will not change its name or
jurisdiction of organization.

        Section 6.25         
Constituent Documents; S Corporation Status.  The Borrower will
not amend its Constituent Documents.  The
Borrower will not become an S Corporation.

        Section 6.26         
Transactions With Affiliates.    The Borrower will
not directly or indirectly enter into or permit to exist any transaction with
any Affiliate of the Borrower except for transactions that are in the ordinary
course of the Borrower's business, upon fair and reasonable terms, that are
fully disclosed to the Lender, and that are no less favorable to the Borrower
than would be obtained in an arm's length transaction with a non-Affiliate.

        Section 6.27         
Performance by the Lender.  If the Borrower at
any time fails to perform or observe any of the foregoing covenants contained
in this Article VI or elsewhere herein, and if such failure shall continue
for a period of ten calendar days after the Lender gives the Borrower written
notice thereof (or in the case of the agreements contained in
Sections 6.13 and 6.15, immediately upon the occurrence of such failure,
without notice or lapse of time), the Lender may, but need not, perform or
observe such covenant on behalf and in the name, place and stead of the
Borrower (or, at the Lender's option, in the Lender's name) and may, but need
not, take any and all other actions which the Lender may reasonably deem
necessary to cure or correct such failure (including the payment of taxes, the
satisfaction of Liens, the performance of obligations owed to Account Debtors
or other obligors, the procurement and maintenance of insurance, the execution
of assignments, security agreements and financing statements, and the
endorsement of instruments); and the Borrower shall thereupon pay to the Lender
on demand the amount of all monies expended and all costs and expenses
(including reasonable attorneys' fees and legal expenses) incurred by the
Lender in connection with or as a result of the performance or observance of
such agreements or the taking of such action by the Lender, together with
interest thereon from the date expended or incurred at the Default Rate.  To facilitate the Lender's performance or
observance of such covenants of the Borrower, the Borrower hereby irrevocably
appoints the Lender, or the Lender's delegate, acting alone, as the Borrower's
attorney in fact (which appointment is coupled with an interest) with the right
(but not the duty) from time to time to create, prepare, complete, execute,
deliver, endorse or file in the name and on behalf of the Borrower any and all
instruments, documents, assignments, security agreements, financing statements,
applications for insurance and other agreements and writings required to be
obtained, executed, delivered or endorsed by the Borrower under this
Section 6.27.

 

40

 

ARTICLE VII

EVENTS OF DEFAULT,
RIGHTS AND REMEDIES

        Section 7.1             
Events of Default.    "Event of Default", wherever used herein,
means any one of the following events:

        (a)               
Default in the payment of any Obligations when they
become due and payable;

        (b)              
Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in this Agreement

        (c)               
A Change of Control shall occur;

        (d)              
Any Financial Covenant shall become inapplicable due to
the lapse of time and the failure to amend any such covenant to cover future
periods;

        (e)               
An Insolvency Proceeding is commenced by the Borrower
or any Guarantor;

        (f)                
An Insolvency Proceeding is commenced against the
Borrower, or any Guarantor, and any of the following events occur:  (a) the Borrower or such Guarantor
consents to the institution of such Insolvency Proceeding against it,
(b) the petition commencing the Insolvency Proceeding is not timely
controverted, (c) the petition commencing the Insolvency Proceeding is not
dismissed within 45 calendar days of the date of the filing thereof; provided,
however, that, during the pendency of such period, the Lender shall be
relieved of its obligations to extend credit hereunder, (d) an interim
trustee is appointed to take possession of all or any substantial portion of
the properties or assets of, or to operate all or any substantial portion of
the business of, the Borrower or any such Guarantor, or (e) an order for
relief shall have been entered therein;

 

41

 

        (g)               
Any material portion of the Borrower's or any
Guarantor's assets is attached, seized, subjected to a writ or distress warrant,
levied upon, or comes into the possession of any third Person;

        (h)               
The Borrower or any Guarantor is enjoined, restrained,
or in any way prevented by court order from continuing to conduct all or any
material part of its business affairs;

        (i)                 
A notice of Lien, levy, or assessment is filed of
record with respect to any of the Borrower's or any Guarantor's assets by the
United States, or any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, or if any taxes or debts
owing at any time hereafter to any one or more of such entities becomes a Lien,
whether choate or otherwise, upon any of the Borrower's or any Guarantor's
assets and the same is not paid before such payment is delinquent;

        (j)                
This Agreement or any other Loan Document that purports
to create a Lien, shall, for any reason, fail or cease to create a valid and
perfected and, except to the extent permitted by the terms hereof or thereof,
first priority Lien on or security interest in the Collateral covered hereby or
thereby; 

        (k)              
Any provision of any Loan Document shall at any time
for any reason be declared to be null and void, or the validity or
enforceability thereof shall be contested by Borrower, or a proceeding shall be
commenced by Borrower, or by any Governmental Authority having jurisdiction
over Borrower, seeking to establish the invalidity or unenforceability thereof,
or Borrower shall deny that Borrower has any liability or obligation purported
to be created under any Loan Document.

        (l)                 
Any representation or warranty made by the Borrower in
this Agreement, by any Guarantor in any guaranty delivered to the Lender, or by
the Borrower (or any of its Officers) or any Guarantor in any agreement,
certificate, instrument or financial statement or other statement contemplated
by or made or delivered pursuant to or in connection with this Agreement or any
such guaranty shall prove to have been incorrect in any material respect when
deemed to be effective;

        (m)             
The rendering against the Borrower of an arbitration
award, final judgment, decree or order for the payment of money in excess of
$200,000 and the continuance of such arbitration award, judgment, decree or
order unsatisfied and in effect for any period of 30 consecutive days without a
stay of execution;

        (n)               
A default under any bond, debenture, note or other
evidence of material Indebtedness of the Borrower owed to any Person other than
the Lender, or under any indenture or other instrument under which any such
evidence of Indebtedness has been issued or by which it is governed, or under
any material lease or other contract, and the expiration of the applicable
period of grace, if any, specified in such evidence of Indebtedness, indenture,
other instrument, lease or contract;

 

42

 

        (o)              
Any Reportable Event, which the Lender determines in
good faith might constitute grounds for the termination of any Pension Plan or
for the appointment by the appropriate United States District Court of a
trustee to administer any Pension Plan, shall have occurred and be continuing
30 days after written notice to such effect shall have been given to the
Borrower by the Lender; or a trustee shall have been appointed by an
appropriate United States District Court to administer any Pension Plan; or the
Pension Benefit Guaranty Corporation shall have instituted proceedings to
terminate any Pension Plan or to appoint a trustee to administer any Pension
Plan; or the Borrower or any ERISA Affiliate shall have filed for a distress
termination of any Pension Plan under Title IV of ERISA; or the Borrower or any
ERISA Affiliate shall have failed to make any quarterly contribution required
with respect to any Pension Plan under Section 412(m) of the IRC, which the
Lender determines in good faith may by itself, or in combination with any such
failures that the Lender may determine are likely to occur in the future,
result in the imposition of a Lien on the Borrower's assets in favor of the
Pension Plan; or any withdrawal, partial withdrawal, reorganization or other
event occurs with respect to a Multiemployer Plan which results or could
reasonably be expected to result in a material liability of the Borrower to the
Multiemployer Plan under Title IV of ERISA.

        (p)              
An event of default shall occur under any Security
Document;

        (q)              
The Borrower shall liquidate, dissolve, terminate or
suspend its business operations or otherwise fail to operate its business in
the ordinary course, or sell or attempt to sell all or substantially all of its
assets;

        (r)                
Default in the payment of any amount owed by the
Borrower to the Lender other than any Indebtedness arising hereunder;

        (s)               
Any Guarantor or person signing a support agreement in
favor of the Lender shall repudiate, purport to revoke or fail to perform his
obligations under his guaranty or support agreement in favor of the Lender, any
individual Guarantor shall die or any other Guarantor shall cease to exist;

        (t)                
The Borrower shall take or participate in any action
which would be prohibited under the provisions of any Subordination Agreement
or make any payment on the Subordinated Indebtedness (as defined in the
Subordination Agreement) that any Person was not entitled to receive under the
provisions of the Subordination Agreement;

        (u)               
Any event or circumstance with respect to the Borrower
shall occur such that the Lender shall believe in good faith that the prospect
of payment of all or any part of the Obligations or the performance by the
Borrower under the Loan Documents is impaired or any material adverse change in
the business or financial condition of the Borrower shall occur;

        (v)               
Any Event of Default under the Affiliate Credit
Agreement shall occur, or any other breach, default or event of default by or
attributable to any Affiliate under any agreement between such Affiliate and
the Lender shall occur; or

        (w)             
Any other Material Adverse Effect shall occur.

 

43

 

        Section 7.2             
Rights and Remedies.    During any Default Period, the Lender may
exercise any or all of the following rights and remedies, all of which the
Borrower acknowledges and agrees are commercially reasonable:

        (a)               
the Lender may, by notice to the Borrower, declare the
Commitment to be terminated, whereupon the same shall forthwith terminate;

        (b)              
the Lender may, by notice to the Borrower, declare the
Obligations to be forthwith due and payable, whereupon all Obligations shall
become and be forthwith due and payable, without presentment, notice of
dishonor, protest or further notice of any kind, all of which the Borrower
hereby expressly waives;

        (c)               
the Lender may, without notice to the Borrower and
without further action, apply any and all money owing by the Lender to the
Borrower to the payment of the Obligations;

        (d)              
the Lender may settle or adjust disputes and claims
directly with Account Debtors for amounts and upon terms which the Lender
considers advisable, and in such cases, the Lender will credit the Obligations
with only the net amounts received by the Lender in payment of such disputed
Accounts after deducting all expenses incurred or expended by the Lender in
connection therewith;

        (e)               
the Lender may cause the Borrower to hold all returned
Inventory in trust for the Lender, segregate all returned Inventory from all
other assets of the Borrower or in the Borrower's possession and conspicuously
label said returned Inventory as the property of the Lender;

        (f)                
without notice to or demand
upon the Borrower or any Guarantor, the Lender
may make such payments and do such acts as the Lender considers necessary or
reasonable to protect its security interests in the Collateral.  The Borrower agrees to assemble the Collateral if the Lender so requires, and to make the
Collateral available to the Lender at a place that the Lender may designate
which is reasonably convenient to both parties. 
The Borrower authorizes Lender to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or
any part of it, and to pay, purchase, contest, or compromise any Lien that in
the Lender's determination appears to conflict with the Lender's Liens and to
pay all expenses incurred in connection therewith and to charge the Obligations
therefor.  With respect to any of the
Borrower's owned or leased premises, the Borrower hereby grants the Lender a
license to enter into possession of such premises and to occupy the same,
without charge, in order to exercise any of the Lender's rights or remedies
provided herein, at law, in equity, or otherwise;

        (g)               
without notice to Borrower (such notice being expressly
waived), and without constituting a retention of any collateral in satisfaction
of an obligation (within the meaning of the UCC), the Lender may set off and
apply to the Obligations any and all (i) balances and deposits of the Borrower
held by the Lender (including any amounts received in the Lockbox), or (ii)
Indebtedness at any time owing to or for the credit or the account of the
Borrower held by Lender;

 

44

 

        (h)               
the Lender may hold, as cash collateral, any and all
balances and deposits of the Borrower held by the Lender, and any amounts
received in the Lockbox, to secure the full and final repayment of all of the
Obligations;

        (i)                 
the Lender may ship, reclaim, recover, store, finish,
maintain, repair, prepare for sale, advertise for sale, and sell (in the manner
provided for herein) the Collateral;

        (j)                
the Lender may sell the Collateral at either a public
or private sale, or both, by way of one or more contracts or transactions, for
cash or on terms, in such manner and at such places (including the Borrower's
premises) as the Lender determines is commercially reasonable.  It is not necessary that the Collateral be
present at any such sale;

        (k)              
the Lender shall give notice of the disposition of the
Collateral as follows:

            (i)                 
The Lender shall give the Borrower a notice in writing
of the time and place of public sale, or, if the sale is a private sale or some
other disposition other than a public sale is to be made of the Collateral, the
time on or after which the private sale or other disposition is to be made; and

            (ii)               
The notice shall be personally delivered or mailed,
postage prepaid, to the Borrower as provided in Section 8.3, at least 10
days before the earliest time of disposition set forth in the notice; no notice
needs to be given prior to the disposition of any portion of the Collateral
that is perishable or threatens to decline speedily in value or that is of a
type customarily sold on a recognized market;

        (l)                 
the Lender may credit bid and purchase at any public sale;

        (m)             
the Lender may seek the appointment of a receiver or
keeper to take possession of all or any portion of the Collateral or to operate
same and, to the maximum extent permitted by law, may seek the appointment of
such a receiver without the requirement of prior notice or a hearing;

        (n)               
If the Lender sells any of the Collateral on credit,
the Obligations will be reduced only to the extent of payments actually
received. If the purchaser fails to pay for the Collateral, the Lender may
resell the Collateral and shall apply any proceeds actually received to the
Obligations;

        (o)              
the Lender shall have no obligation to attempt to
satisfy the Obligations by collecting them from any third Person which may be
liable for them or any portion thereof, and the Lender may release, modify or  waive any
collateral provided by any other Person as security for the Obligations or any
portion thereof, all without affecting the Lender's rights against the
Borrower.  The Borrower waives any right
it may have to require the Lender to pursue any third Person for any of the
Obligations;

        (p)              
the Lender may make demand upon the Borrower and,
forthwith upon such demand, the Borrower will pay to the Lender in immediately
available funds for deposit in the Special Account pursuant to Section 2.4 an amount
equal to the aggregate maximum amount available to be drawn under all Letters
of Credit then outstanding, assuming compliance with all conditions for drawing
thereunder;

 

45

 

        (q)              
the Lender may exercise and enforce its rights and
remedies under the Loan Documents; and

        (r)                
the Lender may exercise any
other rights and remedies available to it by law or agreement.

Notwithstanding the foregoing, upon the occurrence of an
Event of Default described in subsections (e) or (f) of Section 7.1, the
Obligations shall be immediately due and payable automatically without
presentment, demand, protest or notice of any kind.

        Section 7.3             
Disclaimer of Warranties.  

The Lender may sell the Collateral without giving any
warranties as to the Collateral.  The
Lender may specifically disclaim any warranties of title or the like.  This procedure will not be considered to
adversely affect the commercial reasonableness of any sale of the Collateral.

        Section 7.4             
Compliance With Laws.  

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

        Section 7.5             
No Marshalling.  

The Lender shall be under no obligation to marshal any
assets in favor of the Borrower, or against or in payment of the Obligations or
any other obligation owned to the Lender by the Borrower or any other Person.

        Section 7.6             
Borrower to Cooperate.  

Upon the exercise by the Lender of any power, right,
privilege, or remedy pursuant to this Agreement which requires any consent,
approval, registration, qualification, or authorization of any Governmental
Authority, the Borrower agrees to execute and deliver, or will cause the
execution and delivery of, all applications, certificates, instruments,
assignments, and other documents and papers that the Lender or any purchaser of
the Collateral may be required to obtain for such governmental consent,
approval, registration, qualification, or authorization.

        Section 7.7             
Application of Proceeds.  All proceeds realized as the result of any sale of the
Collateral shall be applied by the Lender:

        FIRST to the costs, expenses, liabilities,
obligations and attorneys' fees incurred by the Lender in the exercise of its
rights under this Agreement;

        SECOND to the interest and fees due upon any of
the Obligations; and

        THIRD to the principal of the
Obligations, in such order as the Lender shall determine in its sole
discretion.  Any surplus shall be
paid to the Borrower or other Persons legally entitled thereto; the Borrower
shall remain liable to the Lender for any deficiency.

 

46

 

        Section 7.8             
Remedies Cumulative.  The rights and remedies of the Lender under this Agreement,
the other Loan Documents, and all other agreements contemplated hereby and
thereby shall be cumulative.  The Lender
shall have all other rights and remedies not inconsistent herewith as provided
under the UCC, by law, or in equity.  No
exercise by the Lender of any one right or remedy shall be deemed an election
of remedies, and no waiver by the Lender of any default on the Borrower's part
shall be deemed a continuing waiver of any further defaults.

        Section 7.9             
Lender Not Liable For The Collateral.  So long as the Lender complies with the obligations, if any,
imposed by the UCC, 
the Lender shall not otherwise be liable or responsible in any
way or manner for:  (a) the safekeeping
of the Collateral; (b) any loss or damage thereto occurring or arising in any
manner or fashion or from any cause; (c) any diminution in the value thereof;
or (d) any act or default of any carrier, warehouseman, bailee, forwarding
agency, or other person whomsoever.  The
Borrower bears the risk of loss or damage of the Collateral.

ARTICLE VIII

MISCELLANEOUS

        Section 8.1             
No Waiver.    No failure or delay
by the Lender in exercising any right, power or remedy under the Loan Documents
shall operate as a waiver thereof; 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 under the Loan Documents.

        Section 8.2             
Amendments, Etc.    No amendment,
modification, termination or waiver of any provision of any Loan Document or
consent to any departure by the Borrower therefrom or any release of a Security
Interest shall be effective unless the same shall be in writing and signed by
the Lender, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given. No notice to or
demand on the Borrower in any case shall entitle the Borrower to any other or
further notice or demand in similar or other circumstances.

        Section 8.3             
Addresses for Notices; Requests for
Accounting.    Except as otherwise
expressly provided herein, all notices, requests, demands and other
communications provided for under the Loan Documents shall be in writing and
shall be (a) personally delivered, (b) sent by first class United States mail,
(c) sent by overnight courier of national reputation, or (d) transmitted by
telecopy, in each case addressed or telecopied to the party to whom notice is
being given at its address or telecopier number as set forth below next to its
signature or, as to each party, at such other address or telecopier number as
may hereafter be designated by such party in a written notice to the other
party complying as to delivery with the terms of this Section. All such
notices, requests, demands and other communications shall be deemed to have
been given on (a) the date received if personally delivered, (b) when deposited
in the mail if delivered by mail, (c) the date sent if sent by overnight
courier, or (d) the date of transmission if delivered by telecopy, except that
notices or requests to the Lender pursuant to any of the provisions of Article
II shall not be effective until received by the Lender. All requests under
Section 9210 of the UCC (i) shall be made in a writing signed by a person
authorized under Section 2.2(a), (ii) shall be personally delivered, sent by
registered or certified mail, return receipt requested, or by overnight courier
of national reputation (iii) shall be deemed to be sent when received by the
Lender and (iv) shall otherwise comply with the requirements of
Section 9210. The Borrower requests that the Lender respond to all such
requests which on their face appear to come from an authorized individual and
releases the Lender from any liability for so responding. The Borrower shall
pay Lender the maximum amount allowed by law for responding to such requests.

 

47

 

        Section 8.4             
Further Documents.    The Borrower will
from time to time execute and deliver or endorse any and all instruments,
documents, conveyances, assignments, security agreements, financing statements,
control agreements and other agreements and writings that the Lender may
reasonably request in order to secure, protect, perfect or enforce the Security
Interest or the Lender's rights under the Loan Documents (but any failure to
request or assure that the Borrower executes, delivers or endorses any such
item shall not affect or impair the validity, sufficiency or enforceability of
the Loan Documents and the Security Interest, regardless of whether any such
item was or was not executed, delivered or endorsed in a similar context or on
a prior occasion).

        Section 8.5             
Costs and Expenses.    The Borrower shall
pay on demand all costs and expenses, including reasonable attorneys' fees,
incurred by the Lender in connection with the Obligations, this Agreement, the
Loan Documents, any Letter of Credit and any other document or agreement
related hereto or thereto, and the transactions contemplated hereby, including
all such costs, expenses and fees incurred in connection with the negotiation,
preparation, execution, amendment, administration, performance, collection and
enforcement of the Obligations and all such documents and agreements and the
creation, perfection, protection, satisfaction, foreclosure or enforcement of
the Security Interest.

        Section 8.6             
Indemnity.    In addition to the
payment of expenses pursuant to Section 8.5, the Borrower shall indemnify,
defend and hold harmless the Lender, and any of its participants, parent
corporations, subsidiary corporations, affiliated corporations, successor
corporations, and all present and future officers, directors, employees,
attorneys and agents of the foregoing (the "Indemnitees") from and against any
of the following (collectively, "Indemnified Liabilities"):

            (i)                 
any and all transfer taxes, documentary taxes,
assessments or charges made by any governmental authority by reason of the
execution and delivery of the Loan Documents or the making of the Advances;

            (ii)               
any claims, loss or damage to which any Indemnitee may
be subjected if any representation or warranty contained in Section 5.14 proves
to be incorrect in any respect or as a result of any violation of the covenant
contained in Section 6.11(b); and

            (iii)              
any and all other liabilities, losses, damages,
penalties, judgments, suits, claims, costs and expenses of any kind or nature
whatsoever (including the reasonable fees and disbursements of counsel) in
connection with the foregoing and any other investigative, administrative or
judicial proceedings, whether or not such Indemnitee shall be designated a
party thereto, which may be imposed on, incurred by or asserted against any
such Indemnitee, in any manner related to or arising out of or in connection
with the making of the Advances and the Loan Documents or the use or intended
use of the proceeds of the Advances.

 

48

 

If any investigative, judicial or administrative proceeding
arising from any of the foregoing is brought against any Indemnitee, upon such
Indemnitee's request, the Borrower, or counsel designated by the Borrower and
satisfactory to the Indemnitee, will resist and defend such action, suit or
proceeding to the extent and in the manner directed by the Indemnitee, at the
Borrower's sole costs and expense. Each Indemnitee will use its best efforts to
cooperate in the defense of any such action, suit or proceeding. If the
foregoing undertaking to indemnify, defend and hold
harmless may be held to be unenforceable because it violates any law or public
policy, the Borrower shall nevertheless make the maximum contribution to the
payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law. The Borrower's obligation under this Section
8.6 shall survive the termination of this Agreement and the discharge of the
Borrower's other obligations hereunder.

        Section 8.7             
Participants.   The Borrower hereby
authorizes the Lender to disclose to any assignee or any participant (either, a
"Transferee") and any prospective Transferee any and all financial information
in the Lender's possession concerning Borrower which has been delivered to the
Lender by the Borrower pursuant to this Agreement or which has been delivered
to the Lender by the Borrower in connection with the Lender's credit evaluation
prior to entering into this Agreement. 
The Lender and its participants, if any, are not partners or joint
venturers, and the Lender shall not have any liability or responsibility for
any obligation, act or omission of any of its participants. All rights and
powers specifically conferred upon the Lender may be transferred or delegated
to any of the Lender's participants, successors or assigns.

        Section 8.8             
Advertising and Promotion.  

  The Borrower agrees
that the Lender may use the Borrower's name(s) in advertising and promotional
materials, and in conjunction therewith, the Lender may disclose the amount of
the Commitment and the purpose thereof.

        Section 8.9             
Execution in Counterparts; Telefacsimile
Execution.    This Agreement and
other Loan Documents may be executed in any number of counterparts, each of
which when so executed and delivered shall be deemed to be an original and all
of which counterparts, taken together, shall constitute but one and the same
instrument. Delivery of an executed counterpart of this Agreement by
telefacsimile shall be equally as effective as delivery of an original executed
counterpart of this Agreement. Any party delivering an executed counterpart of
this Agreement by telefacsimile also shall deliver an original executed
counterpart of this Agreement but the failure to deliver an original executed
counterpart shall not affect the validity, enforceability, and binding effect
of this Agreement.

        Section 8.10         
Retention of Borrower's Records.    The Lender shall
have no obligation to maintain any electronic records or any documents,
schedules, invoices, agings, or other papers delivered to the Lender by the
Borrower or in connection with the Loan Documents for more than four months
after receipt by the Lender.

 

49

 

        Section 8.11         
Binding Effect; Assignment; Complete
Agreement; Exchanging Information.    The Loan Documents
shall be binding upon and inure to the benefit of the Borrower and the Lender
and their respective successors and assigns, except that the Borrower shall not
have the right to assign its rights thereunder or any interest therein without
the Lender's prior written consent. To the extent permitted by law, the
Borrower waives and will not assert against any assignee any claims, defenses
or set-offs which the Borrower could assert against the Lender. This Agreement
shall also bind all Persons who become a party to this Agreement as a borrower.
This Agreement, together with the Loan Documents, comprises the complete and
integrated agreement of the parties on the subject matter hereof and supersedes
all prior agreements, written or oral, on the subject matter hereof. Without
limiting the Lender's right to share information regarding the Borrower and its
Affiliates with the Lender's participants, accountants, lawyers and other
advisors, the Lender, Wells Fargo & Company, and all direct and indirect
subsidiaries of Wells Fargo & Company, may exchange any and all information
they may have in their possession regarding the Borrower and its Affiliates,
and the Borrower waives any right of confidentiality it may have with respect
to such exchange of such information.

        Section 8.12         
Severability of Provisions.    Any provision of
this Agreement which is prohibited or unenforceable shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.

        Section 8.13         
Revival and Reinstatement of Obligations.    If the incurrence or
payment of the Obligations by the Borrower or the Guarantor or the transfer to
the Lender of any property should for any reason subsequently be declared to be
void or voidable under any state or federal law relating to creditors' rights,
including provisions of the Bankruptcy Code relating to fraudulent conveyances,
preferences, or other voidable or recoverable payments of money or transfers of
property (collectively, a "Voidable Transfer"), and if the Lender is required
to repay or restore, in whole or in part, any such Voidable Transfer, or elects
to do so upon the reasonable advice of its counsel, then, as to any such
Voidable Transfer, or the amount thereof that the Lender is required or elects
to repay or restore, and as to all reasonable costs, expenses, and attorneys
fees of the Lender related thereto, the liability of the Borrower or the
Guarantor automatically shall be revived, reinstated, and restored and shall
exist as though such Voidable Transfer had never been made.

        Section 8.14         
Headings.    Article, Section and
subsection headings in this Agreement are included herein for convenience of
reference only and shall not constitute a part of this Agreement for any other
purpose.

        Section 8.15         
Governing Law; Jurisdiction, Venue; Waiver of
Jury Trial.    The Loan Documents
shall be governed by and construed in accordance with the substantive laws
(other than conflict laws) of the State of California. The parties hereto
hereby (i) consent to the personal jurisdiction of the state and federal courts
located in the State of California in connection with any controversy related
to this Agreement; (ii) waive any argument that venue in any such forum is not
convenient, (iii) agree that any litigation initiated by the Lender or the
Borrower in connection with this Agreement or the other Loan Documents may be
venued in either the State or Federal courts located in Los Angeles
County, California; and (iv) agree that a final judgment in any such suit,
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.

 

50

 

THE PARTIES WAIVE ANY
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO
THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT.

ARTICLE IX

JOINT AND
SEVERAL LIABILITY

        Section 9.1             
Joint and Several Liability.  The Borrower agrees
that it is jointly and severally, directly and primarily liable to the Lender
for payment, performance and satisfaction in full of the Obligations and that
such liability is independent of the duties, obligations, and liabilities of
the Affiliate Borrower.  The Lender may
bring a separate action or actions on each, any, or all of the Obligations
against the Borrower, whether action is brought against the Affiliate Borrower
or whether the Affiliate Borrower is joined in such action.  In the event that the Affiliate Borrower
fails to make any payment of any Obligation on or before the due date thereof,
the Borrower immediately shall cause such payment to be made or each of such
obligations to be made or each of such Obligations to be performed, kept,
observed, or fulfilled.

        Section 9.2             
Primary Obligation; Waiver of Marshalling.  This Agreement and
the Loan Documents to which the Borrower is a party are a primary and original
obligation of the Borrower, are not the creation of a surety relationship, and
are an absolute, unconditional, and continuing promise of payment and
performance which shall remain in full force and effect without respect to
future changes in conditions, including any change of law or any invalidity or
irregularity with respect to this Agreement or the Loan Documents to which the
Borrower is a party.  The Borrower agrees
that its liability under this Agreement and the Loan Documents to which the
Borrower is a party shall be immediate and shall not be contingent upon the
exercise or enforcement by the Lender of whatever remedies it may have against
the Affiliate Borrower, or the enforcement of any lien or realization upon any
security the Lender may at any time possess. The Borrower consents and agrees
that the Lender shall be under no obligation to marshal any assets of the
Borrower or the Affiliate Borrower against or in payment of any or all of the
Obligations.

        Section 9.3             
Continuing Liability.  The liability of
the Borrower under this Agreement and the Loan Documents to which the Borrower
is a party includes Obligations arising under successive transactions
continuing, compromising, extending, increasing, modifying, releasing, or
renewing the Obligations, changing the interest rate, payment terms, or other
terms and conditions thereof, or creating new or additional Obligations after
prior Obligations have been satisfied in whole or in part.  To the maximum extent permitted by law, the
Borrower hereby waives any right to revoke its liability under this Agreement
and the Loan Documents as to future indebtedness.

 

51

 

        Section
9.4             
Additional Waivers.

        (a)               
The Borrower absolutely, unconditionally, knowingly,
and expressly waives:

            (i)                 
(1) notice of acceptance hereof; (2) notice of any
Advances or other financial accommodations made or extended under the Affiliate
Credit Agreement or the Affiliate Loan Documents or the creation or existence
of any Obligations; (3) notice of the amount of the Obligations, subject,
however, to the Borrower's right to make inquiry of the Lender to ascertain the
amount of the Obligations at any reasonable time; (4) notice of any adverse
change in the financial condition of the Affiliate Borrower or of any fact that
might increase the Borrower's risk hereunder; (5) notice of presentment for
payment, demand, protest, and notice thereof as to any instruments among the
Affiliate Loan Documents; (6) notice of any Event of Default or Default under
the Affiliate Credit Agreement; and (7) all other notices (except if such
notice is specifically required to be given to the Borrower hereunder or under
the Loan Documents to which the Borrower is a party) and demands to which the
Borrower might otherwise be entitled.

            (ii)               
its right, under Sections 2845 or 2850 of the
California Civil Code, or otherwise, to require the Lender to institute suit
against, or to exhaust any rights and remedies which the Lender has or may have
against the Affiliate Borrower or any third Person, or against any collateral
for the Obligations provided by the Affiliate Borrower or any third
Person.  The Borrower further waives any
defense arising by reason of any disability or other defense (other than the
defense that the Obligations shall have been fully and finally performed and
indefeasibly paid) of any third party or by reason of the cessation from any
cause whatsoever of the liability of any third party in respect thereof.

            (iii)              
any rights to assert against the Lender any defense
(legal or equitable), set-off, counterclaim, or claim which the Borrower may
now or at any time hereafter have against the Affiliate Borrower or any other
party liable to the Lender; (2)  any
defense, set-off, counterclaim, or claim, of any kind or nature, arising
directly or indirectly from the present or future lack of perfection,
sufficiency, validity, or enforceability of the Obligations or any security
therefor; (3) any defense the Borrower has to performance hereunder, and any
right The Borrower has to be exonerated, provided by Sections 2819, 2822, or
2825 of the California Civil Code, or otherwise, arising by reason of:  the impairment or suspension of the Lender's
rights or remedies against the Affiliate Borrower or any third Person; the
alteration by the Lender of the Obligations; any discharge of the Affiliate
Borrower or any third Person's obligations to the Lender by operation of law as
a result of the Lender's intervention or omission; or the acceptance by the
Lender of anything in partial satisfaction of the Obligations; and (4) the
benefit of any statute of limitations affecting the Affiliate Borrower or such
third Person's liability hereunder or the enforcement thereof, and any act
which shall defer or delay the operation of any statute of limitations
applicable to the Obligations shall similarly operate to defer or delay the
operation of such statute of limitations applicable to the Borrower's liability
hereunder.

            (iv)             
The Borrower hereby absolutely, unconditionally,
knowingly, and expressly waives: (i) any right of subrogation the Borrower has
or may have as against the Affiliate Borrower or any third Person with respect
to the Obligations; (ii) any right to proceed against the Affiliate Borrower or
any third Person, now or hereafter, for contribution, indemnity, reimbursement,
or any other suretyship rights and claims, whether direct or indirect,
liquidated or contingent, whether arising under express or implied contract or
by operation of law, which the Borrower may now have or hereafter have as
against the Affiliate Borrower or any third Person with respect to the
Obligations; and (iii) any right to proceed or seek recourse against or with
respect to any property or asset of the Affiliate Borrower or any third Person.

 

52

 

            (v)               
The Borrower absolutely, unconditionally, knowingly,
and expressly waives any defense arising by reason of or deriving from (i) any
claim or defense based upon an election of remedies by the Lender including any
defense based upon an election of remedies by the Lender under the provisions
of Sections 580a, 580b, 580d, and 726 of the California Code of Civil Procedure
or any similar law of California or any other jurisdiction; or (ii) any
election by the Lender under Section 1111(b) of the Bankruptcy Code to limit
the amount of, or any collateral securing, its claim against the Affiliate
Borrower.  Pursuant to California Civil
Code Section 2856(b):

        The Borrower waives all rights and defenses arising out of
an election of remedies by the Lender, even though that election of remedies,
such as a nonjudicial foreclosure with respect to security for the Obligations,
has destroyed the Borrower's rights of subrogation and reimbursement against
the Affiliate Borrower by the operation of Section 580(d) of the California
Code of Civil Procedure or otherwise.

        The Borrower waives all rights and defenses that the
Borrower may have because the Obligations are secured by real property.  This means, among other things:  (1) the Lender may collect from the Borrower
without first foreclosing on any real or personal property collateral pledged
by the Affiliate Borrower; and (2) if the Lender forecloses on any real
property collateral pledged by the Affiliate Borrower:  (A) the amount of the Obligations may be
reduced only by the price for which that collateral is sold at the foreclosure
sale, even if the collateral is worth more than the sale price; and (B) the
Lender may collect from the Borrower even if the Lender, by foreclosing on the
real property collateral, has destroyed any right The Borrower may have to
collect from the Affiliate Borrower. 
This is an unconditional and irrevocable waiver of any rights and
defenses the Borrower may have because the Obligations are secured by real
property.  These rights and defenses
include, but are not limited to, any rights or defenses based upon Section
580a, 580b, 580d, or 726 of the California Code of Civil Procedure.

        (b)              
The Borrower also agrees that the "fair market value"
provisions of Section 580a of the California Code of Civil Procedure shall have
no applicability with respect to the determination of the Borrower's liability
under this Agreement and the Loan Documents to which the Borrower is a party.

        (c)               
WITHOUT LIMITING
THE GENERALITY OF ANY OTHER WAIVER OR OTHER PROVISION SET FORTH IN THIS
AGREEMENT, THE BORROWER HEREBY ABSOLUTELY, KNOWINGLY, UNCONDITIONALLY, AND
EXPRESSLY WAIVES AND AGREES NOT TO ASSERT ANY AND ALL BENEFITS OR DEFENSES
ARISING DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE OF CALIFORNIA CIVIL CODE
SECTIONS 2799, 2808, 2809, 2810, 2815, 2819, 2820, 2821, 2822, 2825, 2839,
2845, 2848, 2849, AND 2850, CALIFORNIA CODE OF CIVIL PROCEDURE SECTIONS 580a,
580b, 580c, 580d AND 726, CALIFORNIA UNIFORM COMMERCIAL CODE SECTIONS 3116,
3118, 3119, 3419, AND 3605, AND CHAPTER 2 OF TITLE 14 OF PART 4 OF DIVISION 3
OF THE CALIFORNIA CIVIL CODE.

 

53

 

        Section 9.5             
Settlement or Releases.  The Borrower
consents and agrees that, without notice to or by the Borrower, and without
affecting or impairing the liability of the Borrower hereunder, the Lender may,
by action or inaction:

        (a)               
compromise, settle, extend the duration or the time for
the payment of, or discharge the performance of, or may refuse to or otherwise
not enforce the Affiliate Credit Agreement or the Affiliate Loan Documents, or
any part thereof, with respect to the Affiliate Borrower or any third Person;

        (b)              
release the Affiliate Borrower any third Person or
grant other indulgences to the Affiliate Borrower or any guarantor of the
Obligations in respect thereof;

        (c)               
amend or modify in any manner and at any time (or from
time to time) any of the Affiliate Loan Documents or the Affiliate Credit
Agreement; or

        (d)              
release or substitute any
guarantor, if any, of the Obligations, or enforce, exchange, release, or waive
any security for the Obligations or any other guaranty of the Obligations, or
any portion thereof.

        Section 9.6             
No Election.  The Lender shall
have the right to seek recourse against the Borrower to the fullest extent
provided for herein, and no election by the Lender to proceed in one form of
action or proceeding, or against any party, or on any obligation, shall
constitute a waiver of the Lender's right to proceed in any other form of
action or proceeding or against other parties unless the Lender has expressly
waived such right in writing. 
Specifically, but without limiting the generality of the foregoing, no
action or proceeding by the Lender under this Agreement, the Loan Documents,
the Affiliate Loan Documents or the Affiliate Credit Agreement, shall serve to
diminish the liability of the Borrower under this Agreement and the Loan
Documents to which the Borrower is a party except to the extent that the Lender
finally and unconditionally shall have realized indefeasible payment by such
action or proceeding.

        Section 9.7             
Indefeasible Payment.  The Obligations
shall not be considered indefeasibly paid unless and until all payments to the
Lender are no longer subject to any right on the part of any Person, including
the Affiliate Borrower, the Affiliate Borrower as a debtor in possession, or
any trustee (whether appointed pursuant to the Bankruptcy Code, or otherwise)
of the Affiliate Borrower's assets to invalidate or set aside such payments or
to seek to recoup the amount of such payments or any portion thereof, or to declare
same to be fraudulent or preferential. 
In the event that, for any reason, any portion of such payments to the
Lender is set aside or restored, whether voluntarily or involuntarily, after
the making thereof, then the obligation intended to be satisfied thereby shall
be revived and continued in full force and effect as if said payment or
payments had not been made, and the Borrower shall be liable for the full
amount the Lender is required to repay plus any and all costs and expenses
(including attorneys' fees and attorneys' fees incurred in proceedings brought
under the Bankruptcy Code) paid by the Lender in connection therewith.

 

54

 

        Section 9.8             
Financial Condition of the Affiliate Borrower.  The Borrower
acknowledges that it is presently informed as to the financial condition of the
Affiliate Borrower and of all other circumstances which a diligent inquiry
would reveal and which bear upon the risk of nonpayment of the
Obligations.  The Borrower hereby
covenants that it will continue to keep informed as to the financial condition
the Affiliate Borrower, the status of the other the Affiliate Borrower and of
all circumstances which bear upon the risk of nonpayment.  Absent a written request from the Borrower to
the Lender for information, the Borrower hereby waives any and all rights it
may have to require the Lender to disclose to the Borrower any information
which the Lender may now or hereafter acquire concerning the condition or
circumstances of the Affiliate Borrower.

*   *    *

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of this page intentionally left blank]

*    *    *

55

        IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized
as of the date first above written.

	
  Oregon Micro Systems,
  Inc.

  1800 NW 169th
  Place, Bldg. C100

  Beaverton, Oregon  97006

  Telecopier: (877) 629‐0688

  Attention: Brenda C.G.
  Baumen

  e-mail:
  brendab@omsmotion.com

  	
  OREGON MICRO SYSTEMS,
  INC.

   

  By:                                                                  
  

            Frank H. Zagar, Director

                                                                              

  
	
  Wells Fargo Business
  Credit, Inc.

  245 S. Los Robles Avenue,
  Suite 600

  Pasadena, California  91101

  Telecopier:  (626) 844‐9063

  Attention:  Harry L. Joe

  e-mail:  joeharry@wellsfargo.com

   

  	
  WELLS FARGO BUSINESS
  CREDIT, INC.

   

  By:                                                                  
  

            Jeffrey A. Heisinger, Vice President

  

56

Table of Exhibits and Schedules

Exhibit A                Form
of Revolving Note

Exhibit B                [Intentionally Omitted]

Exhibit C                Compliance Certificate

Exhibit D                Premises

Exhibit E                 Form of Notice of Borrowing

Schedule
5.1          Trade Names, Chief Executive
Office, Principal Place 

                              of
Business, and Locations of Collateral

Schedule
5.2          Capitalization
and Organizational Chart

Schedule
5.5          Subsidiaries

Schedule
5.11        Intellectual Property
Disclosures

Schedule
6.3          Permitted Liens

Schedule
6.4          Permitted Indebtedness and
Guaranties

 

 

 Exhibit A to
Credit and Security Agreement

REVOLVING NOTE

$3,000,000                                                                                                                                     Santa
Ana, California

                                                                                                                                                                  May 28,
2002

        For value received, the undersigned, OREGON MICRO SYSTEMS,
INC., an Oregon corporation (the "Borrower"), jointly and severally with Micro
Motors, Inc., a Colorado corporation, hereby promises to pay on the Termination
Date under the Credit Agreement (defined below), to the order of WELLS FARGO
BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), at its main
office in Minneapolis, Minnesota, or at any other place designated at any time
by the holder hereof, in lawful money of the United States of America and in
immediately available funds, the principal sum of Three Million Dollars
($3,000,000) or, if less, the aggregate unpaid principal amount of all
Revolving Advances made by the Lender to the Borrower under the Credit
Agreement (defined below) together with interest on the principal amount
hereunder remaining unpaid from time to time, computed on the basis of the
actual number of days elapsed and a 360-day year, from the date hereof until
this Note is fully paid at the rate from time to time in effect under the
Credit and Security Agreement of even date herewith (the "Credit Agreement") by
and between the Lender and the Borrower. The principal hereof and interest
accruing thereon shall be due and payable as provided in the Credit Agreement.
This Note may be prepaid only in accordance with the Credit Agreement.

        This Note is issued pursuant, and is subject, to the Credit
Agreement, which provides, among other things, for acceleration hereof. This
Note is the Revolving Note referred to in the Credit Agreement. This Note is
secured, among other things, pursuant to the Credit Agreement and the Security
Documents as therein defined, and may now or hereafter be secured by one or
more other security agreements, mortgages, deeds of trust, assignments or other
instruments or agreements.

        The Borrower shall pay all costs of collection, including
reasonable attorneys' fees and legal expenses if this Note is not paid when
due, whether or not legal proceedings are commenced.

        Presentment or other demand for payment, notice of dishonor
and protest are expressly waived.

OREGON MICRO SYSTEMS, INC.

 

By                                                                   

        Frank H.
Zagar, Director

Exhibit C to
Credit and Security Agreement

Compliance
Certificate

To:                   Harry L.
Joe

                        Wells
Fargo Business Credit, Inc.

Date:                __________________,
200___

Subject:            Oregon
Micro Systems, Inc.

            Financial
Statements

        In accordance with our Credit and Security Agreement dated
as of May 28, 2002 (the "Credit Agreement"), attached are the financial
statements of Oregon Micro Systems, Inc. (the "Borrower") as of and for
________________, 20___ (the "Reporting Date") and the year-to-date period then
ended (the "Current Financials"). All terms used in this certificate have the
meanings given in the Credit Agreement.

        I certify that the Current Financials have been prepared in
accordance with GAAP, subject to year-end audit adjustments, and fairly present
the Borrower's financial condition as of the date thereof.

Events of Default. (Check
one):

 The undersigned does not have knowledge of the
occurrence of a Default or Event of Default under the Credit Agreement except
as previously reported in writing to the Lender.


The undersigned has knowledge of the occurrence
of a Default or Event of Default under the Credit Agreement not previously
reported in writing to the Lender and attached hereto is a statement of the
facts with respect to thereto. The Borrower acknowledges that pursuant to
Section 2.12(d) of the Credit Agreement, the Lender may impose the Default Rate
at any time during the resulting Default Period.

Financial
Covenants. I further hereby certify as follows:

        1.                 
Minimum Tangible Net Worth.  Pursuant to Section 6.2(a) of the Credit
Agreement, as of the Reporting Date, the Borrower's Tangible Net Worth was
$____________, which  satisfies  does not satisfy the requirement that such amount be
not less than $_____________ on the Reporting Date as set forth in table below:

 

1

 

	
  Test
  Date/Period
	
  Minimum
  Tangible Net Worth

  
	
  4/30/2002

  	
  $950,000

  
	
  5/31/2002

  	
  $950,000

  
	
  6/30/2002
  and each month end thereafter

  	
  $950,000

  

 

        2.                 
Minimum Net Income.  Pursuant to Section 6.2(b) of the Credit
Agreement, the Borrower's Net Income (Net Loss) for the fiscal year-to-date
period ending on the Reporting Date, was $____________, which  satisfies

does not satisfy the requirement that such amount be not less than
$____________, as set forth in the table below:

	
   Fiscal Year to Date Period Ending

   	
   Minimum Net Income  (or Maximum Net Loss)

   
	
  6/30/2002

  	
  -$800,000

  
	
   

  	
   

  

 

        3.                 
Maximum Net Loss.  Pursuant to Section 6.2(c) of the Credit
Agreement, the Borrower's Net Income (Net Loss) for the month ending on the
Reporting Date was $____________, which  satisfies  does
not satisfy the requirement that such amount be not less than -$75,000,
commencing with the month ending July 31, 2002.

        4.                 
Capital Expenditures. Pursuant to Section 6.2(i)
of the Credit Agreement, for the year-to-date period ending on the Reporting
Date, the Borrower has expended or contracted to expend during the
_____________ year ended ______________, 200___, for Capital Expenditures,
$___________ in the aggregate, which  satisfies  does not
satisfy the requirement that such expenditures not exceed $150,00 in the aggregate during such year, or $50,000 for the
fiscal quarter ended June 30, 2002.

        5.                 
Salaries. As of the Reporting Date, the Borrower
 is  is not in compliance with Section 6.8 of the Credit
Agreement concerning salaries.

 

2

 

        Attached hereto are all relevant facts in reasonable detail
to evidence, and the computations of the financial
covenants referred to above. These computations were made in accordance with
GAAP.

OREGON MICRO SYSTEMS, INC.

By                                                                                

            Its Chief Financial
Officer

 

 

3

Exhibit D to
Credit and Security Agreement

Premises

The Premises referred to in the Credit and Security Agreement
are legally described as follows:

[_To be completed by
Borrower_]

 

Exhibit E to
Credit and Security Agreement

NOTICE OF
BORROWING

_____________, _______

TO:      Wells
Fargo Business Credit, Inc.

            245
S. Los Robles Avenue, Suite 600

            Pasadena,
California  91101

            Telecopier:  (626) 844‐9063

            Attention:  Harry
L. Joe

        We refer to that certain Credit and Security Agreement
dated as of May 28, 2002 (as amended or modified to date, the "Credit
Agreement") by and between Oregon Micro Systems, Inc. and Wells Fargo Business
Credit, Inc. Capitalized terms used herein but not otherwise defined shall have
the same meanings assigned to them in the Credit Agreement.

        Pursuant to Section 2.2(a) of the Credit Agreement, we
hereby request or confirm our request for an Advance on the date, of the
type(s) and in the amount(s) specified below.

	
  Amount of Advance

  	
  Date of Borrowing

  
	
  $

  	
   

  
	
   

  	
   

  

 

 

OREGON MICRO SYSTEMS, INC.

By                                                                    
            Its                                            

 

Schedule 5.1 to
Credit and Security Agreement

Trade Names, Chief
Executive Office, Principal Place of Business,

and Locations of Collateral

Trade Names

[_to be completed by Borrower_]

Chief
Executive Office/Principal Place of Business

                                                             

                                                             

                                                             

 

Other
Inventory and Equipment Locations

[_to be completed by Borrower_]

Schedule 5.2 to
Credit and Security Agreement

Capitalization
and Organizational Chart

 

	
  Holder

  	
  Type of

  Rights/Stock

  	
  No. of shares (after

  Exercise of all rights

  to acquire shares)

  	
  Percent interest on

  a fully diluted basis

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  

 

Attach organizational chart showing the ownership
structure of all Subsidiaries of the Borrower.

[_to be completed by Borrower_]

 

Schedule 5.5  to Credit and
Security Agreement

Subsidiaries

[_to be completed by Borrower_]

Schedule 5.11 to
Credit and Security Agreement

Intellectual Property
Disclosures

[_to be completed by Borrower_]

Schedule 6.3 to
Credit and Security Agreement

Permitted Liens

	
  Creditor

  	
  Collateral

  	
  Jurisdiction

  	
  Filing Date

  	
  Filing No.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

[_to be completed by Borrower_]

Schedule 6.4 to
Credit and Security Agreement

Permitted
Indebtedness and Guaranties

 

	
  Indebtedness

  
	
  Creditor

  	
  Principal

  Amount

  	
  Maturity

  Date

  	
  Monthly

  Payment

  	
  Collateral

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

[_to be completed by Borrower_]

 

	
  Guaranties

  
	
  Primary Obligor

  	
  Amount and
  Description of

  Obligation
  Guaranteed

  	
  Beneficiary
  of Guaranty

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  

 

[_To be completed by Borrower_]

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