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                                                                       W&S DRAFT
                                                                  EXECUTION COPY

[GRAPHIC OMITTED][GRAPHIC OMITTED]

                                                          AMERICAN NATIONAL BANK
                                                    AND TRUST COMPANY OF CHICAGO

                           LOAN AND SECURITY AGREEMENT

                  THIS LOAN AND SECURITY AGREEMENT (this  "Agreement"),  made as
         of the 10th day of January,  2001, by and among AMERICAN  NATIONAL BANK
         and TRUST COMPANY OF CHICAGO ("Bank"),  a national banking  association
         with its  principal  place of  business  at 120 South  LaSalle  Street,
         Chicago, Illinois 60603, National Securities Corporation,  a Washington
         corporation with its principal place of business at 1001 Fourth Avenue,
         Suite 2200, Seattle, Washington, 98154 ("Borrower") and Olympic Cascade
         Financial  Corporation,  a Delaware  corporation  ("Guarantor") for the
         limited  purposes as set forth  herein,  has reference to the following
         facts and circumstances:

               A. Pursuant to Borrower's request, Bank heretofore,  now and from
          time to time hereafter,  has and/or may loan or advance monies, extend
          credit,  and/or extend other  financial  accommodations  to or for the
          benefit of Borrower.

               B.  To  secure  repayment  of the  same  and  all of  "Borrower's
          Liabilities" (as hereinafter defined), Borrower wishes to provide Bank
          with a security interest in and/or collateral assignment of Borrower's
          assets as set forth herein.

                  NOW,  THEREFORE,  in consideration of terms and conditions set
         forth herein and of any loans or extensions of credit  heretofore,  now
         or hereafter  made to or for the benefit of Borrower the parties hereto
         agree as follows:

                            1. DEFINITIONS AND TERMS

               A. When used herein,  the words,  terms and/or  phrases set forth
          below shall have the following meanings:

               B. "ACCOUNTS": means all present and future rights of Borrower to
          payment for goods sold or leased or for services  rendered,  which are
          not evidenced by instruments or chattel paper, and whether or not they
          have been earned by performance.

               C. "ACQUISITION": means any transaction, or any series of related
          transactions,  consummated on or after the date of this Agreement,  by
          which the Borrower or Guarantor (a) acquires any going business or all
          or substantially all of the assets of any firm, corporation or limited
          liability  company,  or division thereof,  whether through purchase of
          assets, merger or otherwise or (b) directly or indirectly acquires (in
          one  transaction  or as the most  recent  transaction  in a series  of
          transactions)  at  least  a  majority  (in  number  of  votes)  of the
          securities of a corporation  which have ordinary  voting power for the
          election of directors (other than securities having such power only by
          reason of the happening of a contingency) or a majority (by percentage
          or voting

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          power) of the  outstanding  ownership  interests of a  partnership  or
          limited liability company.

               D. "ADVISERS ACT": means the Investment  Advisers Act of 1940, as
          amended from time to time.

               E.  "AFFILIATE":  means,  Guarantor,  WestAmerica  and any  other
          Person directly or indirectly, owned or
         controlled by or under common control with Guarantor or Borrower.

               F. "AMEX":  means the American  Stock  Exchange and any successor
          thereto.

               G. "AUTHORIZED OFFICER": means any of the chief executive officer
          or president of Borrower or chief  financial  officer or controller of
          Borrower or Guarantor, acting singly.

               H.   "BORROWER'S   LIABILITIES":   means  all   obligations   and
          liabilities  of  Borrower to Bank under this  Agreement  and the other
          Loan  Documents  (including  without  limitation  all  debts,  claims,
          indebtedness  and reasonable  attorneys' fees and expenses as provided
          for in Paragraph 9.13) whether primary, secondary, direct, contingent,
          fixed  or  otherwise,  including,  without  limitation,  Rate  Hedging
          Obligations   and  Letter  of  Credit   Obligations   (as  defined  in
          subsections QQ and CC,  respectively,  herein) of Borrower heretofore,
          now and/or from time to time hereafter owing, due or payable,  however
          evidenced,  created, incurred,  acquired or owing and however arising,
          whether  under  this  Agreement  or the  other  Loan  Documents  or by
          operation of law or otherwise.

               I. "BORROWING NOTICE": Means written notice to Bank substantially
          in the form of EXHIBIT A attached hereto.

               J. "CEA":  means the  Commodities  Exchange  Act, as amended from
          time to time.

               K. "CFTC":  means the Commodities  Future Trading  Commission and
          any successor.

               L. "CHARGES":  means all national,  federal, state, county, city,
          municipal and/or other governmental (or any instrumentality, division,
          agency, body or department  thereof,  including without limitation the
          Pension Benefit  Guaranty  Corporation)  taxes,  levies,  assessments,
          charges,  liens,  claims or  encumbrances  upon and/or relating to the
          "Collateral"  (as  hereinafter   defined),   Borrower's   Liabilities,
          Borrower's  business,  Borrower's  ownership  and/or use of any of its
          assets, and/or Borrower's income and/or gross receipts.

               M.  "COLLATERAL":  shall have the meaning set forth in  PARAGRAPH
          3.2.

               N. "CONTINGENT OBLIGATION":  means any agreement,  undertaking or
          arrangement  by  which  such  Person  assumes,  guarantees,  endorses,
          contingently  agrees to purchase or provide  funds for the payment of,
          or otherwise becomes or is contingently liable upon, the obligation or

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          liability of any other Person,  or agrees to maintain the net worth or
          working capital or other financial  condition of any other Person,  or
          otherwise  assures any  creditor of such other  Person  against  loss,
          including,   without   limitation,   any  comfort  letter,   operating
          agreement,  take-or-pay contract or the obligations of any such Person
          as general partner of a partnership with respect to the liabilities of
          the partnership.

               O. "CONTROL  AGREEMENT":  means a control  agreement  executed by
          Borrower, Bank and a securities intermediary of Borrower and delivered
          to Bank,  for the benefit of Bank, as it may be amended,  supplemented
          or otherwise modified from time to time.

               P. "DEFAULT":  means the occurrence of any event which,  with the
          giving of notice or lapse of time, or both,  would constitute an Event
          of Default.

               Q. "EVENT OF DEFAULT": means the occurrences set forth in Section
          8.1,  after  the  expiration  of any cure or grace  period  set  forth
          therein.

               R. "EXCHANGE ACT": means the Securities  Exchange Act of 1934, as
          amended from time to time.

               S. "FISCAL QUARTER": means one of the four three-month accounting
          periods comprising a Fiscal Year.

               T. "FISCAL YEAR": means the twelve-month accounting period ending
          on the last Friday in September of each
         year.

               U. "FOCUS REPORT":  means the Financial and Operational  Combined
          Uniform  Single Report  required to be filed on a monthly or quarterly
          basis,  as the  case may be,  with the  NASD,  or any  report  that is
          required in lieu of such report.

               V.  "GOVERNMENTAL  AUTHORITY":  means any government  (foreign or
          domestic) or any state or other political  subdivision  thereof or any
          governmental  body,  agency,   authority,   department  or  commission
          (including  without  limitation  any  taxing  authority  or  political
          subdivision)  or any  instrumentality  or officer  thereof  (including
          without  limitation  any  court  or  tribunal)  exercising  executive,
          legislative,  judicial,  regulatory or administrative  functions of or
          pertaining to government  and any  corporation,  partnership  or other
          entity directly or indirectly owned or controlled by or subject to the
          control of any of the foregoing.

               W. "GUARANTOR":  means Olympic Cascade Financial  Corporation,  a
          Delaware corporation, and its successors and assigns.

               X. "GUARANTY":  means the Guaranty,  dated as of the date hereof,
          by Guarantor in favor of the Bank, as amended from time to time.

               Y.  "INDEBTEDNESS":  means (i) indebtedness for borrowed money or
          for  the  deferred  purchase  price  of  property  or  services;  (ii)
          obligations as lessee under leases which shall have been or should be,
          in accordance with generally accepted accounting principles,  recorded
          as  capital  leases;   (iii)  obligations  under  direct  or  indirect
          guaranties in respect of, and obligations (contingent or otherwise) to
          purchase  or  otherwise  acquire,  or  otherwise  to assure a creditor
          against loss in respect of,  indebtedness  or obligations of others of
          the  kinds  referred  to in  clauses  (i)  or  (ii)  above;  and  (iv)
          liabilities  with  respect to  unfunded  vested  benefits  under plans
          covered by Title IV of the Employee  Retirement Income Security Act of
          1974, as amended ("ERISA"), and in effect from time to time.

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<PAGE>

               Z. "INVESTMENT":  of a Person means any loan, advance (other than
          commission, travel and similar advances to officers and employees made
          in the ordinary  course of business),  extension of credit (other than
          accounts  receivable  arising in the  ordinary  course of  business on
          terms  customary  in the  trade) or  contribution  of  capital by such
          Person;  stocks, bonds, mutual funds,  partnership  interests,  notes,
          debentures  or other  securities  owned by such  Person;  any  deposit
          accounts  and  certificate  of  deposit  owned  by  such  Person;  and
          structured notes,  derivative financial  instruments and other similar
          instruments or contracts owned by such Person.

               AA. "INVESTMENT COMPANY ACT": means the Investment Company Act of
          1940, as amended from time to time.

               BB. "LETTERS OF CREDIT":  means any and all commercial or standby
          Letters of Credit issued by Bank for the
         account of Borrower, Guarantor or WestAmerica.

               CC.  "LETTERS  OF  CREDIT  OBLIGATIONS":  means  all  outstanding
          obligations (including all duty, freight,  taxes, costs, insurance and
          any other charges and expenses)  incurred by Bank,  whether  direct or
          indirect,  contingent or otherwise, due or not due, in connection with
          Letters of Credit.

               DD.  "LIEN":  means any security  interest,  lien  (statutory  or
          other),   mortgage,   pledge,   hypothecation,   assignment,   deposit
          arrangement,  encumbrance  or  preference,  priority or other security
          agreement  or   preferential   arrangement   of  any  kind  or  nature
          whatsoever.

               EE. "LOANS": means, collectively,  all Revolving Loans as defined
          in PARAGRAPH 2.6.

               FF.  "LOAN  DOCUMENTS":  means this  Agreement,  any notes issued
          pursuant to SECTION 2.1, the Guaranty, and any
         Other Agreements executed by Borrower or Guarantor in favor of Bank.

               GG. "MSRB": means the Municipal  Securities  Rulemaking Board and
          any successor entity.

               HH. "MARGIN STOCK":  shall have the meaning assigned to that term
          under Regulation U.

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<PAGE>

               II. "MATERIAL ADVERSE EFFECT": means a material adverse effect on
          (a) the  business,  property,  condition  (financial  or otherwise) or
          results of operations of Borrower or Guarantor,  or (b) the ability of
          Borrower  or  Guarantor  to  perform  its  obligations  under the Loan
          Documents,  or (c) the validity or  enforceability  of any of the Loan
          Documents of the rights or remedies of the Bank thereunder.

               JJ. "MAXIMUM REVOLVING FACILITY":  means $5,000,000,  the maximum
          amount  Bank has agreed to  consider  as a ceiling on the  outstanding
          principal  balance of Revolving Loans and Letters of Credit to be made
          and issued by Bank pursuant to this Agreement.

               KK. "NSC EXCESS NET  CAPITAL":  means,  at any time,  "excess net
          capital"  computed in accordance  with Rule 15c3-1 and the alternative
          standard method set forth therein.

               LL.  "OBLIGOR":  any Person who is and/or may become obligated to
          Borrower or any Debtor under or on account of "Accounts."

               MM. "NASD": means the National Association of Securities Dealers,
          Inc., and any successor entity.

               NN. "OTHER  AGREEMENTS":  means all  agreements,  instruments and
          documents, including without limitation,  guaranties, mortgages, deeds
          of trust, notes, pledges, powers of attorney,  consents,  assignments,
          contracts,   notices,  security  agreements,   leases,   subordination
          agreements,   financing   statements  and  all  other  written  matter
          heretofore,  now and/or from time to time hereafter executed by and/or
          on behalf of Borrower, Guarantor or WestAmerica.

               OO.  "PERSONS":   means  any  individual,   sole  proprietorship,
          partnership,   joint  venture,  trust,  unincorporated   organization,
          association,  corporation,  limited  liability  company,  institution,
          entity, party or government (whether national, federal, state, county,
          city,  municipal  or  otherwise,  including  without  limitation,  any
          instrumentality, division, agency, body or department thereof.

               PP. "PROPERTY":  of a Person means any and all property,  whether
          real,  personal,  tangible,  intangible,  or mixed, of such Person, or
          other assets owned, leased or operated by such Person.

               QQ. "RATE HEDGING OBLIGATIONS":  means any and all obligations of
          Borrower,  whether  absolute or contingent  and howsoever and whenever
          created,  arising,  evidenced  or acquired  (including  all  renewals,
          extensions  and  modifications  thereof and  substitutions  therefor),
          under (i) any and all agreements designed to protect Borrower from the
          fluctuations  of  interest  rates,  exchange  rates or  forward  rates
          applicable   to  such   party's   assets,   liabilities   or  exchange
          transactions,  including,  but not  limited  to:  interest  rate  swap
          agreements,   dollar-denominated   or  cross-currency   interest  rate
          exchange agreements,  forward currency exchange  agreements,  interest
          rate cap, floor or collar agreements, forward rate currency agreements
          or agreements  relating to interest  rate options,  puts and warrants,
          and (ii) any and all agreements relating to cancellations,  buy backs,
          reversals, terminations or assignments of any of the foregoing.

                                       5
<PAGE>

               RR.  "REGULATION T": means Regulation T of the Board of Governors
          of the Federal Reserve System as from time to time in effect and shall
          include any successor or other  regulation or official  interpretation
          of such Board of  Governors  relating  to the  extension  of credit by
          securities  brokers  and  dealers  for the  purpose of  purchasing  or
          carrying margin stocks applicable to such Persons.

               SS.  "REGULATION U": means Regulation U of the Board of Governors
          of the Federal  Reserve  System as from time to time in effect and any
          successor or other regulation or official interpretation of said Board
          of  Governors  relating  to the  extension  of credit by banks for the
          purpose of  purchasing or carrying  margin  stocks  applicable to such
          Persons.

               TT.  "REGULATION X": means Regulation X of the Board of Governors
          of the Federal Reserve System as from time to time in effect and shall
          include any successor or other  regulation or official  interpretation
          of said Board of Governors  relating to the extension of credit by the
          specified  lenders for the purpose of  purchasing  or carrying  margin
          stocks applicable to such Persons.

               UU.  "RULE  15C3-1":  means Rule 15c3-1 of the General  Rules and
          Regulations  governing net capital requirements for brokers or dealers
          as promulgated by the Commission  under the Exchange Act, as such rule
          may be amended  from time to time,  or any rule or  regulation  of the
          Commission which replaces Rule 15c3-1.

               VV.  "RULE  15C3-3":  means Rule 15c3-3 of the General  Rules and
          Regulations governing customer protection with respect to reserves and
          custody of  securities  as  promulgated  by the  Commission  under the
          Exchange  Act, as such rule may be amended  from time to time,  or any
          rule or regulation of the Commission which replaces Rule 15c3-3.

               WW. "SIPA":  means the Security Investor  Protection Act of 1970,
          as amended from time to time.

               XX. "SIPC": means the Securities Investor Protection  Corporation
          or any successor entity.

               YY. "SECTION": means a numbered section of this Agreement, unless
          another document is specifically referenced.

               ZZ. "SELF-REGULATORY  ORGANIZATION":  has the meaning assigned to
          such term in Section 3(a)(26) of the Exchange Act.

               AAA.  "SUBSIDIARY":  of a Person means (a) any  corporation  more
          than 50% of the outstanding securities having ordinary voting power of
          which  shall  at  the  time  be  owned  or  controlled,   directly  or
          indirectly, by such Person or by one or more of its Subsidiaries or by
          such  Person  and  one  or  more  of  its  Subsidiaries,  or  (b)  any
          partnership,  limited liability company, association, joint venture or
          similar business organization more than 50% of the ownership interests
          having ordinary voting power of which shall at the time be so owned or
          controlled.

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               BBB. "WEEKLY CUSTOMER CREDIT/DEBIT  CALCULATION REPORTS": means a
          report containing such information as set
         forth in EXHIBIT B attached hereto and incorporated herein.

               CCC.   "WESTAMERICA":   means  WestAmerica  Investment  Group,  a
          California corporation.

               DDD.  "WESTAMERICA  EXCESS  NET  CAPITAL":  means,  at any  time,
          "excess net capital"  computed in accordance  with Rule 15c3-1 and the
          "basic" net capital computation method set forth therein.

               1.2 Except as  otherwise  defined in this  Agreement or the Other
          Agreements,  all words,  terms and/or  phrases used herein and therein
          shall be defined by the applicable definition therefor (if any) in the
          Illinois Uniform Commercial Code.

                                    2. LOANS

               2.1 Loans made by Bank to  Borrower  pursuant  to this  Agreement
          shall be  evidenced  by notes or other  instruments  issued or made by
          Borrower to Bank. Except as otherwise provided in this Agreement or in
          any notes  executed and  delivered  by Borrower to Bank in  connection
          herewith,  the principal  portion of Borrower's  Liabilities  shall be
          payable by Borrower to Bank on the maturity  date(s)  described in any
          such note(s) or other instruments  evidencing  Borrower's  Liabilities
          (as the same may be amended,  renewed or replaced) and all  reasonable
          costs,  fees  and  expenses  payable  hereunder  or  under  the  Other
          Agreements,  shall be payable by  Borrower  to the Bank on demand,  in
          either case at Bank's  principal place of business or such other place
          as Bank shall specify in writing to Borrower.

               2.2 From time to time,  Borrower,  Guarantor or  WestAmerica  may
          request that Bank issue Letters of Credit on their behalf.  Bank shall
          have no obligation to issue such Letters of Credit,  each of which may
          be issued by Bank in its sole discretion in each instance.  Any Letter
          of Credit so issued  shall be  subject  to  separate  application  and
          reimbursement  documentation  in form and  substance  satisfactory  to
          Bank. Any such Letter of Credit shall  constitute usage of the Maximum
          Revolving Facility under the terms of this Agreement.

               2.3 All of Borrower's Liabilities shall constitute one obligation
          secured by Bank's security interest in the Collateral and by all other
          security  interests,  liens, claims and encumbrances  heretofore,  now
          and/or from time to time hereafter granted by Borrower to Bank.

               2.4 Each loan made by Bank to Borrower pursuant to this Agreement
          or the Other  Agreements  shall  constitute an automatic  warranty and
          representation  by  Borrower  to Bank that there does not then exist a
          Default or an Event of Default.

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2.5      This Agreement  shall be in effect until all of Borrower's  Liabilities
         have  been  paid in full  and any and all  commitments  of Bank to make
         loans have terminated.

2.6      Subject to Section 7 and the other terms and  provisions  hereof,  Bank
         shall advance to Borrower on a revolving  credit basis (the  "Revolving
         Loans") in an amount not to exceed the Maximum Revolving Facility.

2.7      Notwithstanding  anything  contained  in this  Agreement  or the  Other
         Agreements  to  the  contrary,  the  principal  portion  of  Borrower's
         Liabilities   (including,   without   limitation,   Letter   of  Credit
         Obligations)  outstanding  at any one time shall not exceed the Maximum
         Revolving  Facility.  In the event the principal  portion of Borrower's
         Liabilities  exceeds the Maximum  Revolving  Facility,  Borrower  shall
         immediately  repay the Borrower  Liabilities in the amount necessary to
         comply with this Section 2.7

2.8      Bank's  commitment to loan shall expire on the earlier of: (i) the date
         on which  Borrower's  Liabilities  mature  under  the terms of any note
         given by  Borrower  to  Bank,  or (ii)  the  occurrence  of an Event of
         Default pursuant to Section 8 hereof.

                          3. COLLATERAL: GENERAL TERMS

               3.1  To  secure  the  prompt   payment  to  Bank  of   Borrower's
          Liabilities and the prompt, full and faithful  performance by Borrower
          of all of the provisions to be kept, observed or performed by Borrower
          under this Agreement and/or the Other  Agreements,  Borrower grants to
          Bank a security interest in and to, and collaterally  assigns to Bank,
          all of Borrower's property, wherever located, whether now or hereafter
          existing,  owned,  licensed,  leased  (to  the  extent  of  Borrower's
          leasehold  interest  therein),  consigned (to the extent of Borrower's
          ownership  therein),   arising  and/or  acquired,   including  without
          limitation  all of  Borrower's  right,  title and interest in all: (a)
          Accounts,   chattel  paper,  tax  refunds,  contract  rights,  leases,
          leasehold  interests,  letters  of  credit,  instruments,   documents,
          documents  of  title,  patents,  copyrights,  trademarks,  tradenames,
          licenses, goodwill,  beneficial interests and general intangibles; (b)
          goods whose sale,  lease or other  disposition  by Borrower have given
          rise to Accounts and have been returned to or  repossessed  or stopped
          in transit by Borrower;  (c)  investment  property,  certificated  and
          uncertificated    securities,    securities    accounts,    securities
          entitlements,  commodities  accounts and  commodities  contracts;  (d)
          goods, including without limitation all its consumer goods, machinery,
          equipment,   farm  products,   fixtures  and  inventory;   (e)  liens,
          guaranties  and other rights and  privileges  pertaining to any of the
          Collateral;  (f) monies,  reserves,  deposits,  deposit  accounts  and
          interest or dividends thereon, cash or cash equivalents;  (g) property
          now or at any time or times hereafter in the possession,  or under the
          control of Bank or its bailee;  (h) accessions to the  foregoing,  all
          litigation proceeds pertaining to the foregoing and all substitutions,
          renewals,  improvements  and  replacements  of  and  additions  to the
          foregoing;  and (i) books,  records  and  computer  records in any way
          relating to the Collateral herein described.  Notwithstanding anything
          herein to the  contrary,  Collateral  shall not include (x) items that
          are   prohibited   from  being  pledged  under  federal   statutes  or
          regulations,  and (y) assets  not  permitted  to be pledged  under the
          SEC's Customer Protection Rule 15c3-3.

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<PAGE>

               3.2 All of the  aforesaid  property  and products and proceeds of
          the foregoing in PARAGRAPH 3.1 above,  including  without  limitation,
          proceeds of  insurance  policies  insuring  the  foregoing  are herein
          individually and collectively called the "Collateral".  The terms used
          herein to identify the  Collateral  shall have the same meaning as are
          assigned to such terms as of the date hereof in the  Illinois  Uniform
          Commercial Code.

               3.3 Borrower  shall make  appropriate  entries upon its financial
          statements  and its  books  and  records  disclosing  Bank's  security
          interest in the Collateral.

               3.4 Borrower shall execute and deliver to Bank, at the request of
          Bank,  all  agreements,   instruments  and  documents   ("Supplemental
          Documentation")   that  Bank  reasonably  may  request,  in  form  and
          substance acceptable to Bank, to perfect and maintain perfected Bank's
          security interest in the Collateral and to consummate the transactions
          contemplated  in  or by  this  Agreement  and  the  Other  Agreements.
          Borrower  agrees that a  photographic  or  photostatic  copy, or other
          reproduction of this Agreement or of any financing statement, shall be
          sufficient to evidence Bank's security interest.

               3.5 Bank shall have the right  upon two (2)  business  days prior
          notice to  Borrower,  at any time  during  Borrower's  usual  business
          hours,  to inspect the  Collateral  and all related  records  (and the
          premises  upon  which it is  located)  and to verify  the  amount  and
          condition of or any other matter relating to the Collateral.

               3.6 Borrower  warrants and  represents to and covenants with Bank
          that: (a) Bank's security interest in the Collateral is now and at all
          times hereafter shall be perfected and have a first priority except as
          expressly  agreed  to in  writing  by  Bank;  (b) the  offices  and/or
          locations where Borrower keeps the Collateral are specified at the end
          of this  Paragraph  and  Borrower  shall not  remove  such  Collateral
          therefrom except as may occur in the ordinary course of business,  and
          shall  not  keep  any of  such  Collateral  at any  other  offices  or
          locations  unless  Borrower gives Bank written notice thereof at least
          thirty  (30) days  prior  thereto  and the same is within  the  United
          States of America;  and (c) the addresses specified at the end of this
          Paragraph include and designate Borrower's principal executive office,
          principal  place of business and other  offices and places of business
          and are Borrower's sole offices and places of business.  Borrower,  by
          written  notice  delivered  to Bank at least  thirty  (30) days  prior
          thereto,  shall advise Bank of Borrower's opening of any new office or
          place of business or its  closing of any  existing  office or place of
          business  and any new office or place of business  shall be within the
          United  States of  America.  Borrower  has places of  business  at the
          locations listed below:

            1) The address of Borrower shown at the beginning of this Agreement;
            2) 422 W. Riverside, Suite 1300, Spokane, Washington 99201;
            3) 120 Broadway, 28th Floor, New York, New York 10271; and
            4) 875 North Michigan Avenue, Suite 1560, Chicago, Illinois 60611.

               All of the Collateral  currently owned by Borrower and all of the
          Collateral  hereafter  acquired  is,  or will be held or stored at the
          locations listed below:

            1) The address of Borrower shown at the beginning of this Agreement;

                                       9
<PAGE>

            2) 422 W. Riverside, Suite 1300, Spokane, Washington 99201;
            3) 120 Broadway, 28th Floor, New York, New York 10271; and
            4) 875 North Michigan Avenue, Suite 1560, Chicago, Illinois 60611.

               3.7 Borrower  shall not maintain any depository  accounts  except
          such accounts currently  maintained with those financial  institutions
          set forth on EXHIBIT C attached  hereto  (each  individually  a "Local
          Account" and collectively,  the "Local  Accounts") and Bank.  Borrower
          shall deliver to Bank copies of bank statements for each Local Account
          at least once per quarter and more frequently upon Bank's request.  At
          no time shall the available funds  maintained in each individual Local
          Account exceed $200,000 or exceed  $1,000,000 in the aggregate for all
          Local Accounts for a period in excess of three (3) business days.

               3.8 Upon an Event of Default,  at the  request of Bank,  Borrower
          shall  receive,  as the sole  and  exclusive  property  of Bank and as
          trustee for Bank,  all  monies,  checks,  notes,  drafts and all other
          payments  for  and/or  proceeds  of  Collateral  which  come  into the
          possession  or under the  control of  Borrower  and  immediately  upon
          receipt  thereof,  Borrower shall remit the same (or cause the same to
          be remitted),  in kind, to Bank or at Bank's direction.  Bank may take
          control of, in any manner,  and may endorse  Borrower's name to any of
          the items of payment or proceeds described herein and, pursuant to the
          provisions  of this  Agreement,  Bank  shall  apply the same to and on
          account of Borrower's Liabilities.

               3.9 Bank may, at its option, at any time or times hereafter,  but
          shall  be  under  no  obligation  to pay,  acquire  and/or  accept  an
          assignment  of any  security  interest,  lien,  encumbrance  or  claim
          asserted by any Person against the Collateral.

               3.10 Immediately  upon Borrower's  receipt of that portion of the
          Collateral  evidenced  by an  agreement,  instrument  and/or  document
          ("Special Collateral"), Borrower shall mark the same to show that such
          Special  Collateral is subject to a security interest in favor of Bank
          and  shall  deliver  the  original  thereof  to  Bank,  together  with
          appropriate  endorsement  and/or  specific  evidence of assignment (in
          form and substance acceptable to Bank) thereof to Bank.

               3.11  Regardless  of  the  adequacy  of any  Collateral  securing
          Borrower's  Liabilities  hereunder,  any deposits or other sums at any
          time  credited  by or  payable  or due from Bank to  Borrower,  or any
          monies, cash, cash equivalents,  securities, instruments, documents or
          other  assets of  Borrower  in  possession  or  control of Bank or its
          bailee  for any  purpose  may,  upon an Event of Default be reduced to
          cash and  applied  by Bank to or  setoff  by Bank  against  Borrower's
          Liabilities hereunder.

               3.12 Upon an Event of Default,  at the request of Bank,  Borrower
          shall instruct the Obligors of its Accounts to make payments  directly
          to a  lockbox  or  cash  collateral  account  maintained  by  Bank  in
          Borrower's name. All such  collections  shall be Bank's property to be
          applied against Borrower's  Liabilities,  and not Borrower's property.
          Bank may  endorse  Borrower's  name to any of the items of  payment or
          proceeds described herein.

                                       10
<PAGE>

                            4. COLLATERAL: ACCOUNTS

               4.1 Any of Bank's  officers,  employees  or agents shall have the
          right, at any time or times  hereafter,  in Bank's name or in the name
          of a nominee  of Bank,  to verify  the  validity,  amount or any other
          matter  relating to any  Accounts  by mail,  telephone,  facsimile  or
          otherwise and to sign Borrower's name on any  verification of Accounts
          and notices thereof to Obligors. All costs, fees and expenses relating
          thereto  incurred by Bank (or for which Bank becomes  obligated) shall
          be part of  Borrower's  Liabilities,  payable by  Borrower  to Bank on
          demand.

               4.2  Bank  shall  have  the  right,  now and at any time or times
          hereafter,  at its option,  without notice thereof to Borrower: (a) to
          notify any or all Obligors  that the  Accounts and Special  Collateral
          have  been  assigned  to Bank  and the Bank  has a  security  interest
          therein;  (b) to direct such  Obligors to make all  payments  due from
          them to Borrower upon the Accounts and Special Collateral  directly to
          Bank; and (c) to enforce payment of and collect,  by legal proceedings
          or otherwise,  the Accounts and Special Collateral in the name of Bank
          and Borrower.

               4.3 Borrower,  irrevocably, hereby designates, makes, constitutes
          and appoints  Bank (and all Persons  designated by Bank) as Borrower's
          true and lawful  attorney  (and  agent-in-fact),  with power,  upon an
          Event of Default,  or an event or condition which with notice or lapse
          of time  would  constitute  an Event of  Default,  without  notice  to
          Borrower and in  Borrower's or Bank's name:  (a) to demand  payment of
          Accounts;  (b) to enforce payment of the Accounts by legal proceedings
          or otherwise;  (c) to exercise all of  Borrower's  rights and remedies
          with respect to the collection of the Accounts; (d) to settle, adjust,
          compromise,  discharge,  release, extend or renew the Accounts; (e) to
          settle,  adjust or compromise any legal proceedings brought to collect
          the Accounts;  (f) to sell or assign the Accounts upon such terms, for
          such amounts and at such time or times as Bank deems advisable; (g) to
          prepare,  file  and  sign  Borrower's  name  on any  notice  of  lien,
          assignment or satisfaction  of lien or similar  document in connection
          with the Accounts and Special Collateral;  or (h) to prepare, file and
          sign  Borrower's  name on any Proof of Claim in  Bankruptcy or similar
          document against any Obligor.

                 5. WARRANTIES, REPRESENTATIONS AND COVENANTS:
                               INSURANCE AND TAXES

               5.1  Borrower,  at its sole  cost  and  expense,  shall  keep and
          maintain:  (a) the  Collateral  insured for the full  insurable  value
          against  all  hazards and risks  ordinarily  insured  against by other
          owners or users of such  properties  in  similar  businesses;  and (b)
          business  interruption  insurance  and public  liability  and property
          damage  insurance  relating  to  Borrower's  ownership  and use of its
          assets.  All  such  policies  of  insurance  shall  be in a form  with
          insurers  and in such  amounts as may be  reasonably  satisfactory  to
          Bank.  Borrower shall deliver to Bank the original (or certified) copy
          of each  policy of  insurance,  or a  certificate  of  insurance,  and
          evidence  of  payment  of all  premiums  for each  such  policy.  Such
          policies of insurance (except those of public liability) shall contain
          a standard form lender's  loss payable  clause,  in form and substance
          acceptable  to Bank,  showing loss payable to Bank,  and shall provide
          that: (i) the insurance  companies will give Bank at least thirty (30)
          days written notice before any such

                                       11
<PAGE>

          policy or policies of insurance shall be altered or canceled; and (ii)
          no act or default of Borrower  or any other  Person  shall  effect the
          right of Bank to recover under such policy or policies of insurance in
          case of loss or damage.  Borrower  hereby  directs all insurers  under
          such policies of insurance  (except those of public  liability) to pay
          all proceeds payable thereunder directly to Bank and hereby authorizes
          Bank to make,  settle,  and  adjust  claims  under  such  policies  of
          insurance  and  endorse  the name of  Borrower  on any  check,  draft,
          instrument  or other item of payment for the proceeds of such policies
          of insurance.

               Unless  Borrower  provides  Bank with  evidence of the  insurance
          coverage  required by this Agreement,  Bank may purchase  insurance at
          Borrower's expense to protect Bank's interests in the Collateral. This
          insurance  may,  but  need  not,  protect  Borrower's  interests.  The
          coverage that Bank purchases may not pay any claim that Borrower makes
          or any claim that is made  against  Borrower  in  connection  with the
          Collateral. Borrower may later cancel any insurance purchased by Bank,
          but only after providing Bank with evidence that Borrower has obtained
          insurance as required by this Agreement.  If Bank purchases  insurance
          for the Collateral, Borrower will be responsible for the costs of that
          insurance,  including  interest and other reasonable  charges Bank may
          impose in connection  with the placement of the  insurance,  until the
          effective date of the cancellation or expiration of the insurance. The
          costs of the insurance may be added to  Borrower's  total  outstanding
          balance or obligation. The costs of the insurance may be more than the
          cost of the insurance Borrower is able to obtain on its own.

               5.2 Borrower shall pay promptly, when due, all Charges, and shall
          not  permit  any  Charges  to arise,  or to remain  and will  promptly
          discharge the same.

               6.  WARRANTIES,   REPRESENTATIONS  AND  COVENANTS:
                                     GENERAL

               6.1 Borrower  warrants and  represents to and covenants with Bank
          that:  (a)  Borrower  has the right,  power and  capacity  and is duly
          authorized and empowered to enter into,  execute,  deliver and perform
          this Agreement and the Other  Agreements;  (b) Borrower  possesses all
          licenses,   registrations  and   authorizations   from  and  with  any
          Governmental  Authority,  Self-Regulatory  Organization  or securities
          exchange  necessary  or material to the conduct of its business as now
          or  presently  proposed  to be  conducted;  (c)  Borrower  is (i) duly
          registered with the Commission as a  broker-dealer  under the Exchange
          Act, (ii) a member in good standing of the NASD and SIPC, (iii) not in
          arrears in regard to any assessment made upon it by the SIPC, and (iv)
          has received no notice from the  Commission,  NASD,  MSRB, CFTC or any
          other   Governmental   Authority,   Self-Regulatory   Organization  or
          securities   exchange  of  any  alleged   rule   violation   or  other
          circumstance  which  could  reasonably  be expected to have a Material
          Adverse  Effect,  except as disclosed in the financial  statements (as
          defined in  SECTION  6.4  below);  (d)  Guarantor  is a member in good
          standing  of the AMEX;  (e)  Borrower  has and at all times  hereafter
          shall have good,  indefeasible and merchantable title to and ownership
          of the  Collateral,  free and  clear of all  liens,  claims,  security
          interests and  encumbrances  except those of Bank; (f) Borrower is now
          and at all times hereafter,  shall be solvent and generally paying its
          debts as they  mature  and  Borrower  now owns and  shall at all times
          hereafter own property which, at a fair valuation,

                                       12
<PAGE>

          is  greater  than the sum of its  debts;  and (g)  Borrower  is not in
          default with respect to any indenture, loan agreement,  mortgage, deed
          or other  similar  agreement  relating to the  borrowing  of monies to
          which it is a party or by which it is bound  except where such default
          would not have a Material Adverse Effect.

               6.2 Borrower, with respect to itself, and Guarantor, with respect
          to itself and  WestAmerica,  warrants and  represents to and covenants
          with the Bank that Borrower,  WestAmerica  and Guarantor have complied
          in all material  respects  with all  applicable  laws,  statutes,  and
          rules,  regulations,   orders  and  decrees  or  restrictions  of  any
          Governmental  Authority,  Self-Regulatory  Organization  or securities
          exchange  having  jurisdiction  over the  conduct of their  respective
          businesses or the ownership of their respective properties (including,
          without limitation, the Exchange Act, the Advisers Act, the Investment
          Company Act, the CEA, and the applicable  rules and regulations of the
          Commission, NASD, AMEX, MSRB and CFTC), except where the failure to so
          comply  could not  reasonably  be expected to have a Material  Adverse
          Effect.  Without  limiting the foregoing,  Borrower,  WestAmerica  and
          Guarantor are in compliance with all applicable  capital  requirements
          of all Governmental Authorities (including,  without limitation,  Rule
          15c3-1).  Neither the execution and delivery by Borrower,  WestAmerica
          or Guarantor of the Loan Documents, the application of the proceeds of
          the Loans,  the  consummation of any  transaction  contemplated by the
          Loan  Documents,  nor  compliance  with  the  provisions  of the  Loan
          Documents  will,  or at the  relevant  time did,  (a) violate any law,
          rule,  regulation  (including  Regulations  T, U and X), order,  writ,
          judgment, injunction, decree or award binding on Borrower, WestAmerica
          or Guarantor,  (b) violate or conflict with Borrower's,  WestAmerica's
          or Guarantor's  charter,  articles or certificate of  incorporation or
          by-laws,  (c) violate  the  provisions  of or require the  approval or
          consent of any party to any  indenture,  instrument  or  agreement  to
          which Borrower,  WestAmerica or Guarantor is a party or is subject, or
          by which they,  or their  Property,  are bound,  or  conflict  with or
          constitute  a  default  thereunder,  or  result  in  the  creation  or
          imposition  of any Lien in, of or on the  Property  of Borrower or any
          affiliate  pursuant to the terms of any such indenture,  instrument or
          agreement,  or (d)  require  the  consent or  approval  of any Person,
          except  for any  violation  of, or failure  to obtain an  approval  or
          consent  required under,  any such indenture,  instrument or agreement
          that could not have a Material Adverse Effect.

               6.3 Borrower  warrants and  represents to and covenants  with the
          Bank  that  no  order,  consent,  approval,  qualification,   license,
          authorization,  or validation of, or filing, recording or registration
          with, or exemption by, or other action in respect of, any Governmental
          Authority,  Self-Regulatory  Organization  or  securities  exchange is
          necessary  or required in  connection  with the  execution,  delivery,
          consummation  or performance  of, or the legality,  validity,  binding
          effect  or  enforceability   of,  any  of  the  Loan  Documents,   the
          application of the proceeds of the Loans,  or the  consummation of any
          other transaction contemplated by the Loan Documents. Neither Borrower
          nor any  affiliate is in default under or in violation of any foreign,
          Federal, state or local law, rule, regulation,  order, writ, judgment,
          injunction,  decree or award binding upon or applicable to Borrower or
          such  affiliate,  in each case the  consequence  of which  default  or
          violation  could  reasonably  be expected  to have a Material  Adverse
          Effect.

               6.4 Borrower  warrants and  represents to and covenants with Bank
          that:

                                       14
<PAGE>

               (a).  Borrower has heretofore  furnished to Bank and will furnish
          to the Bank: (i) the September 24, 1999 audited consolidated financial
          statements of Borrower and its  affiliates  and (ii) the June 30, 2000
          unaudited  consolidated  financial  statements  of  Borrower  and  its
          affiliates  (collectively,  the "FINANCIAL STATEMENTS").  Borrower has
          also  heretofore  furnished to Bank the  December 31, 1999,  March 31,
          2000,  June 30, 2000 and September 30, 2000 quarterly FOCUS Reports of
          Borrower and WESTAMERICA  (the "CLOSING FOCUS  REPORTS").  The Closing
          FOCUS  Reports are correct and complete in all  material  respects and
          conform in all  material  respects to Exchange  Act  requirements  and
          applicable Commission rules and regulations.

               (b). as soon as  practicable  and in any event within 20 business
          days after the close of each month, Borrower shall deliver to Bank the
          Focus  Reports for such month filed by Borrower and  WestAmerica  with
          the Commission.

               (c).  as soon as possible  and in any event  within 10 days after
          any  Authorized  Officer of Borrower  learns  thereof,  Borrower shall
          deliver to Bank notice of the assertion or  commencement of any claim,
          action,  litigation,  suit or proceeding against or affecting Borrower
          or Guarantor,  including any investigation or proceeding  commenced by
          the Commission,  NASD, MSRB, AMEX or any other Governmental Authority,
          Self-Regulatory  Organization  or  securities  exchange,  which  could
          reasonably be expected to have a Material Adverse Effect.

               (d). as soon as  available  but not later than one hundred  (100)
          days after the close of each fiscal year of Guarantor,  Borrower shall
          deliver to Bank audited consolidated financial statements, which shall
          include, but not be limited to, balance sheets,  income statements and
          statements  of cash flow of  Guarantor,  prepared in  accordance  with
          generally  accepted  accounting   principles,   consistently  applied,
          audited by a firm of independent certified public accountants selected
          by Guarantor and acceptable to Bank.

               (e).  as soon as  available  but not later  than  fifty (50) days
          after the end of each Fiscal Quarter hereafter, Borrower shall deliver
          to Bank consolidated financial statements of Guarantor and each of its
          subsidiaries,  on a consolidated and consolidating basis, certified by
          Guarantor  to  be  prepared  in  accordance  with  generally  accepted
          accounting  principles and which fairly present the financial position
          and results of operations  of Guarantor  and each of its  subsidiaries
          for such period.

               (f).  Within 3 business  days of the last  Friday of each  month,
          Borrower  shall  deliver  to Bank  the  Weekly  CUstomer  Credit/debit
          Calculation  Reports  for  such  month  substantially  in the  form of
          EXHIBIT B attached hereto. Borrower shall deliver such reports to Bank
          on an interim basis upon Bank's written request.

               (g).   Borrower  shall  deliver  to  Bank  such  other  data  and
          information  (financial and otherwise) as Bank, from time to time, may
          reasonably request.

               6.5 Borrower,  on behalf of itself,  and Guarantor,  on behalf of
          itself,  warrants and  represents to and  covenants  with Bank that it
          shall not, without Bank's prior written consent  thereto:  (a) grant a
          security  interest in or assign any of the Collateral to any Person or
          permit, grant, or

                                       14
<PAGE>

          suffer a Lien, claim or encumbrance upon any of the Collateral, except
          Liens  (i)  incurred  in the  ordinary  course  of the  settlement  of
          securities  transactions;  (ii) imposed by law or statutory obligation
          and  incurred  in the  ordinary  course  of  business  which  are  not
          delinquent  or remain  payable  without  penalty;  (iii)  incurred  in
          respect of worker's compensation claims; or (iv) set forth on SCHEDULE
          6.5;  (b) sell or transfer any of the  Collateral  not in the ordinary
          course of business; (c) enter into any transaction not in the ordinary
          course  of  business  which  materially  and  adversely   affects  the
          Collateral or Borrower's  ability to repay  Borrower's  Liabilities or
          Indebtedness;   (d)  other  than  as  specifically   permitted  in  or
          contemplated  by this Agreement,  encumber,  pledge,  mortgage,  sell,
          lease or otherwise  dispose of or transfer,  whether by sale,  merger,
          consolidation  or  otherwise,   any  of  its  assets;  and  (e)  incur
          Indebtedness  except:  (i) unsecured trade debt in the ordinary course
          of business;  (ii) renewals or extensions of existing Indebtedness and
          interest thereon;  and (iii)  Indebtedness that is unsecured and is to
          Persons  who  execute  and  deliver  to  Bank in  form  and  substance
          reasonably acceptable to Bank and its counsel subordination agreements
          subordinating  their claims against Borrower or Guarantor  therefor to
          the  payment  of   Borrower's   Liabilities   and  of  the   Guaranty.
          Notwithstanding the foregoing,  Bank's consent will not be required in
          connection with  Acquisition  Indebtedness  described in Section 6.10,
          except  as  set  forth   therein.   In  addition,   upon  receipt  and
          satisfactory review of documentation  regarding  Borrower's  unsecured
          loan from Bear Stearns,  Bank's  consent to  Borrower's  incurrence of
          such Indebtedness shall not be unreasonably withheld.

               6.6 Borrower and  Guarantor,  will maintain the primary  treasury
          management  relationship  of each  with Bank and will  establish  such
          accounts and maintain  balances  therein with Bank sufficient to cover
          the cost of all Bank services provided; provided however, that nothing
          herein shall  require  Borrower  and  Guarantor to keep and maintain a
          specific  minimum balance in such account.  In the event that funds in
          Borrower's or Guarantor's accounts are not sufficient to cover service
          charges, they will be paid to Bank on an annual basis.

               6.7 Borrower  warrants and  represents to and covenants with Bank
          that,  neither the making of any Advance  hereunder  or the use of the
          proceeds  thereof will violate or be inconsistent  with the provisions
          of Regulation T, Regulation U or Regulation X.

               6.8 Borrower will, and Guarantor will and will cause  WestAmerica
          to,  maintain all  registrations,  licenses,  consents,  approvals and
          authorizations    from   and   with   any   Governmental    Authority,
          Self-Regulatory  Organization  or  securities  exchange  necessary  or
          material to the conduct of their respective businesses.

               6.9 Neither  Borrower nor Guarantor will create,  incur or suffer
          to exist any  Indebtedness,  except accounts  payable  incurred in the
          ordinary course of business and except:

               (a).  Securities  sold under  agreements  to  repurchase  (to the
          extent such obligations constitute Indebtedness);

               (b).   (i)  Moneys  due  to   counterparties   under  stock  loan
          transactions,  (ii) liabilities to customers for cash on deposit,  and
          (iii)  liabilities  to  brokers,  dealers and  clearing  organizations

                                       15
<PAGE>

          relating to the  settlement of securities  transactions  or secured by
          customer  securities in accordance with the SEC's Customer  Protection
          Rule 15c3-3; and

               (c). Indebtedness incurred pursuant to Section 6.10.

               6.10  Borrower  will  not  make or  suffer  to  exist,  nor  will
          Guarantor make or suffer to exist, any Investments (including, without
          limitation,   loans  and  advances  to,  and  other   Investments  in,
          Affiliates),  or commitments  therefor,  or to make any Acquisition of
          any Person, except (i) Guarantor's existing Investment in Borrower and
          additional  Investments of Guarantor in Subsidiaries,  (ii) Borrower's
          existing   Investment  in  Subsidiaries  of  Borrower,   but  not  any
          additional Investments therein,  (iii) publicly-traded  securities and
          private equity participations in the ordinary course of business, (iv)
          loans to  employees,  brokers  or  others  in the  ordinary  course of
          business which do not exceed  $100,000  individually  or $1,000,000 in
          the aggregate for Guarantor and Borrower. In addition,  upon notice to
          Bank and  provided  no Default or Event of Default  exists at the time
          of, and after giving effect to, the Acquisition, Guarantor or Borrower
          may make an  Acquisition  of assets,  personnel,  securities  or other
          equity interests in any Person if (x) the sole  consideration  for the
          Acquisition  is  the  issuance  of  stock  in  Guarantor,  and/or  the
          assumption or issuance to seller of  Indebtedness by Guarantor and, in
          the  case  of  Acquisitions  by  Borrower,  of  Borrower,  (y)  if the
          Acquisition is by Borrower, the Acquisition is of assets and not stock
          or other equity  interests of any Person,  and Bank is granted a first
          priority  security  interest  in and  pledge of the  assets  acquired,
          subject in the case of  furniture  and  equipment,  to existing  Liens
          thereon of equipment lessors or landlords of the premises acquired not
          to exceed  $50,000  in  aggregate  unpaid  rents for all such Liens in
          connection with all Acquisitions,  and (z) any Indebtedness  incurred,
          assumed by, or guaranteed by Borrower or Guarantor in connection  with
          an  Acquisition  shall be  unsecured  and shall  not  result in annual
          interest being paid on such  Indebtedness,  together with all interest
          payable  on all other  indebtedness  incurred,  guaranteed  or assumed
          under this Section 6.10,  of greater than  $250,000 in the  aggregate.
          Notwithstanding  the  foregoing,  Borrower  must obtain  Bank's  prior
          written  consent to any  Acquisition  to be made by it even  though in
          conformity  with  this  Section  6.10,   which  consent  will  not  be
          unreasonably withheld.

               6.11  Borrower  will not make or suffer to exist,  and  Guarantor
          will not make or  suffer  to  exist,  any  guaranties,  except  (i) by
          endorsement of  instruments  for deposit or collection in the ordinary
          course  of  business,   (ii)  in  connection  with  the  clearance  of
          securities  transactions in the ordinary course of business, and (iii)
          the Guaranty.

               6.12 Neither  Borrower nor  Guarantor  will merge or  consolidate
          with or into any Person.

               6.13  Borrower  shall at all times  maintain a minimum NSC Excess
          Net Capital of $2,000,000.

                                       16
<PAGE>

               6.14  Guarantor  shall  insure  that  WestAmerica  at  all  times
          maintains a minimum WestAmerica Excess Net Capital of $50,000.

               6.15 Neither  Borrower nor Guarantor will maintain any securities
          accounts   with  any  broker,   dealer,   bank  or  other   securities
          intermediary,  except  such  securities  accounts  as are pledged on a
          first  priority  basis to Bank  and  maintained  with  the  securities
          intermediary  Bear  Stearns  Securities  Corporation,  located  at One
          Metrotech Center North,  Brooklyn, NY 11201-3859,  212.272.1000 in the
          jurisdiction of .

               6.16  Borrower,  as  to  itself,  and  Guarantor  as  to  itself,
          represents and warrants that each has no Subsidiaries except for those
          Subsidiaries set forth below the name of each on SCHEDULE 6.16 hereto.

                            7. CONDITIONS PRECEDENT

               7.1 INITIAL LOANS. Bank shall not be required to make the initial
          Advance  hereunder unless Borrower has furnished the following and the
          other conditions set forth below have been satisfied,  in each case on
          a date (the "Closing Date") on or before January 10, 2001:

               (A). CHARTER DOCUMENTS; GOOD STANDING CERTIFICATES. Copies of the
         certificate of incorporation  of Borrower and Guarantor,  together with
         all  amendments  thereto,  certified  by the  Secretary of State of the
         states of  Washington  and Delaware,  respectively,  together with good
         standing certificates (i) as to Borrower, from the states of Washington
         and New York and (ii) as to the Guarantor,  from the States of Delaware
         and Illinois.

               (B). BORROWER'S BY-LAWS AND RESOLUTIONS. Copies, certified by the
          Secretary  or Assistant  Secretary of Borrower,  of its by-laws and of
          its  Board  of  Directors'  resolutions   authorizing  the  execution,
          delivery and  performance of the Loan Documents to which Borrower is a
          party.

               (C).   BORROWER'S   SECRETARY'S   CERTIFICATE.    An   incumbency
          certificate,  executed by the  Secretary  or  Assistant  Secretary  of
          Borrower,  which  shall  identify  by name  and  title  and  bear  the
          signature  of the  officers  of Borrower  authorized  to sign the Loan
          Documents and to make  borrowings  hereunder,  upon which  certificate
          Bank shall be entitled to rely until informed of any change in writing
          by Borrower.

               (D). BORROWER'S OFFICER'S CERTIFICATE.  A certificate,  dated the
          date of this  Agreement,  signed by the  chief  financial  officer  of
          Borrower,  in form and substance  satisfactory  to Bank, to the effect
          that:  (i) on such date (both  before and after  giving  effect to the
          making of any Loans  hereunder)  no Default or  Unmatured  Default has
          occurred and is continuing  and (ii) each of the  representations  and
          warranties set forth in SECTIONS 5 AND 6 of this Agreement is true and
          correct on and as of such date.

               (E).  GUARANTOR'S BY-LAWS AND RESOLUTIONS.  Copies,  certified by
          the Secretary
         or Assistant Secretary of Guarantor, of its by-laws and of its Board of

                                       17
<PAGE>

          Directors'  resolutions   authorizing  the  execution,   delivery  and
          performance of the Loan Documents to which Guarantor is a party.

               (F).   GUARANTOR'S   SECRETARY'S   CERTIFICATE.   An   incumbency
          certificate,  executed by the  Secretary  or  Assistant  Secretary  of
          Guarantor,  which  shall  identify  by name  and  title  and  bear the
          signature  of the officers of  Guarantor  authorized  to sign the Loan
          Documents, upon which certificate Bank shall be entitled to rely until
          informed of any change in writing by the Guarantor.

               (G). LEGAL OPINION.  A favorable  written opinion of Much Shelist
          Freed  Denenberg  Ament &  Rubenstein,  P.C.,  counsel to Borrower and
          Guarantor,  addressed to Bank in form and substance acceptable to Bank
          and its counsel.

               (H). LOAN DOCUMENTS.  Executed originals of this Agreement,  each
          of the other Loan  Documents  (including  any notes  requested by Bank
          pursuant to SECTION 2.1 payable to the order of Bank),  which shall be
          in full  force and  effect,  together  with all  schedules,  exhibits,
          certificates,   instruments,   opinions,   documents   and   financial
          statements required to be delivered pursuant hereto and thereto.

               (I). FINANCIAL STATEMENTS. Copies of the Financial Statements and
          the Closing FOCUS Reports referred to in SECTION 6.4.

               (J).  LETTER OF DIRECTION.  Written money  transfer  instructions
          with respect to the initial Advance and, until  otherwise  instructed,
          as to future Advances in form and substance  acceptable to Bank signed
          by an  Authorized  Officer,  together  with such other  related  money
          transfer authorizations as Bank may have reasonably requested.

               (K).  PAYMENT OF FEES.  Borrower  shall have paid all accrued and
          unpaid  fees,  costs and  expenses to the extent due and payable on or
          prior to the execution of this Agreement.

               (L). UCC FILINGS. Effected the filing of UCC financing statements
          in form and substance,  and in such locations as are,  satisfactory to
          Bank.

               (M).  PAYOFF  LETTER.  Delivered to Bank as payoff letter and UCC
          terminations  statements evidencing payment in full of Borrower's loan
          with Bank of America, N.A. and termination and release of all security
          interests  and  liens  of  Bank  of  America,   N.A.  in   Borrower's,
          Guarantor's and WestAmerica's property.

               (N).  OTHER.  Such other documents as the Bank or its counsel may
          have reasonably requested.

               7.2 EACH FUTURE  ADVANCE.  Bank shall not be required to make any
          Advance unless on the applicable Borrowing Date:

               (a).  There  exists no Default or Event of Default and none would
          result from such Advance;
                                       18
<PAGE>

               (b). The representations  and warranties  contained in SECTIONS 5
          and 6 are true and correct as of such Borrowing Date; and

               (c). A Borrowing Notice shall have been properly submitted.

          Each  Borrowing  Notice  with  respect  to  each  such  Advance  shall
          constitute  a  representation   and  warranty  by  BOrrower  that  the
          conditions contained in SECTION 7.2 have been satisfied.

                                   8. DEFAULT

               8.1 The  occurrence  of any  one of the  following  events  shall
          constitute a default ("Event of Default") under this Agreement: (a) if
          Borrower  fails  to pay any of  Borrower's  Liabilities  when  due and
          payable or declared due and payable  (whether by  scheduled  maturity,
          required payment, acceleration,  demand or otherwise); (b) if Borrower
          fails or  neglects to  perform,  keep or observe any term,  provision,
          condition,  covenant,  warranty or  representation  contained  in this
          Agreement or any of the Other  Agreements  and such failure  continues
          for 15 days after written notice from Bank; (c) occurrence of an Event
          of  Default  or  other  breach  under  any  of  the  Other  Agreements
          heretofore,  now or at any time hereafter delivered by or on behalf of
          Borrower or Guarantor to Bank; (d)  occurrence of a default under,  or
          other breach of, any agreement, instrument or document heretofore, now
          or at any  time  hereafter  delivered  to  Bank  by any  guarantor  of
          Borrower's  Liabilities  or by any Person  which has granted to Bank a
          security  interest or lien in such Person's real or personal  property
          to secure the payment of Borrower's Liabilities; (e) if the Collateral
          or any other of Borrower's or Guarantor's assets are attached, seized,
          subjected to a writ, or are levied upon or become  subject to any Lien
          or come within the possession of any receiver,  trustee,  custodian or
          assignee for the benefit of creditors;  (f) if a notice of Lien,  levy
          or  assessment is filed of record or given to Borrower with respect to
          all or any  substantial  portion of Borrower's  assets by any federal,
          state,  local  department  or agency;  (g) if  Borrower  or  Guarantor
          becomes  insolvent or generally  fails to pay or admits in writing its
          inability  to pay debts as they become due, if a petition  under Title
          11 of the United States Code or any similar law or regulation is filed
          by or against  Borrower or Guarantor,  if Borrower or Guarantor  shall
          make an  assignment  for the  benefit  of  creditors,  if any  case or
          proceeding  is filed  by or  against  Borrower  or  Guarantor  for its
          dissolution  or  liquidation,  if Borrower or  Guarantor  is enjoined,
          restrained or in any way prevented by court order from  conducting all
          or any material part of its business affairs; (h) the appointment of a
          conservator for all or any portion of Borrower's or Guarantor's assets
          or the Collateral; (i) the revocation, termination, or cancellation of
          the Guaranty  without  written  consent of Bank; (j) if a contribution
          failure occurs with respect to any pension plan maintained by Borrower
          or any corporation,  trade or business that is, along with Borrower, a
          member of a controlled  group of corporations  or controlled  group of
          trades or businesses  (as described in Sections  414(b) and (c) of the
          Internal Revenue Code of 1986 or Section 4001 of ERISA)  sufficient to
          give rise to a lien under Section 302(f) of ERISA;  (k) if Borrower or
          Guarantor   is  in  default  in  the   payment  of  any   obligations,
          indebtedness or other  liabilities to any third party and such default
          is  declared  and is not  cured  within  the time,  if any,  specified
          therefor in any  agreement  governing  the same;  (l) if any  material
          statement,  report  or  certificate  made or  delivered  by  Borrower,
          Guarantor or any of their partners,  officers,  employees or agents is
          not true and correct; (m) Guarantor ceases to own, beneficially and of
          record, all the capital

                                       19
<PAGE>

          stock  of  Borrower  or   WestAmerica,   (n)  the  Commission  or  any
          Self-Regulatory Organization has notified the SIPC pursuant to Section
          5(a)(1) of the SIPA of facts which  indicate that Borrower is in or is
          approaching   financial   difficulty,   or  the  SIPC  shall  file  an
          application  for a protective  decree with  respect to Borrower  under
          Section 5(a)(3) of the SIPA; (o) the Commission or other  Governmental
          Authority  shall  revoke or suspend  the license or  authorization  of
          Borrower,  Guarantor  or  WestAmerica  under  Federal  or state law to
          conduct  business as a securities  broker-dealer  (and such license or
          authorization  shall not be  reinstated  within 5 days),  or Borrower,
          Guarantor  or   WestAmerica   shall  be  suspended  or  expelled  from
          membership in the NASD, AMEX or any other Self-Regulatory Organization
          or securities exchange; and (p) any representation or warranty made or
          deemed made on by or on behalf of Borrower,  Guarantor or  WestAmerica
          to the Bank under or in connection with this Agreement,  any Loan, any
          Other  Agreement  or  any  certificate  or  information  delivered  in
          connection  with this  Agreement or any other Loan  Document  shall be
          materially false on the date as of which made.

               8.2 All of Bank's  rights and remedies  under this  Agreement and
          the Other Agreements are cumulative and non-exclusive.

               8.3 Upon an Event of Default or the  occurrence of any one of the
          events described in Paragraph 8.1, without notice by Bank to or demand
          by Bank of Borrower,  Bank shall have no further obligation to and may
          then forthwith  cease advancing  monies or extending  credit to or for
          the benefit of Borrower under this Agreement and the Other Agreements.
          Upon an Event of Default,  without notice by Bank to or demand by Bank
          of  Borrower,  Borrower's  Liabilities  shall be  immediately  due and
          payable.

               8.4 Upon an  Event of  Default,  Bank,  in its sole and  absolute
          discretion,  may  exercise  any one or more of the rights and remedies
          accruing to a secured party under the Uniform  Commercial  Code of the
          relevant state and any other applicable law upon default by a debtor.

               8.5 Upon an Event of Default, Borrower, as soon as practical upon
          demand by Bank, shall assemble the Collateral and make it available to
          Bank at a place or places to be designated by Bank which is reasonably
          convenient to Bank and Borrower. Borrower recognizes that in the event
          Borrower fails to perform, observe or discharge any of its obligations
          or liabilities under this Agreement or the Other Agreements, no remedy
          of law will  provide  adequate  relief to Bank,  and agrees  that Bank
          shall be entitled to temporary and permanent  injunctive relief in any
          such case without the necessity of proving actual damages.

               8.6 Upon an Event of Default,  Bank may take possession of any or
          all of the  Collateral  (in addition to Collateral of which it already
          has possession) in accordance with applicable laws, wherever it may be
          found,  and for that  purpose  may pursue the same  wherever it may be
          found, and may enter into any of Borrower's  premises where any of the
          Collateral  may  be or  is  supposed  to  be,  and  search  for,  take
          possession of, remove,  keep and store any of the Collateral until the
          same shall be sold or  otherwise  disposed of, and Bank shall have the
          right to store the same in any of Borrower's  premises without cost to
          Bank.

                                       20
<PAGE>

               8.7 Any notice required to be given by Bank of a sale,  lease, or
          other  disposition of the  Collateral or any other intended  action by
          Bank,  (i)  deposited in the United States mail,  postage  prepaid and
          duly  addressed to Borrower at the address  specified at the beginning
          of this  Agreement,  or (ii) sent via certified  mail,  return receipt
          requested,  or (iii) sent via facsimile, or (iv) delivered personally,
          not less than ten (10) days prior to such proposed action, with a copy
          to Robert Daskal,  Chief  Financial  Officer of Guarantor at 875 North
          Michigan Avenue,  Suite 1560,  Chicago,  Illinois 60611 via any method
          set forth in (i) - (iv) shall constitute  commercially  reasonable and
          fair notice to Borrower.

               8.8 Upon an Event of Default,  Borrower  agrees that Bank may, if
          Bank deems it  reasonable,  postpone  or adjourn  any such sale of the
          Collateral  from time to time by an announcement at the time and place
          of sale or by  announcement at the time and place of such postponed or
          adjourned  sale,  without being required to give a new notice of sale.
          Borrower agrees that Bank has no obligation to preserve rights against
          prior parties to the Collateral.  Further,  to the extent permitted by
          law,  Borrower  waives  and  releases  any cause of  action  and claim
          against Bank as a result of Bank's  possession,  collection or sale of
          the Collateral, any liability or penalty for failure of Bank to comply
          with any  requirement  imposed  on Bank  relating  to  notice of sale,
          holding of sale or reporting of sale of the Collateral,  and any right
          of redemption from such sale.

                                   9. GENERAL

               9.1 Borrower  waives the right to direct the  application  of any
          and all  payments at any time or times  hereafter  received by Bank on
          account of Borrower's  Liabilities and Borrower agrees that Bank shall
          have the continuing  exclusive right to apply and re-apply any and all
          such payments in such  reasonable  manner as Bank may deem  advisable,
          notwithstanding any entry by Bank upon any of its books and records.

               9.2 Borrower covenants,  warrants and represents to Bank that all
          representations and warranties by or on behalf of Borrower,  Guarantor
          or WestAmerica  contained in this  Agreement and the Other  Agreements
          shall be true in all  material  respects  from the time of  Borrower's
          execution of this  Agreement to the end of the original  term and each
          renewal term hereof.  All of Borrower's  warranties,  representations,
          undertakings,  and covenants  contained in this Agreement or the Other
          Agreements shall survive the termination or cancellation of the same.

               9.3 The  terms and  provisions  of this  Agreement  and the Other
          Agreements shall supersede any prior agreement or understanding of the
          parties hereto, and contain the entire agreement of the parties hereto
          with respect to the matters  covered  herein.  This  Agreement and the
          Other Agreements may not be modified,  altered or amended except by an
          agreement  in  writing  signed by  Borrower  and Bank.  Except for the
          provisions  of Section 2 hereof  which shall  terminate as provided in
          paragraph 2.8, this Agreement  shall continue in full force and effect
          so long as any portion or component of Borrower's Liabilities shall be
          outstanding.  Should a claim ("Recovery  Claim") be made upon the Bank
          at any time for recovery of any amount received by the Bank in payment
          of  Borrower's   Liabilities   (whether   received  from  Borrower  or
          otherwise)  and should  the Bank  repay all or part of said  amount by
          reason  of  (1)  any  judgment,  decree  or  order  of  any  court  or
          administrative  body  having  jurisdiction  over  Bank  or  any of its
          property; or (2) any

                                       21
<PAGE>

          settlement or compromise  of any such Recovery  Claim  effected by the
          Bank with the claimant  (including  Borrower),  this Agreement and the
          security  interests  granted Bank  hereunder  shall continue in effect
          with  respect  to the  amount so repaid to the same  extent as if such
          amount had never originally been received by the Bank, notwithstanding
          any prior termination of this Agreement,  the return of this Agreement
          to  Borrower,  or the  cancellation  of any note or  other  instrument
          evidencing  Borrower's  Liabilities.  Borrower may not sell, assign or
          transfer  this  Agreement,  or the  Other  Agreements  or any  portion
          thereof.

               9.4 Bank's failure to require  strict  performance by Borrower of
          any provision of this  Agreement  shall not waive,  affect or diminish
          any  right  of  Bank  thereafter  to  demand  strict   compliance  and
          performance therewith. Any suspension or waiver by Bank of an Event of
          Default by Borrower under this Agreement or the Other Agreements shall
          not  suspend,  waive or affect any other  Event of Default by Borrower
          under this  Agreement  or the Other  Agreements,  whether  the same is
          prior or subsequent  thereto and whether of the same or of a different
          type. None of the undertakings,  agreements, warranties, covenants and
          representations  of Borrower  contained in this Agreement or the Other
          Agreements and no Event of Default by Borrower under this Agreement or
          the Other  Agreements shall be deemed to have been suspended or waived
          by Bank  unless  such  suspension  or  waiver is by an  instrument  in
          writing  signed  by an  officer  of  Bank  and  directed  to  Borrower
          specifying such suspension or waiver.

               9.5 If any provision of this Agreement or the Other Agreements or
          the application  thereof to any Person or circumstance is held invalid
          or  unenforceable,  the  remainder  of this  Agreement  and the  Other
          Agreements  and the  application of such provision to other Persons or
          circumstances  will not be affected thereby and the provisions of this
          Agreement  and the Other  Agreements  shall be  severable  in any such
          instance.

               9.6 This Agreement and the Other Agreements shall be binding upon
          and inure to the benefit of the  successors  and assigns of  Borrower.
          This provision,  however,  shall not be deemed to modify Paragraph 9.3
          hereof.

               9.7  Borrower  hereby  appoints  Bank  as  Borrower's  agent  and
          attorney-in-fact  for the purpose of carrying  out the  provisions  of
          this  Agreement  and taking any action and  executing  any  agreement,
          instrument or document  which Bank may  reasonably  deem  necessary or
          advisable to  accomplish  the purposes  hereof  which  appointment  is
          irrevocable  and  coupled  with an  interest.  All monies paid for the
          purposes herein,  and all costs, fees and expenses paid or incurred in
          connection therewith, shall be part of Borrower's Liabilities, payable
          by Borrower to Bank on demand.

               9.8 This Agreement,  or a photographic  or other  reproduction of
          this Agreement or of any Uniform  Commercial Code financing  statement
          covering the Collateral or any portion thereof, shall be sufficient as
          a Uniform  Commercial  Code  financing  statement  and may be filed as
          such.

               9.9 Except as otherwise provided in the Other Agreements,  if any
          provision  contained  in  this  Agreement  is  in  conflict  with,  or
          inconsistent  with,  any  provision  in  the  Other  Agreements,   the
          provision contained in this Agreement shall govern and control.

                                       22
<PAGE>

               9.10 Except as otherwise specifically provided in this Agreement,
          Borrower  waives any and all notice or demand which  Borrower might be
          entitled to receive by virtue of any  applicable  statute or law,  and
          waives  presentment,  demand and  protest  and notice of  presentment,
          protest,   default,   dishonor,   non-payment,    maturity,   release,
          compromise,   settlement,   extension   or  renewal  of  any  and  all
          agreements, instruments or documents at any time held by Bank on which
          Borrower may in any way be liable.

               9.11  Until Bank is  notified  by  Borrower  to the  contrary  in
          writing by registered or certified  mail directed to Bank's  principal
          place of business,  the signature  upon this  Agreement or upon any of
          the Other  Agreements of any  Authorized  Officer,  partner,  manager,
          employee or agent of Borrower,  or of any other Person  designated  in
          writing to Bank by any of the  foregoing,  shall bind  Borrower and be
          deemed to be the duly authorized act of Borrower.

               9.12 THE LOAN DOCUMENTS  (OTHER THAN THOSE  CONTAINING A CONTRARY
          EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH
          THE INTERNAL LAWS  (INCLUDING,  WITHOUT  LIMITATION,  735 ILCS SECTION
          105/5-1 ET SEQ, BUT OTHERWISE  WITHOUT  REGARD TO THE CONFLICT OF LAWS
          PROVISIONS)  OF THE STATE OF  ILLINOIS,  BUT GIVING  EFFECT TO FEDERAL
          LAWS APPLICABLE TO NATIONAL BANKS.

               9.13 If at anytime or times hereafter,  whether or not Borrower's
          Liabilities  are  outstanding at such time,  Bank: (a) employs counsel
          for  advice  or  other   representation,   (i)  with  respect  to  the
          Collateral, this Agreement, the Other Agreements or the administration
          of Borrower's  Liabilities,  (ii) to represent Bank in any litigation,
          arbitration,  contest,  dispute,  suit or  proceeding  or to commence,
          defend or  intervene or to take any other action in or with respect to
          any  litigation,  arbitration,  contest,  dispute,  suit or proceeding
          (whether  instituted by Bank, Borrower or any other Person) in any way
          or respect  relating  to the  Collateral,  this  Agreement,  the Other
          Agreements,  or Borrower's  affairs, or (iii) to enforce any rights of
          Bank  against  Borrower or any other  Person which may be obligated to
          Bank by virtue of this Agreement or the Other  Agreements,  including,
          without limitation,  any Obligor; (b) takes any action with respect to
          administration of Borrower's Liabilities or to protect, collect, sell,
          liquidate or otherwise dispose of the Collateral;  and/or (c) attempts
          to or enforces any of Bank's rights or remedies  under this  Agreement
          or the Other Agreements,  including, without limitation, Bank's rights
          or remedies with respect to the Collateral,  the reasonable  costs and
          expenses  incurred  by Bank in any  manner or way with  respect to the
          foregoing,  shall  be  part  of  Borrower's  Liabilities,  payable  by
          Borrower to Bank on demand.

               9.14 The Bank may provide, without any limitation whatsoever, any
          information  or knowledge the Bank may have about the  undersigned  or
          any matter  relating to this  agreement  and any related  documents to
          BANK ONE  CORPORATION,  or any of its  subsidiaries  or  affiliates or
          their  successors,  or to any  one or  more  purchasers  or  potential
          purchasers  of  this  agreement  or any  related  documents,  and  the
          undersigned  waives any right to privacy the undersigned may have with
          respect to such matters. Borrower agrees that the Bank may at any time
          sell,  assign or transfer one or more interests or  participations  in
          all or any part of its rights or  obligations in this agreement to one
          or more purchasers whether or not related to the Bank.

                                       23
<PAGE>

               9.15 BORROWER AND GUARANTOR  IRREVOCABLY  AGREE THAT,  SUBJECT TO
          BANK'S SOLE AND ABSOLUTE  ELECTION,  ALL ACTIONS OR PROCEEDINGS IN ANY
          WAY,  MANNER OR  RESPECT,  ARISING  OUT OF OR FROM OR  RELATED TO THIS
          AGREEMENT,  THE OTHER  AGREEMENTS OR THE COLLATERAL SHALL BE LITIGATED
          ONLY IN COURTS  HAVING  SITUS  WITHIN  THE CITY OF  CHICAGO,  STATE OF
          ILLINOIS.  BORROWER  AND  GUARANTOR  HEREBY  CONSENT AND SUBMIT TO THE
          JURISDICTION OF ANY LOCAL,  STATE OR FEDERAL COURT LOCATED WITHIN SAID
          CITY AND STATE.  BORROWER AND GUARANTOR  HEREBY WAIVE ANY RIGHT EITHER
          MAY HAVE TO  TRANSFER  OR CHANGE THE VENUE OF ANY  LITIGATION  BROUGHT
          AGAINST  BORROWER  OR  GUARANTOR  BY  BANK  IN  ACCORDANCE  WITH  THIS
          PARAGRAPH.

               9.16 BORROWER AND GUARANTOR HEREBY IRREVOCABLY WAIVE ANY RIGHT TO
          TRIAL BY JURY IN ANY ACTION,  SUIT,  COUNTERCLAIM OR PROCEEDING (I) TO
          ENFORCE  OR  DEFEND  ANY  RIGHTS  UNDER  OR IN  CONNECTION  WITH  THIS
          AGREEMENT,  THE  OTHER  AGREEMENTS,  OR  ANY  AMENDMENT,   INSTRUMENT,
          DOCUMENT  OR  AGREEMENT  DELIVERED  OR  WHICH  MAY  IN THE  FUTURE  BE
          DELIVERED IN CONNECTION  HEREWITH OR  THEREWITH,  OR (II) ARISING FROM
          ANY DISPUTE OR  CONTROVERSY  ARISING IN CONNECTION  WITH OR RELATED TO
          THIS  AGREEMENT,   THE  OTHER  AGREEMENTS,   OR  ANY  SUCH  AMENDMENT,
          INSTRUMENT,  DOCUMENT OR  AGREEMENT,  AND AGREE THAT ANY SUCH  ACTION,
          SUIT, COUNTERCLAIM OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT
          BEFORE A JURY.

                            [SIGNATURE PAGE FOLLOWS]

<PAGE>

     IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and
year specified at the beginning hereof.

BORROWER:

                                             GUARANTOR  (As to matters set
                                                         forth  in  Article
                                                         6 and Article 9):

BY:                                          By:
-------------------------------                 --------------------------------

PRINT OR TYPE NAME:                          Print or Type Name:
                   ------------------------                    -----------------

ITS:                                         Its:
    ---------------------------------------     --------------------------------

     Accepted  this 10th day of  January,  2001,  at Bank's  principal  place of
business in the City of Chicago, State of Illinois.

                                                 AMERICAN NATIONAL BANK AND
                                                 TRUST COMPANY OF CHICAGO

                                                 By:
                                                     ---------------------------

                                                 Print or Type Name:
                                                             -------------------

                                                 Its:
                                                     ---------------------------
                                       25<PAGE>

                                                                   EXHIBIT 10.86

Mr. Philip Frey, Jr.
Chairman
Microsemi Corporation
2830 S. Fairview Street
Santa Ana, California 92704

Dear Phil:

        Re: Transition and Consulting Agreement

The purpose of this letter is to confirm a formal arrangement between Microsemi
Corporation (MSC) and your transition from your role as Chairman, Chief
Executive Officer and President of MSC to your continuing role as the Chairman
of the Board of Directors (BOD) and new role as a Consultant to MSC.

Also this letter restates, amends and supersedes the version of this letter as
previously signed on, before or about December 18, 2000.

As discussed with the BOD you will retire December 18, 2000, but continue to
support MSC in a consulting role.  The following items outline the specific
terms and conditions that are applicable regarding this transition and your
services as a consultant to MSC.

1.  The consulting period shall be from December 18, 2000, and shall continue
    until, December 17, 2001.

2.  In your consulting role, you shall provide consulting services as specified
    in writing by the BOD, or its designee. These assignments may cover a
    variety of projects, but will focus primarily on strategic planning,
    business acquisitions, disposition of certain assets and interface with key
    military and aerospace accounts. As a consultant, you are an independent
    contractor, responsible for the means and manner of your performance of
    these consulting services.

3.  MSC agrees to pay you the sum of Twenty Five Thousand Dollars ($ 25,000) per
    month during the consulting period under this agreement.

4.  At the date you retire you will receive pay out of all accrued vacation
    (1,574 hours) and Three Hundred and Ten Thousand Eight Hundred and Eighteen
    Dollars ($310,818) as payment of your Executive Performance Bonus for your
    fiscal year 2000 performance.

5.  Based on your December 18, 2000 retirement date, you will receive the
    initial payment of benefits from the Microsemi Corporation Supplemental
    Executive Retirement Plan of One Hundred Sixteen Thousand Five Hundred and
    Fifty Six Dollars and ninety-six Cents ($116,556.96) on February 1, 2001.

6.  MSC will provide you medical, dental and life insurance coverage during the
    consulting period of this Agreement through the company's benefits plan. You
    will not be eligible to participate in other benefit, bonus or compensations
    plans except as provided by your role on the Board of Directors and by your
    participation in the Microsemi Corporation Supplemental Executive Retirement
    Plan.
<PAGE>

7.  As part of the medical benefits commitment made by the BOD, the company will
    provide you a Medicare Supplemental Insurance policy effective January 1,
    2002. This is a lifetime benefit in recognition of your long service and
    significant contributions as Chairman, President and CEO.

8.  As part of this Agreement Microsemi Corporation agrees to pay the $34,000
    premium for your existing life insurance policy for a period of twelve
    months starting with the date of your retirement.

9.  It is understood you will be taking some personal time during this
    transition and may not be available for consulting assignments during the
    last two weeks of December and possibly some time in January.

10. All of the stock options granted to you through December 2000 will continue
    to vest until their expiration as provided in your stock option agreements,
    and to the extent that each such option agreement is vested or hereafter
    vests, it shall remain exercisable for a period ending on the earlier to
    occur of (a) the first anniversary of your death or (b) the latest
    expiration date specified in the option agreement (generally five years from
    the date of grant).

11. The Board of Directors will approve a resolution awarding you options for
    Ten Thousand (10,000) shares of MSC stock upon your retirement. The Board
    will also award you options for Five Thousand (5,000) shares of Microsemi
    Corporation stock annually, starting in 2002 as part of the recognition for
    your service and as long as you continue to serve as Chairman. Your service
    as Chairman will also include a Fifteen Thousand-Dollar ($15,000) quarterly
    retainer.

12. MSC shall pay you a $1,000 per month car allowance during the consulting
    period and reimburse you for reasonable expenses that are incurred as a
    result of the work performed by you outside of the Santa Ana, California
    area.

13. Payments made under this Agreement shall be at a rate commensurate with the
    value of the services or expenses described herein. These payments shall not
    include any amount, which will be used improperly by you to influence the
    actions of another person on MSC's behalf.

14. To the extent required by law, you shall have the rights under the
    Consolidated Omnibus Budget Reconciliation Act ("COBRA"), or any successor
    statute.

15. Excise Taxes. You will be financially responsible for any taxes imposed on
    you on account of payments by MSC to you; provided, however, that if all or
                                              --------
    any portion of the amounts payable to you or on your behalf under this
    letter agreement or otherwise are subject to the excise tax imposed by
    Section 4999 of the Internal Revenue Code of 1986, as amended (or similar
    state tax and/or assessment), the Company shall pay you an amount necessary
    to place you in the same after-tax position as you would have been had no
    such excise tax been imposed. The amount payable pursuant to the preceding
    sentence shall be grossed-up to the extent necessary to pay income and
    excise taxes due on such amount. The determination of the amount of any such
    tax indemnity shall initially be made by the independent accounting firm
    then employed by the Company. If at a later date it is determined (pursuant
    to final regulations or published rulings of the IRS, final judgment of a
    court of competent jurisdiction or otherwise) that the amount of excise
    taxes payable by you is greater than the amount initially so determined,
    then the Company (or its successor) shall pay you an amount equal to the sum
    of (1) such additional excise taxes, (2) any interest, fines and penalties
    resulting from such underpayment, plus (3) a gross-up amount necessary to
    reimburse you for any income, excise or other taxes payable by you with
    respect to the amounts specified in (1) and (2) above, and the reimbursement
    provided by this clause (3).

                                       2
<PAGE>

16. Indemnification. For at least ten (10) years following the date of your
    retirement, you shall continue to be indemnified under the Company's
    Certificate of Incorporation and Bylaws at least to the same extent
    indemnification was available prior to the date of retirement and permitted
    by law, and you shall be insured under the directors' and officers'
    liability insurance, the fiduciary liability insurance and the professional
    liability insurance policies that are the same as, or provide coverage at
    least equivalent to, those applicable or made available by the Company to
    the then members of senior management of the Company. Independent of such
    provision, if at any time you are made, or threatened to be made, a party to
    any legal action or proceeding, whether civil or criminal, by reason of the
    fact that you are or were a director or officer of the Company or serves or
    served any other corporation or entity fifty percent (50%) or more owned or
    controlled by the Company in any capacity at the Company's request, you
    shall be indemnified by the Company, and the Company shall pay your related
    expenses when and as incurred, all to the full extent permitted by law.

17. You shall deliver to MSC detailed reports and documentation if requested by
    the BOD or its designee. Your reports to MSC should disclose all work or
    services completed to date during the course of your assigned projects and
    shall be supported by appropriate documentation, such as graphs, computer
    programs, formulae, sketches, drawings, summaries and the like.

18. The liaison and general administration of this Agreement shall be through
    the BOD or its designee.

19. You shall maintain confidential and secret all MSC information which has
    been or may be disclosed to you as being confidential or secret in
    character, and you shall not disclose this information to any other person,
    firm or corporation. You shall also maintain as confidential MSC's "know-
    how" and future plans relating to the fields of endeavor in which you
    perform your services as part of this Agreement. The terms of this section
    shall survive indefinitely after any termination of the consulting period.

20. You represent and warrant that no part of the payment of any sums due and
    payable under this Agreement will in any way be paid or distributed to MSC
    or its subsidiaries and affiliates, or any of the directors, officers,
    employees or agents thereof.

21. The consulting period shall continue and is irrevocable during the initial
    term specified above. However, if the consulting period is extended, MSC may
    terminate this Agreement for its convenience upon ninety days (90) prior
    written notice. In such event, MSC's sole obligation shall be to pay you for
    any authorized work performed prior to the end of such notice period in the
    amounts as set forth in paragraphs 3, 6 and 12 above.

22. We agree to attempt to settle any dispute arising out of this Agreement, the
    execution thereof, or in connection therewith, through friendly consultation
    and negotiation in the spirit of mutual cooperation. However, if settlement
    cannot be reached within a reasonable time, then the dispute shall first be
    submitted to a mutually acceptable neutral advisor for Non-Binding
    Mediation. Neither of us shall unreasonably withhold acceptance of such
    advisor, and the party requesting such Mediation shall make the selection
    within thirty (30) days after written notice. Any disputes arising from this
    Agreement, which we cannot resolve in good faith within three (3) months of
    the date of the written request for Mediation, shall be submitted to an
    Arbitration Association consisting of retired judges for arbitration in
    accordance with its rules of procedure. The party seeking ADR as provided by
    this Agreement, agrees that the other party shall select the venue for such
    mediations and arbitration. We agree that the Arbitrator's award shall be
    final and binding upon us. During Arbitration, the terms and conditions of
    this Agreement shall be executed continuously by us except for matters in
    dispute. Each party shall be responsible for all costs associated with the
    preparation and representation by attorneys, or any other persons retained
    thereby, to assist in connection with

                                       3
<PAGE>

    any such Alternative Dispute Resolution. However, all costs charged by the
    mutually agreed upon Alternative Dispute Resolution Entity, shall be equally
    shared by us.

23. This Agreement shall be binding upon and inure to the benefit of MSC's
    successors and assigns, and shall be binding upon and inure to the benefit
    of your heirs, legal representatives, successors and assigns.

24. The validity, construction and performance of this Agreement, and the legal
    relations between the parties shall be governed by and construed in
    accordance with the laws of the State of California.

25. This Agreement shall not be assignable by you without MSC's prior written
    consent, and any purported assignment not permitted hereunder including full
    or partial assignment or delegation to any agent or subcontractor, shall be
    deemed void. This Agreement may be modified only by an instrument in writing
    and signed by you and duly authorized representatives of MSC Board of
    Directors. This document constitutes the entire Agreement between us with
    respect to the subject matter hereof, and supersedes all previous
    communications, representations, understanding and agreements either oral or
    written, between the parties or any official or representative thereof. The
    Agreement dated November 17, 1997 between the Company and you concerning
    generally a termination of your employment and change in control is hereby
    specifically terminated by written agreement effective as of the date of
    your retirement, and thereafter the Agreement dated November 17, 1997 shall
    be of no force or effect whatsoever.

26. In the event any court of competent jurisdiction determines that a
    particular provision of this Agreement is unenforceable and/or contrary to
    law, this will not affect the validity and enforceability of the other
    provisions of this Agreement in such jurisdiction, or the validity and
    enforceability of this Agreement as a whole in any other jurisdiction.

27. MSC's obligations under this Agreement shall not constitute the personal
    obligations of its shareholders, or of it's directors, officers, employees,
    consultants, agents or invitees, and you shall look only to the assets of
    MSC for the satisfaction of any liability with respect to this Agreement,
    and shall not seek recourse against its shareholders, or against its
    directors, officers, employees, consultants, agents, or invitees, or against
    their personal assets for such satisfaction.

28. Separate Counsel. You have been invited and given opportunity to engage
    separate and independent counsel to review or negotiate this Agreement, and
    you have either done so or chosen not to engage counsel.

Phil, we would like to personally thank you for your support and your many years
of service to Microsemi Corporation, its customers, employees and shareholders.
The corporation's success in large measure is a function of your many years of
dedication, contribution and sacrifice.  Much of what Microsemi has accomplished
is a direct result of your efforts.  You move into your new roles with the very
best wishes from your colleagues, co-workers and the Board of Directors.

If you agree with the foregoing terms and conditions please so indicate by
signing and dating one copy hereof at the place provided and return to us for
our records.

Respectfully,

/S/  JAMES J. PETERSON                  /S/  JOSEPH M. SCHEER
----------------------                  ---------------------
James J. Peterson                       Joseph M. Scheer
CEO and President                       Chairman, Compensation Committee

                                       4
<PAGE>

CC:  John Holtrust, Corporate VP, Human Resources

                              AGREED AND ACCEPTED
                              -------------------

            By:   /S/  PHILIP FREY, JR.
                  ---------------------
                  Philip Frey, Jr.

Date:   January 24, 2001

                                       5

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