Document:

EXHIBIT 10.01

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                          CREDIT AND SECURITY AGREEMENT

                                 BY AND BETWEEN

                               LECTEC CORPORATION

                                       AND

                        WELLS FARGO BUSINESS CREDIT, INC.

                         Dated as of: November 22, 1999

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                                Table of Contents

<TABLE>
<S>         <C>
ARTICLE I - Definitions.............................................................................1
    Section 1.1  Definitions........................................................................1
    Section 1.2  Cross References...................................................................9

ARTICLE II - Amount and Terms of the Credit Facility................................................9
    Section 2.1  Revolving Advances................................................................10
    Section 2.2  Letters of Credit.................................................................11
    Section 2.3  Payment of Amounts Drawn Under Letters of Credit; Obligation of
            Reimbursement..........................................................................11
    Section 2.4  Special Account...................................................................11
    Section 2.5  Obligations Absolute..............................................................12
    Section 2.6  Interest; Minimum Interest Charge; Default Interest; Participations;
            Usury..................................................................................12
    Section 2.7  Fees..............................................................................13
    Section 2.8  Computation of Interest and Fees; When Interest Due and Payable...................14
    Section 2.9  Capital Adequacy; Increased Costs and Reduced Return..............................14
    Section 2.10 Voluntary Prepayment; Reduction of the Maximum Line; Termination of
            the Credit Facility by the Borrower; Automatic Renewal.................................15
    Section 2.11 Termination and Line Reduction Fees; Waiver of Termination an Line
            Reduction Fees.........................................................................16
    Section 2.12 Mandatory Prepayment..............................................................16
    Section 2.13 Payment...........................................................................16
    Section 2.14 Payment on Non-Banking Days.......................................................16
    Section 2.15 Use of Proceeds...................................................................17
    Section 2.16 Liability Records.................................................................17

ARTICLE III - Security Interest; Occupancy; Setoff.................................................17
    Section 3.1  Grant of Security Interest........................................................17
    Section 3.2  Notification of Account Debtors and Other Obligors................................17
    Section 3.3  Assignment of Insurance...........................................................17
    Section 3.4  Occupancy.........................................................................18
    Section 3.5  License...........................................................................18
    Section 3.6  Financing Statement...............................................................18
    Section 3.7  Setoff............................................................................19

ARTICLE IV - Conditions of Lending.................................................................19
    Section 4.1  Conditions Precedent to the Initial Revolving Advance and the Initial Letter
            of Credit..............................................................................19
    Section 4.2  Conditions Precedent to All Advances and Letters of Credit........................21
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<TABLE>
<S>         <C>
ARTICLE V - Representations and Warranties.........................................................22
    Section 5.1  Corporate Existence and Power; Name; Chief Executive Office; Inventory
            and Equipment Locations; Tax Identification Number.....................................22
    Section 5.2  Authorization of Borrowing; No Conflict as to Law or Agreements...................22
    Section 5.3  Legal Agreements..................................................................22
    Section 5.4  Subsidiaries......................................................................23
    Section 5.5  Financial Condition; No Adverse Change............................................23
    Section 5.6  Litigation........................................................................23
    Section 5.7  Regulation U......................................................................23
    Section 5.8  Taxes.............................................................................23
    Section 5.9  Titles and Liens..................................................................23
    Section 5.10 Plans.............................................................................24
    Section 5.11 Default...........................................................................24
    Section 5.12 Environmental Matters.............................................................24
    Section 5.13 Submissions to Lender.............................................................25
    Section 5.14 Financing Statements..............................................................25
    Section 5.15 Rights to Payment.................................................................26

ARTICLE VI - Borrower's Affirmative Covenants......................................................26
    Section 6.1  Reporting Requirements............................................................26
    Section 6.2  Books and Records; Inspection and Examination.....................................28
    Section 6.3  Account Verification..............................................................29
    Section 6.4  Compliance with Laws..............................................................29
    Section 6.5  Payment of Taxes and Other Claims.................................................29
    Section 6.6  Maintenance of Properties.........................................................29
    Section 6.7  Insurance.........................................................................30
    Section 6.8  Preservation of Existence.........................................................30
    Section 6.9  Delivery of Instruments, etc......................................................30
    Section 6.10 Collateral Account................................................................30
    Section 6.11 Performance by the Lender.........................................................31
    Section 6.12 Minimum Book Net Worth............................................................31
    Section 6.13 Minimum Earnings Before Taxes.....................................................32
    Section 6.14 New Covenants.....................................................................32

ARTICLE VII - Negative Covenants...................................................................32
    Section 7.1  Liens.............................................................................32
    Section 7.2  Indebtedness......................................................................33
    Section 7.3  Guaranties........................................................................34
    Section 7.4  Investments and Subsidiaries......................................................34
    Section 7.5  Dividends.........................................................................35
    Section 7.6  Sale or Transfer of Assets; Suspension of Business Operations.....................35
    Section 7.7  Consolidation and Merger; Asset Acquisitions......................................35
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<TABLE>
<S>         <C>
    Section 7.8  Sale and Leaseback................................................................35
    Section 7.9  Restrictions on Nature of Business................................................35
    Section 7.10 Capital Expenditures..............................................................35
    Section 7.11 Accounting........................................................................35
    Section 7.12 Discounts, etc....................................................................35
    Section 7.13 Defined Benefit Pension Plans.....................................................36
    Section 7.14 Other Defaults....................................................................36
    Section 7.15 Place of Business; Name...........................................................36
    Section 7.16 Organizational Documents; S Corporation Status....................................36
    Section 7.17 Salaries..........................................................................36

ARTICLE VIII - Events of Default, Rights and Remedies..............................................36
    Section 8.1  Events of Default.................................................................36
    Section 8.2  Rights and Remedies...............................................................38
    Section 8.3  Certain Notices...................................................................39

ARTICLE IX - Miscellaneous.........................................................................40
    Section 9.1  No Waiver; Cumulative Remedies....................................................40
    Section 9.2  Amendments, Etc...................................................................40
    Section 9.3  Addresses for Notices, Etc........................................................40
    Section 9.4  Further Documents ................................................................41
    Section 9.5  Collateral .......................................................................41
    Section 9.6  Costs and Expenses ...............................................................41
    Section 9.7  Indemnity ........................................................................41
    Section 9.8  Participants .....................................................................43
    Section 9.9  Execution in Counterparts ........................................................43
    Section 9.10 Binding Effect; Assignment; Complete Agreement;
            Exchanging Information ................................................................43
    Section 9.11 Severability of Provisions .......................................................43
    Section 9.12 Headings .........................................................................43
    Section 9.13 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial..........................43
    Section 9.14 Confidentiality ..................................................................44
</TABLE>

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                          CREDIT AND SECURITY AGREEMENT

                          Dated as of November 22, 1999

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

                                    ARTICLE I

                                   Definitions

            Section 1.1 Definitions. For all purposes of this Agreement, except
as otherwise expressly provided or unless the context otherwise requires:

            (a) the terms defined in this Article have the meanings assigned to
      them in this Article, and include the plural as well as the singular; and

            (b) all accounting terms not otherwise defined herein have the
      meanings assigned to them in accordance with GAAP.

            "Accounts" means all of the Borrower's accounts, as such term is
      defined in the UCC, including without limitation the aggregate unpaid
      obligations of customers and other account debtors to the Borrower arising
      out of the sale or lease of goods or rendition of services by the Borrower
      on an open account or deferred payment basis.

            "Advance" means a Revolving Advance.

            "Affiliate" or "Affiliates" means LecTec International Corporation,
      a corporation organized under the laws of the U.S. Virgin Islands, and any
      other Person controlled by, controlling or under common control with the
      Borrower, including (without limitation) any Subsidiary of the Borrower.
      For purposes of this definition, "control," when used with respect to any
      specified Person, means the power to direct the management and policies of
      such Person, directly or indirectly, whether through the ownership of
      voting securities, by contract or otherwise.

            "Agreement" means this Credit and Security Agreement, as amended,
      supplemented or restated from time to time.

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

            "Banking Day" means a day other than a Saturday, Sunday or other day
      on which banks are generally not open for business in Minneapolis,
      Minnesota.

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

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

            (a) the Maximum Line; or

            (b) subject to change from time to time in the Lender's sole
      discretion, the sum of:

                  (i)   80% of Eligible Accounts, plus

                  (ii)  the lesser of (A) 50% of Eligible Finished Goods
                        Inventory plus 25% of Eligible Raw Materials Inventory
                        or (B) $750,000; provided that the Inventory component
                        of the Borrowing Base shall not exceed 33% of the
                        Advances at any calendar month-end.

            "Capital Expenditures" for a period means any expenditure of money
      for the lease, purchase or other acquisition of any capital asset, or for
      the lease of any other asset whether payable currently or in the future.

            "Collateral" means all of the Borrower's Equipment, General
      Intangibles, Inventory, Receivables, Investment Property, all sums on
      deposit in any Collateral Account, and any items in any Lockbox; together
      with (i) all substitutions and replacements for and products of any of the
      foregoing; (ii) proceeds of any and all of the foregoing; (iii) in the
      case of all tangible goods, all accessions; (iv) all accessories,
      attachments, parts, equipment and repairs now or hereafter attached or
      affixed to or used in connection with any tangible goods; (v) all
      warehouse receipts, bills of lading and other documents of title now or
      hereafter covering such goods; and all sums on deposit in the Special
      Account.

            "Collateral Account" has the meaning given in the Collateral Account
      Agreement.

            "Collateral Account Agreement" means the Collateral Account
      Agreement of even date herewith by and among the Borrower, Norwest Bank
      Minnesota and the Lender.

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

            "Credit Facility" means the credit facility being made available to
      the Borrower by the Lender pursuant to Article II.

            "Debt" of any Person means all items of indebtedness or liability
      which in accordance with GAAP would be included in determining total
      liabilities as shown on the liabilities side

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      of a balance sheet of that Person as at the date as of which Debt is to be
      determined. For purposes of determining a Person's aggregate Debt at any
      time, "Debt" shall also include the aggregate payments required to be made
      by such Person at any time under any lease that is considered a
      capitalized lease under GAAP.

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

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

            "Default Rate" means an annual rate equal to two percent (2%) over
      the Floating Rate, which rate shall change when and as the Floating Rate
      changes.

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

            "Earnings Before Taxes" or "Loss Before Taxes" for a period means,
      pretax earnings or loss, as the case may be, from continuing operations
      before (i) special extraordinary gains, (ii) minority interests, and (iii)
      miscellaneous gains and losses, in each case for such period.

            "Eligible Accounts" means all unpaid Accounts, net of any credits,
      except the following shall not in any event be deemed Eligible Accounts:

                  (i) That portion of Accounts unpaid 90 days or more after the
            invoice date or, if the Lender in its discretion has determined that
            a particular dated Account may be eligible, that portion of such
            Account which is unpaid more than 30 days past the stated due date
            or more than 120 days past the invoice date;

                  (ii) That portion of Accounts that is disputed or subject to a
            claim of offset or a contra account, including slotting fees or
            cooperative advertising;

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

                  (iv) Accounts owed by any unit of government, whether foreign
            or domestic (provided, however, that there shall be included in
            Eligible Accounts that portion of Accounts owed by such units of
            government for which the Borrower has provided evidence satisfactory
            to the Lender that (A) the Lender has a first priority perfected
            security interest and (B) such Accounts may be enforced by the
            Lender directly against such unit of government under all applicable
            laws);

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                  (v) Accounts owed by an account debtor located outside the
            United States or, at the Lender's discretion, Canada, which are not
            (A) backed by a bank letter of credit naming the Lender as
            beneficiary or assigned to the Lender, in the Lender's possession
            and acceptable to the Lender in all respects, in its sole
            discretion, (B) covered by a foreign receivables insurance policy
            acceptable to the Lender in its sole discretion;

                  (vi) Accounts owed by an account debtor that is insolvent, the
            subject of bankruptcy proceedings or has gone out of business;

                  (vii) Accounts owed by a shareholder, Subsidiary, Affiliate,
            officer or employee of the Borrower;

                  (viii) Accounts not subject to a duly perfected security
            interest in the Lender's favor or which are subject to any lien,
            security interest or claim in favor of any Person other than the
            Lender including without limitation any payment or performance bond;

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

                  (x) That portion of Accounts that constitutes advertising,
            finance charges, service charges, sales or excise taxes or slotting
            fees due to retailers;

                  (xi) Accounts owed by an account debtor, regardless of whether
            otherwise eligible, if 10% or more of the total amount due under
            Accounts from such debtor is ineligible under clauses (i), (ii)or
            (ix) above; and

                  (xii) Accounts, or portions thereof, otherwise deemed
            ineligible by the Lender in its sole discretion.

            "Eligible Finished Goods Inventory" means all Eligible Inventory of
      the Borrower consisting of finished goods.

            "Eligible Inventory" means all Inventory of the Borrower, at the
      lower of cost or market value as determined in accordance with GAAP;
      provided, however, that the following shall not in any event be deemed
      Eligible Inventory:

                  (i) Inventory that is: in-transit; located at any warehouse,
            job site or other premises not approved by the Lender in writing;
            located outside of the states, or localities, as applicable, in
            which the Lender has filed financing statements to perfect a first
            priority security interest in such Inventory; covered by any
            negotiable or non-negotiable warehouse receipt, bill of lading or
            other document of title; on

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            consignment from any Person; on consignment to any Person or subject
            to any bailment unless such consignee or bailee has executed an
            agreement with the Lender;

                  (ii) Supplies, packaging, parts or sample Inventory;

                  (iii) Work-in-process Inventory and material burden included
            in cost of Inventory;

                  (iv) Inventory that is damaged, obsolete or included in an
            obsolescence reserve, past its shelf-life expiration date, slow
            moving or not currently saleable in the normal course of the
            Borrower's operations;

                  (v) Inventory that the Borrower has returned, has attempted to
            return, is in the process of returning or intends to return to the
            vendor thereof;

                  (vi) Inventory that is perishable or live;

                  (vii) Inventory manufactured by the Borrower pursuant to a
            license unless the applicable licensor has agreed in writing to
            permit the Lender to exercise its rights and remedies against such
            Inventory;

                  (viii) Inventory that is subject to a security interest in
            favor of any Person other than the Lender; and

                  (ix) Inventory otherwise deemed ineligible by the Lender in
            its sole discretion.

            "Eligible Raw Materials Inventory" means all Eligible Inventory of
      the Borrower consisting of raw materials.

            "Environmental Laws" has the meaning specified in Section 5.12.

            "Equipment" means all of the Borrower's equipment, as such term is
      defined in the UCC, whether now owned or hereafter acquired, including but
      not limited to all present and future machinery, vehicles, furniture,
      fixtures, manufacturing equipment, shop equipment, office and
      recordkeeping equipment, parts, tools, supplies, and including
      specifically (without limitation) the goods described in any equipment
      schedule or list herewith or hereafter furnished to the Lender by the
      Borrower.

            "Event of Default" has the meaning specified in Section 8.1.

            "Floating Rate" means an annual rate equal to the sum of the Prime
      Rate plus three percent (3%), which annual rate shall change when and as
      the Prime Rate changes.

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

            "GAAP" means generally accepted accounting principles, applied on a
      basis consistent with the accounting practices applied in the financial
      statements described in Section 5.5.

            "Guarantor(s)" means any party who may hereafter deliver a guaranty
      (a "Guaranty") of the Obligations.

            "General Intangibles" means all of the Borrower's general
      intangibles, as such term is defined in the UCC, whether now owned or
      hereafter acquired, including (without limitation) all present and future
      patents, patent applications, copyrights, trademarks, trade names, trade
      secrets, customer or supplier lists and contracts, manuals, operating
      instructions, permits, franchises, the right to use the Borrower's name,
      and the goodwill of the Borrower's business.

            "Hazardous Substance" has the meaning given in Section 5.12.

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

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

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

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

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

            "Letter of Credit" has the meaning specified in Section 2.2.

            "Loan Documents" means this Agreement, the Note and the Security
      Documents.

            "Lockbox" has the meaning given in the Lockbox Agreement.

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            "Lockbox Agreement" means the Lockbox Agreement by and among the
      Borrower, Norwest Bank Minnesota and, the Lender, of even date herewith.

            "Maximum Line" means $2,000,000, unless said amount is reduced
      pursuant to Section 2.10, in which event it means the amount to which said
      amount is reduced.

            "Minimum Interest Charge" has the meaning given in Section 2.6(b).

            "Net Income" means fiscal year-to-date after-tax net income,
      decreased by the sum of any extraordinary, non-operating or non-cash
      income recorded by the Borrower and increased by any extraordinary,
      non-cash or non-operating expense or loss recorded by the Borrower, as
      determined in accordance with GAAP.

            "Norwest Bank Minnesota" means Norwest Bank Minnesota, National
      Association.

            "Note" means the Revolving Note.

            "Obligations" means the Note and each and every other debt,
      liability and obligation of every type and description which the Borrower
      may now or at any time hereafter owe to the Lender, whether such debt,
      liability or obligation now exists or is hereafter created or incurred,
      whether it arises in a transaction involving the Lender alone or in a
      transaction involving other creditors of the Borrower, and whether it is
      direct or indirect, due or to become due, absolute or contingent, primary
      or secondary, liquidated or unliquidated, or sole, joint, several or joint
      and several, and including specifically, but not limited to, the
      Obligation of Reimbursement and all indebtedness of the Borrower arising
      under this Agreement, the Note, any L/C Application completed by the
      Borrower or any other loan or credit agreement or guaranty between the
      Borrower and the Lender, whether now in effect or hereafter entered into.

            "Original Maturity Date" means November 22, 2001.

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

            "Permitted Lien" has the meaning given in Section 7.1.

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

            "Plan" means an employee benefit plan or other plan maintained for
      the Borrower's employees and covered by Title IV of ERISA.

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            "Premises" means all premises where the Borrower conducts its
      business and has any rights of possession, including (without limitation)
      the premises legally described on Exhibit C.

            "Prime Rate" means the rate of interest publicly announced from time
      to time by Wells Fargo Bank, N.A. as its "prime rate" or, if such bank
      ceases to announce a rate so designated, any similar successor rate
      designated by the Lender.

            "Receivables" means each and every right of the Borrower to the
      payment of money, whether such right to payment now exists or hereafter
      arises, whether such right to payment arises out of a sale, lease or other
      disposition of goods or other property, out of a rendering of services,
      out of a loan, out of the overpayment of taxes or other liabilities, or
      otherwise arises under any contract or agreement, whether such right to
      payment is created, generated or earned by the Borrower or by some other
      person who subsequently transfers such person's interest to the Borrower,
      whether such right to payment is or is not already earned by performance,
      and howsoever such right to payment may be evidenced, together with all
      other rights and interests (including all liens and security interests)
      which the Borrower may at any time have by law or agreement against any
      account debtor or other obligor obligated to make any such payment or
      against any property of such account debtor or other obligor; all
      including but not limited to all present and future accounts, contract
      rights, loans and obligations receivable, chattel papers, bonds, notes and
      other debt instruments, tax refunds and rights to payment in the nature of
      general intangibles.

            "Reportable Event" shall have the meaning assigned to that term in
      Title IV of ERISA.

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

            "Revolving Note" means the Borrower's revolving promissory note,
      payable to the order of the Lender in substantially the form of Exhibit A
      hereto, as the same may hereafter be amended, supplemented or restated
      from time to time, and any note or notes issued in substitution therefor,
      as the same may hereafter be amended, supplemented or restated from time
      to time and any note or notes issued in substitution therefor.

            "Security Documents" means this Agreement, the Collateral Account
      Agreement, the Lockbox Agreement, the Patent and Trademark Security
      Agreement and any other document delivered to the Lender from time to time
      to secure the Obligations, as the same may hereafter be amended,
      supplemented or restated from time to time.

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

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

            "Subordination Agreement" means any subordination agreement accepted
      by the Lender from time to time, as the same may hereafter be amended,
      supplemented or restated from time to time.

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

            "Termination Date" means the earliest of (i) the Maturity Date, (ii)
      the date the Borrower terminates the Credit Facility, or (iii) the date
      the Lender demands payment of the Obligations after an Event of Default
      pursuant to Section 8.2.

            "UCC" means the Uniform Commercial Code as in effect from time to
      time in the state designated in Section 9.14 as the state whose laws shall
      govern this Agreement, or in any other state whose laws are held to govern
      this Agreement or any portion hereof.

            Section 1.2 Cross References. All references in this Agreement to
Articles, Sections and subsections, shall be to Articles, Sections and
subsections of this Agreement unless otherwise explicitly specified.

                                   ARTICLE II

                     Amount and Terms of the Credit Facility

            Section 2.1 Revolving Advances. The Lender agrees, on the terms and
subject to the conditions herein set forth, to make advances to the Borrower
from time to time from the date all of the conditions set forth in Section 4.1
are satisfied (the "Funding Date") to the Termination Date, on the terms and
subject to the conditions herein set forth (the "Revolving Advances"). The
Lender shall have no obligation to make a Revolving Advance if, after giving
effect to such requested Revolving Advance, the sum of the outstanding and
unpaid Revolving Advances under this Section 2.1 or otherwise would exceed the
Borrowing Base less the L/C Amount. The Borrower's obligation to pay the
Revolving Advances shall be evidenced by the Revolving Note and shall be secured
by the Collateral as provided in Article III. Within the limits set forth in
this Section 2.1, the Borrower may borrow, prepay pursuant to Section 2.10 and
reborrow. The Borrower agrees to comply with the following procedures in
requesting Revolving Advances under this Section 2.1:

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            (a) The Borrower shall make each request for a Revolving Advance to
      the Lender before 11:00 a.m. (Minneapolis time) of the day of the
      requested Revolving Advance. Requests may be made in writing or by
      telephone, specifying the date of the requested Revolving Advance and the
      amount thereof. Each request shall be by (i) any officer of the Borrower;
      or (ii) any person designated as the Borrower's agent by any officer of
      the Borrower in a writing delivered to the Lender; or (iii) any person
      whom the Lender reasonably believes to be an officer of the Borrower or
      such a designated agent.

            (b) Upon fulfillment of the applicable conditions set forth in
      Article IV, the Lender shall disburse the proceeds of the requested
      Revolving Advance by crediting the same to the Borrower's demand deposit
      account maintained with Norwest Bank unless the Lender and the Borrower
      shall agree in writing to another manner of disbursement. Upon the
      Lender's request, the Borrower shall promptly confirm each telephonic
      request for an Advance by executing and delivering an appropriate
      confirmation certificate to the Lender. The Borrower shall repay all
      Advances even if the Lender does not receive such confirmation and even if
      the person requesting an Advance was not in fact authorized to do so. Any
      request for an Advance, whether written or telephonic, shall be deemed to
      be a representation by the Borrower that the conditions set forth in
      Section 4.2 have been satisfied as of the time of the request.

            Section 2.2 Letters of Credit.

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

                  (i) $250,000 less the L/C Amount, or

                  (ii) the Borrowing Base less the sum of (A) all outstanding
            and unpaid Revolving Advances and (B) the L/C Amount.

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

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

                                       10
<PAGE>

            (c) Any request to cause an Issuer to issue a Letter of Credit under
      this Section 2.2 shall be deemed to be a representation by the Borrower
      that the conditions set forth in Section 4.2 have been satisfied as of the
      date of the request.

            Section 2.3 Payment of Amounts Drawn Under Letters of Credit;
Obligation of Reimbursement.

            The Borrower acknowledges that the Lender, as co-applicant, will be
liable to the Issuer for reimbursement of any and all draws under Letters of
Credit and for all other amounts required to be paid under the applicable L/C
Application. Accordingly, the Borrower agrees to pay to the Lender any and all
amounts required to be paid under the applicable L/C Application, when and as
required to be paid thereby, and the amounts designated below, when and as
designated:

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

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

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

            (d) The Borrower's obligation to pay any Revolving Advance made
      under this Section 2.3, shall be evidenced by Revolving Note and shall
      bear interest as provided in Section 2.6.

            Section 2.4 Special Account. If the Credit Facility is terminated
for any reason whatsoever while any Letter of Credit is outstanding, the
Borrower shall thereupon pay the Lender in immediately available funds for
deposit in the Special Account an amount equal to the L/C Amount. The Special
Account shall be an interest bearing account maintained for the Lender by any

                                       11
<PAGE>

financial institution acceptable to the Lender. Any interest earned on amounts
deposited in the Special Account shall be credited to the Special Account.
Amounts on deposit in the Special Account may be applied by the Lender at any
time or from time to time to the Obligations in the Lender's sole discretion,
and shall not be subject to withdrawal by the Borrower so long as the Lender
maintains a security interest therein. The Lender agrees to transfer any balance
in the Special Account to the Borrower at such time as the Lender is required to
release its security interest in the Special Account under applicable law.

            Section 2.5 Obligations Absolute. The Borrower's obligations arising
under Section 2.3 shall be absolute, unconditional and irrevocable, and shall be
paid strictly in accordance with the terms of Section 2.3, under all
circumstances whatsoever, including (without limitation) the following
circumstances:

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

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

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

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

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

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

            Section 2.6 Interest; Minimum Interest Charge; Default Interest;
Participations; Usury. Interest accruing on the Note shall be due and payable in
arrears on the first day of each month.

            (a) REVOLVING NOTE. Except as set forth in Sections 2.2(c) and
      2.2(f), the outstanding principal balance of the Revolving Note shall bear
      interest at the Floating Rate.

                                       12
<PAGE>

            (b) MINIMUM INTEREST CHARGE. Notwithstanding the interest payable
      pursuant to Section 2.2(a), the Borrower shall pay to the Lender interest
      of not less than the applicable amount shown below per year of this
      Agreement (the "Minimum Interest Charge") during the term of this
      Agreement, and the Borrower shall pay any deficiency between the Minimum
      Interest Charge and the amount of interest otherwise calculated under
      Sections 2.6(a) and 2.6(c) on the date and in the manner provided in
      Section 2.8:

            Period                                   Minimum Annual Interest
            ------                                   -----------------------

            Year One of Agreement                    $80,000
            Year Two of Agreement and thereafter     $95,000

            (c) DEFAULT INTEREST RATE. At any time during any Default Period, in
      the Lender's sole discretion and without waiving any of its other rights
      and remedies, the principal of the Advances outstanding from time to time
      shall bear interest at the Default Rate, effective for any periods
      designated by the Lender from time to time during that Default Period.

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

            (e) USURY. In any event no rate change shall be put into effect
      which would result in a rate greater than the highest rate permitted by
      law.

            Section 2.7 Fees.

            (a) ORIGINATION FEE. The Borrower hereby agrees to pay the Lender a
      fully earned and non-refundable origination fee of $20,000 due and payable
      upon the execution of this Agreement. The Lender acknowledges receipt of
      $8,500 toward payment of this fee and the fees, costs and expenses
      described in Sections 2.7(c) and 9.7.

            (b) UNUSED LINE FEE. For the purposes of this Section 2.7(b),
      "Unused Amount" means the Maximum Line reduced by outstanding Revolving
      Advances plus the L/C Amount. The Borrower agrees to pay to the Lender an
      unused line fee at the rate of one- quarter of one percent (.25%) per
      annum on the average daily Unused Amount from the date of this Agreement
      to and including the Termination Date, due and payable monthly in arrears
      on the first day of the month and on the Termination Date.

            (c) LETTER OF CREDIT FEES. The Borrower agrees to pay the Lender a
      fee with respect to each Letter of Credit, if any, accruing on a daily
      basis and computed at the annual

                                       13
<PAGE>

      rate of two percent (2%) of the aggregate amount that may then be drawn on
      all issued and outstanding Letters of Credit assuming compliance with all
      conditions for drawing thereunder (the "Aggregate Face Amount"), from and
      including the date of issuance of such Letter of Credit until such date as
      such Letter of Credit shall terminate by its terms or be returned to the
      Lender, due and payable monthly in arrears on the first day of each month
      and on the Termination Date; provided, however that during Default
      Periods, in the Lender's sole discretion and without waiving any of its
      other rights and remedies, such fee shall increase to four percent (4%) of
      the Aggregate Face Amount. The foregoing fee shall be in addition to any
      and all fees, commissions and charges of any Issuer of a Letter of Credit
      with respect to or in connection with such Letter of Credit.

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

            (e) AUDIT FEES. The Borrower hereby agrees to pay the Lender, on
      demand, audit fees in connection with any audits or inspections conducted
      by the Lender of any Collateral or the Borrower's operations or business
      at the rates established from time to time by the Lender as its audit fees
      (which fees are currently $62.50 per hour per auditor), together with all
      actual out-of-pocket costs and expenses incurred in conducting any such
      audit or inspection.

            Section 2.8 Computation of Interest and Fees; When Interest Due and
Payable. Interest accruing on the outstanding principal balance of the Advances
and fees hereunder outstanding from time to time shall be computed on the basis
of actual number of days elapsed in a year of 360 days. Interest shall be
payable in arrears on the first day of each month and on the Termination Date,
except that minimum interest pursuant to Section 2.6(b) shall be payable in
arrears annually on each anniversary date and on the Termination Date.

            Section 2.9 Capital Adequacy; Increased Costs and Reduced Return. If
any Related Lender determines at any time that its Return has been reduced as a
result of any Rule Change, such Related Lender may require the Borrower to pay
it the amount necessary to restore its Return to what it would have been had
there been no Rule Change. For purposes of this Section 2.5:

            (a) "Capital Adequacy Rule" means any law, rule, regulation,
      guideline, directive, requirement or request regarding capital adequacy,
      or the interpretation or administration thereof by any governmental or
      regulatory authority, central bank or comparable agency, whether or not
      having the force of law, that applies to any Related Lender. Such rules
      include rules requiring financial institutions to maintain total capital
      in amounts based upon percentages of outstanding loans, binding loan
      commitments and letters of credit.

                                       14
<PAGE>

            (b) "L/C Rule" means any law, rule, regulation, guideline,
      directive, requirement or request regarding letters of credit, or the
      interpretation or administration thereof by any governmental or regulatory
      authority, central bank or comparable agency, whether or not having the
      force of law, that applies to any Related Lender. Such rules include rules
      imposing taxes, duties or other similar charges, or mandating reserves,
      special deposits or similar requirements against assets of, deposits with
      or for the account of, or credit extended by any Related Lender, on
      letters of credit.

            (c) "Return", for any period, means the return as determined by such
      Related Lender on the Advances and Letters of Credit based upon its total
      capital requirements and a reasonable attribution formula that takes
      account of the Capital Adequacy Rules then in effect and costs of issuing
      or maintaining any Letter of Credit. Return may be calculated for each
      calendar quarter and for the shorter period between the end of a calendar
      quarter and the date of termination in whole of this Agreement.

            (d) "Rule Change" means any change in any Capital Adequacy Rule or
      L/C Rule occurring after the date of this Agreement, but the term does not
      include any changes in applicable requirements that at the Closing Date
      are scheduled to take place under the existing Capital Adequacy Rules or
      L/C Rules or any increases in the capital that any Related Lender is
      required to maintain to the extent that the increases are required due to
      a regulatory authority's assessment of the financial condition of such
      Related Lender.

            (e) "Related Lender" includes (but is not limited to) the Lender,
      the Issuer, any parent corporation of the Lender or the Issuer and any
      assignee of any interest of the Lender hereunder and any participant in
      the loans made hereunder.

Certificates of any Related Lender sent to the Borrower from time to time
claiming compensation under this Section 2.9, stating the reason therefor and
setting forth in reasonable detail the calculation of the additional amount or
amounts to be paid to the Related Lender hereunder to restore its Return shall
be conclusive absent manifest error. In determining such amounts, the Related
Lender may use any reasonable averaging and attribution methods.

            Section 2.10 Voluntary Prepayment; Reduction of the Maximum Line;
Termination of the Credit Facility by the Borrower; Automatic Renewal. Except as
otherwise provided herein, the Borrower may prepay the Advances in whole at any
time or from time to time in part. The Borrower may terminate the Credit
Facility or reduce the Maximum Line at any time if it (i) gives the Lender at
least 30 days' prior written notice and (ii) pays the Lender termination or line
reduction fees in accordance with Section 2.11. Any reduction in the Maximum
Line must be in an amount not less than $100,000 or an integral multiple
thereof. If the Borrower reduces the Maximum Line to zero, all Obligations shall
be immediately due and payable. Upon termination of the Credit Facility and
payment and performance of all Obligations, the Lender shall release or
terminate the Security Interest and the Security Documents to which the Borrower
is entitled by law. Unless terminated by the Lender at any time or by the
Borrower pursuant to Section 2.11, the Credit Facility shall

                                       15
<PAGE>

remain in effect until the Original Maturity Date and, thereafter, shall
automatically renew for successive one year periods (the Original Maturity Date
and each anniversary date thereof to which the Credit Facility has been
automatically renewed, is herein referred to as a "Maturity Date").

            Section 2.11 Termination and Line Reduction Fees; Waiver of
Termination an Line Reduction Fees.

            (a) TERMINATION AND LINE REDUCTION FEES. If the Credit Facility is
      terminated for any reason as of a date other than the Maturity Date, or
      the Borrower reduces the Maximum Line, the Borrower shall pay to the
      Lender a fee in an amount equal to a percentage of the Maximum Line (or
      the reduction, as the case may be) as follows: (A) two percent (2%) if the
      termination or reduction occurs on or before the first anniversary of the
      Funding Date and (B) one percent (1%) if the termination or reduction
      occurs after the first anniversary of the Funding Date.

            (b) WAIVER OF TERMINATION AND LINE REDUCTION FEES. The Borrower will
      not be required to pay the termination or line reduction fees otherwise
      due under this Section 2.11 if such termination or line reduction is made
      because of cash flow generated from the Borrower's operations or
      refinancing by an affiliate of the Lender.

            Section 2.12 Mandatory Prepayment. Without notice or demand, if the
sum of the outstanding principal balance of the Revolving Advances plus the L/C
Amount shall at any time exceed the Borrowing Base, the Borrower shall
immediately prepay the Revolving Advances to the extent necessary to eliminate
such excess; and (ii) if prepayment in full of the Revolving Advances is
insufficient to eliminate such excess, pay the Lender in immediately available
funds for deposit in the Special Account an amount equal to the remaining
excess. Any payment received by the Lender under this Section 2.12 or under
Section 2.10 may be applied to the Obligations, in such order and in such
amounts as the Lender, in its discretion, may from time to time determine.

            Section 2.13 Payment. All payments to the Lender shall be made in
immediately available funds and shall be applied to the Obligations upon receipt
by the Lender. The Lender may hold all payments not constituting immediately
available funds for two (2) days before applying them to the Obligations.
Notwithstanding anything in Section 2.1, the Borrower hereby authorizes the
Lender, in its discretion at any time or from time to time without the
Borrower's request and even if the conditions set forth in Section 4.2 would not
be satisfied, to make a Revolving Advance in an amount equal to the portion of
the Obligations from time to time due and payable.

            Section 2.14 Payment on Non-Banking Days. Whenever any payment to be
made hereunder shall be stated to be due on a day which is not a Banking Day,
such payment may be made on the next succeeding Banking Day, and such extension
of time shall in such case be included in the computation of interest on the
Advances or the fees hereunder, as the case may be.

                                       16
<PAGE>

            Section 2.15 Use of Proceeds. The Borrower shall use the proceeds of
Advances for ordinary working capital purposes.

            Section 2.16 Liability Records. The Lender may maintain from time to
time, at its discretion, liability records as to the Obligations. All entries
made on any such record shall be presumed correct until the Borrower establishes
the contrary. Upon the Lender's demand, the Borrower will admit and certify in
writing the exact principal balance of the Obligations that the Borrower then
asserts to be outstanding. Any billing statement or accounting rendered by the
Lender shall be conclusive and fully binding on the Borrower unless the Borrower
gives the Lender specific written notice of exception within 30 days after
receipt.

                                   ARTICLE III

                      Security Interest; Occupancy; Setoff

            Section 3.1 Grant of Security Interest. The Borrower hereby pledges,
assigns and grants to the Lender a security interest (collectively referred to
as the "Security Interest") in the Collateral, as security for the payment and
performance of the Obligations.

            Section 3.2 Notification of Account Debtors and Other Obligors. The
Lender may at any time (whether or not a Default Period then exists) notify any
account debtor or other person obligated to pay the amount due that such right
to payment has been assigned or transferred to the Lender for security and shall
be paid directly to the Lender. The Borrower will join in giving such notice if
the Lender so requests. At any time after the Borrower or the Lender gives such
notice to an account debtor or other obligor, the Lender may, but need not, in
the Lender's name or in the Borrower's name, (a) demand, sue for, collect or
receive any money or property at any time payable or receivable on account of,
or securing, any such right to payment, or grant any extension to, make any
compromise or settlement with or otherwise agree to waive, modify, amend or
change the obligations (including collateral obligations) of any such account
debtor or other obligor; and (b) as the Borrower's agent and attorney-in-fact,
notify the United States Postal Service to change the address for delivery of
the Borrower's mail to any address designated by the Lender, otherwise intercept
the Borrower's mail, and receive, open and dispose of the Borrower's mail,
applying all Collateral as permitted under this Agreement and holding all other
mail for the Borrower's account or forwarding such mail to the Borrower's last
known address.

            Section 3.3 Assignment of Insurance. As additional security for the
payment and performance of the Obligations, the Borrower hereby assigns to the
Lender any and all monies (including, without limitation, proceeds of insurance
and refunds of unearned premiums) due or to become due under, and all other
rights of the Borrower with respect to, any and all policies of insurance now or
at any time hereafter covering the Collateral or any evidence thereof or any
business records or valuable papers pertaining thereto, and the Borrower hereby
directs the issuer of any such policy to pay all such monies directly to the
Lender. At any time, whether or not a Default Period then exists, the Lender may
(but need not), in the Lender's name or in the Borrower's

                                       17
<PAGE>

name, execute and deliver proof of claim, receive all such monies, endorse
checks and other instruments representing payment of such monies, and adjust,
litigate, compromise or release any claim against the issuer of any such policy.

            Section 3.4 Occupancy.

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

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

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

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

            Section 3.5 License. Without limiting the generality of the Patent
Security Agreement, Copyright Security Agreement, Trademark Security Agreement,
the Borrower hereby grants to the Lender a non-exclusive, worldwide and
royalty-free license to use or otherwise exploit all trademarks, franchises,
trade names, copyrights and patents of the Borrower for the purpose of selling,
leasing or otherwise disposing of any or all Collateral during any Default
Period.

            Section 3.6 Financing Statement. A carbon, photographic or other
reproduction of this Agreement or of any financing statements signed by the
Borrower is sufficient as a financing statement and may be filed as a financing
statement in any state to perfect the security interests granted hereby. For
this purpose, the following information is set forth:

            Name and address of Debtor:

            LecTec Corporation
            10701 Red Circle Drive
            Minnetonka, MN 55343

                                       18
<PAGE>

            Federal Tax Identification No. 41-1301878

            Name and address of Secured Party:

            Wells Fargo Business Credit, Inc.
            Norwest Center, N9312-040
            Sixth Street and Marquette Avenue
            Minneapolis, Minnesota 55479
            Federal Tax Identification No. 41-1237652

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

                                   ARTICLE IV

                              Conditions of Lending

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

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

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

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

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

                                       19
<PAGE>

      secured party, evidence that each such secured party has received notice
      from the Borrower and the Lender sufficient to protect the Borrower's and
      the Lender's interests in the Borrower's goods from any claim by such
      secured party.

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

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

            (g) Intentionally omitted.

            (h) The Collateral Account Agreement, properly executed by the
      Borrower and Norwest Bank Minnesota.

            (i) The Lockbox Agreement, properly executed by the Borrower and
      Norwest Bank Minnesota.

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

            (k) Current searches of appropriate filing offices showing that (i)
      no state or federal tax liens have been filed and remain in effect against
      the Borrower, (ii) no financing statements or assignments of patents,
      trademarks or copyrights have been filed and remain in effect against the
      Borrower except those financing statements and assignments of patents,
      trademarks or copyrights relating to Permitted Liens or to liens held by
      Persons who have agreed in writing that upon receipt of proceeds of the
      Advances, they will deliver UCC releases and/or terminations and releases
      of such assignments of patents, trademarks or copyrights satisfactory to
      the Lender, and (iii) the Lender has duly filed all financing statements
      necessary to perfect the Security Interest, to the extent the Security
      Interest is capable of being perfected by filing.

            (l) A certificate of the Borrower's Secretary or Assistant Secretary
      certifying as to (i) the resolutions of the Borrower's directors and, if
      required, shareholders, authorizing the execution, delivery and
      performance of the Loan Documents, (ii) the Borrower's articles

                                       20
<PAGE>

      of incorporation and bylaws, and (iii) the signatures of the Borrower's
      officers or agents authorized to execute and deliver the Loan Documents
      and other instruments, agreements and certificates, including Advance
      requests, on the Borrower's behalf.

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

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

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

            (p) An opinion of counsel to the Borrower, addressed to the Lender.

            (q) Certificates of the insurance required hereunder, with all
      hazard insurance containing a lender's loss payable endorsement in the
      Lender's favor and with all liability insurance naming the Lender as an
      additional insured.

            (r) Payment of the fees and commissions due through the date of the
      initial Advance or Letter of Credit under Section 2.7 and expenses
      incurred by the Lender through such date and required to be paid by the
      Borrower under Section 9.7, including all legal expenses incurred through
      the date of this Agreement.

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

            Section 4.2 Conditions Precedent to All Advances and Letters of
Credit. The Lender's obligation to make each Advance or to cause the Issuer to
issue any Letter of Credit shall be subject to the further conditions precedent
that on such date:

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

            (b) no event has occurred and is continuing, or would result from
      such Advance or the issuance of such Letter of Credit, as the case may be,
      which constitutes a Default or an Event of Default.

                                       21
<PAGE>

                                    ARTICLE V

                         Representations and Warranties

            The Borrower represents and warrants to the Lender as follows:

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

            Section 5.2 Authorization of Borrowing; No Conflict as to Law or
Agreements. The execution, delivery and performance by the Borrower of the Loan
Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (i) require
any consent or approval of the Borrower's stockholders; (ii) require any
authorization, consent or approval by, or registration, declaration or filing
with, or notice to, any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any third party, except such
authorization, consent, approval, registration, declaration, filing or notice as
has been obtained, accomplished or given prior to the date hereof; (iii) violate
any provision of any law, rule or regulation (including, without limitation,
Regulation X of the Board of Governors of the Federal Reserve System) or of any
order, writ, injunction or decree presently in effect having applicability to
the Borrower or of the Borrower's articles of incorporation or bylaws; (iv)
result in a breach of or constitute a default under any indenture or loan or
credit agreement or any other material agreement, lease or instrument to which
the Borrower is a party or by which it or its properties may be bound or
affected; or (v) result in, or require, the creation or imposition of any
mortgage, deed of trust, pledge, lien, security interest or other charge or
encumbrance of any nature (other than the Security Interest) upon or with
respect to any of the properties now owned or hereafter acquired by the
Borrower.

            Section 5.3 Legal Agreements. This Agreement constitutes and, upon
due execution by the Borrower, the other Loan Documents will constitute the
legal, valid and binding obligations of the Borrower, enforceable against the
Borrower in accordance with their respective terms, except as enforceability may
be limited by applicable bankruptcy, insolvency, fraudulent conveyance,

                                       22
<PAGE>

reorganization, moratorium or similar laws affecting the enforcement of
creditors rights generally, and by general equitable principles.

            Section 5.4 Subsidiaries. Except as set forth in Schedule 5.4, the
Borrower has no Subsidiaries.

            Section 5.5 Financial Condition; No Adverse Change. The Borrower has
heretofore furnished to the Lender audited financial statements of the Borrower
for its fiscal year ended June 30, 1999 and unaudited financial statements of
the Borrower for the fiscal year-to-date period ended September 30, 1999, and
those statements fairly present the Borrower's financial condition on the dates
thereof and the results of its operations and cash flows for the periods then
ended and were prepared in accordance with generally accepted accounting
principles. Since the date of the most recent financial statements, there has
been no material adverse change in the Borrower's business, properties or
condition (financial or otherwise).

            Section 5.6 Litigation. There are no actions, suits or proceedings
pending or, to the Borrower's knowledge, threatened against or affecting the
Borrower or any of its Affiliates or the properties of the Borrower or any of
its Affiliates before any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which, if determined
adversely to the Borrower or any of its Affiliates, would have a material
adverse effect on the financial condition, properties or operations of the
Borrower or any of its Affiliates.

            Section 5.7 Regulation U. The Borrower is not engaged in the
business of extending credit for the purpose of purchasing or carrying margin
stock (within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System), and no part of the proceeds of any Advance will be used
to purchase or carry any margin stock or to extend credit to others for the
purpose of purchasing or carrying any margin stock.

            Section 5.8 Taxes. The Borrower and its Affiliates have paid or
caused to be paid to the proper authorities when due all federal, state and
local taxes required to be withheld by each of them. The Borrower and its
Affiliates have filed all federal, state and local tax returns which to the
knowledge of the officers of the Borrower or any Affiliate, as the case may be,
are required to be filed, and the Borrower and its Affiliates have paid or
caused to be paid to the respective taxing authorities all taxes as shown on
said returns or on any assessment received by any of them to the extent such
taxes have become due.

            Section 5.9 Titles and Liens. The Borrower has good and absolute
title to all Collateral described in the collateral reports provided to the
Lender and all other Collateral, properties and assets reflected in the latest
financial statements referred to in Section 5.5 and all proceeds thereof, free
and clear of all mortgages, security interests, liens and encumbrances, except
for Permitted Liens. No financing statement naming the Borrower as debtor is on
file in any office except to perfect only Permitted Liens.

                                       23
<PAGE>

            Section 5.10 Plans. Except as disclosed to the Lender in writing
prior to the date hereof, neither the Borrower nor any of its Affiliates
maintains or has maintained any Plan. Neither the Borrower nor any Affiliate has
received any notice or has any knowledge to the effect that it is not in full
compliance with any of the requirements of ERISA. No Reportable Event or other
fact or circumstance which may have an adverse effect on the Plan's tax
qualified status exists in connection with any Plan. Neither the Borrower nor
any of its Affiliates has:

            (a) Any accumulated funding deficiency within the meaning of ERISA;
      or

            (b) Any liability or knows of any fact or circumstances which could
      result in any liability to the Pension Benefit Guaranty Corporation, the
      Internal Revenue Service, the Department of Labor or any participant in
      connection with any Plan (other than accrued benefits which or which may
      become payable to participants or beneficiaries of any such Plan).

            Section 5.11 Default. The Borrower is in compliance with all
provisions of all agreements, instruments, decrees and orders to which it is a
party or by which it or its property is bound or affected, the breach or default
of which could have a material adverse effect on the Borrower's financial
condition, properties or operations.

            Section 5.12 Environmental Matters.

            (a) Definitions. As used in this Agreement, the following terms
      shall have the following meanings:

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

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

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

                                       24
<PAGE>

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

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

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

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

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

            Section 5.13 Submissions to Lender. All financial and other
information provided to the Lender by or on behalf of the Borrower in connection
with the Borrower's request for the credit facilities contemplated hereby is
true and correct in all material respects and, as to projections, valuations or
proforma financial statements, present a good faith opinion as to such
projections, valuations and proforma condition and results.

            Section 5.14 Financing Statements. The Borrower has provided to the
Lender signed financing statements sufficient when filed to perfect the Security
Interest and the other security interests created by the Security Documents.
When such financing statements are filed in the offices noted therein, the
Lender will have a valid and perfected security interest in all Collateral and
all other collateral described in the Security Documents which is capable of
being perfected by filing financing statements. None of the Collateral or other
collateral covered by the Security Documents is or will become a fixture on real
estate, unless a sufficient fixture filing is in effect with respect thereto.

                                       25
<PAGE>

            Section 5.15 Rights to Payment. Each right to payment and each
instrument, document, chattel paper and other agreement constituting or
evidencing Collateral or other collateral covered by the Security Documents is
(or, in the case of all future Collateral or such other collateral, will be when
arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim, of the account debtor or other
obligor named therein or in the Borrower's records pertaining thereto as being
obligated to pay such obligation.

                                   ARTICLE VI

                        Borrower's Affirmative Covenants

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

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

            (a) as soon as available, and in any event within 120 days after the
      end of each fiscal year of the Borrower, the Borrower's audited financial
      statements with the unqualified opinion of independent certified public
      accountants selected by the Borrower and acceptable to the Lender, which
      annual financial statements shall include the Borrower's balance sheet as
      at the end of such fiscal year and the related statements of the
      Borrower's income, retained earnings and cash flows for the fiscal year
      then ended, prepared, if the Lender so requests, on a consolidating and
      consolidated basis to include any Affiliates, all in reasonable detail and
      prepared in accordance with GAAP, together with (i) copies of all
      management letters prepared by such accountants; (ii) a report signed by
      such accountants stating that in making the investigations necessary for
      said opinion they obtained no knowledge, except as specifically stated, of
      any Default or Event of Default hereunder and all relevant facts in
      reasonable detail to evidence, and the computations as to, whether or not
      the Borrower is in compliance with the requirements set forth in Sections
      6.12, 6.13 and 7.10; and (iii) a certificate of the Borrower's chief
      financial officer stating that such financial statements have been
      prepared in accordance with GAAP and whether or not such officer has
      knowledge of the occurrence of any Default or Event of Default hereunder
      and, if so, stating in reasonable detail the facts with respect thereto;

            (b) as soon as available and in any event within 30 days after the
      end of each month, an unaudited/internal balance sheet and statements of
      income and retained earnings of the Borrower as at the end of and for such
      month and for the year to date period then ended, prepared, if the Lender
      so requests, on a consolidating and consolidated basis to include any
      Affiliates, in reasonable detail and stating in comparative form the
      figures for

                                       26
<PAGE>

      the corresponding date and periods in the previous year, all prepared in
      accordance with GAAP, subject to year-end audit adjustments; and
      accompanied by a certificate of the Borrower's chief financial officer,
      substantially in the form of Exhibit B hereto stating (i) that such
      financial statements have been prepared in accordance with GAAP, subject
      to year-end audit adjustments, (ii) whether or not such officer has
      knowledge of the occurrence of any Default or Event of Default hereunder
      not theretofore reported and remedied and, if so, stating in reasonable
      detail the facts with respect thereto, and (iii) all relevant facts in
      reasonable detail to evidence, and the computations as to, whether or not
      the Borrower is in compliance with the requirements set forth in Sections
      6.12, 6.13 and 7.10;

            (c) within 25 days after the end of each month or more frequently if
      the Lender so requires, agings of the Borrower's accounts receivable and
      its accounts payable, an inventory certification report, and a calculation
      of the Borrower's Accounts, Eligible Accounts, Inventory and Eligible
      Inventory as at the end of such month or shorter time period;

            (d) at least 30 days after the beginning of each fiscal year of the
      Borrower, the projected balance sheets and income statements for each
      month of such year, each in reasonable detail, representing the Borrower's
      good faith projections and certified by the Borrower's chief financial
      officer as being the most accurate projections available and identical to
      the projections used by the Borrower for internal planning purposes,
      together with such supporting schedules and information as the Lender may
      in its discretion require;

            (e) immediately after the commencement thereof, notice in writing of
      all litigation and of all proceedings before any governmental or
      regulatory agency affecting the Borrower of the type described in Section
      5.12 or which seek a monetary recovery against the Borrower in excess of
      $50,000;

            (f) as promptly as practicable (but in any event not later than five
      business days) after an officer of the Borrower obtains knowledge of the
      occurrence of any breach, default or event of default under any Security
      Document or any event which constitutes a Default or Event of Default
      hereunder, notice of such occurrence, together with a detailed statement
      by a responsible officer of the Borrower of the steps being taken by the
      Borrower to cure the effect of such breach, default or event;

            (g) as soon as possible and in any event within 30 days after the
      Borrower knows or has reason to know that any Reportable Event with
      respect to any Plan has occurred, the statement of the Borrower's chief
      financial officer setting forth details as to such Reportable Event and
      the action which the Borrower proposes to take with respect thereto,
      together with a copy of the notice of such Reportable Event to the Pension
      Benefit Guaranty Corporation;

            (h) as soon as possible, and in any event within 10 days after the
      Borrower fails to make any quarterly contribution required with respect to
      any Plan under Section 412(m)

                                       27
<PAGE>

      of the Internal Revenue Code of 1986, as amended, the statement of the
      Borrower's chief financial officer setting forth details as to such
      failure and the action which the Borrower proposes to take with respect
      thereto, together with a copy of any notice of such failure required to be
      provided to the Pension Benefit Guaranty Corporation;

            (i) promptly upon knowledge thereof, notice of (A) any of the
      following items exceeding $50,000 individually (i) any disputes or claims
      by the Borrower's customers; (ii) credit memos; (iii) any goods returned
      to or recovered by the Borrower; and (B) any change in the persons
      constituting the Borrower's officers and directors;

            (j) promptly upon knowledge thereof, notice of any loss of or
      material damage to any Collateral or other collateral covered by the
      Security Documents or of any substantial adverse change in any Collateral
      or such other collateral or the prospect of payment thereof;

            (k) promptly upon their distribution, copies of all financial
      statements, reports and proxy statements which the Borrower shall have
      sent to its stockholders;

            (l) promptly after the sending or filing thereof, copies of all
      regular and periodic reports which the Borrower shall file with the
      Securities and Exchange Commission or any national securities exchange;

            (m) promptly upon knowledge thereof, notice of the Borrower's
      violation of any law, rule or regulation, the non-compliance with which
      could materially and adversely affect the Borrower's business or its
      financial condition; and

            (n) from time to time, with reasonable promptness, any and all
      receivables schedules, collection reports, deposit records, equipment
      schedules, copies of invoices to account debtors, shipment documents and
      delivery receipts for goods sold, and such other material, reports,
      records or information as the Lender may request.

            Section 6.2 Books and Records; Inspection and Examination. The
Borrower will keep accurate books of record and account for itself pertaining to
the Collateral and pertaining to the Borrower's business and financial condition
and such other matters as the Lender may from time to time request in which true
and complete entries will be made in accordance with GAAP and, upon the Lender's
request, will permit any officer, employee, attorney or accountant for the
Lender to audit, review, make extracts from or copy any and all corporate and
financial books and records of the Borrower at all times during ordinary
business hours, to send and discuss with account debtors and other obligors
requests for verification of amounts owed to the Borrower, and to discuss the
Borrower's affairs with any of its directors, officers, employees or agents. The
Borrower will permit the Lender, or its employees, accountants, attorneys or
agents, to examine and inspect any Collateral, other collateral covered by the
Security Documents or any other property of the Borrower at any time during
ordinary business hours.

                                       28
<PAGE>

            Section 6.3 Account Verification. The Lender may at any time and
from time to time send or require the Borrower to send requests for verification
of accounts or notices of assignment to account debtors and other obligors. The
Lender may also at any time and from time to time telephone account debtors and
other obligors to verify accounts.

            Section 6.4 Compliance with Laws.

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

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

            Section 6.5 Payment of Taxes and Other Claims. The Borrower will pay
or discharge, when due, (a) all taxes, assessments and governmental charges
levied or imposed upon it or upon its income or profits, upon any properties
belonging to it (including, without limitation, the Collateral) or upon or
against the creation, perfection or continuance of the Security Interest, prior
to the date on which penalties attach thereto, (b) all federal, state and local
taxes required to be withheld by it, and (c) all lawful claims for labor,
materials and supplies which, if unpaid, might by law become a lien or charge
upon any properties of the Borrower; provided, that the Borrower shall not be
required to pay any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings and for which proper reserves have been made.

            Section 6.6 Maintenance of Properties.

            (a) The Borrower will keep and maintain the Collateral, the other
      collateral covered by the Security Documents and all of its other
      properties necessary or useful in its business in good condition, repair
      and working order (normal wear and tear excepted) and will from time to
      time replace or repair any worn, defective or broken parts; provided,
      however, that nothing in this Section 6.6 shall prevent the Borrower from
      discontinuing the operation and maintenance of any of its properties if
      such discontinuance is, in the Lender's judgment, desirable in the conduct
      of the Borrower's business and not disadvantageous in any material respect
      to the Lender.

                                       29
<PAGE>

            (b) The Borrower will defend the Collateral against all claims or
      demands of all persons (other than the Lender) claiming the Collateral or
      any interest therein.

            (c) The Borrower will keep all Collateral and other collateral
      covered by the Security Documents free and clear of all security
      interests, liens and encumbrances except Permitted Liens.

            Section 6.7 Insurance. The Borrower will obtain and at all times
maintain insurance with insurers believed by the Borrower to be responsible and
reputable, in such amounts and against such risks as may from time to time be
required by the Lender, but in all events in such amounts and against such risks
as is usually carried by companies engaged in similar business and owning
similar properties in the same general areas in which the Borrower operates.
Without limiting the generality of the foregoing, the Borrower will at all times
keep all tangible Collateral insured against risks of fire (including so-called
extended coverage), theft, collision (for Collateral consisting of motor
vehicles) and such other risks and in such amounts as the Lender may reasonably
request, with any loss payable to the Lender to the extent of its interest, and
all policies of such insurance shall contain a lender's loss payable endorsement
for the Lender's benefit acceptable to the Lender. All policies of liability
insurance required hereunder shall name the Lender as an additional insured.

            Section 6.8 Preservation of Existence. The Borrower will preserve
and maintain its existence and all of its rights, privileges and franchises
necessary or desirable in the normal conduct of its business and shall conduct
its business in an orderly, efficient and regular manner.

            Section 6.9 Delivery of Instruments, etc. Upon request by the
Lender, the Borrower will promptly deliver to the Lender in pledge all
instruments, documents and chattel papers constituting Collateral, duly endorsed
or assigned by the Borrower.

            Section 6.10 Collateral Account.

            (a) If, notwithstanding the instructions to debtors to make payments
      to the Lockbox, the Borrower receives any payments on Receivables, the
      Borrower shall deposit such payments into the Collateral Account. Until so
      deposited, the Borrower shall hold all such payments in trust for and as
      the property of the Lender and shall not commingle such payments with any
      of its other funds or property.

            (b) Amounts deposited in the Collateral Account shall not bear
      interest and shall not be subject to withdrawal by the Borrower, except
      after full payment and discharge of all Obligations.

            (c) All deposits in the Collateral Account shall constitute proceeds
      of Collateral and shall not constitute payment of the Obligations. The
      Lender from time to time at its discretion may, after allowing two (2)
      Banking Days, apply deposited funds in the Collateral

                                       30
<PAGE>

      Account to the payment of the Obligations, in any order or manner of
      application satisfactory to the Lender, by transferring such funds to the
      Lender's general account.

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

            Section 6.11 Performance by the Lender. If the Borrower at any time
fails to perform or observe any of the foregoing covenants contained in this
Article VI or elsewhere herein, and if such failure shall continue for a period
of ten calendar days after the Lender gives the Borrower written notice thereof
(or in the case of the agreements contained in Sections 6.5, 6.7 and 6.10,
immediately upon the occurrence of such failure, without notice or lapse of
time), the Lender may, but need not, perform or observe such covenant on behalf
and in the name, place and stead of the Borrower (or, at the Lender's option, in
the Lender's name) and may, but need not, take any and all other actions which
the Lender may reasonably deem necessary to cure or correct such failure
(including, without limitation, the payment of taxes, the satisfaction of
security interests, liens or encumbrances, the performance of obligations owed
to account debtors or other obligors, the procurement and maintenance of
insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments); and the Borrower shall
thereupon pay to the Lender on demand the amount of all monies expended and all
costs and expenses (including reasonable attorneys' fees and legal expenses)
incurred by the Lender in connection with or as a result of the performance or
observance of such agreements or the taking of such action by the Lender,
together with interest thereon from the date expended or incurred at the
Floating Rate. To facilitate the Lender's performance or observance of such
covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender,
or the Lender's delegate, acting alone, as the Borrower's attorney in fact
(which appointment is coupled with an interest) with the right (but not the
duty) from time to time to create, prepare, complete, execute, deliver, endorse
or file in the name and on behalf of the Borrower any and all instruments,
documents, assignments, security agreements, financing statements, applications
for insurance and other agreements and writings required to be obtained,
executed, delivered or endorsed by the Borrower under this Section 6.11.

            Section 6.12 Minimum Book Net Worth. The Borrower will maintain,
during each period described below, its Book Net Worth, determined as at the end
of each month, at an amount not less than the amount set forth opposite such
period:

            Period Ended                     Minimum Book Net Worth
            ------------                     ----------------------
         November 30, 1999                         $6,378,000
         December 31, 1999                         $6,128,000
          January 31, 2000                         $5,778,000

                                       31
<PAGE>

            Period Ended                     Minimum Book Net Worth
            ------------                     ----------------------
         February 29, 2000                         $5,528,000
           March 31, 2000                          $5,428,000
           April 30, 2000                          $5,178,000
            May 31, 2000                           $4,978,000
           June 30, 2000                           $4,808,000

            Section 6.13 Minimum Earnings/Maximum Loss Before Taxes. The
Borrower will achieve during each period described below, year-to-date Earnings
or Loss Before Taxes, of not less than/greater than the amount set forth
opposite such period (bracketed amounts indicate maximum Loss Before Taxes):

            Period Ended                             Minimum
            ------------                      Earnings/Maximus Loss
                                                   Before Taxes
                                                   ------------
          November 30, 1999                        ($1,130,000)
          December 31, 1999                        ($1,380,000)
           January 31, 2000                        ($1,730,000)
          February 29, 2000                        ($1,980,000)
            March 31, 2000                         ($2,080,000)
            April 30, 2000                         ($2,330,000)
             May 31, 2000                          ($2,530,000)
            June 30, 2000                          ($2,700,000)

            Section 6.14 New Covenants. On or before July 31, 2000, The Borrower
and the Lender shall agree on new covenant levels for Sections 6.13, 6.14 and
7.10 for periods after such date. The new covenant levels will be based on the
Borrower's projections for such periods and shall be no less stringent than the
present levels.

                                   ARTICLE VII

                               Negative Covenants

            So long as the Obligations shall remain unpaid, or the Credit
Facility shall remain outstanding, the Borrower agrees that, without the
Lender's prior written consent:

            Section 7.1 Liens. The Borrower will not create, incur or suffer to
exist any mortgage, deed of trust, pledge, lien, security interest, assignment
or transfer upon or of any of its assets, now owned or hereafter acquired, to
secure any indebtedness; excluding, however, from the operation of the
foregoing, the following (collectively, "Permitted Liens"):

                                       32
<PAGE>

            (a) in the case of any of the Borrower's property which is not
      Collateral or other collateral described in the Security Documents,
      covenants, restrictions, rights, easements and minor irregularities in
      title which do not materially interfere with the Borrower's business or
      operations as presently conducted, provided, however, that the Borrower
      expressly agrees that it will not mortgage its real estate locally known
      as 10701 Red Circle Drive, Minnetonka, Minnesota;

            (b) mortgages, deeds of trust, pledges, liens, security interests
      and assignments in existence on the date hereof and listed in Schedule 7.1
      hereto, securing indebtedness for borrowed money permitted under Section
      7.2;

            (c) the Security Interest and liens and security interests created
      by the Security Documents;

            (d) purchase money security interests relating to the acquisition of
      machinery and equipment of the Borrower not exceeding the lower of cost or
      fair market value thereof and so long as no Default Period is then in
      existence and none would exist immediately after such acquisition;

            (e) liens of carriers, warehousemen, mechanics and materialmen, and
      other like liens arising in the ordinary course of business for sums not
      due;

            (f) deposits or pledges, or liens incurred, to secure payment of
      worker's compensation, unemployment insurance, old age pension or other
      social security obligations, in the ordinary course of business of the
      Borrower;

            (g) liens incurred or deposits or pledges made or given in
      connection with or to secure payment of indemnity, performance or other
      similar bonds;

            (h) liens for taxes, fees, assessments and governmental charges not
      delinquent or to the extent that payment therefor shall not at the time be
      required if the same are being contested in good faith by appropriate
      proceedings, and adequate reserves with respect thereto have been set
      aside on the Borrower's books in accordance with GAAP;

            (i) banker's liens, rights of setoff and similar liens incurred on
      deposits made in the ordinary course of business; and

            (j) judgment, attachment or similar liens, unless the judgment it
      secures has not been discharged or execution thereof effectively stayed
      and bonded against pending appeal with 30 days after the entry thereof.

            Section 7.2 Indebtedness. The Borrower will not incur, create,
assume or permit to exist any indebtedness or liability on account of deposits
or advances or any indebtedness for

                                       33
<PAGE>

borrowed money or letters of credit issued on the Borrower's behalf, or any
other indebtedness or liability evidenced by notes, bonds, debentures or similar
obligations, except:

            (a) indebtedness arising hereunder;

            (b) indebtedness of the Borrower in existence on the date hereof and
      listed in Schedule 7.2 hereto; and

            (c) indebtedness relating to liens permitted in accordance with
      Section 7.1.

            Section 7.3 Guaranties. The Borrower will not assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
any obligations of any other Person, except:

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

            (b) guaranties, endorsements and other direct or contingent
      liabilities in connection with the obligations of other Persons, in
      existence on the date hereof and listed in Schedule 7.2 hereto.

            Section 7.4 Investments and Subsidiaries.

            (a) The Borrower will not purchase or hold beneficially any stock or
      other securities or evidences of indebtedness of, make or permit to exist
      any loans or advances to, or make any investment or acquire any interest
      whatsoever in, any other Person, including specifically but without
      limitation any partnership or joint venture, except:

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

                  (ii) travel advances or loans to the Borrower's officers and
            employees not exceeding at any one time an aggregate of $25,000; and

                  (iii) advances in the form of progress payments, prepaid rent
            not exceeding three months or security deposits.

                                       34
<PAGE>

            (b) The Borrower will not create or permit to exist any new
      Subsidiary.

            Section 7.5 Dividends. Except as set forth below, the Borrower will
not declare or pay any dividends (other than dividends payable solely in stock
of the Borrower) on any class of its stock or make any payment on account of the
purchase, redemption or other retirement of any shares of such stock or make any
distribution in respect thereof, either directly or indirectly.

            Section 7.6 Sale or Transfer of Assets; Suspension of Business
Operations. The Borrower will not sell, lease, assign, transfer or otherwise
dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of
its assets, or (iii) any Collateral or any interest therein (whether in one
transaction or in a series of transactions) to any other Person other than the
sale of Inventory in the ordinary course of business and will not liquidate,
dissolve or suspend business operations. The Borrower will not in any manner
transfer any property without prior or present receipt of full and adequate
consideration.

            Section 7.7 Consolidation and Merger; Asset Acquisitions. The
Borrower will not consolidate with or merge into any Person, or permit any other
Person to merge into it, or acquire (in a transaction analogous in purpose or
effect to a consolidation or merger) all or substantially all the assets of any
other Person.

            Section 7.8 Sale and Leaseback. The Borrower will not enter into any
arrangement, directly or indirectly, with any other Person whereby the Borrower
shall sell or transfer any real or personal property, whether now owned or
hereafter acquired, and then or thereafter rent or lease as lessee such property
or any part thereof or any other property which the Borrower intends to use for
substantially the same purpose or purposes as the property being sold or
transferred.

            Section 7.9 Restrictions on Nature of Business. The Borrower will
not engage in any line of business materially different from that presently
engaged in by the Borrower and will not purchase, lease or otherwise acquire
assets not related to its business.

            Section 7.10 Capital Expenditures. The Borrower will not incur or
contract to incur Capital Expenditures of more than $600,000 in the aggregate
during any fiscal year, or more than $250,000 in any one transaction.

            Section 7.11 Accounting. The Borrower will not adopt any material
change in accounting principles other than as required by GAAP. The Borrower
will not adopt, permit or consent to any change in its fiscal year.

            Section 7.12 Discounts, etc. The Borrower will not, after notice
from the Lender, grant any discount, credit or allowance to any customer of the
Borrower or accept any return of goods sold, or at any time (whether before or
after notice from the Lender) modify, amend, subordinate, cancel or terminate
the obligation of any account debtor or other obligor of the Borrower.

                                       35
<PAGE>

            Section 7.13 Defined Benefit Pension Plans. The Borrower will not
adopt, create, assume or become a party to any defined benefit pension plan,
unless disclosed to the Lender pursuant to Section 5.10.

            Section 7.14 Other Defaults. The Borrower will not permit any
breach, default or event of default to occur under any note, loan agreement,
indenture, lease, mortgage, contract for deed, security agreement or other
contractual obligation binding upon the Borrower.

            Section 7.15 Place of Business; Name. The Borrower will not transfer
its chief executive office or principal place of business, or move, relocate,
close or sell any business location. The Borrower will not permit any tangible
Collateral or any records pertaining to the Collateral to be located in any
state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interest. The Borrower will not change
its name.

            Section 7.16 Organizational Documents; S Corporation Status. The
Borrower will not amend its certificate of incorporation, articles of
incorporation or bylaws. The Borrower will not become an S Corporation.

            Section 7.17 Salaries. The Borrower will not pay excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other
compensation; or increase the salary, bonus, commissions, consultant fees or
other compensation of any director, officer or consultant, or any member of
their families, by more than 15% in any one year, either individually or for all
such persons in the aggregate, or pay any such increase from any source other
than profits earned in the year of payment.

                                  ARTICLE VIII

                     Events of Default, Rights and Remedies

            Section 8.1 Events of Default. "Event of Default", wherever used
herein, means any one of the following events:

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

            (b) Failure to pay when due any amount specified in Section 2.3
      relating to the Borrower's Obligation of Reimbursement, or failure to pay
      immediately when due or upon termination of the Credit Facility any
      amounts required to be paid for deposit in the Special Account under
      Section 2.4;

            (c) Default in the payment of any fees, commissions, costs or
      expenses required to be paid by the Borrower under this Agreement;

                                       36
<PAGE>

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

            (e) The Borrower or any Guarantor shall be or become insolvent, or
      admit in writing its or his inability to pay its or his debts as they
      mature, or make an assignment for the benefit of creditors; or the
      Borrower or any Guarantor shall apply for or consent to the appointment of
      any receiver, trustee, or similar officer for it or him or for all or any
      substantial part of its or his property; or such receiver, trustee or
      similar officer shall be appointed without the application or consent of
      the Borrower or such Guarantor, as the case may be; or the Borrower or any
      Guarantor shall institute (by petition, application, answer, consent or
      otherwise) any bankruptcy, insolvency, reorganization, arrangement,
      readjustment of debt, dissolution, liquidation or similar proceeding
      relating to it or him under the laws of any jurisdiction; or any such
      proceeding shall be instituted (by petition, application or otherwise)
      against the Borrower or any such Guarantor; or any judgment, writ, warrant
      of attachment or execution or similar process shall be issued or levied
      against a substantial part of the property of the Borrower or any
      Guarantor;

            (f) A petition shall be filed by or against the Borrower or any
      Guarantor under the United States Bankruptcy Code naming the Borrower or
      such Guarantor as debtor;

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

            (h) The rendering against the Borrower of a final judgment, decree
      or order for the payment of money in excess of $75,000 and the continuance
      of such judgment, decree or order unsatisfied and in effect for any period
      of 30 consecutive days without a stay of execution;

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

            (j) Any Reportable Event, which the Lender determines in good faith
      might constitute grounds for the termination of any Plan or for the
      appointment by the appropriate United States District Court of a trustee
      to administer any Plan, shall have occurred and be continuing 30 days
      after written notice to such effect shall have been given to the Borrower

                                       37
<PAGE>

      by the Lender; or a trustee shall have been appointed by an appropriate
      United States District Court to administer any Plan; or the Pension
      Benefit Guaranty Corporation shall have instituted proceedings to
      terminate any Plan or to appoint a trustee to administer any Plan; or the
      Borrower shall have filed for a distress termination of any Plan under
      Title IV of ERISA; or the Borrower shall have failed to make any quarterly
      contribution required with respect to any Plan under Section 412(m) of the
      Internal Revenue Code of 1986, as amended, which the Lender determines in
      good faith may by itself, or in combination with any such failures that
      the Lender may determine are likely to occur in the future, result in the
      imposition of a lien on the Borrower's assets in favor of the Plan;

            (k) An event of default shall occur under any Security Document or
      under any other security agreement, mortgage, deed of trust, assignment or
      other instrument or agreement securing any obligations of the Borrower
      hereunder or under any note;

            (l) The Borrower shall liquidate, dissolve, terminate or suspend its
      business operations or otherwise fail to operate its business in the
      ordinary course, or sell all or substantially all of its assets, without
      the Lender's prior written consent;

            (m) The Borrower shall fail to pay, withhold, collect or remit any
      tax or tax deficiency when assessed or due (other than any tax deficiency
      which is being contested in good faith and by proper proceedings and for
      which it shall have set aside on its books adequate reserves therefor) or
      notice of any state or federal tax liens shall be filed or issued;

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

            (o) Any Guarantor shall repudiate, purport to revoke or fail to
      perform any such Guarantor's obligations under such guarantor's guaranty
      in favor of the Lender, any individual Guarantor shall die or any other
      Guarantor shall cease to exist;

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

            (q) Any breach, default or event of default by or attributable to
      any Affiliate under any agreement between such Affiliate and the Lender.

            Section 8.2 Rights and Remedies. During any Default Period, the
Lender may exercise any or all of the following rights and remedies:

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

                                       38
<PAGE>

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

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

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

            (e) the Lender may exercise and enforce any and all rights and
      remedies available upon default to a secured party under the UCC,
      including, without limitation, the right to take possession of Collateral,
      or any evidence thereof, proceeding without judicial process or by
      judicial process (without a prior hearing or notice thereof, which the
      Borrower hereby expressly waives) and the right to sell, lease or
      otherwise dispose of any or all of the Collateral, and, in connection
      therewith, the Borrower will on demand assemble the Collateral and make it
      available to the Lender at a place to be designated by the Lender which is
      reasonably convenient to both parties;

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

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

Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in subsections (e) or (f) of Section 8.1, the Obligations shall be
immediately due and payable automatically without presentment, demand, protest
or notice of any kind.

            Section 8.3 Certain Notices. If notice to the Borrower of any
intended disposition of Collateral or any other intended action is required by
law in a particular instance, such notice shall be deemed commercially
reasonable if given (in the manner specified in Section 9.3) at least ten
calendar days before the date of intended disposition or other action.

                                       39
<PAGE>

                                   ARTICLE IX

                                  Miscellaneous

            Section 9.1 No Waiver; Cumulative Remedies. No failure or delay by
the Lender in exercising any right, power or remedy under the Loan Documents
shall operate as a waiver thereof; nor shall any single or partial exercise of
any such right, power or remedy preclude any other or further exercise thereof
or the exercise of any other right, power or remedy under the Loan Documents.
The remedies provided in the Loan Documents are cumulative and not exclusive of
any remedies provided by law.

            Section 9.2 Amendments, Etc. No amendment, modification, termination
or waiver of any provision of any Loan Document or consent to any departure by
the Borrower therefrom or any release of a Security Interest shall be effective
unless the same shall be in writing and signed by the Lender, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.

            Section 9.3 Addresses for Notices, Etc. Except as otherwise
expressly provided herein, all notices, requests, demands and other
communications provided for under the Loan Documents shall be in writing and
shall be (a) personally delivered, (b) sent by first class United States mail,
(c) sent by overnight courier of national reputation, or (d) transmitted by
telecopy, in each case addressed or telecopied to the party to whom notice is
being given at its address or telecopier number as set forth below:

            If to the Borrower:

            LecTec Corporation
            10701 Red Circle Drive
            Minnetonka, MN 55343
            Telecopier: (612) 933-4808
            Attention: Rodney A. Young

            If to the Lender:

            Wells Fargo Business Credit, Inc.
            Norwest Center, N9312-040
            Sixth Street and Marquette Avenue
            Minneapolis, Minnesota 55479
            Telecopier: 612/341-2472
            Attention: Diane G. Conley

                                       40
<PAGE>

or, as to each party, at such other address or telecopier number as may
hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given on
(a) the date received if personally delivered, (b) when deposited in the mail if
delivered by mail, (c) the date sent if sent by overnight courier, or (d) the
date of transmission if delivered by telecopy, except that notices or requests
to the Lender pursuant to any of the provisions of Article II shall not be
effective until received by the Lender.

            Section 9.4 Further Documents. The Borrower will from time to time
execute and deliver or endorse any and all instruments, documents, conveyances,
assignments, security agreements, financing statements and other agreements and
writings that the Lender may reasonably request in order to secure, protect,
perfect or enforce the Security Interest or the Lender's rights under the Loan
Documents (but any failure to request or assure that the Borrower executes,
delivers or endorses any such item shall not affect or impair the validity,
sufficiency or enforceability of the Loan Documents and the Security Interest,
regardless of whether any such item was or was not executed, delivered or
endorsed in a similar context or on a prior occasion).

            Section 9.5 Collateral. This Agreement does not contemplate a sale
of accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any deficiency.
The Lender's duty of care with respect to Collateral in its possession (as
imposed by law) shall be deemed fulfilled if it exercises reasonable care in
physically keeping such Collateral, or in the case of Collateral in the custody
or possession of a bailee or other third person, exercises reasonable care in
the selection of the bailee or other third person, and the Lender need not
otherwise preserve, protect, insure or care for any Collateral. The Lender shall
not be obligated to preserve any rights the Borrower may have against prior
parties, to realize on the Collateral at all or in any particular manner or
order or to apply any cash proceeds of the Collateral in any particular order of
application.

            Section 9.6 Costs and Expenses. The Borrower agrees to pay on demand
all costs and expenses, including (without limitation) reasonable attorneys'
fees, incurred by the Lender in connection with the Obligations, this Agreement,
the Loan Documents, any Letters of Credit, and any other document or agreement
related hereto or thereto, and the transactions contemplated hereby, including
without limitation all such costs, expenses and fees incurred in connection with
the negotiation, preparation, execution, amendment, administration, performance,
collection and enforcement of the Obligations and all such documents and
agreements and the creation, perfection, protection, satisfaction, foreclosure
or enforcement of the Security Interest.

            Section 9.7 Indemnity. In addition to the payment of expenses
pursuant to Section 9.7, the Borrower agrees to indemnify, defend and hold
harmless the Lender, and any of its participants, parent corporations,
subsidiary corporations, affiliated corporations, successor corporations, and
all present and future officers, directors, employees, attorneys and agents of
the foregoing (the "Indemnitees") from and against any of the following
(collectively, "Indemnified Liabilities"):

                                       41
<PAGE>

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

                  (ii) any claims, loss or damage to which any Indemnitee may be
            subjected if any representation or warranty contained in Section
            5.12 proves to be incorrect in any respect or as a result of any
            violation of the covenant contained in Section 6.4(b); and

                  (iii) any and all other liabilities, losses, damages,
            penalties, judgments, suits, claims, costs and expenses of any kind
            or nature whatsoever (including, without limitation, the reasonable
            fees and disbursements of counsel) in connection with the foregoing
            and any other investigative, administrative or judicial proceedings,
            whether or not such Indemnitee shall be designated a party thereto,
            which may be imposed on, incurred by or asserted against any such
            Indemnitee, in any manner related to or arising out of or in
            connection with the making of the Advances and the Loan Documents or
            the use or intended use of the proceeds of the Advances.

If any investigative, judicial or administrative proceeding arising from any of
the foregoing is brought against any Indemnitee, upon such Indemnitee's request,
the Borrower, or counsel designated by the Borrower and satisfactory to the
Indemnitee, will resist and defend such action, suit or proceeding to the extent
and in the manner directed by the Indemnitee, at the Borrower's sole costs and
expense. Each Indemnitee will use its best efforts to cooperate in the defense
of any such action, suit or proceeding. If the foregoing undertaking to
indemnify, defend and hold harmless may be held to be unenforceable because it
violates any law or public policy, the Borrower shall nevertheless make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. The Borrower's obligation
under this Section 9.7 shall survive the termination of this Agreement and the
discharge of the Borrower's other obligations hereunder.

      An Indemnitee seeking indemnification under this Section 9.7 will notify
the Borrower of any event requiring indemnification within a reasonable amount
of time following such Indemnitee's receipt of notice of commencement of any
action or proceeding, or such Indemnitee's obtaining knowledge of the occurrence
of any other event, giving rise to a claim for indemnification hereunder. The
Borrower will be entitled (but not obligated ) to assume the defense or
settlement of any such action or proceeding or to participate in any
negotiations to settle or otherwise resolve any claim using counsel of its
choice; provided that such counsel is reasonably satisfactory to such
Indemnitee. If the Borrower elects to assume the defense or settlement of any
such action or proceeding, such Indemnitee (and its counsel) may continue to
participate at its own expense in such action or proceeding.

                                       42
<PAGE>

            Section 9.8 Participants. The Lender and its participants, if any,
are not partners or joint venturers, and the Lender shall not have any liability
or responsibility for any obligation, act or omission of any of its
participants. All rights and powers specifically conferred upon the Lender may
be transferred or delegated to any of the Lender's participants, successors or
assigns.

            Section 9.9 Execution in Counterparts. This Agreement and other Loan
Documents may be executed in any number of counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same instrument.

            Section 9.10 Binding Effect; Assignment; Complete Agreement;
Exchanging Information. The Loan Documents shall be binding upon and inure to
the benefit of the Borrower and the Lender and their respective successors and
assigns, except that the Borrower shall not have the right to assign its rights
thereunder or any interest therein without the Lender's prior written consent.
This Agreement, together with the Loan Documents, comprises the complete and
integrated agreement of the parties on the subject matter hereof and supersedes
all prior agreements, written or oral, on the subject matter hereof. Without
limiting the Lender's right to share information regarding the Borrower and its
Affiliates with the Lender's participants, accountants, lawyers and other
advisors, the Lender, Wells Fargo Corporation, and all direct and indirect
subsidiaries of Wells Fargo Corporation, may exchange any and all information
they may have in their possession regarding the Borrower and its Affiliates, and
the Borrower waives any right of confidentiality it may have with respect to
such exchange of such information.

            Section 9.11 Severability of Provisions. Any provision of this
Agreement which is prohibited or unenforceable shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.

            Section 9.12 Headings. Article and Section headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.

            Section 9.13 Governing Law; Jurisdiction, Venue; Waiver of Jury
Trial. The Loan Documents shall be governed by and construed in accordance with
the substantive laws (other than conflict laws) of the State of Minnesota. This
Agreement shall be governed by and construed in accordance with the substantive
laws (other than conflict laws) of the State of Minnesota. The parties hereto
hereby (i) consents to the personal jurisdiction of the state and federal courts
located in the State of Minnesota in connection with any controversy related to
this Agreement; (ii) waives any argument that venue in any such forum is not
convenient, (iii) agrees that any litigation initiated by the Lender or the
Borrower in connection with this Agreement or the other Loan Documents shall be
venued in either the District Court of Hennepin County, Minnesota, or the United
States District Court, District of Minnesota, Fourth Division; and (iv) agrees
that a final judgment in any such suit, action or proceeding shall be conclusive
and may be enforced in other jurisdictions by suit on the

                                       43
<PAGE>

judgment or in any other manner provided by law. THE PARTIES WAIVE ANY RIGHT TO
TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS
AGREEMENT.

            Section 9.14 Confidentiality. The Lender agrees to exercise due care
to maintain the confidentiality of all information relating to the Borrower
which has been provided to the Lender, and neither the Lender nor any of its
affiliates shall use any such information for any purpose in any manner other
than pursuant to the terms contemplated by the Loan Documents, except to the
extent such information (a) was or becomes generally available to the public,
other than as result of a disclosure by the Lender, or (b) was or becomes
available on a nonconfidential basis from a source other than the Borrower,
provided that such source is not bound by a confidentiality agreement with the
Borrower that is known to the Lender; provided further, however, that the Lender
may disclose such information (i) at the request of or pursuant to any
requirement of any governmental authority to which the Lender is subject to or
in connection with the examination of the Lender by any such authority, (ii)
pursuant to a subpoena or other court process; (iii) when required to do so in
accordance with the provisions of any applicable law, (iv) to the Lender's
independent auditors and other professional advisors, and (v) to any person or
entity and in any proceeding necessary in the Lender's reasonable judgment to
protect the Lender's interest in connection with any claim or dispute involving
the Lender. The Borrower authorizes the Lender to disclose to any prospective
transferee such financial and other information in the Lender's possession,
provided that, prior to such disclosure, such prospective transferee agrees in
writing to be bound by the provisions of this Section 9.14.

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

WELLS FARGO BUSINESS CREDIT, INC.          LECTEC CORPORATION

By /s/ Diane G. Conley                     By /s/ Deborah L. Moore
   ---------------------------------          ---------------------------------
   Diane G. Conley                            Deborah L. Moore
   An Officer                                 Its Chief Financial Officer

                                       44
<PAGE>

                         Table of Exhibits and Schedules

            Exhibit A           Form of Revolving Note

            Exhibit B           Compliance Certificate

            Exhibit C           Premises

                               -------------------

            Schedule 5.1        Trade Names, Chief Executive Office, Principal
                                Place of Business, and Locations of Collateral

            Schedule 7.1        Permitted Liens

            Schedule 7.2        Permitted Indebtedness and Guaranties

                                       45
<PAGE>

                                      Exhibit A to Credit and Security Agreement

                                 REVOLVING NOTE

$2,000,000.00                                             Minneapolis, Minnesota
                                                               November 22, 1999

            For value received, the undersigned, LECTEC CORPORATION, a Minnesota
corporation (the "Borrower"), hereby promises to pay on the Termination Date
under the Credit Agreement (defined below), to the order of WELLS FARGO BUSINESS
CREDIT, INC., a Minnesota corporation (the "Lender"), at its main office in
Minneapolis, Minnesota, or at any other place designated at any time by the
holder hereof, in lawful money of the United States of America and in
immediately available funds, the principal sum of Two Million and 00/100 Dollars
($2,000,000.00) or, if less, the aggregate unpaid principal amount of all
Revolving Advances made by the Lender to the Borrower under the Credit Agreement
(defined below) together with interest on the principal amount hereunder
remaining unpaid from time to time, computed on the basis of the actual number
of days elapsed and a 360-day year, from the date hereof until this Note is
fully paid at the rate from time to time in effect under the Credit and Security
Agreement of even date herewith (as the same may hereafter be amended,
supplemented or restated from time to time, the "Credit Agreement") by and
between the Lender and the Borrower. The principal hereof and interest accruing
thereon shall be due and payable as provided in the Credit Agreement. This Note
may be prepaid only in accordance with the Credit Agreement.

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

            The Borrower hereby agrees to pay all costs of collection, including
attorneys' fees and legal expenses in the event this Note is not paid when due,
whether or not legal proceedings are commenced.

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

                                       LECTEC CORPORATION

                                       By
                                          --------------------------------------
                                             Deborah L. Moore
                                             Its Chief Financial Officer

                                        1
<PAGE>

                                      Exhibit B to Credit and Security Agreement

                             COMPLIANCE CERTIFICATE

To:         Diane G. Conley
            Wells Fargo Business Credit, Inc.

Date:       __________________, _______

Subject:    LecTec Corporation
            Financial Statements

            In accordance with our Credit and Security Agreement dated as of
November 22, 1999 (the "Credit Agreement"), attached are the financial
statements of LecTec Corporation (the "Borrower") as of and for ______________,
_________ (the "Reporting Date") and the year-to-date period then ended (the
"Current Financials"). All terms used in this certificate have the meanings
given in the Credit Agreement.

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

            Events of Default. (Check one):

      [ ]   The undersigned does not have knowledge of the occurrence of a
            Default or Event of Default under the Credit Agreement.

      [ ]   The undersigned has knowledge of the occurrence of a Default or
            Event of Default under the Credit Agreement and attached hereto is a
            statement of the facts with respect to thereto.

            I hereby certify to the Lender as follows:

            Financial Covenants. I further hereby certify as follows:

                                        1
<PAGE>

            1. Minimum Book Net Worth. Pursuant to Section 6.12 of the Credit
      Agreement, as of the Reporting Date, the Borrower's Book Net Worth was
      $____________ which [ ] satisfies [ ] does not satisfy the requirement
      that such amount be not less than $_____________ on the Reporting Date[ as
      set forth in table below:

               Period                          Minimum Book Net Worth
               ------                          ----------------------
         November 30, 1999                           $6,378,000
         December 31, 1999                           $6,128,000
          January 31, 2000                           $5,778,000
         February 29, 2000                           $5,528,000
           March 31, 2000                            $5,428,000
           April 30, 2000                            $5,178,000
            May 31, 2000                             $4,978,000
           June 30, 2000                             $4,808,000

            2. Minimum Earnings/Maximum Loss Before Taxes. Pursuant to Section
      6.13 of the Credit Agreement, the Borrower's Earnings/Loss Before Taxes
      for the period ending on the Reporting Date, was $____________, which [ ]
      satisfies [ ] does not satisfy the requirement that such amount be not
      less than/greater than $_____________ during such period as set forth in
      table below (bracketed amounts indicate maximum Loss Before Taxes):

            Period Ending                     Minimum Earnings Before
            -------------                              Taxes
                                                       -----
          November 30, 1999                        ($1,130,000)
          December 31, 1999                        ($1,380,000)
           January 31, 2000                        ($1,730,000)
          February 29, 2000                        ($1,980,000)
            March 31, 2000                         ($2,080,000)
            April 30, 2000                         ($2,330,000)
             May 31, 2000                          ($2,530,000)
            June 30, 2000                          ($2,700,000)

            3. Capital Expenditures. Pursuant to Section 7.10 of the Credit
      Agreement, for the year-to-date period ending on the Reporting Date, the
      Borrower has expended or contracted to expend during the fiscal year ended
      ______________, ______, for Capital Expenditures, $__________________ in
      the aggregate and at most $______________ in any one transaction, which
      [ ] satisfies [ ] does not satisfy the requirement that such expenditures
      not exceed $600,000 in the aggregate and $250,000 for any one transaction
      during such year.

                                        2
<PAGE>

            4. Salaries. As of the Reporting Date, the Borrower [ ] is [ ] is
      not in compliance with Section 7.17 of the Credit Agreement concerning
      salaries.

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

                                       LECTEC CORPORATION

                                       By
                                          --------------------------------------
                                             Deborah L. Moore
                                             Its Chief Financial Officer

                                        3
<PAGE>

                                      Exhibit C to Credit and Security Agreement

                                    PREMISES

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

      Lot 2, Block 11, Opus 2, Fourth Addition, Hennepin County, Minnesota

                                       AND

   Lot 1, Block 1, Edina Interchange Center, Fifth Addition, Hennepin County,
                                    Minnesota

                                        1

<PAGE>

                                   Schedule 5.1 to Credit and Security Agreement

            Trade Names, Chief Executive Office, Principal Place of Business,
and Locations of Collateral

                                   TRADE NAMES

                                      NONE

               CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS

                             10701 Red Circle Drive
                              Minnetonka, MN 55343

                     OTHER INVENTORY AND EQUIPMENT LOCATIONS

                           7401 Cahill Road, Edina MN
                           38 Hope Street, Niantic, CT
               6090 White Hart Lane, Mississauga, Ontario, Canada
                         725-B-22nd Avenue, Honolulu, HI
                          Hwy. 56 and I-26, Clinton, SC
                          1060 Clyde Drive, Hammond, WI
                  220 East Marie Ave., West St. Paul, Minnesota
                       490 Vandenberg Street, Baldwin, WI
                   1284 Corporate Center Drive #150, Eagan, MN
                       1903 N. Oxford Ave., Eau Claire, WI

                                        1
<PAGE>

                                   Schedule 7.1 to Credit and Security Agreement

                                 PERMITTED LIENS

   Creditor         Collateral         Jurisdiction     Filing Date   Filing No.
   --------         ----------         ------------     -----------   ----------
Loffler         Specific Equipment   MN Sec. of State   3/30/98       2023866
Bankvest        Specific Equipment   MN Sec. of State   4/6/99        2119892
Capital Corp.

                                        1
<PAGE>

                                   Schedule 7.2 to Credit and Security Agreement

                      PERMITTED INDEBTEDNESS AND GUARANTIES

                                  Indebtedness

                                      NONE

                                   Guaranties

                                      NONE

                                        1
<PAGE>

                     FIRST AMENDMENT TO CREDIT AND SECURITY
                        AGREEMENT AND WAIVER OF DEFAULTS

                  This Amendment, dated as of February 9, 2000, is made by and
between LECTEC CORPORATION, a Minnesota corporation (the "Borrower"), and WELLS
FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender").

                                    Recitals

                  The Borrower and the Lender have entered into a Credit and
Security Agreement dated as of November 22, 1999 (the "Credit Agreement").
Capitalized terms used in these recitals have the meanings given to them in the
Credit Agreement unless otherwise specified.

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

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

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

                  2. Minimum Book Net Worth. Section 6.12 of the Credit
Agreement is hereby deleted its entirety and replaced with the following:

                           Section 6.12 Minimum Book Net Worth. The Borrower
         will maintain, during each period described below, its Book Net Worth,
         determined as at the end of each month, at an amount not less than the
         amount set forth opposite such period:

            Period Ended                     Minimum Book Net Worth
------------------------------------- --------------------------------------
          January 31, 2000                          $5,428,000
         February 29, 2000                          $5,428,000
           March 31, 2000                           $5,428,000
           April 30, 2000                           $5,178,000
            May 31, 2000                            $4,978,000
           June 30, 2000                            $4,808,000

                  3. Minimum Earnings/Maximum Loss Before Taxes. Section 6.13 of
the Credit Agreement is hereby deleted in its entirety and replaced with the
following:

                                       1
<PAGE>

                           Section 6.13 Minimum Earnings/Maximum Loss Before
         Taxes. The Borrower will achieve during each period described below,
         year-to-date Earnings or Loss Before Taxes, of not less than/greater
         than the amount set forth opposite such period (bracketed amounts
         indicate maximum Loss Before Taxes):

             Period Ended                Minimum Earnings/Maximus Loss
                                                  Before Taxes
--------------------------------------- ----------------------------------
           January 31, 2000                      ($2,080,000)
          February 29, 2000                      ($2,080,000)
            March 31, 2000                       ($2,080,000)
            April 30, 2000                       ($2,330,000)
             May 31, 2000                        ($2,530,000)
            June 30, 2000                        ($2,700,000)

                  4. No Other Changes. Except as explicitly amended by this
Amendment, all of the terms and conditions of the Credit Agreement shall remain
in full force and effect and shall apply to any advance or letter of credit
thereunder.

                  5. Waiver of Defaults. The Borrower is in default of the
following provisions of the Credit Agreement (collectively, the "Defaults"):

                  (a)      the Minimum  Book Net Worth  covenant  set forth in
         Section 6.12 as of November 30, 1999; and

                  (b)      the Minimum Earnings/Maximum Loss Before Taxes
         covenant set forth in Section 6.13 as of November 30, 1999 and December
         31, 1999.

Upon the terms and subject to the conditions set forth in this Amendment, the
Lender hereby waives the Defaults. This waiver shall be effective only in this
specific instance and for the specific purpose for which it is given, and this
waiver shall not entitle the Borrower to any other or further waiver in any
similar or other circumstances.

                  6. Conditions Precedent. This Amendment, and the waiver set
forth in Paragraph 5 hereof, shall be effective when the Lender shall have
received an executed original hereof.

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

                                       2

<PAGE>

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

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

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

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

                  9. No Other Waiver. Except as set forth in Paragraph 5 hereof,
the execution of this Amendment and acceptance of any documents related hereto
shall not be deemed to be a waiver of any Default or Event of Default under the
Credit Agreement or breach, default or event of default under any Security
Document or other document held by the Lender, whether or not known to the
Lender and whether or not existing on the date of this Amendment.

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

                                       3
<PAGE>

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

                  12. Miscellaneous. This Amendment may be executed in any
number of counterparts, each of which when so executed and delivered shall be
deemed an original and all of which counterparts, taken together, shall
constitute one and the same instrument.

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

WELLS FARGO BUSINESS CREDIT, INC.           LECTEC CORPORATION

By   /s/ Diane G. Conley                    By   /s/ Deborah L. Moore
   ---------------------------------           ---------------------------------
     Diane G. Conley                             Deborah L. Moore
     An Officer                                  Its Chief Financial OfficerEXHIBIT 10.12

                                 LOAN AGREEMENT

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
   Principal        Loan Date      Maturity       Loan No      Call    Collateral     Account      Officer     Initials
<S>                <C>            <C>             <C>           <C>       <C>          <C>            <C>      <C>
 $2,000,000.00     11-19-1999     11-19-2000      90241693      01        3000         127732         DS
------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any
                                         particular loan or item.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

    Borrower:   DIGITAL BIOMETRICS, INC.            Lender:   RIVERSIDE BANK
                5600 ROWLAND ROAD, SUITE 205                  PLYMOUTH
                MINNETONKA, MN 55343                          2655 CAMPUS DRIVE
                                                              PLYMOUTH, MN 55441

THIS LOAN AGREEMENT between DIGITAL BIOMETRICS, INC. ("Borrower") and RIVERSIDE
BANK ("Lender") is made and executed on the following terms and conditions.
Borrower has received prior commercial loans from Lender or has applied to
Lender for a commercial loan or loans and other financial accommodations,
including those which may be described on any exhibit or schedule attached to
this Agreement. All such loans and financial accommodations, together with all
future loans and financial accommodations from Lender to Borrower, are referred
to In this Agreement individually as the "Loan" and collectively as the "Loans."
Borrower understands and agrees that: (a) in granting, renewing, or extending
any Loan, Lender is relying upon Borrower's representations, warranties, and
agreements, as set forth in this Agreement; (b) the granting, renewing, or
extending of any Loan by Lender at all times shall be subject to Lender's sole
judgment and discretion; and (c) all such Loans shall be and shall remain
subject to the following terms and conditions of this Agreement.

TERM. This Agreement shall be effective as of November 19, 1999, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.

DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.

      Agreement. The word "Agreement" means this Loan Agreement, as this Loan
      Agreement may be amended or modified from time to time, together with all
      exhibits and schedules attached to this Loan Agreement from time to time.

      Account. The word "Account" means a trade account, account receivable, or
      other right to payment for goods sold or services rendered owing to
      Borrower (or to a third party grantor acceptable to Lender).

      Account Debtor. The words "Account Debtor" mean the person or entity
      obligated upon an Account.

      Advance. The word "Advance" means a disbursement of Loan funds under this
      Agreement.

      Borrower. The word "Borrower" means DIGITAL BIOMETRICS, INC.. The word
      "Borrower" also includes, as applicable, all subsidiaries and affiliates
      of Borrower as provided below in the paragraph titled "Subsidiaries and
      Affiliates."

      Borrowing Base. The words "Borrowing Base" mean, as determined by Lender
      from time to time, the lesser of (a) $2,000,000.00; or (b) the sum of (i)
      70.000% of the aggregate amount of Eligible Accounts, plus (ii) 33.333% of
      the aggregate amount of Eligible Inventory (not to exceed in corresponding
      Loan amount based on Eligible Inventory $500,000).

      Business Day. The words "Business Day" mean a day on which commercial
      banks are open for business in the State of Minnesota.

      CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
      Compensation, and Liability Act of 1980, as amended.

      Cash Flow. The words "Cash Flow" mean net income after taxes, and
      exclusive of extraordinary gains and income, plus depreciation and
      amortization.

      Collateral. The word "Collateral" means and includes without limitation
      all property and assets granted as collateral security for a Loan, whether
      real or personal property, whether granted directly or indirectly, whether
      granted now or in the future, and whether granted in the form of a
      security interest, mortgage, deed of trust, assignment, pledge, chattel
      mortgage, chattel trust, factor's lien, equipment trust, conditional sale,
      trust receipt, lien, charge, lien or title retention contract, lease or
      consignment intended as a security device, or any other security or lien
      interest whatsoever, whether created by law, contract, or otherwise. The
      word "Collateral" includes without limitation all collateral described
      below in the section titled "COLLATERAL."

      Debt. The word "Debt" means all of Borrower's liabilities excluding
      Subordinated Debt.

      Eligible Accounts. The words "Eligible Accounts" mean, at any time, all of
      Borrower's Accounts which contain selling terms and conditions acceptable
      to Lender. The net amount of any Eligible Account against which Borrower
      may borrow shall exclude all returns, discounts, credits, and offsets of
      any nature. Unless otherwise agreed to by Lender in writing, Eligible
      Accounts do not include:

            (a) Accounts with respect to which the Account Debtor is an officer,
            an employee or agent of Borrower.

            (b) Accounts with respect to which the Account Debtor is a
            subsidiary of, or affiliated with or related to Borrower or its
            shareholders, officers, or directors.

            (c) Accounts with respect to which goods are placed on consignment,
            guaranteed sale, or other terms by reason of which the payment by
            the Account Debtor may be conditional.

            (d) Accounts with respect to which the Account Debtor is not a
            resident of the United States, except to the extent such Accounts
            are supported by insurance, bonds or other assurances satisfactory
            to Lender.

            (e) Accounts with respect to which Borrower is or may become liable
            to the Account Debtor for goods sold or services rendered by the
            Account Debtor to Borrower.

            (f) Accounts which are subject to dispute, counterclaim, or setoff.

            (g) Accounts with respect to which the goods have not been shipped
            or delivered, or the services have not been rendered, to the Account
            Debtor.

            (h) Accounts with respect to which Lender, in its sole discretion,
            deems the creditworthiness or financial condition of the Account
            Debtor to be unsatisfactory.

            (i) Accounts of any Account Debtor who has filed or has had filed
            against it a petition in bankruptcy or an application for relief
            under any provision of any state or federal bankruptcy, insolvency,
            or debtor-in-relief acts; or who has had appointed a trustee,
            custodian, or receiver for the assets of such Account Debtor; or who
            has made an assignment for the benefit of creditors or has become
            insolvent or fails generally to pay its debts (including its
            payrolls) as such debts become due.

            (j) Accounts with respect to which the Account Debtor is the United
            States government or any department or agency of the United States.

<PAGE>

11-19-1999                       LOAN AGREEMENT                           Page 2
Loan No 90241693                  (Continued)

            (k) Accounts which have not been paid in full within 90 DAYS from
            the invoice date.

      Eligible Inventory. The words "Eligible Inventory" mean, at any time, all
      of Borrower's Inventory as defined below except:

            (a) Inventory which is not owned by Borrower free and clear of all
            security interests, liens, encumbrances, and claims of third
            parties.

            (b) Inventory which Lender, in its sole discretion, deems to be
            obsolete, unsalable, damaged, defective, or unfit for further
            processing.

      ERISA. The word "ERISA" means the Employee Retirement Income Security Act
      of 1974, as amended.

      Event of Default. The words "Event of Default" mean and include without
      limitation any of the Events of Default set forth below in the section
      titled "EVENTS OF DEFAULT."

      Expiration Date. The words "Expiration Date" mean the date of termination
      of Lender's commitment to lend under this Agreement.

      Grantor. The word "Grantor" means and includes without limitation each and
      all of the persons or entities granting a Security Interest in any
      Collateral for the Indebtedness, including without limitation all
      Borrowers granting such a Security Interest.

      Guarantor. The word "Guarantor" means and includes without limitation each
      and all of the guarantors, sureties, and accommodation parties in
      connection with any Indebtedness.

      Indebtedness. The word "Indebtedness" means and includes without
      limitation all Loans, together with all other obligations, debts and
      liabilities of Borrower to Lender, or any one or more of them, as well as
      all claims by Lender against Borrower, or any one or more of them; whether
      now or hereafter existing, voluntary or involuntary, due or not due,
      absolute or contingent, liquidated or unliquidated; whether Borrower may
      be liable individually or jointly with others; whether Borrower may be
      obligated as a guarantor, surety, or otherwise; whether recovery upon such
      Indebtedness may be or hereafter may become barred by any statute of
      limitations; and whether such Indebtedness may be or hereafter may become
      otherwise unenforceable.

      Inventory. The word "Inventory" means all of Borrower's raw materials,
      work in process, finished goods, merchandise, parts and supplies, of every
      kind and description, and goods held for sale or lease or furnished under
      contracts of service in which Borrower now has or hereafter acquires any
      right, whether held by Borrower or others, and all documents of title,
      warehouse receipts, bills of lading, and all other documents of every type
      covering all or any part of the foregoing. Inventory includes inventory
      temporarily out of Borrower's custody or possession and all returns on
      Accounts.

      Lender. The word "Lender" means RIVERSIDE BANK, its successors and
      assigns.

      Line of Credit. The words "Line of Credit" mean the credit facility
      described in the Section titled "LINE OF CREDIT" below.

      Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand plus
      Borrower's readily marketable securities.

      Loan. The word "Loan" or "Loans" means and includes without limitation any
      and all commercial loans and financial accommodations from Lender to
      Borrower, whether now or hereafter existing, and however evidenced,
      including without limitation those loans and financial accommodations
      described herein or described on any exhibit or schedule attached to this
      Agreement from time to time.

      Note. The word "Note" means and includes without limitation Borrower's
      promissory note or notes, if any, evidencing Borrower's Loan obligations
      in favor of Lender, as well as any substitute, replacement or refinancing
      note or notes therefor.

      Permitted Liens. The words "Permitted Liens" mean: (a) liens and security
      interests securing Indebtedness owed by Borrower to Lender; (b) liens for
      taxes, assessments, or similar charges either not yet due or being
      contested in good faith; (c) liens of materialmen, mechanics,
      warehousemen, or carriers, or other like liens arising in the ordinary
      course of business and securing obligations which are not yet delinquent;
      (d) purchase money liens or purchase money security interests upon or in
      any property acquired or held by Borrower in the ordinary course of
      business to secure indebtedness outstanding on the date of this Agreement
      or permitted to be incurred under the paragraph of this Agreement titled
      "Indebtedness and Liens"; (e) liens and security interests which, as of
      the date of this Agreement, have been disclosed to and approved by the
      Lender in writing; and (f) those liens and security interests which in the
      aggregate constitute an immaterial and insignificant monetary amount with
      respect to the net value of Borrower's assets.

      Related Documents. The words "Related Documents" mean and include without
      limitation all promissory notes, credit agreements, loan agreements,
      environmental agreements, guaranties, security agreements, mortgages,
      deeds of trust, and all other instruments, agreements and documents,
      whether now or hereafter existing, executed in connection with the
      Indebtedness.

      Security Agreement. The words "Security Agreement" mean and include
      without limitation any agreements, promises, covenants, arrangements,
      understandings or other agreements, whether created by law, contract, or
      otherwise, evidencing, governing, representing, or creating a Security
      Interest.

      Security Interest. The words "Security Interest" mean and include without
      limitation any type of collateral security, whether in the form of a lien,
      charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
      chattel trust, factor's lien, equipment trust, conditional sale, trust
      receipt, lien or title retention contract, lease or consignment intended
      as a security device, or any other security or lien interest whatsoever,
      whether created by law, contract, or otherwise.

      SARA. The word "SARA" means the Superfund Amendments and Reauthorization
      Act of 1986 as now or hereafter amended.

      Subordinated Debt. The words "Subordinated Debt" mean indebtedness and
      liabilities of Borrower which have been subordinated by written agreement
      to indebtedness owed by Borrower to Lender in form and substance
      acceptable to Lender.

      Tangible Net Worth. The term "Tangible Net Worth" shall mean Borrower's
      total assets excluding all intangible assets (i.e., goodwill, trademarks,
      patents, copyrights, organizational expenses, and similar intangible
      items, but including leaseholds and leasehold improvements) and Related
      Party Notes less total debt. The term "Related Party Notes" shall mean all
      notes due from companies affiliated by common ownership, officers,
      directors, stockholders, or employees. The term "Debt" shall mean all of
      Borrower's liabilities excluding subordinated debt. The term "Subordinated
      Debt" shall mean indebtedness and liabilities of Borrower which have been
      subordinated by written agreement to indebtedness owed by Borrower to
      Lender in form and substance acceptable to Lender.

      Working Capital. The words "Working Capital" mean Borrower's current
      assets, excluding prepaid expenses, less Borrower's current liabilities.

LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits, Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows.

      Conditions Precedent to Each Advance. Lender's obligation to make any
      Advance to or for the account of Borrower under this Agreement is subject
      to the following conditions precedent, with all documents, instruments,
      opinions, reports, and other items required under this Agreement to be in
      form and substance satisfactory to Lender:

            (a) Lender shall have received evidence that this Agreement and all
            Related Documents have been duly authorized, executed, and delivered

<PAGE>

11-19-1999                       LOAN AGREEMENT                           Page 3
Loan No 90241693                  (Continued)

            by Borrower to Lender.

            (b) Lender shall have received such opinions of counsel,
            supplemental opinions, and documents as Lender may request.

            (c) The security interests in the Collateral shall have been duly
            authorized, created, and perfected with first lien priority and
            shall be in full force and effect.

            (d) All guaranties required by Lender for the Line of Credit shall
            have been executed by each Guarantor, delivered to Lender, and be in
            full force and effect.

            (e) Lender, at its option and for its sole benefit, shall have
            conducted an audit of Borrower's Accounts, Inventory, books,
            records, and operations, and Lender shall be satisfied as to their
            condition.

            (f) Borrower shall have paid to Lender all fees, costs, and expenses
            specified in this Agreement and the Related Documents as are then
            due and payable.

            (g) There shall not exist at the time of any Advance a condition
            which would constitute an Event of Default under this Agreement.

      Making Loan Advances. Advances under the Line of Credit may be requested
      either orally or in writing by authorized persons. Lender may, but need
      not, require that all oral requests be confirmed in writing. Each Advance
      shall be conclusively deemed to have been made at the request of and for
      the benefit of Borrower (a) when credited to any deposit account of
      Borrower maintained with Lender or (b) when advanced in accordance with
      the instructions of an authorized person. Lender, at its option, may set a
      cutoff time, after which all requests for Advances will be treated as
      having been requested on the next succeeding Business Day.

      Mandatory Loan Repayments. If at any time the aggregate principal amount
      of the outstanding Advances shall exceed the applicable Borrowing Base,
      Borrower, immediately upon written or oral notice from Lender, shall pay
      to Lender an amount equal to the difference between the outstanding
      principal balance of the Advances and the Borrowing Base. On the
      Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid
      principal amount of all Advances then outstanding and all accrued unpaid
      interest, together with all other applicable fees, costs and charges, if
      any, not yet paid.

      Loan Account. Lender shall maintain on its books a record of account in
      which Lender shall make entries for each Advance and such other debits and
      credits as shall be appropriate in connection with the credit facility.
      Lender shall provide Borrower with periodic statements of Borrower's
      account, which statements shall be considered to be correct and
      conclusively binding on Borrower unless Borrower notifies Lender to the
      contrary within thirty (30) days after Borrower's receipt of any such
      statement which Borrower deems to be incorrect.

COLLATERAL. To secure payment of the Line of Credit and performance of all other
Loans, obligations and duties owed by Borrower to Lender, Borrower (and others,
if required) shall grant to Lender Security Interests in such property and
assets as Lender may require (the "Collateral"), including without limitation
Borrower's present and future Accounts, general intangibles, and Inventory.
Lender's Security Interests in the Collateral shall be continuing liens and
shall include the proceeds and products of the Collateral, including without
limitation the proceeds of any insurance. With respect to the Collateral,
Borrower agrees and represents and warrants to Lender:

      Perfection of Security Interests. Borrower agrees to execute such
      financing statements and to take whatever other actions are requested by
      Lender to perfect and continue Lender's Security Interests in the
      Collateral. Upon request of Lender, Borrower will deliver to Lender any
      and all of the documents evidencing or constituting the Collateral, and
      Borrower will note Lender's interest upon any and all chattel paper if not
      delivered to Lender for possession by Lender. Contemporaneous with the
      execution of this Agreement, Borrower will execute one or more UCC
      financing statements and any similar statements as may be required by
      applicable law, and will file such financing statements-and all such
      similar statements in the appropriate location or locations. Borrower
      hereby appoints Lender as its irrevocable attorney-in-fact for the purpose
      of executing any documents necessary to perfect or to continue any
      Security Interest. Lender may at any time, and without further
      authorization from Borrower, file a carbon, photograph, facsimile, or
      other reproduction of any financing statement for use as a financing
      statement. Borrower will reimburse Lender for all expenses for the
      perfection, termination, and the continuation of the perfection of
      Lender's security interest in the Collateral. Borrower promptly will
      notify Lender of any change in Borrower's name including any change to the
      assumed business names of Borrower. Borrower also promptly will notify
      Lender of any change in Borrower's Social Security Number or Employer
      Identification Number. Borrower further agrees to notify Lender in writing
      prior to any change in address or location of Borrower's principal
      governance office or should Borrower merge or consolidate with any other
      entity.

      Collateral Records. Borrower does now, and at all times hereafter shall,
      keep correct and accurate records of the Collateral, all of which records
      shall be available to Lender or Lender's representative upon demand for
      inspection and copying at any reasonable time. With respect to the
      Accounts, Borrower agrees to keep and maintain such records as Lender may
      require, including without limitation information concerning Eligible
      Accounts and Account balances and agings. With respect to the Inventory,
      Borrower agrees to keep and maintain such records as Lender may require,
      including without limitation information concerning Eligible Inventory and
      records itemizing and describing the kind, type, quality, and quantity of
      Inventory, Borrower's Inventory costs and selling prices, and the daily
      withdrawals and additions to Inventory.

      Collateral Schedules. Concurrently with the execution and delivery of this
      Agreement, Borrower shall execute and deliver to Lender schedules of
      Accounts and Inventory and Eligible Accounts and Eligible Inventory, in
      form and substance satisfactory to the Lender. Thereafter and at such
      frequency as Lender shall require, Borrower shall execute and deliver to
      Lender such supplemental schedules of Eligible Accounts and Eligible
      Inventory and such other matters and information relating to the Accounts
      and Inventory as Lender may request.

      Representations and Warranties Concerning Accounts. With respect to the
      Accounts, Borrower represents and warrants to Lender: (a) Each Account
      represented by Borrower to be an Eligible Account for purposes of this
      Agreement conforms to the requirements of the definition of an Eligible
      Account; (b) All Account information listed on schedules delivered to
      Lender will be true and correct, subject to immaterial variance; and (c)
      Lender, its assigns, or agents shall have the right at any time and at
      Borrower's expense to inspect, examine, and audit Borrower's records and
      to confirm with Account Debtors the accuracy of such Accounts.

      Representations and Warranties Concerning Inventory. With respect to the
      Inventory, Borrower represents and warrants to Lender: (a) All Inventory
      represented by Borrower to be Eligible Inventory for purposes of this
      Agreement conforms to the requirements of the definition of Eligible
      Inventory; (b) All Inventory values listed on schedules delivered to
      Lender will be true and correct, subject to immaterial variance; (c) The
      value of the Inventory will be determined on a consistent accounting
      basis; (d) Except as agreed to the contrary by Lender in writing, all
      Eligible Inventory is now and at all times hereafter will be in Borrower's
      physical possession and shall not be held by others on consignment, sale
      on approval, or sale or return; (e) Except as reflected in the Inventory
      schedules delivered to Lender, all Eligible Inventory is now and at all
      times hereafter will be of good and merchantable quality, free from
      defects; (f) Eligible Inventory is not now and will not at any time
      hereafter be stored with a bailee, warehouseman, or similar party without
      Lender's prior written consent, and, in such event, Borrower will
      concurrently at the time of bailment cause any such bailee, warehouseman,
      or similar party to issue and deliver to Lender, in form acceptable to
      Lender, warehouse receipts in Lender's name evidencing the storage of
      Inventory; and (g) Lender, its assigns, or agents shall have the right at
      any time and at Borrower's expense to inspect and examine the Inventory
      and to check and test the same as to quality, quantity, value, and
      condition.

REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:

<PAGE>

11-19-1999                       LOAN AGREEMENT                           Page 4
Loan No 90241693                  (Continued)

      Organization. Borrower is a corporation which is duly organized, validly
      existing, and in good standing under the laws of the State of Delaware and
      is validly existing and in good standing in all states in which Borrower
      is doing business. Borrower has the full power and authority to own its
      properties and to transact the businesses in which it is presently engaged
      or presently proposes to engage. Borrower also is duly qualified as a
      foreign corporation and is in good standing in all states in which the
      failure to so qualify would have a material adverse effect on its
      businesses or financial condition.

      Authorization. The execution, delivery, and performance of this Agreement
      and all Related Documents by Borrower, to the extent to be executed,
      delivered or performed by Borrower, have been duly authorized by all
      necessary action by Borrower; do not require the consent or approval of
      any other person, regulatory authority or governmental body; and do not
      conflict with, result in a violation of, or constitute a default under (a)
      any provision of its articles of incorporation or organization, or bylaws,
      or any agreement or other instrument binding upon Borrower or (b) any law,
      governmental regulation, court decree, or order applicable to Borrower.

      Financial Information. Each financial statement of Borrower supplied to
      Lender truly and completely disclosed Borrower's financial condition as of
      the date of the statement, and there has been no material adverse change
      in Borrower's financial condition subsequent to the date of the most
      recent financial statement supplied to Lender. Borrower has no material
      contingent obligations except as disclosed in such financial statements.

      Legal Effect. This Agreement constitutes, and any instrument or agreement
      required hereunder to be given by Borrower when delivered will constitute,
      legal, valid and binding obligations of Borrower enforceable against
      Borrower in accordance with their respective terms.

      Properties. Except for Permitted Liens, Borrower owns and has good title
      to all of Borrower's properties free and clear of all Security Interests,
      and has not executed any security documents or financing statements
      relating to such properties. All of Borrower's properties are titled in
      Borrower's legal name, and Borrower has not used, or filed a financing
      statement under, any other name for at least the last five (5) years.

      Hazardous Substances. The terms "hazardous waste," "hazardous substance,"
      "disposal," "release," and "threatened release," as used in this
      Agreement, shall have the same meanings as set forth in the "CERCLA,"
      "SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section
      1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C.
      Section 6901, et seq., or other applicable state or Federal laws, rules,
      or regulations adopted pursuant to any of the foregoing. Except as
      disclosed to and acknowledged by Lender in writing, Borrower represents
      and warrants that: (a) During the period of Borrower's ownership of the
      properties, there has been no use, generation, manufacture, storage,
      treatment, disposal, release or threatened release of any hazardous waste
      or substance by any person on, under, about or from any of the properties.
      (b) Borrower has no knowledge of, or reason to believe that there has been
      (i) any use, generation, manufacture, storage, treatment, disposal,
      release, or threatened release of any hazardous waste or substance on,
      under, about or from the properties by any prior owners or occupants of
      any of the properties, or (ii) any actual or threatened litigation or
      claims of any kind by any person relating to such matters. (c) Neither
      Borrower nor any tenant, contractor, agent or other authorized user of any
      of the properties shall use, generate, manufacture, store, treat, dispose
      of, or release any hazardous waste or substance on, under, about or from
      any of the properties; and any such activity shall be conducted in
      compliance with all applicable federal, state, and local laws,
      regulations, and ordinances, including without limitation those laws,
      regulations and ordinances described above. Borrower authorizes Lender and
      its agents to enter upon the properties to make such inspections and tests
      as Lender may deem appropriate to determine compliance of the properties
      with this section of the Agreement. Any inspections or tests made by
      Lender shall be at Borrower's expense and for Lender's purposes only and
      shall not be construed to create any responsibility or liability on the
      part of Lender to Borrower or to any other person. The representations and
      warranties contained herein are based on Borrower's due diligence in
      investigating the properties for hazardous waste and hazardous substances.
      Borrower hereby (a) releases and waives any future claims against Lender
      for indemnity or contribution in the event Borrower becomes liable for
      cleanup or other costs under any such laws, and (b) agrees to indemnify
      and hold harmless Lender against any and all claims, losses, liabilities,
      damages, penalties, and expenses which Lender may directly or indirectly
      sustain or suffer resulting from a breach of this section of the Agreement
      or as a consequence of any use, generation, manufacture, storage,
      disposal, release or threatened release of a hazardous waste or substance
      on the properties. The provisions of this section of the Agreement,
      including the obligation to indemnify, shall survive the payment of the
      Indebtedness and the termination or expiration of this Agreement and shall
      not be affected by Lender's acquisition of any interest in any of the
      properties, whether by foreclosure or otherwise.

      Litigation and Claims. No litigation, claim, investigation, administrative
      proceeding or similar action (including those for unpaid taxes) against
      Borrower is pending or threatened, and no other event has occurred which
      may materially adversely affect Borrower's financial condition or
      properties, other than litigation, claims, or other events, if any, that
      have been disclosed to and acknowledged by Lender in writing.

      Taxes. To the best of Borrower's knowledge, all tax returns and reports of
      Borrower that are or were required to be filed, have been filed, and all
      taxes, assessments and other governmental charges have been paid in full,
      except those presently being or to be contested by Borrower in good faith
      in the ordinary course of business and for which adequate reserves have
      been provided.

      Lien Priority. Unless otherwise previously disclosed to Lender in writing,
      Borrower has not entered into or granted any Security Agreements, or
      permitted the filing or attachment of any Security Interests on or
      affecting any of the Collateral directly or indirectly securing repayment
      of Borrower's Loan and Note, that would be prior or that may in any way be
      superior to Lender's Security Interests and rights in and to such
      Collateral.

      Binding Effect. This Agreement, the Note, all Security Agreements directly
      or indirectly securing repayment of Borrower's Loan and Note and all of
      the Related Documents are binding upon Borrower as well as upon Borrower's
      successors, representatives and assigns, and are legally enforceable in
      accordance with their respective terms.

      Commercial Purposes. Borrower intends to use the Loan proceeds solely for
      business or commercial related purposes.

      Employee Benefit Plans. Each employee benefit plan as to which Borrower
      may have any liability complies in all material respects with all
      applicable requirements of law and regulations, and (i) no Reportable
      Event nor Prohibited Transaction (as defined in ERISA) has occurred with
      respect to any such plan, (ii) Borrower has not withdrawn from any such
      plan or initiated steps to do so, (iii) no steps have been taken to
      terminate any such plan, and (iv) there are no unfunded liabilities other
      than those previously disclosed to Lender in writing.

      Location of Borrower's Offices and Records. Borrower's place of business,
      or Borrower's Chief executive office, if Borrower has more than one place
      of business, is located at 5600 ROWLAND ROAD, SUITE 205, MINNETONKA, MN
      55343. Unless Borrower has designated otherwise in writing this location
      is also the office or offices where Borrower keeps its records concerning
      the Collateral.

      Year 2000. Borrower warrants and represents that all software utilized in
      the conduct of Borrower's business will have appropriate capabilities and
      compatibility for operation to handle calendar dates falling on or after
      January 1, 2000, and all information pertaining to such calendar dates, in
      the same manner and with the same functionality as the software does
      respecting calendar dates failing on or before December 31, 1999. Further,
      Borrower warrants and represents that the data-related user interface
      functions, data-fields, and data-related program instructions and
      functions of the software include the indication of the century.

      Information. All information heretofore or contemporaneously herewith
      furnished by Borrower to Lender for the purposes of or in connection with
      this Agreement or any transaction contemplated hereby is, and all
      information hereafter furnished by or on behalf of Borrower to Lender will
      be, true and accurate in every material respect on the date as of which
      such information is dated or certified; and none of such information is or
      will be incomplete by omitting to state any material fact necessary to
      make such information not misleading.

<PAGE>

11-19-1999                       LOAN AGREEMENT                           Page 5
Loan No 90241693                  (Continued)

      Survival of Representations and Warranties. Borrower understands and
      agrees that Lender, without independent investigation, is relying upon the
      above representations and warranties in extending Loan Advances to
      Borrower. Borrower further agrees that the foregoing representations and
      warranties shall be continuing in nature and shall remain in full force
      and effect until such time as Borrower's Indebtedness shall be paid in
      full, or until this Agreement shall be terminated in the manner provided
      above, whichever is the last to occur.

AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:

      Litigation. Promptly inform Lender in writing of (a) all material adverse
      changes in Borrower's financial condition, and (b) all existing and all
      threatened litigation, claims, investigations, administrative proceedings
      or similar actions affecting Borrower or any Guarantor which could
      materially affect the financial condition of Borrower or the financial
      condition of any Guarantor.

      Financial Records. Maintain its books and records in accordance with
      generally accepted accounting principles, applied on a consistent basis,
      and permit Lender to examine and audit Borrower's books and records at all
      reasonable times.

      Financial Statements. Furnish Lender with, as soon as available, but in no
      event later than ninety (90) days after the end of each fiscal year,
      Borrower's balance sheet and income statement for the year ended, audited
      by a certified public accountant satisfactory to Lender, and, as soon as
      available, but in no event later than thirty (30) days after the end of
      each month, Borrower's balance sheet and profit and loss statement for the
      period ended, prepared and certified as correct to the best knowledge and
      belief by Borrower's chief financial officer or other officer or person
      acceptable to Lender. All financial reports required to be provided under
      this Agreement shall be prepared in accordance with generally accepted
      accounting principles, applied on a consistent basis, and certified by
      Borrower as being true and correct.

      Additional Information. Furnish such additional information and
      statements, lists of assets and liabilities, agings of receivables and
      payables, inventory schedules, budgets, forecasts, tax returns, and other
      reports with respect to Borrower's financial condition and business
      operations as Lender may request from time to time. Additional information
      shall be delivered according to the following schedule: BORROWER SHALL
      PROVIDE LENDER WITH AN ACCOUNTS RECEIVABLE AGING, A BORROWING BASE
      CERTIFICATE, AND AN INVENTORY LISTING NO LATER THAN THIRTY DAYS AFTER EACH
      MONTH END. Financial Covenants and Ratios. Comply with the following
      covenants and ratios:

            Tangible Net Worth. Maintain a minimum Tangible Net Worth of not
            less than $7,000,000.00 at September 30,1999 and monthly thereafter,
            $7,500,000.00 at September 30, 2000 and monthly thereafter.

            Net Worth Ratio. Maintain a ratio of Total Liabilities to Tangible
            Net Worth of less than 1.20 at September 30, 1999 and monthly
            thereafter. Current Ratio. Maintain a ratio of Current Assets to
            Current Liabilities in excess of 1.75 to 1.00.

            Income. Maintain not less than the following income level: Minimum
            Profitability equal to or greater than $500,000.00 for Financial
            Year End September 30, 2000.

      For purposes of this Agreement and to the extent the following terms are
      utilized in this Agreement, the term "Tangible Net Worth" shall mean
      Borrower's total assets excluding all intangible assets (i.e., goodwill,
      trademarks, patents, copyrights, organizational expenses, and similar
      intangible items, but including leaseholds and leasehold improvements) and
      Related Party Notes less total debt. The term "Related Party Notes" shall
      mean all notes due from companies affiliated by common ownership,
      officers, directors, stockholders, or employees. The term "Debt" shall
      mean all of Borrower's liabilities excluding subordinated debt. The term
      "Subordinated Debt" shall mean indebtedness and liabilities of Borrower
      which have been subordinated by written agreement to indebtedness owed by
      Borrower to Lender in form and substance acceptable to Lender. The term
      "Working Capital" shall mean Borrower's current assets, excluding prepaid
      expenses, less Borrower's current liabilities. The term "Liquid Assets"
      shall mean Borrower's cash on hand plus Borrower's receivables. The term
      "Cash Flow" shall mean net income after taxes, and exclusive of
      extraordinary gains and income, plus depreciation and amortization. Except
      as provided above, all computations made to determine compliance with the
      requirements contained in this paragraph shall be made in accordance with
      generally accepted accounting principles, applied on a consistent basis,
      and certified by Borrower as being true and correct.

      Insurance. Maintain fire and other risk insurance, public liability
      insurance, and such other insurance as Lender may require with respect to
      Borrower's properties and operations, in form, amounts, coverages and with
      insurance companies reasonably acceptable to Lender. Borrower, upon
      request of Lender, will deliver to Lender from time to time the policies
      or certificates of insurance in form satisfactory to Lender, including
      stipulations that coverages will not be cancelled or diminished without at
      least ten (10) days' prior written notice to Lender. Each insurance policy
      also shall include an endorsement providing that coverage in favor of
      Lender will not be impaired in any way by any act, omission or default of
      Borrower or any other person. In connection with all policies covering
      assets in which Lender holds or is offered a security interest for the
      Loans, Borrower will provide Lender with such loss payable or other
      endorsements as Lender may require.

      Insurance Reports. Furnish to Lender, upon request of Lender, reports on
      each existing insurance policy showing such information as Lender may
      reasonably request, including without limitation the following: (a) the
      name of the insurer; (b) the risks insured; (c) the amount of the policy;
      (d) the properties insured; (e) the then current property values on the
      basis of which insurance has been obtained, and the manner of determining
      those values; and (f) the expiration date of the policy. In addition, upon
      request of Lender (however not more often than annually), Borrower will
      have an independent appraiser satisfactory to Lender determine, as
      applicable, the actual cash value or replacement cost of any Collateral.
      The cost of such appraisal shall be paid by Borrower.

      Other Agreements. Comply with all terms and conditions of all other
      agreements, whether now or hereafter existing, between Borrower and any
      other party and notify Lender immediately in writing of any default in
      connection with any other such agreements.

      Loan Fees and Charges. In addition to all other agreed upon fees and
      charges, pay the following: $10,000.00.

      Loan Proceeds. Use all Loan proceeds solely for Borrower's business
      operations, unless specifically consented to the contrary by Lender in
      writing.

      Taxes, Charges and Liens. Pay and discharge when due all of its
      indebtedness and obligations, including without limitation all
      assessments, taxes, governmental charges, levies and liens, of every kind
      and nature, imposed upon Borrower or its properties, income, or profits,
      prior to the date on which penalties would attach, and all lawful claims
      that, if unpaid, might become a lien or charge upon any of Borrower's
      properties, income, or profits. Provided however, Borrower will not be
      required to pay and discharge any such assessment, tax, charge, levy, lien
      or claim so long as (a) the legality of the same shall be contested in
      good faith by appropriate proceedings, and (b) Borrower shall have
      established on its books adequate reserves with respect to such contested
      assessment, tax, charge, levy, lien, or claim in accordance with generally
      accepted accounting practices. Borrower, upon demand of Lender, will
      furnish to Lender evidence of payment of the assessments, taxes, charges,
      levies, liens and claims and will authorize the appropriate governmental
      official to deliver to Lender at any time a written statement of any
      assessments, taxes, charges, levies, liens and claims against Borrower's
      properties, income, or profits.

      Performance. Perform and comply with all terms, conditions, and provisions
      set forth in this Agreement and in the Related Documents in a timely
      manner, and promptly notify Lender if Borrower learns of the occurrence of
      any event which constitutes an Event of Default under this Agreement or
      under any of the Related Documents.

<PAGE>

11-19-1999                       LOAN AGREEMENT                           Page 6
Loan No 90241693                  (Continued)

      Operations. maintain executive and management personnel with substantially
      the same qualifications and experience as the present executive and
      management personnel; provide written notice to Lender of any change in
      executive and management personnel; conduct its business affairs in a
      reasonable and prudent manner and in compliance with all applicable
      federal, state and municipal laws, ordinances, rules and regulations
      respecting its properties, charters, businesses and operations, including
      without limitation, compliance with the Americans With Disabilities Act
      and with all minimum funding standards and other requirements of ERISA and
      other laws applicable to Borrower's employee benefit plans.

      Inspection. Permit employees or agents of Lender at any reasonable time to
      inspect any and all Collateral for the Loan or Loans and Borrower's other
      properties and to examine or audit Borrower's books, accounts, and records
      and to make copies and memoranda of Borrower's books, accounts, and
      records. If Borrower now or at any time hereafter maintains any records
      (including without limitation computer generated records and computer
      software programs for the generation of such records) in the possession of
      a third party, Borrower, upon request of Lender, shall notify such party
      to permit Lender free access to such records at all reasonable times and
      to provide Lender with copies of any records it may request, all at
      Borrower's expense.

      Environmental Compliance and Reports. Borrower shall comply in all
      respects with all environmental protection federal, state and local laws,
      statutes, regulations and ordinances; not cause or permit to exist, as a
      result of an intentional or unintentional action or omission on its part
      or on the part of any third party, on property owned and/or occupied by
      Borrower, any environmental activity where damage may result to the
      environment, unless such environmental activity is pursuant to and in
      compliance with the conditions of a permit issued by the appropriate
      federal, state or local governmental authorities; shall furnish to Lender
      promptly and in any event within thirty (30) days after receipt thereof a
      copy of any notice, summons, lien, citation, directive, letter or other
      communication from any governmental agency or instrumentality concerning
      any intentional or unintentional action or omission on Borrower's part in
      connection with any environmental activity whether or not there is damage
      to the environment and/or other natural resources.

      Additional Assurances. Make, execute and deliver to Lender such promissory
      notes, mortgages, deeds of trust, security agreements, financing
      statements, instruments, documents and other agreements as Lender or its
      attorneys may reasonably request to evidence and secure the Loans and to
      perfect all Security Interests.

NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:

      Indebtedness and Liens. (a) Except for trade debt incurred in the normal
      course of business and indebtedness to Lender contemplated by this
      Agreement, create, incur or assume indebtedness for borrowed money,
      including capital leases, (b) except as allowed as a Permitted Lien, sell,
      transfer, mortgage, assign, pledge, lease, grant a security interest in,
      or encumber any of Borrower's assets, or (c) sell with recourse any of
      Borrower's accounts, except to Lender.

      Continuity of Operations. (a) Engage in any business activities
      substantially different than those in which Borrower is presently engaged,
      (b) cease operations, liquidate, merge, transfer, acquire or consolidate
      with any other entity, change ownership, change its name, dissolve or
      transfer or sell Collateral out of the ordinary course of business, (c)
      pay any dividends on Borrower's stock (other than dividends payable in its
      stock), provided, however that notwithstanding the foregoing, but only so
      long as no Event of Default has occurred and is continuing or would result
      from the payment of dividends, if Borrower is a "Subchapter S Corporation"
      (as defined in the Internal Revenue Code of 1986, as amended), Borrower
      may pay cash dividends on its stock to its shareholders from time to time
      in amounts necessary to enable the shareholders to pay income taxes and
      make estimated income tax payments to satisfy their liabilities under
      federal and state law which arise solely from their status as Shareholders
      of a Subchapter S Corporation because of their ownership of shares of
      stock of Borrower, or (d) purchase or retire any of Borrower's outstanding
      shares or alter or amend Borrower's capital structure.

      Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money
      or assets, (b) purchase, create or acquire any interest in any other
      enterprise or entity, or (c) incur any obligation as surety or guarantor
      other than in the ordinary course of business.

CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.

RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on the Indebtedness against any and all such accounts.

EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:

      Default on Indebtedness. Failure of Borrower to make any payment when due
      on the Loans.

      Other Defaults. Failure of Borrower or any Grantor to comply with or to
      perform when due any other term, obligation, covenant or condition
      contained in this Agreement or in any of the Related Documents, or failure
      of Borrower to comply with or to perform any other term, obligation,
      covenant or condition contained in any other agreement between Lender and
      Borrower.

      False Statements. Any warranty, representation or statement made or
      furnished to Lender by or on behalf of Borrower or any Grantor under this
      Agreement or the Related Documents is false or misleading in any material
      respect at the time made or furnished, or becomes false or misleading at
      any time thereafter.

      Defective Collateralization. This Agreement or any of the Related
      Documents ceases to be in full force and effect (including failure of any
      Security Agreement to create a valid and perfected Security Interest) at
      any time and for any reason.

      Insolvency. The dissolution or termination of Borrower's existence as a
      going business, the insolvency of Borrower, the appointment of a receiver
      for any part of Borrower's property, any assignment for the benefit of
      creditors, any type of creditor workout, or the commencement of any
      proceeding under any bankruptcy or insolvency laws by or against Borrower.

      Creditor or Forfeiture Proceedings. Commencement of foreclosure or
      forfeiture proceedings, whether by judicial proceeding, self-help,
      repossession or any other method, by any creditor of Borrower, any
      creditor of any Grantor against any collateral securing the Indebtedness,
      or by any governmental agency. This includes a garnishment, attachment, or
      levy on or of any of Borrower's deposit accounts with Lender. However,
      this Event of Default shall not apply if there is a good faith dispute by
      Borrower or Grantor, as the case may be, as to the validity or
      reasonableness of the claim which is the basis of the creditor or
      forfeiture proceeding, and if Borrower or Grantor gives Lender written
      notice of the creditor or forfeiture proceeding and furnishes reserves or
      a surety bond for the creditor or forfeiture proceeding satisfactory to
      Lender.

<PAGE>

11-19-1999                       LOAN AGREEMENT                           Page 7
Loan No 90241693                  (Continued)

      Events Affecting Guarantor. Any of the preceding events occurs with
      respect to any Guarantor of any of the Indebtedness or any Guarantor dies
      or becomes incompetent, or revokes or disputes the validity of, or
      liability under, any Guaranty of the Indebtedness. Lender, at its option,
      may, but shall not be required to, permit the Guarantor's estate to assume
      unconditionally the obligations arising under the guaranty in a manner
      satisfactory to Lender, and, in doing so, cure the Event of Default.

      Change In Ownership. Any change in ownership of twenty-five percent (25%)
      or more of the common stock of Borrower.

      Adverse Change. A material adverse change occurs in Borrower's financial
      condition, or Lender believes the prospect of payment or performance of
      the Indebtedness is impaired.

      Year 2000 Compliance Failure. Failure to meet the deadlines required in
      the Year 2000 Compliance Agreement to be Year 2000 Compliant or a
      reasonable likelihood that Borrower cannot be Year 2000 Compliant on or
      before December 31, 1999.

      Insecurity. Lender, in good faith, deems itself insecure.

      Right to Cure. If any default, other than a Default on Indebtedness, is
      curable and if Borrower or Grantor, as the case may be, has not been given
      a notice of a similar default within the preceding twelve (12) months, it
      may be cured (and no Event of Default will have occurred) if Borrower or
      Grantor, as the case may be, after receiving written notice from Lender
      demanding cure of such default: (a) cures the default within fifteen (15)
      days; or (b) if the cure requires more than fifteen (15) days, immediately
      initiates steps which Lender deems in Lender's sole discretion to be
      sufficient to cure the default and thereafter continues and completes all
      reasonable and necessary steps sufficient to produce compliance as soon as
      reasonably practical.

EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:

      Amendments. This Agreement, together with any Related Documents,
      constitutes the entire understanding and agreement of the parties as to
      the matters set forth in this Agreement. No alteration of or amendment to
      this Agreement shall be effective unless given in writing and signed by
      the party or parties sought to be charged or bound by the alteration or
      amendment.

      Applicable Law. This Agreement has been delivered to Lender and accepted
      by Lender in the State of Minnesota. If there is a lawsuit, Borrower
      agrees upon Lender's request to submit to the jurisdiction of the courts
      of HENNEPIN County, the State of Minnesota. This Agreement shall be
      governed by and construed in accordance with the laws of the State of
      Minnesota.

      Caption Headings. Caption headings in this Agreement are for convenience
      purposes only and are not to be used to interpret or define the provisions
      of this Agreement.

      Consent to Loan Participation. Borrower agrees and consents to Lender's
      sale or transfer, whether now or later, of one or more participation
      interests in the Loans to one or more purchasers, whether related or
      unrelated to Lender. Lender may provide, without any limitation
      whatsoever, to any one or more purchasers, or potential purchasers, any
      information or knowledge Lender may have about Borrower or about any other
      matter relating to the Loan, and Borrower hereby waives any rights to
      privacy it may have with respect to such matters. Borrower additionally
      waives any and all notices of sale of participation interests, as well as
      all notices of any repurchase of such participation interests. Borrower
      also agrees that the purchasers of any such participation interests will
      be considered as the absolute owners of such interests in the Loans and
      will have all the rights granted under the participation agreement or
      agreements governing the sale of such participation interests. Borrower
      further waives all rights of offset or counterclaim that it may have now
      or later against Lender or against any purchaser of such a participation
      interest and unconditionally agrees that either Lender or such purchaser
      may enforce Borrower's obligation under the Loans irrespective of the
      failure or insolvency of any holder of any interest in the Loans. Borrower
      further agrees that the purchaser of any such participation interests may
      enforce its interests irrespective of any personal claims or defenses that
      Borrower may have against Lender.

      Costs and Expenses. Borrower agrees to pay upon demand all of Lender's
      expenses, including without limitation attorneys' fees, incurred in
      connection with the preparation, execution, enforcement, modification and
      collection of this Agreement or in connection with the Loans made pursuant
      to this Agreement. Lender may pay someone else to help collect the Loans
      and to enforce this Agreement, and Borrower will pay that amount. This
      includes, subject to any limits under applicable law, Lender's attorneys'
      fees and Lender's legal expenses, whether or not there is a lawsuit,
      including attorneys' fees for bankruptcy proceedings (including efforts to
      modify or vacate any automatic stay or injunction), appeals, and any
      anticipated post-judgment collection services. Borrower also will pay any
      court costs, in addition to all other sums provided by law.

      Notices. All notices required to be given under this Agreement shall be
      given in writing, may be sent by telefacsimile (unless otherwise required
      by law), and shall be effective when actually delivered or when deposited
      with a nationally recognized overnight courier or deposited in the United
      States mail, first class, postage prepaid, addressed to the party to whom
      the notice is to be given at the address shown above. Any party may change
      its address for notices under this Agreement by giving formal written
      notice to the other parties, specifying that the purpose of the notice is
      to change the party's address. To the extent permitted by applicable law,
      if there is more than one Borrower, notice to any Borrower will constitute
      notice to all Borrowers. For notice purposes, Borrower will keep Lender
      informed at all times of Borrower's current addressees).

      Severability. If a court of competent jurisdiction finds any provision of
      this Agreement to be invalid or unenforceable as to any person or
      circumstance, such finding shall not render that provision invalid or
      unenforceable as to any other persons or circumstances. If feasible, any
      such offending provision shall be deemed to be modified to be within the
      limits of enforceability or validity; however, if the offending provision
      cannot be so modified, it shall be stricken and all other provisions of
      this Agreement in all other respects shall remain valid and enforceable.

      Subsidiaries and Affiliates of Borrower. To the extent the context of any
      provisions of this Agreement makes it appropriate, including without
      limitation any representation, warranty or covenant, the word "Borrower"
      as used herein shall include all subsidiaries and affiliates of Borrower.
      Notwithstanding the foregoing however, under no circumstances shall this
      Agreement be construed to require Lender to make any Loan or other
      financial accommodation to any subsidiary or affiliate of Borrower.

      Successors and Assigns. All covenants and agreements contained by or on
      behalf of Borrower shall bind its successors and assigns and shall inure
      to the benefit of Lender, its successors and assigns. Borrower shall not,
      however, have the right to assign its rights under this Agreement or any
      interest therein, without the prior written consent of Lender.

      Survival. All warranties, representations, and covenants made by Borrower
      in this Agreement or in any certificate or other instrument delivered by
      Borrower to Lender under this Agreement shall be considered to have been
      relied upon by Lender and will survive the making of the Loan and

<PAGE>

11-19-1999                       LOAN AGREEMENT                           Page 8
Loan No 90241693                  (Continued)

      delivery to Lender of the Related Documents, regardless of any
      investigation made by Lender or on Lender's behalf.

      Time Is of the Essence. Time is of the essence in the performance of this
      Agreement.

      Waiver. Lender shall not be deemed to have waived any rights under this
      Agreement unless such waiver is given in writing and signed by Lender. No
      delay or omission on the part of Lender in exercising any right shall
      operate as a waiver of such right or any other right. A waiver by Lender
      of a provision of this Agreement shall not prejudice or constitute a
      waiver of Lender's right otherwise to demand strict compliance with that
      provision or any other provision of this Agreement. No prior waiver by
      Lender, nor any course of dealing between Lender and Borrower, or between
      Lender and any Grantor, shall constitute a waiver of any of Lender's
      rights or of any obligations of Borrower or of any Grantor as to any
      future transactions. Whenever the consent of Lender is required under this
      Agreement, the granting of such consent by Lender in any instance shall
      not constitute continuing consent in subsequent instances where such
      consent is required, and in all cases such consent may be granted or
      withheld in the sole discretion of Lender.

BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND
BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF NOVEMBER 19, 1999.

BORROWER:

DIGITAL BIOMETRICS, INC.

By: /s/ JOHN METIL, EVP, COO & CFO

LENDER:

RIVERSIDE BANK

By: /s/ DUANE SATHER 12/30/99

    Authorized Officer

LASER PRO, Reg.U.S. Pal.& T.M.off., ver. 3.28b (c) 1999 CFI ProServices, Inc.All
rights reserved. [MN-C40 E3.28 F3.28 P3.28a 90241693.LN CL.OVL ]

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