Document:

EXHIBIT 10.68

                      $4,000,000 Revolving Credit Facility
                              $1,000,000 Term Loan
                    $500,000 Equipment Acquisition Term Loan

                          REVOLVING CREDIT, TERM LOAN,
                        EQUIPMENT ACQUISITION TERM LOAN,
                             AND SECURITY AGREEMENT

                                     between

                         ADVANCED NUTRACEUTICALS, INC.,
                        BACTOLAC PHARMACEUTICAL INC., and
                           ANI PHARMACEUTICALS, INC.,
                                  as Borrowers
                                       and

                           CAPITALSOURCE FINANCE LLC,
                               as Agent and Lender

                                   Dated as of
                                 March 21, 2003

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                                Table of Contents
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I.    DEFINITIONS............................................................1

      1.1      General Terms.................................................1

II.   LOANS, PAYMENTS, AND INTEREST AND COLLATERAL...........................2

      2.1      The Revolving Facility........................................2

      2.2      The Revolving Notes; Maturity.................................2

      2.3      Interest on the Revolving Notes...............................3

      2.4      Revolving Facility Disbursements; Requirement to
               Deliver Borrowing Certificate.................................3

      2.5      Collections; Repayment; Borrowing and Lockbox.................4

      2.6      Term Loan; Term Notes.........................................5

      2.7      Interest on Term Loan.........................................5

      2.8      Repayment of Term Loan; Maturity..............................5

      2.9      Equipment Acquisition Term Loan...............................6

      2.10     Interest on the Equipment Acquisition Term Notes..............7

      2.11     Repayment of Equipment Acquisition Term Loan; Maturity........7

      2.12     Promise to Pay; Manner of Payment.............................8

      2.13     Repayment of Excess Advances..................................8

      2.14     Other Mandatory Prepayments...................................8

      2.15     Payments by Agent.............................................9

      2.16     Grant of Security Interest; Collateral........................9

      2.17     Collateral Administration....................................11

      2.18     Power of Attorney............................................12

      2.19     Notes........................................................13

      2.20     Replacement of Lost Notes....................................13

      2.21     Right of First Refusal.......................................14

III.  FEES AND OTHER CHARGES................................................14

      3.1      Commitment Fee...............................................14

      3.2      Unused Line Fee..............................................14

      3.3      Collateral Management Fee....................................14

      3.4      Early Termination Fee........................................15

      3.5      Computation of Fees; Lawful Limits...........................15

      3.6      Default Rate of Interest.....................................15

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      3.7      Acknowledgement of Joint and Several Liability,
               Cross-Guaranty and Contribution Rights;
               Guaranty Enforcement.........................................16

IV.   CONDITIONS PRECEDENT..................................................19

      4.1      Conditions to Initial Advance, Funding the Term
               Loan and Closing.............................................19

      4.2      Conditions to Each Advance and Funding of the Term Loan......22

V.    REPRESENTATIONS AND WARRANTIES........................................23

      5.1      Organization and Authority...................................23

      5.2      Loan Documents and Acquisition Documents.....................24

      5.3      Subsidiaries, Capitalization and Ownership Interests.........24

      5.4      Properties...................................................25

      5.5      Other Agreements.............................................25

      5.6      Litigation...................................................25

      5.7      Hazardous Materials..........................................26

      5.8      Tax Returns; Governmental Reports............................26

      5.9      Financial Statements and Reports.............................26

      5.10     Compliance with Law; Business................................26

      5.11     Intellectual Property........................................27

      5.12     Licenses and Permits; Labor..................................27

      5.13     No Default; Solvency.........................................28

      5.14     Disclosure...................................................28

      5.15     Existing Indebtedness; Investments, Guarantees and
               Certain Contracts............................................28

      5.16     Affiliated Agreements........................................29

      5.17     Insurance....................................................29

      5.18     Names; Location of Offices, Records and Collateral;
               Deposit Accounts and Investment Property.....................29

      5.19     Non-Subordination............................................30

      5.20     Accounts.....................................................30

      5.21     Legal Investments; Use of Proceeds...........................30

      5.22     Broker's or Finder's Commissions.............................31

      5.23     Survival.....................................................31

VI.   AFFIRMATIVE COVENANTS.................................................31

      6.1      Financial Statements, Reports and Other Information..........31

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      6.2      Payment of Obligations.......................................34

      6.3      Conduct of Business and Maintenance of Existence
               and Assets...................................................35

      6.4      Compliance with Legal and Other Obligations..................35

      6.5      Insurance....................................................35

      6.6      True Books...................................................36

      6.7      Inspection; Periodic Audits..................................36

      6.8      Further Assurances; Post Closing.............................36

      6.9      Payment of Indebtedness......................................37

      6.10     Lien Searches................................................37

      6.11     Use of Proceeds..............................................37

      6.12     Collateral Documents; Security Interest in Collateral........38

      6.13     Taxes and Other Charges......................................39

      6.14     Inventory Covenants..........................................39

VII.  NEGATIVE COVENANTS....................................................40

      7.1      Financial Covenants..........................................40

      7.2      Indebtedness.................................................40

      7.3      Liens........................................................41

      7.4      Investments; Investment Property; New Facilities or
               Collateral; Subsidiaries.....................................41

      7.5      Dividends; Redemptions; Equity...............................42

      7.6      Transactions with Affiliates.................................42

      7.7      Charter Documents; Fiscal Year; Dissolution; Use of
               Proceeds; Insurance Policies;  Disposition of
               Collateral; Taxes; Trade Names...............................43

      7.8      Transfer of Assets...........................................44

      7.9      Contingent Obligations and Risks.............................44

      7.10     Truth of Statements..........................................44

      7.11     Intentionally Omitted........................................45

      7.12     Intentionally Omitted........................................45

      7.13     Negative Pledge..............................................45

VIII. EVENTS OF DEFAULT.....................................................45

IX.   RIGHTS AND REMEDIES AFTER DEFAULT.....................................48

      9.1      Rights and Remedies..........................................48

      9.2      Application of Proceeds......................................49

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      9.3      Rights to Appoint Receiver...................................50

      9.4      Attorney in Fact.............................................50

      9.5      Blocked Accounts.............................................50

      9.6      Rights and Remedies not Exclusive............................50

X.    WAIVERS AND JUDICIAL PROCEEDINGS......................................51

      10.1     Waivers......................................................51

      10.2     Delay; No Waiver of Defaults.................................51

      10.3     Jury Waiver..................................................51

      10.4     Cooperation in Discovery and Litigation......................51

      10.5     Amendment and Waivers........................................52

XI.   EFFECTIVE DATE AND TERMINATION........................................53

      11.1     Effectiveness and Termination................................53

      11.2     Survival.....................................................53

XII.  AGENCY PROVISIONS.....................................................54

      12.1     Agent........................................................54

      12.2     Consents.....................................................58

      12.3     Set Off and Sharing of Payments..............................59

      12.4     Disbursement of Funds........................................60

      12.5     Settlements; Payments and Information........................60

      12.6     Dissemination of Information.................................62

XIII. MISCELLANEOUS.........................................................62

      13.1     Governing Law; Jurisdiction; Service of Process; Venue.......62

      13.2     Successors and Assigns; Assignments and Participations.......63

      13.3     Application of Payments......................................65

      13.4     Indemnity....................................................66

      13.5     Notice.......................................................67

      13.6     Severability; Captions; Counterparts; Facsimile
               Signatures...................................................67

      13.7     Expenses.....................................................67

      13.8     Entire Agreement.............................................68

      13.9     Approvals and Duties.........................................68

      13.10    Confidentiality and Publicity................................69

      13.11    Release of Collateral........................................69

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               REVOLVING CREDIT, TERM LOAN, EQUIPMENT ACQUISITION
               --------------------------------------------------
                        TERM LOAN, AND SECURITY AGREEMENT
                        ---------------------------------

     THIS REVOLVING CREDIT,  TERM LOAN AND SECURITY  AGREEMENT (the "Agreement")
dated  as  of  March  21,  2003,   is  entered   into  by  and  among   ADVANCED
NUTRACEUTICALS,  INC., a Texas corporation  ("Parent"),  BACTOLAC PHARMACEUTICAL
INC. a Delaware  corporation  ("Bactolac"),  and ANI  PHARMACEUTICALS,  INC.,  a
Mississippi  corporation ("ANIP") (Parent,  Bactolac and ANIP are each sometimes
referred  to  herein as a  "Borrower"  and  collectively  as  "Borrowers"),  and
CAPITALSOURCE    FINANCE   LLC,   a   Delaware   limited    liability    company
("CapitalSource"),  as  administrative,  payment  and  collateral  agent for the
Lenders (in such capacities, the "Agent"), and the Lenders.

     WHEREAS,  Borrowers have requested that Lenders make available to Borrowers
(i)  a  revolving  credit  facility  (the  "Revolving  Facility")  in a  maximum
principal  amount  at  any  time  outstanding  of up  to  Four  Million  Dollars
($4,000,000)  (the "Facility Cap"), and (ii) a term loan (the "Term Loan") in an
aggregate  maximum  principal  amount of One Million Dollars  ($1,000,000),  the
proceeds of which Revolving Facility and Term Loan shall be used by Borrowers to
refinance  Borrowers' existing  obligations and indebtedness to General Electric
Capital  Corporation  ("GECC"),  to repay  $500,000 on a related party note plus
accrued  interest  thereon due to Dr. Pailla M. Reddy (subject to the receipt by
Agent of a satisfactory no offset  agreement from VitaRich  Laboratories,  Inc.)
and to finance the working  capital needs of Borrowers in connection  with their
nutraceutical   (vitamin)   and  over  the  counter   liquid  and  powder  based
pharmaceuticals and health and beauty products business (the "Business");

     WHEREAS,  Borrowers  also have  requested  that Lenders  make  available to
Borrowers  an  equipment   acquisition   term  loan  facility  (the   "Equipment
Acquisition  Term  Loan")  in an  aggregate  principal  amount  of Five  Hundred
Thousand  Dollars  ($500,000)  (the  "Maximum  Equipment  Acquisition  Term Loan
Amount") the proceeds of which will be used by Borrowers for the  acquisition of
Eligible Equipment to be used solely in connection with the Business;

     WHEREAS,  Lenders are willing to make the Revolving Facility, Term Loan and
Equipment  Acquisition  Term  Loan  available  to  Borrowers  upon the terms and
subject to the conditions set forth herein.

     NOW,  THEREFORE,  in  consideration of the foregoing and for other good and
valuable   consideration,   the  receipt  and   adequacy  of  which  hereby  are
acknowledged, Borrowers, Agent and Lenders hereby agree as follows:

I.   DEFINITIONS

     1.1 General Terms

          (a) For purposes of the Loan  Documents  and all Annexes  thereto,  in
     addition to the  definitions  above and elsewhere in this  Agreement or the
     other Loan Documents,  the terms listed in Appendix A hereto shall have the
     meanings given such terms in Appendix A, which is  incorporated  herein and
     made a part hereof.  All capitalized  terms used which are not specifically
     defined shall have

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     meanings  provided  in Article 9 of the UCC in effect on the date hereof to
     the extent the same are used or defined therein. Unless otherwise specified
     herein or in  Appendix  A, this  Agreement  and any  agreement  or contract
     referred to herein or in Appendix A shall mean such  agreement as modified,
     amended or supplemented from time to time. Unless otherwise  specified,  as
     used in the Loan  Documents or in any  certificate,  report,  instrument or
     other document made or delivered pursuant to any of the Loan Documents, all
     accounting  terms not defined in Appendix A or elsewhere in this  Agreement
     shall have the meanings  given to such terms in and shall be interpreted in
     accordance with GAAP.

II.  LOANS, PAYMENTS, AND INTEREST AND COLLATERAL

     2.1 The Revolving Facility

     Subject to the provisions of this Agreement,  each Revolving  Lender agrees
to make  available  its Pro Rata  Share  of  Advances  to  Borrowers  under  the
Revolving Facility from time to time during the Term; provided, that (i) the Pro
Rata Share of the Advances of any Revolving  Lender shall not at any time exceed
its separate  Commitment,  and (ii) the aggregate  amount of all Advances at any
time outstanding under the Revolving Facility shall not exceed the lesser of (A)
the Facility Cap and (B) the Availability.  The obligations of Revolving Lenders
hereunder shall be several, and not joint or joint and several, up to the amount
of the Commitments.  The Revolving Facility is a revolving credit facility which
may be drawn,  repaid  and  redrawn  from time to time as  permitted  under this
Agreement.  Any  determination  as to whether there is  availability  within the
Borrowing  Base for requested  Advances  shall be made by Agent in its Permitted
Discretion  and shall be final and  binding  upon  Borrowers.  Unless  otherwise
permitted by Agent,  each Advance  shall be in an amount of at least One Hundred
Thousand  Dollars  ($100,000).  Subject  to the  provisions  of this  Agreement,
Borrowers may request  Advances up to and including the value, in Dollars of (a)
the  Receivables  Percentage of the  Receivables  Borrowing  Base,  plus (b) the
Inventory Percentage of the Inventory Borrowing Base but not to exceed $750,000,
minus amounts reserved  pursuant to this Agreement (such calculated amount being
referred to herein as the "Availability"). Advances under the Revolving Facility
automatically  shall be made for the  payment of interest on the Notes and other
Obligations  on the date when due to the extent  available  and as provided  for
herein.  Borrowers may not at any time increase,  reduce or otherwise adjust the
Facility Cap.  Agent shall have the right to establish and readjust from time to
time, in its Permitted  Discretion,  reserves  against the Borrowing Base, which
reserves shall have the effect of reducing the amounts otherwise  eligible to be
disbursed to Borrowers under the Revolving Facility pursuant to this Agreement.

     2.2 The Revolving Notes; Maturity

          (a) All Advances  under the Revolving  Facility  shall be evidenced by
     the Revolving  Notes,  payable to the order of each Revolving Lender in the
     principal amount of the Commitment of such Revolving Lender,  duly executed
     and  delivered  by  Borrowers.  The  Revolving  Notes  shall  evidence  the
     aggregate  Indebtedness  of Borrowers to Revolving  Lenders  resulting from
     Advances  under the Revolving  Facility from time to time.  Each  Revolving

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     Lender hereby is authorized,  but is not obligated,  to enter the amount of
     such Revolving  Lender's Pro Rata Share of each Advance under the Revolving
     Facility,  and the amount of each  payment or  prepayment  of  principal or
     interest  thereon  in the  appropriate  spaces on the  reverse  of or on an
     attachment to such Revolving Lender's Revolving Note(s). Agent will account
     to  Borrowers  monthly  with a statement  of Advances  under the  Revolving
     Facility, and any charges and payments made pursuant to this Agreement, and
     in the absence of manifest error,  such accounting  rendered by Agent shall
     be deemed  final,  binding  and  conclusive  unless  Agent is  notified  by
     Borrowers in writing to the contrary  within  fifteen (15) calendar days of
     Receipt of each accounting,  which notice shall be deemed an objection only
     to items specifically objected to therein.

          (b) All amounts  outstanding  under the Revolving  Notes and all other
     Obligations under the Revolving  Facility shall be due and payable in full,
     if not earlier in accordance with this Agreement, on the Maturity Date.

     2.3  Interest on the Revolving Notes

     Interest on outstanding Advances under the Revolving Notes shall be payable
monthly  in arrears on the first day of each  calendar  month at an annual  rate
equal to the  Prime  Rate  plus two  percent  (2.00%),  provided,  however  that
notwithstanding any provision of any Loan Documents, the interest on outstanding
Advances  under the  Revolving  Notes shall be not less than six and one half of
one  percent  (6.50%)  per annum,  calculated,  in each case,  on the basis of a
360-day year and for the actual number of calendar days elapsed in each interest
calculation  period.  Interest accrued on each Advance under the Revolving Notes
shall be due and payable on the first day of each calendar  month, in accordance
with the procedures  provided for in Section 2.9,  commencing  April 1, 2003 and
continuing  until  the  later  of  the  expiration  of the  Term  and  the  full
performance  and  indefeasible  payment in full in cash of the  Obligations  and
termination of this Agreement.

     2.4 Revolving  Facility  Disbursements;  Requirement  to Deliver  Borrowing
Certificate

     So long as no  Default  or Event of  Default  shall  have  occurred  and be
continuing,  Borrowers may give Agent  irrevocable  written notice requesting an
Advance under the Revolving Facility by delivering to Agent not later than 12:00
noon (New York City  time) at least one (1) but not more than four (4)  Business
Days before the proposed  Business Day on which such requested  Advance is to be
made (the "Borrowing Date"), a completed Borrowing  Certificate  requesting such
Advance accompanied by relevant supporting  documentation  satisfactory to Agent
in its Permitted Discretion, which shall (a) specify the proposed Borrowing Date
of such Advance, (b) specify the principal amount of such requested Advance, and
(c) certify the matters contained in Section 4.2 and, to the extent  applicable,
provide  calculations  evidencing  satisfaction  of the  conditions set forth in
Section 4.2. Each Wednesday  during the Term (and more frequently if Agent shall
so request) until the Obligations are indefeasibly paid in cash in full and this
Agreement  is  terminated  and  each  time a  request  for an  Advance  is made,
Borrowers  shall  deliver  to Agent a  Borrowing  Certificate  accompanied  by a
separate detailed aging and categorization of Borrowers' accounts receivable and
accounts  payable and such other  supporting  documentation  with respect to the
figures and  information in the Borrowing  Certificate as Agent shall request in
its  Permitted  Discretion.   On  each  Borrowing  Date,  Borrowers  irrevocably
authorize Agent and Lenders to disburse the proceeds of the requested Advance to

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the applicable  account(s) of Borrowers  specified in the  applicable  Borrowing
Certificate, each of which accounts shall constitute one or more of the accounts
set forth on Schedule  2.4, in all cases for credit to the  applicable  Borrower
(or to such other  account as to which such  Borrower  shall  instruct  Agent in
writing) via Federal  funds wire transfer no later than 3:00 p.m. (New York City
time).

     2.5 Collections; Repayment; Borrowing and Lockbox

     Borrowers  shall  maintain  a  lockbox  together  with  a  blocked  account
(individually  and collectively,  the "Blocked  Account") with one or more banks
acceptable  to Agent  (each,  a "Lockbox  Bank"),  and shall  execute  with each
Lockbox  Bank  one or more  agreements  acceptable  to Agent  (individually  and
collectively,  the  "Lockbox  Agreement"),  and such  other  agreements  related
thereto as Agent may require.  Borrowers  shall ensure that all  collections  of
their  respective  Accounts  and all other cash  payments  received by Borrowers
(other  than  direct  proceeds of sales of  Permitted  Securities)  are paid and
delivered  directly  from  Account  Debtors and other  Persons  into the Blocked
Account. The Lockbox Agreements shall provide that the Lockbox Banks immediately
will transfer all funds paid into the Blocked Accounts into a depository account
or accounts  maintained  by Agent or an Affiliate of Agent at such bank as Agent
may  communicate to Borrowers from time to time (the  "Concentration  Account").
Notwithstanding  and without  limiting any other provision of any Loan Document,
Agent  shall  apply,  on  a  daily  basis,   all  funds   transferred  into  the
Concentration  Account pursuant to the Lockbox Agreement and this Section 2.5 in
such order and manner as  determined  by Agent.  To the extent that any Accounts
collections  of Borrowers or any other cash  payments  received by Borrowers are
not sent directly to the Blocked Account but are received by any Borrower or any
of Borrowers'  Affiliates,  such collections and proceeds shall be held in trust
for the benefit of Agent and Lenders and immediately  remitted (and in any event
within two (2) Business Days), in the form received,  to the Blocked Account for
immediate transfer to the Concentration Account. Borrowers acknowledge and agree
that  compliance with the terms of this Section 2.5 is an essential term of this
Agreement,  and that nothing shall prevent Agent from considering any failure to
comply with the terms of this Section 2.5 to be a Default or an Event of Default
or from taking any action or exercising  any right or remedy  available to Agent
or any  Lender  with  respect  to any  Default  or Event of  Default.  All funds
transferred to the  Concentration  Account for  application  to the  Obligations
under the Revolving  Facility shall be applied to reduce the  Obligations  under
the Revolving  Facility,  but, for purposes of calculating  interest  hereunder,
shall be subject to a five (5) Business Day clearance  charge.  If as the result
of collections of Accounts and/or any other cash payments  received by Borrowers
(other than Permitted  Securities) pursuant to this Section 2.5 a credit balance
exists with respect to the Concentration  Account, such credit balance shall not
accrue interest in favor of a Borrower, but shall be available to Borrowers upon
written request in accordance  with the terms of this Agreement.  If applicable,
at any time prior to the execution of all or any of the Lockbox  Agreements  and
operation of the Blocked  Account,  Borrowers and their  Affiliates shall direct
all collections or proceeds they receive on Accounts or from other Collateral or
any other cash payment received by Borrowers  (except for Permitted  Securities)
to the  accounts(s)  and in the  manner  specified  by  Agent  in its  Permitted
Discretion.

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     2.6 Term Loan; Term Notes

     Subject to the terms and conditions set forth in this Agreement,  each Term
Lender agrees to loan to Borrowers on the Closing Date its Pro Rata Share of the
Term Loan, which, in the aggregate,  equals an original  principal amount of One
Million Dollars  ($1,000,000).  The Term Loan is not a revolving credit facility
and may not be drawn,  repaid and redrawn.  Any  repayments  of principal on the
Term Loan shall be applied to permanently reduce such Term Loan. The obligations
of the Term  Lenders  hereunder  are several and not joint or joint and several.
The Term Loan shall be  evidenced  by Term  Notes,  payable to the order of each
Term Lender in the principal  amount of the  Commitment of the  applicable  Term
Lender, duly executed and delivered by Borrowers.  The Term Notes shall evidence
the  aggregate  Indebtedness  of Borrowers to Term Lenders  under the Term Loan.
Each Term Lender hereby is authorized, but is not obligated, to enter the amount
of such Term Lender's Pro Rata Share of  outstanding  principal of the Term Loan
and the amount of each payment or prepayment  of principal and interest  thereon
on the reverse of or on an  attachment  to such Term  Lender's Term Note. On the
Closing Date, Borrowers irrevocably authorize Agent and Term Lenders to disburse
the proceeds of the Term Loan to the  applicable  account(s)  of  Borrowers  set
forth on Schedule  2.4, in all cases for credit to  Borrowers  (or to such other
account as to which the Borrowers  shall  instruct Agent in writing) via Federal
funds wire transfer no later than 3:00 p.m. (New York City time).

     2.7 Interest on Term Loan

          (a)  Interest  on the  outstanding  balance of the Term Loan under the
     Term  Notes  shall be  payable  monthly in arrears on the first day of each
     calendar  month at an annual rate equal to (i) the Prime Rate plus four and
     three   quarters  of  one  percent   (4.75%),   provided,   however,   that
     notwithstanding  any provisions of any Loan  Document,  the interest on the
     outstanding  principal  balance of the Term Loan under the Term Notes shall
     not be less than nine and one  quarter of one  percent  (9.25%)  per annum,
     calculated, in each case, on the basis of a 360-day year and for the actual
     number of  calendar  days  elapsed in each  interest  calculation  period..
     Interest  accrued on the Term Loan shall be due and  payable in cash on the
     first  day of  each  calendar  month  commencing  on  April  1,  2003,  and
     continuing  until  the  later  of the  expiration  of the Term and the full
     performance and  indefeasible  payment in full in cash of the Term Loan and
     all Obligations related thereto and termination of this Agreement.

          (b) Advances  under the Revolving  Facility may be made  automatically
     for the  payment  of  interest  and  principal  on the Term  Loan and other
     Obligations  on the date when due to the extent  available  and as provided
     for herein.

     2.8 Repayment of Term Loan; Maturity

     Payment  of the  outstanding  principal  balance  under  the Term  Loan (in
addition to the interest  payments in Section 2.7) and all other amounts  (other
than  interest)  outstanding  under  the Term  Loan  shall be made  monthly,  as
follows:  Sixteen Thousand Six Hundred and Sixty-Six Dollars and Sixty Six Cents
(($16,666.66) shall be due and payable on the first day of each month during the
Term commencing on April 1, 2003.

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<PAGE>

          (a) The  unpaid  principal  amount  of the  Term  Loan  and all  other
     Obligations  under the Term Loan shall be due and payable in full,  and the
     Term Notes shall mature,  if not earlier in accordance with this Agreement,
     on the Maturity Date.

     2.9 Equipment Acquisition Term Loan

          (a) Subject to the terms and conditions  set forth in this  Agreement,
     each Equipment  Acquisition Term Lender agrees to loan to Borrowers its Pro
     Rata Share of the  Maximum  Equipment  Acquisition  Term Loan Amount in the
     form of draws  ("Draws"),  in each case subject to the conditions set forth
     in this  Agreement;  provided that the aggregate  amount of all Draws shall
     never  exceed the lesser of the  Maximum  Equipment  Acquisition  Term Loan
     Amount or the aggregate amount of Draws that are permitted pursuant to this
     Agreement and the Pro Rata Share of Draws under the  Equipment  Acquisition
     Term Loan of any  Equipment  Acquisition  Term Lender shall not at any time
     exceed its separate  Commitment.  Any balance of Draws  outstanding  at any
     time in excess of the foregoing limits shall be immediately due and payable
     by Borrowers  without the  necessity  of any demand at the Payment  Office,
     whether or not a Default or Event of Default has occurred or is continuing,
     and  shall  be  paid  in the  manner  specified  in  this  Agreement,  and,
     notwithstanding any other provision of this Agreement, shall be an Event of
     Default  hereunder.   All  Draws  shall  be  disbursed  to  the  Borrowers'
     account(s)  as set forth on  Schedule  2.4 (or to such other  account as to
     which  the  Borrower  shall  instruct  Agent  in  writing).  The  Equipment
     Acquisition  Term Loan is not a revolving  credit  facility  and may not be
     drawn,  repaid and redrawn.  Any  repayments  of principal on the Equipment
     Acquisition Term Loan shall be applied to permanently  reduce the Equipment
     Acquisition  Term Loan and Maximum Loan Amount.  The Equipment  Acquisition
     Term Loan and all Draws shall be evidenced by  Equipment  Acquisition  Term
     Notes,  payable to the order of each Lender in the principal  amount of the
     Commitment  of the  applicable  Lender,  duly  executed  and  delivered  by
     Borrowers and dated the Closing Date. The Equipment  Acquisition Term Notes
     shall evidence the aggregate Indebtedness of Borrowers to Lenders resulting
     from Draws  under the  Equipment  Acquisition  Term Loan from time to time.
     Each Lender hereby is authorized, but is not obligated, to enter the amount
     of such Lender's Pro Rata Share of each Draw and  outstanding  principal of
     the  Equipment  Acquisition  Term Loan and the  amount of each  payment  or
     prepayment  of principal  and  interest  thereon on the reverse of or on an
     attachment to such Lender's Equipment Acquisition Term Note.

          (b)  Unless  otherwise  permitted  by Agent,  each Draw shall be in an
     amount of at least  $100,000.  Subject to the provisions of this Agreement,
     Borrowers  may  request  a Draw  up to and  including  the  value,  in U.S.
     dollars, of eighty-five  percent (85%) (the "Equipment  Percentage") of the
     lesser of (i) the actual invoice purchase  price/cost of Eligible Equipment
     purchased by any Borrower  (excluding all soft costs,  such as installation
     costs, insurance policies, warranty plans, etc. (i.e., all costs other than
     the actual hard cost of  purchasing  the Eligible  Equipment)  and (ii) the
     liquidation  auction value of the Eligible Equipment as determined pursuant
     to an  appraisal  in form  and  substance  satisfactory  to  Agent,  in its
     Permitted  Discretion,  from  an  appraiser  acceptable  to  Agent,  in its
     Permitted Discretion.

                                        6
<PAGE>

          (c) So long as no Default or Event of Default  shall have occurred and
     be  continuing,   Borrowers  may  give  Agent  irrevocable  written  notice
     requesting a Draw under the Equipment  Acquisition  Term Loan by delivering
     to Agent not later than  11:00  a.m.  (New York City time) at least two (2)
     but not more than four (4) Business Days before the proposed borrowing date
     of  such  requested  Draw  (the  "Draw  Date"),  a  completed  Draw  Notice
     requesting  such Draw  accompanied  by  relevant  supporting  documentation
     satisfactory to Agent,  including but not limited to copies of invoices for
     and an  appraisal  of the  Eligible  Equipment  to be  purchased  with  the
     proceeds  of such Draw,  which Draw Notice  shall (a) specify the  proposed
     Draw Date of such Draw  which  shall be a Business  Day,  (b)  specify  the
     principal  amount of such  requested  Draw,  and (c)  certify  the  matters
     contained in Section 4.2. Each time a request for a Draw is made  Borrowers
     shall  deliver  to  Agent a Draw  Notice.  On  each  Draw  Date,  Borrowers
     irrevocably authorizes Agent to disburse the proceeds of the requested Draw
     to the Borrowers' account(s) as set forth on Schedule 2.4, in all cases for
     credit to the Borrowers (or to such other account as to which the Borrowers
     shall  instruct  Agent in writing) via Federal funds wire transfer no later
     than 4:00 p.m. New York City time.

     2.10 Interest on the Equipment Acquisition Term Notes

          (a) Interest on the outstanding  balance of the Equipment  Acquisition
     Term Loan  under the  Equipment  Acquisition  Term  Notes  shall be payable
     monthly  in arrears  on the first day of each  calendar  month at an annual
     rate of Prime Rate plus four and three  quarters  of one  percent  (4.75%),
     provided,  however,  that,  notwithstanding any other provision of any Loan
     Document,  the  interest  on  the  outstanding  principal  balance  of  the
     Equipment  Acquisition Term Loan under the Equipment Acquisition Term Notes
     shall be not less than nine and one  quarter  of one  percent  (9.25%)  per
     annum, calculated, in each case, on the basis of a 360-day year and for the
     actual number of calendar days elapsed in each interest calculation period.
     Interest  accrued on the Equipment  Acquisition  Term Loan shall be due and
     payable on the first day of each calendar month  commencing  with the first
     calendar month after the Initial Draw,  and  continuing  until the later of
     the  expiration  of the  Term  and the full  performance  and  indefeasible
     payment in full in cash of the Obligations  related thereto and termination
     of this Agreement.

          (b) Advances under the Revolving Facility may be made automatically by
     Lenders  for  the  payment  of  interest  and  principal  on the  Equipment
     Acquisition  Term  Loan and other  Obligations  on the date when due to the
     extent available and as provided for herein.

     2.11 Repayment of Equipment Acquisition Term Loan; Maturity

     Payment of principal (in addition to the interest payments in Section 2.10)
and all other amounts outstanding under the Equipment  Acquisition Term Loan and
all Draws shall be made monthly as follows:

          (a) for each Draw the following amount shall be due and payable on the
     first day of each calendar month  commencing  with the first calendar month
     after the funding of such Draw and continuing  through the end of the Term:
     (i) the original funded amount of such Draw, divided by (ii) 60;

          (b) all remaining  outstanding amounts under the Equipment Acquisition
     Term Loan and all Draws shall be due and payable in full on the last day of
     the Term; and

                                        7
<PAGE>

          (c) the unpaid  principal of the Equipment  Acquisition  Term Loan and
     all  Draws  thereunder  and  all  other  Obligations  under  the  Equipment
     Acquisition  Term Loan shall be due and payable in full,  and the Equipment
     Acquisition Term Notes shall mature, if not earlier in accordance with this
     Agreement, on the Maturity Date.

     2.12 Promise to Pay; Manner of Payment.

     Borrowers  absolutely  and  unconditionally  promise  to pay,  when due and
payable  pursuant  hereto,  principal,   interest  and  all  other  amounts  and
Obligations  payable  hereunder  or under any other Loan  Document,  without any
right  of  rescission  and  without  any  deduction  whatsoever,  including  any
deduction for set-off,  recoupment or counterclaim,  notwithstanding  any damage
to, defects in or  destruction  of the Collateral or any other event,  including
obsolescence  of any property or  improvements.  Any payments  made by Borrowers
(other than payments  automatically  paid through  Advances  under the Revolving
Facility as provided  herein),  shall be made only by wire  transfer on the date
when due, without offset, deduction or counterclaim,  in Dollars, in immediately
available  funds to such  account  as may be  indicated  in  writing by Agent to
Borrowers from time to time. Any such payment  received after 2:00 p.m. New York
City time on any date shall be deemed  received on the  following  Business Day.
Whenever any payment hereunder shall be stated to be due or shall become due and
payable  on a day other  than a  Business  Day,  the due date  thereof  shall be
extended to, and such  payment  shall be made on, the next  succeeding  Business
Day,  and  such  extension  of  time in  such  case  shall  be  included  in the
computation  of payment of any  interest  (at the  interest  rate then in effect
during such extension) and/or fees, as the case may be.

     2.13 Repayment of Excess Advances

     Any balance of Advances  under the Revolving  Facility  outstanding  at any
time in excess of the lesser of (a) the Facility  Cap and (b) the  Availability,
shall be immediately  due and payable by Borrowers  without the necessity of any
demand, at the Payment Office,  whether or not a Default or Event of Default has
occurred or is continuing  and shall be paid in the manner  specified in Section
2.12 and,  notwithstanding  any other provision of this  Agreement,  shall be an
Event of Default.

     2.14 Other Mandatory Prepayments

     In addition to and without limiting any provision of any Loan Document:

          (a) if a Change of Control  occurs that has not been  consented  to in
     writing  by Agent  prior to the  consummation  thereof,  on or prior to the
     first Business Day following the date of such Change of Control,  Borrowers
     shall prepay the Loans and all other  Obligations  in full in cash together
     with  accrued  interest  thereon  to the date of  prepayment  and all other
     amounts owing to Agent and Lenders under the Loan Documents; and

          (b)  if  any  Borrower  or  any  of  Borrowers'  Subsidiaries,  in any
     transaction  or  series of  related  transactions,  (i) sells any  material
     assets or other  properties  (other than sales of assets that are  promptly
     (and in any event  within 180 days)  replaced  with similar  assets),  (ii)
     sells or issues any equity or debt  securities,  capital stock or ownership
     interests (other than Permitted Securities  including,  without limitation,

                                        8
<PAGE>

     as part of a Public Offering of Permitted Securities, and/or, as long as no
     Default or Event of Default  has  occurred  and is  continuing  or would be
     caused by or result  therefrom,  sales or issuances of Permitted  Options),
     (iii) receives any property  damage  insurance award or any other insurance
     proceeds of any kind that are not used  promptly  (and in any event  within
     180 days) after receipt to repair or replace the property or assets covered
     thereby, (iv) incurs any Indebtedness except for Permitted Indebtedness, or
     (v) receives any life insurance proceeds, then it shall apply 100% (or such
     lesser  amount  as is  required  to  indefeasibly  pay in cash in full  the
     Obligations)  of the  proceeds  thereof  to  the  prepayment  of the  Loans
     together with accrued interest and all other  Obligations,  such payment to
     be applied  first,  to all then unpaid fees and  expenses;  second,  to all
     accrued and unpaid interest on the Loans;  third, to the principal payments
     due under the Term Loan in the inverse order of their  maturities;  fourth,
     to the principal  payments due under the Equipment  Acquisition Term in the
     inverse order of their maturities; and fifth to the principal amount of the
     Revolving  Loans;  provided  however,  that the  reduction of the principal
     balance of the Loans  shall not  affect  the amount or timing of  principal
     payments  (other  than the extent to which  reductions  have been made with
     respect to such principal payments as allocated pursuant to this paragraph)
     required under this Agreement until the balance of such Loans is reduced to
     zero.

     2.15 Payments by Agent

     Should any amount  required  to be paid under any Loan  Document  be unpaid
beyond any  applicable  cure period,  such amount may be paid by Agent,  for the
account of Lenders, which payment shall be deemed a request for an Advance under
the  Revolving  Facility  as of the date  such  payment  is due,  and  Borrowers
irrevocably  authorize  disbursement of any such funds to Agent, for the benefit
of  Lenders,  by way of direct  payment  of the  relevant  amount,  interest  or
Obligations  without  necessity  of any demand  and  whether or not a Default or
Event of Default has occurred or is continuing.  No payment or prepayment of any
amount by Agent,  Lenders or any other  Person  shall  entitle  any Person to be
subrogated to the rights of Agent and/or Lenders under any Loan Document  unless
and until the  Obligations  have been fully  performed and paid  indefeasibly in
cash and this Agreement has been  terminated.  Any sums expended or amounts paid
by Agent and/or Lenders as a result of any Borrower's or any Guarantor's failure
to pay,  perform or comply with any Loan Document or any of the  Obligations may
be charged to Borrowers'  account as an Advance under the Revolving Facility and
added to the Obligations.

     2.16 Grant of Security Interest; Collateral

          (a) To secure the payment and  performance  of the  Obligations,  each
     Borrower hereby grants to Agent, for the benefit of itself and the Lenders,
     a valid,  perfected,  continuing first priority (other than with respect to
     property or assets covered by Priority  Permitted Liens) security  interest
     in and Lien upon,  and pledges to Agent,  for the benefit of itself and the
     Lenders,  all of its right,  title and  interest  in and to and upon all of
     such Borrower's assets, now owned or hereafter acquired, including, without
     limitation, all of the following property and interests in property of such
     Borrower:

               (i) all of such Borrower's tangible personal property,  including
          without  limitation  all  present  and  future  Goods,  Inventory  and
          Equipment (including items of equipment which are or become Fixtures),
          Computer Hardware and Software, now owned or hereafter acquired;

                                        9
<PAGE>

               (ii)  all  of  such  Borrower's   intangible  personal  property,
          including   without   limitation  all  present  and  future  Accounts,
          securities,  Contract Rights,  Permits,  General Intangibles,  Chattel
          Paper,   Investment  Property,   Intellectual   Property,   Documents,
          Instruments,     Deposit    Accounts,    Commercial    Tort    Claims,
          Letter-of-Credit  Rights  and  Supporting  Obligations,  rights to the
          payment  of money or other  forms of  consideration  of any kind,  tax
          refunds, insurance proceeds (including,  without limitation,  proceeds
          of any life insurance policy),  now owned or hereafter  acquired,  and
          all intangible and tangible  personal  property relating to or arising
          out of any of the foregoing;

               (iii)  all of  such  Borrower's  present  and  future  Government
          Contracts and rights  thereunder and the related  Government  Accounts
          and  proceeds  thereof,  now or  hereafter  owned or  acquired by such
          Borrower;  provided,  however,  that  Agent  shall not have a security
          interest in any rights under any Government  Contract of such Borrower
          or in the related Government Account where the taking of such security
          interest would be a violation of an express  prohibition  contained in
          the  Government  Contract (for purposes of this  limitation,  the fact
          that a  Government  Contract  is subject to, or  otherwise  refers to,
          Title 31, ss. 203 or Title 41, ss. 15 of the United  States Code shall
          not be deemed an express prohibition against assignment thereof) or is
          prohibited by applicable law; and

               (iv)  any  and  all  additions  and  accessions  to  any  of  the
          foregoing,  and  any  and  all  replacements,  products  and  proceeds
          (including insurance proceeds) of any of the foregoing.

          (b)  Notwithstanding  the  foregoing  provisions of this Section 2.11,
     such  grant of a  security  interest  shall  not  extend  to,  and the term
     "Collateral" shall not include,  any General Intangibles of any Borrower to
     the extent that (but only to the extent  that) (i) they are not  assignable
     or capable of being encumbered as a matter of law or under the terms of any
     license or other  agreement  applicable  thereto  (but solely to the extent
     that any  such  restriction  shall be  enforceable  under  applicable  law)
     without  the  consent of the  licensor  thereof or other  applicable  party
     thereto,  and (ii) such consent has not been obtained;  provided,  however,
     that the foregoing  grant of a security  interest  shall extend to, and the
     term  "Collateral"  shall include,  each of the following:  (A) any General
     Intangible  which is in the nature of an Account or a right to the  payment
     of money or a proceed  of,  or  otherwise  related  to the  enforcement  or
     collection of, any Account or right to the payment of money, or goods which
     are the subject of any  Account or right to the  payment of money,  (B) any
     and all proceeds of any General  Intangible  that is otherwise  excluded to
     the extent that the  assignment,  pledge or encumbrance of such proceeds is
     not so restricted,  and (C) upon obtaining the consent of any such licensor
     or other  applicable  party  with  respect to any such  otherwise  excluded
     General Intangible, such General Intangible as well as any and all proceeds
     thereof  that might  theretofore  have been  excluded  from such grant of a
     security interest and from the term "Collateral."

                                       10
<PAGE>

          (c)  In  addition  to  the  foregoing,   to  secure  the  payment  and
     performance of the  Obligations,  each Borrower has pledged or shall pledge
     to Agent,  for its  benefit  and the  benefit  of the  Lenders,  all of the
     securities it owns in any  Subsidiary  pursuant to the Pledge  Agreement to
     which it is a party, and each Guarantor,  if any, has pledged to Agent, for
     its benefit and the benefit of the Lenders,  certain securities pursuant to
     the Pledge Agreement to which such Guarantor is a party.

          (d) Each Borrower shall promptly  notify Agent of any Commercial  Tort
     Claims in which such  Borrower  has an interest  arising  after the Closing
     Date and shall  provide  all  necessary  information  concerning  each such
     Commercial  Tort Claim and make all necessary  filings with respect thereto
     to perfect  Agent's (for its benefit and the benefit of the Lenders)  first
     priority security interest therein.

          (e) Each Borrower has full right and power to grant to Agent,  for the
     benefit of itself and the Lenders, a perfected,  first priority (other than
     with  respect to property or assets  covered by Priority  Permitted  Liens)
     security  interest and Lien in the Collateral  pursuant to this  Agreement,
     subject to the following sentence.  Upon the execution and delivery of this
     Agreement, and upon the filing of the necessary financing statements and/or
     appropriate   filings  and/or   delivery  of  the  necessary   certificates
     evidencing an equity interest,  control and/or  possession,  as applicable,
     without  any  further  action,  Agent,  for the  benefit  of itself and the
     Lenders,  will  have a good,  valid  and first  priority  (other  than with
     respect to property  or assets  covered by  Priority  Permitted  Liens) and
     perfected  Lien and  security  interest  in the  Collateral,  subject to no
     transfer or other  restrictions  or Liens of any kind in favor of any other
     Person except for Permitted Liens. No financing  statement  relating to any
     of the  Collateral  is on file in any  public  office  except  those (i) on
     behalf of Agent, for the benefit of itself and the Lenders,  and/or (ii) in
     connection  with  Permitted  Liens.  No Borrower is party to any agreement,
     document or instrument that conflicts with this Section 2.16.

     2.17 Collateral Administration

          (a) All  Collateral  (except  Deposit  Accounts and  Collateral in the
     possession  of  Agent)  will  at all  times  be kept  by  Borrowers  at the
     locations set forth on Schedule 5.18B hereto, and shall not, without thirty
     (30) calendar days prior written notice to Agent,  be moved therefrom other
     than to another such  location,  and in any case shall not be moved outside
     the  continental  United  States.  Whether or not an Event of  Default  has
     occurred,  any of Agent's officers,  employees,  representatives  or agents
     shall have the right, at any time during normal business hours, in the name
     of Agent,  or any designee of Agent or  Borrowers,  to verify the validity,
     amount or any other  matter  relating to the  Collateral.  Borrowers  shall
     cooperate fully with Agent in an effort to facilitate and promptly conclude
     such verification process. In addition to and notwithstanding any provision
     of any Loan  Document,  Agent  shall have the right at all times  after the
     occurrence  and  during  the  continuance  of an Event of Default to notify
     Persons owing  Accounts to Borrowers that their Accounts have been assigned
     to Agent  and to  collect  such  Accounts  directly  in its own name and to
     charge collection costs and expenses, including reasonable attorney's fees,
     to  Borrowers.  Borrowers  shall  endeavor  in the first  instance  to make
     collection  of their  respective  Accounts  for Agent,  for the  account of
     Lenders.

          (b) As and when determined by Agent in its Permitted Discretion, Agent
     will perform the searches  described in clauses (i) and (ii) below  against
     Borrowers  (the  results  of which  are to be  consistent  with  Borrowers'
     representations  and warranties  under this  Agreement),  all at Borrowers'
     expense:  (i) UCC  searches  with the  Secretary  of State and local filing

                                       11
<PAGE>

     offices of each  jurisdiction  where any Borrower and/or any Guarantors are
     organized and/or maintain their respective  executive  offices,  a place of
     business or assets;  and (ii) judgment,  federal tax lien and corporate and
     partnership tax lien searches,  in each jurisdiction  searched under clause
     (i) above.

          (c) Upon Agent's  request,  Borrowers shall promptly  deliver to Agent
     all items for which  Agent must  receive  possession  to obtain a perfected
     Lien and security  interest and all notes,  certificates,  and documents of
     title,  Chattel  Paper,  warehouse  receipts,  Instruments,  and any  other
     similar Instruments constituting Collateral, in each case to the extent not
     already in possession of Agent.

          (d)  Borrowers  shall,  and shall  cause their  Subsidiaries  to, keep
     accurate  and  complete  records of the  Collateral  and all  payments  and
     collections thereon and shall submit such records to Agent on such periodic
     bases as Agent may request in its  Permitted  Discretion.  In addition,  if
     Accounts of  Borrowers  in an  aggregate  face amount in excess of $100,000
     become ineligible because they fall within one of the specified  categories
     of  ineligibility  set forth in the  definition  of  Eligible  Receivables,
     Borrowers  shall  notify  Agent of such  occurrence  no later than five (5)
     Business  Days  following  such  occurrence  and the  Borrowing  Base shall
     thereupon  be adjusted to reflect  such  occurrence.  In  addition,  if any
     Eligible  Equipment of Borrower the purchase of which was in part funded by
     any Draw,  becomes  ineligible because it falls within one of the specified
     categories  of  ineligibility  set  forth  in the  definition  of  Eligible
     Equipment,  Borrowers shall notify Agent of such occurrence within five (5)
     Business Days following such  occurrence.  If requested by Agent upon or at
     any time after the  occurrence and during the  continuation  of an Event of
     Default, Borrowers shall execute and deliver to Agent, and shall cause each
     of their Subsidiaries to execute and deliver, formal written assignments of
     all of their  respective  Accounts  as Agent  may  request,  including  all
     Accounts  created  since  the date of the last  assignment,  together  with
     copies of claims, invoices and/or other information related thereto. To the
     extent that  collections  from such assigned  Accounts exceed the amount of
     the  Obligations,  such excess amount shall not accrue interest in favor of
     Borrowers  but shall be  available to  Borrowers  upon  written  request in
     accordance with the terms of this Agreement.

          (e) Borrowers (i) shall provide prompt written notice to their current
     bank  to  transfer  all  items,   collections   and   remittances   to  the
     Concentration  Account,  (ii) shall provide  prompt  written notice to each
     Account Debtor that Agent,  for itself and the benefit of the Lenders,  has
     been  granted a lien and  security  interest  in, upon and to all  Accounts
     payable by such Account  Debtor,  shall direct or shall have  directed each
     Account Debtor to make payments to the appropriate Blocked Account, in each
     case not later than (A) ten (10) calendar  days after the  occurrence of an
     Event of Default, or (B) ten (10) calendar days after the Person becomes an
     Account Debtor, and hereby authorize Agent and/or Lenders, upon any failure
     to send such directions  within the applicable time period, to send any and
     all similar  directions or notice to such Account Debtors,  and (iii) shall
     do anything further that may be lawfully required by Agent in its Permitted
     Discretion  to secure  Agent,  for the benefit of itself and  Lenders,  and
     effectuate the intentions of the Loan Documents.

     2.18 Power of Attorney

     Agent is hereby  irrevocably  made,  constituted and appointed the true and
lawful attorney for Borrowers (without requiring Agent to act as such) with full
power of  substitution  to do the  following:  (i)  endorse the name of any such

                                       12
<PAGE>

Person upon any and all checks,  drafts,  money orders and other instruments for
the payment of money that are payable to such Person and constitute  collections
on such Person's Accounts;  (ii) execute and/or file in the name of any Borrower
any  financing  statements,  amendments  to financing  statements,  schedules to
financing statements, releases or terminations thereof (and such Borrower hereby
waives  any  right  to file  any of the  foregoing  until  the  Obligations  are
indefeasibly paid in full in cash and this Agreement is terminated or with prior
written  consent of Agent,  in its Permitted  Discretion),  (iii) execute and/or
file in the name of each Borrower assignments, instruments, documents, schedules
and  statements  that  it is  obligated  to give  Agent  under  any of the  Loan
Documents  (to the extent such Borrower  fails to so execute  and/or file any of
the foregoing  within two (2) Business Days of Agent's  request or the time when
such Borrower is otherwise  obligated to do so);  (iv) execute  and/or file such
documents as may be necessary to register and/or otherwise  perfect Agent's (for
the benefit of the Lenders) Lien on such Borrower's  owned motor  vehicles,  and
(v) do such other and further  acts and deeds in the name of any  Borrower  that
Agent may deem  necessary or desirable in its  Permitted  Discretion to enforce,
make, create, maintain,  continue or enforce or perfect Agent's, for the benefit
of itself and Lenders, security interest or lien or rights in any Collateral. In
addition,  if any Borrower breaches its obligation  hereunder to direct payments
of Accounts or the proceeds of any other  Collateral to the appropriate  Blocked
Account,  Agent,  as the  irrevocably  made,  constituted and appointed true and
lawful  attorney  for  such  Person  pursuant  to this  paragraph,  may,  by the
signature  or other act of any of Agent's  officers  or  authorized  signatories
(without  requiring any of them to do so), direct any federal,  state or private
payor or fiscal intermediary to pay proceeds of Accounts or any other Collateral
to the appropriate Blocked Account.

     2.19 Notes

     Upon  Agent's or any  Lender's  request,  and in any event within three (3)
Business Days of any such request,  Borrowers shall execute and deliver to Agent
new Notes and/or  divide the Notes in exchange for then  existing  Notes in such
smaller amounts or  denominations as Agent or such Lender shall specify in their
respective sole and absolute  discretion,  provided that the aggregate principal
amount of such new Notes does not exceed the aggregate  principal  amount of the
Notes outstanding at the time such request is made.

     2.20 Replacement of Lost Notes

     Upon receipt of evidence  reasonably  satisfactory  to the Borrowers of the
mutilation,  destruction,  loss or theft of any Notes and the ownership thereof,
the  Borrowers  shall,  upon the  written  request of the holder of such  Notes,
execute and deliver in  replacement  thereof new Notes in the same form,  in the
same  original  principal  amount  and  dated  the  same  date as the  Notes  so
mutilated,  destroyed,  lost or stolen; and such Notes so mutilated,  destroyed,
lost or stolen  shall  then be deemed no longer  outstanding  hereunder.  If the
Notes being  replaced  have been  mutilated,  they shall be  surrendered  to the
Borrowers after Agent's receipt of the replacement  Notes;  and if such replaced
Notes have been  destroyed,  lost or  stolen,  such  holder  shall  furnish  the
Borrowers with an indemnity in writing reasonably acceptable to the Borrowers to
save them harmless in respect of such replaced Note.

                                       13
<PAGE>

     2.21 Right of First Refusal

     Each  Borrower  agrees that if it seeks or is  approached  to refinance the
Revolving  Facility,  the Term Loan, the Equipment  Acquisition Term Loan or any
other  financing  or  Indebtedness  prior  to the end of the  Term  or the  full
performance and  irrevocable  payment in full in cash of the  Obligations,  such
Borrower  shall  notify  Agent in  writing of its  intention  to  refinance  the
Revolving  Facility,  the Term Loan, the Equipment  Acquisition Term Loan and/or
obtain other financing or other Indebtedness by delivering to Agent a summary of
the material terms and conditions  offered for such financing from a third-party
lender that is not an Affiliate of such Borrower or any of its  Subsidiaries  or
any  Guarantor  ("Third-Party  Offer") at least  fifteen (15)  calendar  days in
advance of the date such Borrower  intends to enter into such  financing.  Agent
shall have fifteen (15) calendar days from the date of such notice or request to
notify such Borrower that Agent is willing to extend  financing on substantially
the same terms and  conditions (or terms more favorable to such Borrower) as set
forth in the Third-Party  Offer, in which case such Borrower shall consider such
refinancing  from Agent and Borrower may elect the financing option that is more
favorable to Borrower.

III. FEES AND OTHER CHARGES

     3.1 Commitment Fee

     On or before  the  Closing  Date,  Borrowers  shall  pay to Agent,  for the
ratable benefit of Revolving  Lenders,  a nonrefundable  commitment fee equal to
Sixty Thousand Dollars ($60,000). On or before the Closing Date, Borrowers shall
pay to  Agent,  for  the  ratable  benefit  of  Term  Lenders,  a  nonrefundable
commitment  fee equal to Twenty  Thousand  Dollars  ($20,000).  On or before the
Closing Date, Borrowers shall pay to Agent, for the ratable benefit of Equipment
Acquisition Term Lenders,  a nonrefundable  commitment fee equal to Ten Thousand
Dollars ($10,000.00).

     3.2 Unused Line Fee

     Borrowers shall pay to Agent, for the ratable benefit of Revolving Lenders,
an unused line fee (the "Unused Line Fee") in an amount equal to one-half of one
percent (0.5%) per annum of the difference  derived by subtracting (a) the daily
average amount of the balances under the Revolving  Facility  outstanding during
the  preceding  month,  from (b) the Facility  Cap. The Unused Line Fee shall be
payable  monthly in arrears on the first day of each  successive  calendar month
(starting with the month in which the Closing Date occurs).

     3.3 Collateral Management Fee

     Borrowers  shall  pay  Agent  for  its own  account  a  monthly  collateral
management  fee (the  "Collateral  Management  Fee") in an  amount  equal to one
percent  (1.00%) per annum of the daily average amount of the balances under the
Revolving  Facility  outstanding  during the  preceding  month.  The  Collateral
Management  Fee shall be  payable  monthly  in  arrears on the first day of each
successive  calendar  month  (starting  with the month in which the Closing Date
occurs).

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<PAGE>

     3.4 Early Termination Fee

     If (a)  Borrowers  terminate  this  Agreement  under Section 11.1 hereof or
otherwise make final payment of the Obligations, (b) Agent or any Lender demands
or  accelerates  the  Obligations,  or Borrowers are otherwise  required to make
payment in full of the Obligations,  or Lender's obligations to make loans shall
terminate  under the occurrence of an Event of Default,  (c) a Change of Control
occurs  that  has not  been  consented  to in  writing  by  Agent  prior  to the
consummation  thereof,  and/or  final  payment  of all  outstanding  Obligations
pursuant  to  Section  2.14  occurs  or is  required  to  occur,  (d) any  other
termination of this Agreement and/or final prepayment of the Obligations occurs,
whether by virtue of Agent's  exercising  its right of set-off or otherwise,  or
(e) any  automatic  acceleration  of any Loan or  Obligations  or  cessation  of
lending on account of or during or payment or reduction of any outstanding  Loan
or Obligations is made on account of or during a bankruptcy,  reorganization  or
other  proceeding or  liquidation  or pursuant to any Debtor Relief Law (each, a
"Termination"),  then, at the effective date of any such Termination,  Borrowers
shall pay Agent,  for the ratable  benefit of Lenders  (in  addition to the then
outstanding principal,  accrued interest and other Obligations owing pursuant to
the terms of this Agreement and any other Loan Document),  as yield  maintenance
for the loss of bargain and not as a penalty,  an amount equal to the applicable
Termination Fee.

     3.5 Computation of Fees; Lawful Limits

     All fees hereunder shall be computed on the basis of a year of 360 days and
for the actual number of days elapsed in each calculation period, as applicable.
In no  contingency or event  whatsoever,  whether by reason of  acceleration  or
otherwise,  shall the  interest  and other  charges paid or agreed to be paid to
Agent,  for the benefit of Lenders,  for the use,  forbearance  or  detention of
money hereunder exceed the maximum rate permissible under applicable law which a
court of competent jurisdiction shall, in a final determination, deem applicable
hereto.  If, due to any  circumstance  whatsoever,  fulfillment of any provision
hereof, at the time performance of such provision shall be due, shall exceed any
such limit,  then,  the  obligation to be so fulfilled  shall be reduced to such
lawful limit, and, if Agent or Lenders shall have received interest or any other
charges of any kind which might be deemed to be interest under applicable law in
excess of the maximum  lawful rate,  then such excess shall be applied  first to
any unpaid fees and charges hereunder,  then to unpaid principal balance owed by
Borrowers  hereunder,  and if the then remaining excess interest is greater than
the previously unpaid principal balance, Agent and Lenders shall promptly refund
such  excess  amount to  Borrowers  and the  provisions  hereof  shall be deemed
amended to provide for such  permissible  rate. The terms and provisions of this
Section 3.5 shall control to the extent any other provision of any Loan Document
is inconsistent herewith.

     3.6 Default Rate of Interest

     Upon the occurrence and during the continuation of an Event of Default, the
Applicable  Rate  of  interest  in  effect  at such  time  with  respect  to the
Obligations  shall be increased by three percent  (3.0%) per annum (the "Default
Rate") upon written  notice of such  increase  given by Agent to Borrowers or if
such Event of Default occurs under Sections VIII (g) or (h),  automatically upon
the occurrence of the event or condition that triggered such Event of Default.

                                       15
<PAGE>

     3.7  Acknowledgement  of Joint and Several  Liability,  Cross-Guaranty  and
Contribution Rights; Guaranty Enforcement

          (a) Each Borrower acknowledges that it is jointly and severally liable
     for  all of  the  Obligations  under  the  Loan  Documents.  Each  Borrower
     expressly  understands,  agrees and acknowledges that (i) Borrowers are all
     Affiliated entities by common ownership, (ii) each Borrower desires to have
     the  availability of one common credit facility  instead of separate credit
     facilities,  (iii) each Borrower has requested that the Lenders extend such
     a common  credit  facility on the terms herein  provided,  (iv) the Lenders
     will be lending  against,  and  relying on a lien upon,  all of  Borrowers'
     assets even though the proceeds of any  particular  loan made hereunder may
     not be advanced directly to a particular  Borrower,  (v) each Borrower will
     nonetheless  benefit by the making of all such loans by each Lender and the
     availability  of a single credit facility of a size greater than each could
     independently  warrant,  (vi)  all  of  the  representations,   warranties,
     covenants, obligations, conditions, agreements and other terms contained in
     the Loan  Documents  shall be  applicable to and shall be binding upon each
     Borrower, and (vii) the Borrowers have each executed the Notes as co-makers
     of the Notes and that it would not be able to obtain the credit provided by
     the Lenders  hereunder  without the financial support provided by the other
     Borrowers.

          (b) Each Borrower hereby guarantees the prompt payment and performance
     in full of all  Obligations.  Such  guarantee  constitutes  a guarantee  of
     payment  and not of  collection.  Each  Borrower's  obligations  under this
     Agreement  shall, to the fullest extent  permitted by law, be unconditional
     irrespective  of  (i)  the  validity  or  enforceability,   avoidance,   or
     subordination of the Obligations of any other Borrower or of any promissory
     note or other document evidencing all or any part of the Obligations of any
     other Borrower,  (ii) the absence of any attempt to collect the Obligations
     from any other  Borrower,  any  Guarantor,  if any,  or any other  security

                                       16
<PAGE>

     therefor, or the absence of any other action to enforce the same, (iii) the
     waiver, consent,  extension,  forbearance, or granting of any indulgence by
     the Agent and/or any Lender with respect to any provision of any instrument
     evidencing the  Obligations of any other Borrower or Guarantor,  if any, or
     any part thereof,  or any other agreement now or hereafter  executed by any
     other Borrower or Guarantor,  if any, and delivered to the Agent and/or any
     Lender,  (iv) the failure by the Agent  and/or any Lender to take any steps
     to perfect and maintain its security interest in, or to preserve its rights
     to, any security or collateral for the Obligations of any other Borrower or
     Guarantor,  if any, (v) the Agent's  and/or any Lender's  election,  in any
     proceeding   instituted  under  the  United  States  Bankruptcy  Code  (the
     "Bankruptcy  Code"),  of  the  application  of  Section  1111(b)(2)  of the
     Bankruptcy Code, (vi) any borrowing or grant of a security  interest by any
     other Borrower, as debtor-in-possession under Section 364 of the Bankruptcy
     Code,  (vii) the  disallowance  of all or any portion of the Agent's and/or
     any Lender's  claim(s) for the  repayment of the  Obligations  of any other
     Borrower  under  Section 502 of the  Bankruptcy  Code,  or (viii) any other
     circumstances  which might  constitute  a legal or  equitable  discharge or
     defense  of a  guarantor  or of  any  other  Borrower  (other  than  actual
     indefeasible  payment  in full in cash).  With  respect  to any  Borrower's
     Obligations  arising as a result of the joint and several  liability of the
     Borrowers  hereunder with respect to Advances or other extensions of credit
     made to any of the other Borrowers  hereunder,  such Borrower waives, until
     the Obligations (other than indemnity  obligations under the Loan Documents
     not then due and  payable  for any  events of claims  that  would give rise
     thereto that are not then  pending)  shall have been  indefeasibly  paid in
     full and this Agreement  shall have been  terminated,  any right to enforce
     any right of  subrogation  or any remedy  which the Agent and/or any Lender
     now has or may hereafter have against any other  Borrower,  any endorser or
     any  Guarantor,  if any,  of all or any  part of the  Obligations,  and any
     benefit of, and any right to  participate  in, any  security or  collateral
     given to the Agent and/or any Lender to secure  payment of the  Obligations
     or any other  liability  of any  Borrower  to the Agent  and/or any Lender.
     During any Event of Default,  the Agent may proceed  directly  and at once,
     without  notice,  against  any  Borrower  to collect  and  recover the full
     amount, or any portion of the Obligations, without first proceeding against
     any  other  Borrower  or any other  Person,  or  against  any  security  or
     collateral for the Obligations.  Each Borrower consents and agrees that the
     Agent  shall be under no  obligation  to marshal any assets in favor of any
     Borrower or against or in payment of any or all of the Obligations.

          (c) Each Borrower is obligated to repay the  Obligations  as joint and
     several  obligors  under this  Agreement.  To the extent that any  Borrower
     shall,  under this Agreement as a joint and several  obligor,  repay any of
     the Obligations constituting Advances made to another Borrower hereunder or
     other Obligations incurred directly and primarily by any other Borrower (an
     "Accommodation  Payment"),  then the  Borrower  making  such  Accommodation
     Payment shall be entitled to contribution and indemnification  from, and be
     reimbursed by, each of the other  Borrowers in an amount,  for each of such
     other Borrowers,  equal to a fraction of such  Accommodation  Payment,  the
     numerator of which fraction is such other  Borrower's  Allocable Amount and
     the denominator of which is the sum of the Allocable  Amounts of all of the
     Borrowers. As of any date of determination,  the "Allocable Amount" of each
     Borrower   shall  be  equal  to  the  maximum   amount  of  liability   for
     Accommodation  Payments  which  could be  asserted  against  such  Borrower
     hereunder  without  (i)  rendering  such  Borrower  "insolvent"  within the
     meaning  of  Section  101 (31) of the  Bankruptcy  Code,  Section  2 of the
     Uniform  Fraudulent  Transfer  Act  ("UFTA")  or  Section 2 of the  Uniform
     Fraudulent  Conveyance  Act  ("UFCA"),  (ii)  leaving  such  Borrower  with
     unreasonably small capital or assets,  within the meaning of Section 548 of
     the  Bankruptcy  Code,  Section 4 of the UFTA, or Section 5 of the UFCA, or
     (iii)  leaving  such  Borrower  unable to pay its debts as they  become due
     within the  meaning of Section 548 of the  Bankruptcy  Code or Section 4 of
     the UFTA, or Section 5 of the UFCA. All rights and claims of  contribution,
     indemnification,   and  reimbursement  under  this  Section  3.7  shall  be
     subordinate  in  right  of  payment  to the  prior  payment  in full of the
     Obligations.  The  provisions  of this  Section  3.7  shall,  to the extent
     inconsistent  with any  provision  in any  Loan  Document,  supersede  such
     inconsistent provision.

          (d) If (i) any court holds that the Borrowers are  guarantors  and not
     jointly  and  severally   liable  or  (ii)  bankruptcy  or   reorganization
     proceedings at any time are instituted by or against any Borrower under any
     Debtor Relief Law, each Borrower hereby: (A) until indefeasible  payment in
     full of the Obligations,  expressly and irrevocably  waives, to the fullest
     extent possible,  on behalf of such Borrower,  any and all rights at law or
     in  equity  to  subrogation,   to   reimbursement,   to   exoneration,   to
     contribution,  to  indemnification,  to set off or to any other rights that
     could  accrue to a surety  against a  principal,  to a guarantor  against a
     maker or obligor, to an accommodation party against the party accommodated,
     to a holder  or  transferee  against a maker,  or to the  holder of a claim
     against any Person,  and which such Borrower may have or hereafter  acquire
     against  any Person in  connection  with or as a result of such  Borrower's
     execution,  delivery  and/or  performance of this  Agreement,  or any other
     documents  to which  such  Borrower  is a party  or  otherwise;  (B)  until
     indefeasible payment in full of the Obligations,  expressly and irrevocably
     waives any "claim" (as such term is defined in the Bankruptcy  Code) of any
     kind against any other Borrower,  and further agrees that it shall not have
     or assert any such rights against any Person (including any surety), either

                                       17
<PAGE>

     directly or as an attempted  set off to any action  commenced  against such
     Borrower by the Agent or a Lender or any other Person; and (C) acknowledges
     and agrees (I) that this  waiver is  intended  to benefit the Agent and the
     Lenders and shall not limit or otherwise  affect such Borrower's  liability
     hereunder or the enforceability of this Agreement,  and (II) that the Agent
     and the Lenders and their successors and assigns are intended beneficiaries
     of this  waiver,  and  agreements  set forth in this  Section 3.7 and their
     rights  under  this  Section  3.7  shall  survive  payment  in  full of the
     Obligations.

          (e) This Agreement  shall in all respects be continuing,  absolute and
     unconditional,  and shall  remain in full force and effect with  respect to
     each Borrower until all  Obligations  created or existing before receipt of
     such  notice  shall  have been  indefeasibly  fully  paid.  No  compromise,
     settlement,  release or  discharge  of, or  indulgence  with respect to, or
     failure,  neglect or omission to enforce or exercise any right against, any
     one or more Borrowers shall release or discharge the other Borrowers.

          (f) EACH  BORROWER  WAIVES  THE  FILING OF A CLAIM WITH A COURT IN THE
     EVENT OF  RECEIVERSHIP  OR  BANKRUPTCY  OF ANY  BORROWER,  AND WAIVES EVERY
     DEFENSE, CAUSE OF ACTION, COUNTERCLAIM OR SETOFF WHICH ANY BORROWER MAY NOW
     HAVE OR  HEREAFTER  MAY HAVE TO ANY  ACTION BY THE  AGENT OR ANY  LENDER IN
     ENFORCING THIS AGREEMENT,  INCLUDING,  WITHOUT  LIMITATION,  EVERY DEFENSE,
     COUNTERCLAIM  OR SETOFF WHICH SUCH  BORROWER MAY NOW HAVE, OR HEREAFTER MAY
     HAVE,  AGAINST  ANOTHER  BORROWER OR ANY OTHER PARTY LIABLE TO THE AGENT OR
     ANY  LENDER  IN ANY  MANNER.  AS  FURTHER  SECURITY,  ANY AND ALL DEBTS AND
     LIABILITIES NOW OR HEREAFTER ARISING AND OWING TO ANY BORROWER BY ANY OTHER
     BORROWER,  OR TO ANY OTHER  PARTY  LIABLE TO THE AGENT OR ANY  LENDER,  ARE
     HEREBY  SUBORDINATED  TO THE AGENT'S AND ANY SUCH LENDER'S  CLAIMS AND UPON
     THE  OCCURRENCE  OF AN EVENT OF DEFAULT  ARE  ASSIGNED TO THE AGENT FOR THE
     BENEFIT OF THE LENDERS.  EACH BORROWER  RATIFIES AND CONFIRMS  WHATEVER THE
     AGENT OR A LENDER MAY DO  PURSUANT  TO THE TERMS  HEREOF,  AND AGREES  THAT
     NEITHER THE AGENT NOR ANY LENDER  SHALL BE LIABLE FOR ANY ERROR IN JUDGMENT
     OR  MISTAKES OF FACT OR LAW.  EACH  BORROWER  HEREBY  AGREES THAT IT MAY BE
     JOINED AS A PARTY  DEFENDANT IN ANY LEGAL  PROCEEDING  (INCLUDING,  BUT NOT
     LIMITED TO, A FORECLOSURE PROCEEDING) INSTITUTED BY THE AGENT OR ANY LENDER
     AGAINST ANY OTHER BORROWER.

          (g)  Should a claim be made upon the  Agent or any  Lender at any time
     for repayment of any amount  received by the Agent or any Lender in payment
     of the Obligations, or any part thereof, whether received from any Borrower
     or received by the Agent or any Lender as the  proceeds of  Collateral,  by
     reason of: (1) any judgment, decree or order of any court or administrative
     body  having  jurisdiction  over the  Agent or any  Lender  or any of their
     property, or (2) any settlement or compromise of any such claim effected by
     the  Agent  or any  Lender,  in its  sole  discretion,  with  the  claimant
     (including a Borrower),  each Borrower  shall remain liable to the Agent or
     any such  Lender  for the  amount so  repaid to the same  extent as if such
     amount had never  originally been received by the Agent or any such Lender,
     notwithstanding  any termination  hereof or the cancellation of any note or
     other  instrument  evidencing  any of the  indebtedness.  To the extent the

                                       18
<PAGE>

     Agent is  required to repay any such  amount,  each  Lender  shall,  to the
     extent  the Agent  previously  paid to such  Lender a portion of the amount
     which must be  repaid,  upon  demand of the Agent,  return to the Agent the
     amount which had previously been paid by the Agent to such Lender.

          (h) To the extent that any payment to, or  realization  by, the Lender
     or the Agent on the Obligations exceeds the limitations of this Section 3.7
     and is otherwise  subject to avoidance and recovery in any such proceeding,
     the  amount  subject  to  avoidance  shall in all  events be limited to the
     amount by which such actual payment or realization exceeds such limitation,
     and this  Agreement as limited shall in all events remain in full force and
     effect and be fully enforceable against such Borrower.  This Section 3.7 is
     intended  solely  to  reserve  the  rights  of the  Lenders  and the  Agent
     hereunder  against each Borrower,  in such proceeding to the maximum extent
     permitted by applicable  Debtor Relief Laws and neither the Borrowers,  any
     guarantor  of the  Obligations  nor any other  Person shall have any right,
     claim or  defense  under  this  Section  3.7 that  would not  otherwise  be
     available under applicable Debtor Relief Laws in such proceeding.

IV.  CONDITIONS PRECEDENT

     4.1 Conditions to Initial Advance, Funding the Term Loan and Closing

     The  obligations  of Lenders to consummate  the  transactions  contemplated
herein  and to make the  initial  Advance  under  the  Revolving  Facility  (the
"Initial Advance"), to fund the Term Loan and to fund the initial Draw under the
Equipment  Acquisition Term Loan (the "Initial Draw")are subject,  in each case,
to the satisfaction,  in the judgment of Agent, in its Permitted Discretion,  of
the following:

          (a) (i) Each  Borrower  shall  have  delivered  to Agent  (A) the Loan
     Documents  to which it is a party,  each  duly  executed  by an  authorized
     officer  of such  Borrower  and the  other  parties  thereto,  (B) the Life
     Insurance Policy,  and (C) a Borrowing  Certificate for the Initial Advance
     and a Draw Notice for the Initial Draw under the Equipment Acquisition Term
     Loan,  executed by an  authorized  officer of such  Borrower  and (ii) each
     Guarantor  (if any) shall have  delivered  to Agent the Loan  Documents  to
     which such  Guarantor is a party,  each duly executed and delivered by such
     Guarantor or an authorized  officer of such Guarantor,  as applicable,  and
     the other parties thereto;

          (b) all in form and substance  satisfactory  to Agent in its Permitted
     Discretion,  Agent shall have  received (i) a report of Uniform  Commercial
     Code  financing  statement,  tax and judgment lien searches  performed with
     respect to Borrowers and any Guarantor in each  jurisdiction  determined by
     Agent in its Permitted  Discretion,  and such report shall show no Liens on
     the Collateral  (other than  Permitted  Liens and Liens to be terminated at
     Closing),  (ii) each document (including,  without limitation,  any Uniform
     Commercial Code financing statement) required by any Loan Document or under
     law or requested by Agent to be filed, registered or recorded to create, in
     favor of Agent,  for the benefit of Lenders,  a first priority  (other than
     with  respect  to  property  or covered by  Priority  Permitted  Liens) and
     perfected  security  interest upon the  Collateral,  (iii) evidence of each
     such filing, registration or recordation and of the payment by Borrowers of
     any necessary fee, tax or expense  relating  thereto,  and (iv) evidence of
     the amount due with respect to the Mississippi  personal property tax owing
     by Borrowers and the payment thereof with proceeds of the Initial Advance;

                                       19
<PAGE>

          (c) Agent  shall  have  received  (i) the  Charter  and Good  Standing
     Documents,  all in form and substance  acceptable to Agent in its Permitted
     Discretion,  (ii) a  certificate  of the  corporate  secretary or assistant
     secretary of each Borrower dated the Closing Date, as to the incumbency and
     signature  of the Persons  executing  the Loan  Documents on behalf of such
     Borrower,  in form and  substance  acceptable  to  Agent  in its  Permitted
     Discretion,  (iii) the written  legal  opinions of counsel  and/or  special
     counsel for Borrowers and each Guarantor,  if any, in each case in form and
     substance satisfactory to Agent in its Permitted Discretion and its counsel
     and  usual  and  customary  for  transactions  of  this  type,  and  (iv) a
     certificate executed by an authorized officer of each Borrower, which shall
     constitute a representation and warranty by such Borrower as of the Closing
     Date, the Borrowing Date for the Initial Advance and the date of funding of
     the Term Loan that the  conditions  contained in this  Agreement  have been
     satisfied;

          (d) Agent shall have  received a  certificate  of the chief  financial
     officer  (or,  in the  absence  of a chief  financial  officer,  the  chief
     executive officer) of each Borrower, in form and substance  satisfactory to
     Agent  in  its  Permitted  Discretion  (each,  a  "Solvency  Certificate"),
     certifying  (i) the solvency of such  Borrower  after giving  effect to the
     transactions and the Indebtedness  contemplated by the Loan Documents,  and
     (ii) as to such Borrower's  financial  resources and anticipated ability to
     meet its obligations and liabilities as they become due, to the effect that
     as of the Closing Date and the Borrowing Date for the Initial Advance,  the
     date of funding of the Term  Loan,  and the date of funding of the  Initial
     Draw under the Equipment  Acquisition Term Facility and after giving effect
     to such transactions and Indebtedness:  (A) the assets of such Borrower, at
     a Fair  Valuation,  exceed  the total  liabilities  (including  contingent,
     subordinated, unmatured and unliquidated liabilities) of such Borrower, and
     (B) no  unreasonably  small  capital  base  with  which  to  engage  in its
     anticipated business exists with respect to such Borrower;

          (e) Agent  shall have  completed  examinations,  the  results of which
     shall be  satisfactory  in form and substance to Agent,  of the Collateral,
     the financial  statements and the books,  records,  business,  obligations,
     financial  condition and operational  state of Borrowers and any Guarantor,
     and  Borrowers  shall  have  demonstrated  to Agent's  satisfaction  in its
     Permitted  Discretion  that (i) their  operations  comply,  in all respects
     deemed material by Agent, in its Permitted Discretion,  with all applicable
     federal,  state,  foreign and local laws,  statutes and  regulations,  (ii)
     their  operations  are not the subject of any  governmental  investigation,
     evaluation or any remedial  action which could result in any expenditure or
     liability deemed material by Agent, in its Permitted Discretion,  and (iii)
     they have no liabilities or obligations  (whether  contingent or otherwise)
     that are deemed material by Agent, in its Permitted Discretion;

          (f) Agent shall have  received (or is  satisfied  that it will receive
     simultaneously  with the  funding of the Term Loan and/or  Initial  Advance
     and/or Initial Draw, as applicable) all fees,  charges and expenses due and
     payable to Agent and  Lenders on or prior to the Closing  Date  pursuant to
     the Loan Documents;

                                       20
<PAGE>

          (g) all in form and substance  satisfactory  to Agent in its Permitted
     Discretion,   Agent  shall  have  received  such  consents,  approvals  and
     agreements from such third parties as Agent and its counsel shall determine
     in their  Permitted  Discretion  are necessary or desirable with respect to
     (i) the Loan Documents and/or the transactions  contemplated  thereby, (ii)
     claims  against any Borrower or any  Guarantor or the  Collateral,  (iii) a
     no-offset   agreement  from  VitaRich   Laboratories,   Inc.,  and/or  (iv)
     agreements,  documents or  instruments  to which  Borrower is a party or by
     which any of its  properties  or assets  are bound or  subject,  including,
     without  limitation,  Landlord  Waivers and  Consents  with respect to each
     property  leased by any Borrower and  Mortgagee  Waivers and Consents  with
     respect  to each  property  owned  by any  Borrower  that is  subject  to a
     mortgage;

          (h) Each Borrower shall be in compliance  with Section 7.7 and Section
     6.5,  and Agent  shall  have  received  original  certificates  of all such
     required insurance policies and confirming that they are in effect and that
     the premiums due and owing with respect  thereto have been paid in full and
     naming  only the Agent,  for the  benefit of itself  and  Lenders,  as sole
     beneficiary or loss payee and additional insured, as appropriate;

          (i) all corporate and other  proceedings,  documents,  instruments and
     other legal matters in connection with the transactions contemplated by the
     Loan Documents (including,  but not limited to, those relating to corporate
     and capital  structures of Borrowers) shall be satisfactory to Agent in its
     Permitted Discretion;

          (j) no default shall exist pursuant to any obligations of any Borrower
     or any Guarantor,  if any, under any material  contract,  and each Borrower
     and each Guarantor  shall be in compliance  with  applicable laws and there
     shall exist no fact,  condition or circumstance  which, with the passage of
     time,  the  giving of notice  or both,  could  reasonably  be  expected  to
     constitute  or become a default  under any  material  contract to which any
     Borrower or any  Guarantor  is a party or any law to which any  Borrower or
     any Guarantor is subject;

          (k) no Borrower, Guarantor or principal or key management personnel of
     any Borrower shall have been indicted or under active  investigation  by an
     U.S. Attorney for a felony crime;

          (l) Borrowers shall have established the Blocked  Account(s)  pursuant
     to Section 2.5;

          (m) Agent shall have  received  copies of all Permits  required for or
     pursuant to which each Borrower and each Guarantor conducts the business in
     which it is  currently  engaged  or is  contemplated  pursuant  to the Loan
     Documents the absence of which to have could  reasonably be expected to be,
     have or result in a Material Adverse Effect;

          (n) Agent  shall have  completed  its due  diligence  examinations  of
     Borrowers,  including,  without limitation, (i) an examination of the terms
     and conditions of all obligations owed by Borrowers and their  Subsidiaries
     deemed  material by Agent,  the results of which shall be  satisfactory  in
     form and substance to Agent and (ii) customer  reference  checks and calls,
     credit  checks,  and  background  checks with  respect to the  relevant key
     management and principals of each Borrower and each Guarantor, if any;

                                       21
<PAGE>

          (o) Agent shall have  received  evidence  (i) of repayment in full and
     termination of all liabilities and obligations of Borrowers to GECC and Dr.
     Pailla M. Reddy and all related  documents,  agreements and instruments and
     of all Liens and Uniform  Commercial  Code  financing  statements  relating
     thereto, including, without limitation, any Liens and/or Uniform Commercial
     Code financing  statements covering or relating to any assets or properties
     of any shareholder of any Borrower,  (ii) of release and termination of, or
     Agent's  authority  to  release  and  terminate,  any and all Liens  and/or
     Uniform  Commercial  Code  financing  statements  in,  on,  against or with
     respect to any of the Collateral  (other than Permitted  Liens),  and (iii)
     that any and all existing  lockbox  arrangements  are either  terminated or
     made subject to and covered by a Lockbox  Agreement as required pursuant to
     Section 2.5;

          (p) there  shall not have  occurred  any  Material  Adverse  Change or
     Material  Adverse  Effect from that which was  reflected  on the  financial
     statements  provided  to Agent or any  liabilities  or  obligations  of any
     nature with respect to any Borrower or any Guarantor which could reasonably
     be likely to have a Material Adverse Effect;

          (q) after giving  effect to the Initial  Advance and  repayment of all
     ANIP payables that are 30 days or more past due, Borrowers must have Excess
     Availability  plus unencumbered cash in deposit accounts subject to Account
     Control  Agreements in favor of Agent of at least $1,000,000 and shall have
     provided to Agent evidence of the foregoing;

          (r) Borrowers  shall have entered into the  Employment  Agreements and
     furnished copies thereof to Agent;

          (s) Agent shall have  received from each  Borrower and  Guarantor,  if
     any, a completed IRS Form 8821;

          (t) Agent  shall have  received  (i) copies of all other  intercompany
     agreements,  management  agreements,  documents relating to borrowed money,
     Capital Leases,  occupancy  leases and other material  contracts,  and (ii)
     such  other  documents  or  materials  as Agent  shall  deem  necessary  or
     appropriate,  each in form  and  substance  satisfactory  to  Agent  in its
     Permitted Discretion;

          (u) Agent shall have received a complete and accurate list of all ANIP
     payables that are 30 days or more past due; and

          (v) Agent shall be  satisfied,  as determined in its sole and absolute
     discretion,  with the results of its financial and operational audit of the
     Borrowers.

     4.2 Conditions to Each Advance and Funding of the Term Loan

     The obligations of Lenders to make any Advance under the Revolving Facility
(including,  without  limitation,  the Initial  Advance) and/or to fund the Term
Loan  and/or  to fund  any  Draw  under  the  Equipment  Acquisition  Term  Loan
(including,   without   limitation,   the  Initial  Draw)  are  subject  to  the
satisfaction,  in the judgment of Agent,  in its  Permitted  Discretion,  of the
following additional conditions precedent:

          (a)  Borrowers  shall have  delivered to Agent,  (i) in the case of an
     Advance, a Borrowing  Certificate for the Advance with necessary supporting
     documentation  and (ii) in the case of a Draw, a Draw Notice with necessary
     supporting  documentation,  each  executed  by  an  authorized  officer  of

                                       22
<PAGE>

     Borrowers,  which shall  constitute  a  representation  and warranty by all
     Borrowers as of the Borrowing  Date that the  conditions  contained in this
     Section 4.2 and in Section 4.1 have been satisfied; provided, however, that
     any  determination  as to whether to fund Advances,  Draws, or extension of
     credit shall be made by Agent, in its sole and absolute discretion;

          (b) each of the  representations  and warranties made by Borrowers and
     Guarantors  in or pursuant to the Loan  Documents  shall be accurate in all
     material  respects  before and after  giving  effect to funding of the Term
     Loan and/or  making such  Advance,  and/or  funding of the Draw (except for
     those representations and warranties made as of a specific date), Borrowers
     and Guarantors  shall be in compliance  with all covenants,  agreements and
     obligations  under the Loan  Documents,  and no Default or Event of Default
     shall have  occurred or be continuing or would exist after giving effect to
     the requested Advance and/or Term Loan and/or Draw on such date;

          (c)  immediately  after giving effect to the requested  Advance,  Term
     Loan, or Draw, the aggregate outstanding principal amount of Advances under
     the Revolving  Facility shall not exceed the lesser of (i) the Facility Cap
     and (ii) the Availability;

          (d) there shall be no liabilities  or obligations  with respect to any
     Borrower of any nature  whatsoever  which,  either  individually  or in the
     aggregate,  could  reasonably  be likely  to have or  result in a  Material
     Adverse Effect;

          (e) Agent shall have received all fees,  charges and expenses  payable
     to Agent  and/or  Lenders  on or prior to such  date  pursuant  to the Loan
     Documents; and

          (f) there  shall not have  occurred  any  Material  Adverse  Change or
     Material Adverse Effect.

V.  REPRESENTATIONS AND WARRANTIES

     Each  Borrower,  jointly and  severally,  represents and warrants as of the
date hereof,  the Closing Date, and each Borrowing  Date, the date of funding of
the Term Loan and the date of any Draw on the Equipment Acquisition Term Loan as
follows:

     5.1 Organization and Authority

     Each Borrower is a corporation or limited liability company duly organized,
validly  existing and in good standing under the laws of its state of formation.
Each  Borrower (a) has all requisite  power and authority to own its  properties
and assets (including,  without limitation,  the Collateral) and to carry on its
business as now being conducted and as  contemplated in the Loan Documents,  (b)
is duly qualified to do business in the jurisdictions set forth on Schedule 5.1,
which  are  all of the  jurisdictions  in  which  failure  so to  qualify  could
reasonably be likely to have or result in a Material Adverse Effect, and (c) has
all requisite  power and authority (i) to execute,  deliver and perform the Loan
Documents to which it is a party, (ii) to borrow hereunder,  (iii) to consummate
the transactions  contemplated  under the Loan Documents,  and (iv) to grant the
Liens with regard to the Collateral  pursuant to the Security Documents to which
it is a party. No Borrower is an "investment  company" registered or required to
be  registered  under the  Investment  Company Act of 1940,  as  amended,  or is
controlled by such an "investment company."

                                       23
<PAGE>

     5.2 Loan Documents and Acquisition Documents

     The execution,  delivery and performance by Borrowers of the Loan Documents
to which any  Borrower  is a party,  and the  consummation  of the  transactions
contemplated  thereby,  (a) have been duly authorized by all requisite action of
such  Borrower and have been duly executed and delivered by or on behalf of such
Borrower;  (b) do not violate any provisions of (i) any applicable law, statute,
rule,  regulation,  ordinance  or  tariff,  (ii) any  order of any  Governmental
Authority  binding  on such  Borrower  or any of its  properties,  or (iii)  the
certificate  of  incorporation  or  bylaws  (or any other  equivalent  governing
agreement or document) of such Borrower,  or any agreement between such Borrower
and its  shareholders,  members,  partners  or  equity  owners or among any such
shareholders,  members, partners or equity owners; (c) are not in conflict with,
and do not result in a breach or default of or  constitute  an event of default,
or an event,  fact,  condition or circumstance  which, with notice or passage of
time,  or both,  would  constitute or result in a conflict,  breach,  default or
event of default under,  any indenture,  agreement or other  instrument to which
such Borrower is a party,  or by which the properties or assets of such Borrower
are bound,  the effect of which  could  reasonably  be  expected  to be, have or
result in a Material Adverse Effect;  (d) except as set forth herein or therein,
will not result in the creation or imposition of any Lien of any nature upon any
of the  properties  or assets of any  Borrower,  and (e)  except as set forth on
Schedule 5.2 and except for filings in connection with the perfection of Agent's
Liens,  do not require the  consent,  approval or  authorization  of, or filing,
registration  or  qualification  with, any  Governmental  Authority or any other
Person.  When executed and  delivered,  each of the Loan Documents to which such
Borrower is a party will constitute the legal,  valid and binding  obligation of
each Borrower,  enforceable  against each Borrower in accordance with its terms,
subject  to the effect of any  applicable  bankruptcy,  moratorium,  insolvency,
reorganization  or other similar law affecting the  enforceability of creditors'
rights  generally  and to the effect of general  principles  of equity which may
limit the availability of equitable  remedies (whether in a proceeding at law or
in equity).

     5.3 Subsidiaries, Capitalization and Ownership Interests

     No  Borrower  has any  Subsidiaries  other  than  those  Persons  listed as
Subsidiaries  on Schedule  5.3 as of the Closing  Date.  Schedule 5.3 states the
authorized and issued capitalization of each Borrower,  and the number and class
of equity securities and/or  ownership,  voting or partnership  interests issued
and  outstanding  of such Borrower and the  beneficial and record owners thereof
(including  options,  warrants and other rights to acquire any of the foregoing)
as of the Closing Date. The  outstanding  equity  securities  and/or  ownership,
voting or partnership  interests of each Borrower have been duly  authorized and
validly  issued and are fully paid and  nonassessable  and each Person listed on
Schedule 5.3 as of the Closing Date owns  beneficially  and of record all of the
equity  securities it is listed as owning free and clear of any Liens other than
Liens  created by the Loan  Documents.  Schedule  5.3 also lists the  directors,
members,  managers  and/or  partners of each  Borrower  as of the Closing  Date.
Except as listed on Schedule  5.3 as of the Closing  Date,  no Borrower (i) owns
any Investment Property nor (ii) owns any interest or participates or engages in
any joint venture, partnership or similar arrangements with any Person.

                                       24
<PAGE>

     5.4 Properties

     Each  Borrower  (a) is the sole  owner and has good,  valid and  marketable
title to, or a valid leasehold  interest in, license of, or right to use, all of
its properties and assets,  including the Collateral,  whether personal or real,
subject to no transfer  restrictions  or Liens of any kind except for  Permitted
Liens,  and (b) is in  compliance  in all material  respects  with each lease or
license to which it is a party or otherwise  bound.  Schedule 5.4 lists all real
properties  (and  their  locations)  owned or  leased  by or to,  and all  other
material assets or property that are leased or licensed by, any Borrower and all
leases  (including  leases of leased real property)  covering or with respect to
such  properties  and assets.  Each  Borrower  enjoys  peaceful and  undisturbed
possession  under all such leases and such  leases are all the leases  necessary
for the operation of such  properties  and assets,  are valid and subsisting and
are in full force and effect.  All personal property and assets of each Borrower
that are material to the  operation of the Business are in good repair,  working
order  and  condition  (normal  wear and tear  excepted)  and are  suitable  and
adequate for the uses for which they are being used or are intended.

     5.5 Other Agreements

     Except as set forth on  Schedule  5.5,  no  Borrower  is (a) a party to any
judgment, order or decree or any agreement,  document or instrument,  or subject
to any  restriction,  which  would  materially  adversely  affect its ability to
execute  and  deliver,  or  perform  under,  any  Loan  Document  or to pay  the
Obligations, (b) in default in the performance, observance or fulfillment of any
obligation,  covenant  or  condition  contained  in any  agreement,  document or
instrument  to which it is a party or to which any of its  properties  or assets
are subject,  which default, if not remedied within any applicable grace or cure
period, could reasonably be expected to be, have or result in a Material Adverse
Effect,  nor is there any event,  fact,  condition or circumstance  which,  with
notice or passage of time or both,  would  constitute  or result in a  conflict,
breach,  default or event of default under,  any of the foregoing  which, if not
remedied within any applicable grace or cure period could reasonably be expected
to be, have or result in a Material Adverse Effect, or (c) a party or subject to
any agreement, document or instrument with respect to, or obligation to pay any,
service or management fee with respect to, the ownership,  operation, leasing or
performance of any of its business.

     5.6 Litigation

     Except as set forth on Schedule 5.6, there is no action,  suit,  proceeding
or investigation  pending or, to its knowledge,  threatened against any Borrower
that (a)  questions or could  reasonably  be expected to prevent the validity of
any of the Loan  Documents or the right of such  Borrower to enter into any Loan
Document or to  consummate  the  transactions  contemplated  thereby,  (b) could
reasonably be expected to be, have or result in, either  individually  or in the
aggregate,  any Material Adverse Change or Material Adverse Effect, or (c) could
reasonably be expected to result in any Change of Control or other change in the
current ownership,  control or management of such Borrower. No Borrower is aware
that there is any basis for the foregoing.  No Borrower is a party or subject to
any audit,  investigation,  order, writ,  injunction,  judgment or decree of any
Governmental  Authority.  There is no action, suit,  proceeding or investigation
initiated  by any  Borrower  currently  pending.  No Borrower  has any  existing
accrued and/or unpaid  Indebtedness to any  Governmental  Authority or any other
governmental payor.

                                       25
<PAGE>

     5.7 Hazardous Materials

     Each Borrower is in compliance in all material respects with all applicable
Environmental  Laws.  Except as set forth in Schedule  5.7, no Borrower has been
notified of any action,  suit,  proceeding or investigation  (a) relating in any
way to compliance by or liability of any Borrower under any Environmental  Laws,
(b) which otherwise deals with any Hazardous Substance or any Environmental Law,
or (c) which  seeks to  suspend,  revoke or  terminate  any  license,  permit or
approval necessary for the generation,  handling, storage, treatment or disposal
of any Hazardous Substance.

     5.8 Tax Returns; Governmental Reports

     Except  as set  forth on  Schedule  5.8,  each  Borrower  (a) has filed all
federal,  state, foreign (if applicable) and local tax returns and other reports
which are  required  by law to be filed by such  Borrower,  and (b) has paid all
taxes,  assessments,  fees and other governmental  charges,  including,  without
limitation,  payroll and other  employment  related taxes, in each case that are
due and  payable,  except  only  for  items  that  such  Borrower  is  currently
contesting in good faith and that are described on Schedule 5.8.

     5.9 Financial Statements and Reports

     All financial  statements and financial  information  relating to Borrowers
that have been or may  hereafter  be  delivered  to Agent by  Borrowers  are (a)
accurate and complete in accordance  with GAAP, (b) consistent with the books of
account and records of Borrowers, (c) have been prepared in accordance with GAAP
on a  consistent  basis  throughout  the  indicated  periods,  except  that  the
unaudited financial statements contain no footnotes or year-end adjustments, and
(d)  present  fairly  in  all  material  respects  the  consolidated   financial
condition,  assets and liabilities and results of operations of Borrowers at the
dates and for the relevant periods  indicated in accordance with GAAP on a basis
consistently  applied.  Borrowers have no material obligations or liabilities of
any kind not disclosed in such audited financial information or statements,  and
since the date of the most recent financial statements submitted to Agent, there
has not occurred any Material  Adverse Change or Material  Adverse Effect or, to
Borrowers'  knowledge,  any other event or condition  that could  reasonably  be
expected to be, have or result in a Material Adverse Effect.

     5.10 Compliance with Law; Business

     Each Borrower (a) is in compliance  with all guidelines,  standards,  laws,
statutes,  rules,  regulations,  ordinances  and  tariffs  of  any  Governmental
Authority  applicable  to such  Borrower,  the Business  and/or such  Borrower's
assets or operations, including, without limitation, the Federal Food, Drug, and
Cosmetic  Act, as amended,  the Dietary  Supplement  Health and Education Act of
1994, as amended,  ERISA and any laws or regulations pertaining to the Business,
(b)  is  in  compliance  with  all  guidelines,   policies,   standards,  rules,
regulations, and requirements of the Consumer Product Safety Commission, the OTC
Monograph System, the United States  Pharmacopeia and other applicable  industry
organization  setting  standards for the Business (an "ISO"),  and (c) is not in

                                       26
<PAGE>

violation of any order or requirement  of any  Governmental  Authority,  ISO, or
other  board  or  tribunal,  except,  in the  case of  (a),  (b),  or (c)  where
noncompliance  or  violation  could not  reasonably  be  expected to be, have or
result in a Material  Adverse  Effect.  There is no event,  fact,  condition  or
circumstance which, with notice or passage of time, or both, would constitute or
result in any noncompliance with, or any violation of, any of the foregoing,  in
each case except  where  noncompliance  or  violation  could not  reasonably  be
expected to be, have or result in a Material  Adverse  Effect.  No Borrower  has
received  any notice  that any  Borrower is not in  material  compliance  in any
respect with any of the  requirements  of any of the foregoing.  No Borrower has
(i) engaged in any  Prohibited  Transactions  as defined in Section 406 of ERISA
and Section 4975 of the Internal Revenue Code of 1986, as amended, and the rules
and  regulations  promulgated  thereunder,  (ii)  failed to meet any  applicable
minimum funding  requirements under Section 302 of ERISA in respect of its plans
and no funding  requirements have been postponed or delayed,  (iii) knowledge of
any  event  or  occurrence  which  would  cause  the  Pension  Benefit  Guaranty
Corporation to institute proceedings under Title IV of ERISA to terminate any of
the employee benefit plans,  (iv) any fiduciary  responsibility  under ERISA for
investments  with respect to any plan  existing for the benefit of Persons other
than  its  employees  or  former  employees,  or (v)  withdrawn,  completely  or
partially,  from any multi-employer pension plans so as to incur liability under
the  MultiEmployer  Pension  Plan  Amendments  of  1980.  With  respect  to each
Borrower,  there exists no event  described in Section 4043 of ERISA,  excluding
Subsections  4043(b)(2)  and 4043(b)(3)  thereof,  for which the thirty (30) day
notice  period  contained  in 12 C.F.R.  ss.  2615.3 has not been  waived.  Each
Borrower  has  maintained  in all material  respects all records  required to be
maintained by any  applicable  Governmental  Authority or ISO. None of Borrowers
nor their respective  predecessors have engaged,  or do not engage,  directly or
indirectly, in any business other than the Business.

     5.11 Intellectual Property

     Except as set  forth on  Schedule  5.11,  no  Borrower  owns,  licenses  or
utilizes, and is not a party to, any patents,  patent applications,  trademarks,
trademark  applications,  service marks,  service mark applications,  registered
copyrights,  copyright  applications,  copyrights,  trade secrets,  trade names,
software or licenses.  The items listed on Schedule 5.11  constitute  all of the
Intellectual  Property  necessary  or required for the  operation of  Borrowers'
business as of the Closing  Date and as proposed to be conducted  and  Borrowers
own or have a valid and enforceable right to use all such Intellectual Property.
All such items are in full force and effect and not in known  conflict  with the
rights of others. No Borrower is in breach of or default under the provisions of
any of the foregoing,  nor is there any event,  fact,  condition or circumstance
which,  with notice or passage of time or both,  would constitute or result in a
conflict, breach, default or event of default under, any of the foregoing which,
if not remedied within any applicable  grace or cure period could  reasonably be
expected to be, have or result in a Material Adverse Effect.

     5.12 Licenses and Permits; Labor

     Each  Borrower is in compliance  with and has all Permits and  Intellectual
Property necessary or required by applicable law, Governmental Authority, or ISO
for the operation of its Businesses as presently conducted and as proposed to be

                                       27
<PAGE>

conducted  except  where  noncompliance,  violation  or lack  thereof  could not
reasonably  be  expected  to be,  have or result in a Material  Adverse  Effect.
Schedule  5.12 lists all  Permits  necessary  or  required  by  applicable  law,
Governmental  Authority, or ISO for the operation of Borrowers' businesses as of
the Closing  Date and as proposed to be conducted  except  where  noncompliance,
violation or lack thereof could not reasonably be expected to be, have or result
in a Material  Adverse Effect.  All Permits  necessary or required by applicable
law, Governmental Authority, or ISO for the operation of Borrowers' business are
in full force and effect  and not in known  conflict  with the rights of others,
except  where such  conflict or lack of being in full force and effect could not
reasonably be expected to be, have or result in a Material  Adverse  Effect.  No
Borrower  (a) is in breach of or  default  under  the  provisions  of any of the
foregoing,  nor is there any event, fact,  condition or circumstance which, with
notice or passage of time or both,  would  constitute  or result in a  conflict,
breach,  default or event of default under,  any of the foregoing  which, if not
remedied within any applicable grace or cure period could reasonably be expected
to be,  have or result in a  Material  Adverse  Effect,  and (b) is nor has been
involved in any labor dispute, strike, walkout or union organization.

     5.13 No Default; Solvency

     There does not exist any  Default  or Event of Default or any event,  fact,
condition or circumstance which, with the giving of notice or passage of time or
both, would likely  constitute or result in a Default or Event of Default.  Each
Borrower is and, after giving effect to the  transactions  and the  Indebtedness
contemplated  by the  Loan  Documents,  will be  solvent  and  able to meet  its
obligations and liabilities as they become due, and the assets of such Borrower,
at a  Fair  Valuation,  exceed  the  total  liabilities  (including  contingent,
subordinated,  unmatured and unliquidated  liabilities) of such Borrower, and no
unreasonably small capital base with which to engage in its anticipated business
exists with respect to such Borrower.

     5.14 Disclosure

     No Loan  Document  nor  any  other  agreement,  document,  certificate,  or
statement  furnished to Agent by or on behalf of any Borrower in connection with
the transactions  contemplated by the Loan Documents,  nor any representation or
warranty  made  by any  Borrower  in any  Loan  Document,  contains  any  untrue
statement  of  material  fact or omits to state any fact  necessary  to make the
factual statements  therein taken as a whole not materially  misleading in light
of the circumstances under which it was furnished. There is no fact known to any
Borrower which has not been disclosed to Agent in writing which could reasonably
be expected to be, have or result in a Material Adverse Effect.

     5.15 Existing Indebtedness; Investments, Guarantees and Certain Contracts

     Except as  contemplated  by the Loan Documents or as otherwise set forth on
Schedule 5.15, no Borrower (a) has outstanding  Indebtedness,  (b) is subject or
party to any mortgage, note, indenture,  indemnity or guarantee of, with respect
to or evidencing any Indebtedness of any other Person,  and/or (c) owns or holds
any equity or long-term debt investments in, nor has any outstanding advances to
or any  outstanding  guarantees  for,  the  obligations  of, or any  outstanding
borrowings  from,  any other  Person.  Each  Borrower has performed all material
obligations  required  to  be  performed  by  such  Borrower  pursuant  to or in
connection  with any items  listed on  Schedule  5.15 and there has  occurred no

                                       28
<PAGE>

breach, default or event of default under any document evidencing any such items
or any fact,  circumstance,  condition or event which, with the giving of notice
or passage of time or both, would  constitute or result in a breach,  default or
event  of  default  thereunder.  Except  for  Permitted  Indebtedness,   actions
permitted  under  Section 7.4 and as set forth on Schedule  5.15,  no  Borrower,
directly or indirectly,  has made, and there does not exist, any loans, advances
or  guarantees  to or for the  benefit  of any Person or  agreements  to assume,
guarantee,  endorse,  contingently  agree to purchase or otherwise become liable
for or upon or incur any obligation of any Person.

     5.16 Affiliated Agreements

     Except as set forth on Schedule 5.16, (i) there are no existing or proposed
agreements,  arrangements,  understandings or transactions  between any Borrower
and any of such Borrower's officers, members, managers, directors, stockholders,
partners,  other interest  holders,  employees,  or Affiliates or any members of
their respective families,  and (ii) to each Borrower's  knowledge,  none of the
foregoing Persons are directly or indirectly,  indebted to or have any direct/or
indirect  ownership,  partnership  or voting  interest in, any  Affiliate of any
Borrower or any Person with which any  Borrower has a business  relationship  or
which competes with any Borrower  (except that any such Persons may own stock in
(but not  exceeding  two (2%) percent of the  outstanding  capital stock of) any
publicly traded company that may compete with any Borrower.

     5.17 Insurance

     Each Borrower has in full force and effect such  insurance  policies as are
customary in its industry and as may be required pursuant to Section 6.5 hereof.
All such  insurance  policies as of the Closing Date are listed and described on
Schedule 5.17. No Borrower has assumed or is subject to any risks or liabilities
other than those relating to its Business.

     5.18 Names; Location of Offices,  Records and Collateral;  Deposit Accounts
and Investment Property

     During the preceding  five (5) years,  none of Borrowers,  nor any of their
respective predecessors, have conducted business under or used any name (whether
corporate,  partnership or assumed) other than as shown on Schedule 5.18A.  Each
Borrower is (or such Borrower's  predecessors  were) the sole owner(s) of all of
its names listed on Schedule  5.18A,  and any and all business done and invoices
issued in such names are such  Borrower's  (or any such  predecessors'  ) sales,
business and invoices. Each trade name of each Borrower represents a division or
trading style of such Borrower.  Each Borrower  maintains,  and such  Borrower's
predecessors maintained, their respective places of business and chief executive
offices only at the locations set forth on Schedule  5.18B or, after the Closing
Date, as  additionally  disclosed to Agent in writing in accordance with Section
7.4, and all Accounts of such Borrower arise, originate and are located, and all
of the  Collateral  and all books and records in connection  therewith or in any
way relating thereto or evidencing the Collateral are located and shall be only,
in  and at  such  locations.  All  of the  Collateral  is  located  only  in the
continental  United States.  Schedule 5.18C lists all of each Borrower's Deposit
Accounts and Investment Property as of the Closing Date.

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<PAGE>

     5.19 Non-Subordination

     The Obligations are not subordinated in any way to any other obligations of
any Borrower or to the rights of any other Person.

     5.20 Accounts

     In determining which Accounts are Eligible  Receivables,  Agent may rely on
all  statements  and  representations  made by  Borrowers  with  respect  to any
Account.  Unless otherwise  indicated in writing to Agent,  each Account of each
Borrower (a) is genuine and in all material  respects what it purports to be and
is not  evidenced by a judgment,  (b) arises out of a completed,  bona fide sale
and delivery of goods or rendering of services by such  Borrower in the ordinary
course of  business  and in  accordance  with the terms  and  conditions  of all
purchase orders, contracts, certifications, participations, certificates of need
and other documents  relating  thereto or forming a part of the contract between
such Borrower and the Account Debtor, (c) is for a liquidated amount maturing as
stated  in a claim or  invoice  covering  such  sale of goods  or  rendering  of
services,  a copy of which has been  furnished  or is  available  to Agent,  (d)
together with Agent's security interest  therein,  is not and will not be in the
future (by voluntary act or omission by such  Borrower),  subject to any offset,
lien, deduction,  defense, dispute,  counterclaim or other adverse condition, is
absolutely  owing to such  Borrower and is not  contingent in any respect or for
any reason  (other than  pursuant  to  Permitted  Liens or offsets,  deductions,
defenses, disputes or counterclaims arising in the ordinary course of business),
(e) there  are no  facts,  events or  occurrences  which in any way  impair  the
validity  or  enforceability  thereof  or  tend to  reduce  the  amount  payable
thereunder from the face amount of the claim or invoice and statements delivered
to Agent with respect  thereto (other than those arising in the ordinary  course
of business),  (f) to best of such Borrower's knowledge,  (i) the Account Debtor
thereunder  had the  capacity  to  contract  at the time any  contract  or other
document  giving  rise  thereto was  executed  and (ii) such  Account  Debtor is
solvent, (g) to best of such Borrower's  knowledge,  there are no proceedings or
actions which are threatened or pending  against any Account  Debtor  thereunder
which might  result in any  material  adverse  change in such  Account  Debtor's
financial  condition  or the  collectability  thereof,  (h) has been  billed and
forwarded to the Account Debtor for payment in accordance  with  applicable laws
and is in compliance and conformance with any requisite procedures, requirements
and  regulations  governing  payment by such Account Debtor with respect to such
Account,  and (i) such  Borrower  has  obtained  and  currently  has all Permits
necessary in the generation thereof.

     5.21 Legal Investments; Use of Proceeds

     The Borrowers  are not engaged in the business of extending  credit for the
purpose of  purchasing  or  carrying  any  "margin  stock" or "margin  security"
(within the meaning of Regulations T, U or X issued by the Board of Governors of
the  Federal  Reserve  System),  and no  proceeds  of the Loans  will be used to
purchase or carry any margin  stock or margin  security  or to extend  credit to
others for the  purpose of  purchasing  or carrying  any margin  stock or margin
security.

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<PAGE>

     5.22 Broker's or Finder's Commissions

     Except as set forth on  Schedule  5.22  (the  payment  of which is the sole
obligation of the Borrower and shall be made upon the Closing Date), no broker's
or  finder's or  placement  fee or  commission  will be payable to any broker or
agent engaged by the Borrowers or any of its officers,  directors or agents with
respect  to the issue of the Notes,  or the  transactions  contemplated  by this
Agreement except for fees payable to Agent and the Lenders.  The Borrowers agree
to indemnify  Agent and Lenders and hold them  harmless  from against any claim,
demand or  liability  for  broker's  or finder's  or  placement  fees or similar
commissions,  whether  or not  payable  by the  Borrowers,  alleged to have been
incurred  in  connection  with such  transactions,  other than any  broker's  or
finder's  fees  payable to  Persons  engaged  by Agent or  Lenders  without  the
knowledge of the Borrowers.

     5.23 Survival

     Each Borrower makes the  representations  and warranties  contained  herein
with the  knowledge  and  intention  that Agent and Lenders are relying and will
rely thereon. All such representations and warranties will survive the execution
and  delivery  of this  Agreement,  the  Closing  and the  making of any and all
Advances and/or the funding of the Term Loan and/or the funding of any Draw.

VI.  AFFIRMATIVE COVENANTS

     Each Borrower, jointly and severally, covenants and agrees that, until full
performance and satisfaction,  and indefeasible  payment in full in cash, of all
the Obligations and termination of this Agreement:

     6.1 Financial Statements, Reports and Other Information

          (a) Financial Reports. Borrowers shall furnish to Agent (i) as soon as
     available  and in any event  within one hundred  five (105)  calendar  days
     after the end of each fiscal year of Borrowers, audited annual consolidated
     financial statements of Borrowers,  including the notes thereto, consisting
     of a consolidated  balance sheet at the end of such  completed  fiscal year
     and  the  related  consolidated   statements  of  income,  cash  flows  and
     stockholders'  equity  for such  completed  fiscal  year,  which  financial
     statements  shall be prepared and  certified  without  qualification  by an
     independent  certified public  accounting firm satisfactory to Agent in its
     Permitted  Discretion and  accompanied by related  management  letters,  if
     available,  together with  unaudited,  management  prepared,  consolidating
     balance  sheets  and  statements  of income,  cash flows and  stockholders'
     equity for such completed fiscal year, (ii) as soon as available and in any
     event within fifty (50) calendar days after the end of each fiscal  quarter
     of  Borrowers  (other  than the last fiscal  quarter of each fiscal  year),
     unaudited consolidated and consolidating  financial statements of Borrowers
     consisting of a balance sheet and statements of income,  and cash flows and
     stockholders'  equity  as of the end of the  immediately  preceding  fiscal
     quarter,  (iii) as soon as available  and in any event  within  thirty (30)
     calendar  days after the end of each  calendar  month  (other than the last
     calendar  month  of  a  fiscal   quarter),   unaudited   consolidated   and
     consolidating  financial  statements  of Borrowers  consisting of a balance
     sheet and statements of income,  cash flows and stockholders'  equity as of
     the end of the immediately preceding calendar month, and (iv) within thirty

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<PAGE>

     (30) calendar days after the end of each calendar  month,  a listing of all
     proposed  non-recurring  adjustments to EBITDA during such calendar  month.
     All such  financial  statements  shall be prepared in accordance  with GAAP
     consistently applied with prior periods (subject, as to interim statements,
     to lack of footnotes  and year-end  adjustments).  With each  quarterly and
     annual  financial  statement,  Borrowers  shall also  deliver a  compliance
     certificate  of its chief  financial  officer in the form  satisfactory  to
     Agent  stating that (A) such person has reviewed the relevant  terms of the
     Loan  Documents and the condition of Borrowers,  (B) no Default or Event of
     Default has  occurred or is  continuing,  or, if any of the  foregoing  has
     occurred or is  continuing,  specifying the nature and status and period of
     existence  thereof and the steps taken or proposed to be taken with respect
     thereto,  (C) Borrowers are in compliance  with all financial  covenants in
     this Agreement attached as Annex I hereto.

          (b)  Other  Materials.  Borrowers  shall  furnish  to Agent as soon as
     available,  and in any  event  within  ten (10)  calendar  days  after  the
     preparation or issuance  thereof or such other time as set forth below,  as
     applicable:  (i)  copies of such  financial  statements  (other  than those
     required to be delivered pursuant to Section 6.1(a)) prepared by, for or on
     behalf of  Borrowers  and any  other  notes and  reports  related  thereto,
     including,  without  limitation,  any pro forma  financial  statements  and
     monthly board reports, (ii) any reports, returns, information,  notices and
     other materials that any Borrower shall send to its stockholders,  members,
     partners  and/or  other  equity  owners  generally  or by class at any time
     together  with any and all  supporting  documentation  related  thereto and
     notices  of  or  to  directors  of  meetings   together   with   supporting
     documentation related thereto,  (iii) within fifty (50) calendar days after
     the end of each calendar quarter, a report listing and describing  material
     details about any and all new contracts entered into by any Borrower during
     the calendar  quarter then ended,  (iv) within  thirty (30)  calendar  days
     after the end of each calendar month, a monthly  operating  report for each
     Borrower,  which report shall include Capital  Expenditures for such month,
     payments (if any)  received on the  Indebtedness  due from NFLI during such
     month, the amount of Borrowers'  depreciation and amortization  during such
     month  and a  detailed  comparison  of the  actual  year-to-date  operating
     results against (A) the projected  operating budget for such period and (B)
     the actual operating  results for the same period during the prior calendar
     year, in each case inclusive of profit and loss statements,  (v) within ten
     (10)  calendar  days of the end of each  month,  a month end summary of the
     full physical inventory test count at Bactolac conducted as of the last day
     of the prior  month;  (vi) copies of any reports  submitted to Borrowers by
     their  independent  accountants in connection with any interim audit of the
     books of such Person or any of its Affiliates and copies of each management
     control letter provided by such  independent  accountants,  (vii) copies of
     any and all  materials,  documents,  instrument and other items that relate
     to, secure,  evidence,  give rise to or generate or otherwise relate to the
     Collateral,  (ix) copies of all  pleadings  and motions filed by or against
     any Borrower in  connection  with the  bankruptcy  proceedings  relating to
     NFLI; and (x) such additional information,  documents,  statements, reports
     and other  materials as Agent may request in its Permitted  Discretion from
     time to time.  Borrowers  shall  furnish to Agent not less than thirty (30)
     calendar days prior to the  commencement of each fiscal year in the Term, a
     list setting forth the location of the Collateral.  Borrowers shall furnish
     to Agent within ten (10) calendar days after the end of each calendar month
     a report specifying all unpaid amounts,  fees,  payables and balances owing
     to any Governmental  Authority (other than for taxes) as of the last day of
     such ended calendar month.

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<PAGE>

          (c) Notices.  Borrowers shall promptly,  and in any event within three
     (3)  Business  Days after any  Borrower  or any  authorized  officer of any
     Borrower  obtains  knowledge  thereof,  notify  Agent in writing of (i) any
     pending or threatened litigation, suit, investigation, arbitration, dispute
     resolution proceeding or administrative or regulatory proceeding brought or
     initiated by or against any Borrower or otherwise affecting or involving or
     relating  to any  Borrower or any of  Borrowers'  property or assets to the
     extent  (A) the  amount in  controversy  exceeds  $25,000  individually  or
     $75,000 in the aggregate  for all such events,  or (B) to the extent any of
     the  foregoing  seeks  injunctive  relief,  (ii)  any  Default  or Event of
     Default,  which notice  shall  specify the nature and status  thereof,  the
     period of  existence  thereof  and what action is proposed to be taken with
     respect thereto, (iii) any other development,  event, fact, circumstance or
     condition  that could  reasonably  be  expected  to be, have or result in a
     Material  Adverse  Effect,  in each case  describing  the nature and status
     thereof and the action proposed to be taken with respect thereto,  (iv) any
     notice  received by any Borrower  from any payor of a claim,  suit or other
     action  such payor has,  claims or has filed  against any  Borrower  for an
     amount in excess of $25,000  individually or $75,000 in the aggregate,  (v)
     any  matter(s)  in the amount of  $25,000,  individually  or $75,000 in the
     aggregate, in existence at any one time affecting the value, enforceability
     or  collectability  of any of the Collateral,  (vi) any notice given by any
     Borrower to any other lender of any  Borrower and shall  furnish to Agent a
     copy of such  notice,  (vii)  receipt  of any  notice or  request  from any
     Governmental  Authority or ISO  regarding  any audit or  inspection  of the
     Borrowers or of any product  quality issues or potential  product recall or
     of any  liability or claim of liability in the amount equal to or exceeding
     $25,000  individually  or $75,000 in the  aggregate,  (viii) receipt of any
     notice by any Borrower regarding  termination of any lease of real property
     (other than by expiration of the term) or any senior executive, (ix) if any
     Account or other Collateral  becomes  evidenced or secured by an Instrument
     or Chattel Paper,  (x) the filing,  recording or assessment of any federal,
     state,  local or foreign tax lien against the  Collateral  or any Borrower,
     (xi) any  action  taken  or  threatened  to be  taken  by any  Governmental
     Authority  (or any  notice of any of the  foregoing)  with  respect  to any
     Borrower  which  could  reasonably  be  expected to be, have or result in a
     Material Adverse Effect or with respect to any Collateral, (xii) any change
     in the  corporate  name of any  Borrower  or  Guarantor,  (xiii)  the loss,
     termination or expiration of any material contract to which any Borrower is
     a party or by which its  properties or assets are subject or bound,  and/or
     (xv) any breach,  termination,  rescission  or notice of the  foregoing  by
     VitaRich  Laboratories,  Inc. of the no offset agreement received therefrom
     in favor of Agent and Lenders.

          (d) Consents. Borrowers shall obtain and deliver to Agent from time to
     time all  required  consents,  approvals  and  agreements  from such  third
     parties  as  Agent  shall  determine  are  necessary  or  desirable  in its
     Permitted  Discretion and that are  satisfactory  to Agent in its Permitted
     Discretion  with  respect to (i) the Loan  Documents  and the  transactions
     contemplated  thereby, (ii) claims against any Borrower, or the Collateral,
     and/or (iii) any  agreements,  consents,  documents or instruments to which
     any  Borrower  is a party or by  which  any  properties  or  assets  of any
     Borrower or any of the  Collateral  is or are bound or subject,  including,
     without limitation, Landlord Waivers and Consents with respect to leases.

          (e) Operating Budget.  Borrowers shall furnish to Agent on or prior to
     the Closing Date and for each fiscal year of Borrowers  thereafter not less
     than thirty (30)  calendar  days prior to the  commencement  of such fiscal
     year,  consolidated and  consolidating  month by month projected  operating
     budgets,  projections,  profit  and  loss  statements,  income  statements,

                                       33
<PAGE>

     balance sheets and cash flow reports of and for Borrowers for such upcoming
     fiscal year  (including  an income  statement for and a balance sheet as at
     the end of each  month),  and  annual  projections  for  the  fiscal  years
     remaining  in the  Term,  in each case  prepared  in  accordance  with GAAP
     consistently  applied with prior periods  (subject to lack of footnotes and
     year-end adjustments).

          (f)  Shareholder  Reports  and  Government  Filings.  Borrowers  shall
     furnish to Agent,  concurrently with the sending or filing thereof,  a copy
     of any proxy  statements,  financial  statements or reports which Borrowers
     have made available to their shareholders or other equity owners as a class
     or any class or series of shareholders or other equity owners as a class or
     series  and a  copy  of  any  regular,  periodic  and  special  reports  or
     registration  statements  which  Borrowers  file  with the  Securities  and
     Exchange Commission, any stock exchange or any Governmental Authority.

          (g)  Deposit  Accounts,   Other  Accounts  and  Investment   Property.
     Borrowers  shall (i)  promptly,  and in any event  within five (5) Business
     Days after any Borrower (A)  establishes  any Deposit  Account,  securities
     account,  money market account or any similar  account,  or (B) becomes the
     owner of any  Investment  Property,  in each case,  on and with  respect to
     which  Agent,  for itself and the benefit of the  Lenders,  does not have a
     perfected,  first priority Lien,  notify Agent of such, and thereafter (ii)
     deliver to Agent,  within ten (10) Business Days,  documentation to perfect
     Agent's,  for its benefit and the benefit of the Lenders,  Lien thereon, in
     each  case in form and  substance  acceptable  to  Agent  in its  Permitted
     Discretion.

          (h)  Intellectual  Property.  Borrowers  shall furnish to Agent within
     five (5) Business Days after June 30 and December 31 of each year, a report
     specifying any Intellectual Property interests acquired by, obtained by, or
     licensed to Borrowers  during the  six-month  period then ended,  and shall
     deliver to Agent,  within ten (10) Business Days,  documentation to perfect
     Agent's,  for its  benefit  and the  benefit of the  Lenders,  Lien in such
     Intellectual  Property,  in each case in form and  substance  acceptable to
     Agent in its Permitted Discretion.

          (i) Payroll  Taxes.  Without  limiting  or being  limited by any other
     provision  of  any  Loan  Document,   Borrowers  shall  retain  and  use  a
     third-party  acceptable  to Agent in its  Permitted  Discretion to process,
     manage and pay the  payroll  taxes of the  Borrowers  and shall cause to be
     delivered  to Agent  within  ten (10)  calendar  days after the end of each
     calendar  month a report of such  payroll  taxes of the  Borrowers  for the
     immediately preceding calendar month and evidence of payment thereof.

     6.2 Payment of Obligations

     Borrowers  shall make full and timely  indefeasible  payment in cash of the
principal  of and  interest on the Loans,  Advances  and all other  Obligations.
Simultaneously  upon  any  prepayment  in full  of the  Revolving  Loan  and all
Advances thereunder and termination of the Revolving  Facility,  Borrowers shall
make full  indefeasible  payment in cash of the principal of and interest on the
Term Loan, Equipment Acquisition Term Loan and all other Obligations.

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<PAGE>

     6.3 Conduct of Business and Maintenance of Existence and Assets

     Each  Borrower  shall (a) conduct  its  business  in  accordance  with good
business practices customary to its industry, (b) engage principally in the same
or similar lines of business substantially as heretofore conducted,  (c) collect
its  Accounts  in the  ordinary  course of  business,  (d)  maintain  all of its
material properties, assets and equipment used or useful in its business in good
repair,  working order and condition (normal wear and tear and damage by fire or
other casualty  excepted and except as may be disposed of in the ordinary course
of  business  and in  accordance  with  and  subject  to the  terms  of the Loan
Documents),  (e) from time to time to make all necessary  repairs,  renewals and
replacements  thereof,  (f)  maintain  and keep in full  force  and  effect  its
existence and all material  Permits and  qualifications  to do business and good
standing in its  jurisdiction of formation and each other  jurisdiction in which
the  ownership  or lease of  property or the nature of its  business  makes such
Permits or qualification necessary and in which failure to maintain such Permits
or  qualification  could  reasonably  be  expected  to be,  have or  result in a
Material Adverse Effect; (g) remain in good standing and maintain  operations in
all jurisdictions in which currently located, except where the failure to remain
in good standing or maintain  operations would not reasonably be expected to be,
have or result in a Material Adverse Effect,  and (h) maintain,  comply with and
keep in full force and effect its  existence and all  Intellectual  Property and
Permits  necessary  to  conduct  the  Business  the loss of which or  failure to
maintain  could  reasonably  be  expected  to be,  have or result in a  Material
Adverse Effect.

     6.4 Compliance with Legal and Other Obligations

     Each Borrower shall (a) comply with all  guidelines,  standards,  policies,
laws, statutes, rules,  regulations,  ordinances and tariffs of all Governmental
Authorities  and ISOs  applicable  to it or its  products,  business,  assets or
operations,  (b) pay all taxes, assessments,  fees, governmental charges, claims
for labor, supplies,  rent and all other obligations or liabilities of any kind,
except  liabilities  being  contested in good faith and against  which  adequate
reserves have been  established,  (c) perform in accordance  with its terms each
contract,  agreement or other  arrangement to which it is a party or by which it
or any of the Collateral is bound, and (d) properly file all reports required to
be filed with any  Governmental  Authority and/or ISO, except under clauses (a),
(b), (c), and/or (d) where the failure to comply, pay, file or perform would not
reasonably be expected to be, have or result in a Material Adverse Effect.  Each
Borrower shall conduct its manufacturing operations and shall maintain in effect
quality control and assurance programs in accordance with FDA good manufacturing
practices and guidelines and all other standards,  guidelines,  policies,  laws,
statutes,  rules,  and  regulations of all  Governmental  Authorities  and ISO's
applicable  to it or its products,  business,  assets,  or operations  where the
failure to so comply would not reasonably be expected to be, have or result in a
Material Adverse Effect.

     6.5 Insurance

     Each Borrower shall (a) ensure that the Life Insurance Policy is fully paid
and in full  force  and  effect  at all  times,  (b) keep  all of its  insurable
properties  and assets  adequately  insured  in all  material  respects  against
losses,  damages and hazards as are  customarily  insured  against by businesses
engaging in similar  activities or lines of business or owning similar assets or
properties  and  at  least  the  minimum  amount  required  by  this  Agreement,

                                       35
<PAGE>

applicable  law and any  agreement to which such Borrower is a party or pursuant
to which such Borrower  provides any services,  including,  without  limitation,
liability,   errors  and  omissions  and  property  and  business   interruption
insurance, as applicable;  and maintain general liability insurance at all times
against  liability  on account of damage to persons  and  property  having  such
limits,  deductibles,  exclusions and  co-insurance  and other provisions as are
customary  for a  business  engaged  in  activities  similar  to  those  of such
Borrower;  and (c) maintain insurance under all applicable workers' compensation
laws;  all of the  foregoing  insurance  policies and coverage  levels to (i) be
satisfactory  in form and substance to Agent in its Permitted  Discretion,  (ii)
name Agent, for the benefit of itself and Lenders,  as loss payee and additional
insured thereunder,  as applicable (except that Agent shall be named, for itself
and for the benefit of Lenders, as sole beneficiary of the Life Insurance Policy
and the Collateral  Assignment of Life Insurance  Policy),  and (iii)  expressly
provide  that they  cannot be  altered,  amended  or  modified  or  canceled  or
terminated  without thirty (30) Business Days prior written notice to Agent, and
that they inure to the benefit of Agent,  for the benefit of itself and Lenders,
notwithstanding any action or omission or negligence of or by such Borrower,  or
any insured thereunder.

     6.6 True Books

     Each  Borrower  shall (a) keep true,  complete and accurate (in  accordance
with  GAAP)  books  of  record  and  account  in  accordance  with  commercially
reasonable  business practices in which true and correct entries are made of all
of its dealings and  transactions in all material  respects;  and (b) set up and
maintain on its books such  reserves as may be required by GAAP with  respect to
doubtful  accounts and all taxes,  assessments,  charges,  levies and claims and
with respect to its business, and include such reserves in its quarterly as well
as year end financial statements.

     6.7 Inspection; Periodic Audits

     Each Borrower shall permit the  representatives of Agent, at the expense of
Borrowers,  from time to time  during  normal  business  hours  upon  reasonable
notice, to (a) visit and inspect any of such Borrower's offices or properties or
any other place where Collateral is located to inspect the Collateral  and/or to
examine and/or audit all of such Borrower's books of account,  records,  reports
and other papers, (b) make copies and extracts  therefrom,  and (c) discuss such
Borrower's business,  operations,  prospects,  properties,  assets, liabilities,
condition and/or Accounts with its officers and independent  public  accountants
(and by this provision such officers and  accountants  are authorized to discuss
the foregoing),  provided,  however, that no such notice shall be required to do
any of the foregoing if an Event of Default has occurred and is continuing.

     6.8 Further Assurances; Post Closing

     At Borrowers'  cost and expense,  each  Borrower  shall (a) within five (5)
Business  Days (or such  longer  period in the case of actions  involving  third
parties  as  determined  by Agent in its  Permitted  Discretion)  after  Agent's
demand,  take such further actions,  obtain such consents and approvals and duly
execute  and deliver  such  further  agreements,  assignments,  instructions  or
documents as Agent may request in its Permitted  Discretion  with respect to the
purposes, terms and conditions of the Loan Documents and the consummation of the
transactions  contemplated thereby,  whether before, at or after the performance

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<PAGE>

and/or consummation of the transactions contemplated hereby or the occurrence of
a Default or Event of Default,  (b) without  limiting  and  notwithstanding  any
other  provision  of any Loan  Document,  execute  and  deliver,  or cause to be
executed and delivered,  such agreements and documents,  and take or cause to be
taken  such  actions,  and  otherwise  perform,  observe  and  comply  with such
obligations,  as are set forth on  Schedule  6.8,  and (c) upon the  exercise by
Agent, any Lender or any of their Affiliates of any power,  right,  privilege or
remedy pursuant to any Loan Document or under  applicable law or at equity which
requires any consent, approval, registration,  qualification or authorization of
any Person (including,  without limitation, any Governmental Authority), execute
and  deliver,  or  cause  the  execution  and  delivery  of,  all  applications,
certificates,  instruments  and other documents that may be so required for such
consent,  approval,  registration,   qualification  or  authorization.   Without
limiting the foregoing,  upon the exercise by Agent,  any Lender or any of their
Affiliates  of any right or remedy under any Loan  Document  which  requires any
consent, approval or registration with, consent,  qualification or authorization
by, any Person,  each Borrower shall execute and deliver, or cause the execution
and delivery of, all applications, certificates, instruments and other documents
that Agent, any Lender or such Affiliate may be required to obtain for itself or
on its  behalf  for  such  consent,  approval,  registration,  qualification  or
authorization.  Agent may, and upon the request of Required  Lenders,  shall, at
any time and from time to time,  request a  certificate  from an officer of each
Borrower  representing  that all  conditions  precedent  to the  making of Loans
contained herein are satisfied.  Lenders may, at their respective option,  cease
to make any further  Loans until Agent has received  such  certificate,  and, in
addition,  Agent has  determined  that such  conditions  are  satisfied,  in its
Permitted Discretion.

     6.9 Payment of Indebtedness

     Except as otherwise prescribed in the Loan Documents,  Borrowers shall pay,
discharge  or otherwise  satisfy at or before  maturity  (subject to  applicable
grace periods and, in the case of trade  payables,  to ordinary  course  payment
practices)  all of its material  obligations  and  liabilities,  except when the
amount or  validity  thereof is being  contested  in good  faith by  appropriate
proceedings  and such  reserves  as Agent may deem proper and  necessary  in its
Permitted Discretion shall have been made.

     6.10 Lien Searches

     If Liens other than  Permitted  Liens exist,  Borrowers  immediately  shall
take,  execute and deliver all actions,  documents and instruments  necessary to
release and terminate such Liens.

     6.11 Use of Proceeds

     Borrowers  shall  use  the  proceeds  from  Advances  under  the  Revolving
Facility,  the Term Loan and the  Equipment  Acquisition  Term Loan only for the
separate purposes set forth in the recitals to this Agreement.

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<PAGE>

     6.12 Collateral Documents; Security Interest in Collateral

          (a) On  demand of Agent in its  Permitted  Discretion,  each  Borrower
     shall make available to Agent copies of any and all documents, instruments,
     materials and other items that relate to, secure, evidence, give rise to or
     generate or otherwise involve  Collateral,  including,  without limitation,
     Accounts and Inventory of such  Borrower.  Each Borrower shall (i) execute,
     obtain,  deliver,  file,  register  and/or  record  any and  all  financing
     statements,  continuation statements,  stock powers,  instruments and other
     documents,  or cause the  execution,  filing,  registration,  recording  or
     delivery of any and all of the  foregoing,  that are  necessary or required
     under law or  otherwise  or  reasonably  requested by Agent to be executed,
     filed,  registered,  obtained,  delivered or recorded to create,  maintain,
     perfect,  preserve,  validate  or  otherwise  protect  the  pledge  of  the
     Collateral  to Agent and  Agent's,  for its  benefit and the benefit of the
     Lenders,  perfected  first priority (other than with respect to property or
     assets covered by Priority  Permitted  Liens) Lien on the  Collateral  (and
     each Borrower  irrevocably  grants Agent the right, at Agent's  option,  to
     file  any  or  all  of  the  foregoing),  (ii)  maintain,  or  cause  to be
     maintained,  at all  times,  the  pledge  of the  Collateral  to Agent  and
     Agent's,  for its benefit and the benefit of the  Lenders,  first  priority
     (other  than with  respect  to  property  or  assets  covered  by  Priority
     Permitted  Liens) and perfected Lien on the Collateral,  (iii)  immediately
     upon  learning  thereof,  report  to  Agent  any  reclamation,   return  or
     repossession  of goods in excess of $25,000  individually or $75,000 in the
     aggregate,  and (iv) defend the Collateral and Agent's, for its benefit and
     the benefit of the  Lenders,  first  priority  (other than with  respect to
     property or assets covered by Priority  Permitted Liens) and perfected Lien
     thereon  against all claims and demands of all Persons at any time claiming
     the same or any interest  therein  adverse to Agent,  and pay all costs and
     expenses  (including,   without  limitation,   in-house  documentation  and
     diligence  fees and  legal  expenses  and  reasonable  attorneys'  fees and
     expenses) in connection with such defense,  which may at Agent's discretion
     be added to the Obligations.

          (b) If,  after the date  hereof,  any  Borrower  shall (i)  obtain any
     registered  Trademark,   Patent  or  Copyright,   or  apply  for  any  such
     registration in the United States Patent and Trademark Office or the United
     States Copyright Office, as applicable,  or in any similar office or agency
     in the United States, any State thereof, any political  subdivision thereof
     or in any other country, or (ii) becomes the owner of any Trademark, Patent
     or  Copyright  registrations  or  applications  for  Trademark,  Patent  or
     Copyright  registration  used in the  United  States or any State  thereof,
     political  subdivision  thereof or in any other country,  the provisions of
     Section 2.13 hereof shall automatically apply thereto.  Upon the request of
     Agent,  Borrowers  shall promptly  execute and deliver to Agent any and all
     assignments,  agreements,  instruments,  documents and such other papers as
     may be  requested  by Agent in its  Permitted  Discretion  to evidence  the
     security interest in and conditional  assignment of such Trademark,  Patent
     or Copyright, as the case may be, in favor of Agent (for the benefit of the
     Lenders).  Borrowers shall: (i) prosecute diligently any Trademark,  Patent
     or Copyright  application at any time pending;  (ii) make  application  for
     registration or issuance of all new  Trademarks,  Patents and Copyrights as
     reasonably deemed appropriate by Borrowers; (iii) preserve and maintain all
     rights in the  Intellectual  Property;  and (iv) use their best  efforts to
     obtain any  consents,  waivers or  agreements  necessary to enable Agent to
     exercise its remedies with respect to such Intellectual Property. Borrowers
     shall  not  abandon  any  material  right to file a  Trademark,  Patent  or
     Copyright  application  nor shall  Borrowers  abandon any material  pending
     Trademark,  Patent or Copyright application,  or material Trademark, Patent
     or Copyright without the prior written consent of Agent.

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<PAGE>

          (c) Upon Agent's request,  Borrowers shall (i) make available to Agent
     the original  certificates of title for Borrowers' owned motor vehicles for
     which a certificate of title has been issued and (ii) property execute such
     forms as  required  by Agent to  register  Agent's  (for the benefit of the
     Lenders) liens on such certificates of title.

     6.13 Taxes and Other Charges

     All payments and  reimbursements  to Agent,  for its own account and/or for
the benefit of Lenders,  made under any Loan Document shall be free and clear of
and without deduction for all taxes, levies, imposts,  deductions,  assessments,
charges or withholdings,  and all liabilities with respect thereto of any nature
whatsoever,  excluding  taxes to the extent imposed on each Lender's net income.
If any  Borrower  or any  Guarantor  shall be required by law to deduct any such
amounts from or in respect of any sum payable  under any Loan Document to Agent,
for its own account  and/or for the benefit of Lenders,  then the sum payable to
Agent, for its own account and/or for the benefit of Lenders, shall be increased
as may be necessary so that, after making all required  deductions,  each Lender
receives  an  amount  equal  to the  sum it  would  have  received  had no  such
deductions been made.  Notwithstanding any other provision of any Loan Document,
if at any time after the  Closing or the making of any Advance or funding of the
Term Loan (a) any change in any existing law, regulation, treaty or directive or
in the  interpretation  or  application  thereof,  (b) any new law,  regulation,
treaty or directive enacted or any interpretation or application thereof, or (c)
compliance by Agent or any Lender with any request or directive  (whether or not
having the force of law) from any Governmental Authority:  (i) subjects Agent or
such  Lender  to  any  tax,  levy,  impost,  deduction,  assessment,  charge  or
withholding of any kind whatsoever with respect to any Loan Document, or changes
the basis of taxation of payments to Agent,  for its own account  and/or for the
benefit of  Lenders,  of any amount  payable  thereunder  (except for net income
taxes, or franchise taxes imposed in lieu of net income taxes, imposed generally
by  federal,  state or local  taxing  authorities  with  respect to  interest or
commitment fees or other fees payable hereunder or changes in the rate of tax on
the overall net income of Agent and/or each Lender), or (ii) imposes on Agent or
Lenders  any  other   condition  or  increased  cost  in  connection   with  the
transactions  contemplated thereby or participations  therein; and the result of
any of the  foregoing  is to increase  the cost to Agent or Lenders of making or
continuing or maintaining any Loan hereunder or to reduce any amount  receivable
hereunder,  then, in any such case,  Borrowers shall promptly pay to Agent,  for
its own  account  and/or for the  benefit of  Lenders,  any  additional  amounts
necessary to compensate  Agent and each Lender,  on an after-tax basis, for such
additional cost or reduced amount as determined by Agent and/or such Lender.  If
Agent or any Lender becomes entitled to claim any additional amounts pursuant to
this Section 6.13 it shall promptly  notify  Borrowers of the event by reason of
which  Agent or such  Lender has  become so  entitled,  and each such  notice of
additional  amounts payable  pursuant to this Section 6.13 submitted by Agent or
such Lender to Borrowers shall, absent manifest error, be final,  conclusive and
binding for all purposes.

     6.14 Inventory Covenants

     With  respect  to the  Inventory:  (a) each  Borrower  shall  at all  times
maintain  correct and accurate  inventory  records  reasonably  satisfactory  to
Agent;  (b) each Borrower  shall not remove any Inventory from the locations set
forth or permitted  herein,  without the prior written consent of Agent,  except
for sales of Inventory in the ordinary course of Borrower's  business and except

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<PAGE>

to move  Inventory  directly from one location set forth or permitted  herein to
another such location; (c) such Borrower shall produce, use, store, maintain and
sell the Inventory with all reasonable  care and caution and in accordance  with
applicable  standards of any insurance and in conformity with  applicable  laws,
standards and guidelines (including, without limitation, the requirements of the
(i) Federal Food, Drug and Cosmetics Act, as amended and all rules,  regulations
and orders related thereto,  the Dietary  Supplement Health and Education Act of
1994, as amended, and all rules, regulations,  and orders related thereto, (iii)
all standards and guidelines of all applicable  ISOs and (iv) Federal Fair Labor
Standards Act of 1938, as amended and all rules,  regulations and orders related
thereto);  (d) each Borrower assumes all  responsibility  and liability  arising
from or  relating  to the  production,  use,  sale or other  disposition  of the
Inventory;  (e) each  Borrower  shall  not sell  Inventory  to any  customer  on
approval,  or any other  basis  which  entitles  the  customer  to return or may
obligate such Borrower to repurchase  such  Inventory;  (f) each Borrower  shall
keep the Inventory in good and marketable condition; and (g) each Borrower shall
not,  without prior written notice to Agent,  acquire or accept any Inventory on
consignment or approval.

     6.15 Colorado Checking Account

     1. Parent may maintain a checking  account at a Colorado bank convenient to
the  Parent  and such  checking  account  will not be  subject  to the  Lender's
requirement  that a Control Account  Agreement to be in effect for such checking
account so long as not more than  $50,000  shall be on deposit in such  checking
account at any time and Parent shall  provide to Agent monthly  statements  from
the bank where such checking  account is maintained  confirming  that Parent has
complied with this restriction.

VII.  NEGATIVE COVENANTS

     Each Borrower, jointly and severally, covenants and agrees that, until full
performance and satisfaction,  and indefeasible  payment in full in cash, of all
the Obligations and termination of this Agreement:

7.1      Financial Covenants

     No Borrower shall  violate,  and each Borrower shall fully comply with, the
financial  covenants  set  forth on Annex I to this  Agreement,  which  annex is
incorporated herein and made a part hereof.

     7.2 Indebtedness

     No  Borrower   shall  create,   incur,   assume  or  suffer  to  exist  any
Indebtedness, except the following (collectively, "Permitted Indebtedness"): (a)
Indebtedness  under  the  Loan  Documents,  (b) any  Indebtedness  set  forth on
Schedule  7.2  and  replacements  thereof;  (c)  Capitalized  Lease  Obligations
incurred  after the  Closing  Date and  other  Indebtedness  incurred  after the
Closing  Date  pursuant to purchase  money Liens  permitted  by Section  7.3(e);
provided,  that the aggregate  amount thereof  outstanding at any time shall not
exceed  $360,000.00,  and  accounts  payable  to  trade  creditors  and  current
operating  expenses (other than for borrowed money) which are not aged more than
sixty (60)  calendar days from the billing date or thirty (30) days from the due

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<PAGE>

date, in each case  incurred in the ordinary  course of business and paid within
such time  period,  unless  the same are being  contested  in good  faith and by
appropriate  and lawful  proceedings  and such  reserves,  if any,  with respect
thereto  as are  required  by  GAAP  and  deemed  adequate  by  such  Borrower's
independent accountants shall have been reserved to the satisfaction of Agent in
its Permitted Discretion.  No Borrower shall make prepayments on any existing or
future  Indebtedness  to any  Person  other than to Agent,  for its own  account
and/or for the benefit of Lenders,  or to the extent  specifically  permitted by
this Agreement.

     7.3 Liens

     No Borrower shall create,  incur,  assume or suffer to exist any Lien upon,
in or against,  or pledge of, any of the  Collateral or any of its properties or
assets  or any of its  shares,  securities  or  other  equity  or  ownership  or
partnership  interests,  whether  now owned or  hereafter  acquired,  except the
following (collectively,  "Permitted Liens"): (a) Liens under the Loan Documents
or otherwise  arising in favor of Agent,  for the benefit of itself and Lenders,
(b) Liens imposed by law for taxes,  assessments or charges of any  Governmental
Authority  for claims not yet due or which are being  contested in good faith by
appropriate  proceedings  and with respect to which  adequate  reserves or other
appropriate  provisions are being  maintained by such Person in accordance  with
GAAP to the satisfaction of Agent in its Permitted Discretion, (c) (i) statutory
Liens of  landlords  (provided  that any such  landlord  has executed a Landlord
Waiver and Consent in form and substance  satisfactory to Agent in its Permitted
Discretion),  and of carriers,  warehousemen,  mechanics and/or materialmen, and
(ii)  other  Liens  imposed  by law or that  arise  by  operation  of law in the
ordinary course of business from the date of creation thereof, in each case only
for  amounts  not yet  due or  which  are  being  contested  in  good  faith  by
appropriate  proceedings  and with respect to which  adequate  reserves or other
appropriate  provisions are being  maintained by such Person in accordance  with
GAAP to the  satisfaction  of  Agent  in its  Permitted  Discretion,  (d)  Liens
incurred or deposits made in the ordinary course of business (including, without
limitation,   surety  bonds  and  appeal  bonds)  in  connection  with  workers'
compensation, unemployment insurance and other types of social security benefits
or to secure the performance of tenders, bids, leases, contracts (other than for
the  repayment  of  Indebtedness),   statutory  obligations  and  other  similar
obligations,  (e) purchase money Liens (i) securing Indebtedness permitted under
Section  7.2(c),  or (ii) in  connection  with the  purchase  by such  Person of
equipment in the normal course of business;  provided,  that such purchase money
liens  attach  only  to  the  equipment  acquired  thereby  and  such  payables,
Indebtedness  and amounts shall not exceed any limits on  Indebtedness  provided
for herein and shall otherwise be Permitted  Indebtedness  hereunder,  (f) Liens
necessary and desirable for the operation of such Person's  business,  provided,
that with  respect  to this  clause  (f) Agent has  consented  to such  Liens in
writing  before their  creation and existence and the priority of such Liens and
the debt secured thereby are both subject and subordinate in right of repayment,
liens, security and remedies and in all other respects to the Liens securing the
Collateral  and to the  Obligations  and all of the rights and remedies of Agent
and each Lender,  all in form and  substance  satisfactory  to Agent in its sole
discretion; and (g) Liens disclosed on Schedule 7.3 as of the Closing Date.

     7.4  Investments;   Investment  Property;  New  Facilities  or  Collateral;
Subsidiaries

     No Borrower,  directly or indirectly,  shall (a) merge with, purchase, own,
hold,  invest in or otherwise acquire any obligations or stock or securities of,
or any other  interest  in, or all or  substantially  all of the  assets of, any

                                       41
<PAGE>

Person or any joint venture,  (b) purchase,  own,  hold,  invest in or otherwise
acquire any  Investment  Property  (except those set forth on Schedule 5.3 as of
the Closing Date and Cash  Equivalents  with respect to which Agent,  for itself
and the benefit of the Lenders, has a perfected, first priority Lien in form and
substance  satisfactory  to Agent in its Permitted  Discretion),  or (c) make or
permit to exist any loans,  advances or  guarantees to or for the benefit of any
Person  or  assume,  guarantee,  endorse,  contingently  agree  to  purchase  or
otherwise become liable for or upon or incur any obligation of any Person (other
than (i) those created by the Loan Documents,  (ii) Permitted  Indebtedness  set
forth on Schedule  7.2,  (iii) trade credit  extended in the ordinary  course of
business,  (iv) advances for business travel and similar temporary advances made
in the ordinary course of business to officers, directors and employees, and (v)
the  endorsement of negotiable  instruments for deposit or collection or similar
transactions  in the ordinary  course of  business).  No  Borrower,  directly or
indirectly,  shall purchase,  lease, own, operate,  hold, invest in or otherwise
acquire (A) any property or asset or any Collateral  that is located  outside of
the  continental  United  States,  or (B)  any  Collateral  that is  located  at
locations other than those set forth on Schedule 5.18B, unless with respect to a
new location within the continental United States such Borrower shall provide to
Agent at least  thirty  (30)  Business  Days prior  written  notice and obtain a
Landlord  Waiver and Consent in favor of Agent prior to using such new location.
No Borrower shall have any Subsidiaries  other than (i) the Subsidiaries  listed
on Schedule 5.3 or (ii) such Subsidiaries  which execute a Joinder Agreement and
become a party to such of the Loan  Documents  as Agent shall  determine  in its
Permitted  Discretion  and the  securities of such  Subsidiaries  are pledged to
Agent,  for its  benefit and the  benefit of the  Lenders,  pursuant to a Pledge
Agreement.

     7.5 Dividends; Redemptions; Equity

     Notwithstanding  any provision of any Loan Document,  no Borrower shall (a)
declare, pay or make any dividend or distribution on any shares of capital stock
or  other   securities  or  ownership   interests   (other  than   dividends  or
distributions  payable in its stock,  or split-ups or  reclassifications  of its
stock),  (b)  apply any of its  funds,  property  or assets to the  acquisition,
redemption  or other  retirement  of any capital  stock or other  securities  or
interests  or of any  options  to  purchase  or  acquire  any  of the  foregoing
(provided,  however,  that such  Borrower  may  redeem  its  capital  stock from
terminated  employees,  non-employee  directors and consultants pursuant to, but
only to the extent required under, the terms of the related  employment or other
compensation-related  agreements  as long as no Default or Event of Default  has
occurred  and is  continuing  or would be caused by or  result  therefrom),  (c)
otherwise  make any payments,  dividends or  Distributions  to any  stockholder,
director,  member,  partner or other equity owner in such  Person's  capacity as
such (other than payments or  Distributions  from one Borrower to another),  (d)
make any  payment of any  management,  service or related or similar  fee to any
Person;  or (e)  issue,  sell or  create  any  capital  stock  or  other  equity
securities other than Permitted Securities and Permitted Options.

     7.6 Transactions with Affiliates

     Notwithstanding any provision of any Loan Document, no Borrower shall enter
into or consummate any transaction of any kind with any of its Affiliates (other
than another  Borrower) or any Guarantor or any of their  respective  Affiliates
other than: (a) salary,  bonus, employee stock option and other compensation and
employment  arrangements  with directors or employees in the ordinary  course of

                                       42
<PAGE>

business;  provided, that no payments of any bonus, compensation or remuneration
or otherwise  (except normal salaries  consistent with past practices)  shall be
permitted if a Default or Event of Default has occurred and remains in effect or
would be caused by or result from such payment,  (b) distributions and dividends
permitted  pursuant to Section 7.5, (c) transactions with Agent or any Affiliate
of Agent, or (d) other  transactions  and payments under and pursuant to written
agreements  entered  into  by and  between  a  Borrower  and  one or more of its
Affiliates  that both (i) reflect and  constitute  transactions  and payments on
overall  terms at least as favorable to such Borrower as would be the case in an
arm's length  transaction  between  unrelated parties of equal bargaining power,
and  (ii) if  Agent  requests,  are  subject  to such  subordination  terms  and
conditions as determined by Agent in its Permitted  Discretion;  provided,  that
notwithstanding the foregoing or any provision of any Loan Document, no Borrower
shall (A) enter into or  consummate  any  transaction  or agreement  pursuant to
which  it  becomes  a  party  to any  mortgage,  note,  indenture  or  guarantee
evidencing  any  Indebtedness  of any of its  Affiliates  or otherwise to become
responsible  or  liable,  as a  guarantor,  surety  or  otherwise,  pursuant  to
agreement  for any  Indebtedness  of any  such  Affiliate  (other  than  another
Borrower),  (B)  enter  into or make  any  payment  pursuant  to any  management
agreement  or other  similar  services  arrangement  with any of its  Affiliates
(other than another Borrower),  or (C) make any payment to any of its Affiliates
in excess of $10,000  individually or $50,000 in the aggregate without the prior
written consent of Agent (other than payments pursuant to transactions permitted
under  clauses (a), (b) or (d) of this Section 7.6).  Notwithstanding  any other
provision of any Loan Document,  no Borrower shall enter into,  make, take or do
any  transaction,  payment or action  permitted  under  Section  7.6 or make any
payment  to an  Affiliate  if a Default  or Event of Default  has  occurred  and
remains in effect or would be caused by or result therefrom (other than payments
specifically permitted under clause (a) of this Section 7.6).

     7.7 Charter Documents; Fiscal Year; Dissolution; Use of Proceeds; Insurance
Policies; Disposition of Collateral; Taxes; Trade Names

     No Borrower shall (a) amend,  modify,  restate or change its certificate of
incorporation  or bylaws or similar charter  documents in a manner that would be
adverse to Agent or any Lender,  (b) change its state of  organization or change
its corporate  name without  thirty (30)  Business Days prior written  notice to
Agent,  (c) change its fiscal year, (d) amend,  alter or suspend or terminate or
make  provisional  in any material  way, any Permit the  suspension,  amendment,
alteration or termination  of which could  reasonably be expected to be, have or
result in a Material  Adverse Effect without the prior written consent of Agent,
which  consent shall not be  unreasonably  withheld,  (e) wind up,  liquidate or
dissolve  (voluntarily or  involuntarily)  or commence or suffer any proceedings
seeking or that would  result in any of the  foregoing,  (f) use any proceeds of
any  Loans  for  "purchasing"  or  "carrying"   "margin  stock"  as  defined  in
Regulations  T, U or X of the Board of Governors of the Federal  Reserve  System
for any use not contemplated or permitted by this Agreement,  (g) amend, modify,
restate or change  any  insurance  policy in any  material  respect  (including,
without  limitation,  any increase in the amount of any  deductibles  payable by
Borrowers  under  any such  insurance  policy  or any  change  in the  coverage,
coverage amount,  beneficiaries,  loss payees and/or additional  insureds),  (h)
sell, lease, transfer,  pledge, assign or otherwise dispose of any Collateral or
any interest  therein  (except as permitted under this  Agreement),  (i) engage,
directly or indirectly,  in any business other than the Business, (j) change its
federal tax employer  identification number or establish new or additional trade
names without providing not less than thirty (30) days advance written notice to
Agent, or (j) revoke,  alter or amend any Tax Information  Authorization (on IRS
Form 8821 or otherwise) given to Agent.

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<PAGE>

     7.8 Transfer of Assets

          (a) No  Borrower  shall  sell,  lease,  transfer,  pledge,  assign  or
     otherwise dispose of any Collateral or any interest therein, or agree to do
     any of the foregoing, except that:

               (i) any  Borrower  may  lease  (other  than  by a  sale-leaseback
          transaction) as lessee real or personal property or surrender all or a
          portion of a lease of the same, in each case in the ordinary course of
          business  (so long as such  lease  does not create or result in and is
          not otherwise a Capitalized  Lease  Obligation  prohibited  under this
          Agreement),  provided  that  Landlord  Waivers and  Consents  shall be
          obtained  and  delivered  to Agent  with  respect to any lease of real
          property;

               (ii)  any  Borrower  may  sell  obsolete,  worn  out or  replaced
          equipment or excess  equipment no longer needed in the ordinary course
          of business  other than  Eligible  Equipment the purchase of which was
          financed through an Equipment Acquisition Term Loan;

               (iii) any Borrower may sell  Inventory in the ordinary  course of
          business; and

               (iv) any Borrower may sell material  assets or properties only so
          long  as  such  Borrower   complies  with  the  mandatory   prepayment
          provisions of Section 2.11 in connection therewith.

          (b) Borrowers shall not transfer any material  Collateral,  whether in
     one  transaction or a series of  transactions,  to any location for which a
     Landlord Waiver and Consent has not been obtained.

     7.9 Contingent Obligations and Risks

     No  Borrower  shall  enter  into  any  Contingent  Obligations  or  assume,
guarantee,  endorse,  contingently  agree to purchase or otherwise become liable
for or upon or  incur  any  obligation  of any  Person  (other  than  any  other
Borrower);  provided,  however, that nothing contained in this Section 7.9 shall
prohibit  any  Borrower  from  endorsing  checks in the  ordinary  course of its
business. No Borrower shall assume or become subject to any risks or liabilities
other than those relating to its respective Business.

     7.10 Truth of Statements

     No Borrower  shall furnish to Agent or any Lender any  certificate or other
document that contains any untrue  statement of a material fact or that omits to
state a  material  fact  necessary  to make it not  misleading  in  light of the
circumstances under which it was furnished.

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<PAGE>

     7.11 Intentionally Omitted.

     7.12 Intentionally Omitted.

     7.13 Negative Pledge.

          (a) Except for  Permitted  Liens of type  described in clauses (b) and
     (c) of Section 7.3 hereof,  no Borrower shall pledge or grant a Lien on any
     real property  which it owns at any time to any Person other than Agent for
     itself and the benefit of Lenders.

          (b)  Except for  Permitted  Liens of type  described  in clause (b) of
     Section 7.3 hereof,  no Borrower  shall pledge or grant a Lien on any motor
     vehicles  which it owns at any time to any  Person  other  than  Agent  for
     itself and the benefit of Lenders.

VIII. EVENTS OF DEFAULT

     The  occurrence  of any one or more of the  following  shall  constitute an
"Event of Default":

          (a)  Borrowers  shall  fail to pay any  amount on the  Obligations  or
     provided for in any Loan  Document  when due (in all cases,  whether on any
     payment  date,  at  maturity,  by  reason  of  acceleration,  by  notice of
     intention to prepay, by required prepayment or otherwise);

          (b) any  representation,  statement or warranty made or deemed made by
     any  Borrower  or  any  Guarantor  in any  Loan  Document  or in any  other
     certificate,  document, report or opinion delivered in conjunction with any
     Loan Document to which it is a party,  shall not be true and correct in all
     material  respects or shall have been false or  misleading  in any material
     respect  on the date when made or deemed to have been made  (except  to the
     extent already qualified by materiality, in which case it shall be true and
     correct  in all  respects  and  shall  not be  false or  misleading  in any
     respect) except those made as of a specific date;

          (c) any Borrower or any Guarantor or other party  thereto,  other than
     Agent or any Lender, shall be in violation,  breach or default of, or shall
     fail to  perform,  observe  or  comply  with any  covenant,  obligation  or
     agreement  set forth in, or any event of  default  occurs  under,  any Loan
     Document and such violation,  breach,  default, event of default or failure
     shall not be cured within the applicable period set forth in the applicable
     Loan Document; provided that, with respect to the affirmative covenants set
     forth in Article VI (other  than  Sections  6.3(f),  6.9 and 6.11 for which
     there  shall be no cure  period and  Section 6.2 for which there shall be a
     cure period to the extent  indicated in subsection (a) above),  there shall
     be a thirty (30)  calendar day cure period  commencing  from the earlier of
     (i)  Receipt by such  Person of  written  notice of such  breach,  default,
     violation  or  failure,  and  (ii) the time at  which  such  Person  or any
     authorized  officer thereof knew or became aware, or should reasonably have
     known or been aware, of such failure, violation, breach or default;

                                       45
<PAGE>

          (d) (i) any of the  Loan  Documents  ceases  to be in full  force  and
     effect,  or (ii) any Lien created  thereunder  ceases to constitute a valid
     first  priority  (other than with respect to property or assets  covered by
     Priority  Permitted  Liens)  perfected Lien on the Collateral in accordance
     with the terms  thereof,  or Agent,  for the benefit of itself and Lenders,
     ceases  to have a valid  perfected  first  priority  security  interest  in
     (subject  to  Priority  Permitted  Liens)  any  of  the  Collateral  or any
     securities  pledged  to  Agent,  for the  benefit  of itself  and  Lenders,
     pursuant to the Security Documents;

          (e) (i) one or more  judgments  or decrees  is  rendered  against  any
     Borrower or any Guarantor in an amount in excess of $37,500 individually or
     $75,000 in the  aggregate  (excluding  judgments  to the extent  covered by
     insurance of such  Person),  which is/are not  satisfied,  stayed  (pending
     appeal or  otherwise),  vacated or  discharged of record within thirty (30)
     calendar days of being rendered;

          (f) (i) any default or breach  occurs,  which is not cured  within any
     applicable  grace  period or waived,  (x) in the payment of any amount with
     respect to any Indebtedness (other than the Obligations) of any Borrower or
     any Guarantor in excess of $75,000 individually or in the aggregate, (y) in
     the  performance,  observance or fulfillment of any provision  contained in
     any  agreement,  contract,  document or instrument to which any Borrower or
     any Guarantor is a party or to which any of their  properties or assets are
     subject  or bound (1) that is a  material  (as  determined  by Agent in its
     Permitted  Discretion)  agreement of such  Borrower or  Guarantor  and such
     default or breach  continues for more than any  applicable  grace period or
     permits the other party  thereto to terminate  such  agreement,  setoff any
     amounts or  otherwise  reduce or limit any amounts owed by such other party
     thereunder,  (2) under or pursuant to which any  Indebtedness  in excess of
     $75,000  individually  or in the  aggregate was issued,  created,  assumed,
     guaranteed  or secured and such default or breach  continues  for more than
     any applicable grace period or permits the holder of any such  Indebtedness
     to accelerate the maturity thereof,  or (3) that is between any Borrower or
     any  Guarantor  and Agent or any Lender or Affiliate of Agent or any Lender
     (other than the Loan  Documents),  or (ii) any Indebtedness of any Borrower
     or any Guarantor in excess of $75,000  individually  or in the aggregate is
     declared to be due and payable or is required to be prepaid  (other than by
     a regularly scheduled payment) prior to the stated maturity thereof, or any
     obligation  of such  Person for the  payment of  Indebtedness  in excess of
     $75,000  individually or in the aggregate  (other than the  Obligations) is
     not paid  when due or  within  any  applicable  grace  period,  or any such
     obligation  becomes  or is  declared  to be  due  and  payable  before  the
     expressed maturity thereof, or there occurs any event which would cause any
     such obligation to become, or allow any such obligation to be declared, due
     and payable;

          (g) any Borrower or any Guarantor shall (i) be unable to pay its debts
     generally  as they become due,  (ii) file a petition  under any  insolvency
     statute,  (iii) make a general assignment for the benefit of its creditors,
     (iv)  commence a proceeding  for the  appointment  of a receiver,  trustee,
     liquidator or conservator of itself or of the whole or any substantial part
     of its property or shall otherwise be dissolved or liquidated,  or (v) file
     a petition  seeking  reorganization  or liquidation or similar relief under
     any Debtor Relief Law or any other applicable law or statute;

                                       46
<PAGE>

          (h) (i) a court of  competent  jurisdiction  shall (A) enter an order,
     judgment or decree appointing a custodian, receiver, trustee, liquidator or
     conservator  of  any  Borrower  or  any  Guarantor  or  the  whole  or  any
     substantial  part of any such  Person's  properties,  which shall  continue
     unstayed and in effect for a period of sixty (60) calendar  days, (B) shall
     approve a petition  filed  against any  Borrower or any  Guarantor  seeking
     reorganization,  liquidation  or similar relief under the any Debtor Relief
     Law or any other  applicable law or statute,  which is not dismissed within
     sixty (60) calendar days or, (C) under the  provisions of any Debtor Relief
     Law or other  applicable  law or statute,  assume custody or control of any
     Borrower or any  Guarantor or of the whole or any  substantial  part of any
     such Person's  properties,  which is not  irrevocably  relinquished  within
     sixty (60) calendar  days, or (ii) there is commenced  against any Borrower
     or  any  Guarantor  any  proceeding  or  petition  seeking  reorganization,
     liquidation  or similar  relief  under any  Debtor  Relief Law or any other
     applicable  law or  statute,  which  (A) is not  unconditionally  dismissed
     within sixty (60) calendar days after the date of  commencement,  or (B) is
     with  respect to which any  Borrower or any  Guarantor  takes any action to
     indicate its approval of or consent;

          (i) (i) any Change of Control occurs, (ii) any Material Adverse Effect
     or  Material  Adverse  Change  occurs,  or (iii) any  Borrower  ceases  any
     material  portion of its  business  operations  as conducted at the Closing
     Date and the other transactions contemplated herein;

          (j) Agent or any Lender  receives any  indication or evidence that any
     Borrower or any Guarantor  may have directly or indirectly  been engaged in
     any  type  of  activity  which,  in  Agent's  Permitted  Discretion,  might
     reasonably  result in forfeiture of any material (as determined by Agent in
     its Permitted  Discretion)  Collateral to any Governmental  Authority which
     shall have  continued  unremedied for a period of twenty (20) calendar days
     after written notice from Agent;

          (k) an event of  default  occurs  under any other  Loan  Document  and
     remains unremedied or uncured for any applicable cure periods;

          (l) uninsured damage to, or loss, theft or destruction of, any portion
     of the Collateral occurs that exceeds $75,000 in the aggregate;

          (m)  any  Borrower  or any of its  directors  or  senior  officers  is
     criminally  indicted or convicted of or under (a) a felony,  or (b) any law
     that could lead to a forfeiture of any material (as  determined by Agent in
     its Permitted Discretion) Collateral;

          (n) the issuance of any process for levy, attachment or garnishment or
     execution  upon or  prior  to any  judgment  against  any  Borrower  or any
     Guarantor or any of its or their material property or assets or against any
     of the  Collateral,  in each  case  which  is/are  not  satisfied,  stayed,
     vacated,  dismissed or discharged within thirty (30) calendar days of being
     issued or executed; or

          (o) any Borrower or any Guarantor, as applicable, does, or enters into
     or becomes a party to any  agreement  or  commitment  to do, or cause to be
     done,  any of the  things  described  in this  Article  VIII  or  otherwise
     prohibited  by any Loan  Document  (subject  to any cure  periods set forth
     therein);

     then,  and in any such event,  notwithstanding  any other  provision of any
     Loan  Document,  (I) Agent may (and at the  request of  Requisite  Lenders,
     shall),  by  notice  to  Borrowers  (i)  terminate   Lenders'   obligations
     hereunder, whereupon the same shall immediately terminate, and (ii) declare

                                       47
<PAGE>

     all or any of the Loans and/or  Notes,  all interest  thereon and all other
     Obligations  to be due and  payable  immediately  (except in the case of an
     Event of Default under  Section  8(d),  (g), or (h) (other than an Event of
     Default under Section 8(g) or (h) with respect to any Guarantor),  in which
     event all of the foregoing shall  automatically  and without further act by
     Agent or any Lender be due and payable and  Lenders  obligations  hereunder
     shall terminate;  provided,  that, with respect to non-material breaches or
     violations that  constitute  Events of Default under clause (ii) of Section
     8(d),  there shall be a five (5) Business Day cure period  commencing  from
     the earlier of (A) Receipt by the  applicable  Person of written  notice of
     such breach or violation or of any event, fact or circumstance constituting
     or resulting in any of the foregoing, and (B) the time at which such Person
     or any  authorized  officer  thereof knew or became  aware,  or should have
     known or been aware,  of such breach or violation  and  resulting  Event of
     Default or of any event, fact or circumstance  constituting or resulting in
     any of the foregoing)),  in each case without presentment,  demand, protest
     or further notice of any kind, all of which are hereby  expressly waived by
     Borrowers, and (II) effective immediately upon Receipt of notice from Agent
     (unless  specifically  prohibited and provided for in Article VII, in which
     case effective  immediately  upon an Event of Default without any action of
     Agent or Lenders), no action permitted to be taken under Article VII hereof
     may be taken.

IX.  RIGHTS AND REMEDIES AFTER DEFAULT

     9.1 Rights and Remedies

          (a) In addition to the  acceleration  provisions  set forth in Article
     VIII above,  upon the occurrence and  continuation  of an Event of Default,
     Agent  shall have the right to (and at the  request of  Requisite  Lenders,
     shall)  exercise any and all rights,  options and remedies  provided for in
     any Loan Document, under the UCC or at law or in equity, including, without
     limitation,  the right to (i) apply any  property  of any  Borrower  or any
     Guarantor held by Agent,  for the benefit of Lenders,  or Lenders to reduce
     the Obligations, (ii) foreclose the Liens created under the Loan Documents,
     (iii)  realize  upon,  take  possession  of and/or sell any  Collateral  or
     securities  pledged,  with or without judicial  process,  (iv) exercise all
     rights and powers with  respect to the  Collateral  as any  Borrower or any
     Guarantor,  as  applicable,  might  exercise,  (v) collect and send notices
     regarding the Collateral, with or without judicial process, (vi) by its own
     means or with judicial  assistance,  enter any premises at which Collateral
     and/or  pledged  securities  are  located,  or render any of the  foregoing
     unusable or dispose of the  Collateral  and/or  pledged  securities on such
     premises without any liability for rent, storage, utilities, or other sums,
     and no Borrower or Guarantor  shall  resist or interfere  with such action,
     (vii) at Borrowers' expense, require that all or any part of the Collateral
     be assembled and made  available to Agent at any place  designated by Agent
     in its Permitted Discretion, (viii) reduce or otherwise change the Facility
     Cap,  the   Receivables   Percentage,   the   Inventory   Percentage,   the
     Availability,  the Maximum  Equipment  Acquisition  Term Loan  Amount,  the
     Equipment  Percentage,  and/or any component of the foregoing,  and/or (ix)
     relinquish  or abandon any  Collateral  or  securities  pledged or any Lien
     thereon.  Notwithstanding any provision of any Loan Document, Agent, in its
     Permitted  Discretion,  shall have the right, at any time that any Borrower
     fails to do so, and from time to time, without prior notice, to: (i) obtain
     insurance covering any of the Collateral to the extent required  hereunder;
     (ii) pay for the  performance of any of the  Obligations;  (iii)  discharge
     taxes,  levies and/or Liens on any of the Collateral  that are in violation
     of any  Loan  Document  unless  such  Borrower  is in good  faith  with due

                                       48
<PAGE>

     diligence by appropriate  proceedings  contesting those items; and (iv) pay
     for the  maintenance,  repair and/or  preservation of the Collateral.  Such
     expenses and advances shall be added to the Obligations until reimbursed to
     Agent and shall be secured by the  Collateral,  and such  payments by Agent
     shall  not be  construed  as a waiver by Agent or  Lenders  of any Event of
     Default or any other rights or remedies of Agent and Lenders.

          (b) Borrowers  agree that notice  received by any of them at least ten
     (10) calendar days before the time of any intended public sale, or the time
     after which any private sale or other  disposition  of  Collateral is to be
     made,  shall  be  deemed  to be  reasonable  notice  of such  sale or other
     disposition.  If permitted by  applicable  law, any  perishable  Collateral
     which  threatens  to  speedily  decline  in  value  or  which  is sold on a
     recognized  market may be sold immediately by Agent without prior notice to
     Borrowers.  At any sale or disposition of Collateral or securities pledged,
     Agent may (to the extent  permitted by applicable  law) purchase all or any
     part  thereof  free  from  any  right of  redemption  by  Borrowers  or any
     Guarantor which right is hereby waived and released.  Borrowers jointly and
     severally  covenant  and  agree  not to,  and not to permit or cause any of
     their  Subsidiaries  to,  interfere  with or impose any obstacle to Agent's
     exercise of its rights and  remedies  with  respect to the  Collateral.  In
     dealing with or disposing of the Collateral or any part thereof,  Agent and
     Lenders shall not be required to give priority or preference to any item of
     Collateral or otherwise to marshal assets or to take possession or sell any
     Collateral with judicial process.

     9.2 Application of Proceeds

     In addition to any other  rights,  options and  remedies  Agent and Lenders
have under the Loan  Documents,  the UCC,  at law or in equity,  all  dividends,
interest,  rents, issues,  profits,  fees,  revenues,  income and other proceeds
collected or received from collecting,  holding, managing,  renting, selling, or
otherwise disposing of all or any part of the Collateral or any proceeds thereof
upon exercise of its remedies  hereunder upon the occurrence and continuation of
an Event of Default  shall be applied in the  following  order of priority:  (i)
first,  to the payment of all costs and  expenses of such  collection,  storage,
lease,  holding,  operation,  management,  sale,  disposition or delivery and of
conducting  Borrowers'  business  and  of  maintenance,  repairs,  replacements,
alterations,  additions and  improvements  of or to the  Collateral,  and to the
payment of all sums which  Agent or Lenders may be required or may elect to pay,
if any, for taxes, assessments,  insurance and other charges upon the Collateral
or any part  thereof,  and all  other  payments  that  Agent or  Lenders  may be
required or authorized to make under any provision of this Agreement (including,
without limitation, in each such case, in-house documentation and diligence fees
and legal expenses,  search, audit, recording,  professional and filing fees and
expenses  and  reasonable  attorneys'  fees and all  expenses,  liabilities  and
advances made or incurred in connection therewith);  (ii) second, to the payment
of all Obligations in such order as determined by Agent in its sole  discretion;
(iii) third,  to the  satisfaction  of  indebtedness  secured by any subordinate
security interest of record in the Collateral if written  notification of demand
therefor is received before distribution of the proceeds is completed, provided,
that, if requested by Agent, the holder of a subordinate security interest shall
furnish  reasonable  proof of its  interest,  and  unless it does so,  Agent and
Lenders need not address  their claims;  and (iv) fourth,  to the payment of any
surplus  then  remaining  to  Borrowers,  unless  otherwise  provided  by law or
directed by a court of competent jurisdiction,  provided that Borrowers shall be
liable for any  deficiency  if such  proceeds  are  insufficient  to satisfy the
Obligations  or any of the other items  referred to in this Section  (other than
Section  9.2(iii) to the extent the Obligations have been  indefeasibly  paid in
full in cash).

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<PAGE>

     9.3 Rights to Appoint Receiver

     Without limiting and in addition to any other rights,  options and remedies
Agent and Lenders have under the Loan  Documents,  the UCC, at law or in equity,
upon the occurrence and  continuation of an Event of Default,  Agent and Lenders
shall  have the right to apply for and have a receiver  appointed  by a court of
competent  jurisdiction in any action taken by Agent to enforce its and Lenders'
rights and remedies in order to manage,  protect and preserve the Collateral and
continue the  operation of the business of Borrowers and to collect all revenues
and profits  thereof and apply the same to the payment of all expenses and other
charges of such  receivership  including the compensation of the receiver and to
the payments as aforesaid  until a sale or other  disposition of such Collateral
shall be finally made and consummated.

     9.4 Attorney in Fact

     Each Borrower hereby  irrevocably  appoints Agent,  for its benefit and the
benefit of  Lenders,  as its  attorney  in fact to take any action  Agent  deems
necessary or  desirable  upon the  occurrence  and  continuation  of an Event of
Default to protect and realize  upon its and  Lenders'  Lien in the  Collateral,
including the  execution  and delivery of any and all  documents or  instruments
related to the Collateral in such Borrower's  name, and said  appointment  shall
create in Agent,  for its benefit and the  benefit of Lenders,  a power  coupled
with an interest.

     9.5 Blocked Accounts

     Without  limiting any other  provision of any Loan Document and in addition
to any other rights, options and remedies, Agent and Lenders have under the Loan
Documents, the UCC, at law or in equity, upon the occurrence and continuation of
any Event of Default,  Agent shall have the right to require that all amounts in
all Deposit Accounts of any Borrower and that all cash payments received by such
Borrower are paid and delivered  directly into a blocked  account under the sole
dominion  and  control  of  Agent  and that all  such  amounts  are  immediately
transferred  into a  depository  account or accounts  maintained  by Agent or an
Affiliate of Agent at such bank as Agent may determine in its sole discretion.

     9.6 Rights and Remedies not Exclusive

     Agent  shall  have the  right in its sole  discretion  to  determine  which
rights,  Liens  and/or  remedies  Agent  or  Lenders  may  at any  time  pursue,
relinquish,  subordinate or modify,  and such  determination will not in any way
modify or affect any of Agent's or Lenders' rights,  Liens or remedies under any
Loan  Document,  applicable  law or equity.  The  enumeration  of any rights and
remedies in any Loan Document is not intended to be  exhaustive,  and all rights
and remedies of Agent  described in any Loan Document are cumulative and are not
alternative  to or  exclusive  of any  other  rights  or  remedies  which  Agent
otherwise  may have.  The  partial or  complete  exercise of any right or remedy
shall not  preclude  any other  further  exercise  of such or any other right or
remedy.

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<PAGE>

X.   WAIVERS AND JUDICIAL PROCEEDINGS

     10.1 Waivers

     Except as expressly  provided for herein,  each Borrower  hereby waives set
off, counterclaim,  demand,  presentment,  protest, all defenses with respect to
any and all instruments and all notices and demands of any description,  and the
pleading of any statute of limitations as a defense to any demand under any Loan
Document.  Each Borrower hereby waives any and all defenses and counterclaims it
may have or could  interpose in any action or procedure  brought by Agent or any
Lender to obtain an order of court  recognizing  the  assignment  of, or Lien of
Agent, for the benefit of itself and Lenders, in and to, any Collateral.

     10.2 Delay; No Waiver of Defaults

     No course of  action or  dealing,  renewal,  release  or  extension  of any
provision  of any Loan  Document,  or single  or  partial  exercise  of any such
provision,  or delay,  failure  or  omission  on  Agent's  or  Lenders'  part in
enforcing any such  provision  shall affect the liability of any Borrower or any
Guarantor or operate as a waiver of such  provision  or affect the  liability of
any Borrower or any Guarantor or preclude any other or further  exercise of such
provision.  No  waiver  by any  party  to any Loan  Document  of any one or more
defaults by any other party in the  performance  of any of the provisions of any
Loan Document  shall operate or be construed as a waiver of any future  default,
whether of a like or  different  nature,  and each such waiver  shall be limited
solely to the express terms and provisions of such waiver.  Notwithstanding  any
other  provision of any Loan  Document,  by  completing  the Closing  under this
Agreement and/or by making Advances and/or funding the Term Loan,  neither Agent
nor any Lender waives any breach of any  representation or warranty of under any
Loan Document,  and all of Agent's and Lenders' claims and rights resulting from
any such breach or misrepresentation are specifically reserved.

     10.3 Jury Waiver

     EACH PARTY TO THIS AGREEMENT  HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY
JURY OF ANY CLAIM OR CAUSE OF ACTION  ARISING UNDER THE LOAN DOCUMENTS OR IN ANY
WAY CONNECTED  WITH OR INCIDENTAL TO THE DEALINGS OF THE PARTIES WITH RESPECT TO
THE  LOAN  DOCUMENTS  OR THE  TRANSACTIONS  CONTEMPLATED  THEREBY,  WHETHER  NOW
EXISTING OR  HEREAFTER  ARISING,  AND  WHETHER  SOUNDING  IN  CONTRACT,  TORT OR
OTHERWISE. EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM OR CAUSE OF
ACTION  SHALL BE DECIDED BY COURT  TRIAL  WITHOUT A JURY,  AND THAT ANY PARTY TO
THIS  AGREEMENT MAY FILE AN ORIGINAL  COUNTERPART OR A COPY OF THIS SECTION WITH
ANY COURT AS WRITTEN  EVIDENCE  OF THE  CONSENTS OF THE PARTIES TO THE WAIVER OF
THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY.

     10.4 Cooperation in Discovery and Litigation

     In any  litigation,  arbitration  or other  dispute  resolution  proceeding
relating  to any Loan  Document,  each  Borrower  waives  any and all  defenses,

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objections and  counterclaims it may have or could interpose with respect to (a)
any of its directors, officers, employees or agents being deemed to be employees
or managing  agents of such Borrower for purposes of all applicable law or court
rules regarding the production of witnesses by notice for testimony  (whether in
a  deposition,  at trial or  otherwise),  (b)  Agent's or any  Lender's  counsel
examining  any such  individuals  as if under  cross-examination  and  using any
discovery deposition of any of them as if it were an evidence deposition, and/or
(c) using all  commercially  reasonable  efforts to produce in any such  dispute
resolution  proceeding,  at the time and in the manner  requested by Agent,  all
Persons, documents (whether in tangible,  electronic or other form) and/or other
things under its control and relating to the dispute.

     10.5 Amendment and Waivers

          (a) Except as otherwise  provided herein, no amendment,  modification,
     termination,  or  waiver of any  provision  of this  Agreement  or any Loan
     Document, or consent to any departure by Borrowers therefrom,  shall in any
     event be  effective  unless  the same  shall be in  writing  and  signed by
     Requisite  Lenders,  Agent  and  Borrowers;  provided,  that no  amendment,
     modification, termination, or waiver shall, unless in writing and signed by
     each Lender directly affected thereby, do any of the following and that the
     agreement   of  Borrowers   shall  not  be  required  for  any   amendment,
     modification,  termination, or waiver that does any of the following (other
     than item (vi) below to the extent  adverse to Borrowers  and unless any of
     the following  would increase any  commitment fee owing by Borrowers):  (i)
     increase the  Commitment  of any  individual  Lender (which action shall be
     deemed to directly affect all Lenders);  (ii) reduce the principal of, rate
     of interest on or fees payable  with respect to any Loan;  (iii) extend the
     scheduled  due date, or reduce the amount due on any scheduled due date, of
     any installment of principal, interest, or fees payable with respect to any
     Loan, or waive,  forgive,  extend,  defer or postpone the payment  thereof;
     (iv) change the  percentage of the  Commitments,  of the  aggregate  unpaid
     principal  amount of the Loans,  or of Lenders  which shall be required for
     Lenders or any of them to take any action  hereunder (which action shall be
     deemed to directly  affect all  Lenders) or alter,  as between or among the
     Revolving Lenders and Term Lenders and Equipment  Acquisition Term Lenders,
     the amount  payable to each  hereunder;  (v) except as otherwise  permitted
     herein or in the other Loan Documents,  release any Guaranty or release any
     of the  Collateral  (which  action  shall be deemed to directly  affect all
     Lenders)  (provided,  that consent to such release shall not be required if
     such  release  is made  after and  during  the  continuance  of an Event of
     Default in connection  with the sale or  disposition  of the  Collateral by
     Agent); (vi) amend, modify or waive this Section 10.5 or the definitions of
     the terms used in this Section 10.5 insofar as the  definitions  affect the
     substance of this  Section  10.5 (which  action shall be deemed to directly
     affect all Lenders);  (vii) consent to the  assignment or other transfer by
     any  Borrower  or any other  party  (other than Agent or any Lender) to any
     Loan  Documents  of any of their  rights  and  obligations  under  any Loan
     Document;  and,  provided,   further,  that  no  amendment,   modification,
     termination  or waiver  affecting  the rights or duties of Agent  under any
     Loan Document shall in any event be effective, unless in writing and signed
     by Agent, in addition to Lenders required herein above to take such action.
     Notwithstanding  anything  contained in this Agreement to the contrary,  no
     waiver or consent with respect to any Default (if in  connection  therewith
     Revolving  Lenders  have  exercised  their  right to suspend  the making or
     incurrence of further  Advances) or any Event of Default shall be effective
     for purposes of the conditions  precedent to the making of Advances  unless
     the same  shall be in  writing  and signed by the  Requisite  Lenders  with
     respect to the Revolving Lenders and Borrowers.

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<PAGE>

          (b) Each  amendment,  modification,  termination  or  waiver  shall be
     effective  only in the specific  instance and for the specific  purpose for
     which it was given. No amendment, modification, termination or waiver shall
     be  required  for  Agent,  for the  benefit  of itself  and the  benefit of
     Lenders, to take additional Collateral pursuant to any Loan Document.

          (c)  Any  amendment,  modification,  termination,  waiver  or  consent
     effected in accordance  with this Section 10.5 shall be binding upon Agent,
     each Lender and Borrowers.

XI.  EFFECTIVE DATE AND TERMINATION

     11.1 Effectiveness and Termination

     Subject to Agent's and Lenders rights to accelerate the Loans and terminate
and cease making and funding  Advances upon or after any Event of Default,  this
Agreement  shall  continue  in full force and effect  until the  Maturity  Date,
unless  terminated  sooner as provided in this Section  11.1.  Borrowers may not
terminate  this  Agreement or the Revolving  Facility  without  terminating  the
entire  Agreement and all Loans.  Borrowers may terminate  this Agreement at any
time upon not less than thirty (30) calendar days' prior written notice to Agent
and  upon  full  performance  and  indefeasible  payment  in full in cash of all
Obligations on or prior to such 30th calendar day after Receipt by Agent of such
written notice. Upon the earlier of the Maturity Date or any such termination by
Borrowers,  the  obligation  of Lenders  to make  Advances  under the  Revolving
Facility shall  terminate.  All of the Obligations  shall be immediately due and
payable upon the earlier of the  Maturity  Date or any such  termination  on the
Maturity Date or the termination  date stated in any notice of  termination,  as
applicable (the "Termination Date"); provided,  that,  notwithstanding any other
provision  of any Loan  Document,  a  Termination  Date  voluntarily  caused  by
Borrowers shall be effective no earlier than the first Business Day of the month
following the  expiration of the thirty (30) calendar days' prior written notice
period.  Notwithstanding  the  foregoing,  any  termination  notice by Borrowers
pursuant to this Section 11.1 shall be revocable;  provided, that any revocation
shall be by written  notice by  Borrowers  to Agent and to the extent  Borrowers
wish to terminate this Agreement after any such revocation they shall do so only
in compliance with the time periods and other  requirements of this Section 11.1
(i.e., once a termination notice is revoked,  any subsequent  termination notice
shall be subject to the full advance notice and  effectiveness  requirements  of
this Section 11.1). Notwithstanding any other provision of any Loan Document, no
termination of this Agreement shall affect any Lender's or Agent's rights or any
of the Obligations  existing as of the effective date of such  termination,  and
the provisions of the Loan Documents  shall continue to be fully operative until
the Obligations have been fully performed and indefeasibly paid in cash in full.
The Liens  granted to Agent,  for the benefit of itself and  Lenders,  under the
Security  Documents and the financing  statements filed pursuant thereto and the
rights and powers of Agent and Lenders  shall  continue in full force and effect
notwithstanding the fact that Borrowers'  borrowings  hereunder may from time to
time be in a zero or  credit  position  until all of the  Obligations  have been
fully performed and indefeasibly paid in full in cash.

     11.2 Survival

     All  obligations,  covenants,  agreements,   representations,   warranties,
waivers  and  indemnities  made by any  Borrower  or any  Guarantor  in any Loan
Document  shall survive the execution  and delivery of the Loan  Documents,  the
Closing,  the  making  and  funding  of the  Loans and any  termination  of this

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Agreement until all Obligations  are fully  performed and  indefeasibly  paid in
full in cash. The obligations  and provisions of Sections 3.4, 3.6, 6.13,  10.1,
10.3,  11.1, 11.2, 13.3, 13.4, 13.7, 13.9, 13.10 and 13.11 and Article XII shall
survive  termination of the Loan Documents and any payment,  in full or in part,
of the Obligations.

XII. AGENCY PROVISIONS

     12.1 Agent

          (a)   Appointment.   Each  Lender  hereby   designates   and  appoints
     CapitalSource  as the  administrative  agent,  payment agent and collateral
     agent,  under this Agreement and the other Loan Documents,  and each Lender
     hereby irrevocably authorizes  CapitalSource,  as the administrative agent,
     payment agent and collateral agent for such Lender,  to take such action or
     to refrain  from taking such action on its behalf under the  provisions  of
     this Agreement and the other Loan Documents and to exercise such powers and
     perform  such  duties  as are  delegated  to the Agent by the terms of this
     Agreement and the other Loan Documents,  together with such other powers as
     are  reasonably  incidental  thereto.  Agent  agrees  to act as such on the
     conditions  contained in this Article XII. The  provisions  of this Article
     XII are solely for the benefit of Agent and Lenders,  and  Borrowers  shall
     have no rights as a  third-party  beneficiary  of any of the  provisions of
     this  Article XII other than the second  sentence of Section  12.1(h)(iii).
     Agent may perform any of its duties hereunder, or under the Loan Documents,
     by or through its agents or employees.

          (b) Nature of Duties.  In  performing  its  functions and duties under
     this Agreement,  Agent is acting solely on behalf of Lenders and its duties
     are administrative in nature and does not assume and shall not be deemed to
     have assumed any obligation  toward or relationship of agency or trust with
     or for Lenders,  other than as expressly  set forth herein and in the other
     Loan Documents,  or Borrowers.  Agent shall have no duties,  obligations or
     responsibilities  except those  expressly set forth in this Agreement or in
     the other Loan Documents.  Agent shall not have by reason of this Agreement
     or any other  Loan  Document  a  fiduciary  relationship  in respect of any
     Lender.  Except for  information,  notices,  reports,  and other  documents
     expressly  required to be  furnished  to Lenders by the Agent  hereunder or
     given to the Agent for the  account  of or with  copies for  Lenders,  each
     Lender  shall  make  its own  independent  investigation  of the  financial
     condition  and affairs of Borrowers  in  connection  with the  extension of
     credit  hereunder and shall make its own appraisal of the  creditworthiness
     of  Borrowers,  and  Agent  shall  have no duty or  responsibility,  either
     initially or on a continuing  basis,  to provide any Lender with any credit
     or  other  information  with  respect  thereto,  whether  coming  into  its
     possession before the Closing Date or at any time or times  thereafter.  If
     Agent  seeks the  consent  or  approval  of any  Lenders  to the  taking or
     refraining  from taking any action  hereunder,  then Agent shall send prior
     written  notice  thereof to each Lender.  Agent shall  promptly  notify (in
     writing)  each Lender any time that the  applicable  percentage  of Lenders
     have instructed Agent to act or refrain from acting pursuant hereto.

          (c) Rights,  Exculpation,  Etc. Neither Agent nor any of its officers,
     directors,  managers,  members, equity owners, employees or agents shall be
     liable to any  Lender  for any  action  lawfully  taken or  omitted by them
     hereunder  or under  any of the  other  Loan  Documents,  or in  connection
     herewith  or  therewith.  Notwithstanding  the  foregoing,  Agent  shall be
     obligated  on the terms set forth  herein for  performance  of its  express

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     duties and obligations hereunder, and Agent shall be liable with respect to
     its own gross negligence or willful  misconduct.  Agent shall not be liable
     for any apportionment or distribution of payments made by it in good faith,
     and if any such apportionment or distribution is subsequently determined to
     have been made in error,  the sole  recourse of any Lender to whom  payment
     was due but not made shall be to recover from other  Lenders any payment in
     excess of the amount to which they are  determined to be entitled (and such
     other  Lenders  hereby  agree to return to such  Lender any such  erroneous
     payments  received  by  them).  In  performing  its  functions  and  duties
     hereunder,  Agent  shall  exercise  the same care which it would in dealing
     with  loans for its own  account.  Agent  shall not be  responsible  to any
     Lender for any recitals, statements,  representations or warranties made by
     Borrowers  herein  or  for  the  execution,   effectiveness,   genuineness,
     validity, enforceability,  collectability, or sufficiency of this Agreement
     or  any of the  other  Loan  Documents  or  the  transactions  contemplated
     thereby,  or for the financial  condition of Borrowers.  Agent shall not be
     required  to  make  any  inquiry   concerning  either  the  performance  or
     observance of any of the terms, provisions, or conditions of this Agreement
     or any of the Loan  Documents or the financial  condition of Borrowers,  or
     the  existence  or possible  existence  of any Default or Event of Default.
     Agent may at any time request instructions from Lenders with respect to any
     actions or approvals  which by the terms of this Agreement or of any of the
     other Loan  Documents  Agent is  permitted or required to take or to grant,
     and Agent shall be absolutely entitled to refrain from taking any action or
     to withhold any approval and shall not be under any liability whatsoever to
     any Person  for  refraining  from  taking  any  action or  withholding  any
     approval under any of the Loan Documents  until it shall have received such
     instructions  from the applicable  percentage of Lenders.  Without limiting
     the foregoing,  no Lender shall have any right of action whatsoever against
     Agent as a result of Agent  acting or  refraining  from  acting  under this
     Agreement  or any of the  other  Loan  Documents  in  accordance  with  the
     instructions  of the applicable  percentage of Lenders and  notwithstanding
     the  instructions  of Lenders,  Agent shall have no  obligation to take any
     action if it, in good faith  believes that such action exposes Agent or any
     of its officers, directors,  managers, members, equity owners, employees or
     agents to any personal  liability unless Agent receives an  indemnification
     reasonably satisfactory to it from Lenders with respect to such action.

          (d)  Reliance.  Agent  shall be  entitled  to rely  upon  any  written
     notices,  statements,  certificates,  orders  or  other  documents  or  any
     telephone  message or other  communication  (including any writing,  telex,
     telecopy  or  telegram)  believed  by it in good  faith to be  genuine  and
     correct and to have been  signed,  sent or made by the proper  Person,  and
     with  respect to all matters  pertaining  to this  Agreement  or any of the
     other Loan Documents and its duties hereunder or thereunder, upon advice of
     legal counsel, independent accountants, and other experts selected by Agent
     in its sole discretion.

          (e)  Indemnification.  Each Lender,  severally  and not (i) jointly or
     (ii) jointly and  severally,  agrees to reimburse  and  indemnify  and hold
     harmless  Agent and its  officers,  directors,  managers,  members,  equity
     owners,  employees and agents (to the extent not reimbursed by Borrowers or
     the Guarantors,  if any),  ratably  according to their  respective Pro Rata
     Share in effect on the date on which  indemnification  is sought under this

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<PAGE>

     subsection of the total outstanding  obligations (or, if indemnification is
     sought after the date upon which the Commitments  shall have terminated and
     the Loans shall have been paid in full,  ratably in  accordance  with their
     Pro Rata  Share  immediately  prior to such date of the  total  outstanding
     obligations),  from  and  against  any  and all  liabilities,  obligations,
     losses, damages,  penalties,  actions,  judgments,  suits, costs, expenses,
     advances,  or disbursements  of any kind or nature  whatsoever which may be
     imposed on, incurred by, or asserted  against Agent or any of its officers,
     directors, managers, members, equity owners, employees or agents in any way
     relating  to or  arising  out of this  Agreement  or any of the other  Loan
     Documents or any action  taken or omitted by Agent under this  Agreement or
     any of the other Loan Documents; provided, however, that no Lender shall be
     liable for the  payment of any  portion of such  liabilities,  obligations,
     losses, damages,  penalties,  actions,  judgments,  suits, costs, expenses,
     advances or  disbursements  resulting  from  Agent's  gross  negligence  or
     willful misconduct. The obligations of Lenders under this Article XII shall
     survive the payment in full of the  Obligations and the termination of this
     Agreement.

          (f) CapitalSource Individually.  With respect to the Loans made by it,
     and the Notes issued to it,  CapitalSource  shall have and may exercise the
     same rights and powers  hereunder and under the other Loan Documents and is
     subject to the same  obligations  and  liabilities as and to the extent set
     forth herein and the other Loan  Documents as any other  Lender.  The terms
     "Lenders" or  "Requisite  Lenders" or any similar  terms shall,  unless the
     context  clearly  otherwise   indicates,   include   CapitalSource  in  its
     individual   capacity  as  a  Lender  or  one  of  the  Requisite  Lenders.
     CapitalSource  may lend  money  to,  and  generally  engage  in any kind of
     banking,  trust or other  business  with any Borrower or any  Subsidiary or
     Affiliates  of any  Borrower  as if it were not  acting  as Agent  pursuant
     hereto.

          (g) Successor Agent.

               (i) Resignation.  Agent may resign from the performance of all or
          part of its  functions  and duties  hereunder at any time by giving at
          least thirty (30) days' prior written notice to Borrowers and Lenders.
          Such resignation  shall take effect upon the acceptance by a successor
          Agent of  appointment  pursuant to clause  (ii) below or as  otherwise
          provided below.

               (ii)   Appointment   of  Successor.   Upon  any  such  notice  of
          resignation  pursuant to clause (g)(i) above,  Requisite Lenders shall
          appoint a successor Agent  reasonably  acceptable to Borrowers,  which
          consent shall not be unreasonably withheld, delayed or conditioned. If
          a successor Agent shall not have been so appointed  within said thirty
          (30) day period, the retiring Agent, upon notice to Borrowers, may, on
          behalf  of  Lenders,   then  appoint  a  successor  Agent   reasonably
          acceptable  to  Borrowers,  which  consent  shall not be  unreasonably
          withheld, delayed or conditioned,  who shall serve as Agent until such
          time,  as  Requisite  Lenders,  appoint a successor  Agent as provided
          above.  If no  successor  Agent  has been  appointed  pursuant  to the
          foregoing  within said thirty (30) day period,  the resignation  shall
          become effective and Requisite  Lenders shall  thereafter  perform all
          the duties of Agent  hereunder,  until such time, if any, as Requisite
          Lenders appoint a successor Agent as provided above.

               (iii) Successor Agent.  Upon the acceptance of any appointment as
          Agent under the Loan  Documents by a successor  Agent,  such successor
          Agent  shall  thereupon  succeed  to and  become  vested  with all the
          rights, powers, privileges and duties of the retiring Agent, and, upon
          the earlier of such  acceptance or the effective  date of the retiring
          Agent's  resignation,  the retiring Agent shall be discharged from its
          duties  and  obligations  under the Loan  Documents,  except  that any

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          indemnity rights or other rights in favor of such retiring Agent shall
          continue.  After any retiring  Agent's  resignation as Agent under the
          Loan Documents,  the provisions of this Article XII shall inure to its
          benefit as to any actions  taken or omitted to be taken by it while it
          was Agent under the Loan Documents.

          (h) Collateral Matters.

               (i)  Collateral.  Each Lender agrees that any action taken by the
          Agent or the  Requisite  Lenders  (or,  where  required by the express
          terms  of  this  Agreement,   a  greater  proportion  of  Lenders)  in
          accordance  with the provisions of this Agreement or of the other Loan
          Documents relating to the Collateral, and the exercise by the Agent or
          the Requisite Lenders (or, where so required, such greater proportion)
          of the powers set forth  herein or therein,  together  with such other
          powers as are reasonably  incidental thereto,  shall be authorized and
          binding  upon all of  Lenders  and the  Agent.  Without  limiting  the
          generality  of the  foregoing,  the  Agent  shall  have  the  sole and
          exclusive  right  and  authority  to (i)  act as  the  disbursing  and
          collecting  agent  for  Lenders  with  respect  to  all  payments  and
          collections arising in connection herewith and with the Loan Documents
          in connection with the Collateral;  (ii) execute and deliver each Loan
          Document  relating to the Collateral and accept  delivery of each such
          agreement delivered by Borrowers or any of their  Subsidiaries;  (iii)
          act as collateral  agent for Lenders for purposes of the perfection of
          all security  interests and Liens created by such  agreements  and all
          other purposes  stated therein;  (iv) manage,  supervise and otherwise
          deal with the  Collateral;  (v) take such  action as is  necessary  or
          desirable  to maintain  the  perfection  and  priority of the security
          interests  and Liens  created or  purported  to be created by the Loan
          Documents  relating  to the  Collateral,  and  (vi)  except  as may be
          otherwise specifically  restricted by the terms hereof or of any other
          Loan  Document,  exercise all remedies given to such Agent and Lenders
          with  respect  to the  Collateral  under the Loan  Documents  relating
          thereto, applicable law or otherwise.

               (ii) Release of Collateral.  Lenders hereby irrevocably authorize
          Agent,  at its  option  and in its  discretion,  to  release  any Lien
          granted  to or held by  Agent  for the  benefit  of  Lenders  upon any
          property  covered by the Loan  Documents (A) upon  termination of this
          Agreement and payment and satisfaction in full of all Obligations; (B)
          constituting  property being sold or disposed of if Borrowers  certify
          to Agent that the sale or disposition  is made in compliance  with the
          provisions  of the Loan  Documents  (and  Agent may rely in good faith
          conclusively on any such certificate, without further inquiry); or (C)
          constituting  property  leased to any Borrower under a lease which has
          expired  or been  terminated  in a  transaction  permitted  under this
          Agreement  or is about to expire  and  which has not been,  and is not
          intended by such Borrower to be, renewed or extended.

               (iii) Confirmation of Authority;  Execution of Releases.  Without
          in any manner limiting  Agent's  authority to act without any specific
          or  further  authorization  or  consent  by  Lenders  (as set forth in
          Section  12.1(h)(i)  and  (ii)),  each  Lender  agrees to  confirm  in
          writing,  upon  request by  Borrowers,  the  authority  to release any
          property  covered by this  Agreement or the Loan  Documents  conferred
          upon Agent under Section  12.1(h)(ii).  So long as no Event of Default
          is then  continuing,  upon receipt by Agent of  confirmation  from the
          requisite  percentage  of  Lenders,  of its  authority  to release any
          particular item or types of property  covered by this Agreement or the
          Loan Documents, and upon at least five (5) Business Days prior written
          request  by  Borrowers,   Agent  shall  (and  is  hereby   irrevocably
          authorized  by Lenders to) execute such  documents as may be necessary

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          to evidence the release of the Liens  granted to Agent for the benefit
          of Lenders herein or pursuant hereto upon such  Collateral;  provided,
          however,  that (A) Agent  shall not be  required  to execute  any such
          document on terms  which,  in Agent's  opinion,  would expose Agent to
          liability or create any  obligation  or entail any  consequence  other
          than the release of such Liens  without  recourse  or warranty  (other
          than  that  such  Collateral  is free and  clear,  on the date of such
          delivery,  of any and all Liens  arising from such Person's own acts),
          and (B) such  release  shall not in any  manner  discharge,  affect or
          impair the  Obligations or any Liens upon (or obligations of Borrowers
          or any Subsidiary of Borrowers, in respect of), all interests retained
          by  Borrowers  or any  Subsidiary  of  Borrowers,  including,  without
          limitation,  the proceeds of any sale,  all of which shall continue to
          constitute part of the property  covered by this Agreement or the Loan
          Documents.

               (iv) Absence of Duty.  Agent shall have no obligation  whatsoever
          to any Lender or any other Person to assure that the property  covered
          by  this  Agreement  or the  Loan  Documents  exists  or is  owned  by
          Borrowers or is cared for, protected or insured or has been encumbered
          or that the Liens  granted  to Agent on behalf  of  Lenders  herein or
          pursuant  hereto  have  been  properly  or  sufficiently  or  lawfully
          created, perfected,  protected, enforced or maintained or are entitled
          to any particular priority, or to exercise at all or in any particular
          manner  or under  any duty of care,  disclosure,  or  fidelity,  or to
          continue exercising, any of the rights, authorities and powers granted
          or available  to Agent in this  Section  12.1(h) or in any of the Loan
          Documents,  it being  understood  and  agreed  that in  respect of the
          property  covered by this  Agreement or the Loan Documents or any act,
          omission, or event related thereto, Agent may act in any manner it may
          deem  appropriate,  in its  discretion,  given Agent's own interest in
          property  covered by this  Agreement  or the Loan  Documents as one of
          Lenders and that Agent shall have no duty or liability  whatsoever  to
          any of the other Lenders; provided, that Agent shall exercise the same
          care  which  it would  in  dealing  with  loans  for its own  account.
          Notwithstanding  the foregoing,  Agent shall be liable with respect to
          its own gross negligence or willful misconduct.

          (i) Agency for Perfection.  Each Lender hereby appoints Agent as agent
     for the purpose of  perfecting  Lenders'  security  interest in  Collateral
     which,  in  accordance  with  Article  9  of  the  UCC  in  any  applicable
     jurisdiction, can be perfected only by possession. Should any Lender (other
     than Agent)  obtain  possession of any such  Collateral,  such Lender shall
     notify Agent thereof,  and, promptly upon Agent's request  therefor,  shall
     deliver  such   Collateral   to  Agent  or  in   accordance   with  Agent's
     instructions.

          (j) Exercise of Remedies.  Except as set forth in Section  12.3,  each
     Lender  agrees that it will not have any right  individually  to enforce or
     seek to enforce this  Agreement or any Loan Document or to realize upon any
     collateral security for the Loans, it being understood and agreed that such
     rights and remedies may be exercised only by Agent.

     12.2 Consents

          (a) In the event Agent  requests  the consent of a Lender and does not
     receive a written  denial  thereof within five (5) Business Days after such
     Lender's  receipt of such request,  then such Lender will be deemed to have
     given such consent so long as such request  contained a notice stating that
     such failure to respond within five (5) Business Days would be deemed to be
     a consent by such Lender.

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          (b) In the event Agent requests the consent of a Lender in a situation
     where such  Lender's  consent would be required and such consent is denied,
     then Agent may, at its option,  require  such Lender to assign its interest
     in the Loans to Agent for a price equal to the then  outstanding  principal
     amount  thereof due such Lender plus  accrued and unpaid  interest and fees
     due such  Lender,  which  principal,  interest and fees will be paid to the
     Lender when  collected  from  Borrowers.  In the event that Agent elects to
     require any Lender to assign its interest to Agent pursuant to this Section
     12.2,  Agent will so notify such Lender in writing within  forty-five  (45)
     days  following  such  Lender's  denial,  and such  Lender  will assign its
     interest to Agent no later than five (5) calendar days following receipt of
     such notice.

     12.3 Set Off and Sharing of Payments

     In addition  to any rights and  remedies  now or  hereafter  granted  under
applicable  law  and not by way of  limitation  of any  such  rights,  upon  the
occurrence and during the  continuance  of any Event of Default,  each Lender is
hereby  authorized by Borrowers at any time or from time to time, to the fullest
extent permitted by law, with reasonably  prompt  subsequent notice to Borrowers
or to any  other  Person  (any  prior or  contemporaneous  notice  being  hereby
expressly  waived)  to set off and to  appropriate  and to apply any and all (a)
balances (general or special, time or demand, provisional or final) held by such
Lender or such holder at any of its offices for the account of  Borrowers or any
of their  Subsidiaries  (regardless  of whether  such  balances  are then due to
Borrowers  or their  Subsidiaries),  and (b) other  property at any time held or
owing by such  Lender or such  holder to or for the credit or for the account of
Borrowers  or any of their  Subsidiaries,  against  and on account of any of the
Obligations  which  are not paid  when  due;  except  that no Lender or any such
holder shall  exercise any such right  without  prior  written  notice to Agent;
provided,  however, that the failure to give notice to Borrowers or to any other
Person shall not affect the validity of such set-off and  application.  Any Term
Lender or  Equipment  Acquisition  Term  Lender,  as the case may be,  which has
exercised  its right to set off or otherwise has received any payment on account
of the  Obligations  shall,  to the  extent  the  amount  of any such set off or
payment  exceeds  its Pro Rata  Share of  payments  obtained  by all of the Term
Lenders or Equipment Acquisition Term Lenders, as the case may be, on account of
such  Obligations,  purchase  for cash (and the other Term  Lenders or Equipment
Acquisition Term Lenders, as the case may be, shall sell) participations in each
such other Term Lender's or Equipment  Acquisition  Term Lender's Pro Rata Share
of  Obligations  as would be  necessary  to cause such Term Lender or  Equipment
Acquisition  Term  Lender,  as the case may be, to share such  excess  with each
other Term Lenders or Equipment Acquisition Term Lenders, as the case may be, in
accordance with their respective Pro Rata Shares; provided, however, that if all
or any portion of such excess  payment or benefits is thereafter  recovered from
such purchasing Term Lender, such purchase shall be rescinded,  and the purchase
price and  benefits  returned,  to the extent of such  recovery.  Any  Revolving
Lender which has  exercised  its right to set off or otherwise  has received any
payment  on account of the  Obligations  shall,  to the extent the amount of any
such set off or payment  exceeds its Pro Rata Share of payments  obtained by all
the Revolving  Lenders on account of such  Obligations  shall, to the extent the
amount of any such set off or  payment  exceeds  it Pro Rata  Share of  payments
obtained by all the Revolving Lenders on account of such  Obligations,  purchase
for cash (and the other  Revolving  Lenders or holders of Revolving  Loans shall

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sell)  participations in each such other Revolving Lender's or holder's Pro Rata
Share of the Obligations as would be necessary to cause such Revolving Lender to
share such excess with each other Revolving Lender or holders in accordance with
their respective Pro Rata Share;  provided,  however, that if all or any portion
of such excess payment or benefits is thereafter  recovered from such purchasing
Revolving Lender,  such purchase shall be rescinded,  and the purchase price and
benefits returned, to the extent of such recovery.  Each Borrower agrees, to the
fullest extent  permitted by law, that (a) any Lender or holder may exercise its
right to set off with  respect to amounts in excess of its Pro Rata Share of the
Obligations  and may sell  participations  in such  excess to other  Lenders and
holders, and (b) any Lender or holder so purchasing a participation in the Loans
made or other  Obligations  held by other  Lenders or holders may  exercise  all
rights of set-off, bankers' lien, counterclaim or similar rights with respect to
such  participation as fully as if such Lender or holder were a direct holder of
Loans and other Obligations in the amount of such participation.

     12.4 Disbursement of Funds

     Agent may, on behalf of Revolving Lenders,  disburse funds to Borrowers for
Advances  requested.  Each Revolving  Lender shall reimburse Agent on demand for
its Pro Rata Share of all funds disbursed on its behalf by Agent, or if Agent so
requests,  each  Revolving  Lender will remit to Agent its Pro Rata Share of any
Advance  before Agent  disburses  same to Borrowers.  If Agent elects to require
that funds be made available  prior to  disbursement  to Borrowers,  Agent shall
advise each  Revolving  Lender by telephone,  telex or telecopy of the amount of
such Revolving  Lender's Pro Rata Share of such requested  Advance no later than
one (1) Business Day prior to the funding date applicable thereto, and each such
Revolving Lender shall pay Agent such Revolving  Lender's Pro Rata Share of such
requested Loan, in same day funds, by wire transfer to Agent's account not later
than 3:00 p.m. (New York City time).  If any  Revolving  Lender fails to pay the
amount of its Pro Rata Share forthwith upon Agent's demand, Agent shall promptly
notify  Borrowers,  and Borrowers shall  immediately repay such amount to Agent.
Any repayment required pursuant to this Section 12.4 shall be without premium or
penalty.  Nothing in this Section  12.4 or  elsewhere  in this  Agreement or the
other Loan  Documents,  including  without  limitation the provisions of Section
12.5,  shall be deemed to require Agent to advance funds on behalf of any Lender
or to  relieve  any  Lender  from its  obligation  to  fulfill  its  commitments
hereunder  or to prejudice  any rights that Agent or Borrowers  may have against
any Lender as a result of any default by such Lender hereunder.

     12.5 Settlements; Payments and Information

          (a) Advances; Payments; Interest and Fee Payments.

               (i) The amount of  outstanding  Loans  pursuant to  Advances  may
          fluctuate from day to day through  Agent's  disbursement  of funds to,
          and  receipt  of funds  from,  Borrowers.  In order  to  minimize  the
          frequency  of  transfers  of  funds  between  Agent  and  each  Lender
          notwithstanding  terms to the  contrary  set  forth in  Section  12.4,
          Advances and  repayments  may be settled  according to the  procedures
          described in Sections  12.5(a)(ii) and 12.5(a)(iii) of this Agreement.
          Payments of principal,  interest and fees in respect of the Loans will
          be settled,  in accordance with each Revolving Lender's Pro Rata Share
          on  the  first   Business  Day  after  such   payments  are  received.
          Notwithstanding these procedures, each Lender's obligation to fund its

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          Pro  Rata  Share of any  Advances  made by  Agent  to  Borrowers  will
          commence  on the  date  such  Advances  are made by  Agent;  provided,
          however,  nothing  contained in this Agreement shall obligate a Lender
          to make an  Advance  at any  time an  Event of  Default  exists.  Such
          payments will be made by such Lender without set-off,  counterclaim or
          reduction of any kind.

               (ii) Once each week, or more  frequently  (including  daily),  if
          Agent so elects (each such day being a "Settlement Date"),  Agent will
          advise  each  Lender by 1:00 p.m.  (New York City time) by  telephone,
          telex,  or telecopy of the amount of each such Lender's Pro Rata Share
          of the  outstanding  Loans.  In the event  payments  are  necessary to
          adjust the amount of such Lender's share of the Loans to such Lender's
          Pro Rata Share of the Loans,  the party from which such payment is due
          will pay the other, in same day funds, by wire transfer to the other's
          account not later than 3:00 p.m.  (New York City time) on the Business
          Day following the Settlement Date.

               (iii)  On  the  first  Business  Day  of  each  month  ("Interest
          Settlement  Date"),  Agent will  advise each  Lender by  telephone  or
          facsimile of the amount of interest and fees charged to and  collected
          from Borrowers for the  proceeding  month in respect of the applicable
          Loans.  Provided that such Lender has made all payments required to be
          made by it under this  Agreement,  Agent will pay to such  Lender,  by
          wire transfer to such Lender's account (as specified by such Lender on
          Schedule A of this  Agreement  as amended by such  Lender from time to
          time after the date hereof pursuant to the notice provisions contained
          herein or in the applicable Lender Addition  Agreement) not later than
          3:00 p.m.  (New York City time) on the next Business Day following the
          Interest  Settlement  Date such  Lender's  share of such  interest and
          fees.

          (b) Availability of Lenders' Pro Rata Share.

               (i) Unless Agent has been notified by a Revolving Lender prior to
          any proposed  funding date of such Lender's  intention not to fund its
          Pro Rata Share of the Advance amount requested by Borrowers, Agent may
          assume that such Lender  will make such amount  available  to Agent on
          the  proposed  funding date or the  Business  Day  following  the next
          Settlement Date, as applicable;  provided,  however, nothing contained
          in this  Agreement  shall  obligate a Lender to make an Advance at any
          time an Event of Default exists.  If such amount is not, in fact, made
          available to Agent by such Lender when due,  Agent will be entitled to
          recover  such  amount on  demand  from such  Lender  without  set-off,
          counterclaim, or deduction of any kind.

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               (ii) Nothing  contained in this Section 12.5(b) will be deemed to
          relieve a Lender of its  obligation to fulfill its  commitments  or to
          prejudice  any rights Agent or Borrowers  may have against such Lender
          as a result of any default by such Lender under this Agreement.

          (c) Return of Payments.

               (i) If Agent pays an amount to a Lender  under this  Agreement in
          the belief or expectation  that a related  payment has been or will be
          received  by Agent  from  Borrowers  and such  related  payment is not
          received by Agent,  then Agent will be entitled to recover such amount
          from such Lender  without  set-off,  counterclaim  or deduction of any
          kind.

               (ii) If Agent  determines at any time that any amount received by
          Agent under this  Agreement  must be returned to  Borrowers or paid to
          any other  Person  pursuant to any solvency  law or  otherwise,  then,
          notwithstanding  any other term or condition of this Agreement,  Agent
          will not be required to distribute any portion  thereof to any Lender.
          In addition,  each Lender will repay to Agent on demand any portion of
          such amount that Agent has  distributed to such Lender,  together with
          interest  at such  rate,  if  any,  as  Agent  is  required  to pay to
          Borrowers  or such other  Person,  without  set-off,  counterclaim  or
          deduction of any kind.

     12.6 Dissemination of Information

     Upon request by each  Lender,  the Agent will  distribute  promptly to such
Lender,  unless previously  provided by Borrowers to such Lender,  copies of all
notices, schedules, reports, projections,  financial statements,  agreements and
other material and other information,  including,  but not limited to, financial
and reporting  information  received  from  Borrowers or their  Subsidiaries  or
generated by a third party (and excluding only internal information generated by
CapitalSource  for its own use as a Lender or as Agent), as provided for in this
Agreement and the other Loan Documents as received by Agent.  Agent shall not be
liable to Lenders  for any  failure to comply  with its  obligations  under this
Section 12.6,  except to the extent that such failure is attributable to Agent's
gross negligence or willful misconduct.

XIII. MISCELLANEOUS

     13.1 Governing Law; Jurisdiction; Service of Process; Venue

     The Loan  Documents  shall be governed by and construed in accordance  with
the internal laws of the State of Maryland  without  giving effect to its choice
of law provisions. Any judicial proceeding against Borrowers with respect to the
Obligations,  any Loan  Document or any related  agreement may be brought in any
federal  or state  court  of  competent  jurisdiction  located  in the  State of
Maryland.  By  execution  and  delivery  of each Loan  Document to which it is a
party, each Borrower (i) accepts the non-exclusive jurisdiction of the aforesaid
courts and irrevocably agrees to be bound by any judgment rendered thereby, (ii)
waives personal service of process, (iii) agrees that service of process upon it
may be made by certified or registered mail, return receipt requested,  pursuant
to Section 13.5 hereof,  and (iv) waives any objection to jurisdiction and venue
of any action instituted hereunder and agrees not to assert any defense based on
lack of jurisdiction,  venue, convenience or forum non conveniens. Nothing shall
affect the right of Agent or any Lender to serve process in any manner permitted
by law or shall  limit  the right of Agent or any  Lender  to bring  proceedings
against  any   Borrower  in  the  courts  of  any  other   jurisdiction   having
jurisdiction.  Any judicial  proceedings  against Agent or any Lender involving,
directly  or  indirectly,  the  Obligations,  any Loan  Document  or any related
agreement shall be brought only in a federal or state court located in the State
of Maryland.  All parties  acknowledge that they participated in the negotiation
and  drafting  of this  Agreement  with the  assistance  of  counsel  and  that,
accordingly,  no party shall move or petition a court  construing this Agreement
to construe it more stringently against one party than against any other.

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     13.2 Successors and Assigns; Assignments and Participations

          (a) Each  Lender may at any time assign all or a portion of its rights
     and delegate all or a portion of its  obligations  under this Agreement and
     the other Loan  Documents  (including all its rights and  obligations  with
     respect to the Loans) to one or more  Persons (a  "Transferee");  provided,
     that (i) so long as no  Default  or Event of Default  has  occurred  and is
     continuing and subject to the provisions of Section  13.2(h)  hereof,  such
     Transferee  shall be a Qualified  Lender and (ii) such  Transferee and such
     assigning  Lender  shall  execute and deliver to Agent for  acceptance  and
     recording in the Register,  a Lender Addition Agreement,  which shall be in
     form  and  substance  reasonably  acceptable  to  Agent  in  its  Permitted
     Discretion. Upon such execution,  delivery,  acceptance and recording, from
     and after the effective date  determined  pursuant to such Lender  Addition
     Agreement,  (A) the Transferee  thereunder  shall be a party hereto and, to
     the  extent  provided  in such  Lender  Addition  Agreement,  have the same
     rights, benefits and obligations as it would if it were a Lender hereunder,
     (B) the  assigning  Lender shall be relieved of its  obligations  hereunder
     with respect to its Commitment or assigned portion thereof, as the case may
     be, to the extent that such obligations  shall have been expressly  assumed
     by the Transferee  pursuant to such Lender Addition  Agreement (and, in the
     case of a Lender Addition  Agreement  covering all or the remaining portion
     of an assigning Lender's rights and obligations under this Agreement,  such
     assigning  Lender shall cease to be a party  hereto but shall  nevertheless
     continue  to be  entitled  to the  benefits  of  Sections  13.4 and  13.7).
     Borrowers  hereby  acknowledge and agree that any assignment will give rise
     to a  direct  obligation  of  Borrowers  to the  Transferee  and  that  the
     Transferee  shall be considered to be a "Lender"  hereunder.  Borrowers may
     not sell,  assign or transfer  any interest in this  Agreement,  any of the
     other Loan Documents,  or any of the  Obligations,  or any portion thereof,
     including Borrowers' rights, title, interests, remedies, powers, and duties
     hereunder or thereunder.

          (b) Each Lender may at any time sell participations in all or any part
     of its  rights and  obligations  under  this  Agreement  and the other Loan
     Documents  (including  all its rights and  obligations  with respect to the
     Loans) to one or more Persons (each, a "Participant").  In the event of any
     such sale by a Lender of a  participation  to a Participant,  such Lender's
     obligations  under this  Agreement to the other  parties to this  Agreement
     shall remain unchanged, such Lender shall remain solely responsible for the
     performance  thereof,  such Lender shall remain the holder of any such Loan
     (and any Note  evidencing  such Loan) for all purposes under this Agreement
     and the other Loan Documents and Borrowers and Agent shall continue to deal
     solely and  directly  with such  Lender in  connection  with such  Lender's
     rights and  obligations  under this Agreement and the other Loan Documents.
     Any   agreement   pursuant  to  which  any  Lender   shall  sell  any  such
     participation  shall  provide  that such Lender shall retain the sole right
     and  responsibility  to exercise such  Lender's  rights and enforce each of
     Borrowers'  obligations  hereunder,  including  the right to consent to any
     amendment,  supplement,  modification  or waiver of any  provision  of this
     Agreement  or  any  of  the  other  Loan  Documents;  provided,  that  such
     participation  agreement  may  provide  that such  Lender  will not  agree,
     without  the  consent of the  Participant,  to any  amendment,  supplement,
     modification  or waiver  of: (i) any  reduction  in the  principal  amount,
     interest rate or fees payable with respect to any Loan in which such holder
     participates;  (ii) any extension of the termination date of this Agreement
     or the date fixed for any payment of  principal,  interest or fees  payable
     with respect to any Loan in which such holder  participates;  and (iii) any
     release  of all or  substantially  all of the  Collateral  (other  than  in
     accordance  with  the  terms  of this  Agreement  or the  Loan  Documents).
     Borrowers  hereby  acknowledge  and agree that the  Participant  under each
     participation  shall,  solely for the purposes of Sections  10.5,  13.4 and
     13.7 of this Agreement be considered to be a "Lender" hereunder.

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          (c) Agent,  on behalf of  Borrowers,  shall  maintain  at its  address
     referred  to in  Section  13.5 a copy of  each  Lender  Addition  Agreement
     delivered to it and a written or electronic  register (the  "Register") for
     the  recordation  of the  names  and  addresses  of  the  Lenders  and  the
     Commitment  of,  and the  principal  amount of the Loans  owing to, and the
     Notes  evidencing  such  Loans  owned by,  each  Lender  from time to time.
     Notwithstanding  anything  in  this  Agreement  to the  contrary,  each  of
     Borrowers,  the Agent and the Lenders shall treat each Person whose name is
     recorded  in the  Register  as the  owner of the  Loans,  the Notes and the
     Commitment  recorded  therein  for  all  purposes  of this  Agreement.  The
     Register  shall be available for  inspection by the Borrowers or any Lender
     at any reasonable time and from time to time upon reasonable prior notice.

          (d)  Notwithstanding  anything in this  Agreement to the contrary,  no
     assignment  under Section 13.2(a) of any rights or obligations  under or in
     respect of the Loans or the Notes  evidencing such Loans shall be effective
     unless and until  Agent  shall have  recorded  the  assignment  pursuant to
     Section 13.2(c).  Upon its receipt of a Lender Addition  Agreement executed
     by an assigning  Lender and an Transferee,  Agent shall (i) promptly accept
     such Lender  Addition  Agreement and (ii) on the effective date  determined
     pursuant thereto record the information  contained  therein in the Register
     and give prompt notice of such  acceptance  and  recordation to the Lenders
     and  Borrowers.  On or prior to such effective  date, the assigning  Lender
     shall surrender any outstanding  Notes held by it all or a portion of which
     are being assigned,  and Borrowers,  at their own expense,  shall, upon the
     request of Agent by the assigning Lender or the Transferee,  as applicable,
     execute and deliver to Agent, within five (5) Business Days of any request,
     new Notes to reflect  the  interest  held by the  assigning  Lender and its
     Transferee.

          (e) Except as otherwise provided in this Section 13.2 no Lender shall,
     as between Borrowers and that Lender, be relieved of any of its obligations
     hereunder as a result of any sale, assignment,  transfer or negotiation of,
     or  granting  of  participation  in,  all or any part of the Loans or other
     Obligations  owed to such Lender.  Each Lender may furnish any  information
     concerning  Borrowers  and their  Subsidiaries  in the  possession  of that
     Lender  from  time  to  time  to  assignees  and  participants   (including
     prospective   assignees  and  participants),   subject  to  confidentiality
     requirements hereunder.

          (f)  Notwithstanding  any other provision set forth in this Agreement,
     any Lender may at any time create a security interest in all or any portion
     of its rights under this  Agreement,  including,  without  limitation,  the
     Loans owing to it and the Notes held by it and the other Loan Documents and
     Collateral.

          (g) Borrowers  agree to use  commercially  reasonable  best efforts to
     assist any Lender in assigning or selling participations in all or any part
     of any Loans  made by such  Lender to  another  Person  identified  by such
     Lender.

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          (h)  Notwithstanding  anything in the Loan  Documents to the contrary,
     (i)  CapitalSource  and its Affiliates shall not be required to execute and
     deliver a Lender  Addition  Agreement in  connection  with any  transaction
     involving  its  Affiliates  or its or their lenders or financing or funding
     sources,  (ii) no lender to or funding or financing source of CapitalSource
     or its Affiliates shall be considered a Transferee and (iii) there shall be
     no limitation or  restriction on (A)  CapitalSource's  ability to assign or
     otherwise  transfer  any  Loan  Document  or any  Obligation  to  any  such
     Affiliate  or lender  or  funding  or  financing  source,  and (B) any such
     lender's or  financing or funding  source's  ability to assign or otherwise
     transfer any Loan Document or Obligation;  provided, however, CapitalSource
     shall continue to be liable as a "Lender"  under the Loan Documents  unless
     such Affiliate or lender executes a Lender  Addition  Agreement and thereby
     becomes a "Lender."

          (i) The Loan  Documents  shall  inure to the  benefit of each  Lender,
     Agent, Transferees,  Participants (to the extent expressly provided therein
     only) and all future holders of the Note, the Obligations and/or any of the
     Collateral,  and each of their respective successors and assigns. Each Loan
     Document shall be binding upon the Persons other than Lender and Agent that
     are parties  thereto and their  respective  successors and assigns,  and no
     such Person may assign,  delegate or transfer  any Loan  Document or any of
     its rights or obligations  thereunder  without the prior written consent of
     Agent. No rights are intended to be created under any Loan Document for the
     benefit of any third party donee, creditor or incidental beneficiary of any
     Borrower or any Guarantor.  Nothing contained in any Loan Document shall be
     construed as a delegation to Agent or any Lender of any other Person's duty
     of performance. BORROWERS ACKNOWLEDGE AND AGREE THAT AGENT OR ANY LENDER AT
     ANY  TIME  AND  FROM  TIME TO TIME  MAY (I)  DIVIDE  AND  REISSUE  (WITHOUT
     SUBSTANTIVE  CHANGES  OTHER THAN THOSE  RESULTING  FROM SUCH  DIVISION) THE
     NOTES,  AND/OR (II) SELL,  ASSIGN OR GRANT  PARTICIPATING  INTERESTS  IN OR
     TRANSFER  ALL OR ANY  PART OF ITS  RIGHTS  OR  OBLIGATIONS  UNDER  ANY LOAN
     DOCUMENT,  NOTE, THE OBLIGATIONS AND/OR THE COLLATERAL TO OTHER PERSONS, IN
     EACH CASE ON THE TERMS AND CONDITIONS  PROVIDED HEREIN. Each Transferee and
     Participant  shall have all of the rights and benefits  with respect to the
     Obligations, Notes, Collateral and/or Loan Documents held by it as fully as
     if the original holder thereof, provided that,  notwithstanding anything to
     the contrary in any Loan  Document,  no Borrower  shall be obligated to pay
     under this Agreement to any Transferee or Participant  any sum in excess of
     the sum  which it would  have been  obligated  to pay to  Lenders  had such
     participation not been effected. Notwithstanding any other provision of any
     Loan  Document,  Agent  and  Lenders  may  disclose  to any  Transferee  or
     Participant all information,  reports,  financial statements,  certificates
     and documents obtained under any provision of any Loan Document;  provided,
     that Transferees and Participants  shall be subject to the  confidentiality
     provisions contained herein that are applicable to Agent and Lenders.

     13.3 Application of Payments

     To the  extent  that any  payment  made or  received  with  respect  to the
Obligations  is  subsequently  invalidated,   determined  to  be  fraudulent  or
preferential,  set aside, defeased or required to be repaid to a trustee, debtor
in possession,  receiver,  custodian or any other Person under any Debtor Relief
Law,  common  law or  equitable  cause or any other  law,  then the  Obligations
intended to be satisfied by such payment shall be revived and shall  continue as
if such  payment  had not been  received  by Agent of any  Lender  and the Liens
created hereby shall be revived  automatically without any action on the part of

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any party hereto and shall  continue as if such payment had not been received by
Agent or any Lender.  Except as  specifically  provided in this  Agreement,  any
payments with respect to the Obligations  received shall be credited and applied
in such manner and order as Agent shall decide in its sole discretion.

     13.4 Indemnity

     Borrowers,  jointly and severally,  shall  indemnify Agent and each Lender,
their  respective  Affiliates  and  managers,   members,  officers,   employees,
Affiliates,  agents,  representatives,   successors,  assigns,  accountants  and
attorneys (collectively, the "Indemnified Persons") from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs,  expenses and disbursements of any kind or nature whatsoever  (including,
without  limitation,  reasonable fees and  disbursements of counsel and in-house
documentation  and diligence fees and legal  expenses)  which may be imposed on,
incurred  by or  asserted  against any  Indemnified  Person  with  respect to or
arising out of, or in any litigation,  proceeding or investigation instituted or
conducted  by any Person  with  respect  to any  aspect  of, or any  transaction
contemplated  by, or any matter  related to, any Loan Document or any agreement,
document or transaction  contemplated  thereby,  whether or not such Indemnified
Person is a party thereto,  except to the extent that such  litigation is solely
between or among  Lenders  and  relates  solely to issues  between the Lenders a
final and nonappealable  order of judgment binding on such Indemnified Person of
a court of competent  jurisdiction  determines that any of the foregoing  arises
out of the gross negligence or willful misconduct of such Indemnified Person. If
any Indemnified Person uses in-house counsel for any purpose for which Borrowers
are  responsible  to pay or  indemnify,  Borrowers  expressly  agree  that their
indemnification   obligations   include   reasonable   charges   for  such  work
commensurate  with the fees that would  otherwise  be  charged by outside  legal
counsel selected by such Indemnified  Person in its sole discretion for the work
performed.  Agent  agrees to give  Borrowers  reasonable  notice of any event of
which Agent becomes aware for which  indemnification  may be required under this
Section 13.4,  and Agent may elect (but is not  obligated) to direct the defense
thereof;  provided, that the selection of counsel shall be subject to Borrowers'
consent,  which  consent  shall not be  unreasonably  withheld or  delayed,  and
Borrowers  shall be  entitled  to  participate  in the defense of any matter for
which  indemnification  may be required  under this  Section  13.4 and to employ
counsel  at its own  expense  to  assist in the  handling  of such  matter.  Any
Indemnified  Person may, in its reasonable  discretion,  take such actions as it
deems necessary and  appropriate to  investigate,  defend or settle any event or
take  other  remedial  or  corrective  actions  with  respect  thereto as may be
necessary  for the  protection  of such  Indemnified  Person or the  Collateral,
subject to  Borrowers'  prior  approval  of any  settlement,  which shall not be
unreasonably withheld or delayed.  Notwithstanding the foregoing, if any insurer
agrees to undertake the defense of an event (an "Insured  Event"),  Agent agrees
not to  exercise  its right to select  counsel to defend the event if that would
cause  Borrowers'  insurer  to deny  coverage;  provided,  however,  that  Agent
reserves the right to retain  counsel to represent any  Indemnified  Person with
respect to an Insured  Event at its sole cost and  expense.  To the extent  that
Agent  or any  Lender  obtains  recovery  from  a  third  party  other  than  an
Indemnified  Person of any of the amounts that  Borrowers  have paid to Agent or
any Lender  pursuant to the indemnity set forth in this Section 13.4, then Agent
and/or  Lender  shall  promptly pay to  Borrowers  the amount of such  recovery.
Without  limiting  any of  the  foregoing,  Borrowers,  jointly  and  severally,
indemnifies  the  Indemnified  Parties  for all  claims  for  brokerage  fees or
commissions  (other than claims of a broker with whom such Indemnified Party has

                                       66
<PAGE>

directly  contracted in writing) which may be made in connection with respect to
any aspect of, or any  transaction  contemplated  by or  referred  to in, or any
matter  related to, any Loan  Document,  Acquisition  Document or any agreement,
document or transaction contemplated thereby.

     13.5 Notice

     Any notice or request under any Loan  Document  shall be given to any party
to this Agreement at such party's address set forth beneath its signature on the
signature  page to this  Agreement,  or at such other  address as such party may
hereafter  specify in a notice given in the manner  required  under this Section
13.5.  Any  notice or  request  hereunder  shall be given  only by, and shall be
deemed to have been  received  upon  (each,  a  "Receipt"):  (i)  registered  or
certified mail, return receipt requested,  on the date on which such received as
indicated  in such return  receipt,  (ii)  delivery by a  nationally  recognized
overnight  courier,  one (1) Business Day after  deposit with such  courier,  or
(iii)  facsimile  or  electronic  transmission,  in each case upon  telephone or
further  electronic  communication  from  the  recipient  acknowledging  receipt
(whether automatic or manual from recipient), as applicable.

     13.6 Severability; Captions; Counterparts; Facsimile Signatures

     If any  provision of any Loan Document is  adjudicated  to be invalid under
applicable  laws or  regulations,  such provision  shall be  inapplicable to the
extent of such invalidity  without  affecting the validity or  enforceability of
the  remainder  of the Loan  Documents  which  shall be given  effect  so far as
possible.  The captions in the Loan Documents are intended for  convenience  and
reference  only and shall not affect the meaning or  interpretation  of the Loan
Documents. The Loan Documents may be executed in one or more counterparts (which
taken together, as applicable, shall constitute one and the same instrument) and
by  facsimile  transmission,  which  facsimile  signatures  shall be  considered
original executed counterparts. Each party to this Agreement agrees that it will
be bound  by its own  facsimile  signature  and that it  accepts  the  facsimile
signature of each other party.

     13.7 Expenses

     Borrowers  shall pay,  whether  or not the  Closing  occurs,  all costs and
expenses incurred by Agent, Lenders and/or their Affiliates,  including, without
limitation,  documentation and diligence fees and expenses,  all search,  audit,
appraisal,  recording,  professional  and filing fees and expenses and all other
out-of-pocket  charges and  expenses  (including,  without  limitation,  UCC and
judgment and tax lien searches and UCC filings and fees for post-Closing UCC and
judgment and tax lien searches and wire transfer fees and audit  expenses),  and
reasonable attorneys' fees and expenses,  (i) in any effort to enforce,  protect
or collect  payment of any  Obligation  or to enforce  any Loan  Document or any
related  agreement,  document or  instrument,  (ii) in connection  with entering
into, negotiating,  preparing, reviewing and executing the Loan Documents and/or
any related agreements,  documents or instruments,  (iii) arising in any way out
of  administration of the Obligations or the taking or refraining from taking by
Agent or Lender of any action  requested by Borrowers,  (iv) in connection  with
instituting,  maintaining,  preserving, enforcing and/or foreclosing on Agent's,
for the  benefit  of  itself  and  Lenders,  Liens in any of the  Collateral  or
securities   pledged  under  the  Loan  Documents,   whether  through   judicial
proceedings or otherwise, (v) in defending or prosecuting any actions, claims or

                                       67
<PAGE>

proceedings  arising out of or relating to Agent's and/or Lenders'  transactions
with Borrowers, (vi) in seeking,  obtaining or receiving any advice with respect
to its rights and obligations under any Loan Document and any related agreement,
document or instrument, (vii) arising out of or relating to any Default or Event
of Default or occurring thereafter or as a result thereof,  (viii) in connection
with all actions,  visits, audits and inspections undertaken by Agent or Lenders
or their  Affiliates  pursuant to the Loan Documents,  and/or (ix) in connection
with any modification,  restatement,  supplement, amendment, waiver or extension
of any Loan Document and/or any related agreement,  document or instrument.  All
of the foregoing shall be charged to Borrowers' account and shall be part of the
Obligations  and absent a Default or Event of Default all the foregoing shall be
reasonable  in  amount.  If Agent,  any Lender or any of their  Affiliates  uses
in-house counsel for any purpose under any Loan Document for which Borrowers are
responsible  to  pay  or  indemnify,   Borrowers   expressly  agree  that  their
Obligations  include reasonable charges for such work commensurate with the fees
that would otherwise be charged by outside legal counsel selected by Agent, such
Lender or such Affiliate in its sole discretion for the work performed.  Without
limiting the  foregoing,  Borrowers  shall pay all taxes (other than taxes based
upon or measured by each  Lender's  income or revenues or any personal  property
tax), if any, in connection  with the issuance of any Note and the filing and/or
recording of any documents and/or financing statements.

     13.8 Entire Agreement

     This Agreement and the other Loan Documents to which  Borrowers are parties
constitute  the entire  agreement  between  Borrowers,  Agent and  Lenders  with
respect to the  subject  matter  hereof and  thereof,  and  supersede  all prior
agreements and understandings (including but not limited to the term sheet dated
on or about February 25, 2003, if any,  relating to the subject matter hereof or
thereof.  Any promises,  representations,  warranties  or guarantees  not herein
contained and hereinafter  made shall have no force and effect unless in writing
signed by Borrowers,  Agent and Lenders or Requisite  Lenders,  as  appropriate.
Except as set forth in and subject to Section  10.5,  no  provision  of any Loan
Document may be changed,  modified,  amended,  restated,  waived,  supplemented,
discharged,  canceled or terminated orally or by any course of dealing or in any
other manner other than by an agreement in writing  signed by  Borrowers,  Agent
and Requisite Lenders; provided, that no consent or agreement by Borrowers shall
be required to amend, modify, change,  restate,  waive,  supplement,  discharge,
cancel or terminate any provision of Article XII so long as no additional duties
are required to be assumed by Borrowers.  Each party hereto acknowledges that it
has been advised by counsel in connection  with the negotiation and execution of
this  Agreement  and is not  relying  upon oral  representations  or  statements
inconsistent with the terms and provisions hereof. The schedules attached hereto
may be amended or  supplemented  by  Borrowers  upon  delivery  to Agent of such
amendments or supplements  and, except as expressly  provided  otherwise in this
Agreement, the written approval thereof by Agent.

     13.9 Approvals and Duties

     Unless expressly  provided herein to the contrary,  any approval,  consent,
waiver or  satisfaction  of Agent or Lenders  with respect to any matter that is
subject of any Loan Document may be granted or withheld by Agent or Lenders,  as
applicable,  in their sole and absolute  discretion.  Other than Agent's duty of
reasonable  care with  respect to  Collateral  delivered  pursuant to the Pledge

                                       68
<PAGE>

Agreements,  Agent and Lenders shall have no responsibility for or obligation or
duty with respect to any of the  Collateral or any matter or proceeding  arising
out of or relating thereto,  including,  without  limitation,  any obligation or
duty to collect any sums due in respect  thereof or to protect or  preserve  any
rights pertaining thereto.

     13.10 Confidentiality and Publicity

     Agent and each Lender reserve the right to review and approve all materials
that Borrowers or any of their Affiliates  prepares that contain Agent's or such
Lender's  name or  describe  or  refer to any Loan  Document,  any of the  terms
thereof or any of the transactions  contemplated  thereby.  Borrowers shall not,
and shall not permit  any of their  Affiliates  to,  use  either  Agent's or any
Lender's  name (or the name of any of Agent's  or any  Lenders'  Affiliates)  in
connection  with any of its business  operations,  provided,  that Borrowers may
disclose  the  Lenders'  names,  the  aggregate  principal  amount  of the Loans
outstanding  and other  principal  terms of such Loans to its  shareholders  and
other equity owners and prospective  purchasers of debt or equity  securities of
Borrowers  so  long as  Borrowers  inform  such  prospective  purchasers  of the
confidential nature of such information and such Persons agree in writing not to
disclose  the same to any other  Person  and to be bound by the  confidentiality
provisions of this Agreement. Nothing contained in any Loan Document is intended
to permit or  authorize  any  Borrower or any of its  Affiliates  to contract on
behalf of Agent or any Lender.

     13.11 Release of Collateral

     Subject  to  Section  12.3,   promptly   following  full   performance  and
satisfaction and indefeasible payment in full in cash of all Obligations and the
termination  of this  Agreement,  the Liens created  hereby shall  terminate and
Agent and Lenders  shall  execute  and deliver  such  documents,  at  Borrowers'
expense,  as are necessary to release Lenders' Liens in the Collateral and shall
return the Collateral to Borrowers;  provided,  however,  that the parties agree
that, notwithstanding any such termination or release or the execution, delivery
or filing of any such documents or the return of any  Collateral,  if and to the
extent that any such payment made or received with respect to the Obligations is
subsequently  invalidated,  determined  to be fraudulent  or  preferential,  set
aside,  defeased or required  to be repaid to a trustee,  debtor in  possession,
receiver,  custodian or any other Person under any Debtor Relief Law, common law
or  equitable  cause or any  other  law,  then the  Obligations  intended  to be
satisfied by such payment shall be revived and shall continue as if such payment
had not been received by Agent or any Lender and the Liens created  hereby shall
be revived  automatically without any action on the part of any party hereto and
shall  continue as if such payment had not been received by Agent or any Lender.
Agent  and  Lenders  shall not be  deemed  to have  made any  representation  or
warranty with respect to any Collateral so delivered except that such Collateral
is free and clear,  on the date of such  delivery,  of any and all Liens arising
from such Person's own acts.

         [Remainder Of Page Intentionally Blank; Signature Pages Follow]

                                       69
<PAGE>

Signature Page to Revolving Credit,  Term Loan,  Equipment Acquisition Term Loan
                                                          and Security Agreement

     IN WITNESS  WHEREOF,  each of the parties has duly executed this  Revolving
Credit, Term Loan, Equipment  Acquisition Term Loan and Security Agreement as of
the date first written above.

BORROWERS:                              ADVANCED NUTRACEUTICALS, INC.

                                        By:
                                           -------------------------------------
                                        Name:
                                              ----------------------------------
                                        Title:
                                               ---------------------------------
                                        Advanced Nutraceuticals, Inc.
                                        106 South University Blvd., Unit #14
                                        Denver, CO 80209
                                        Attention:
                                                    ----------------------------
                                        Telephone:
                                                    ----------------------------
                                        FAX:
                                              ----------------------------------
                                        E-MAIL:
                                                 -------------------------------

                                        BACTOLAC PHARMACEUTICAL, INC.

                                        By:
                                           -------------------------------------
                                        Name:
                                              ----------------------------------
                                        Title:
                                               ---------------------------------
                                        Bactolac Pharmaceutical Inc.
                                        7 Oser Avenue
                                        Hauppauge, NY 11788
                                        Attention:
                                                    ----------------------------
                                        Telephone:
                                                    ----------------------------
                                        FAX:
                                              ----------------------------------
                                        E-MAIL:
                                                 -------------------------------

                                        ANI PHARMACEUTICALS, INC.

                                        By:
                                           -------------------------------------
                                        Name:
                                              ----------------------------------
                                        Title:
                                               ---------------------------------
                                        ANI Pharmaceuticals, Inc.
                                        3600 25th Avenue
                                        Gulfport, MS 39501
                                        Attention:
                                                    ----------------------------
                                        Telephone:
                                                    ----------------------------
                                        FAX:
                                              ----------------------------------
                                        E-MAIL:
                                                 -------------------------------

                                       70
<PAGE>

AGENT AND LENDER:                       CAPITALSOURCE FINANCE LLC

                                        By:
                                           -------------------------------------
                                        Name:
                                             -----------------------------------
                                        Title:
                                              ----------------------------------
                                        CapitalSource Finance LLC
                                        4445 Willard Avenue, 12th Floor
                                        Chevy Chase, MD  20815
                                        Attention:  Corporate Finance Group,
                                        Portfolio Manager
                                        Telephone:  (301) 841-2700
                                        FAX:  (301) 841-2360
                                        E-MAIL:  rdailey@capitalsource.com

                                       71
<PAGE>

                                     ANNEXES
                                     -------

Annex I             Financial Covenants

                                    EXHIBITS
                                    --------

Exhibit A           Borrowing Certificate

Exhibit B           Form of Draw Notice

                                    SCHEDULES
                                    ---------

     Schedule A         Lenders/Commitments
     Schedule 2.4       Borrowers' Accounts for Receipt of Loan Proceeds
     Schedule 5.1       Organization and Authority
     Schedule 5.2       Consents, Approvals/Authorizations Required
     Schedule 5.3       Subsidiaries, Capitalization and Ownership Interests
     Schedule 5.4       Properties
     Schedule 5.5       Other Agreements
     Schedule 5.6       Litigation
     Schedule 5.7       Environmental
     Schedule 5.8       Tax Returns; Governmental Reports
     Schedule 5.11      Intellectual Property
     Schedule 5.12      Licenses and Permits; Labor
     Schedule 5.15      Existing Indebtedness; Investments, Guaranties and
                          Certain Contracts
     Schedule 5.16      Affiliated Agreements
     Schedule 5.17      Insurance
     Schedule 5.18A     Names
     Schedule 5.18B     Location of Offices, Records and Collateral
     Schedule 5.18C     Deposit Accounts and Investment Property
     Schedule 5.22      Finders Fee Payable by Borrowers
     Schedule 6.8       Further Assurances and Post Closing Deliverables
     Schedule 7.2       Permitted Indebtedness
     Schedule 7.3       Permitted Liens

<PAGE>

                                  Schedule 6.8
                                  ------------

                Further Assurances and Post Closing Deliverables

     In accordance  with and in  furtherance of the provisions of Section 6.8 of
the Agreement,  the following actions, items and deliverables will be completed,
taken and/or  delivered to Agent's  satisfaction on or before the date specified
below.  The failure to take,  comply with or provide any of the actions or items
referred  to herein on or before  such date  shall  constitute  and be deemed an
Event of Default under the  Agreement.  Nothing in this Schedule 6.8 shall limit
the  effect  of  any  provision  of  the  Agreement  or  Borrowers'  obligations
thereunder.  Capitalized  terms not otherwise defined in this Schedule 6.8 shall
have the same meaning as in the Agreement.

     1. On or before ten (10) days after the Closing Date, Borrowers shall cause
to be duly filed all UCC-3 termination  statements with respect to GECC and each
other holder of security interests on the assets of the Borrowers except for any
statements evidencing Permitted Liens.

     2. On or before  thirty (30) days after the Closing Date,  Borrowers  shall
cause to be  delivered  to Agent  true and  complete  copies of their  insurance
policies,  including,  without  limitation,  the lender loss payable endorsement
thereunder, which shall be reasonably satisfactory to Agent.

     3. On or before  March 31,  2003,  Borrowers  shall cause to be provided to
Agent  evidence  satisfactory  to Agent that the  Collateral  Assignment of Life
Insurance has been accepted by and duly recorded on the books and records of the
insurance company that issued the Life Insurance Policy.

     4. On or before  thirty (30) days after the Closing  Date,  Borrowers  will
deliver to Agent a good standing and foreign qualification  certificate from the
Secretary of State of the State of New York for Bactolac.

     5. On or before  twenty (20) days after the Closing  Date,  Borrowers  will
deliver to Agent evidence that the  Mississippi  personal  property tax has been
paid in full.

<PAGE>

                                     ANNEX I

                               FINANCIAL COVENANTS
                               -------------------

1)   Tangible Net Worth

     As measured on the last day of each fiscal year of Borrowers,  the Tangible
Net Worth shall not be less than the following:

----------------------------------------------------------------
Test Date:                         Minimum Tangible Net Worth:
----------------------------------------------------------------
September 30, 2003                 $8,000,000
September 30, 2004                 $8,500,000
September 30, 2005                 $9,000,000
----------------------------------------------------------------

2)   Fixed Charge Coverage Ratio

     The Fixed Charge  Coverage  Ratio shall not be less than 1:00 to 1:00 as of
the last day of each fiscal  month  commencing  with the month  ending April 30,
2003.

3)   Capital Expenditure

     Borrowers  shall not permit the Capital  Expenditures  in the  aggregate to
exceed $700,000 in any fiscal year of the Borrowers.

4)   Defined Terms

     For purposes of the  covenants  set forth in this Annex I, the terms listed
below shall have the following meanings:

     "Capital Expenditures"
     ----------------------
     shall  mean  for  Borrowers,  on a  consolidated  basis,  the sum  (without
duplication)  of  all   expenditures   (whether  paid  in  cash  or  accrued  as
liabilities)  that are or are  required  to be treated  as capital  expenditures
under GAAP.

     "EBITDA"
     --------
     shall  mean for  Borrowers,  on a  consolidated  basis,  the  sum,  without
duplication,  of the following:  Net Income  determined in accordance with GAAP,
plus, (a) Interest Expense,  (b) taxes on income, (c) depreciation  expense, (d)
amortization  expense, (e) all other non-cash and/or  non-recurring  charges and
expenses approved by Agent in its Permitted  Discretion,  excluding accruals for
cash  expenses  made in the ordinary  course of business,  and (f) loss from any
sale of assets,  other than sales in the ordinary  course of business,  less (x)
gain  from any sale of  assets,  other  than  sales in the  ordinary  course  of
business, and (y) all non-cash and/or non-recurring income, all of the foregoing
determined in accordance with GAAP.

     "Fixed Charge Coverage Ratio"
     -----------------------------
     shall  mean,  for  Borrowers  on a  consolidated  basis,  at  any  date  of
determination, the ratio of (a) EBITDA, minus non-financed Capital Expenditures,
minus income  taxes paid in cash,  to (b) Fixed  Charges,  (i) during the period

                                       1

<PAGE>

from the Closing Date through  December 31, 2003,  cumulative for the months (or
portions thereof) from January 1, 2003 to the date of determination taken as one
accounting period, and (ii) commencing on January 1, 2004 and thereafter for the
twelve (12) months then ending taken as one accounting period.

     "Fixed Charges"
     ---------------
     shall mean,  the sum of the  following  for  Borrowers,  on a  consolidated
basis: (a) Total Debt Service,  (b) dividends and/or distributions paid in cash,
and (c) cash paid for stock repurchases and/or redemptions.

     "Interest Expense"
     ------------------
     shall mean total interest  expense  generated during the period in question
(including attributable to conditional sales contracts, Capital Leases and other
title  retention   agreements  in  accordance  with  GAAP)  of  Borrowers  on  a
consolidated  basis  with  respect  to all  outstanding  Indebtedness  including
accrued  interest  and  interest  paid  in kind  and  capitalized  interest  but
excluding commissions,  discounts and other fees owed with respect to letters of
credit and bankers'  acceptance  financing,  and net costs under  Interest  Rate
Agreements.

     "Interest Rate Agreement"
     -------------------------
     shall mean any interest rate swap, cap or collar agreement or other similar
agreement or arrangement designed to hedge the position with respect to interest
rates.

     "Net Income"
     ------------
     shall mean the net income (or loss) of  Borrowers on a  consolidated  basis
for such period taken as a single  accounting  period  determined  in conformity
with GAAP;  provided,  that there shall be excluded  (i) the income (or loss) of
any  Person  in which  any  other  Person  (other  than  Borrowers)  has a joint
interest, except to the extent of the amount of dividends or other distributions
actually paid to a Borrower by such Person  during such period,  (ii) the income
(or loss) of any Person  accrued  prior to the date it becomes a Borrower  or is
merged into or consolidated with a Borrower or that Person's assets are acquired
by a Borrower,  (iii) the income of any  Subsidiary  of  Borrowers to the extent
that the  declaration or payment of dividends or similar  distributions  of that
income by that Subsidiary is not at the time permitted by operation of the terms
of the charter or any agreement,  instrument,  judgment, decree, order, statute,
rule or governmental regulation applicable to that Subsidiary, (iv) compensation
expense  resulting  from the issuance of capital  stock,  stock options or stock
appreciation  rights issued to former or current employees,  including officers,
of a Borrower,  or the exercise of such  options or rights,  in each case to the
extent the  obligation  (if any)  associated  therewith  is not  expected  to be
settled by the payment of cash by a Borrower or any Affiliate  thereof,  and (v)
compensation expense resulting from the repurchase of capital stock, options and
rights described in clause (iv) of this definition of Net Income.

     "Tangible Net Worth"
     --------------------
     shall mean as to Borrowers, at any time, in accordance with GAAP (except as
otherwise  specifically set forth below), on a consolidated  basis for Borrowers
and their  Subsidiaries,  the amount equal to the  difference  between:  (a) the
aggregate  net book  value of all  assets of  Borrowers  and their  Subsidiaries
(excluding the value of patents, trademarks,  tradenames,  copyrights, licenses,
goodwill,  leasehold improvements,  prepaid assets and other intangible assets),
calculating the book value of inventory for this purpose on a first-in-first-out
basis,  after  deducting  from such book  values  all  appropriate  reserves  in
accordance  with  GAAP   (including  all  reserves  for  doubtful   receivables,
obsolescence,  depreciation  and  amortization)  and (b) the aggregate amount of
Total Debt of Borrowers and their Subsidiaries.

                                        2
<PAGE>

     "Total Debt"
     ------------
     shall  mean,  at any  date of  determination,  the  total  Indebtedness  of
Borrowers  on  a  consolidated  basis,   including,   without  limitation,   all
Indebtedness  under the Loan Documents and all accrued interest on the foregoing
(including,  without  limitation,  all  interest  paid in kind) and all  Capital
Leases,  but excluding current operating  liabilities.  For all purposes of this
Agreement,  the term "Total Debt" shall be calculated to include (i.e.,  not net
of) discounts,  deductions or  allocations  relating or applicable to or arising
from  any  equity  or  equity  participation  or  fees,  whether  under  GAAP or
otherwise.

     "Total Debt Service"
     --------------------
     shall mean the sum of (i) scheduled or other required payments of principal
on Total Debt  (excluding  the repayment of the note due to Dr. Reddy so long as
such  repayment  occurs on or  immediately  after the Closing  Date as permitted
hereunder),  (ii) any  other  cash  fees due or  payable  with  respect  to,  in
connection with or on Total Debt, and (iii) cash Interest Expense.

                                        3
<PAGE>

                                   APPENDIX A

                                   DEFINITIONS
                                   -----------

     "Account Debtor"
     ----------------
     shall mean any Person who is obligated under an Account.

     "Accounts"
     ----------
     shall mean all  "accounts"  (as  defined in the UCC) of  Borrowers  (or, if
referring  to  another  Person,   of  such  other  Person),   including  without
limitation,  accounts,  accounts  receivables,  monies  due or to become due and
obligations in any form (whether arising in connection with contracts,  Contract
Rights, Instruments, General Intangibles or Chattel Paper), in each case whether
arising out of goods sold or services rendered or from any other transaction and
whether or not earned by  performance,  now or hereafter in  existence,  and all
documents of title or other documents representing any of the foregoing, and all
collateral  security and  guaranties of any kind, now or hereafter in existence,
given by any Person with respect to any of the foregoing.

     "Advances"
     ----------
     shall mean a borrowing  under the Revolving  Facility.  Any amounts paid by
Agent or any Lender on behalf of any  Borrower or any  Guarantor  under any Loan
Document  (other than the Term Loan)  shall be an Advance  for  purposes of this
Agreement.

     "Affiliate" or "affiliate"
     --------------------------
     shall  mean,  as to any  Person,  any other  Person (a) that,  directly  or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with, such Person,  (b) who is a director or officer (i) of
such  Person,  (ii) of any  Subsidiary  of such  Person,  or (iii) of any Person
described  in clause  (a) above  with  respect  to such  Person,  or (c)  which,
directly or indirectly through one or more intermediaries,  is the beneficial or
record owner (as defined in Rule 13d-3 of the  Securities  Exchange Act of 1934,
as amended, as the same is in effect on the date hereof) of five percent (5%) or
more of any class of the outstanding voting stock, securities or other equity or
ownership  interests of such Person.  For purposes of this definition,  the term
"control" (and the correlative terms,  "controlled by" and "under common control
with") shall mean the possession, directly or indirectly, of the power to direct
or cause the direction of the management or policies,  whether through ownership
of securities or other interests, by contract or otherwise.

     "Accommodation Payment"
     -----------------------
     shall have the meaning assigned to it in Section 3.7(c) hereof.

     "Agreement"
     -----------
     shall have the meaning assigned to it in the introductory paragraph hereof.

     "Allocable Amount"
     ------------------
     shall have the meaning assigned to it in Section 3.7(c) hereof.

     "Applicable Rate"
     -----------------
     shall mean the interest rates  applicable  from time to time to Loans under
this Agreement.

     "Availability"
     --------------
     shall have the meaning assigned to it in Section 2.1 hereof.

     "Bankruptcy Code"
     -----------------
     shall have the meaning assigned to it in Section 3.7(b) hereof.

                                        1
<PAGE>

     "Blocked Accounts"
     ------------------
     shall mean the lockbox and accounts  maintained by Borrowers at the Lockbox
Banks  into  which all  collections  or  payments  on their  Accounts  and other
Collateral  and other cash  payments  received by Borrowers are paid pursuant to
this Agreement.

     "Borrowing Base"
     ----------------
     shall mean, collectively,  the Receivables Borrowing Base and the Inventory
Borrowing Base less all reserves.

     "Borrowing Certificate"
     -----------------------
     shall mean a Borrowing  Certificate  substantially in the form of Exhibit A
hereto.

     "Borrowing Date"
     ----------------
     shall have the meaning assigned to it in Section 2.4 hereof.

     "Business"
     ----------
     shall have the meaning given such term in the recitals of this Agreement.

     "Business Day"
     --------------
     shall mean any day other than a Saturday,  Sunday or other day on which the
Federal Reserve or Agent is closed.

     "Capital Lease"
     ---------------
     shall  mean,  as to any  Person,  a lease  of any  interest  in any kind of
property  or asset by that  Person as lessee  that is,  should be or should have
been recorded as a "capital lease" in accordance with GAAP.

     "Capitalized Lease Obligations"
     -------------------------------
     shall mean all  obligations  of any Person under  Capital  Leases,  in each
case,  taken at the amount  thereof  accounted  for as a liability in accordance
with GAAP.

     "Cash Equivalents"
     ------------------
     shall mean (a)  securities  issued,  or directly  and fully  guaranteed  or
insured, by the United States or any agency or instrumentality thereof (provided
that the full  faith and  credit of the  United  States is  pledged  in  support
thereof)  having  maturities  of not  more  than  six  months  from  the date of
acquisition, (b) U.S. dollar denominated time deposits,  certificates of deposit
and bankers'  acceptances  of (i) any  domestic  commercial  bank of  recognized
standing having capital and surplus in excess of $500,000,000,  or (ii) any bank
(or the parent company of such bank) whose  short-term  commercial  paper rating
from  Standard  &  Poor's  Ratings  Services  ("S&P")  is at  least  A-2  or the
equivalent  thereof or from Moody's Investors  Service,  Inc.  ("Moody's") is at
least P-2 or the  equivalent  thereof in each case with  maturities  of not more
than  six  months  from  the  date  of   acquisition   (any  bank   meeting  the
qualifications  specified in clauses  (b)(i) or (ii), an "Approved  Bank"),  (c)
repurchase  obligations  with a term of not more than seven days for  underlying
securities of the types  described in clause (a),  above,  entered into with any
Approved Bank, (d) commercial paper issued by any Approved Bank or by the parent
company of any Approved Bank and  commercial  paper issued by, or guaranteed by,
any industrial or financial company with a short-term commercial paper rating of
at least A-2 or the equivalent  thereof by S&P or at least P-2 or the equivalent
thereof by Moody's,  or  guaranteed by any  industrial  company with a long term
unsecured  debt rating of at least A or A2, or the  equivalent  of each thereof,
from S&P or Moody's,  as the case may be, and in each case  maturing  within six
months after the date of acquisition  and (e)  investments in money market funds
substantially  all of whose  assets  are  comprised  of  securities  of the type
described in clauses (a) through (d) above.

                                        2
<PAGE>

     "Change of Control"
     -------------------
     shall mean, with respect to any Borrower or Guarantor  individually  and/or
collectively  and/or any division or business or operating  units  thereof,  the
occurrence of any of the following: (i) a merger, consolidation, reorganization,
recapitalization  or share or interest  exchange,  sale or transfer or any other
transaction  or series of  transactions  in which  its  stockholders,  managers,
partners,  owners or interest holders  immediately  prior to such transaction or
series of transactions  receive, in exchange for the stock or interests owned by
them,  cash,  property or securities of the resulting or surviving entity or any
Affiliate thereof, and, as a result thereof, Persons who, individually or in the
aggregate,  were  holders  of 50% or more of its  voting  stock,  securities  or
equity, partnership or ownership interests immediately prior to such transaction
or series of transactions hold less than 50% of the voting stock,  securities or
other equity,  partnership or ownership  interests of the resulting or surviving
entity or such Affiliate  thereof,  calculated on a fully diluted basis,  (ii) a
direct or indirect sale,  transfer or other  conveyance or  disposition,  in any
single transaction or series of transactions, of all or substantially all of its
assets,  (iii) a direct  or  indirect  sale,  transfer  or other  conveyance  or
disposition,  in any single  transaction  or series of  transactions,  of all or
substantially  all of the equity ownership of any Subsidiary  thereof,  (iv) the
liquidation  or dissolution  of any  Subsidiary  thereof,  (v) any "change in/of
control"  or  "sale"  or  "disposition"  or  similar  event  as  defined  in any
certificate  or  incorporation  or formation or  statement  of  designations  or
operating  agreement of any  Borrower or Guarantor or in any document  governing
indebtedness  of such  Person  in  excess of  $100,000,  individually  or in the
aggregate which gives the holder of such indebtedness the right to accelerate or
otherwise  require  payment  of such  indebtedness  prior to the  maturity  date
thereof,  or in any  Employment  Agreement,  (vi) the  Controlling  Equity Group
ceases to be the record owner of 51% of the voting  power of Parent,  calculated
on a fully  diluted  basis,  or ceases to have the right to  appoint  or elect a
majority of the board of managers/advisors  of Borrowers,  or (vii) (A) Dr. P.M.
Reddy  ceases to be  employed  as Chief  Executive  Officer  of  Bactolac  or he
otherwise  becomes  disabled and, in each case, he is not replaced within thirty
(30) calendar days by an interim Chief Executive Officer of Bactolac, and within
180 days by a permanent  Chief  Executive  Officer of Bactolac,  each to Agent's
satisfaction as determined in its Permitted Discretion,  or any such replacement
Chief Executive  Officer of Bactolac ceases such employment or otherwise becomes
disabled unless replaced in the same time period and to Agent's  satisfaction as
determined in its Permitted  Discretion  or (B) Jeffrey  McGonegal  ceases to be
employed as Chief Financial  Officer of Parent or he otherwise  becomes disabled
and in each case,  he is not replaced  within  thirty (30)  calendar  days by an
interim  Chief  Financial  Officer of Parent,  and within  ninety (90) days by a
permanent Chief  Financial  Officer of Parent,  each to Agent's  satisfaction as
determined in its Permitted Discretion,  or any such replacement Chief Financial
Officer of Parent ceases such  employment or otherwise  becomes  disabled unless
replaced in the same time period and to Agent's  satisfaction  as  determined in
its Permitted Discretion.

     "Charter and Good Standing Documents"
     -------------------------------------
     shall mean, for each Borrower and each Guarantor, if any, (i) a copy of the
certificate of incorporation or formation (or other applicable charter document)
certified as of a date not more than five (5)  Business  Days before the Closing
Date  by  the  applicable   Governmental   Authority  of  the   jurisdiction  of
incorporation  or  organization  of such Borrower,  (ii) a copy of the bylaws or
similar  organizational  documents  of certified as of a date not more than five
(5)  Business  Days  before  the  Closing  Date by the  corporate  secretary  or
assistant  secretary of such  Borrower,  (iii) an original  certificate  of good
standing as of a date acceptable to Agent issued by the applicable  Governmental

                                        3
<PAGE>

Authority of the  jurisdiction of incorporation or organization of such Borrower
and of every other jurisdiction in which such Borrower has an office or conducts
business or is otherwise required to be in good standing, and (iv) copies of the
resolutions of the Board of Directors or managers (or other applicable governing
body) and, if required, stockholders, members or other equity owners authorizing
the  execution,  delivery and  performance  of the Loan  Documents to which such
Borrower is a party, certified by an authorized officer of such Person as of the
Closing Date.

     "Closing"
     ---------
     shall  mean the  satisfaction,  or written  waiver by Agent,  of all of the
conditions  precedent set forth in this Agreement required to be satisfied prior
to the consummation of the transactions contemplated hereby.

     "Closing Date"
     --------------
     shall mean the date of this Agreement.

     "Collateral"
     ------------
     shall mean,  collectively  and each  individually,  all  collateral  and/or
security granted and/or  securities  pledged to Agent, for the benefit of itself
and  Lenders,  by  Borrowers  and/or  Guarantors,  if any,  pursuant to the Loan
Documents including,  without limitation, the items set forth in Section 2.13 of
this Agreement.

     "Collateral Assignment of Life Insurance Policy"
     ------------------------------------------------
     shall mean a collateral  assignment of the Life  Insurance  Policy  whereby
Borrowers  shall  collaterally  assign all of the Borrowers'  rights in the Life
Insurance  Policy to Agent for the benefit of Lenders,  in form and substance to
Agent in its sole discretion.

     "Collateral Management Fee"
     ---------------------------
     shall have the meaning assigned to it in Section 3.3 hereof.

     "Commitment" or "Commitments"
     -----------------------------
     shall mean, (i) with respect to the Revolving Facility, as to any Revolving
Lender, the aggregate  commitment of such Revolving Lender to make Advances,  as
set forth on Schedule A or in the most recent Lender Addition Agreement executed
by such  Revolving  Lender,  (ii) as to all  Revolving  Lenders,  the  aggregate
commitment of all Revolving Lenders to make Advances,  (iii) with respect to the
Term Loan, as to any Term Lender,  the aggregate  commitment of such Term Lender
to fund the Term Loan,  as set forth on Schedule A or in the most recent  Lender
Addition  Agreement  executed by such Term Lender,  (iv) as to all Term Lenders,
the  aggregate  commitment  of all Term Lenders to fund the Term Loan,  (v) with
respect to the Equipment  Acquisition Term Loan, as to any Equipment Acquisition
Term Lender, the aggregate commitment of such Equipment  Acquisition Term Lender
to fund the  Equipment  Acquisition  Term Loan, as set forth on Schedule A or in
the most recent Lender Addition Agreement executed by such Equipment Acquisition
Term Lender,  (vi) as to all Equipment  Acquisition Term Lenders,  the aggregate
commitment  of all  Equipment  Acquisition  Term  Lenders to fund the  Equipment
Acquisition Term Loan, and (vii) as to all Lenders, the aggregate commitments of
all Lenders to fund the Loans, in each case as the same may be reduced, modified
or terminated pursuant to this Agreement.

     "Common Stock"
     --------------
     shall mean the common stock, $0.01 par value, of the Parent.

                                        4
<PAGE>

     "Computer Hardware and Software"
     --------------------------------
     shall mean all of  Borrowers'  rights  (including  rights as  licensee  and
lessee)  with  respect to (a)  computer  and other  electronic  data  processing
hardware,  including all integrated computer systems,  central processing units,
memory units, display terminals, printers, computer elements, card readers, tape
drives,  hard  and  soft  disk  drives,  cables,   electrical  supply  hardware,
generators, power equalizers,  accessories, peripheral devices and other related
computer  hardware;  (b) all Software and all software programs designed for use
on the computers and electronic data processing hardware described in clause (a)
above,  including  all operating  system  software,  utilities  and  application
programs in any form (source code and object code in magnetic tape, disk or hard
copy format or any other listings  whatsoever) and any other  Software;  (c) any
firmware associated with any of the foregoing;  (d) any other Software;  and (e)
any documentation for or related to hardware, Software and firmware described in
clauses (a),  (b), (c) and (d) above,  including  flow charts,  logic  diagrams,
manuals, specifications, training materials, charts and pseudo codes.

     "Concentration Account"
     -----------------------
     shall have the meaning assigned to it in Section 2.5 hereof.

     "Contingent Obligations"
     ------------------------
     shall mean, as to any Person, any obligation of such Person guaranteeing or
intending to guaranty any Indebtedness,  leases,  dividends or other obligations
("primary  obligations")  of any other  Person (the  "primary  obligor")  in any
manner,  whether  directly or indirectly,  including,  without  limitation,  any
obligation of such Person,  whether or not contingent,  (a) to purchase any such
primary  obligation  or any property  constituting  direct or indirect  security
therefor,  (b) to advance or supply funds (i) for the purchase or payment of any
such primary obligation or (ii) to maintain working capital or equity capital of
the primary  obligor or  otherwise  to maintain the net worth or solvency of the
primary obligor, (c) to purchase property,  securities or services primarily for
the purpose of assuring the owner of any such primary  obligation of the ability
of the  primary  obligor to make  payment  of such  primary  obligation,  or (d)
otherwise to assure or to hold  harmless  the owner of such  primary  obligation
against loss in respect thereof,  provided,  however,  that the term "Contingent
Obligation"  shall not  include  endorsements  of  instruments  for  deposit  or
collection  in the  ordinary  course of business.  The amount of any  Contingent
Obligation  shall be deemed to be an amount equal to the stated or  determinable
amount of the primary obligation in respect of which such Contingent  Obligation
is made or, if not stated or determinable,  the maximum  reasonably  anticipated
liability  in respect  thereof  (assuming  such  Person is  required  to perform
thereunder) as determined by such Person in good faith.

     "Contract Right"
     ----------------
     shall mean any right of any  Borrower to payment  under a contract  for the
sale or lease of goods or the rendering of services,  which right is at the time
not yet earned by performance.

     "Controlling Equity Group"
     --------------------------
     shall mean Dr. Pailla M. Reddy,  Glenwood  Capital,  Greg Pusey and Jeffrey
McGonegal.

     "Copyrights"
     ------------
     shall mean all of  Borrowers'  now  existing or hereafter  acquired  right,
title,  and  interest  in and  to:  (i)  copyrights,  rights  and  interests  in
copyrights, works protectable by copyright, all applications,  registrations and
recordings  relating to the  foregoing as may at any time be filed in the United
States Copyright Office or in any similar office or agency of the United States,
any State thereof,  any political  subdivision  thereof or in any other country,
and all  research  and  development  relating  to the  foregoing;  and  (ii) all
renewals of any of the foregoing.

                                        5
<PAGE>

     "Debit Memo"
     ------------
     shall mean a  Borrower's  memorandum  to  document a partial  payment by an
Account Debtor of amounts due and owing to such Borrower in accordance  with the
practice and procedure of the Borrowers as of the Closing Date.

     "Debtor Relief Law"
     -------------------
     shall  mean,  collectively,  the  Bankruptcy  Code of the United  States of
America  and all  other  applicable  liquidation,  conservatorship,  bankruptcy,
moratorium, rearrangement,  receivership,  insolvency, reorganization or similar
debtor relief laws from time to time in effect affecting the rights of creditors
generally, as amended from time to time.

     "Default"
     ---------
     shall mean any event, fact, circumstance or condition that, with the giving
of  applicable  notice or passage  of time or both,  would  constitute  or be or
result in an Event of Default.

     "Default Rate"
     --------------
     shall have the meaning assigned to it in Section 3.6 hereof.

     "Deposit Account"
     -----------------
     shall mean,  individually  and  collectively,  any Blocked Accounts and all
bank or other depository accounts of any Borrower.

     "Distribution"
     --------------
     shall mean any fee, payment,  bonus or other  remuneration of any kind, and
any repayment of or debt service on loans or other indebtedness.

     "Dollars" and "$"
     -----------------
     shall mean lawful money of the United States of America.

     "Draw Notice"
     -------------
     shall mean a Draw Notice substantially in the form of Exhibit B hereto.

     "Draws"
     -------
     shall mean a borrowing by Borrowers  under the Equipment  Acquisition  Term
Loan.

     "Eligible Equipment"
     --------------------
     shall mean  Equipment  purchased  by a Borrower to be used in the  ordinary
course of Borrowers' business unless:

          (a) such Equipment is not subject to a valid  perfected first priority
     security  interest in favor of Agent for its benefit and the benefit of the
     Lenders or such  Equipment  is subject to any Liens or  security  interests
     other than those in favor of Agent for its  benefit  and the benefit of the
     Lenders;

          (b) the purchase of which is not evidenced by an invoice, statement or
     other documentary evidence satisfactory to Agent;

          (c) any consent,  license,  approval or  authorization  required to be
     obtained by  Borrowers  in  connection  with the  granting of the  security
     interest under the Loan Documents has not been or was not duly obtained and
     is not in full force and effect;

          (d) such Equipment is not owned by a Borrower;

                                        6
<PAGE>

          (e) such  Equipment  does not, or at the time of its purchase from the
     vendor did not,  constitute  "Equipment" under Article 9 of the UCC as then
     in effect in the jurisdiction  whose law governs perfection of the security
     interest;

          (f) the transfer of such  Equipment to a Borrower by vendor,  supplier
     or other  Person  did not  constitute  a valid  sale and  transfer  to such
     Borrower of all right,  title and interest of such Person in the  Equipment
     enforceable against all creditors of and purchasers from such Person;

          (g) (A) a  Borrower  is not the sole  owner of all  right,  title  and
     interest in and to such Equipment,  or (B) a Borrower does not have a valid
     ownership  interest  therein  free and clear of all Liens  other than Liens
     granted under the Loan Documents;

          (h) such Equipment is not in good working order or is damaged;

          (i) such Equipment is at a location which is not covered by a Landlord
     Waiver and Consent;

          (j) it arises out of  services  rendered  or a sale made to, or out of
     any other transaction between with,  Borrowers or one or more Affiliates of
     Borrowers;

          (k) any covenant,  agreement,  representation or warranty contained in
     any Loan  Document  with respect to such  Equipment  has been  breached and
     remains uncured;

          (l) at the time of the purchase of such  Equipment by a Borrower,  the
     seller of such  Equipment has  commenced a voluntary  case under any Debtor
     Relief Law or has made an  assignment  for the benefit of  creditors,  or a
     decree or order for relief has been entered by a court having  jurisdiction
     in respect of such seller in an  involuntary  case under any Debtor  Relief
     Law,  or any other  petition  or  application  for relief  under any Debtor
     Relief Law has been filed  against such seller,  or such seller has failed,
     suspended  business,  ceased  to  be  solvent,  called  a  meeting  of  its
     creditors, or has consented to or suffered a receiver,  trustee, liquidator
     or custodian to be appointed for it or for all or a significant  portion of
     its  assets  or  affairs,  or such  Borrower,  in the  ordinary  course  of
     business, should have known of any of the foregoing,  unless, in each case,
     Agent  consents  in writing in its  Permitted  Discretion  to include  such
     Equipment as Eligible Equipment;

          (m) it is located outside the continental United States;

          (n)  it  was   purchased   on  a   bill-and-hold,   guaranteed   sale,
     sale-and-return,  sale on approval,  consignment or any other repurchase or
     return basis or is evidenced by chattel  paper or an instrument of any kind
     or has been reduced to judgment;

          (o) the  purchase  of which is  contingent  in any  respect or for any
     reason;

          (p) any return, rejection or repossession of such Equipment occurred;

          (q)  such  Equipment  does  not  comply,  or was not  manufactured  in
     compliance,  in all material  respects with all applicable  requirements of
     all statutes, laws, rules, regulations,  ordinances, codes, policies, rules
     of  common  law,  and  the  like,  now  or  hereafter  in  effect,  of  any
     Governmental   Authority,   including   any   judicial  or   administrative
     interpretations   thereof,  and  any  judicial  or  administrative  orders,
     consents, decrees or judgments; and

                                        7
<PAGE>

          (r)  such  Equipment  fails  to meet  such  other  specifications  and
     requirements  which may from time to time be established by Agent,  or such
     Equipment  otherwise is not satisfactory to Agent, as determined in Agent's
     Permitted  Discretion and as communicated to Borrowers  within a reasonable
     time of such determination by Agent; provided, however, that any failure of
     Agent to  provide  such  notice  or  communication  shall  not  negate  the
     effectiveness  or application of any such  specifications,  requirements or
     determinations,  result in any  liability of Agent or otherwise  release or
     excuse any Borrower from its  obligations  under the Loan Documents  and/or
     complying with such specifications,  requirements or determinations and the
     Borrowers'  obligations  under  the  Loan  Documents,   including,  without
     limitation,  its  obligations to make  principal and interest  payments and
     other  mandatory  payments  of  the  Obligations,  shall  be  absolute  and
     continuous  notwithstanding  any failure by Agent to provide such notice or
     communication..

     "Eligible Inventory"
     --------------------
     shall mean the value of the  Borrowers'  saleable raw materials  Inventory,
after taking into account all  discounts,  which  Inventory is maintained in the
ordinary  course  of the  Borrowers'  business  which  Agent,  in its  Permitted
Discretion, deems Eligible Inventory unless:

          (a) such Inventory is not subject to a valid  perfected first priority
     security  interest  in favor of the  Agent,  for the  benefit of itself and
     Lenders, subject to no other lien other than Permitted Liens having a lower
     priority than the Liens of Agent, for the benefit of itself and Lenders;

          (b) any consent,  license,  approval or  authorization  required to be
     obtained by the Borrowers in  connection  with the granting of the security
     interest under the Security  Documents or in connection with manufacture or
     sale of such  Inventory has not been or was not duly obtained and is not in
     full force and effect;

          (c)  any  covenant,  representation  or  warranty  contained  in  this
     Agreement or in any other Loan Document with respect to such  Inventory has
     been breached and remains uncured;

          (d) such Inventory is not owned by any Borrower;

          (e)  such  Inventory  does  not  comply,  or was not  manufactured  in
     compliance,  in all material  respects with all applicable  requirements of
     all statutes, laws, rules, regulations,  ordinances, codes, policies, rules
     of  common  law,  and  the  like,  now  or  hereafter  in  effect,  of  any
     Governmental   Authority,   including   any   judicial  or   administrative
     interpretations   thereof,  and  any  judicial  or  administrative  orders,
     consents, decrees or judgments;

          (f) such  Inventory  does not, or at the time of its purchase from the
     vendor did not,  constitute  "inventory" under Article 9 of the UCC as then
     in effect in the jurisdiction  whose law governs perfection of the security
     interest;

                                        8
<PAGE>

          (g) the  Person  for  whose  account  such  Inventory  is being or was
     produced has commenced a voluntary  case under any Debtor Relief Law or has
     made an assignment  for the benefit of  creditors,  or if a decree or order
     for relief has been  entered by a court having  jurisdiction  in respect of
     such Person in an  involuntary  case under any Debtor Relief Law, or if any
     other  petition or  application  for relief under any Debtor Relief Law has
     been filed  against  such Person,  or if such Person has failed,  suspended
     business,  ceased to be solvent,  called a meeting of its creditors, or has
     consented to or suffered a receiver, trustee, liquidator or custodian to be
     appointed  for it or for all or a  significant  portion  of its  assets  or
     affairs,  or  Borrowers,  in the ordinary  course of business,  should have
     known of any of the foregoing;

          (h) the  transfer  of  such  Inventory  to the  Borrowers  by  vendor,
     supplier or other  Person did not  constitute  a valid sale and transfer to
     the  Borrowers  of all  right,  title and  interest  of such  Person in the
     Inventory  enforceable  against all creditors of and  purchasers  from such
     Person;

          (i) (A) any  Borrower  is not the sole owner of all  right,  title and
     interest in and to such Inventory,  (B) such Borrower does not have a valid
     ownership  interest  therein  free and clear of all Liens  other than Liens
     granted under the Loan Documents and Permitted  Liens with a lower priority
     than the Liens of the Agent, for the benefit of itself and Lenders,  or (C)
     any offsets,  defenses or counterclaims have been asserted or threatened in
     writing  against  such  Inventory  (but only to the extent of such  offset,
     defense or counterclaim);

          (j) such Inventory is not in good working order or is damaged;

          (k) such  Inventory is not located at a location which is covered by a
     valid Landlord Waiver and Consent;

          (l) such Inventory consists of packing materials,  displays, supplies,
     parts  or  other  components  or  is  returned,  rejected,  repossessed  or
     discontinued product or Inventory;

          (m) such Inventory is subject to a bona fide dispute or is or has been
     classified by any Borrower or otherwise as counterfeit or fraudulent;

          (n) such  Inventory has been sold  (excluding  pre-billed  inventory),
     assigned,  or otherwise  encumbered by any Borrower  except pursuant to the
     Loan Documents;

          (o) such Inventory consists of equipment that such Borrower offers for
     rental or that is being rented from the Borrowers or equipment  borrowed by
     such  Borrower  or  given  to  such  Borrower  to  serve  as  demonstration
     equipment;

          (p) such  Inventory  constitutes  finished  goods,  custom  Inventory,
     private-label Inventory,  raw materials in process,  discontinued products,
     Inventory subject to drop-shipments, work-in-process, slow-moving, obsolete
     or  unmerchantable  Inventory,  Inventory  allocated  to  current  warranty
     assignments, Inventory that consists of spare parts or Inventory subject to
     a quality assurance hold;

          (q) such  Inventory  is held as samples or for sale to employees or as
     promotional  or  marketing   materials  or  for  promotional  or  marketing
     purposes;

                                        9
<PAGE>

          (r) such Inventory is in transit;

          (s)  such  Inventory  is (i) not in  such  Borrower's  possession  and
     control or (ii) outside the continental United States;

          (t)  such  Inventory   consists  of   instruction   manuals  or  other
     publications that are sold in connection with finished goods;

          (u) there is no support or justification  satisfactory to Agent in its
     Permitted  Discretion  for such  Inventory  on the  general  ledger  of the
     Borrowers; or

          (v)  such  Inventory  fails  to meet  such  other  specifications  and
     requirements  which may from time to time be established by Agent,  or such
     Inventory  otherwise is not  satisfactory  to Agent,  as  determined in the
     Permitted Discretion of Agent; provided, however, that any failure of Agent
     to provide such notice or communication  shall not negate the effectiveness
     or application of any such specifications,  requirements or determinations,
     result  in any  liability  of Agent or  otherwise  release  or  excuse  any
     Borrower from its  obligations  under the Loan Documents  and/or  complying
     with such specifications, requirements or determinations and the Borrowers'
     obligations under the Loan Documents,  including,  without limitation,  its
     obligations  to make  principal and interest  payments and other  mandatory
     payments   of  the   Obligations,   shall  be   absolute   and   continuous
     notwithstanding   any   failure  by  Agent  to  provide   such   notice  or
     communication.

     "Eligible Receivables"
     ----------------------
     shall mean each  Account  arising in the  ordinary  course of a  Borrower's
business  from the sale of goods or  rendering of services  which Agent,  in its
Permitted Discretion, deems an Eligible Receivable unless:

          (a) it is not subject to a valid  perfected  first  priority  security
     interest in favor of Agent, for the benefit of itself and Lenders,  subject
     to no other Lien other than  Permitted  Liens having a lower  priority than
     the Liens in favor of Agent, for the benefit of itself and Lenders;

          (b) it is not evidenced by an invoice,  statement or other documentary
     evidence satisfactory to Agent;  provided,  however, that Agent in its sole
     discretion may from time to time include as Accounts that are not evidenced
     by an invoice,  statement or other  documentary  evidence  satisfactory  to
     Agent as Eligible  Receivables  and determine the advance rate and reserves
     applicable to Advances made on any such Accounts;

          (c) it  arises  out of  services  rendered  or sales to, or out of any
     other  transaction  between,  among or with, one or more Affiliates of such
     Borrower and/or one or more Borrowers (i.e., between or among Borrowers);

          (d) it remains  unpaid for longer  than the  earlier of (i) sixty (60)
     calendar  days after the original due date,  (ii) one hundred  twenty (120)
     calendar days after the original  invoice date and (iii) one hundred twenty
     (120)  calendar  days after the  applicable  services  were rendered or the
     applicable goods were sold;

                                       10
<PAGE>

          (e) with respect to all Accounts owed by any particular Account Debtor
     and/or its  Affiliates,  if more than 50% of the  aggregate  balance of all
     such Accounts owing from such Account  Debtor and/or its Affiliates  remain
     unpaid for longer  than the earlier of (i) sixty (60)  calendar  days after
     the original due date,  (ii) one hundred  twenty (120)  calendar days after
     the original invoice date, and (iii) one hundred twenty (120) calendar days
     after the applicable services were rendered or goods were sold;

          (f) with respect to all Accounts owed by any particular Account Debtor
     and/or  its  Affiliates,  50% or more of all such  Accounts  are not deemed
     Eligible  Receivables for any reason  hereunder  (which  percentage may, in
     Agent's Permitted Discretion, be increased or decreased);

          (g) with respect to all Accounts owed by any particular Account Debtor
     and/or its  Affiliates,  if such Accounts exceed twenty percent (20%) (such
     percentage or any other  percentage  now or hereafter  established  for any
     particular Account Debtor, a "Concentration  Limit") of the net collectible
     dollar  value of all  Accounts  at any one time  (but  the  portion  of the
     Accounts not in excess of the applicable percentages may be deemed Eligible
     Receivables, in the Agent's Permitted Discretion);

          (h) any covenant,  agreement,  representation or warranty contained in
     any Loan  Document  with  respect to such  Account  has been  breached  and
     remains uncured;

          (i) the Account Debtor for such Account has commenced a voluntary case
     under any Debtor  Relief Law or has made an  assignment  for the benefit of
     creditors,  or a decree or order for  relief  has been  entered  by a court
     having  jurisdiction  in respect of such Account  Debtor in an  involuntary
     case under any Debtor Relief Law, or any other petition or application  for
     relief  under any Debtor  Relief Law has been filed  against  such  Account
     Debtor, or such Account Debtor has failed, suspended business, ceased to be
     solvent, called a meeting of its creditors, or has consented to or suffered
     a receiver,  trustee, liquidator or custodian to be appointed for it or for
     all or a significant portion of its assets or affairs, or such Borrower, in
     the ordinary course of business, should have known of any of the foregoing;

          (j) it arises from the sale of property or services rendered to one or
     more Account  Debtors  outside the  continental  United States or that have
     their principal  place of business or chief  executive  offices outside the
     continental  United  States (but  foreign  receivables  may be deemed to be
     Eligible  Receivables  if the payment  thereof is  supported by a letter of
     credit in form and substance  satisfactory  to Agent payable to or assigned
     for payment to Agent and issued by a domestic bank acceptable to Agent);

          (k) it  represents  the sale of goods,  rendering  of  services  to an
     Account Debtor on a bill-and-hold,  guaranteed sale, sale-and-return,  sale
     on  approval,  consignment  or any other  repurchase  or return basis or is
     evidenced by Chattel Paper or an Instrument of any kind or has been reduced
     to judgment;

                                       11
<PAGE>

          (l) the applicable Account Debtor for such Account is any Governmental
     Authority,  unless  rights to payment of such Account have been assigned to
     Agent, for the benefit of itself and Lenders, pursuant to the Assignment of
     Claims Act of 1940,  as amended (31 U.S.C.  Section  3727,  et seq.  and 41
     U.S.C.  Section 15, et seq.), or otherwise,  and all applicable statutes or
     regulations  respecting  the  assignment of  government  Accounts have been
     complied with;

          (m) it is subject to any offset,  credit  (including  any  resource or
     other income credit or offset), deduction,  defense, discount,  chargeback,
     freight  claim,  allowance,  adjustment,  dispute  or  counterclaim,  or is
     contingent in any respect or for any reason (but only to the extent of such
     offset, credit, deduction,  defense, discount,  chargeback,  freight claim,
     allowance, adjustment, dispute or counterclaim or contingency);

          (n) there is any  agreement  with an Account  Debtor for any deduction
     from such Account,  except for discounts or allowances made in the ordinary
     course of business for prompt payment, all of which discounts or allowances
     are reflected in the  calculation of the face value of each invoice related
     thereto,  such that only the discounted amount of such Account after giving
     effect to such  discounts  and  allowances  shall be considered an Eligible
     Receivable;

          (o) any return, rejection or repossession of goods or services related
     to it has occurred;

          (p) it is not payable to any Borrower;

          (q) such  Borrower  has agreed to accept or has  accepted any non-cash
     payment for such Account;

          (r) it  constitutes  a re-billing  of an amount  previously  billed or
     double billing (i.e., counted twice);

          (s) it constitutes a billing for a sample;

          (t) with respect to any Account  arising  from the sale of goods,  the
     goods have not been shipped to the Account Debtor or its designee;

          (u) with  respect  to any  Account  arising  from the  performance  of
     services,  the services  have not been  actually  performed or the services
     were undertaken in violation of any law;

          (v) the  applicable  Account Debtor for such Account 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 the Borrower to whom such Account is owing 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;

          (w) it is an Account subject to a Debit Memo issued by any Borrower;

                                       12
<PAGE>

          (x) such  Accounts do not arise from the actual and bona fide sale and
     delivery of goods by any Borrower or rendition of services by such Borrower
     in the ordinary course of its business which  transactions are completed in
     accordance with the terms and provisions contained in any documents related
     thereto;

          (y) it is an Account subject to a surety bond, guaranty,  indemnity or
     other similar arrangement;

          (z) it is an  Account  owed by an  Account  Debtor  that is subject to
     legal process by any Borrower or against which such Borrower has asserted a
     mechanics'  or other  similar lien or that is subject to  collection by any
     Borrower; or

          (aa) it fails to meet such other specifications and requirements which
     may  from  time  to  time  be  established  by  Agent  or is not  otherwise
     satisfactory  to Agent,  as  determined  in Agent's  Permitted  Discretion;
     provided,  however,  that any  failure of Agent to provide  such  notice or
     communication shall not negate the effectiveness or application of any such
     specifications,  requirements or determinations, result in any liability of
     Agent or  otherwise  release or excuse any  Borrower  from its  obligations
     under  the  Loan  Documents  and/or  complying  with  such  specifications,
     requirements or  determinations  and the Borrowers'  obligations  under the
     Loan  Documents,  including,  without  limitation,  its obligations to make
     principal  and  interest  payments  and  other  mandatory  payments  of the
     Obligations,  shall be absolute and continuous  notwithstanding any failure
     by Agent to provide such notice or communication..

     "Employment Agreements"
     -----------------------
     shall mean, collectively,  (i) that certain Employment Agreement,  dated as
of November 18, 2001 by and between Dr.  Pailla M. Reddy and  Bactolac,  in form
and substance satisfactory to Agent in its Permitted Discretion, as the same may
be modified, amended, supplemented,  restated and/or replaced from time to time,
(ii) that certain Employment Agreement dated as of March 18, 2003 by and between
Gary Long and ANIP, in form and substance satisfactory to Agent in its Permitted
Discretion, as the same may be modified, amended, supplemented,  restated and/or
replaced from time to time, and (iii) that certain Employment Agreement dated as
of February 28, 2003 by and between  Jeffrey  McGonegal and Parent,  in form and
substance satisfactory to Agent in its Permitted Discretion,  as the same may be
modified, amended, supplemented, restated and/or replaced from time to time.

     "Environmental Laws"
     --------------------
     shall  mean,   collectively  and  each   individually,   the  Comprehensive
Environmental  Response,  Compensation  and Liability Act of 1980, the Superfund
Amendment  and  Reauthorization  Act of  1986,  the  Resource  Conservation  and
Recovery  Act,  the Toxic  Substances  Control Act, the Clean Air Act, the Clean
Water Act, any other "Superfund" or "Superlien" law and all other federal, state
and local and foreign  environmental,  land use, zoning,  health,  chemical use,
safety and  sanitation  laws,  statutes,  ordinances  and codes  relating to the
protection of the  environment  and/or  governing the use,  storage,  treatment,
generation,  transportation,  processing,  handling,  production  or disposal of
Hazardous Substances,  in each case, as amended, and the legally-binding  rules,
regulations,  policies,  guidelines,  interpretations,   decisions,  orders  and
directives of Governmental Authorities with respect thereto.

                                       13
<PAGE>

     "Equipment"
     -----------
     shall mean all  "equipment"  (as defined in the UCC) of  Borrowers  (or, if
referring  to another  Person,  of such other  Person),  now owned or  hereafter
acquired,  and all documents of title or other documents representing any of the
foregoing,  and all  collateral  security  and  guaranties  of any kind,  now or
hereafter  in  existence,  given  by  any  Person  with  respect  to  any of the
foregoing.

     "Equipment Acquisition Term Lenders"
     ------------------------------------
     shall mean the financial institutions from time to time named on Schedule A
under  the  heading  "Equipment  Acquisition  Term  Lenders",  their  respective
successors and permitted assigns (but not, expect as expressly set forth herein,
any Participant that is not otherwise as party to this Agreement).

     "Equipment Acquisition Term Loan"
     ---------------------------------
     shall  mean the  Equipment  Acquisition  Term  Loan  made by the  Equipment
Acquisition Term Lenders to Borrowers in the aggregate principal amount of up to
Five Hundred Thousand Dollars ($500,000) and all Obligations related thereto.

     "Equipment Acquisition Term Note"
     ---------------------------------
     shall  mean,   individually  and   collectively,   one  or  more  Equipment
Acquisition  Loan Term Notes and any additional  promissory notes payable to the
order of each Equipment  Acquisition Term Lender executed by Borrower evidencing
the  Equipment  Acquisition  Term Loan,  as the same may be  amended,  modified,
split, dividend, supplemented and/or restated from time to time.

     "Equipment Percentage"
     ----------------------
     shall have the meaning given such term in Section 2.9(b).

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

     "Event of Default"
     ------------------
     shall mean the occurrence of any event set forth in Article VIII.

     "Excess Availability"
     ---------------------
     shall mean, as determined  by Agent in its  Permitted  Discretion,  (i) the
lesser of (a) the Facility Cap and (b) Availability,  minus (ii) the outstanding
balance of all Advances minus (iii) the aggregate amount of all then outstanding
and unpaid  trade  payables and other  obligations  of the  Borrowers  which are
outstanding more than sixty (60) days past due as of such time (other than trade
payables or other  obligations  being  contested or disputed by the Borrowers in
good faith), minus (i) without  duplication,  the amount of checks issued by the
Borrowers to pay trade payables and other  obligations which are more than sixty
(60)  days  past  due as of such  time  (other  than  trade  payables  or  other
obligations being contested or disputed by the Borrowers in good faith), but not
yet sent and the book overdraft of the Borrowers.

     "Facility Cap"
     --------------
     shall have the meaning  given such term in the recitals of this  Agreement,
subject to adjustment as provided in Section 9.1(a) hereof.

     "Fair Valuation"
     ----------------
     shall mean the  determination of the value of the consolidated  assets of a
Person on the basis of the  amount  which may be  realized  by a willing  seller
within a  reasonable  time through  collection  or sale of such assets at market
value on a going concern basis to an interested buyer who is willing to purchase
under ordinary selling conditions in an arm's length transaction.

                                       14
<PAGE>

     "FDA"
     -----
     shall mean the United States Food and Drug Administration and any successor
Governmental Authority.

     "GAAP"
     ------
     shall mean generally accepted accounting principles in the United States of
America  in  effect  from  time to  time as  applied  by  nationally  recognized
accounting firms.

     "Governmental Authority"
     ------------------------
     shall  mean  any  federal,  state,  municipal,  national,  local  or  other
governmental   department,   court,   commission,   board,  bureau,   agency  or
instrumentality  or  political  subdivision  thereof,  or any  entity or officer
exercising  executive,  legislative  or judicial,  regulatory or  administrative
functions of or pertaining to any government or any court, in each case, whether
of the United  States or a state,  territory or  possession  thereof,  a foreign
sovereign entity or country or jurisdiction or the District of Columbia.

     "Government Account"
     --------------------
     shall be defined to mean all Accounts arising out of or with respect to any
Government Contract.

     "Government Contracts"
     ----------------------
     shall mean all  contracts  with the United  States  government or any other
Governmental  Authority  or  any  agency  of  any  of  the  foregoing,  and  all
amendments, modifications and supplements thereto.

     "Guarantor"
     -----------
     shall mean,  collectively  and each  individually,  all  guarantors  of the
Obligations or any part thereof, including,  without limitation, all Persons who
execute a Guaranty.

     "Guaranty"
     ----------
     shall mean, collectively and each individually,  all guarantees executed by
any Guarantors, if any, including,  without limitation, any guarantees set forth
in any Pledge  Agreement  executed by any Person  relating to the  securities of
Borrowers or any of their respective Subsidiaries.

     "Hazardous Substances"
     ----------------------
     shall  mean,  without   limitation,   any  flammable   explosives,   radon,
radioactive   materials,    asbestos,   urea   formaldehyde   foam   insulation,
polychlorinated biphenyls,  petroleum and petroleum products, methane, hazardous
materials,  hazardous wastes, hazardous or toxic substances or related materials
as defined in or subject to any applicable Environmental Law.

     "Indebtedness"
     --------------
     of any Person shall mean,  without  duplication,  (a) all items  which,  in
accordance  with GAAP,  would be included in  determining  total  liabilities as
shown on the  liability  side of the balance sheet of such Person as of the date
as of which  Indebtedness  is to be  determined,  including any lease which,  in
accordance with GAAP would constitute Indebtedness, (b) all indebtedness secured
by any  mortgage,  pledge,  security,  Lien or  conditional  sale or other title
retention  agreement to which any property or asset owned or held by such Person
is subject,  whether or not the  indebtedness  secured  thereby  shall have been
assumed,  (c) all  indebtedness  of others  which such  Person has  directly  or
indirectly guaranteed, endorsed (otherwise than for collection or deposit in the
ordinary  course  of  business),  discounted  or sold  with  recourse  or agreed
(contingently or otherwise) to purchase or repurchase or otherwise  acquire,  or

                                       15
<PAGE>

in respect of which such Person has agreed to supply or advance  funds  (whether
by way of loan,  stock,  equity or other ownership  interest  purchase,  capital
contribution or otherwise) or otherwise to become directly or indirectly liable.

     "Initial Advance"
     -----------------
     shall have the meaning assigned to it in Section 4.1 hereof.

     "Initial Draw"
     --------------
     shall have the meaning assigned to it in Section 4.1 hereof.

     "Insured Event"
     ---------------
     shall have the meaning assigned to it in Section 13.4 hereof.

     "Intellectual Property"
     -----------------------
     shall mean all  present  and  future:  trade  secrets,  know-how  and other
proprietary information; Trademarks, internet domain names, service marks, trade
dress,  trade  names,   business  names,   designs,   logos,  slogans  (and  all
translations,  adaptations,  derivations  and  combinations  of  the  foregoing)
indicia and other source and/or  business  identifiers,  and the goodwill of the
business   relating   thereto  and  all   registrations   or  applications   for
registrations  which have  heretofore  been or may  hereafter be issued  thereon
throughout the world;  Copyrights  (including  Copyrights for computer programs)
and all tangible and intangible  property  embodying the Copyrights,  unpatented
inventions (whether or not patentable);  Patents; industrial design applications
and registered  industrial  designs;  license  agreements  related to any of the
foregoing and income  therefrom;  books,  records,  writings,  computer tapes or
disks, flow diagrams,  specification  sheets,  computer software,  source codes,
object   codes,   executable   code,   data,   databases   and  other   physical
manifestations, embodiments or incorporations of any of the foregoing; the right
to sue for all past,  present and future  infringements of any of the foregoing;
all other intellectual  property; and all common law and other rights throughout
the world in and to all of the foregoing.

     "Intellectual Property Security Agreement"
     ------------------------------------------
     shall mean that certain  Acknowledgment of Intellectual Property Collateral
Lien executed by Borrowers and/or Guarantors, if any, in favor of Agent, for the
benefit of itself and Lenders, as such may be modified,  amended or supplemented
from time to time.

     "Inventory"
     -----------
     shall mean all  "inventory"  (as defined in the UCC) of  Borrowers  (or, if
referring  to another  Person,  of such other  Person),  now owned or  hereafter
acquired,  and all documents of title or other documents representing any of the
foregoing,  and all  collateral  security  and  guaranties  of any kind,  now or
hereafter  in  existence,  given  by  any  Person  with  respect  to  any of the
foregoing.

     "Inventory Borrowing Base"
     --------------------------
     shall mean, as of any date of  determination,  the net collectible value of
Eligible  Inventory,  as determined with reference to the most recent  Borrowing
Certificate and otherwise in accordance with this Agreement;  provided, however,
that, if as of such date of determination, the most recent Borrowing Certificate
is as of a date that is (x) more than four (4)  Business  Days  before  the next
Borrowing  Certificate  is due in  accordance  hereof  or (y) more than four (4)
Business Days after the most recent  Borrowing  Certificate,  then the Inventory
Borrowing Base shall be determined by Agent in its Permitted Discretion.

                                       16
<PAGE>

     "Inventory Percentage"
     ----------------------
     shall mean, from time to time, fifty percent (50%) or such other percentage
as the Agent shall determine, in its sole and absolute discretion, in accordance
with this Agreement.

     "Joinder Agreement"
     -------------------
     shall mean an agreement in form and  substance  acceptable  to Agent in its
Permitted  Discretion,  the material  terms of which shall provide that a Person
shall become a party to and become bound by the terms of this  Agreement  and/or
the  other  Loan  Documents  in the same  capacity  and to the same  extent as a
Borrower.

     "Landlord Waiver and Consent"
     -----------------------------
     shall mean a waiver/consent in form and substance  satisfactory to Agent in
its Permitted  Discretion  from the  owner/lessor of any premises not owned by a
Borrower  at which any of the  Collateral  is now or  hereafter  located for the
purpose of providing Agent access to such  Collateral,  in each case as such may
be modified, amended or supplemented from time to time.

     "Lender Addition Agreement"
     ---------------------------
     shall mean an agreement  among Agent,  a Lender and such Lender's  assignee
regarding their respective rights and obligations with respect to assignments of
the Loans and other interests under this Agreement and the other Loan Documents,
in form and substance acceptable to Agent in its Permitted Discretion,  it being
agreed and  understood  that the consent or approval of  Borrowers  shall not be
required in connection  with any Lender  Addition  Agreement but may be obtained
and shall be given by Borrowers upon request of Agent.

     "Lenders"
     ---------
     shall mean the financial institutions,  from time to time named on Schedule
A under the headings  "Revolving  Lenders" and "Term Lenders",  their respective
successors and permitted assigns (but not, except as expressly set forth herein,
any Participant that is not otherwise a party to this Agreement).

     "Lien"
     ------
     shall mean any mortgage, pledge, security interest,  encumbrance,  transfer
or other  restriction,  lien or charge of any kind  (including  any agreement to
give  any of the  foregoing,  any  conditional  sale or  other  title  retention
agreement or any lease in the nature thereof), or any other arrangement pursuant
to which title to the property is retained by or vested in some other Person for
security purposes.

     "Life Insurance Policy"
     -----------------------
     shall mean a current,  valid and fully paid key man life  insurance  policy
insuring the life of Dr. Pailla M. Reddy (or, in the case Dr. Pailla M. Reddy is
no longer  the chief  executive  officer of  Bactolac,  his  successor  as chief
executive officer) in the amount of $7,000,000 which, until indefeasible payment
in full in cash of the Obligations  and  termination of the Loan Documents,  (i)
names Agent,  for the benefit of itself and the benefit of Lenders,  as the sole
beneficiary,  (ii) no other Person has any rights thereto,  (iii) is issued by a
carrier  and  otherwise  is in form  and  substance  acceptable  to Agent in its
Permitted  Discretion,  and (iv)  expressly  provides that it cannot be altered,
amended or modified in any material respect (including, without limitation, with
respect to amounts of coverage,  beneficiaries and/or loss payees and additional
insureds) or canceled  without thirty (30) Business Days prior written notice to
Agent and that it inures to the benefit of Agent,  for the benefit of itself and
the benefit of Lenders,  notwithstanding any action or omission or negligence of
or by any Borrower or Guarantor or any insured  thereunder.  All amounts paid on
such  policy in excess  of the  amount  necessary  to  indefeasibly  pay all the
Obligations  in full shall be paid over to the Borrowers  under the terms of the
policy.

                                       17
<PAGE>

     "Loan" or "Loans"
     -----------------
     shall mean,  individually and collectively,  the Equipment Acquisition Term
Loan and all Draws thereunder,  the Term Loan and the Revolving Facility and all
Advances thereunder.

     "Loan Documents"
     ----------------
     shall mean, collectively and each individually,  this Agreement, the Notes,
the Security Documents,  the Collateral Assignment of Life Insurance Policy, the
Landlord  Waiver  and  Consents,   the  Borrowing  Certificates  and  all  other
agreements,  documents,  instruments  and  certificates  heretofore or hereafter
executed  or  delivered  to  Agent  or  Lenders  in  connection  with any of the
foregoing  or the Loans,  as the same may be amended,  modified or  supplemented
from time to time.

     "Lockbox Agreement"
     -------------------
     shall have the meaning assigned to it in Section 2.5 hereof.

     "Lockbox Bank"
     --------------
     shall have the meaning assigned to it in Section 2.5 hereof.

     "Material Adverse Effect" or "Material Adverse Change"
     ------------------------------------------------------
     shall mean any event, condition,  obligation,  liability or circumstance or
set of events,  conditions,  obligations,  liabilities or  circumstances  or any
change(s)  which  (i)  has,  had or could  reasonably  be  expected  to have any
material adverse effect upon or change in the validity or  enforceability of any
Loan Document,  (ii) has been or could reasonably be expected to be material and
adverse to the value of any of the  Collateral or to the  business,  operations,
prospects,  properties, assets, liabilities or condition of Borrowers taken as a
whole,  or (iii) has  materially  impaired  or could  reasonably  be expected to
materially  impair the  ability  of  Borrowers  or  Guarantors  to  perform  the
Obligations or to consummate the transactions  under the Loan Documents executed
by such Persons.

     "Maturity Date"
     ---------------
     shall  mean the  earlier  of (i) the  occurrence  of an Event of Default if
amounts  outstanding under the Loan Documents and other Obligations shall be due
and payable in connection  therewith or as a result  thereof as required by this
Agreement,  (ii)  Agent's  demand upon an Event of Default of payment of amounts
outstanding under the Loan Documents and other  Obligations,  and (iii) the last
day of the Term.

     "Maximum Equipment Acquisition Term Loan Amount"
     ------------------------------------------------
     shall have the meaning assigned to it in the Recitals.

     "NFLI"
     ------
     shall mean Nutrition for Life International,  Inc., a Texas corporation and
its successors and assigns.

     "Note"
     ------
     shall mean, collectively and each individually, the Revolving Notes and the
Term Notes, as the same may be amended, modified,  divided,  supplemented and/or
restated from time to time.

     "Obligations"
     -------------
     shall mean,  without double counting,  all present and future  obligations,
Indebtedness  and  liabilities  of Borrowers  and/or  Guarantors to Agent and/or
Lenders at any time and from time to time of every kind, nature and description,
direct or  indirect,  secured  or  unsecured,  joint and  several,  absolute  or
contingent,  due or to  become  due,  matured  or  unmatured,  now  existing  or

                                       18
<PAGE>

hereafter  arising,   contractual  or  tortious,   liquidated  or  unliquidated,
including,  without  limitation,  all of the  foregoing  under  any of the  Loan
Documents  or  otherwise  relating to Notes  and/or  Loans,  including,  without
limitation,  interest,  all  applicable  fees,  charges and expenses  and/or all
amounts  paid or advanced by Agent or Lenders on behalf of or for the benefit of
any Borrower and/or any Guarantor for any reason at any time,  including in each
case  obligations  of performance as well as obligations of payment and interest
that accrue after the commencement of any proceeding under any Debtor Relief Law
by or against any such Person.

     "Participant"
     -------------
     shall have the meaning assigned to it in Section 13.2(b) hereof.

     "Patents"
     ---------
     shall mean all of  Borrowers'  now  existing or hereafter  acquired  right,
title and interest in and to: (i) all patents, patent applications,  inventions,
invention disclosures and improvements, and all applications,  registrations and
recordings  relating to the  foregoing as may at any time be filed in the United
States  Patent and  Trademark  Office or in any similar  office or agency of the
United States, any State thereof,  any political  subdivision  thereof or in any
other country, and all research and development  relating to the foregoing;  and
(ii)  the  reissues,   divisions,   continuations,   renewals,   extensions  and
continuations-in-part of any of the foregoing.

     "Payment Office"
     ----------------
     shall mean  initially the address set forth beneath the Agent's name on the
signature page of this Agreement, and thereafter, such other office of Agent, if
any, which it may designate by notice to Borrowers to be the Payment Office.

     "Permit"
     --------
     shall mean collectively all licenses, leases, powers, permits,  franchises,
certificates,  authorizations,  guidelines,  standards,  and  approvals  whether
issued by a Governmental Authority, ISO, or otherwise.

     "Permitted Discretion"
     ----------------------
     shall mean a  determination  or judgment made in good faith in the exercise
of reasonable  (from the  perspective  of a secured  lender)  credit or business
judgment.

     "Permitted Indebtedness"
     ------------------------
     shall mean Indebtedness of Borrowers permitted under Section 7.2.

     "Permitted Liens"
     -----------------
     shall mean Liens of Borrowers permitted under Section 7.3.

     "Permitted Options"
     -------------------
     shall mean options to acquire  Permitted  Securities of Parent in an amount
not to exceed twenty-five  percent (25%) of the fully diluted Common Stock as of
the Closing Date issued to employees,  non-employee  directors,  consultants and
other  advisors  pursuant  to the  terms  of the  related  employment  or  other
compensation-related   agreements  and/or  incentive  stock  plans  adopted  and
approved by the Board of Directors or Managers/Advisors of such Borrower.

     "Permitted Securities"
     ----------------------
     shall mean any shares, units or interests of equity securities or ownership
interests of Parent sold, issued, or otherwise transferred by Parent, including,
without limitation, with or as part of a Public Offering by Parent that by their
terms (or by the terms of any security into which it is convertible or for which
it is  exchangeable) or upon the happening of any event or otherwise (A) are not
convertible or  exchangeable  for  Indebtedness  or any securities  that are not

                                       19
<PAGE>

Permitted  Securities,  (B)  (i) do not  mature  and  (ii)  are not  putable  or
redeemable at the option of the holder thereof, in each case under clause (i) or
(ii) in  whole or in part on or prior  to the  date  six (6)  months  after  the
earlier  of the end of the  Term or the  actual  payment  in full in cash of the
Obligations,  (C) do not have  payments of dividends on or prior to the date six
(6) months  after the  earlier  of the end of the Term or the actual  payment in
full of the Obligations, (D) are unsecured and by operation of law or by legally
binding  agreement are subordinated in right of repayment,  liens,  security and
remedies to all of the  Obligations  and to all of Agent's and Lenders'  rights,
Liens and  remedies,  and/or  (E) do not have any veto or  supermajority  voting
rights or approval rights with respect to any issues.

     "Person"
     --------
     shall mean an individual, a partnership, a corporation, a limited liability
company,  a business trust, a joint stock company,  a trust,  an  unincorporated
association,  a joint venture,  a Governmental  Authority or any other entity of
whatever nature.

     "Pledge Agreement"
     ------------------
     shall  mean,  collectively  and  individually,  if  applicable,  all pledge
agreements executed by and between Agent and any Borrower and/or any Guarantors,
in each case as such may be modified, amended or supplemented from time to time.

     "Prime Rate"
     ------------
     shall mean a fluctuating  interest rate per annum equal at all times to the
rate of interest announced  publicly from time to time by Citibank,  N.A. as its
base rate; provided,  that such rate is not necessarily the best rate offered to
its customers,  and,  should Agent be unable to determine such rate,  such other
indication of the prevailing  prime rate of interest as may reasonably be chosen
by Agent;  provided,  further, that each change in the fluctuating interest rate
shall take  effect  simultaneously  with the  corresponding  change in the Prime
Rate.

     "Priority Permitted Liens"
     --------------------------
     shall mean  Permitted  Liens  contemplated  by and  permitted  pursuant  to
Sections 7.3(b),  (c)(ii), (d), (e) and/or, to the extent identified on Schedule
7.3 as Priority Permitted Liens, (g).

     "Pro Rata Share"
     ----------------
     shall mean (a) with respect to matters relating to a particular  Commitment
of a Revolving Lender,  the percentage  obtained by dividing (i) such Commitment
of that Revolving Lender by (ii) all such Commitments of all Revolving  Lenders;
provided,  however,  that if any Commitment of a Revolving  Lender is terminated
pursuant  to the  terms  hereof,  then  "Pro Rata  Share"  means the  percentage
obtained  by  dividing  (x) the  aggregate  amount  of such  Revolving  Lender's
outstanding  Loans related to such Commitment by (y) the aggregate amount of all
outstanding  Loans  related  to such  Commitment,  (b) with  respect  to matters
relating to a particular Term Loan of a Term Lender, the percentage  obtained by
dividing (i) the aggregate  amount of the portion of the  outstanding  Term Loan
made by such Lender by (ii) the aggregate  amount of the outstanding  Term Loan,
(c) with respect to matters relating to a particular Equipment  Acquisition Term
Loan of a Equipment Acquisition Term Lender, the percentage obtained by dividing
(i) the aggregate amount of the portion of the outstanding Equipment Acquisition
Term Loan made by such Lender by (ii) the  aggregate  amount of the  outstanding
Equipment  Acquisition Term Loan, and (d) with respect to all other matters, the
percentage  obtained by dividing (i) the  aggregate  amount of a Lender's  Loans
outstanding  and such Lender's  Commitment  by (ii) the aggregate  amount of all
Lenders' Loans  outstanding  and all Lenders'  Commitments;  in any case as such
percentage may be adjusted by assignments permitted pursuant to Section 12.2.

                                       20
<PAGE>

     "Public Offering"
     -----------------
     shall mean any offer or sale of  securities  pursuant  to any  registration
statement filed and effective with the Securities and Exchange Commission or any
other Governmental Authority.

     "Qualified Lender"
     ------------------
     shall mean (i) an Affiliate of any Lender and (ii) a bank, savings and loan
association,  savings bank,  commercial  finance company,  insurance  company or
other entity in the business of making commercial loans organized under the laws
of the United  States of  America or any State  thereof,  or a  commercial  bank
organized  under the laws of any  country  which is a member  of the OECD,  or a
political subdivision of any such country or a fund that invests in loans of the
type or similar to the loans made  hereby or any entity  that is an  "Accredited
Investor"  within  the rules and  regulations  of the  Securities  and  Exchange
Commission.

     "Receipt"
     ---------
     shall have the meaning given such term in Section 13.5.

     "Receivables Borrowing Base"
     ----------------------------
     shall mean, as of any date of  determination,  the net collectible value of
Eligible Receivables,  as determined with reference to the most recent Borrowing
Certificate and otherwise in accordance with this Agreement;  provided, however,
that, if as of such date of determination, the most recent Borrowing Certificate
is as of a date that is (x) more than four (4)  Business  Days  before  the next
Borrowing  Certificate  is due in  accordance  hereof  or (y) more than four (4)
Business Days after the most recent Borrowing Certificate,  then the Receivables
Borrowing Base shall be determined by Agent in its Permitted Discretion.

     "Receivables Percentage"
     ------------------------
     shall  mean,  from time to time,  eighty-five  percent  (85%) or such other
percentage as the Agent shall determine in its sole and absolute discretion,  in
accordance with this Agreement.

     "Requisite Lenders"
     -------------------
     shall mean (a) with  respect  to matters  relating  to  Revolving  Lenders,
Revolving Lenders holding or being responsible for 51% or more of the sum of all
outstanding Revolving Loans and all unutilized Commitments to make Advances, (b)
with respect to matters relating to Term Lenders,  Term Lenders holding or being
responsible  for 51% or more of the sum of the  outstanding  Term Loan, (c) with
respect to matters  relating to Equipment  Acquisition  Term Lenders,  Equipment
Acquisition Term Lenders holding or being responsible for 51% of more of the sum
of the outstanding  Equipment Acquisition Term Loan, and (d) with respect to all
other  matters,  Lenders  holding  or being  responsible  for 51% or more of all
outstanding Loans and unutilized Commitments.

     "Revolving Facility"
     --------------------
     shall have the meaning given such term in the recitals of this Agreement.

     "Revolving Lenders"
     -------------------
     shall mean the financial institutions from time to time named on Schedule A
under the heading "Revolving Lenders", their respective successors and permitted
assigns (but not, except as expressly set forth herein,  any Participant that is
not otherwise a party to this Agreement).

                                       21
<PAGE>

     "Revolving Loans"
     -----------------
     shall  mean,  collectively,  the  Advances  made by  Revolving  Lenders  to
Borrowers in the maximum  aggregate  principal amount equal to the Facility Cap,
and all Obligations related thereto.

     "Revolving Note(s)"
     -------------------
     shall mean, individually and collectively,  one or more Revolving Notes and
any additional  promissory note(s) payable to the order of each Revolving Lender
executed by Borrowers evidencing the Revolving Facility and Advances thereunder,
as the  same may be  amended,  modified,  divided,  split,  supplemented  and/or
restated from time to time.

     "Securities Act"
     ----------------
     shall mean the Securities Act of 1933, as amended.

     "Security Documents"
     --------------------
     shall  mean this  Agreement,  the  Notes,  Intellectual  Property  Security
Agreement,  Guarantees,  Pledge  Agreements,  the Collateral  Assignment of Life
Insurance Policy,  Lockbox Agreements,  UCC financing  statements,  , agreements
related to Accounts,  and all other documents or instruments necessary to create
or perfect  the Liens in the  Collateral,  as such may be  modified,  amended or
supplemented from time to time.

     "Solvency Certificate"
     ----------------------
     shall have the meaning assigned to it in Section 4.1(f) hereof.

     "Subsidiary"
     ------------
     shall mean,  (i) as to any  Borrower,  any Person in which more than 50% of
all  equity,  membership,  partnership  or other  ownership  interests  is owned
directly or indirectly by such Borrower or one or more of its Subsidiaries,  and
(ii) as to any other  Person,  any Person in which more than 50% of all  equity,
membership,  partnership  or other  ownership  interests  is owned  directly  or
indirectly by such Person or by one or more of such Person's Subsidiaries.

     "Term"
     ------
     shall mean the period  commencing  on the Closing  Date and ending on March
21, 2006.

     "Termination"
     -------------
     shall have the meaning assigned to it in Section 3.4 hereof.

     "Termination Fee"
     -----------------
     shall mean an amount equal to (i) three  percent (3%) of  $5,500,000 if the
event giving rise to the payment of the Termination Fee occurs during the period
from Closing Date through the first anniversary of the Closing Date and (ii) two
percent  (2%) of  $5,500,000  if the event  giving  rise to the  payment  of the
Termination  Fee  occurs  during the period  from the first  anniversary  of the
Closing  Date  up to the  second  anniversary  of the  Closing  Date;  provided,
however,  that if the  Termination  Fee is  payable  as a result  of an Event of
Default,  not  waived  by  Agent  and  Lenders,  arising  out  of  the  sale  of
substantially  all of the assets or equity  securities of ANIP,  the amount upon
which the  Termination  Fee shall be calculated  shall be $4,000,000  instead of
$5,500,000.

     "Term Lenders"
     --------------
     shall mean the financial institutions from time to time named on Schedule A
under the heading "Term  Lenders",  their  respective  successors  and permitted
assigns (but not, except as expressly set forth herein,  any Participant that is
not otherwise a party to this Agreement).

                                       22
<PAGE>

     "Term Loan"
     -----------
     shall mean the Term Loan made by Term Lenders to Borrowers in the aggregate
principal  amount  of One  Million  Dollars  ($1,000,000),  and all  Obligations
related thereto.

     "Term Note(s)"
     --------------
     shall mean,  individually and collectively,  one or more Term Notes and any
additional  promissory note(s) payable to the order of each Term Lender executed
by Borrowers  evidencing  the Term Loan,  as the same may be amended,  modified,
split, divided, supplemented and/or restated from time to time.

     "Trademarks"
     ------------
     shall mean all of  Borrowers'  now  existing or hereafter  acquired  right,
title,  and interest in and to: (i) all of Borrowers'  trademarks,  trade names,
corporate names, company names, business names, fictitious business names, trade
styles,  service marks, logos, other business identifiers,  prints and labels on
which  any  of  the  foregoing  have  appeared  or  appear,   all  applications,
registrations  and  recordings  relating to the  foregoing as may at any time be
filed in the United States Patent and Trademark  Office or in any similar office
or agency of the United  States,  any State thereof,  any political  subdivision
thereof or in any other country,  and all research and  development  relating to
the  foregoing;  (ii) all  renewals  thereof;  and (iii) all designs and general
intangibles of a like nature.

     "UCC"
     -----
     shall  mean  the  Uniform  Commercial  Code as in  effect  in the  State of
Maryland from time to time.

     "UFCA"
     ------
     shall have the meaning assigned to it in Section 3.7(c) hereof.

     "UFTA"
     ------
     shall have the meaning assigned to it in Section 3.7(c) hereof.

     "Unused Line Fee"
     -----------------
     shall have the meaning assigned to it in Section 3.2 hereof.

                                       23
<PAGE>

                                   SCHEDULE A
                               Lenders/Commitments
                               -------------------

Revolving Lenders                                           Revolving Commitment
--------------------------------------------------------------------------------

CapitalSource Finance LLC                                         $4,000,000
4445 Willard Avenue, 12th Floor
Chevy Chase, Maryland 20815
Attention:  Corporate Finance Group, Portfolio Manager
Telephone:  (301) 841-2700
FAX:  (301) 841-2360
E-Mail: rdailey@capitalsource.com

Wire Instructions:

Bank:             Bank of America, Baltimore, MD
Account:          003930559738
ABA:              052001633
Account Name:     CapitalSource Funding LLC
Reference:        Advanced Nutraceuticals, Inc.

--------------------------------------------------------------------------------
Total:                                                            $4,000,000
================================================================================

Term Lenders                                                Term Loan Commitment

CapitalSource Finance LLC                                         $1,000,000
4445 Willard Avenue, 12th Floor
Chevy Chase, Maryland 20815
Attention:  Corporate Finance Group, Portfolio Manager
Telephone:  (301) 841-2700
FAX:  (301) 841-2360
E-Mail:  rdailey@capitalsource.com

Wire Instructions:

Bank:                      Bank of America, Baltimore, MD
Account:                   003930559738
ABA:                       052001633
Account Name:              CapitalSource Funding LLC
Reference:                 Advanced Nutraceuticals, Inc.

--------------------------------------------------------------------------------
Total:                                                            $1,000,000
================================================================================

<PAGE>

Equipment Acquisition                                Equipment Acquisition Term
Term Lenders                                         Loan Commitment
--------------------------------------------------------------------------------

CapitalSource Finance LLC                                           $500,000
4445 Willard Avenue, 12th Floor
Chevy Chase, Maryland 20815
Attention:  Corporate Finance Group, Portfolio Manager
Telephone:  (301) 841-2700
FAX:  (301) 841-2360
E-Mail:  rdailey@capitalsource.com

Wire Instructions:

Bank:                      Bank of America, Baltimore, MD
Account:                   003930559738
ABA:                       052001633
Account Name:              CapitalSource Funding LLC
Reference:                 Advanced Nutraceuticals, Inc.

--------------------------------------------------------------------------------
Total:                                                                  $500,000
================================================================================SECURITIES PURCHASE AGREEMENT

     SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"),  dated as of December 20,
2002, by and among  Peabodys  Coffee,  Inc., a Nevada  corporation  (d/b/a Black
Rhino  Coffee),  with  headquarters  located  at 3845  Atherton  Road,  Suite 9,
Rocklin,  CA 95765 (the "COMPANY"),  and each of the purchasers set forth on the
signature pages hereto (the "BUYERS").

     WHEREAS:

     A. The Company and the Buyers are executing and  delivering  this Agreement
in reliance  upon the exemption  from  securities  registration  afforded by the
rules and  regulations  as  promulgated  by the  United  States  Securities  and
Exchange  Commission  (the "SEC") under the  Securities  Act of 1933, as amended
(the "1933 Act");

     B.  Buyers  desire to purchase  and the Company  desires to issue and sell,
upon the terms and conditions  set forth in this  Agreement (i) 10%  convertible
debentures of the Company,  in the form  attached  hereto as EXHIBIT "A", in the
aggregate  principal amount of Seven Hundred Fifty Thousand  Dollars  ($750,000)
(together with any debenture(s)  issued in replacement  thereof or as a dividend
thereon or otherwise with respect  thereto in accordance with the terms thereof,
the "DEBENTURES"),  convertible into shares of common stock, par value $.001 per
share,  of the Company (the "COMMON  STOCK"),  upon the terms and subject to the
limitations  and conditions set forth in such  Debentures and (ii) warrants,  in
the form  attached  hereto as EXHIBIT "B", to purchase One Million Eight Hundred
Seventy-Five Thousand (1,875,000) shares of Common Stock (the "WARRANTS").

     C. Each Buyer wishes to purchase,  upon the terms and conditions  stated in
this Agreement, such principal amount of Debentures and number of Warrants as is
set forth immediately below its name on the signature pages hereto; and

     D. Contemporaneous  with the execution and delivery of this Agreement,  the
parties hereto are executing and delivering a Registration Rights Agreement,  in
the form attached hereto as EXHIBIT "C" (the "REGISTRATION  RIGHTS  AGREEMENT"),
pursuant to which the Company has agreed to provide certain  registration rights
under the 1933 Act and the rules and  regulations  promulgated  thereunder,  and
applicable state securities laws.

     NOW  THEREFORE,  the  Company  and each of the  Buyers  severally  (and not
jointly) hereby agree as follows:

     1.   PURCHASE AND SALE OF DEBENTURES AND WARRANTS.

          A.  PURCHASE OF  DEBENTURES  AND  WARRANTS.  On the  Closing  Date (as
defined  below),  the Company  shall issue and sell to each Buyer and each Buyer
severally  agrees  to  purchase  from  the  Company  such  principal  amount  of
Debentures and number of Warrants as is set forth immediately below such Buyer's
name on the signature pages hereto.

          B. FORM OF PAYMENT.  On the Closing Date (as defined below),  (i) each
Buyer shall pay the  purchase  price for the  Debentures  and the Warrants to be
issued and

<PAGE>

sold to it at the  Closing (as defined  below)  (the  "PURCHASE  PRICE") by wire
transfer of immediately  available funds to the Company,  in accordance with the
Company's written wiring instructions, against delivery of the Debentures in the
principal  amount equal to the  Purchase  Price and the number of Warrants as is
set forth immediately below such Buyer's name on the signature pages hereto, and
(ii) the Company  shall  deliver such  Debentures  and Warrants duly executed on
behalf of the Company, to such Buyer, against delivery of such Purchase Price.

          C. CLOSING DATE.  Subject to the  satisfaction  (or written waiver) of
the conditions  thereto set forth in Section 6 and Section 7 below, the date and
time of the issuance  and sale of the  Debentures  and the Warrants  pursuant to
this Agreement (the "CLOSING DATE") shall be 12:00 noon,  Eastern  Standard Time
on December 20, 2002 or such other mutually agreed upon time. The closing of the
transactions  contemplated by this Agreement (the "CLOSING")  shall occur on the
Closing Date at such location as may be agreed to by the parties.

     2. BUYERS'  REPRESENTATIONS  AND WARRANTIES.  Each Buyer severally (and not
jointly) represents and warrants to the Company solely as to such Buyer that:

          A. INVESTMENT  PURPOSE. As of the date hereof, the Buyer is purchasing
the  Debentures  and the shares of Common Stock  issuable upon  conversion of or
otherwise  pursuant  to the  Debentures  (including,  without  limitation,  such
additional  shares of Common  Stock,  if any, as are  issuable (i) on account of
interest on the Debentures, (ii) as a result of the events described in Sections
1.3 and 1.4(g) of the  Debentures  and Section 2(c) of the  Registration  Rights
Agreement  or (iii) in payment of the  Standard  Liquidated  Damages  Amount (as
defined in Section 2(f) below) pursuant to this Agreement, such shares of Common
Stock being collectively  referred to herein as the "CONVERSION SHARES") and the
Warrants  and the shares of Common Stock  issuable  upon  exercise  thereof (the
"WARRANT SHARES" and, collectively with the Debentures,  Warrants and Conversion
Shares,  the  "SECURITIES")  for its own  account  and not with a  present  view
towards  the public  sale or  distribution  thereof,  except  pursuant  to sales
registered or exempted from registration under the 1933 Act; provided,  however,
that by making the representations  herein, the Buyer does not agree to hold any
of the  Securities for any minimum or other specific term and reserves the right
to dispose of the  Securities  at any time in  accordance  with or pursuant to a
registration statement or an exemption under the 1933 Act.

          B. ACCREDITED  INVESTOR STATUS. The Buyer is an "accredited  investor"
as  that  term is  defined  in  Rule  501(a)  of  Regulation  D (an  "ACCREDITED
INVESTOR").

          C. RELIANCE ON EXEMPTIONS.  The Buyer  understands that the Securities
are being offered and sold to it in reliance upon specific  exemptions  from the
registration requirements of United States federal and state securities laws and
that the  Company is relying  upon the truth and  accuracy  of, and the  Buyer's
compliance with, the representations,  warranties,  agreements,  acknowledgments
and  understandings  of the  Buyer set forth  herein in order to  determine  the
availability  of such exemptions and the eligibility of the Buyer to acquire the
Securities.

          D. INFORMATION. The Buyer and its advisors, if any, have been, and for
so long as the Debentures and Warrants remain  outstanding  will continue to be,
furnished

                                        2
<PAGE>

with all  materials  relating to the  business,  finances and  operations of the
Company and  materials  relating to the offer and sale of the  Securities  which
have been requested by the Buyer or its advisors. The Buyer and its advisors, if
any,  have  been,  and  for  so  long  as the  Debentures  and  Warrants  remain
outstanding  will continue to be,  afforded the  opportunity to ask questions of
the Company. Notwithstanding the foregoing, the Company has not disclosed to the
Buyer any material nonpublic  information and will not disclose such information
unless  such  information  is  disclosed  to the  public  prior  to or  promptly
following such disclosure to the Buyer. Neither such inquiries nor any other due
diligence   investigation   conducted  by  Buyer  or  any  of  its  advisors  or
representatives  shall  modify,  amend or  affect  Buyer's  right to rely on the
Company's representations and warranties contained in Section 3 below. The Buyer
understands that its investment in the Securities  involves a significant degree
of risk.

          E.  GOVERNMENTAL  REVIEW.  The Buyer understands that no United States
federal  or state  agency or any other  government  or  governmental  agency has
passed upon or made any recommendation or endorsement of the Securities.

          F.  TRANSFER  OR  RE-SALE.  The Buyer  understands  that (i) except as
provided  in the  Registration  Rights  Agreement,  the sale or  re-sale  of the
Securities  has not been and is not being  registered  under the 1933 Act or any
applicable  state  securities  laws,  and the  Securities may not be transferred
unless  (a) the  Securities  are  sold  pursuant  to an  effective  registration
statement  under the 1933 Act, (b) the Buyer shall have delivered to the Company
an opinion of counsel that shall be in form,  substance and scope  customary for
opinions of counsel in comparable transactions to the effect that the Securities
to be sold or transferred  may be sold or  transferred  pursuant to an exemption
from such registration,  which opinion shall be accepted by the Company, (c) the
Securities are sold or  transferred  to an  "affiliate"  (as defined in Rule 144
promulgated  under the 1933 Act (or a successor rule) ("RULE 144")) of the Buyer
who agrees to sell or otherwise  transfer the Securities only in accordance with
this Section 2(f) and who is an Accredited Investor, (d) the Securities are sold
pursuant to Rule 144, or (e) the  Securities  are sold  pursuant to Regulation S
under the 1933 Act (or a successor rule)  ("REGULATION  S"), and the Buyer shall
have  delivered  to the  Company an  opinion  of counsel  that shall be in form,
substance and scope customary for opinions of counsel in corporate transactions,
which opinion shall be accepted by the Company; (ii) any sale of such Securities
made in  reliance on Rule 144 may be made only in  accordance  with the terms of
said Rule and  further,  if said Rule is not  applicable,  any  re-sale  of such
Securities  under  circumstances in which the seller (or the person through whom
the sale is made) may be deemed to be an underwriter (as that term is defined in
the 1933 Act) may require  compliance  with some other  exemption under the 1933
Act or the rules and  regulations of the SEC  thereunder;  and (iii) neither the
Company nor any other person is under any obligation to register such Securities
under the 1933 Act or any state  securities laws or to comply with the terms and
conditions of any exemption thereunder (in each case, other than pursuant to the
Registration  Rights Agreement).  Notwithstanding the foregoing or anything else
contained herein to the contrary, the Securities may be pledged as collateral in
connection with a bona fide margin account or other lending arrangement.  In the
event that the Company  does not accept the  opinion of counsel  provided by the
Buyer with respect to the transfer of Securities  pursuant to an exemption  from
registration,  such as Rule 144 or  Regulation S, within three (3) business days
of delivery of the opinion to the  Company,  the Company  shall pay to the Buyer
liquidated  damages  of three  percent  (3%) of the  outstanding  amount  of the
Debentures  per month  plus  accrued  and  unpaid  interest  on the  Debentures,
prorated for partial months, in cash or shares

                                       3
<PAGE>

at the option of the Buyer ("STANDARD  LIQUIDATED DAMAGES AMOUNT"). If the Buyer
elects to be paid the  Standard  Liquidated  Damages  Amount in shares of Common
Stock,  such  shares  shall be  issued  at the  Conversion  Price at the time of
payment.

          G. LEGENDS. The Buyer understands that the Debentures and the Warrants
and,  until such time as the  Conversion  Shares and  Warrant  Shares  have been
registered  under  the  1933  Act as  contemplated  by the  Registration  Rights
Agreement or otherwise  may be sold pursuant to Rule 144 or Regulation S without
any  restriction as to the number of securities as of a particular date that can
then be immediately  sold,  the Conversion  Shares and Warrant Shares may bear a
restrictive  legend in  substantially  the following  form (and a  stop-transfer
order may be placed against transfer of the certificates for such Securities):

          "The  securities   represented  by  this  certificate  have  not  been
          registered  under  the  Securities  Act  of  1933,  as  amended.   The
          securities may not be sold,  transferred or assigned in the absence of
          an effective registration statement for the securities under said Act,
          or an opinion of counsel,  in form,  substance and scope customary for
          opinions of counsel in comparable  transactions,  that registration is
          not  required  under said Act or unless  sold  pursuant to Rule 144 or
          Regulation S under said Act."

     The legend set forth above  shall be removed and the Company  shall issue a
certificate  without such legend to the holder of any Security  upon which it is
stamped,  if, unless otherwise required by applicable state securities laws, (a)
such Security is registered for sale under an effective  registration  statement
filed  under  the  1933 Act or  otherwise  may be sold  pursuant  to Rule 144 or
Regulation  S without any  restriction  as to the number of  securities  as of a
particular  date that can then be immediately  sold, or (b) such holder provides
the Company with an opinion of counsel,  in form,  substance and scope customary
for opinions of counsel in comparable transactions,  to the effect that a public
sale or transfer of such  Security  may be made without  registration  under the
1933 Act,  which  opinion  shall be  accepted by the Company so that the sale or
transfer is effected or (c) such holder  provides  the Company  with  reasonable
assurances  that such Security can be sold pursuant to Rule 144 or Regulation S.
The Buyer  agrees  to sell all  Securities,  including  those  represented  by a
certificate(s)  from which the  legend  has been  removed,  in  compliance  with
applicable prospectus delivery requirements, if any.

          H.  AUTHORIZATION;  ENFORCEMENT.  This Agreement and the  Registration
Rights Agreement have been duly and validly authorized.  This Agreement has been
duly  executed  and  delivered  on  behalf  of the  Buyer,  and  this  Agreement
constitutes,  and upon  execution and delivery by the Buyer of the  Registration
Rights Agreement,  such agreement will constitute,  valid and binding agreements
of the Buyer enforceable in accordance with their terms.

          I. RESIDENCY.  The Buyer is a resident of the  jurisdiction  set forth
immediately below such Buyer's name on the signature pages hereto.

     3.  REPRESENTATIONS  AND WARRANTIES OF THE COMPANY.  The Company represents
and warrants to each Buyer that:

                                       4
<PAGE>

          A.  ORGANIZATION  AND  QUALIFICATION.  The  Company  and  each  of its
Subsidiaries  (as defined  below),  if any,  is a  corporation  duly  organized,
validly  existing and in good  standing  under the laws of the  jurisdiction  in
which it is incorporated, with full power and authority (corporate and other) to
own,  lease,  use and operate its properties and to carry on its business as and
where now owned, leased, used, operated and conducted.  SCHEDULE 3(A) sets forth
a list of all of the  Subsidiaries of the Company and the  jurisdiction in which
each is incorporated. The Company and each of its Subsidiaries is duly qualified
as a  foreign  corporation  to do  business  and is in good  standing  in  every
jurisdiction  in which its  ownership  or use of  property  or the nature of the
business  conducted by it makes such  qualification  necessary  except where the
failure to be so qualified or in good standing would not have a Material Adverse
Effect.  "MATERIAL  ADVERSE  EFFECT"  means any material  adverse  effect on the
business, operations, assets, financial condition or prospects of the Company or
its Subsidiaries,  if any, taken as a whole, or on the transactions contemplated
hereby or by the  agreements  or  instruments  to be entered into in  connection
herewith.  "SUBSIDIARIES"  means any corporation or other organization,  whether
incorporated  or  unincorporated,   in  which  the  Company  owns,  directly  or
indirectly, any equity or other ownership interest.

          B.  AUTHORIZATION;  ENFORCEMENT.  (i) The  Company  has all  requisite
corporate  power and  authority  to enter into and perform this  Agreement,  the
Registration Rights Agreement, the Debentures and the Warrants and to consummate
the transactions contemplated hereby and thereby and to issue the Securities, in
accordance with the terms hereof and thereof, (ii) the execution and delivery of
this  Agreement,  the  Registration  Rights  Agreement,  the  Debentures and the
Warrants  by  the  Company  and  the  consummation  by  it of  the  transactions
contemplated hereby and thereby (including without  limitation,  the issuance of
the Debentures and the Warrants and the issuance and reservation for issuance of
the Conversion  Shares and Warrant Shares  issuable upon  conversion or exercise
thereof) have been duly  authorized  by the Company's  Board of Directors and no
further consent or authorization of the Company, its Board of Directors,  or its
shareholders  is  required,  (iii) this  Agreement  has been duly  executed  and
delivered by the Company by its authorized  representative,  and such authorized
representative  is the true and official  representative  with authority to sign
this Agreement and the other documents executed in connection  herewith and bind
the Company accordingly, and (iv) this Agreement constitutes, and upon execution
and delivery by the Company of the Registration Rights Agreement, the Debentures
and the Warrants,  each of such instruments will constitute,  a legal, valid and
binding obligation of the Company  enforceable against the Company in accordance
with its terms.

          C. CAPITALIZATION. As of the date hereof, the authorized capital stock
of the Company  consists of: (i)  50,000,000  shares of Common  Stock,  of which
21,567,120 shares are issued and outstanding,  5,481,336 shares are reserved for
issuance  pursuant to the Company's  stock option plans,  no shares are reserved
for issuance pursuant to securities (other than the Debentures and the Warrants)
exercisable  for, or convertible into or exchangeable for shares of Common Stock
and  12,083,333  shares  are  reserved  for  issuance  upon  conversion  of  the
Debentures  and the  Additional  Debentures  (as  defined in  Section  4(l)) and
exercise of the  Warrants  and the  Additional  Warrants  (as defined in Section
4(l))  (subject to adjustment  pursuant to the  Company's  covenant set forth in
Section  4(h)  below);  and  (ii) no  shares  of  preferred  stock.  All of such
outstanding  shares  of  capital  stock  are,  or upon  issuance  will be,  duly
authorized,  validly issued, fully paid and nonassessable.  No shares of capital
stock of the

                                       5
<PAGE>

Company  are subject to  preemptive  rights or any other  similar  rights of the
shareholders  of the Company or any liens or  encumbrances  imposed  through the
actions or failure to act of the Company.  Except as disclosed in SCHEDULE 3(C),
as of the  effective  date of  this  Agreement,  (i)  there  are no  outstanding
options,  warrants, scrip, rights to subscribe for, puts, calls, rights of first
refusal,  agreements,  understandings,  claims or other commitments or rights of
any character  whatsoever  relating to, or securities or rights convertible into
or  exchangeable  for any shares of capital  stock of the  Company or any of its
Subsidiaries, or arrangements by which the Company or any of its Subsidiaries is
or may become bound to issue  additional  shares of capital stock of the Company
or any of its Subsidiaries,  (ii) there are no agreements or arrangements  under
which the Company or any of its  Subsidiaries  is obligated to register the sale
of any of its or their  securities  under the 1933 Act (except the  Registration
Rights  Agreement)  and (iii)  there are no  anti-dilution  or price  adjustment
provisions  contained in any security issued by the Company (or in any agreement
providing rights to security  holders) that will be triggered by the issuance of
the  Debentures,  the Warrants,  the Conversion  Shares or Warrant  Shares.  The
Company  has  furnished  to the Buyer true and correct  copies of the  Company's
Articles  of  Incorporation  as in  effect  on the  date  hereof  ("ARTICLES  OF
INCORPORATION"),  the  Company's  By-laws,  as in effect on the date hereof (the
"BY-LAWS"),  and the terms of all securities convertible into or exercisable for
Common  Stock of the Company and the material  rights of the holders  thereof in
respect  thereto.  The Company shall provide the Buyer with a written  update of
this  representation  signed by the Company's Chief Executive or Chief Financial
Officer on behalf of the Company as of the Closing Date.

          D. ISSUANCE OF SHARES.  The  Conversion  Shares and Warrant Shares are
duly authorized and reserved for issuance and, upon conversion of the Debentures
and exercise of the Warrants in accordance with their respective  terms, will be
validly issued,  fully paid and non-assessable,  and free from all taxes, liens,
claims  and  encumbrances  with  respect to the issue  thereof  and shall not be
subject to preemptive  rights or other  similar  rights of  shareholders  of the
Company and will not impose personal liability upon the holder thereof.

          E.   ACKNOWLEDGMENT   OF  DILUTION.   The  Company   understands   and
acknowledges  the  potentially  dilutive  effect to the  Common  Stock  upon the
issuance of the  Conversion  Shares and Warrant  Shares upon  conversion  of the
Debenture or exercise of the Warrants. The Company further acknowledges that its
obligation to issue Conversion  Shares and Warrant Shares upon conversion of the
Debentures or exercise of the Warrants in accordance  with this  Agreement,  the
Debentures  and the Warrants is absolute  and  unconditional  regardless  of the
dilutive effect that such issuance may have on the ownership  interests of other
shareholders of the Company.

          F. NO  CONFLICTS.  The  execution,  delivery and  performance  of this
Agreement, the Registration Rights Agreement, the Debentures and the Warrants by
the Company and the consummation by the Company of the transactions contemplated
hereby and thereby (including,  without limitation, the issuance and reservation
for issuance of the Conversion  Shares and Warrant Shares) will not (i) conflict
with or result in a violation of any provision of the Articles of  Incorporation
or  By-laws  or (ii)  violate  or  conflict  with,  or result in a breach of any
provision of, or constitute a default (or an event which with notice or lapse of
time or both  could  become a  default)  under,  or give to others any rights of
termination,   amendment,   acceleration  or  cancellation  of,  any  agreement,
indenture, patent, patent license or instrument to

                                       6
<PAGE>

which the Company or any of its  Subsidiaries  is a party,  or (iii) result in a
violation of any law, rule,  regulation,  order,  judgment or decree  (including
federal  and  state  securities  laws and  regulations  and  regulations  of any
self-regulatory  organizations  to  which  the  Company  or its  securities  are
subject)  applicable to the Company or any of its  Subsidiaries  or by which any
property or asset of the Company or any of its Subsidiaries is bound or affected
(except for such conflicts, defaults, terminations,  amendments,  accelerations,
cancellations  and  violations as would not,  individually  or in the aggregate,
have a Material Adverse Effect). Neither the Company nor any of its Subsidiaries
is  in   violation  of  its   Articles  of   Incorporation,   By-laws  or  other
organizational  documents and neither the Company nor any of its Subsidiaries is
in default (and no event has occurred which with notice or lapse of time or both
could put the Company or any of its  Subsidiaries in default) under, and neither
the Company nor any of its  Subsidiaries  has taken any action or failed to take
any action  that would  give to others  any  rights of  termination,  amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its  Subsidiaries  is a party or by which any  property or
assets of the Company or any of its  Subsidiaries  is bound or affected,  except
for possible  defaults as would not,  individually  or in the aggregate,  have a
Material Adverse Effect. The businesses of the Company and its Subsidiaries,  if
any, are not being conducted, and shall not be conducted so long as a Buyer owns
any of the Securities,  in violation of any law,  ordinance or regulation of any
governmental entity.  Except as specifically  contemplated by this Agreement and
as required under the 1933 Act and any  applicable  state  securities  laws, the
Company is not  required to obtain any  consent,  authorization  or order of, or
make any filing or registration with, any court, governmental agency, regulatory
agency, self regulatory organization or stock market or any third party in order
for  it to  execute,  deliver  or  perform  any of its  obligations  under  this
Agreement,  the Registration Rights Agreement, the Debentures or the Warrants in
accordance  with the terms hereof or thereof or to issue and sell the Debentures
and Warrants in  accordance  with the terms  hereof and to issue the  Conversion
Shares upon conversion of the Debentures and the Warrant Shares upon exercise of
the   Warrants.   Except  as  disclosed   in  SCHEDULE   3(F),   all   consents,
authorizations,  orders, filings and registrations which the Company is required
to obtain  pursuant to the preceding  sentence have been obtained or effected on
or prior to the date  hereof.  The  Company is not in  violation  of the listing
requirements of the  Over-the-Counter  Bulletin Board (the "OTCBB") and does not
reasonably anticipate that the Common Stock will be delisted by the OTCBB in the
foreseeable future. The Company and its Subsidiaries are unaware of any facts or
circumstances which might give rise to any of the foregoing.

          G.  SEC  DOCUMENTS;  FINANCIAL  STATEMENTS.  Except  as  disclosed  in
SCHEDULE  3(G),  the Company has timely  filed all  reports,  schedules,  forms,
statements and other documents  required to be filed by it with the SEC pursuant
to the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "1934  ACT") (all of the  foregoing  filed prior to the date hereof and all
exhibits  included  therein and financial  statements and schedules  thereto and
documents  (other than  exhibits to such  documents)  incorporated  by reference
therein,  being  hereinafter  referred  to herein as the "SEC  DOCUMENTS").  The
Company  has  delivered  to each  Buyer  true  and  complete  copies  of the SEC
Documents,  except for such  exhibits and  incorporated  documents.  As of their
respective  dates, the SEC Documents  complied in all material respects with the
requirements  of the  1934  Act  and  the  rules  and  regulations  of  the  SEC
promulgated  thereunder  applicable  to the SEC  Documents,  and none of the SEC
Documents,  at the time they  were  filed  with the SEC,  contained  any  untrue
statement of a material  fact or omitted to state a material fact required to be
stated therein or necessary in order to make the

                                       7
<PAGE>

statements  therein,  in light of the circumstances  under which they were made,
not misleading. None of the statements made in any such SEC Documents is, or has
been,  required to be amended or updated under  applicable  law (except for such
statements as have been amended or updated in subsequent  filings prior the date
hereof).  As of their respective dates, the financial  statements of the Company
included in the SEC Documents  complied as to form in all material respects with
applicable  accounting  requirements  and the published rules and regulations of
the SEC with respect  thereto.  Such financial  statements have been prepared in
accordance  with  United  States  generally  accepted   accounting   principles,
consistently  applied,  during  the  periods  involved  (except  (i)  as  may be
otherwise  indicated in such financial  statements or the notes thereto, or (ii)
in the case of unaudited interim statements,  to the extent they may not include
footnotes or may be condensed or summary  statements)  and fairly present in all
material  respects the  consolidated  financial  position of the Company and its
consolidated  Subsidiaries as of the dates thereof and the consolidated  results
of their  operations and cash flows for the periods then ended (subject,  in the
case of unaudited statements,  to normal year-end audit adjustments).  Except as
set  forth  in the  financial  statements  of the  Company  included  in the SEC
Documents, the Company has no liabilities,  contingent or otherwise,  other than
(i) liabilities  incurred in the ordinary course of business subsequent to March
31, 2002 and (ii)  obligations  under contracts and commitments  incurred in the
ordinary course of business and not required under generally accepted accounting
principles to be reflected in such financial statements,  which, individually or
in the  aggregate,  are not  material to the  financial  condition  or operating
results of the Company.

          H. ABSENCE OF CERTAIN  CHANGES.  Except as set forth on SCHEDULE 3(H),
since March 31, 2002,  there has been no material adverse change and no material
adverse   development  in  the  assets,   liabilities,   business,   properties,
operations,  financial  condition,  results of  operations  or  prospects of the
Company or any of its Subsidiaries.

          I. ABSENCE OF LITIGATION. There is no action, suit, claim, proceeding,
inquiry  or  investigation  before or by any  court,  public  board,  government
agency, self-regulatory organization or body pending or, to the knowledge of the
Company or any of its Subsidiaries,  threatened against or affecting the Company
or any of its Subsidiaries,  or their officers or directors in their capacity as
such,  that could have a  Material  Adverse  Effect.  SCHEDULE  3(I)  contains a
complete list and summary  description  of any pending or threatened  proceeding
against or affecting the Company or any of its  Subsidiaries,  without regard to
whether  it  would  have  a  Material  Adverse  Effect.   The  Company  and  its
Subsidiaries are unaware of any facts or circumstances  which might give rise to
any of the foregoing.

          J.   PATENTS, COPYRIGHTS, ETC.

               (i) The Company and each of its  Subsidiaries  owns or  possesses
the requisite licenses or rights to use all patents, patent applications, patent
rights, inventions, know-how, trade secrets, trademarks, trademark applications,
service  marks,  service  names,  trade  names  and  copyrights   ("INTELLECTUAL
PROPERTY")  necessary to enable it to conduct its business as now operated (and,
except  as set  forth in  SCHEDULE  3(J)  hereof,  to the best of the  Company's
knowledge,  as presently contemplated to be operated in the future); there is no
claim or action by any person  pertaining to, or proceeding  pending,  or to the
Company's knowledge threatened,  which challenges the right of the Company or of
a Subsidiary with respect to any Intellectual Property necessary to enable it to
conduct its business as now operated (and, except

                                       8
<PAGE>

as set forth in SCHEDULE 3(J) hereof, to the best of the Company's knowledge, as
presently  contemplated  to be  operated  in the  future);  to the  best  of the
Company's  knowledge,  the Company's or its  Subsidiaries'  current and intended
products, services and processes do not infringe on any Intellectual Property or
other  rights  held by any  person;  and the  Company is unaware of any facts or
circumstances  which  might give rise to any of the  foregoing.  The Company and
each of its Subsidiaries have taken reasonable  security measures to protect the
secrecy, confidentiality and value of their Intellectual Property.

               (ii)  All  of  the  Company's   computer  software  and  computer
hardware,  and other  similar or related  items of  automated,  computerized  or
software systems that are used or relied on by the Company in the conduct of its
business or that were, or currently  are being,  sold or licensed by the Company
to customers (collectively,  "INFORMATION TECHNOLOGY"), are Year 2000 Compliant.
For  purposes of this  Agreement,  the term "YEAR 2000  Compliant"  means,  with
respect to the Company's Information Technology, that the Information Technology
is designed to be used prior to,  during and after the calendar  Year 2000,  and
the  Information  Technology  used during each such time period will  accurately
receive, provide and process date and time data (including,  but not limited to,
calculating,  comparing and sequencing) from, into and between the 20th and 21st
centuries,  including the years 1999 and 2000, and leap-year  calculations,  and
will not malfunction, cease to function, or provide invalid or incorrect results
as a result of the date or time  data,  to the  extent  that  other  information
technology,  used in  combination  with  the  Information  Technology,  properly
exchanges  date and time data with it. The Company has  delivered  to the Buyers
true and correct copies of all analyses,  reports,  studies and similar  written
information,  whether  prepared  by the  Company or another  party,  relating to
whether the Information Technology is Year 2000 Compliant, if any.

          K. NO MATERIALLY ADVERSE  CONTRACTS,  ETC. Neither the Company nor any
of its  Subsidiaries  is  subject  to any  charter,  corporate  or  other  legal
restriction,  or any judgment,  decree,  order,  rule or regulation which in the
judgment of the  Company's  officers  has or is expected in the future to have a
Material  Adverse Effect.  Neither the Company nor any of its  Subsidiaries is a
party to any  contract  or  agreement  which in the  judgment  of the  Company's
officers has or is expected to have a Material Adverse Effect.

          L. TAX STATUS.  Except as set forth on SCHEDULE  3(L), the Company and
each of its Subsidiaries has made or filed all federal, state and foreign income
and all other tax returns, reports and declarations required by any jurisdiction
to which it is subject  (unless and only to the extent that the Company and each
of its Subsidiaries has set aside on its books  provisions  reasonably  adequate
for the payment of all unpaid and  unreported  taxes) and has paid all taxes and
other governmental assessments and charges that are material in amount, shown or
determined to be due on such  returns,  reports and  declarations,  except those
being  contested  in good  faith  and  has set  aside  on its  books  provisions
reasonably  adequate for the payment of all taxes for periods  subsequent to the
periods  to which such  returns,  reports or  declarations  apply.  There are no
unpaid taxes in any material amount claimed to be due by the taxing authority of
any jurisdiction,  and the officers of the Company know of no basis for any such
claim.  The  Company has not  executed a waiver  with  respect to the statute of
limitations  relating to the  assessment or collection of any foreign,  federal,
state or local tax.  Except as set forth on SCHEDULE 3(L), none of the Company's
tax returns is presently being audited by any taxing authority.

                                       9
<PAGE>

          M.  CERTAIN  TRANSACTIONS.  Except as set forth on  SCHEDULE  3(M) and
except for arm's length transactions pursuant to which the Company or any of its
Subsidiaries  makes  payments in the ordinary  course of business  upon terms no
less  favorable  than the Company or any of its  Subsidiaries  could obtain from
third  parties and other than the grant of stock  options  disclosed on SCHEDULE
3(C), none of the officers,  directors, or employees of the Company is presently
a party to any transaction  with the Company or any of its  Subsidiaries  (other
than for services as employees, officers and directors), including any contract,
agreement or other  arrangement  providing for the  furnishing of services to or
by,  providing for rental of real or personal  property to or from, or otherwise
requiring payments to or from any officer,  director or such employee or, to the
knowledge of the Company, any corporation, partnership, trust or other entity in
which any officer,  director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.

          N. DISCLOSURE.  All information  relating to or concerning the Company
or any of its  Subsidiaries  set forth in this  Agreement  and  provided  to the
Buyers  pursuant to Section  2(d) hereof and  otherwise in  connection  with the
transactions  contemplated  hereby is true and correct in all material  respects
and the Company has not omitted to state any material fact necessary in order to
make the statements made herein or therein,  in light of the circumstances under
which they were made, not misleading.  No event or circumstance  has occurred or
exists with  respect to the Company or any of its  Subsidiaries  or its or their
business,  properties,  prospects,  operations or financial  conditions,  which,
under  applicable  law,  rule  or  regulation,  requires  public  disclosure  or
announcement  by the  Company but which has not been so  publicly  announced  or
disclosed  (assuming for this purpose that the Company's reports filed under the
1934 Act are being incorporated into an effective  registration  statement filed
by the Company under the 1933 Act).

          O.  ACKNOWLEDGMENT  REGARDING  BUYERS'  PURCHASE  OF  SECURITIES.  The
Company  acknowledges  and  agrees  that the  Buyers  are  acting  solely in the
capacity of arm's  length  purchasers  with  respect to this  Agreement  and the
transactions contemplated hereby. The Company further acknowledges that no Buyer
is acting as a financial  advisor or fiduciary of the Company (or in any similar
capacity)  with  respect to this  Agreement  and the  transactions  contemplated
hereby  and  any  statement  made  by  any  Buyer  or any  of  their  respective
representatives or agents in connection with this Agreement and the transactions
contemplated  hereby is not advice or a recommendation  and is merely incidental
to the Buyers'  purchase of the Securities.  The Company  further  represents to
each Buyer that the  Company's  decision to enter into this  Agreement  has been
based   solely  on  the   independent   evaluation   of  the   Company  and  its
representatives.

          P.  NO  INTEGRATED  OFFERING.  Neither  the  Company,  nor  any of its
affiliates,  nor any  person  acting on its or their  behalf,  has  directly  or
indirectly  made any offers or sales in any security or solicited  any offers to
buy any security under  circumstances that would require  registration under the
1933 Act of the issuance of the  Securities  to the Buyers.  The issuance of the
Securities to the Buyers will not be integrated  with any other  issuance of the
Company's  securities (past,  current or future) for purposes of any shareholder
approval provisions applicable to the Company or its securities.

                                       10
<PAGE>

          Q. NO BROKERS.  Except as set forth on Schedule  3(q), the Company has
taken no action  which would give rise to any claim by any person for  brokerage
commissions,  transaction fees or similar payments relating to this Agreement or
the transactions contemplated hereby.

          R. PERMITS; COMPLIANCE. The Company and each of its Subsidiaries is in
possession  of  all  franchises,  grants,  authorizations,   licenses,  permits,
easements, variances, exemptions,  consents, certificates,  approvals and orders
necessary to own,  lease and operate its properties and to carry on its business
as it is now being conducted (collectively, the "COMPANY PERMITS"), and there is
no action  pending or, to the  knowledge  of the Company,  threatened  regarding
suspension or  cancellation of any of the Company  Permits.  Neither the Company
nor any of its  Subsidiaries is in conflict with, or in default or violation of,
any of  the  Company  Permits,  except  for  any  such  conflicts,  defaults  or
violations  which,  individually  or in the  aggregate,  would not reasonably be
expected to have a Material  Adverse Effect.  Since March 31, 2002,  neither the
Company nor any of its Subsidiaries  has received any notification  with respect
to possible  conflicts,  defaults or violations of applicable  laws,  except for
notices relating to possible conflicts, defaults or violations, which conflicts,
defaults or violations would not have a Material Adverse Effect.

          S. ENVIRONMENTAL MATTERS.

               (i)  Except as set forth in  SCHEDULE  3(S),  there  are,  to the
Company's  knowledge,  with respect to the Company or any of its Subsidiaries or
any predecessor of the Company,  no past or present  violations of Environmental
Laws (as defined below), releases of any material into the environment, actions,
activities,   circumstances,   conditions,  events,  incidents,  or  contractual
obligations which may give rise to any common law environmental liability or any
liability  under the  Comprehensive  Environmental  Response,  Compensation  and
Liability  Act of 1980 or similar  federal,  state,  local or  foreign  laws and
neither the Company nor any of its  Subsidiaries  has  received  any notice with
respect to any of the foregoing,  nor is any action pending or, to the Company's
knowledge,  threatened  in  connection  with  any of  the  foregoing.  The  term
"ENVIRONMENTAL LAWS" means all federal, state, local or foreign laws relating to
pollution or protection of human health or the environment  (including,  without
limitation,  ambient air, surface water, groundwater, land surface or subsurface
strata), including, without limitation, laws relating to emissions,  discharges,
releases or threatened releases of chemicals,  pollutants contaminants, or toxic
or hazardous substances or wastes (collectively, "HAZARDOUS MATERIALS") into the
environment, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous Materials,
as well as all  authorizations,  codes,  decrees,  demands  or  demand  letters,
injunctions,  judgments,  licenses,  notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved thereunder.

               (ii) Other than those that are or were  stored,  used or disposed
of in compliance with applicable law, no Hazardous Materials are contained on or
about any real property currently owned, leased or used by the Company or any of
its Subsidiaries,  and no Hazardous Materials were released on or about any real
property  previously  owned,  leased  or  used  by  the  Company  or  any of its
Subsidiaries during the period the property was owned, leased

                                       11
<PAGE>

or used by the Company or any of its  Subsidiaries,  except in the normal course
of the Company's or any of its Subsidiaries' business.

               (iii)  Except  as  set  forth  in  SCHEDULE  3(S),  there  are no
underground storage tanks on or under any real property owned, leased or used by
the  Company  or  any of its  Subsidiaries  that  are  not  in  compliance  with
applicable law.

          T. TITLE TO PROPERTY.  The Company and its Subsidiaries  have good and
marketable  title in fee  simple to all real  property  and good and  marketable
title to all personal  property  owned by them which is material to the business
of the Company and its  Subsidiaries,  in each case free and clear of all liens,
encumbrances  and defects  except such as are described in SCHEDULE 3(T) or such
as would not have a Material  Adverse  Effect.  Any real property and facilities
held under  lease by the  Company  and its  Subsidiaries  are held by them under
valid,  subsisting and enforceable leases with such exceptions as would not have
a Material Adverse Effect.

          U. INSURANCE.  The Company and each of its Subsidiaries are insured by
insurers of recognized  financial  responsibility  against such losses and risks
and in such  amounts as  management  of the  Company  believes to be prudent and
customary  in the  businesses  in which the  Company  and its  Subsidiaries  are
engaged.  Neither the Company nor any such  Subsidiary has any reason to believe
that it will not be able to renew its  existing  insurance  coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as may
be  necessary  to continue its business at a cost that would not have a Material
Adverse Effect. The Company has provided to Buyer true and correct copies of all
policies  relating to directors' and officers'  liability  coverage,  errors and
omissions coverage, and commercial general liability coverage.

          V.  INTERNAL  ACCOUNTING  CONTROLS.   The  Company  and  each  of  its
Subsidiaries  maintain a system of internal accounting controls  sufficient,  in
the  judgment  of the  Company's  board  of  directors,  to  provide  reasonable
assurance that (i)  transactions  are executed in accordance  with  management's
general or specific authorizations,  (ii) transactions are recorded as necessary
to permit  preparation  of financial  statements  in conformity  with  generally
accepted  accounting  principles  and to maintain  asset  accountability,  (iii)
access to assets is permitted only in accordance  with  management's  general or
specific  authorization  and (iv) the  recorded  accountability  for  assets  is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.

          W. FOREIGN  CORRUPT  PRACTICES.  Neither the  Company,  nor any of its
Subsidiaries,  nor any director, officer, agent, employee or other person acting
on behalf of the  Company or any  Subsidiary  has,  in the course of his actions
for, or on behalf of, the  Company,  used any  corporate  funds for any unlawful
contribution,  gift,  entertainment  or  other  unlawful  expenses  relating  to
political activity;  made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds; violated or is
in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977,
as amended, or made any bribe, rebate,  payoff,  influence payment,  kickback or
other  unlawful  payment  to any  foreign or  domestic  government  official  or
employee.

                                       12
<PAGE>

          X. SOLVENCY.  Except as set forth on Schedule 3(x), the Company (after
giving effect to the  transactions  contemplated  by this  Agreement) is solvent
(i.e.,  its assets have a fair market value in excess of the amount  required to
pay its probable  liabilities on its existing debts as they become  absolute and
matured)  and  currently  the Company has no  information  that would lead it to
reasonably  conclude  that the Company  would not,  after  giving  effect to the
transaction  contemplated  by this  Agreement,  have the ability to, nor does it
intend to take any action  that would  impair its ability to, pay its debts from
time to time  incurred in connection  therewith as such debts mature.  Except as
set forth on Schedule 3(x), the Company did not receive a qualified opinion from
its auditors with respect to its most recent  fiscal year end and,  after giving
effect to the transactions  contemplated by this Agreement,  does not anticipate
or know of any basis upon which its auditors might issue a qualified  opinion in
respect of its current fiscal year.

          Y. NO  INVESTMENT  COMPANY.  The Company is not, and upon the issuance
and sale of the  Securities as  contemplated  by this  Agreement  will not be an
"investment  company" required to be registered under the Investment Company Act
of  1940  (an  "INVESTMENT  COMPANY").  The  Company  is  not  controlled  by an
Investment Company.

          Z. BREACH OF  REPRESENTATIONS  AND  WARRANTIES BY THE COMPANY.  If the
Company  breaches any of the  representations  or  warranties  set forth in this
Section  3, and in  addition  to any  other  remedies  available  to the  Buyers
pursuant  to this  Agreement,  the Company  shall pay to the Buyer the  Standard
Liquidated  Damages Amount in cash or in shares of Common Stock at the option of
the  Buyer,  until  such  breach is cured.  If the  Buyers  elect to be paid the
Standard Liquidated Damages Amounts in shares of Common Stock, such shares shall
be issued at the Conversion Price at the time of payment.

     4.   COVENANTS.

          A. BEST  EFFORTS.  The parties shall use their best efforts to satisfy
timely each of the conditions described in Section 6 and 7 of this Agreement.

          B.  FORM D; BLUE SKY LAWS.  The  Company  agrees to file a Form D with
respect to the Securities as required  under  Regulation D and to provide a copy
thereof to each Buyer  promptly  after such  filing.  The Company  shall,  on or
before the  Closing  Date,  take such  action as the  Company  shall  reasonably
determine is necessary to qualify the  Securities  for sale to the Buyers at the
applicable  closing  pursuant to this Agreement under  applicable  securities or
"blue sky" laws of the states of the  United  States (or to obtain an  exemption
from such qualification), and shall provide evidence of any such action so taken
to each Buyer on or prior to the Closing Date.

          C.  REPORTING  STATUS;  ELIGIBILITY TO USE FORM S-3, SB-2 OR FORM S-1.
The Company's  Common Stock is  registered  under Section 12(g) of the 1934 Act.
The Company  represents and warrants that it meets the  requirements for the use
of Form S-3 (or if the Company is not eligible for the use of Form S-3 as of the
Filing Date (as defined in the Registration  Rights Agreement),  the Company may
use the  form of  registration  for  which  it is  eligible  at that  time)  for
registration of the sale by the Buyer of the Registrable  Securities (as defined
in the Registration  Rights  Agreement).  So long as the Buyer beneficially owns
any of the

                                       13
<PAGE>

Securities,  the Company shall timely file all reports required to be filed with
the SEC pursuant to the 1934 Act, and the Company shall not terminate its status
as an issuer required to file reports under the 1934 Act even if the 1934 Act or
the rules and regulations thereunder would permit such termination.  The Company
further agrees to file all reports  required to be filed by the Company with the
SEC in a timely manner so as to become eligible,  and thereafter to maintain its
eligibility,  for the use of Form S-3. The Company  shall issue a press  release
describing the materials terms of the transaction contemplated hereby as soon as
practicable  following  the  Closing  Date  but in no  event  more  than two (2)
business days of the Closing Date, which press release shall be subject to prior
review by the Buyers.  The  Company  agrees  that such press  release  shall not
disclose the name of the Buyers unless expressly  consented to in writing by the
Buyers or unless required by applicable law or regulation,  and then only to the
extent of such requirement.

          D. USE OF PROCEEDS.  The Company  shall use the proceeds from the sale
of the  Debentures  and the  Warrants in the manner set forth in  SCHEDULE  4(D)
attached  hereto and made a part hereof and shall not,  directly or  indirectly,
use  such  proceeds  for any loan to or  investment  in any  other  corporation,
partnership, enterprise or other person (except in connection with its currently
existing direct or indirect Subsidiaries)

          E. FUTURE  OFFERINGS.  Subject to the exceptions  described below, the
Company will not, without the prior written consent of a majority-in-interest of
the Buyers,  not to be  unreasonably  withheld,  negotiate or contract  with any
party to obtain  additional  equity financing  (including debt financing with an
equity  component)  that involves (A) the issuance of Common Stock at a discount
to the market  price of the Common  Stock on the date of issuance  (taking  into
account the value of any  warrants or options to acquire  Common Stock issued in
connection  therewith) or (B) the issuance of  convertible  securities  that are
convertible  into an  indeterminate  number of shares of Common Stock or (C) the
issuance of warrants during the period (the "LOCK-UP  PERIOD")  beginning on the
Closing Date and ending on the later of (i) two hundred  seventy (270) days from
the  Closing  Date and (ii) one  hundred  eighty  (180)  days  from the date the
Registration  Statement  (as defined in the  Registration  Rights  Agreement) is
declared effective (plus any days in which sales cannot be made thereunder).  In
addition,  subject to the  exceptions  described  below,  the  Company  will not
conduct any equity financing  (including debt with an equity component) ("FUTURE
OFFERINGS")  during the period  beginning on the Closing Date and ending two (2)
years after the end of the Lock-up  Period unless it shall have first  delivered
to each Buyer,  at least twenty (20)  business days prior to the closing of such
Future  Offering,  written  notice  describing  the  proposed  Future  Offering,
including the terms and conditions thereof and proposed definitive documentation
to be entered into in connection  therewith,  and providing each Buyer an option
during the fifteen (15) day period following delivery of such notice to purchase
its pro rata share (based on the ratio that the  aggregate  principal  amount of
Debentures  purchased by it hereunder bears to the aggregate principal amount of
Debentures  purchased  hereunder) of the securities  being offered in the Future
Offering  on the  same  terms  as  contemplated  by such  Future  Offering  (the
limitations  referred  to in  this  sentence  and  the  preceding  sentence  are
collectively referred to as the "CAPITAL RAISING LIMITATIONS"). In the event the
terms and  conditions of a proposed  Future  Offering are amended in any respect
after  delivery  of the  notice to the Buyers  concerning  the  proposed  Future
Offering,  the Company shall deliver a new notice to each Buyer  describing  the
amended  terms and  conditions  of the proposed  Future  Offering and each Buyer
thereafter shall have an option during

                                       14
<PAGE>

the fifteen  (15) day period  following  delivery of such new notice to purchase
its pro  rata  share  of the  securities  being  offered  on the  same  terms as
contemplated  by such  proposed  Future  Offering,  as  amended.  The  foregoing
sentence shall apply to successive amendments to the terms and conditions of any
proposed Future Offering. The Capital Raising Limitations shall not apply to any
transaction   involving  (i)  issuances  of  securities  in  a  firm  commitment
underwritten  public offering  (excluding a continuous offering pursuant to Rule
415 under the 1933 Act) or (ii) issuances of securities as  consideration  for a
merger, consolidation or purchase of assets, or in connection with any strategic
partnership  or joint  venture  (the  primary  purpose  of which is not to raise
equity  capital),  or in connection  with the  disposition  or  acquisition of a
business,  product or license by the Company.  The Capital  Raising  Limitations
also shall not apply to the issuance of  securities  upon exercise or conversion
of the Company's options,  warrants or other convertible  securities outstanding
as of the date hereof or to the grant of additional options or warrants,  or the
issuance of additional securities,  under any Company stock option or restricted
stock plan approved by the shareholders of the Company.

          F. EXPENSES.  At the Closing,  the Company shall reimburse  Buyers for
expenses  incurred  by them in  connection  with the  negotiation,  preparation,
execution,  delivery and performance of this Agreement and the other  agreements
to  be  executed  in  connection  herewith  ("Documents"),   including,  without
limitation,  attorneys' and consultants' fees and expenses, transfer agent fees,
fees  for  stock  quotation  services,   fees  relating  to  any  amendments  or
modifications  of the  Documents or any consents or waivers of provisions in the
Documents,  fees for the  preparation  of opinions of counsel,  escrow fees, and
costs of  restructuring  the  transactions  contemplated by the Documents.  When
possible,  the Company must pay these fees directly,  otherwise the Company must
make immediate payment for reimbursement to the Buyers for all fees and expenses
immediately  upon written notice by the Buyer or the submission of an invoice by
the Buyer If the Company  fails to reimburse  the Buyer in full within three (3)
business days of the written  notice or submission of invoice by the Buyer,  the
Company  shall pay  interest on the total amount of fees to be  reimbursed  at a
rate of 15% per annum.

          G.  FINANCIAL  INFORMATION.  The Company  agrees to send the following
reports to each Buyer until such Buyer transfers,  assigns,  or sells all of the
Securities:  (i) within  ten (10) days after the filing  with the SEC, a copy of
its Annual Report on Form 10-KSB,  its Quarterly  Reports on Form 10-QSB and any
Current  Reports on Form 8-K; (ii) within one (1) day after  release,  copies of
all press releases issued by the Company or any of its  Subsidiaries;  and (iii)
contemporaneously with the making available or giving to the shareholders of the
Company,  copies of any notices or other information the Company makes available
or gives to such shareholders.

          H.  AUTHORIZATION AND RESERVATION OF SHARES.  The Company shall at all
times have  authorized,  and reserved for the purpose of issuance,  a sufficient
number of shares of Common Stock to provide for the full  conversion or exercise
of the outstanding Debentures and Warrants and issuance of the Conversion Shares
and Warrant Shares in connection therewith (based on the Conversion Price of the
Debentures or Exercise Price of the Warrants in effect from time to time) and as
otherwise required by the Debentures. The Company shall not reduce the number of
shares of Common Stock  reserved for issuance upon  conversion of Debentures and
exercise of the Warrants without the consent of each Buyer. The Company shall at
all times

                                       15
<PAGE>

maintain  the number of shares of Common  Stock so reserved  for  issuance at an
amount  ("RESERVED  AMOUNT") equal to no less than two (2) times the number that
is then actually  issuable upon full conversion of the Debentures and Additional
Debentures and upon exercise of the Warrants and the Additional  Warrants (based
on the Conversion  Price of the Debentures or the Exercise Price of the Warrants
in  effect  from time to  time).  If at any time the  number of shares of Common
Stock authorized and reserved for issuance ("AUTHORIZED AND RESERVED SHARES") is
below the Reserved  Amount,  the Company will promptly take all corporate action
necessary to authorize  and reserve a  sufficient  number of shares,  including,
without  limitation,  calling a special  meeting of  shareholders  to  authorize
additional shares to meet the Company's  obligations under this Section 4(h), in
the case of an  insufficient  number of authorized  shares,  obtain  shareholder
approval  of an  increase in such  authorized  number of shares,  and voting the
management  shares of the  Company  in favor of an  increase  in the  authorized
shares  of the  Company  to  ensure  that the  number  of  authorized  shares is
sufficient  to meet the  Reserved  Amount.  If the Company  fails to obtain such
shareholder  approval  within  thirty (30) days  following the date on which the
number of  Authorized  and  Reserved  Shares  exceeds the Reserved  Amount,  the
Company shall pay to the Borrower the Standard  Liquidated  Damages  Amount,  in
cash or in shares  of Common  Stock at the  option  of the  Buyer.  If the Buyer
elects to be paid the  Standard  Liquidated  Damages  Amount in shares of Common
Stock,  such  shares  shall be  issued  at the  Conversion  Price at the time of
payment.  In order to ensure that the Company has authorized a sufficient amount
of shares to meet the Reserved Amount at all times,  the Company must deliver to
the Buyer at the end of every month a list  detailing (1) the current  amount of
shares  authorized by the Company and reserved for the Buyer;  and (2) amount of
shares  issuable  upon  conversion  of the  Debentures  and upon exercise of the
Warrants and as payment of interest  accrued on the  Debentures for one year. If
the Company  fails to provide such list within five (5) business days of the end
of each month, the Company shall pay the Standard  Liquidated Damages Amount, in
cash or in shares of Common Stock at the option of the Buyer,  until the list is
delivered. If the Buyer elects to be paid the Standard Liquidated Damages Amount
in shares of Common Stock,  such shares shall be issued at the Conversion  Price
at the time of payment.

          I.  LISTING.  The  Company  shall  promptly  secure the listing of the
Conversion Shares and Warrant Shares upon each national  securities  exchange or
automated  quotation  system, if any, upon which shares of Common Stock are then
listed  (subject to official  notice of issuance) and, so long as any Buyer owns
any of the  Securities,  shall  maintain,  so long as any other shares of Common
Stock  shall be so listed,  such  listing of all  Conversion  Shares and Warrant
Shares from time to time issuable upon  conversion of the Debentures or exercise
of the  Warrants.  The Company will obtain and, so long as any Buyer owns any of
the  Securities,  maintain  the listing  and trading of its Common  Stock on the
OTCBB  or any  equivalent  replacement  exchange,  the  Nasdaq  National  Market
("NASDAQ"),  the Nasdaq SmallCap Market ("NASDAQ SMALLCAP"),  the New York Stock
Exchange  ("NYSE"),  or the American Stock Exchange  ("AMEX") and will comply in
all respects with the Company's  reporting,  filing and other  obligations under
the bylaws or rules of the National  Association of Securities  Dealers ("NASD")
and such exchanges,  as applicable.  The Company shall promptly  provide to each
Buyer copies of any notices it receives  from the OTCBB and any other  exchanges
or  quotation  systems on which the Common  Stock is then listed  regarding  the
continued  eligibility  of the Common  Stock for listing on such  exchanges  and
quotation systems.

                                       16
<PAGE>

          J.  CORPORATE  EXISTENCE.  So long as a Buyer  beneficially  owns  any
Debentures or Warrants,  the Company shall maintain its corporate  existence and
shall not sell all or substantially all of the Company's  assets,  except in the
event of a merger or consolidation  or sale of all or  substantially  all of the
Company's  assets,  where the surviving or successor  entity in such transaction
(i) assumes the Company's  obligations  hereunder and under the  agreements  and
instruments  entered into in connection  herewith and (ii) is a publicly  traded
corporation  whose  Common  Stock is listed for  trading  on the OTCBB,  Nasdaq,
Nasdaq SmallCap, NYSE or AMEX.

          K. NO  INTEGRATION.  The Company shall not make any offers or sales of
any security (other than the Securities) under  circumstances that would require
registration  of the Securities  being offered or sold hereunder  under the 1933
Act or cause the  offering of the  Securities  to be  integrated  with any other
offering  of  securities  by the  Company  for the  purpose  of any  stockholder
approval provision applicable to the Company or its securities.

          L. SUBSEQUENT INVESTMENT.  The Company and the Buyers agree that, upon
filing by the Company of the Registration  Statement to be filed pursuant to the
Registration  Rights  Agreement (the "FILING  DATE"),  the Buyers shall purchase
additional debentures ("FILING DEBENTURES") in the aggregate principal amount of
Two Hundred Fifty  Thousand  Dollars  ($250,000)  and  additional  warrants (the
"FILING  WARRANTS") to purchase an aggregate of 625,000  shares of Common Stock,
for  an  aggregate   purchase  price  of  Two  Hundred  Fifty  Thousand  Dollars
($250,000),  with the closing of such purchase to occur within fifteen (15) days
of the Filing Date;  provided,  however,  that the  obligation  of each Buyer to
purchase  the  Filing  Debentures  and the  Filing  Warrants  is  subject to the
satisfaction,  at or before  the  closing  of such  purchase  and  sale,  of the
conditions  set forth in Section 7. The  Company  and the Buyers  further  agree
that, upon the declaration of effectiveness of the Registration  Statement to be
filed pursuant to the Registration  Rights Agreement (the "EFFECTIVE DATE"), the
Buyers shall purchase additional debentures (the "EFFECTIVENESS DEBENTURES" and,
collectively  with the Filing  Debentures,  the "ADDITIONAL  DEBENTURES") in the
aggregate  principal amount of Two Hundred Fifty Thousand Dollars ($250,000) and
additional  warrants (the  "EFFECTIVENESS  WARRANTS" and,  collectively with the
Filing Warrants,  the "ADDITIONAL WARRANTS") to purchase an aggregate of 625,000
shares of Common  Stock,  for an aggregate  purchase  price of Two Hundred Fifty
Thousand Dollars  ($250,000),  with the closing of such purchase to occur within
five (5)  business  days of the  Effective  Date;  provided,  however,  that the
obligation  of each  Buyer to  purchase  the  Effectiveness  Debentures  and the
Effectiveness Warrants is subject to the satisfaction,  at or before the closing
of such  purchase  and sale,  of the  conditions  set forth in  Section  7; and,
provided,  further,  that there shall not have been a Material Adverse Effect as
of  such  effective  date.  The  terms  of the  Additional  Debentures  and  the
Additional  Warrants  shall be  identical  to the  terms of the  Debentures  and
Warrants, as the case may be, to be issued on the Closing Date. The Common Stock
underlying  the  Additional  Debentures  and the  Additional  Warrants  shall be
Registrable  Securities (as defined in the  Registration  Rights  Agreement) and
shall be  included in the  Registration  Statement  to be filed  pursuant to the
Registration Rights Agreement.

          M. BREACH OF COVENANTS.  If the Company  breaches any of the covenants
set forth in this Section 4, and in addition to any other remedies  available to
the Buyers pursuant to this  Agreement,  the Company shall pay to the Buyers the
Standard  Liquidated Damages Amount, in cash or in shares of Common Stock at the
option of the Buyer,

                                       17
<PAGE>

until  such  breach  is  cured.  If the  Buyers  elect to be paid  the  Standard
Liquidated  Damages  Amount  in  shares,  such  shares  shall be  issued  at the
Conversion Price at the time of payment.

     5.  TRANSFER  AGENT  INSTRUCTIONS.  The  Company  shall  issue  irrevocable
instructions to its transfer agent to issue certificates, registered in the name
of each Buyer or its nominee,  for the  Conversion  Shares and Warrant Shares in
such  amounts as  specified  from time to time by each Buyer to the Company upon
conversion of the Debentures or exercise of the Warrants in accordance  with the
terms  thereof  (the  "IRREVOCABLE  TRANSFER  AGENT  INSTRUCTIONS").   Prior  to
registration  of the Conversion  Shares and Warrant Shares under the 1933 Act or
the date on which the Conversion  Shares and Warrant Shares may be sold pursuant
to Rule 144  without  any  restriction  as to the number of  Securities  as of a
particular date that can then be immediately sold, all such  certificates  shall
bear the restrictive  legend  specified in Section 2(g) of this  Agreement.  The
Company warrants that no instruction  other than the Irrevocable  Transfer Agent
Instructions  referred to in this Section 5, and stop transfer  instructions  to
give  effect to Section  2(f) hereof (in the case of the  Conversion  Shares and
Warrant  Shares,  prior to  registration  of the  Conversion  Shares and Warrant
Shares under the 1933 Act or the date on which the Conversion Shares and Warrant
Shares may be sold pursuant to Rule 144 without any restriction as to the number
of Securities as of a particular date that can then be immediately  sold),  will
be given by the  Company to its  transfer  agent and that the  Securities  shall
otherwise be freely  transferable on the books and records of the Company as and
to the extent provided in this Agreement and the Registration  Rights Agreement.
Nothing in this  Section  shall  affect in any way the Buyer's  obligations  and
agreement  set  forth in  Section  2(g)  hereof to  comply  with all  applicable
prospectus delivery requirements,  if any, upon re-sale of the Securities.  If a
Buyer provides the Company with (i) an opinion of counsel in form, substance and
scope  customary for opinions in comparable  transactions,  to the effect that a
public sale or  transfer of such  Securities  may be made  without  registration
under  the 1933 Act and such  sale or  transfer  is  effected  or (ii) the Buyer
provides reasonable  assurances that the Securities can be sold pursuant to Rule
144, the Company shall permit the transfer,  and, in the case of the  Conversion
Shares and Warrant Shares,  promptly instruct its transfer agent to issue one or
more  certificates,  free  from  restrictive  legend,  in such  name and in such
denominations as specified by such Buyer. The Company acknowledges that a breach
by it of its obligations hereunder will cause irreparable harm to the Buyers, by
vitiating  the  intent  and  purpose of the  transactions  contemplated  hereby.
Accordingly, the Company acknowledges that the remedy at law for a breach of its
obligations under this Section 5 may be inadequate and agrees, in the event of a
breach or  threatened  breach by the Company of the  provisions of this Section,
that the Buyers shall be entitled,  in addition to all other available remedies,
to an  injunction  restraining  any breach  and  requiring  immediate  transfer,
without the  necessity  of showing  economic  loss and without any bond or other
security being required.

     6.  CONDITIONS TO THE COMPANY'S  OBLIGATION TO SELL.  The obligation of the
Company  hereunder to issue and sell the  Debentures  and Warrants to a Buyer at
the Closing is subject to the  satisfaction,  at or before the  Closing  Date of
each of the following conditions thereto, provided that these conditions are for
the  Company's  sole benefit and may be waived by the Company at any time in its
sole discretion:

          A. The  applicable  Buyer shall have executed  this  Agreement and the
Registration Rights Agreement, and delivered the same to the Company.

                                       18
<PAGE>

          B. The  applicable  Buyer shall have  delivered the Purchase  Price in
accordance with Section 1(b) above.

          C. The representations and warranties of the applicable Buyer shall be
true and correct in all material respects as of the date when made and as of the
Closing  Date as  though  made at that  time  (except  for  representations  and
warranties  that speak as of a specific  date),  and the applicable  Buyer shall
have  performed,  satisfied  and  complied  in all  material  respects  with the
covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied  with by the  applicable  Buyer at or prior to the Closing
Date.

          D. No litigation, statute, rule, regulation,  executive order, decree,
ruling or injunction shall have been enacted,  entered,  promulgated or endorsed
by or in any court or  governmental  authority of competent  jurisdiction or any
self-regulatory  organization  having  authority  over the matters  contemplated
hereby which prohibits the consummation of any of the transactions  contemplated
by this Agreement.

     7.  CONDITIONS TO EACH BUYER'S  OBLIGATION TO PURCHASE.  The  obligation of
each Buyer  hereunder to purchase the  Debentures and Warrants at the Closing is
subject  to the  satisfaction,  at or  before  the  Closing  Date of each of the
following  conditions,  provided that these conditions are for such Buyer's sole
benefit and may be waived by such Buyer at any time in its sole discretion:

          A. The Company shall have executed this Agreement and the Registration
Rights Agreement, and delivered the same to the Buyer.

          B. The  Company  shall have  delivered  to such  Buyer  duly  executed
Debentures  (in such  denominations  as the Buyer shall request) and Warrants in
accordance with Section 1(b) above.

          C. The Irrevocable Transfer Agent Instructions,  in form and substance
satisfactory to a majority-in-interest  of the Buyers, shall have been delivered
to and acknowledged in writing by the Company's Transfer Agent.

          D. The representations and warranties of the Company shall be true and
correct in all material  respects as of the date when made and as of the Closing
Date as though made at such time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants,  agreements and conditions
required by this  Agreement to be  performed,  satisfied or complied with by the
Company  at or prior to the  Closing  Date.  The Buyer  shall  have  received  a
certificate  or  certificates,  executed by the chief  executive  officer of the
Company,  dated as of the Closing Date,  to the foregoing  effect and as to such
other matters as may be reasonably  requested by such Buyer  including,  but not
limited to certificates with respect to the Company's Articles of Incorporation,
By-laws  and  Board  of  Directors'  resolutions  relating  to the  transactions
contemplated hereby.

          E. No litigation, statute, rule, regulation,  executive order, decree,
ruling or injunction shall have been enacted,  entered,  promulgated or endorsed
by or in any court or  governmental  authority of competent  jurisdiction or any
self-regulatory organization having

                                       19
<PAGE>

authority over the matters  contemplated hereby which prohibits the consummation
of any of the transactions contemplated by this Agreement.

          F. No event shall have occurred which could  reasonably be expected to
have a Material Adverse Effect on the Company.

          G. The Conversion Shares and Warrant Shares shall have been authorized
for  quotation  on the OTCBB and trading in the Common  Stock on the OTCBB shall
not have been suspended by the SEC or the OTCBB.

          H. The Buyer shall have received an opinion of the Company's  counsel,
dated  as  of  the  Closing  Date,  in  form,  scope  and  substance  reasonably
satisfactory  to the Buyer and in  substantially  the same form as  EXHIBIT  "D"
attached hereto.

          I. The Buyer shall have received an officer's certificate described in
Section 3(c) above, dated as of the Closing Date.

     8.   GOVERNING LAW; MISCELLANEOUS.

          A. GOVERNING LAW. THIS  AGREEMENT  SHALL BE ENFORCED,  GOVERNED BY AND
CONSTRUED IN  ACCORDANCE  WITH THE LAWS OF THE STATE OF NEW YORK  APPLICABLE  TO
AGREEMENTS MADE AND TO BE PERFORMED  ENTIRELY WITHIN SUCH STATE,  WITHOUT REGARD
TO THE  PRINCIPLES OF CONFLICT OF LAWS.  THE PARTIES HERETO HEREBY SUBMIT TO THE
EXCLUSIVE  JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN NEW YORK,
NEW  YORK  WITH  RESPECT  TO ANY  DISPUTE  ARISING  UNDER  THIS  AGREEMENT,  THE
AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS  CONTEMPLATED
HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT
FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING.  BOTH PARTIES FURTHER AGREE
THAT  SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED
IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR
PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY'S RIGHT TO SERVE PROCESS IN
ANY  OTHER  MANNER   PERMITTED  BY  LAW.   BOTH  PARTIES   AGREE  THAT  A  FINAL
NON-APPEALABLE  JUDGMENT IN ANY SUCH SUIT OR PROCEEDING  SHALL BE CONCLUSIVE AND
MAY BE ENFORCED IN OTHER  JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER
LAWFUL  MANNER.  THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE  ARISING  UNDER
THIS  AGREEMENT  SHALL  BE  RESPONSIBLE  FOR ALL FEES  AND  EXPENSES,  INCLUDING
ATTORNEYS'  FEES,  INCURRED  BY THE  PREVAILING  PARTY IN  CONNECTION  WITH SUCH
DISPUTE.

          B.  COUNTERPARTS;  SIGNATURES  BY  FACSIMILE.  This  Agreement  may be
executed in one or more counterparts,  each of which shall be deemed an original
but all of which shall  constitute  one and the same  agreement and shall become
effective when  counterparts have been signed by each party and delivered to the
other party. This Agreement, once executed by a

                                       20
<PAGE>

party, may be delivered to the other party hereto by facsimile transmission of a
copy of this  Agreement  bearing the signature of the party so  delivering  this
Agreement.

          C.  HEADINGS.  The headings of this  Agreement are for  convenience of
reference only and shall not form part of, or affect the interpretation of, this
Agreement.

          D. SEVERABILITY.  In the event that any provision of this Agreement is
invalid or unenforceable  under any applicable statute or rule of law, then such
provision  shall  be  deemed  inoperative  to the  extent  that it may  conflict
therewith  and shall be deemed  modified to conform with such statute or rule of
law. Any provision hereof which may prove invalid or unenforceable under any law
shall not affect the validity or enforceability of any other provision hereof.

          E. ENTIRE  AGREEMENT;  AMENDMENTS.  This Agreement and the instruments
referenced  herein contain the entire  understanding of the parties with respect
to the matters covered herein and therein and, except as specifically  set forth
herein or therein,  neither the Company nor the Buyer makes any  representation,
warranty,  covenant or undertaking with respect to such matters. No provision of
this  Agreement  may be waived or amended other than by an instrument in writing
signed by the party to be charged with enforcement.

          F.  NOTICES.  Any notices  required or permitted to be given under the
terms of this  Agreement  shall be sent by certified or registered  mail (return
receipt requested) or delivered personally or by courier (including a recognized
overnight  delivery  service) or by facsimile  and shall be effective  five days
after being placed in the mail, if mailed by regular United States mail, or upon
receipt, if delivered personally or by courier (including a recognized overnight
delivery  service)  or by  facsimile,  in each case  addressed  to a party.  The
addresses for such communications shall be:

                    If to the Company:

                         Peabodys Coffee, Inc.
                         3845 Atherton Road, Suite 9
                         Rocklin, CA 95765
                         Attention:  Todd N. Tkachuk
                         Telephone: 916-632-6090
                         Facsimile:  916-632-6099

                                       21
<PAGE>

                    With a copy to:

                         Sichenzia Ross Friedman Ference LLP
                         1065 Avenue of the Americas, 21st Floor
                         New York, New York 10018
                         Attention:  Gregory Sichenzia, Esq.
                         Telephone:  212-930-9700
                         Facsimile:   212-930-9725
                         Email: GSichenzia@srfllp.net

     If to a Buyer: To the address set forth immediately below such Buyer's name
on the signature pages hereto.

                    With copy to:

                         Ballard Spahr Andrews & Ingersoll, LLP
                         1735 Market Street
                         51st Floor
                         Philadelphia, Pennsylvania  19103
                         Attention:  Gerald J. Guarcini, Esq.
                         Telephone:  215-864-8625
                         Facsimile:  215-864-8999
                         Email:  guarcini@ballardspahr.com

     Each  party  shall  provide  notice  to the  other  party of any  change in
address.

          G.  SUCCESSORS AND ASSIGNS.  This Agreement  shall be binding upon and
inure to the benefit of the parties and their  successors  and assigns.  Neither
the  Company  nor any  Buyer  shall  assign  this  Agreement  or any  rights  or
obligations   hereunder   without  the  prior  written  consent  of  the  other.
Notwithstanding the foregoing, subject to Section 2(f), any Buyer may assign its
rights  hereunder  to  any  person  that  purchases   Securities  in  a  private
transaction from a Buyer or to any of its  "affiliates," as that term is defined
under the 1934 Act, without the consent of the Company.

          H. THIRD PARTY  BENEFICIARIES.  This  Agreement  is  intended  for the
benefit of the parties  hereto and their  respective  permitted  successors  and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.

          I. SURVIVAL. The representations and warranties of the Company and the
agreements  and  covenants set forth in Sections 3, 4, 5 and 8 shall survive the
closing hereunder  notwithstanding any due diligence  investigation conducted by
or on behalf of the Buyers.  The Company  agrees to indemnify  and hold harmless
each of the Buyers and all their officers,  directors,  employees and agents for
loss or damage arising as a result of or related to any breach or alleged breach
by the Company of any of its representations, warranties and covenants set forth
in Sections 3 and 4 hereof or any of its covenants and obligations under this

                                       22
<PAGE>

Agreement  or  the  Registration  Rights  Agreement,  including  advancement  of
expenses as they are incurred.

          J. PUBLICITY.  The Company and each of the Buyers shall have the right
to review a  reasonable  period of time before  issuance of any press  releases,
SEC, OTCBB or NASD filings,  or any other public  statements with respect to the
transactions  contemplated hereby; provided,  however, that the Company shall be
entitled,  without the prior  approval of each of the Buyers,  to make any press
release or SEC, OTCBB (or other applicable  trading market) or NASD filings with
respect to such  transactions  as is required by applicable law and  regulations
(although  each of the Buyers shall be  consulted  by the Company in  connection
with any such press  release  prior to its release and shall be provided  with a
copy thereof and be given an opportunity to comment thereon).

          K. FURTHER ASSURANCES. Each party shall do and perform, or cause to be
done and  performed,  all such  further acts and things,  and shall  execute and
deliver all such other agreements,  certificates,  instruments and documents, as
the other  party may  reasonably  request  in order to carry out the  intent and
accomplish  the  purposes  of  this  Agreement  and  the   consummation  of  the
transactions contemplated hereby.

          L. NO STRICT CONSTRUCTION. The language used in this Agreement will be
deemed to be the language  chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any party.

          M.  REMEDIES.  The  Company  acknowledges  that a breach  by it of its
obligations hereunder will cause irreparable harm to the Buyers by vitiating the
intent and purpose of the  transaction  contemplated  hereby.  Accordingly,  the
Company  acknowledges  that the  remedy at law for a breach  of its  obligations
under this Agreement will be inadequate and agrees,  in the event of a breach or
threatened  breach by the Company of the provisions of this Agreement,  that the
Buyers shall be entitled,  in addition to all other available remedies at law or
in equity, and in addition to the penalties  assessable herein, to an injunction
or  injunctions  restraining,  preventing or curing any breach of this Agreement
and to  enforce  specifically  the  terms and  provisions  hereof,  without  the
necessity of showing  economic loss and without any bond or other security being
required.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       23
<PAGE>

     IN WITNESS WHEREOF, the undersigned Buyers and the Company have caused this
Agreement to be duly executed as of the date first above written.

PEABODYS COFFEE, INC.

______________________________________
Todd N. Tkachuk
President

AJW PARTNERS, LLC
By:  SMS Group, LLC

______________________________________
Corey S. Ribotsky
Manager

RESIDENCE:  Delaware

ADDRESS: 1044 Northern Boulevard
         Suite 302
         Roslyn, New York  11576
         Facsimile:  (516) 739-7115
         Telephone:  (516) 739-7110

AGGREGATE SUBSCRIPTION AMOUNT:

         Aggregate Principal Amount of Debentures:            $83,334
         Number of Warrants:                                  208,336
         Aggregate Purchase Price:                            $83,334

                                       24
<PAGE>

AJW OFFSHORE, LTD.
By:  First Street Manager II, LLC

______________________________________
Corey S. Ribotsky
Manager

RESIDENCE:  Cayman Islands

ADDRESS: AJW Offshore, Ltd.
         P.O. Box 32021 SMB
         Grand Cayman, Cayman Island, B.W.I.

AGGREGATE SUBSCRIPTION AMOUNT:

         Aggregate Principal Amount of Debentures:            $83,333
         Number of Warrants:                                  208,332
         Aggregate Purchase Price:                            $83,333

                                       25
<PAGE>

AJW QUALIFIED PARTNERS, LLC
By:  AJW Manager, LLC

____________________________________
Corey S. Ribotsky
Manager

RESIDENCE:  New York

ADDRESS: 1044 Northern Boulevard
         Suite 302
         Roslyn, New York  11576
         Facsimile:        (516) 739-7115
         Telephone:        (516) 739-7110

AGGREGATE SUBSCRIPTION AMOUNT:

         Aggregate Principal Amount of Debentures:            $83,333
         Number of Warrants:                                  208,332
         Aggregate Purchase Price:                            $83,333

                                       26
<PAGE>

                           EXHIBIT D - FORM OF EXHIBIT

                                               December 20, 2002

AJW Partners, LLC AJW Offshore, Ltd.
AJW Qualified Partners, LLC
1044 Northern Boulevard
Suite 302
Roslyn, New York 11576

          Re:  Peabodys Coffee, Inc.

Ladies and Gentlemen:

     We have acted as counsel to Peabodys  Coffee,  Inc.,  a Nevada  corporation
(d/b/a Black Rhino Coffee) (the  "COMPANY"),  in connection  with the Securities
Purchase  Agreement,  dated as of December 20, 2002, between you and the Company
(the "AGREEMENT") and the transactions  contemplated therein.  Capitalized terms
used herein and not otherwise defined herein shall have the respective  meanings
assigned to such terms in the Agreement.  The Agreement, the Registration Rights
Agreement,   the  Debentures,   the  Warrants,   the  Security  Agreement,   the
Intellectual  Property  Security  Agreement and the  Irrevocable  Transfer Agent
Instructions  are  hereinafter  referred  to  collectively  as the  "TRANSACTION
AGREEMENTS."

     In so acting,  we have examined (i) the  Transaction  Agreements,  (ii) the
Company's  Articles  of  Incorporation,  as in  effect on the date  hereof  (the
"ARTICLES OF  INCORPORATION"),  and (iii) the Company's  Bylaws, as in effect on
the date  hereof  (the  "BYLAWS"),  and we have  examined  and  considered  such
corporate records, certificates and matters of law as we have deemed appropriate
as a basis for our opinions set forth below.

     Based  upon the  foregoing  and  subject to the  assumptions,  limitations,
qualifications  and exceptions  stated herein,  we are of the opinion that as of
the date hereof:

     1.   The Company and its  Subsidiaries  are  corporations  duly  organized,
validly  existing  and in good  standing  under  the  laws of  their  respective
jurisdictions of incorporation, have all requisite corporate power and authority
to conduct their  business as described in the  Company's  Annual Report on Form
10-KSB for its fiscal year ended March 31, 2002 (the "FORM 10-KSB"), as amended.

     2.   (i) The Company has the  requisite  corporate  power and  authority to
enter into and perform the Transaction Agreements,  and to issue the Debentures,
the  Warrants,  the  Conversion  Shares  in  accordance  with  the  terms of the
Debentures,  and the Warrant  Shares upon exercise of the Warrants in accordance
with  the  terms  of the  Warrants,  (ii)  the  execution  and  delivery  of the
Transaction  Agreements  by  the  Company  and  the  consummation  by it of  the
transactions

                                       27
<PAGE>

contemplated  thereby  have  been  duly  authorized  by the  Company's  Board of
Directors and no further consent or authorization  of the Company,  its Board or
Directors,  or its  shareholders is required,  (iii) the Transaction  Agreements
have been duly executed and delivered by the Company,  and (iv) the  Transaction
Agreements  constitute valid and binding  obligations of the Company enforceable
against  the  Company  in   accordance   with  their   terms,   except  as  such
enforceability   may  be   limited   by   applicable   bankruptcy,   insolvency,
reorganization,   moratorium,  liquidation  or  similar  laws  relating  to,  or
affecting  generally,  the  enforcement of creditors'  rights and remedies or by
other equitable  principles of general application and subject to the limitation
that the indemnification and contribution  provisions of the Registration Rights
Agreement may be unenforceable as a matter of public policy.

     3.   The Conversion  Shares and the Warrant Shares are duly authorized and,
upon issuance in accordance  with the terms and conditions of the Debentures and
the  Warrants  (as  applicable)   will  be  validly   issued,   fully  paid  and
non-assessable,  and free from all taxes,  liens and charges with respect to the
issue  thereof.  The terms and  conditions of the Debentures are as set forth in
the  Debentures and the terms and conditions of the Warrants are as set forth in
the  Warrants.  A number  of  shares  of  Common  Stock  sufficient  to meet the
Company's  obligations  to  issue  Common  Stock  upon  full  conversion  of the
Debentures and full exercise of the Warrants has been duly reserved.

     4.   As of the date hereof,  the  authorized  capital  stock of the Company
consists of (i) 50,000,000 shares of Common Stock, par value $.001 per share, of
which the Company's transfer agent has advised that 19,196,695 shares are issued
and outstanding,  and the Company has advised that 4,771,336 shares are reserved
for issuance;  and (ii) no shares of preferred  stock. No shares of Common Stock
or preferred stock are subject to preemptive  rights or any other similar rights
of the  shareholders of the Company pursuant to the Articles of Incorporation or
Bylaws or by statute or pursuant to any  agreement by which the Company is bound
of which we are  aware,  and to our  knowledge  are not  subject to any liens or
encumbrances.  To our  knowledge,  except as disclosed  in Schedule  3(c) to the
Agreement,  (i) there are no outstanding  options,  warrants,  scrip,  rights to
subscribe to, calls or commitments of any character  whatsoever  relating to, or
securities  or rights  convertible  into,  any  shares of  capital  stock of the
Company or any of its Subsidiaries,  or arrangements by which the Company or any
of its Subsidiaries is or may become bound to issue additional shares of capital
stock  of the  Company  or  any  of its  Subsidiaries,  and  (ii)  there  are no
agreements or arrangements under which the Company or any of its subsidiaries is
obligated to register the sale of any of its or their  securities under the 1933
Act  (except  the  Registration   Rights  Agreement)  and  (iii)  there  are  no
anti-dilution or price adjustment provisions contained in any security issued by
the Company (or in any agreement providing rights to security holders) that will
be triggered by the issuance of the  Debentures,  the Warrants,  the  Conversion
Shares or the Warrant Shares.

     5.   The Company  meets the  eligibility  requirements  for the use of Form
SB-2 for the registration of the Conversion Shares and the Warrant Shares.

     6.   Based upon your representations, warranties and covenants set forth in
the Agreement,  the Securities may be issued to you without  registration  under
the 1933 Act.

                                       28
<PAGE>

     7.   Other  than  necessary   approvals   that  have  been   obtained,   no
authorization  approval or consent of any court,  governmental body,  regulatory
agency,  self-regulatory  organization  or  stock  exchange  or  market,  or the
shareholders of the Company or, to our knowledge, any third party is required to
be  obtained  by the  Company for the  issuance  and sale of the  Securities  as
contemplated  by the  Transaction  Agreements or the  consummation  of the other
transactions contemplated thereby.

     8.   To our knowledge,  there is no action,  suit,  proceeding,  inquiry or
investigation  before or by any court,  public board or body or any governmental
agency  or  self-regulatory   organization  pending  or  threatened  against  or
affecting  the  Company  or any  of its  subsidiaries,  wherein  an  unfavorable
decision,  ruling or finding would have a Material Adverse Effect or which would
adversely affect the validity or  enforceability  of or the authority or ability
of the Company to perform its obligations  under the  Transaction  Agreements or
the Debentures.

     9.   To the best of our  knowledge,  the Company is not in violation of any
term of the  Articles  of  Incorporation  or Bylaws.  Neither  the  Articles  of
Incorporation  nor the  Bylaws of the  Company  are in  violation  of the Nevada
Business  Corporation  Law.  The  execution,  delivery  and  performance  of and
compliance with the terms of the Transaction  Agreements and the issuance of the
Debentures  and the Warrants (and the Common Stock  issuable upon  conversion of
the Debentures and upon exercise of the Warrants),  do not violate any provision
of the Articles of Incorporation  or Bylaws or, to our knowledge,  any provision
of any applicable  federal or state law, rule or  regulation.  To our knowledge,
the execution,  delivery and  performance of and compliance with the Transaction
Agreements  and the issuance of the  Debentures and the Warrants (and the Common
Stock  issuable  upon  conversion  of the  Debentures,  and upon exercise of the
Warrants)  have not  resulted  and will  not  result  in any  violation  of,  or
constitute  a default  under (or an event  which with the passage of time or the
giving of notice or both would  constitute  a default  under),  or result in the
creation  of any  lien,  security  interest  or  encumbrance  on the  assets  or
properties  of the Company  pursuant  to any  contract,  agreement,  instrument,
judgment  or decree  binding  upon the  Company  which,  individually  or in the
aggregate, would have a Material Adverse Effect.

     10.  All approvals necessary for you (or any other holder of the Debentures
or Warrants)  to acquire the  Debentures  and the  Warrants  and the  Conversion
Shares and the  Warrant  Shares  under the laws of the State of Nevada have been
obtained  and no  further  approvals  are  required  under the  Nevada  Business
Corporation  Law in order for you (or any other holder of the  Debentures or the
Warrants) to engage in a "business combination" with the Company because of your
or their acquisition of the Debentures,  the Warrants,  the Conversion Shares or
the Warrant Shares.

     11.  The  provisions  of the  Security  Agreement  are  effective to create
enforceable  security  interests in favor of the Secured  Party named therein in
all of the collateral  described therein that is of the type in which a security
interest  can  be  created  under  Article  9 of  the  Uniform  Commercial  Code
(collectively,   the  "Filing   Collateral").   Insofar  as  perfection  can  be
accomplished  only by the  filing of  financing  statements  under  the  Uniform
Commercial   Code,  upon  the  filing  and  proper  indexing  of  the  Financing
Statements,  the Secured Party will have a perfected  security  interest in such
Filing  Collateral  as to which the  security  interest  in favor of the Secured
Party has attached.

                                       29
<PAGE>

     These opinions are limited to the matters  expressly  stated herein and are
rendered  solely for your  benefit  and may not be quoted or relied upon for any
other  purpose or by an other  person,  except that the  opinions  expressed  in
paragraphs (3) and (6) above may be relied upon byInterwest Transfer Company, as
Transfer Agent.

     The opinions  expressed  herein are subject to the  following  assumptions,
limitations, qualifications and exceptions:

     We have assumed the genuineness of all signatures,  the authenticity of all
Transaction  Agreements  submitted  to  us as  originals,  the  conformity  with
originals  of  all  Transaction  Agreements  submitted  to  us  as  copies,  the
authenticity  of  certificates  of public  officials and the due  authorization,
execution  and  delivery  of  all   Transaction   Agreements   (except  the  due
authorization,  execution  and  delivery  by  the  Company  of  the  Transaction
Agreements).

     A.   We have assumed that each of the parties to the Transaction Agreements
other than the Company (the "Other  Parties") has the legal right,  capacity and
power to enter  into,  enforce  and  perform  all of its  obligations  under the
Transaction  Agreements.  Furthermore,  we have assumed the due authorization by
each of the Other  Parties of all  requisite  action and the due  execution  and
delivery of the  Transaction  Agreements by each of the Other Parties,  and that
the Transaction  Agreements are valid and binding upon each of the Other Parties
and are enforceable against each Other Party in accordance with their terms.

     B.   In the  process of our review of the Form  10-KSB and any of the other
reports filed by the Company  pursuant to Sections 13 or 15(d) of the Securities
Exchange  Act of 1934,  as  amended,  since  the date of the  filing of the Form
10-KSB,  although we have not engaged in any independent  investigation,  and do
not  assume  any   responsibility  for  the  accuracy  or  completeness  of  the
information contained therein, nothing has come to our attention that would lead
us to  believe  that any of such  reports  contains  any untrue  statement  of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of circumstances under which they were
made, not misleading, as of its filing date.

     Our  examination of law relevant to the matters  covered by this opinion is
limited  to the laws of the State of Nevada  and the  federal  law of the United
States,  and we express no  opinion as to the effect on the  matters  covered by
this opinion of the laws of any other  jurisdiction.  In furnishing  the opinion
regarding the valid  existence and good standing of the Company,  we have relied
solely upon a good  standing  certificate  issued by the  Secretary  of State of
Nevada on December 12, 2002.

     This opinion is given as of the date hereof and we assume no obligation, to
update or supplement  this opinion to reflect any facts or  circumstances  which
may  hereafter  come to our attention or any changes in laws which may hereafter
occur.

                                        Sincerely,

                                        Sichenzia Ross Friedman Ference LLP

                                       30

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