HIRSCH INTERNATIONAL CORP
EXHIBIT 10.1
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<FILENAME>congress.txt
<DESCRIPTION>EXHIBIT 10.1
<TEXT>
                                                               [Execution Copy]










                           LOAN AND SECURITY AGREEMENT

                                 by and between

                         CONGRESS FINANCIAL CORPORATION
                                    as Lender

                                       and

                           HIRSCH INTERNATIONAL CORP.
                                   as Borrower








                         Dated: As of November 26, 2002




<TABLE>
<CAPTION>


                                                  TABLE OF CONTENTS

                                                                                                               Page

<S>     <C>                                                                                                      <C>
SECTION 1.        DEFINITIONS.....................................................................................1

SECTION 2.        CREDIT FACILITIES..............................................................................20
         2.1      Loans..........................................................................................20
         2.2      Letter of Credit Accommodations................................................................21

SECTION 3.        INTEREST AND FEES..............................................................................25
         3.1      Interest.......................................................................................25
         3.2      Closing Fee....................................................................................26
         3.3      Servicing Fee..................................................................................26
         3.4      Unused Line Fee................................................................................26
         3.5      Changes in Laws and Increased Costs of Loans...................................................26

SECTION 4.        CONDITIONS PRECEDENT...........................................................................28
         4.1      Conditions Precedent to Initial Loans and Letter of Credit Accommodations......................28
         4.2      Conditions Precedent to All Loans and Letter of Credit Accommodations..........................30

SECTION 5.        GRANT AND PERFECTION OF SECURITY INTEREST......................................................31
         5.1      Grant of Security Interest.....................................................................31
         5.2      Perfection of Security Interests...............................................................32

SECTION 6.        COLLECTION AND ADMINISTRATION..................................................................36
         6.1      Borrower's Loan Account........................................................................36
         6.2      Statements.....................................................................................36
         6.3      Collection of Accounts.........................................................................37
         6.4      Payments.......................................................................................38
         6.5      Authorization to Make Loans....................................................................39
         6.6      Use of Proceeds................................................................................39

SECTION 7.  COLLATERAL REPORTING AND COLLATERAL COVENANTS........................................................40
         7.1      Collateral Reporting...........................................................................40
         7.2      Accounts Covenants.............................................................................40
         7.3      Inventory Covenants............................................................................41
         7.4      Equipment and Real Property Covenants..........................................................42
         7.5      Power of Attorney..............................................................................42
         7.6      Right to Cure..................................................................................43
         7.7      Access to Premises.............................................................................44

SECTION 8.        REPRESENTATIONS AND WARRANTIES.................................................................44
         8.1      Corporate Existence; Power and Authority.......................................................44
         8.2      Name; State of Organization; Chief Executive Office; Collateral Locations......................45
         8.3      Financial Statements; No Material Adverse Change...............................................45
         8.4      Priority of Liens; Title to Properties.........................................................45
         8.5      Tax Returns....................................................................................45
         8.6      Litigation.....................................................................................46
         8.7      Environmental Compliance.......................................................................46
         8.8      Employee Benefits..............................................................................47
         8.9      Bank Accounts..................................................................................47
         8.10     Intellectual Property..........................................................................47
         8.11     Subsidiaries; Affiliates; Capitalization; Solvency.............................................48
         8.12     Labor Disputes.................................................................................48
         8.13     Restrictions on Subsidiaries...................................................................49
         8.14     Material Contracts.............................................................................49
         8.15     Payable Practices..............................................................................49
         8.16     Accuracy and Completeness of Information.......................................................49
         8.17     Survival of Warranties; Cumulative.............................................................49

SECTION 9.        AFFIRMATIVE AND NEGATIVE COVENANTS.............................................................50
         9.1      Maintenance of Existence.......................................................................50
         9.2      New Collateral Locations.......................................................................50
         9.3      Compliance with Laws, Regulations, Etc.........................................................50
         9.4      Payment of Taxes and Claims....................................................................52
         9.5      Insurance......................................................................................52
         9.6      Financial Statements and Other Information.....................................................52
         9.7      Sale of Assets, Consolidation, Merger, Dissolution, Etc........................................54
         9.8      Encumbrances...................................................................................57
         9.9      Indebtedness...................................................................................58
         9.10     Loans, Investments, Etc........................................................................61
         9.11     Dividends and Redemptions......................................................................64
         9.12     Transactions with Affiliates...................................................................65
         9.13     Compliance with ERISA.  .......................................................................65
         9.14     End of Fiscal Years; Fiscal Quarters...........................................................66
         9.15     Change in Business.............................................................................66
         9.16     Limitation of Restrictions Affecting Subsidiaries..............................................66
         9.17     Minimum EBITDA.................................................................................66
         9.18     Capital Expenditures...........................................................................67
         9.19     Minimum Excess Availability....................................................................67
         9.20     License Agreements.............................................................................67
         9.21     Costs and Expenses.............................................................................68
         9.22     Further Assurances.............................................................................68

SECTION 10.       EVENTS OF DEFAULT AND REMEDIES.................................................................69
         10.1     Events of Default..............................................................................69
         10.2     Remedies.......................................................................................71

SECTION 11.       JURY TRIAL WAIVER; OTHER WAIVERS.................................................................
         AND CONSENTS; GOVERNING LAW       ......................................................................74
         11.1     Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver..........................74
         11.2     Waiver of Notices..............................................................................76
         11.3     Amendments and Waivers.........................................................................76
         11.4     Waiver of Counterclaims........................................................................76
         11.5     Indemnification................................................................................76

SECTION 12.       TERM OF AGREEMENT; MISCELLANEOUS...............................................................77
         12.1     Term...........................................................................................77
         12.2     Interpretative Provisions......................................................................78
         12.3     Notices........................................................................................80
         12.4     Partial Invalidity.............................................................................80
         12.5     Confidentiality................................................................................80
         12.6     Successors.....................................................................................81
         12.7     Entire Agreement...............................................................................82
         12.8     Counterparts, Etc..............................................................................82
</TABLE>

                                    INDEX TO
                             EXHIBITS AND SCHEDULES


                  Exhibit A                 Information Certificate

                  Exhibit B                 Compliance Certificate

                  Schedule 1.37             Existing Letters of Credit




                           LOAN AND SECURITY AGREEMENT


     This Loan and Security  Agreement  dated as of November 26, 2002 is entered
into by and  between  Congress  Financial  Corporation,  a Delaware  corporation
("Lender"), and Hirsch International Corp., a Delaware corporation ("Borrower").


                              W I T N E S S E T H:
                              -------------------

     WHEREAS,   Borrower  has  requested   that  Lender  enter  into   financing
arrangements  with Borrower  pursuant to which Lender may make loans and provide
other financial accommodations to Borrower; and

     WHEREAS,  Lender is willing to make such loans and provide  such  financial
accommodations on the terms and conditions set forth herein;

     NOW,  THEREFORE,  in consideration of the mutual  conditions and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency  of  which is  hereby  acknowledged,  the  parties  hereto  agree as
follows:


SECTION 1.     DEFINITIONS
               -----------

     For  purposes  of this  Agreement,  the  following  terms  shall  have  the
respective meanings given to them below:

     1.1  "Accounts"  shall mean all  present  and future  rights of Borrower to
payment of a monetary obligation, whether or not earned by performance, which is
not evidenced by chattel paper or an instrument,  (a) for property that has been
or is to be sold, leased, licensed,  assigned, or otherwise disposed of, (b) for
services rendered or to be rendered,  (c) for a secondary obligation incurred or
to be  incurred,  or (d)  arising  out of the use of a credit or charge  card or
information contained on or for use with the card.

     1.2 "Adjusted  Eurodollar  Rate" shall mean,  with respect to each Interest
Period for any Eurodollar  Rate Loan, the rate per annum  (rounded  upwards,  if
necessary,  to the next one-sixteenth  (1/16) of one (1%) percent) determined by
dividing (a) the  Eurodollar  Rate for such Interest  Period by (b) a percentage
equal to: (i) one (1) minus (ii) the Reserve  Percentage.  For purposes  hereof,
"Reserve Percentage" shall mean the reserve percentage,  expressed as a decimal,
prescribed by any United States or foreign banking authority for determining the
reserve requirement which is or would be applicable to deposits of United States
dollars in a non-United  States or an international  banking office of Reference
Bank used to fund a Eurodollar  Rate Loan or any Eurodollar  Rate Loan made with
the proceeds of such deposit,  whether or not the Reference  Bank actually holds
or has made any such deposits or loans.  The Adjusted  Eurodollar  Rate shall be
adjusted on and as of the effective day of any change in the Reserve Percentage.

     1.3 "Affiliate" shall mean, with respect to a specified  Person,  any other
Person  which  directly  or  indirectly,  through  one or  more  intermediaries,
controls or is  controlled by or is under common  control with such Person,  and
without limiting the generality of the foregoing,  includes (a) any Person which
beneficially  owns or holds  ten  (10%)  percent  or more of any class of Voting
Stock of such Person or other equity interests in such Person, (b) any Person of
which such Person  beneficially  owns or holds ten (10%)  percent or more of any
class of Voting  Stock or in which such  Person  beneficially  owns or holds ten
(10%) percent or more of the equity  interests and (c) any director or executive
officer  of  such  Person;  provided,  that,  Pulse  Microsystems  Ltd.  and its
successors,  assigns and other Affiliates shall not be deemed to be an Affiliate
of  Borrower  solely as a result of the  ownership  by  Borrower  of warrants to
acquire Voting Stock of Pulse  Microsystems Ltd. or of warrants to acquire other
equity  interests  in  Pulse  Microsystems  Ltd.  as set  forth  in the  Warrant
Agreement,  dated October 31, 2002, by and between Pulse Microsystems,  Ltd. and
Borrower as in effect on the date hereof.  For the purposes of this  definition,
the term "control" (including with correlative  meanings,  the terms "controlled
by" and "under common control with"), as used with respect to any Person,  means
the  possession,  directly  or  indirectly,  of the power to direct or cause the
direction of the  management  and policies of such Person,  whether  through the
ownership of Voting Stock, by agreement or otherwise.

     1.4 "Arnberg  Holders"  shall mean,  as of the date of  determination,  (a)
Henry Arnberg,  his spouse, his lineal descendants  (whether natural or adopted)
and the spouses of such lineal descendants,  (b) any Person controlled by any of
the Persons included in clause (a) of this definition (as the term  "controlled"
is defined in the definition of the term "Affiliate" herein), (c) trusts for the
benefit of any of the persons included in clause (a) of this definition, and (d)
any charitable foundation a majority of whose members, trustees or directors, as
the case may be, are Persons included in clause (a) of this definition.

     1.5  "Blocked  Accounts"  shall have the  meaning  set forth in Section 6.3
hereof.

     1.6  "Borrowing  Base" shall mean,  at any time,  the amount  equal to: (a)
eighty-five (85%) percent of the Net Amount of Eligible  Accounts,  plus (b) the
lesser of: (i) sixty (60%) percent multiplied by the Value of Eligible Inventory
or (ii) eighty-five (85%) percent of the Net Recovery  Percentage  multiplied by
the Value of Eligible Inventory (such percentage of the Net Recovery  Percentage
being  forty-eight  (48%) percent as of the date  hereof),  plus (c) one hundred
(100%) percent of Eligible Cash Collateral, less (c) any Reserves (provided that
in no event  shall the amount of the  Borrowing  Base  attributable  to Eligible
Inventory  exceed  $3,000,000  at any time).  For purposes  only of applying the
sublimit on Loans based on Eligible Inventory set forth clause (b) above, Lender
may  treat  the  then   undrawn   amounts  of   outstanding   Letter  of  Credit
Accommodations for the purpose of purchasing  Eligible Inventory as Loans to the
extent  Lender  is in  effect  basing  the  issuance  of the  Letter  of  Credit
Accommodations on the Value of the Eligible  Inventory being purchased with such
Letter of Credit  Accommodations.  In  determining  the  actual  amounts of such
Letter of Credit  Accommodations  to be so treated for purposes of the sublimit,
the outstanding  Loans and Reserves shall be attributed  first to any components
of the lending  formulas set forth above that are not subject to such  sublimit,
before being  attributed to the  components of the lending  formulas  subject to
such sublimit.

     1.7  "Business  Day" shall mean any day other than a Saturday,  Sunday,  or
other day on which  commercial  banks are  authorized or required to close under
the laws of the State of New York or the State of North  Carolina,  and a day on
which the Reference  Bank and Lender are open for the  transaction  of business,
except that if a determination  of a Business Day shall relate to any Eurodollar
Rate Loans,  the term Business Day shall also exclude any day on which banks are
closed for dealings in dollar deposits in the London  interbank  market or other
applicable Eurodollar Rate market.

     1.8 "Capital  Expenditures"  shall mean all  expenditures  for any fixed or
capital assets (including, but not limited to, tooling) or improvements,  or for
replacements, substitutions or additions thereto, including, but not limited to,
the direct or  indirect  acquisition  of such  assets by way of offset  items or
otherwise and  including the principal  amount of payments in respect of Capital
Leases during the applicable  period,  but excluding the portion  thereof funded
with insurance  proceeds or condemnation  payments,  during such period,  in all
cases which would be included as additions to property,  plant and equipment for
such period in accordance with GAAP.

     1.9 "Capital Leases" shall mean, as applied to any Person, any lease of any
property  (whether  real,  personal or mixed) by such Person as lessee  which in
accordance  with GAAP,  is required to be  reflected  as a capital  lease on the
balance sheet of such Person.

     1.10 "Capital  Stock" shall mean,  with respect to any Person,  any and all
shares,  interests,  participations or other equivalents (however designated) of
such Person's capital stock or partnership,  limited  liability company or other
equity interests at any time  outstanding,  and any and all rights,  warrants or
options  exchangeable  for or  convertible  into  such  capital  stock  or other
interests  (but  excluding  any  debt  security  that  is  exchangeable  for  or
convertible into such capital stock).

     1.11 "Cash  Equivalents"  shall  mean,  at any time,  (a) any  evidence  of
Indebtedness  with a  maturity  date of one  hundred  eighty  (180) days or less
issued or  directly  and fully  guaranteed  or insured  by the United  States of
America or any agency or instrumentality thereof; provided, that, the full faith
and credit of the United  States of America is pledged in support  thereof;  (b)
certificates of deposit or bankers'  acceptances  with a maturity of one hundred
eighty (180) days or less of any financial  institution  that is a member of the
Federal Reserve System having combined capital and surplus and undivided profits
of not less than  $250,000,000;  (c) commercial paper  (including  variable rate
demand  notes)  with a maturity  of one  hundred  (180) days or less issued by a
corporation  (except an Affiliate of Borrower)  organized  under the laws of any
State of the United  States of America or the  District of Columbia and rated at
least A-1 by Standard & Poor's Ratings  Service,  a division of The  McGraw-Hill
Companies,  Inc.  or at  least  P-1 by  Moody's  Investors  Service,  Inc.;  (d)
repurchase  obligations  with a term of not  more  than  thirty  (30)  days  for
underlying  securities  of the types  described in clause (a) above entered into
with any financial institution having combined capital and surplus and undivided
profits of not less than  $250,000,000;  (e)  repurchase  agreements and reverse
repurchase  agreements  relating  to  marketable  direct  obligations  issued or
unconditionally  guaranteed  by the  United  States of  America or issued by any
governmental  agency  thereof  and  backed by the full  faith and  credit of the
United States of America,  in each case maturing within ninety (90) days or less
from the date of  acquisition;  provided,  that,  the  terms of such  agreements
comply with the  guidelines  set forth in the Federal  Financial  Agreements  of
Depository  Institutions  with Securities  Dealers and Others, as adopted by the
Comptroller  of the Currency on October 31, 1985;  and (f)  investments in money
market funds and mutual funds which invest  substantially all of their assets in
securities of the types  described in clauses (a) through (e) above (except that
such  investments  by money market funds and mutual funds may have a maturity of
up to two hundred seventy (270) days or less and may be issued by an issuer that
is not a member of the Federal Reserve System).

     1.12 "Cash Management  Account" shall mean account no. 09135825 of Borrower
at Citibank,  N.A. (or such other account as Borrower and Lender may agree) that
is used as an  investment  account and as a controlled  disbursement  account by
Borrower in the ordinary course of its business.

     1.13 "Change of Control"  shall mean (a) the  acquisition  by any Person or
group (as such term is used in Section 13(d)(3) of the Exchange Act), except for
one or  more  of the  Arnberg  Holders  or the  Levine  Holders,  of  beneficial
ownership,  directly or  indirectly,  of a majority  of the voting  power of the
total  outstanding  Voting  Stock  of  Borrower  or the  Board of  Directors  of
Borrower; (b) during any period of two (2) consecutive years, individuals who at
the  beginning  of such period  constituted  the Board of  Directors of Borrower
(together with any new directors who have been appointed by the Arnberg  Holders
or the Levine Holders,  or whose  nomination for election by the stockholders of
Borrower,  as the case may be, was approved by a vote of the number of directors
required in accordance  with  applicable law and the by-laws or other  corporate
documents  of  Borrower  then still in office who were either  directors  at the
beginning  of such  period or whose  election or  nomination  for  election  was
previously  so  approved)  cease for any reason to  constitute a majority of the
Board of  Directors  of  Borrower  then still in office;  (c) the failure of the
Arnberg  Holders and/or the Levine  Holders to own, in the aggregate,  more than
seventy-five  (75%) percent of the voting power of the total outstanding  Voting
Stock of Borrower consisting of the Class B Common Stock of Borrower; or (d) the
failure of the holders of the Class B Common Stock of Borrower to have the right
to elect two-thirds of the Board of Directors of Borrower.

     1.14 "Code" shall mean the Internal  Revenue Code of 1986,  as the same now
exists or may from time to time  hereafter be amended,  modified,  recodified or
supplemented,   together  with  all  rules,   regulations  and   interpretations
thereunder or related thereto.

     1.15 "Collateral" shall have the meaning set forth in Section 5 hereof.

     1.16 "Collateral  Access Agreement" shall mean an agreement in writing,  in
form and  substance  satisfactory  to  Lender,  from any lessor of  premises  to
Borrower,  or any other  person  to whom any  Collateral  (including  Inventory,
Equipment,  bills of lading or other documents of title) is consigned or who has
custody,  control or possession of any such Collateral or is otherwise the owner
or operator of any premises on which any of such Collateral is located, pursuant
to which such lessor,  consignee or other person,  inter alia,  acknowledges the
first priority security  interest of Lender in such Collateral,  agrees to waive
any and all claims such lessor, consignee or other person may, at any time, have
against such  Collateral,  whether for  processing,  storage or  otherwise,  and
agrees to permit  Lender  access to, and the right to remain on, the premises of
such lessor,  consignee or other  person so as to exercise  Lender's  rights and
remedies  and  otherwise  deal  with  such  Collateral  and,  in the case of any
consignee or other person who at any time has custody,  control or possession of
any  Collateral,  acknowledges  that it holds  and will hold  possession  of the
Collateral  for the benefit of Lender and agrees to follow all  instructions  of
Lender with respect thereto.

     1.17  "Consolidated  Net Income" shall mean, with respect to any Person for
any  period,  the  aggregate  of the net  income  (loss) of such  Person and its
Subsidiaries,  on a consolidated basis, for such period (excluding to the extent
included  therein any  extraordinary or  non-recurring  gains and  extraordinary
non-cash  charges) after  deducting all charges which should be deducted  before
arriving  at the net income  (loss)  for such  period  and after  deducting  the
Provision for Taxes for such period,  all as determined in accordance with GAAP;
provided,  that,  (a) the net  income of any Person  that is not a  wholly-owned
Subsidiary or that is accounted for by the equity method of accounting  shall be
included  in the  Consolidated  Net Income of a Person only to the extent of the
amount  of  dividends  or  distributions  paid or  payable  to such  Person or a
wholly-owned  Subsidiary  of such  Person;  (b)  except to the  extent  included
pursuant to the foregoing clause,  the net income of any Person accrued prior to
the date it becomes a  wholly-owned  Subsidiary of such Person or is merged into
or consolidated with such Person or any of its wholly-owned Subsidiaries or that
Person's  assets  are  acquired  by such  Person  or by any of its  wholly-owned
Subsidiaries shall be excluded;  (c) net income shall exclude interest accruing,
but not paid on indebtedness owing to a Subsidiary or parent corporation of such
Person,  which is subordinated in right of payment to the payment in full of the
Obligations,  on terms and  conditions  acceptable  to  Lender;  and (d) the net
income (if  positive)  of any  wholly-owned  Subsidiary  to the extent  that the
declaration   or  payment  of  dividends  or  similar   distributions   by  such
wholly-owned  Subsidiary to such Person or to any other wholly-owned  Subsidiary
of such Person is not at the time  permitted  by  operation  of the terms of its
charter or any agreement,  instrument, judgment, decree, order, statute, rule or
governmental  regulation applicable to such wholly-owned  Subsidiary (other than
this Agreement or any of the other Financing Agreements) shall be excluded.  For
the purposes of this definition,  net income excludes any gain and non-cash loss
(but not any cash loss)  together with any related  Provision for Taxes for such
gain and non-cash  loss (but not any cash loss)  realized upon the sale or other
disposition  of any assets that are not sold in the ordinary  course of business
(including,  without  limitation,  dispositions  pursuant to sale and  leaseback
transactions)  or of any Capital  Stock of such Person or a  Subsidiary  of such
Person.

     1.18 "Default"  shall mean an act,  condition or event which with notice or
passage of time or both would constitute an Event of Default.

     1.19  "Deposit  Account  Control  Agreement"  shall  mean an  agreement  in
writing,  in form and  substance  satisfactory  to Lender,  by and among Lender,
Borrower  and any bank at which any  deposit  account of Borrower is at any time
maintained  which  provides  that  such  bank  will  comply  with   instructions
originated by Lender  directing  disposition of the funds in the deposit account
without  further  consent by  Borrower  and such other terms and  conditions  as
Lender may  require,  including  as to any such  agreement  with  respect to any
Blocked  Account,  providing that all items received or deposited in the Blocked
Accounts  are held for the  benefit of Lender,  that the bank agrees to waive or
subordinate any lien upon, or right to setoff against, the Blocked Accounts, the
items  received for deposit  therein,  or the funds from time to time on deposit
therein  and that the bank will wire,  or  otherwise  transfer,  in  immediately
available  funds,  all collected  funds  received or deposited  into the Blocked
Accounts in accordance with the instructions of Lender.

     1.20 "EBITDA" shall mean, as to any Person,  with respect to any period, an
amount equal to: (a) the Consolidated Net Income of such Person for such period,
plus (b)  depreciation  and amortization for such period (to the extent deducted
in the computation of Consolidated Net Income of such Person), all in accordance
with GAAP, plus (c) Interest  Expense for such period (to the extent deducted in
the  computation  of  Consolidated  Net  Income  of such  Person),  plus (d) the
Provision of Taxes for such period (to the extent deducted in the computation of
Consolidated Net Income of such Person).

     1.21 "Eligible  Accounts" shall mean Accounts created by Borrower which are
and continue to be  acceptable  to Lender based on the criteria set forth below.
The criteria for Eligible Accounts include:

     (a) such Accounts  arise from the actual and bona fide sale and delivery of
goods by Borrower or rendition of services by Borrower in the ordinary course of
its business which  transactions  are completed in accordance with the terms and
provisions related thereto (as the same may be amended,  modified,  supplemented
or waived from time to time);

     (b) such  Accounts  are not  unpaid  more  than  sixty  (60)  days from the
original  due date for them,  but in any event are not unpaid  more than  ninety
(90) days after the original invoice date for them;

     (c) such Accounts comply with the terms and conditions contained in Section
7.2(b) of this Agreement;

     (d) such Accounts do not arise from sales on consignment,  guaranteed sale,
sale and return,  sale on  approval,  or other terms under which  payment by the
account debtor may be conditional or contingent;

     (e) the  account  debtor  with  respect to such  Accounts is located in the
United  States of America or Canada  (provided,  that, at any time promptly upon
Lender's  request,  Borrower shall execute and deliver,  or cause to be executed
and  delivered,  such other  agreements,  documents  and  instruments  as may be
required by Lender to perfect the security interests of Lender in those Accounts
of an account debtor that is located in Canada in accordance with the applicable
laws of the Province of Canada in which such account  debtor is located and take
or cause to be taken such  other and  further  actions as Lender may  request to
enable  Lender as secured  party with respect  thereto to collect such  Accounts
under the  applicable  Federal or  Provincial  laws of Canada)  or, at  Lender's
option,  if the account  debtor with respect to such  Accounts is located  other
than in the United States of America or Canada,  then if either: (i) the account
debtor has  delivered  to Borrower  an  irrevocable  letter of credit  issued or
confirmed by a bank satisfactory to Lender and payable only in the United States
of America and in U.S.  dollars,  sufficient to cover such Account,  in form and
substance satisfactory to Lender and if required by Lender, the original of such
letter of credit has been delivered to Lender or Lender's agent and Borrower has
complied with the terms of Section  5.2(f) hereof with respect to the assignment
of the  proceeds  of such  letter  of  credit  to  Lender  or  naming  Lender as
transferee beneficiary  thereunder,  as Lender may specify, or (ii) such Account
is subject to credit  insurance  payable to Lender  issued by an insurer  and on
terms and in an amount  acceptable to Lender, or (iii) such Account is otherwise
acceptable  in all  respects to Lender  (subject to such  lending  formula  with
respect thereto as Lender may determine);

     (f) such  Accounts  do not  consist  of  progress  billings  (such that the
obligation of the account  debtors with respect to such Accounts is  conditioned
upon Borrower's  satisfactory  completion of any further  performance  under the
agreement  giving rise thereto),  bill and hold invoices or retainage  invoices,
except as to bill and hold invoices,  if Lender shall have received an agreement
in writing  from the  account  debtor,  in form and  substance  satisfactory  to
Lender,  confirming the  unconditional  obligation of the account debtor to take
the goods related thereto and pay such invoice;

     (g) the account  debtor with  respect to such  Accounts  has not asserted a
counterclaim,  defense  or dispute  with  respect  thereto,  and is not owed any
amounts  that may give rise to any right of setoff or  recoupment  against  such
Accounts  (but the portion of the Accounts of such  account  debtor in excess of
the amount at any time and from time to time owed by  Borrower  to such  account
debtor or claimed owed by such account debtor may be deemed Eligible Accounts);

     (h) there are no  facts,  events or  occurrences  which  would  impair  the
validity, enforceability or collectability of such Accounts or reduce the amount
payable or delay  payment  thereunder  (but the portion of the  Accounts of such
account  debtor  that are not so  impaired  or reduced or delayed  may be deemed
Eligible Accounts);

     (i) such  Accounts are subject to the first  priority,  valid and perfected
security  interest of Lender and any goods giving rise thereto are not, and were
not at the time of the sale thereof, subject to any liens except those permitted
in this Agreement that are  subordinate to the security  interests of Lender and
are subject to an intercreditor  agreement in form and substance satisfactory to
Lender between Lender and the holder of such lien;

     (j) neither  the account  debtor nor any officer or employee of the account
debtor with respect to such Accounts is an Affiliate of Borrower;

     (k) the account  debtors with respect to such  Accounts are not any foreign
government,  the United  States of America,  any State,  political  subdivision,
department,  agency or instrumentality thereof, unless, if the account debtor is
the United  States of America,  any State,  political  subdivision,  department,
agency or instrumentality thereof, upon Lender's request, the Federal Assignment
of  Claims  Act of 1940,  as  amended  or any  similar  State or local  law,  if
applicable, has been complied with in a manner satisfactory to Lender;

     (l) there are no  proceedings  or actions  which are  threatened or pending
against the account  debtors with respect to such Accounts which might result in
any material  adverse change in any such account  debtor's  financial  condition
(including,  without  limitation,  any  bankruptcy,  dissolution,   liquidation,
reorganization or similar proceeding);

     (m) such  Accounts  of a single  account  debtor or its  affiliates  do not
constitute  more than twenty (20%)  percent of all otherwise  Eligible  Accounts
(but the portion of the Accounts not in excess of such  percentage may be deemed
Eligible Accounts);

     (n) such Accounts are not owed by an account debtor who has Accounts unpaid
more than sixty (60) days after the original due date for them, but in any event
unpaid more than ninety (90) days after the original invoice date for them which
constitute  more than fifty (50%) percent of the total  Accounts of such account
debtor;

     (o) the account debtor is not located in a state  requiring the filing of a
Notice  of  Business  Activities  Report  or  similar  report in order to permit
Borrower to seek judicial  enforcement in such State of payment of such Account,
unless Borrower has qualified to do business in such state or has filed a Notice
of Business  Activities Report or equivalent report for the then current year or
such failure to file and  inability to seek judicial  enforcement  is capable of
being remedied without any material delay or material cost;

     (p) such Accounts are owed by account  debtors whose total  indebtedness to
Borrower  does not exceed the credit limit with respect to such account  debtors
as determined  by Borrower from time to time in the ordinary  course of business
consistent with its current practices as of the date hereof and as is reasonably
acceptable  to Lender  (but the  portion of the  Accounts  not in excess of such
credit limit may be deemed Eligible Accounts); and

     (q) such Accounts are owed by account  debtors deemed  creditworthy  at all
times by Lender in good faith.

The criteria  for Eligible  Accounts set forth above may only be changed and any
new  criteria for Eligible  Accounts may only be  established  by Lender in good
faith based on either:  (i) an event,  condition or other  circumstance  arising
after  the date  hereof,  or (ii) an  event,  condition  or  other  circumstance
existing on the date hereof to the extent Lender has no written  notice  thereof
from Borrower prior to the date hereof,  in either case under clause (i) or (ii)
which adversely  affects or could reasonably be expected to adversely affect the
Accounts in the good faith  determination of Lender.  Any Accounts which are not
Eligible Accounts shall nevertheless be part of the Collateral.

     1.22 "Eligible Assignee" shall mean (a) the parent company of Lender and/or
any other Affiliate of Lender or its parent company or (b) any person (whether a
corporation, partnership, trust or otherwise) that is engaged in the business of
making,  purchasing,  holding or  otherwise  investing in bank loans and similar
extensions of credit in the ordinary  course of its business and is administered
or managed by Lender or the parent company of Lender and/or any other  Affiliate
of Lender or its parent company.

     1.23 "Eligible Cash Collateral" shall mean such immediately available funds
from time to time  delivered  by  Borrower to Lender then held by Lender as cash
collateral  under the terms of the Cash Collateral  Pledge  Agreement,  dated of
even date herewith,  by Borrower in favor of Lender (including the $2,000,000 in
immediately available funds delivered by Borrower to Lender on or about the date
hereof) so long as (a) all  representations  and warranties with respect thereto
set forth in such  Cash  Collateral  Pledge  Agreement  or  herein  are true and
correct and (b) Lender has not  received  any notice of an adverse  claim and no
other person has asserted any lien, interest or claim with respect thereto.

     1.24 "Eligible  Inventory"  shall mean  Inventory  consisting of new, fully
assembled embroidery machines purchased from Tajima Industries,  Ltd. within the
immediately  preceding twelve (12) consecutive months and held for resale in the
ordinary  course of the business of Borrower,  in each case which are acceptable
to Lender based on the criteria set forth below.  Eligible  Inventory  shall not
include  (a)  work-in-process;  (b)  components  which are not part of  finished
goods; (c) spare parts for equipment;  (d) packaging and shipping materials; (e)
supplies used or consumed in  Borrower's  business;  (f) Inventory  subject to a
security  interest or lien in favor of any person other than Lender except those
permitted  in this  Agreement  (but  without  limiting  the  right of  Lender to
establish any Reserves with respect to amounts secured by such security interest
or lien in favor of any  Person  even if  permitted  herein);  (g) bill and hold
goods; (h) unserviceable, obsolete or slow moving Inventory; (i) Inventory which
is not subject to the first priority,  valid and perfected  security interest of
Lender (other than liens described in Sections 9.8(b)(i),  9.8(b)(ii), 9.8(c)(i)
and 9.8(i)  hereof);  (j) returned,  damaged  and/or  defective  Inventory;  (k)
Inventory  purchased or sold on consignment;  (l) Inventory which is in transit;
and (m) Inventory at premises other than those owned and controlled by Borrower,
except any Inventory which would otherwise be deemed Eligible  Inventory that is
located  at  premises  leased and  operated  by  Borrower  may  nevertheless  be
considered Eligible Inventory, if Lender shall have received a Collateral Access
Agreement from the owner and lessor of such location, duly authorized,  executed
and  delivered by such owner and lessor and if Lender shall have  received  UCC,
tax lien and  judgment  searches  with  respect to the  jurisdiction  where such
Inventory  is located  the  results  of which  shall be  satisfactory  to Lender
(provided,  that,  only up to $500,000 of  otherwise  Eligible  Inventory in the
aggregate at all locations other than Borrower's  current  premises in Hauppage,
New York may be  considered  Eligible  Inventory).  The  criteria  for  Eligible
Inventory  set forth above may only be changed and any new criteria for Eligible
Inventory may only be established  by Lender in good faith based on either:  (i)
an event, condition or other circumstance arising after the date hereof, or (ii)
an event,  condition  or other  circumstance  existing on the date hereof to the
extent  Lender has no written  notice  thereof from  Borrower  prior to the date
hereof, in either case under clause (i) or (ii) which adversely affects or could
reasonably  be  expected to  adversely  affect the  Inventory  in the good faith
determination  of Lender.  Any Inventory  which is not Eligible  Inventory shall
nevertheless be part of the Collateral.

     1.25 "Environmental Laws" shall mean all foreign,  Federal, State and local
laws  (including  common law),  legislation,  rules,  codes,  licenses,  permits
(including  any  conditions  imposed  therein),   authorizations,   judicial  or
administrative  decisions,  injunctions or agreements  between  Borrower and any
Governmental   Authority,   (a)  relating  to  pollution  and  the   protection,
preservation  or restoration  of the  environment  (including  air, water vapor,
surface water,  ground water,  drinking  water,  drinking water supply,  surface
land, subsurface land, plant and animal life or any other natural resource), (b)
relating  to  the  exposure  to,  or the  use,  storage,  recycling,  treatment,
generation, manufacture,  processing,  distribution,  transportation,  handling,
labeling,  production,  release or disposal, or threatened release, of Hazardous
Materials,   or  (c)  relating  to  all  laws  with  regard  to   recordkeeping,
notification,   disclosure  and  reporting  requirements   respecting  Hazardous
Materials.  The term "Environmental Laws" includes (i) the Federal Comprehensive
Environmental  Response,  Compensation  and Liability  Act of 1980,  the Federal
Superfund  Amendments  and  Reauthorization  Act,  the Federal  Water  Pollution
Control Act of 1972, the Federal Clean Water Act, the Federal Clean Air Act, the
Federal Resource  Conservation and Recovery Act of 1976 (including the Hazardous
and Solid Waste  Amendments  thereto),  the Federal Solid Waste Disposal and the
Federal Toxic  Substances  Control Act, the Federal  Insecticide,  Fungicide and
Rodenticide  Act,  and  the  Federal  Safe  Drinking  Water  Act of  1974,  (ii)
applicable  state  counterparts  to such  laws,  and  (iii)  any  common  law or
equitable  doctrine  that may impose  liability or  obligations  for injuries or
damages due to, or threatened as a result of, the presence of or exposure to any
Hazardous Materials.

     1.26  "Equipment"  shall  mean all of  Borrower's  now owned and  hereafter
acquired equipment,  wherever located,  including machinery, data processing and
computer  equipment  and  computer  hardware  and  software,  whether  owned  or
licensed, and including embedded software, vehicles, tools, furniture, fixtures,
all  attachments,  accessions and property now or hereafter  affixed  thereto or
used in  connection  therewith,  and  substitutions  and  replacements  thereof,
wherever located.

     1.27  "ERISA"  shall  mean the United  States  Employee  Retirement  Income
Security Act of 1974,  together with all rules,  regulations and interpretations
thereunder or related thereto.

     1.28 "ERISA Affiliate" shall mean any person required to be aggregated with
Borrower or any of its  Subsidiaries  under Sections 414(b),  414(c),  414(m) or
414(o) of the Code.

     1.29 "ERISA  Event" shall mean (a) any  "reportable  event",  as defined in
Section 4043 of ERISA or the regulations  issued  thereunder,  with respect to a
Plan;  (b) the  adoption  of any  amendment  to a Plan that  would  require  the
provision of security pursuant to Section  401(a)(29) of the Code or Section 307
of ERISA; (c) the existence with respect to any Plan of an "accumulated  funding
deficiency"  (as  defined in Section  412 of the Code or Section  302 of ERISA),
whether or not  waived;  (d) the filing  pursuant  to Section 412 of the Code or
Section  303(d) of ERISA of an application  for a waiver of the minimum  funding
standard  with  respect  to  any  Plan;  (e)  the  occurrence  of a  "prohibited
transaction"  with  respect to which  Borrower or any of its  Subsidiaries  is a
"disqualified  person"  (within the meaning of Section 4975 of the Code) or with
respect to which Borrower or any of its Subsidiaries  could otherwise be liable;
(f) a complete or partial withdrawal by the Borrower or any ERISA Affiliate from
a  Multiemployer  Plan or a cessation of  operations  which is treated as such a
withdrawal or notification that a Multiemployer Plan is in  reorganization;  (g)
the filing of a notice of intent to terminate, the treatment of a Plan amendment
as a termination  under Section 4041 or 4041A of ERISA,  or the  commencement of
proceedings by the Pension Benefit Guaranty Corporation to terminate a Plan; (h)
an event or condition which might  reasonably be expected to constitute  grounds
under  Section 4042 of ERISA for the  termination  of, or the  appointment  of a
trustee to administer, any Plan; (i) the imposition of any liability under Title
IV of ERISA,  other than the Pension Benefit Guaranty  Corporation  premiums due
but not  delinquent  under  Section  4007 of ERISA,  upon  Borrower or any ERISA
Affiliate  in excess of  $100,000;  and (j) any other  event or  condition  with
respect to a Plan including any Plan subject to Title IV of ERISA maintained, or
contributed  to, by any ERISA  Affiliate  that could  reasonably  be expected to
result in liability of Borrower in excess of $100,000.

     1.30 "Eurodollar Rate" shall mean with respect to the Interest Period for a
Eurodollar  Rate  Loan,  the  interest  rate per annum  equal to the  arithmetic
average of the rates of interest per annum (rounded  upwards,  if necessary,  to
the next  one-sixteenth  (1/16) of one (1%) percent) at which  Reference Bank is
offered  deposits of United States  dollars in the London  interbank  market (or
other  Eurodollar Rate market selected by Borrower and approved by Lender) on or
about 9:00 a.m. (New York time) two (2) Business Days prior to the  commencement
of such Interest Period in amounts  substantially  equal to the principal amount
of  the  Eurodollar  Rate  Loans  requested  by and  available  to  Borrower  in
accordance  with this Agreement,  with a maturity of comparable  duration to the
Interest Period selected by Borrower.

     1.31  "Eurodollar  Rate Loans"  shall mean any Loans or portion  thereof on
which  interest is payable based on the Adjusted  Eurodollar  Rate in accordance
with the terms hereof.

     1.32 "Event of Default" shall mean the occurrence or existence of any event
or condition described in Section 10.1 hereof.

     1.33 "Excess  Availability" shall mean the amount, as determined by Lender,
calculated  at any time,  equal to: (a) the lesser  of: (i) the  Borrowing  Base
(without regard to any Reserves) and (ii) the Maximum Credit,  minus (b) the sum
of: (i) the amount of all then outstanding and unpaid Obligations, plus (ii) the
amount of all Reserves,  plus (iii) the aggregate amount of all then outstanding
and unpaid trade payables and other  obligations of Borrower which are more than
sixty (60) days past due as of such time,  plus (iv) the amount of checks issued
by  Borrower to pay trade  payables  and other  obligations  which are more than
sixty  (60)  days  past  due as of such  time,  but not yet  sent  (but  without
duplication of clause (b)(iii) and the book overdraft of Borrower.

     1.34  "Exchange  Act"  shall  mean  the  Securities  Exchange  Act of 1934,
together with all rules,  regulations and interpretations  thereunder or related
thereto.

     1.35  "Exchange  Rate" shall mean the  prevailing  spot rate of exchange of
Reference Bank or if such rate is not available from Reference  Bank, such other
bank as Lender may  reasonably  select  for the  purpose  of  conversion  of one
currency to another,  at or around 11:00 a.m. New York City time, on the date on
which any such conversion of currency is to be made under this Agreement.

     1.36 "Existing Lenders" shall mean,  collectively,  the lenders to Borrower
pursuant to the Revolving  Credit and Security  Agreement,  dated  September 30,
1999, by and among the lenders party thereto,  PNC Bank, National Association in
its  capacity  as agent  acting for such  lenders,  Borrower  and certain of its
affiliates,  and including  PNC Bank,  National  Association  in its capacity as
agent  acting for such lenders and in each case their  respective  predecessors,
successors and assigns;  sometimes  being referred to herein  individually as an
"Existing Lender".

     1.37 "Existing Letters of Credit" shall mean, collectively,  the letters of
credit  issued for the account of Borrower  or for which  Borrower is  otherwise
liable listed on Schedule 1.37 hereto, as the same now exist or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced.

     1.38 "Financing  Agreements" shall mean,  collectively,  this Agreement and
all notes, guarantees,  security agreements, deposit account control agreements,
investment property control agreements,  intercreditor agreements, and all other
agreements,  documents and  instruments  now or at any time  hereafter  executed
and/or delivered by Borrower or any Obligor in connection with this Agreement.

     1.39 "GAAP" shall mean  generally  accepted  accounting  principles  in the
United  States of  America  as in  effect  from time to time as set forth in the
opinions and pronouncements of the Accounting  Principles Board and the American
Institute of Certified Public  Accountants and the statements and pronouncements
of  the  Financial  Accounting  Standards  Board  which  are  applicable  to the
circumstances as of the date of determination consistently applied, except that,
if any change in generally accepted accounting  principles after the date hereof
affects the  calculation  of compliance  with the financial  covenant in Section
9.17  hereof,  Borrower  may by notice  to  Lender,  or Lender  may by notice to
Borrower, require that such covenant thereafter be calculated in accordance with
generally  accepted  accounting  principles as in effect and applied by Borrower
immediately  before  such change in  generally  accepted  accounting  principles
occurred.  If such notice is given, the financial  statements delivered pursuant
to  Section  9.6  hereof  after  such  change  occurs  shall be  accompanied  by
reconciliations  of the difference between the calculation set forth therein and
a calculation made in accordance with generally accepted  accounting  principles
as in effect from time to time after such change occurs.

     1.40  "Governmental  Authority"  shall mean any nation or  government,  any
state,  province,  or other political  subdivision thereof, any central bank (or
similar  monetary  or  regulatory  authority)  thereof,  any  entity  exercising
executive,  legislative,  judicial, regulatory or administrative functions of or
pertaining to government.

     1.41 "HAPL" shall mean HAPL Leasing, Inc., a New York corporation,  and its
successors and assigns.

     1.42  "Hazardous  Materials"  shall mean any hazardous,  toxic or dangerous
substances,  materials and wastes,  including hydrocarbons  (including naturally
occurring  or  man-made  petroleum  and  hydrocarbons),   flammable  explosives,
asbestos,  urea  formaldehyde  insulation,   radioactive  materials,  biological
substances, polychlorinated biphenyls, pesticides, herbicides and any other kind
and/or type of pollutants or  contaminants  (including  materials  which include
hazardous  constituents),  sewage, sludge,  industrial slag, solvents and/or any
other  similar  substances,   materials,  or  wastes  and  including  any  other
substances,  materials  or  wastes  that  are  or  become  regulated  under  any
Environmental  Law (including any that are or become  classified as hazardous or
toxic under any Environmental Law).

     1.43  "Indebtedness"  shall mean, with respect to any Person, any liability
(a) in respect of borrowed  money  (whether or not the recourse of the lender is
to the whole of the  assets of such  Person  or only to a  portion  thereof)  or
evidenced by bonds, notes,  debentures or similar instruments;  (b) representing
the  balance  deferred  and  unpaid of the  purchase  price of any  property  or
services (except any such balance that constitutes an account payable to a trade
creditor (whether or not an Affiliate) created,  incurred, assumed or guaranteed
by such Person in the ordinary  course of business of such Person in  connection
with obtaining goods, materials or services that is not overdue by more than one
hundred eighty (180) days,  unless the trade payable is being  contested in good
faith);  (c) all obligations as lessee under Capital Leases; (d) any contractual
obligation,  contingent or otherwise, of such Person to pay or be liable for the
payment of any  indebtedness  described in this  definition  of another  Person,
including,  without  limitation,  any such indebtedness,  directly or indirectly
guaranteed, or any agreement to purchase,  repurchase, or otherwise acquire such
indebtedness,  obligation or liability or any security  therefor,  or to provide
funds for the payment or discharge  thereof,  or to maintain  solvency,  assets,
level of income, or other financial condition;  (e) all obligations with respect
to redeemable stock and redemption or repurchase  obligations  under any Capital
Stock or other equity  securities  issued by such Person;  (f) all reimbursement
obligations  and other  liabilities  of such Person with respect to surety bonds
(whether  bid,   performance   or  otherwise),   letters  of  credit,   banker's
acceptances, drafts or similar documents or instruments issued for such Person's
account;  (g) all  indebtedness  of such  Person in respect of  indebtedness  of
another Person for borrowed money or  indebtedness  of another Person  otherwise
described in this definition which is secured by any consensual  lien,  security
interest,  collateral assignment,  conditional sale, mortgage, deed of trust, or
other encumbrance on any asset of such Person,  whether or not such obligations,
liabilities or indebtedness  are assumed by or are a personal  liability of such
Person,  all as of such time; (h) all obligations,  liabilities and indebtedness
of such Person (marked to market) arising under swap agreements,  cap agreements
and collar  agreements and other agreements or arrangements  designed to protect
such person  against  fluctuations  in interest  rates or currency or  commodity
values and (i) all obligations owed by such Person under License Agreements with
respect  to  non-refundable,  advance  or minimum  guarantee  royalty  payments;
provided,  that, in no event shall the obligations of Borrower arising under the
Pulse License  Agreement as in effect on the date hereof constitute or be deemed
to  constitute  Indebtedness  of Borrower for purposes of this  Agreement or the
other Financing Agreements.

     1.44 "Information  Certificate"  shall mean the Information  Certificate of
Borrower  constituting  Exhibit A hereto  containing  material  information with
respect  to  Borrower,  its  business  and  assets  provided  by or on behalf of
Borrower to Lender in connection  with the preparation of this Agreement and the
other Financing Agreements and the financing arrangements provided for herein.

     1.45 "Intellectual  Property" shall mean Borrower's now owned and hereafter
arising or acquired:  patents,  patent rights, patent applications,  copyrights,
works  which are the  subject  matter of  copyrights,  copyright  registrations,
trademarks,  servicemarks, trade names, trade styles, trademark and service mark
applications,  and  licenses  and  rights  to  use  any of  the  foregoing;  all
extensions,     renewals,    reissues,     divisions,     continuations,     and
continuations-in-part  of any of the  foregoing;  all  rights  to sue for  past,
present  and future  infringement  of any of the  foregoing;  inventions,  trade
secrets, formulae, processes, compounds, drawings, designs, blueprints, surveys,
reports,  manuals,  and operating  standards;  goodwill  (including any goodwill
associated  with any  trademark or the license of any  trademark);  customer and
other lists in whatever  form  maintained;  and trade secret  rights,  copyright
rights,   rights  in  works  of   authorship,   domain  names  and  domain  name
registrations;  software and contract rights  relating to software,  in whatever
form created or maintained.

     1.46 "Interest  Expense" shall mean, for any period,  as to any Person,  as
determined in accordance  with GAAP, the total interest  expense of such Person,
whether paid or accrued during such period (including the interest  component of
Capital Leases for such period),  including,  without  limitation,  discounts in
connection  with  the  sale of any  Accounts,  but  excluding  interest  paid in
property other than cash and any other interest expense not payable in cash.

     1.47 "Interest Period" shall mean for any Eurodollar Rate Loan, a period of
approximately  one (1),  two (2), or three (3) months  duration as Borrower  may
elect,  the exact  duration to be determined  in  accordance  with the customary
practice in the applicable Eurodollar Rate market;  provided, that, Borrower may
not  elect  an  Interest  Period  which  will  end  after  the  last  day of the
then-current term of this Agreement.

     1.48  "Interest  Rate" shall mean, as to Prime Rate Loans,  a rate equal to
three-quarters  (3/4%)  percent per annum in excess of the Prime Rate and, as to
Eurodollar  Rate Loans,  a rate of three and one-half (3 1/2%) percent per annum
in  excess  of the  Adjusted  Eurodollar  Rate  (based  on the  Eurodollar  Rate
applicable for the Interest  Period  selected by Borrower as in effect three (3)
Business Days after the date of receipt by Lender of the request of Borrower for
such  Eurodollar  Rate Loans in accordance  with the terms hereof,  whether such
rate is higher or lower than any rate previously quoted to Borrower);  provided,
that,  notwithstanding  anything to the contrary  contained herein, the Interest
Rate shall mean the rate of two and three-quarters (2 3/4%) percent per annum in
excess  of the  Prime  Rate as to  Prime  Rate  Loans  and the  rate of five and
one-half (5 1/2%) percent per annum in excess of the Adjusted Eurodollar Rate as
to Eurodollar Rate Loans, at Lender's option, without notice, (a) either (i) for
the period on and after the date of termination or non-renewal hereof until such
time  as all  Obligations  are  indefeasibly  paid  and  satisfied  in  full  in
immediately  available  funds, or (ii) for the period from and after the date of
the occurrence of any Event of Default, and for so long as such Event of Default
is  continuing  as  determined  by  Lender  and  (b) on the  Loans  at any  time
outstanding  in excess of the  amounts  available  to Borrower  under  Section 2
(whether  or not such  excess(es)  arise or are made  with or  without  Lender's
knowledge or consent and whether made before or after an Event of Default).

     1.49  "Inventory"  shall  mean all of  Borrower's  now owned and  hereafter
existing or acquired goods,  wherever located,  which (a) are leased by Borrower
as lessor; (b) are held by Borrower for sale or lease or to be furnished under a
contract of service;  (c) are furnished by Borrower under a contract of service;
or (d) consist of raw  materials,  work in process,  finished goods or materials
used or consumed in its business.

     1.50  "Investment  Property  Control  Agreement" shall mean an agreement in
writing,  in form and  substance  satisfactory  to Lender,  by and among Lender,
Borrower and any securities intermediary, commodity intermediary or other person
who has custody,  control or possession of any  investment  property of Borrower
acknowledging that such securities intermediary, commodity intermediary or other
person has custody,  control or possession of such investment property on behalf
of Lender, that it will comply with entitlement orders originated by Lender with
respect to such investment property, or other instructions of Lender, or (as the
case may be) apply any value distributed on account of any commodity contract as
directed by Lender,  in each case,  without the further  consent of Borrower and
including such other terms and conditions as Lender may require.

     1.51 "Lender Payment Account" shall mean account no. 500000003029 of Lender
at Wachovia Bank, National Association or such other account of Lender as Lender
may from time to time  designate to Borrower as the Lender  Payment  Account for
purposes of this Agreement.

     1.52 "Letter of Credit Accommodations" shall mean, collectively, letters of
credit (and banker's  acceptances  issued with respect to drafts presented under
letters of credit) and  merchandise  purchase or other  guaranties  in each case
which  are from time to time  either  (a)  issued  or  opened by Lender  for the
account of Borrower or (b) with respect to which Lender have agreed to indemnify
the issuer or  guaranteed  to the  issuer the  performance  by  Borrower  of its
obligations to such issuer; sometimes being referred to herein individually as a
"Letter of Credit Accommodation".  The term "banker's acceptance" as used herein
shall  refer to a time draft  that is an order  issued by the  beneficiary  of a
letter of credit as the drawer of the time draft  instructing  the issuer of the
letter of credit as the  drawee to pay the  amount  specified  in the time draft
that has been accepted by a bank.

     1.53 "Levine Holders" shall mean, as of the date of determination, (a) Paul
Levine, his spouse, his lineal descendants  (whether natural or adopted) and the
spouses of such  lineal  descendants,  (b) any Person  controlled  by any of the
Persons  included in clause (a) of this definition (as the term  "controlled" is
defined in the definition of the term  "Affiliate"  herein),  (c) trusts for the
benefit of any of the persons included in clause (a) of this definition, and (d)
any charitable foundation a majority of whose members, trustees or directors, as
the case may be, are Persons included in clause (a) of this definition.

     1.54 "License  Agreements" shall have the meaning set forth in Section 8.10
hereof.

     1.55 "Loans" shall mean the loans now or hereafter made by Lender to or for
the benefit of Borrower on a revolving basis (involving advances, repayments and
readvances) as set forth in Section 2.1 hereof.

     1.56  "Material  Contract"  shall mean (a) any contract or other  agreement
(other than the Financing  Agreements),  written or oral, of Borrower  involving
monetary  liability of or to any Person in an amount in excess of  $1,000,000 in
any fiscal year and (b) any other  contract or other  agreement  (other than the
Financing Agreements),  whether written or oral, to which Borrower is a party as
to which the  breach,  nonperformance,  cancellation  or failure to renew by any
party thereto  would have a material  adverse  effect on the  business,  assets,
condition  (financial  or  otherwise)  or results of  operations or prospects of
Borrower or the validity or enforceability  of this Agreement,  any of the other
Financing  Agreements,  or any of the rights and remedies of Lender hereunder or
thereunder;  provided that, in no event shall the Pulse License  Agreement as in
effect on the date  hereof  be deemed to  constitute  a  Material  Contract  for
purposes of this Agreement and the other Financing Agreements.

     1.57 "Maturity  Date" shall mean the date that is the third  anniversary of
the date of this Agreement.

     1.58 "Maximum Credit" shall mean the amount of $12,000,000.

     1.59 "Multiemployer Plan" shall mean a "multi-employer  plan" as defined in
Section  4001(a)(3) of ERISA which is or was at any time during the current year
or the  immediately  preceding six (6) years  contributed  to by Borrower or any
ERISA Affiliate.

     1.60 "Net  Amount of  Eligible  Accounts"  shall  mean the gross  amount of
Eligible Accounts less (a) sales, excise or similar taxes included in the amount
thereof and (b) returns, discounts, claims, credits and allowances of any nature
at any time  issued,  owing,  granted,  outstanding,  available  or claimed with
respect thereto.

     1.61 "Net  Recovery  Percentage"  shall mean the  fraction,  expressed as a
percentage,  (a) the  numerator  of which is the amount equal to the recovery on
the  aggregate  amount of the  Inventory at such time on a "orderly  liquidation
value" basis as set forth in the most recent  acceptable  appraisal of Inventory
received by Lender in  accordance  with Section 7.3, net of operating  expenses,
liquidation  expenses and  commissions,  and (b) the denominator of which is the
applicable  original  cost of the aggregate  amount of the Inventory  subject to
appraisal.

     1.62  "Obligations"  shall  mean  any  and  all  Loans,  Letter  of  Credit
Accommodations and all other obligations,  liabilities and indebtedness of every
kind,  nature and description owing by Borrower to Lender and/or its affiliates,
including  principal,  interest,  charges,  fees,  costs and  expenses,  however
evidenced,  whether as  principal,  surety,  endorser,  guarantor or  otherwise,
arising under this Agreement or any of the other Financing  Agreements,  whether
now existing or hereafter arising,  whether arising before,  during or after the
initial or any renewal term of this Agreement or after the  commencement  of any
case with respect to Borrower  under the United  States  Bankruptcy  Code or any
similar statute (including the payment of interest and other amounts which would
accrue and become due but for the commencement of such case, whether or not such
amounts are  allowed or  allowable  in whole or in part in such  case),  whether
direct or indirect,  absolute or contingent,  joint or several,  due or not due,
primary or secondary, liquidated or unliquidated, or secured or unsecured.

     1.63 "Obligor"  shall mean any  guarantor,  endorser,  acceptor,  surety or
other person liable on or with respect to the Obligations or who is the owner of
any property which is security for the Obligations, other than Borrower.

     1.64 "Person" or "person" shall mean any individual,  sole  proprietorship,
partnership,  corporation  (including any corporation  which elects subchapter S
status  under  the  Code),   limited   liability   company,   limited  liability
partnership,   business   trust,   unincorporated   association,   joint   stock
corporation,  trust,  joint  venture or other  entity or any  government  or any
agency or instrumentality or political subdivision thereof.

     1.65 "Plan"  means an employee  benefit plan (as defined in Section 3(3) of
ERISA) which Borrower sponsors,  maintains,  or to which it makes, is making, or
is obligated to make  contributions,  or in the case of a Multiemployer Plan has
made  contributions  at any time during the  immediately  preceding six (6) plan
years.

     1.66 "Prime Rate" shall mean the rate from time to time publicly  announced
by Reference  Bank, or its  successors,  as its prime rate,  whether or not such
announced rate is the best rate available at such bank.

     1.67 "Prime Rate  Loans"  shall mean any Loans or portion  thereof on which
interest  is  payable  based on the  Prime  Rate in  accordance  with the  terms
thereof.

     1.68  "Provision for Taxes" shall mean an amount equal to all taxes imposed
on or measured by net income,  whether  Federal,  State,  Provincial,  county or
local,  and whether foreign or domestic,  that are paid or payable by any Person
in respect of any period in accordance with GAAP.

     1.69  "Pulse  License  Agreement"  shall  mean  the  Software  License  and
Distribution  Agreement,  dated as of October 31,  2002,  by and  between  Pulse
Microsystems Ltd. and Borrower.

     1.70 "Real Property"  shall mean all now owned and hereafter  acquired real
property  of  Borrower,   including  leasehold  interests,   together  with  all
buildings,  structures, and other improvements located thereon and all licenses,
easements and appurtenances relating thereto, wherever located.

     1.71  "Receivables"  shall mean all of the following now owned or hereafter
arising or acquired  property of Borrower:  (a) all Accounts;  (b) all interest,
fees,  late  charges,  penalties,  collection  fees and other  amounts due or to
become due or otherwise payable in connection with any Account;  (c) all payment
intangibles of Borrower and other contract rights,  chattel paper,  instruments,
notes, and other forms of obligations  owing to Borrower,  whether from the sale
and  lease of goods or other  property,  licensing  of any  property  (including
Intellectual  Property or other general  intangibles),  rendition of services or
from loans or advances by Borrower or to or for the benefit of any third  person
(including  loans or advances to any Affiliates or  Subsidiaries of Borrower) or
otherwise  associated  with any Accounts,  Inventory or general  intangibles  of
Borrower (including, without limitation, choses in action, causes of action, tax
refunds,  tax refund  claims,  any funds which may become payable to Borrower in
connection with the  termination of any Plan or other employee  benefit plan and
any other amounts  payable to Borrower from any Plan or other  employee  benefit
plan,   rights  and   claims   against   carriers   and   shippers,   rights  to
indemnification,  business interruption insurance and proceeds thereof, casualty
or any similar  types of  insurance  and any  proceeds  thereof and  proceeds of
insurance covering the lives of employees on which Borrower is a beneficiary).

     1.72  "Records"  shall mean all of  Borrower's  present and future books of
account of every kind or nature, purchase and sale agreements,  invoices, ledger
cards, bills of lading and other shipping evidence, statements,  correspondence,
memoranda, credit files and other data relating to the Collateral or any account
debtor,  together with the tapes,  disks,  diskettes and other data and software
storage  media and  devices,  file  cabinets  or  containers  in or on which the
foregoing  are stored  (including  any rights of  Borrower  with  respect to the
foregoing maintained with or by any other person).

     1.73 "Reference Bank" shall mean Wachovia Bank,  National  Association,  or
such other bank as Lender may from time to time designate.

     1.74 "Reserves" shall mean as of any date of determination, such amounts as
Lender may from time to time  establish,  and as to any new category of Reserves
upon not less than two (2)  Business  Days' prior  notice to  Borrower  (or such
lesser  period  for  notice  as  Lender  may  determine  is  required  under the
circumstances)  and revise in good faith reducing the amount of Loans and Letter
of Credit  Accommodations  which would  otherwise be available to Borrower under
the lending formula(s)  provided for herein: (a) to reflect events,  conditions,
contingencies  or risks which, as determined by Lender in good faith,  adversely
affect, or would have a reasonable likelihood of adversely affecting, either (i)
the Collateral or any other  property  which is security for the  Obligations or
its value, (ii) the assets,  business or prospects of Borrower or any Obligor or
(iii)  the  security  interests  and other  rights  of Lender in the  Collateral
(including  the  enforceability,  perfection  and  priority  thereof)  or (b) to
reflect  Lender's  good faith  belief that any  collateral  report or  financial
information furnished by or on behalf of Borrower or any Obligor to Lender is or
may have been  incomplete,  inaccurate or misleading in any material  respect at
the time  provided  to Lender  or (c) to  reflect  outstanding  Letter of Credit
Accommodations  as  provided  in Section  2.2 hereof or (d) to reflect  Lender's
estimate  of the amount  necessary  to reflect  changes in  applicable  currency
exchange  rates or currency  exchange  markets or (e) in respect of any state of
facts which Lender determines in good faith constitutes a Default or an Event of
Default or (f) to reflect a decrease in the  liquidation  value of the  Eligible
Inventory, including any such decrease attributable to any change in the nature,
quality or mix of the Inventory or (g) the turnover of the Inventory  calculated
based on the immediately  preceding twelve (12) consecutive  month period ending
immediately  prior to the date of a field  examination by Lender of Borrower and
its  assets  shall have  decreased  by more than fifty  (50%)  percent  from the
turnover  of  Inventory  as  determined  in  the  immediately   preceding  field
examination  conducted  by Lender or (h) in respect of amounts  due or to become
due to the financial  intermediary or other  institution where the Eligible Cash
Collateral is  maintained.  Without  limiting the  generality of the  foregoing,
Reserves may be established  to reflect any of the following:  (i) that dilution
with  respect to the  Accounts  (based on the ratio of the  aggregate  amount of
non-cash reductions in Accounts for any period to the aggregate dollar amount of
the sales of Borrower for such period) as calculated by Lender for any period is
or is  reasonably  anticipated  to be greater than five (5%)  percent,  (ii) the
aggregate amount of deposits, if any, received by Borrower from its customers in
respect of unfilled orders for  merchandise,  (iii) amounts due or to become due
in respect of sales,  use and/or  withholding  taxes,  (iv) any rental payments,
service  charges or other amounts that have not been paid when due to lessors of
real or personal  property to the extent  Inventory or Records are located in or
on property or such  Records  are needed to monitor or  otherwise  deal with the
Collateral.  To the  extent  Lender  may revise  the  lending  formulas  used to
determine  the  Borrowing  Base or  establish  new  criteria or revise  existing
criteria  for  Eligible  Accounts  or  Eligible  Inventory  so as to address any
circumstances,  condition,  event or  contingency  in a manner  satisfactory  to
Lender, Lender shall not establish a Reserve for the same purpose. The amount of
any Reserve  established by Lender shall have a reasonable  relationship  to the
event,  condition  or other  matter  which is the  basis  for  such  reserve  as
determined  by Lender in good  faith.  Without  limiting  the right of Lender to
adjust the amount of any  category of  Reserves,  a new category of Reserves not
provided for above or  established as of the date hereof may only be established
by  Lender  after  the  date  hereof  based  on an  event,  condition  or  other
circumstance  arising  after the date  hereof,  or an event,  condition or other
circumstance  existing  on the date  hereof to the extent  Lender has no written
notice thereof from Borrower prior to the date hereof.

     1.75 "Solvent" shall mean, at any time with respect to any Person,  that at
such time such  Person (a) is able to pay its debts as they  mature and has (and
has a reasonable basis to believe it will continue to have)  sufficient  capital
(and not  unreasonably  small capital) to carry on its business  consistent with
its practices as of the date hereof,  and (b) the assets and  properties of such
Person at a fair  valuation  (and including as assets for this purpose at a fair
valuation all rights of  subrogation,  contribution or  indemnification  arising
pursuant  to  any  guarantees  given  by  such  Person)  are  greater  than  the
Indebtedness  of  such  Person,   and  including   subordinated  and  contingent
liabilities  computed at the amount which, such person has a reasonable basis to
believe,  represents  an amount  which can  reasonably  be expected to become an
actual or matured liability (and including as to contingent  liabilities arising
pursuant  to any  guarantee  the face  amount of such  liability  as  reduced to
reflect the probability of it becoming a matured liability).

     1.76  "Subsidiary" or "subsidiary"  shall mean, with respect to any Person,
any corporation,  limited liability  company,  limited liability  partnership or
other  limited or general  partnership,  trust,  association  or other  business
entity of which an aggregate of at least a majority of the  outstanding  Capital
Stock  or other  interests  entitled  to vote in the  election  of the  board of
directors of such  corporation  (irrespective of whether,  at the time,  Capital
Stock of any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency),  managers, trustees
or other controlling persons, or an equivalent  controlling interest therein, of
such Person is, at the time, directly or indirectly, owned by such Person and/or
one or more subsidiaries of such Person.

     1.77 "UCC" shall mean the Uniform Commercial Code as in effect in the State
of New York, and any successor  statute,  as in effect from time to time (except
that terms used herein  which are defined in the Uniform  Commercial  Code as in
effect in the State of New York on the date  hereof  shall  continue to have the
same meaning notwithstanding any replacement or amendment of such statute except
as Lender may otherwise determine).

     1.78 "US  Dollar  Equivalent"  shall  mean at any time (a) as to any amount
denominated  in US Dollars,  the amount  thereof at such time, and (b) as to any
amount  denominated in any other currency,  the equivalent  amount in US Dollars
calculated  by Lender  in good  faith at such time  using the  Exchange  Rate in
effect on the Business Day of determination.

     1.79 "US  Dollars",  "US$" and "$" shall each mean  lawful  currency of the
United States of America.

     1.80 "Value" shall mean with respect to Inventory, the US Dollar Equivalent
of the  lower of (a)  cost  computed  on a  "specific  identification"  basis in
accordance  with GAAP or (b) market value  provided,  that,  for purposes of the
calculation  of the Borrowing  Base,  (i) the Value of the  Inventory  shall not
include: (A) the portion of the value of Inventory equal to the profit earned by
any Affiliate on the sale thereof to Borrower in excess of the amount that would
be considered  profit in an equivalent  arms' length  transaction  with a person
that is not an Affiliate or (B) write-ups or  write-downs  in value with respect
to currency  exchange  rates and (ii)  notwithstanding  anything to the contrary
contained herein, the cost of the Inventory shall be computed in the same manner
and  consistent  with the most recent  appraisal of the  Inventory  received and
accepted by Lender prior to the date hereof, if any.

     1.81 "Voting  Stock" shall mean with respect to any Person,  (a) one (1) or
more classes of Capital  Stock of such Person  having  general  voting powers to
elect at least a majority of the board of  directors,  managers or trustees  (or
persons performing similar functions) of such Person, irrespective of whether at
the time  Capital  Stock of any other class or classes have or might have voting
power by reason of the happening of any  contingency,  and (b) any Capital Stock
of such Person convertible or exchangeable  without restriction at the option of
the holder thereof into Capital Stock of such Person  described in clause (a) of
this definition.

SECTION 2.    CREDIT FACILITIES
              -----------------

       2.1    Loans.
              -----

     (a) Subject to and upon the terms and conditions  contained herein,  Lender
agrees to make  Loans to  Borrower  from time to time in  amounts  requested  by
Borrower up to the amount equal to the lesser of: (i) the Borrowing Base or (ii)
the Maximum Credit.

     (b) Except in Lender's  discretion,  the aggregate  amount of the Loans and
the Letter of Credit Accommodations outstanding at any time shall not exceed the
Maximum Credit and the aggregate amount of the Loans based on Eligible Inventory
outstanding  at any time  shall not  exceed  $3,000,000.  In the event  that the
outstanding amount of any component of the Loans, or the aggregate amount of the
outstanding  Loans and  Letter  of Credit  Accommodations,  exceed  the  amounts
available  pursuant to the  Borrowing  Base,  the  sublimit for Letter of Credit
Accommodations set forth in Section 2.2(e) or the Maximum Credit, as applicable,
such event shall not limit,  waive or  otherwise  affect any rights of Lender in
that  circumstance or on any future occasions and Borrower shall, upon demand by
Lender, which may be made at any time or from time to time, immediately repay to
Lender the entire amount of any such excess(es) for which payment is demanded.

       2.2    Letter of Credit Accommodations.
              -------------------------------

     (a) Subject to and upon the terms and conditions  contained  herein, at the
request of  Borrower,  Lender  agrees to provide or arrange for Letter of Credit
Accommodations  denominated  in US Dollars or  Japanese  Yen for the  account of
Borrower  containing  terms and  conditions  acceptable to Lender and the issuer
thereof.  Any  payments  made by Lender to any  issuer  thereof  and/or  related
parties in connection with the Letter of Credit  Accommodations shall constitute
additional Loans to Borrower pursuant to this Section 2. All such Loans shall be
in US Dollars  notwithstanding  that the currency in which such Letter of Credit
Accommodations  may be denominated and the determination  thereof shall be based
on the Exchange Rate or such other exchange rate as may be used by the issuer in
requiring  any  payment  to  it  in  connection   with  such  Letter  of  Credit
Accommodations.

     (b) In addition  to any  charges,  fees or expenses  charged by any bank or
issuer in  connection  with the Letter of Credit  Accommodations,  (i)  Borrower
shall pay to Lender a letter of credit and acceptance fee at a rate equal to two
and one-half (2 1/2%) percent per annum on the daily outstanding  balance of the
Letter of Credit Accommodations consisting of banker's acceptances and at a rate
equal to two (2%)  percent  per annum on the daily  outstanding  balance  of all
other  Letter  of  Credit  Accommodations,  in each  case  for  the  immediately
preceding  month (or part  thereof),  payable  in arrears as of the first day of
each succeeding  month,  except that Borrower shall pay to Lender such letter of
credit fee,  at Lender's  option,  without  notice,  at a rate equal to four and
one-half (4 1/2%) percent per annum on such daily  outstanding  balance for: (A)
the period from and after the date of termination  or  non-renewal  hereof until
Lender has received full and final payment of all  Obligations  (notwithstanding
entry of a judgment against Borrower) and (B) the period from and after the date
of the occurrence of an Event of Default for so long as such Event of Default is
continuing  as  determined  by Lender and (ii) on each  anniversary  of the date
hereof (and if such day is the effective date of the  termination or non-renewal
hereof,  then on such  date),  Borrower  shall pay to  Lender as a  supplemental
letter of credit fee an amount equal to $100,000  minus the aggregate  amount of
all letter of credit and  acceptance  fees  received by Lender from  Borrower in
accordance  with the terms hereof during the immediately  preceding  twelve (12)
month period ending on such anniversary date; provided,  that, in the event that
the this  Agreement is terminated  prior to any  anniversary of the date hereof,
such  supplemental  letter of credit shall be immediately due and payable on the
date of  termination  in an  amount  equal  to (A)  $100,000  multiplied  by the
fraction, the numerator of which is the number of months that have elapsed since
the  date of this  Agreement  or the  prior  anniversary,  whichever  is  later,
including  the month in which such  termination  occurs and the  denominator  of
which is twelve (12) minus (B) the aggregate  amount of all letter of credit and
acceptance  fees received by Lender from  Borrower in accordance  with the terms
hereof since the date of this Agreement or the prior  anniversary,  whichever is
later. Such letter of credit and acceptance fee shall be calculated on the basis
of a three  hundred  sixty  (360)  day  year and  actual  days  elapsed  and the
obligation  of  Borrower  to pay such  fee  shall  survive  the  termination  or
non-renewal  of  this  Agreement.  In  the  event  that  any  Letter  of  Credit
Accommodation  is  payable in a currency  other than US  Dollars,  the letter of
credit and acceptance fee shall be calculated based on the Exchange Rate as from
time to time in effect for the  currency  payable  under  such  Letter of Credit
Accommodation.

     (c) Borrower  shall give Lender two (2) Business Days' prior written notice
of Borrower's request for the issuance of a Letter of Credit Accommodation. Such
notice shall be  irrevocable  and shall  specify the original face amount of the
Letter of Credit Accommodation  requested,  the effective date (which date shall
be a Business Day) of issuance of such requested Letter of Credit Accommodation,
whether  such  Letter  of Credit  Accommodations  may be drawn in a single or in
partial draws, the date on which such requested  Letter of Credit  Accommodation
is to expire  (which  date  shall be a  Business  Day and in no event  shall the
expiration  date be a date less than five (5) Business  Days prior to the end of
the then current term of this  Agreement),  the purpose for which such Letter of
Credit  Accommodation  is to be issued,  and the  beneficiary  of the  requested
Letter  of Credit  Accommodation.  Borrower  shall  attach  to such  notice  the
proposed terms of the Letter of Credit Accommodation.

     (d) In  addition to being  subject to the  satisfaction  of the  applicable
conditions  precedent  contained  in  Section 4 hereof  and the other  terms and
conditions  contained  herein,  no  Letter  of  Credit  Accommodations  shall be
available unless each of the following  conditions precedent have been satisfied
in a manner  satisfactory  to Lender:  (i) Borrower  shall have delivered to the
proposed issuer of such Letter of Credit Accommodation at such times and in such
manner as such proposed issuer may require, an application in form and substance
satisfactory  to such proposed  issuer and Lender for the issuance of the Letter
of Credit  Accommodation and such other documents as may be required pursuant to
the  terms  thereof,  and the form and  terms of the  proposed  Letter of Credit
Accommodation  shall be satisfactory to Lender and such proposed issuer, (ii) as
of the date of issuance, no order of any court, arbitrator or other Governmental
Authority  shall  purport by its terms to enjoin or restrain  money center banks
generally  from  issuing  letters of credit of the type and in the amount of the
proposed  Letter  of  Credit  Accommodation,  and no  law,  rule  or  regulation
applicable to money center banks generally and no request or directive  (whether
or  not  having  the  force  of  law)  from  any  Governmental   Authority  with
jurisdiction  over money center banks generally shall prohibit,  or request that
the proposed  issuer of such Letter of Credit  Accommodation  refrain from,  the
issuance  of letters of credit  generally  or the  issuance  of such  Letters of
Credit Accommodation;  and (iii) the Excess Availability, prior to giving effect
to any  Reserves  with respect to such Letter of Credit  Accommodations,  on the
date of the proposed issuance of any Letter of Credit  Accommodations,  shall be
equal to or greater than: (A) if the proposed Letter of Credit  Accommodation is
for the purpose of purchasing Eligible Inventory and the documents of title with
respect thereto are consigned to the issuer, the sum of (1) the percentage equal
to one hundred (100%) percent minus the then applicable  percentage with respect
to Eligible  Inventory set forth in the  definition of the term  Borrowing  Base
multiplied by the Value of such  Eligible  Inventory,  plus (2) freight,  taxes,
duty and other amounts which Lender  estimates  must be paid in connection  with
such Inventory upon arrival and for delivery to one of Borrower's  locations for
Eligible  Inventory  within the United States of America and (B) if the proposed
Letter of Credit  Accommodation  is for any other  purpose or the  documents  of
title are not  consigned  to the  issuer in  connection  with a Letter of Credit
Accommodation  for the purpose of purchasing  Inventory,  an amount equal to one
hundred (100%) percent of the face amount thereof and all other  commitments and
obligations  made or incurred by Lender with respect  thereto.  Effective on the
issuance of each Letter of Credit Accommodation,  a Reserve shall be established
in the  applicable  amount  set  forth  in  Section  2.2(d)(iii)(A)  or  Section
2.2(d)(iii)(B).  In the event that any Letter of Credit Accommodation is payable
in a currency other than US Dollars,  the determination of such Reserve shall be
based on the  Exchange  Rate as from time to time in effect with respect to such
currency.

     (e) Except in Lender's discretion,  the amount of all outstanding Letter of
Credit Accommodations and all other commitments and obligations made or incurred
by Lender in connection therewith shall not at any time exceed $7,000,000.

     (f) Borrower shall  indemnify and hold Lender harmless from and against any
and all losses, claims,  damages,  liabilities,  costs and expenses which Lender
may suffer or incur in connection with any Letter of Credit  Accommodations  and
any documents,  drafts or acceptances  relating  thereto,  including any losses,
claims, damages, liabilities,  costs and expenses due to any action taken by any
issuer or  correspondent  with  respect to any  Letter of Credit  Accommodation,
other than losses, claims, damages, liabilities,  costs and expenses as a result
of the gross negligence or wilful misconduct of Lender as determined pursuant to
a final,  non-appealable  order of a court of competent  jurisdiction.  Borrower
assumes all risks with  respect to the acts or  omissions of the drawer under or
beneficiary  of any Letter of Credit  Accommodation  and for such  purposes  the
drawer or beneficiary  shall be deemed  Borrower's  agent.  Borrower assumes all
risks for,  and agrees to pay,  all  foreign,  Federal,  State and local  taxes,
duties  and  levies  relating  to any  goods  subject  to any  Letter  of Credit
Accommodations  or any  documents,  drafts or acceptances  thereunder.  Borrower
hereby  releases and holds Lender  harmless from and against any acts,  waivers,
errors,  delays or  omissions,  whether  caused by  Borrower,  by any  issuer or
correspondent  or otherwise  with respect to or relating to any Letter of Credit
Accommodation, except for the gross negligence or wilful misconduct of Lender as
determined  pursuant to a final,  non-appealable  order of a court of  competent
jurisdiction. The provisions of this Section 2.2(f) shall survive the payment of
Obligations and the termination or non-renewal of this Agreement.

     (g) In connection  with  Inventory  purchased  pursuant to Letter of Credit
Accommodations,  Borrower  shall, at Lender's  request,  instruct all suppliers,
carriers, forwarders, customs brokers, warehouses or others receiving or holding
cash,  checks,  Inventory,  documents  or  instruments  in which  Lender holds a
security  interest to deliver them to Lender and/or  subject to Lender's  order,
and if they  shall  come into  Borrower's  possession,  to  deliver  them,  upon
Lender's  request,  to Lender in their  original  form.  Borrower shall also, at
Lender's  request,  designate Lender as the consignee on all bills of lading and
other negotiable and non-negotiable documents.

     (h)  Borrower  hereby  irrevocably  authorizes  and directs any issuer of a
Letter of Credit Accommodation to name Borrower as the account party therein and
to deliver to Lender all instruments,  documents and other writings and property
received by issuer pursuant to the Letter of Credit Accommodations and to accept
and rely upon Lender's  instructions  and agreements with respect to all matters
arising  in  connection  with  the  Letter  of  Credit   Accommodations  or  the
applications therefor.  Nothing contained herein shall be deemed or construed to
grant  Borrower  any right or  authority  to pledge  the credit of Lender in any
manner. Lender shall have no liability of any kind with respect to any Letter of
Credit  Accommodation  provided by an issuer other than Lender unless Lender has
duly  executed and  delivered to such issuer the  application  or a guarantee or
indemnification in writing with respect to such Letter of Credit  Accommodation.
Borrower shall be bound by any  interpretation  made in good faith by Lender, or
any other  issuer or  correspondent  under or in  connection  with any Letter of
Credit  Accommodation  or  any  documents,  drafts  or  acceptances  thereunder,
notwithstanding   that  such   interpretation   may  be  inconsistent  with  any
instructions of Borrower.

     (i) At any time so long as no  Default  or Event of  Default  exists or has
occurred and is continuing, Borrower may (i) approve or resolve any questions of
non-compliance  of  documents,  (ii) give any  instructions  as to acceptance or
rejection of any documents or goods,  and (iii) execute any and all applications
for steamship or airway guaranties, indemnities or delivery orders.

     (j) At any time a Default or an Event of Default exists or has occurred and
is continuing,  Lender shall have the sole and exclusive right and authority to,
and  Borrower  shall not,  after  notice by Lender to  Borrower:  (i) approve or
resolve any questions of non-compliance of documents, (ii) give any instructions
as to acceptance  or rejection of any documents or goods,  (iii) execute any and
all  applications  for steamship or airway  guaranties,  indemnities or delivery
orders.  At any  time,  Borrower  may,  with the  consent  of  Agent,  grant any
extensions of the maturity of, time of payment for, or time of presentation  of,
any drafts,  acceptances,  or documents and agree to any  amendments,  renewals,
extensions,  modifications,  changes  or  cancellations  of any of the  terms or
conditions  of any of the  applications,  Letter  of Credit  Accommodations,  or
documents, drafts or acceptances thereunder or any letters of credit included in
the  Collateral.  Lender  may take  such  actions  either  in its own name or in
Borrower's name.

     (k) Any rights,  remedies,  duties or obligations  granted or undertaken by
Borrower to any issuer or  correspondent  in any  application  for any Letter of
Credit  Accommodation,  or  any  other  agreement  in  favor  of any  issuer  or
correspondent relating to any Letter of Credit Accommodation, shall be deemed to
have been granted or undertaken by Borrower to Lender. Any duties or obligations
undertaken by Lender to any issuer or  correspondent  in any application for any
Letter of Credit Accommodation, or any other agreement by Lender in favor of any
issuer or correspondent relating to any Letter of Credit Accommodation, shall be
deemed  to have  been  undertaken  by  Borrower  to  Lender  and to apply in all
respects to Borrower.


SECTION 3.    INTEREST AND FEES
              -----------------

       3.1    Interest.
              --------

     (a)  Borrower  shall pay to Lender  interest on the  outstanding  principal
amount of the Loans at the Interest Rate. All interest accruing hereunder on and
after the date of any Event of  Default or  termination  or  non-renewal  hereof
shall be payable on demand.

     (b)  Borrower may from time to time  request  Eurodollar  Rate Loans or may
request that Prime Rate Loans be converted to Eurodollar  Rate Loans or that any
existing  Eurodollar Rate Loans continue for an additional Interest Period. Such
request from Borrower shall specify the amount of the  Eurodollar  Rate Loans or
the amount of the Prime Rate Loans to be converted to  Eurodollar  Rate Loans or
the amount of the Eurodollar  Rate Loans to be continued  (subject to the limits
set forth below) and the Interest  Period to be  applicable  to such  Eurodollar
Rate Loans.  Subject to the terms and  conditions  contained  herein,  three (3)
Business  Days after  receipt by Lender of such a request  from  Borrower,  such
Eurodollar  Rate Loans shall be made or Prime Rate Loans shall be  converted  to
Eurodollar Rate Loans or such Eurodollar Rate Loans shall continue,  as the case
may be,  provided,  that, (i) no Default or Event of Default shall exist or have
occurred and be  continuing,  (ii) no party hereto shall have sent any notice of
termination or non-renewal of this Agreement, (iii) Borrower shall have complied
with such  customary  procedures as are  established  by Lender and specified by
Lender to Borrower  from time to time for  requests by Borrower  for  Eurodollar
Rate Loans,  (iv) no more than four (4) Interest Periods may be in effect at any
one time, (v) the aggregate  amount of the  Eurodollar  Rate Loans must be in an
amount not less than  $1,000,000  or an integral  multiple of $500,000 in excess
thereof,  (vi) the  maximum  amount  of the  Eurodollar  Rate  Loans at any time
requested by Borrower  shall not exceed the amount equal to eighty (80%) percent
of the lowest  principal  amount of the Loans  which it is  anticipated  will be
outstanding during the applicable Interest Period, in each case as determined by
Lender (but with no obligation  of Lender to make such Loans),  and (vii) Lender
shall have determined  that the Interest  Period or Adjusted  Eurodollar Rate is
available to Lender through the Reference Bank and can be readily  determined as
of the date of the  request  for such  Eurodollar  Rate  Loan by  Borrower.  Any
request by Borrower for Eurodollar  Rate Loans or to convert Prime Rate Loans to
Eurodollar Rate Loans or to continue any existing Eurodollar Rate Loans shall be
irrevocable.  Notwithstanding  anything to the contrary contained herein, Lender
and  Reference  Bank shall not be  required  to purchase  United  States  Dollar
deposits in the London  interbank  market or other  applicable  Eurodollar  Rate
market to fund any Eurodollar  Rate Loans,  but the  provisions  hereof shall be
deemed to apply as if Lender and Reference  Bank had purchased  such deposits to
fund the Eurodollar Rate Loans.

     (c) Any  Eurodollar  Rate Loans shall  automatically  convert to Prime Rate
Loans upon the last day of the  applicable  Interest  Period,  unless Lender has
received and approved a request to continue such  Eurodollar  Rate Loan at least
three (3)  Business  Days  prior to such last day in  accordance  with the terms
hereof.  Any Eurodollar  Rate Loans shall,  at Lender's  option,  upon notice by
Lender to Borrower, convert to Prime Rate Loans in the event that this Agreement
shall terminate or not be renewed.  Borrower shall pay to Lender, upon demand by
Lender (or Lender may, at its option,  charge any loan account of Borrower)  any
amounts  required to compensate  Lender,  the Reference Bank or any  participant
with  Lender  for any loss  (including  loss of  anticipated  profits),  cost or
expense  incurred by such person,  as a result of the  conversion  of Eurodollar
Rate Loans to Prime Rate Loans pursuant to any of the foregoing.

     (d) Interest  shall be payable by Borrower to Lender monthly in arrears not
later than the first day of each  calendar  month and shall be calculated on the
basis of a three  hundred  sixty  (360) day year and actual  days  elapsed.  The
interest rate on non-contingent  Obligations  (other than Eurodollar Rate Loans)
shall  increase or decrease by an amount  equal to each  increase or decrease in
the Prime Rate  effective on the first day of the month after any change in such
Prime Rate is announced based on the Prime Rate in effect on the last day of the
month in which any such change  occurs.  In no event shall charges  constituting
interest  payable by  Borrower to Lender  exceed the maximum  amount or the rate
permitted  under  any  applicable  law or  regulation,  and if any such  part or
provision of this Agreement is in  contravention  of any such law or regulation,
such part or provision shall be deemed amended to conform thereto.

       3.2    Closing Fee.  Borrower shall  pay to  Lender as a closing fee the
amount of  $120,000, which  shall be fully  earned and  payable as of the date
hereof.

       3.3 Servicing Fee. Borrower shall pay to Lender monthly a servicing fee
in an amount equal to $4,000 in respect of Lender's services for each month (or
part thereof) while this Agreement remains in effect and for so long thereafter
as any of the Obligations are outstanding, which fee shall be fully earned as of
and payable in advance on the date hereof and on the first day of each month
hereafter.

       3.4 Unused Line Fee. Borrower shall pay to Lender monthly an unused line
fee at a rate equal to three-eighths (3/8%) percent per annum calculated upon
the amount by which the Maximum Credit exceeds the average daily principal
balance of the outstanding Loans and Letter of Credit Accommodations during the
immediately preceding month (or part thereof) while this Agreement is in effect
and for so long thereafter as any of the Obligations are outstanding, which fee
shall be payable on the first day of each month in arrears.

       3.5    Changes in Laws and Increased Costs of Loans.
              --------------------------------------------

     (a) If  after  the  date  hereof,  either  (i)  any  change  in,  or in the
interpretation  of, any law or  regulation  is  introduced,  including,  without
limitation,  with respect to reserve  requirements,  applicable to Lender or any
banking or  financial  institution  from whom  Lender  borrows  funds or obtains
credit (a "Funding  Bank"),  or (ii) a Funding Bank or Lender  complies with any
future  guideline  or  request  from  any  central  bank or  other  Governmental
Authority or (iii) a Funding Bank or Lender  determines that the adoption of any
applicable law, rule or regulation  regarding  capital  adequacy,  or any change
therein,  or any change in the  interpretation or administration  thereof by any
Governmental  Authority,  central  bank or  comparable  agency  charged with the
interpretation or administration  thereof has or would have the effect described
below,  or a Funding  Bank or Lender  complies  with any  request  or  directive
regarding  capital adequacy (whether or not having the force of law) of any such
authority,  central bank or comparable  agency, and in the case of any event set
forth in this clause (iii),  such  adoption,  change or compliance  has or would
have the direct or indirect  effect of  reducing  the rate of return on Lender's
capital as a  consequence  of its  obligations  hereunder  to a level below that
which Lender could have  achieved but for such  adoption,  change or  compliance
(taking into  consideration the Funding Bank's or Lender's policies with respect
to  capital  adequacy)  by an amount  deemed by Lender to be  material,  and the
result of any of the foregoing events described in clauses (i), (ii) or (iii) is
or results in an  increase in the cost to Lender of funding or  maintaining  the
Loans or the Letter of Credit  Accommodations,  then Borrower shall from time to
time upon  demand  by Lender  pay to Lender  additional  amounts  sufficient  to
indemnify Lender against such increased cost on an after-tax basis (after taking
into  account  applicable  deductions  and  credits  in  respect  of the  amount
indemnified).  A certificate  as to the amount of such  increased  cost shall be
submitted to Borrower by Lender and shall be conclusive, absent manifest error.

     (b) If prior to the first day of any Interest Period, (i) Lender shall have
determined in good faith (which  determination  shall be conclusive  and binding
upon Borrower) that, by reason of  circumstances  affecting the relevant market,
adequate and reasonable  means do not exist for ascertaining the Eurodollar Rate
for such  Interest  Period,  (ii) Lender  determines  that the  Eurodollar  Rate
determined or to be determined for such Interest  Period will not adequately and
fairly reflect the cost to Lender of making or maintaining Eurodollar Rate Loans
during such Interest Period,  or (iii) Dollar deposits in the principal  amounts
of the Eurodollar  Rate Loans to which such Interest  Period is to be applicable
are not generally  available in the applicable  Eurodollar market,  Lender shall
give telecopy or telephonic  notice  thereof to Borrower as soon as  practicable
thereafter,  and will also give  prompt  written  notice to  Borrower  when such
conditions  no longer  exist.  If such notice is given (A) any  Eurodollar  Rate
Loans  requested  to be made on the first day of such  Interest  Period shall be
made as Prime Rate Loans,  (B) any Loans that were to have been converted on the
first day of such Interest Period to or continued as Eurodollar Rate Loans shall
be  converted  to or  continued  as Prime  Rate  Loans and (C) each  outstanding
Eurodollar  Rate Loan shall be  converted,  on the last day of the  then-current
Interest  Period  thereof,  to Prime  Rate  Loans.  Until  such  notice has been
withdrawn by Lender, no further Eurodollar Rate Loans shall be made or continued
as such,  nor shall  Borrower  have the right to  convert  Prime  Rate  Loans to
Eurodollar Rate Loans.

     (c)  Notwithstanding  any other provision herein, if the adoption of or any
change  in  any  law,  treaty,  rule  or  regulation  or  final,  non-appealable
determination of an arbitrator or a court or other Governmental  Authority or in
the interpretation or application  thereof occurring after the date hereof shall
make it  unlawful  for  Lender  to make or  maintain  Eurodollar  Rate  Loans as
contemplated  by this Loan  Agreement,  (i) Lender shall  promptly  give written
notice of such  circumstances  to  Borrower  (which  notice  shall be  withdrawn
whenever such  circumstances  no longer  exist),  (ii) the  commitment of Lender
hereunder to make Eurodollar Rate Loans,  continue Eurodollar Rate Loans as such
and  convert  Prime  Rate Loans to  Eurodollar  Rate Loans  shall  forthwith  be
canceled  and,  until such time as it shall no longer be unlawful  for Lender to
make or maintain Eurodollar Rate Loans, Lender shall then have a commitment only
to make a Prime Rate Loan when a  Eurodollar  Rate Loan is  requested  and (iii)
Loans then  outstanding  as Eurodollar  Rate Loans,  if any,  shall be converted
automatically  to Prime  Rate  Loans  on the  respective  last  days of the then
current  Interest  Periods  with  respect to such Loans or within  such  earlier
period as required  by law. If any such  conversion  of a  Eurodollar  Rate Loan
occurs on a day which is not the last day of the then  current  Interest  Period
with respect thereto, Borrower shall pay to such Lender such amounts, if any, as
may be required pursuant to Section 3.3(d) below.

     (d) Borrower shall  indemnify  Lender and to hold Lender  harmless from any
loss or expense  which  Lender  may  sustain  or incur as a  consequence  of (i)
default by Borrower in making a borrowing  of,  conversion  into or extension of
Eurodollar  Rate Loans after Borrower has given a notice  requesting the same in
accordance with the provisions of this Loan Agreement,  provided, that, Borrower
shall not be required to so  indemnify  Lender if the sole reason that  Borrower
failed to make a borrowing of, or convert or extend,  a Eurodollar  Rate Loan is
as the result of the  establishment  of a new category of Reserve by Lender that
results  in such  Loan not being  available  based on the  Borrowing  Base as in
effect  after  giving  effect to such new  category of Reserve,  (ii) default by
Borrower in making any  prepayment of a Eurodollar  Rate Loan after Borrower has
given a notice thereof in accordance with the provisions of this Agreement,  and
(iii) the making of a prepayment of Eurodollar  Rate Loans on a day which is not
the last day of an  Interest  Period  with  respect  thereto.  With  respect  to
Eurodollar Rate Loans, such  indemnification  may include an amount equal to the
excess,  if any, of (A) the amount of interest  which would have  accrued on the
amount so prepaid,  or not so borrowed,  converted  or extended,  for the period
from the date of such prepayment or of such failure to borrow, convert or extend
to the last day of the applicable  Interest Period (or, in the case of a failure
to borrow,  convert or extend,  the Interest Period that would have commenced on
the date of such  failure) in each case at the  applicable  rate of interest for
such  Eurodollar  Rate Loans provided for herein over (B) the amount of interest
(as reasonably  determined by such Lender) which would have accrued to Lender on
such  amount by placing  such  amount on deposit  for a  comparable  period with
leading banks in the interbank  Eurodollar  market.  This covenant shall survive
the  termination  or  non-renewal  of this Loan Agreement and the payment of the
Obligations.

SECTION 4.    CONDITIONS PRECEDENT
              --------------------

     4.1   Conditions   Precedent   to  Initial   Loans  and  Letter  of  Credit
Accommodations.  Each of the following is a condition precedent to Lender making
the initial  Loans and  providing  the initial  Letter of Credit  Accommodations
hereunder:

     (a) Lender  shall have  received,  in form and  substance  satisfactory  to
Lender,  all  releases,  terminations  and such  other  documents  as Lender may
request to evidence and  effectuate the  termination by the existing  lenders to
Borrower  of their  respective  financing  arrangements  with  Borrower  and the
termination  and release by it or them,  as the case may be, of any  interest in
and to any assets and properties of Borrower and each Obligor,  duly authorized,
executed and delivered by it or each of them, including, but not limited to, UCC
termination  statements for all UCC financing statements  previously filed by it
or any of them or their  predecessors,  as  secured  party and  Borrower  or any
Obligor,  as debtor and  authorization for Lender to file them from the existing
lenders;

     (b) all requisite  corporate action and proceedings in connection with this
Agreement and the other Financing  Agreements  shall be satisfactory in form and
substance to Lender,  and Lender shall have received all  information and copies
of  all  documents,   including  records  of  requisite   corporate  action  and
proceedings  which  Lender may have  requested  in  connection  therewith,  such
documents  where  requested  by  Lender  or  its  counsel  to  be  certified  by
appropriate  corporate officers or Governmental  Authority (and including a copy
of the certificate of  incorporation  of Borrower  certified by the Secretary of
State (or  equivalent  Governmental  Authority)  which  shall set forth the same
complete  corporate name of Borrower as is set forth herein and such document as
shall set forth the organizational  identification number of Borrower, if one is
issued in its jurisdiction of incorporation);

     (c) no material adverse change shall have occurred in the assets,  business
or prospects  of Borrower  since the date of Lender's  latest field  examination
(not  including  for this  purpose  the field  review  referred to in clause (d)
below) and no change or event shall have occurred which would impair the ability
of Borrower or any Obligor to perform its obligations  hereunder or under any of
the other Financing Agreements to which it is a party in any material respect or
of Lender to enforce the Obligations or realize upon the Collateral;

     (d) Lender  shall have  completed  a field  review of the  Records and such
other  information  with  respect to the  Collateral  as Lender  may  require to
determine  the  amount  of  Loans  available  to  Borrower  (including,  without
limitation, current perpetual inventory records and/or roll-forwards of Accounts
and Inventory  through the date of closing and test counts of the Inventory in a
manner  satisfactory to Lender,  together with such supporting  documentation as
may be necessary or appropriate,  and other documents and information  that will
enable Lender to accurately identify and verify the Collateral),  the results of
which in each case  shall be  satisfactory  to  Lender,  not more than three (3)
Business Days prior to the date hereof;

     (e) Lender  shall have  received,  in form and  substance  satisfactory  to
Lender, all consents,  waivers,  acknowledgments and other agreements from third
persons which Lender may deem necessary or desirable in order to permit, protect
and  perfect  its  security  interests  in and liens upon the  Collateral  or to
effectuate the provisions or purposes of this Agreement and the other  Financing
Agreements,  including,  without  limitation,  Collateral  Access  Agreements by
owners and lessors of leased  premises of Borrower  and by  warehouses  at which
Collateral is located;

     (f) the Excess Availability as determined by Lender, as of the date hereof,
shall be not less than $5,000,000  after giving effect to the initial Loans made
or to be made and  Letter  of  Credit  Accommodations  issued or to be issued in
connection with the initial transactions hereunder;

     (g) Lender  shall have  received,  in form and  substance  satisfactory  to
Lender,  Deposit  Account Control  Agreements by and among Lender,  Borrower and
each bank where  Borrower has a deposit  account  (other than  deposit  accounts
exclusively used for payroll, payroll taxes and other employee wage and benefits
payments  to or for the benefit of  Borrower's  employees),  in each case,  duly
authorized, executed and delivered by such bank and Borrower (or Lender shall be
the  bank's  customer  with  respect  to such  deposit  account,  as Lender  may
specify);

     (h) Lender  shall have  received,  in form and  substance  satisfactory  to
Lender, Investment Property Control Agreements by and among Lender, Borrower and
each bank or other  financial  institution  where Borrower has a money market or
other investment  account (other than investment  accounts  exclusively used for
payroll,  payroll taxes and other employee wage and benefits  payments to or for
the benefit of Borrower's  employees),  in each case, duly authorized,  executed
and delivered by such bank or other financial institution and Borrower;

     (i) Lender shall have received evidence, in form and substance satisfactory
to Lender, that Lender has a valid perfected first priority security interest in
all of the Collateral, subject only to liens permitted under Section 9.8 hereof;

     (j) Lender  shall have  received  and reviewed  lien and  judgement  search
results for the jurisdiction of  incorporation or organization of Borrower,  the
jurisdiction of the chief executive office of Borrower and all  jurisdictions in
which assets of Borrower are located,  which search results shall be in form and
substance satisfactory to Lender;

     (k) Lender shall have received evidence, in form and substance satisfactory
to Lender,  that the inventory  records of Borrower  shall set forth in a manner
satisfactory to Lender the amount, value and location of inventory consisting of
demonstrator  models,  tradeshow  machines,  new and used  machines  and damaged
inventory;

     (l)  Lender  shall  have  received  evidence  of  insurance  and loss payee
endorsements  required  hereunder and under the other Financing  Agreements,  in
form and  substance  satisfactory  to  Lender,  and  certificates  of  insurance
policies and/or endorsements naming Lender as loss payee;

     (m) Lender  shall have  received,  in form and  substance  satisfactory  to
Lender,  such  opinion  letters  of  counsel  to  Borrower  with  respect to the
Financing Agreements and such other matters as Lender may request; and

     (n) the  other  Financing  Agreements  and all  instruments  and  documents
hereunder and thereunder  shall have been duly executed and delivered to Lender,
in form and substance satisfactory to Lender.

     4.2 Conditions Precedent to All Loans and Letter of Credit  Accommodations.
Each of the  following is an  additional  condition  precedent to Lender  making
Loans and/or providing Letter of Credit  Accommodations  to Borrower,  including
the initial Loans and Letter of Credit  Accommodations  and any future Loans and
Letter of Credit Accommodations:

     (a) all  representations  and warranties  contained herein and in the other
Financing  Agreements  that are qualified by reference to  materiality  shall be
true and correct and all other  representations and warranties  contained herein
and in the other Financing  Agreements shall be true and correct in all material
respects,  in each case with the same effect as though such  representations and
warranties  had been made on and as of the date of the  making of each such Loan
or providing  each such Letter of Credit  Accommodation  and after giving effect
thereto, except to the extent that such representations and warranties expressly
relate  solely to an  earlier  date (in  which  case  such  representations  and
warranties shall have been true and accurate on and as of such earlier date);

     (b) no Default  or Event of Default  shall  exist or have  occurred  and be
continuing  on and as of the date of the making of such Loan or  providing  each
such Letter of Credit Accommodation and after giving effect thereto.


SECTION 5.    GRANT AND PERFECTION OF SECURITY INTEREST
              -----------------------------------------

     5.1 Grant of Security  Interest.  To secure payment and  performance of all
Obligations, Borrower hereby grants to Lender a continuing security interest in,
a lien upon,  and a right of set off  against,  and hereby  assigns to Lender as
security,  all personal and real property and fixtures and interests in property
and fixtures of Borrower,  whether now owned or hereafter  acquired or existing,
and  wherever  located  (together  with all other  collateral  security  for the
Obligations at any time granted to or held or acquired by Lender,  collectively,
the "Collateral"), including:

     (a) all Accounts;

     (b)  all  general   intangibles,   including,   without   limitation,   all
Intellectual Property;

     (c) all goods, including, without limitation, Inventory and Equipment;

     (d) all chattel  paper  (including  all  tangible  and  electronic  chattel
paper);

     (e) all instruments (including all promissory notes);

     (f) all documents;

     (g) all deposit accounts;

     (h) all letters of credit, banker's acceptances and similar instruments and
including all letter-of-credit rights;

     (i) all supporting  obligations and all present and future liens,  security
interests,  rights,  remedies,  title  and  interest  in, to and in  respect  of
Receivables  and other  Collateral,  including (i) rights and remedies  under or
relating to guaranties,  contracts of  suretyship,  letters of credit and credit
and other  insurance  related to the  Collateral,  (ii)  rights of  stoppage  in
transit, replevin, repossession, reclamation and other rights and remedies of an
unpaid  vendor,  lienor or secured  party,  (iii) goods  described  in invoices,
documents,  contracts or instruments with respect to, or otherwise  representing
or evidencing,  Receivables or other Collateral, including returned, repossessed
and reclaimed  goods,  and (iv)  deposits by and property of account  debtors or
other persons securing the obligations of account debtors;

     (j) all (i) investment property (including securities, whether certificated
or  uncertificated,   securities  accounts,  security  entitlements,   commodity
contracts or commodity accounts) and (ii) monies, credit balances,  deposits and
other property of Borrower now or hereafter held or received by or in transit to
Lender or its Affiliates or at any other depository or other institution from or
for  the  account  of  Borrower,  whether  for  safekeeping,   pledge,  custody,
transmission, collection or otherwise;

     (k) all  commercial  tort  claims,  including,  without  limitation,  those
identified in the Information Certificate;

     (l) to the extent not otherwise described above, all Receivables;

     (m) all Records; and

     (n) all  products  and proceeds of the  foregoing,  in any form,  including
insurance proceeds and all claims against third parties for loss or damage to or
destruction of or other  involuntary  conversion of any kind or nature of any or
all of the other Collateral.

Notwithstanding  anything to the  contrary  set forth in this  Section  5.1, the
Collateral shall not include the interests of Borrower as lessee under the lease
agreement  of  Borrower  with the owner and lessor of the  current  premises  of
Borrower located at 200 Wireless Boulevard, Hauppauge, New York.

     5.2 Perfection of Security Interests.

     (a) Borrower  irrevocably  and  unconditionally  authorizes  Lender (or its
agent) to file at any time and from time to time such financing  statements with
respect to the Collateral naming Lender or its designee as the secured party and
Borrower as debtor,  as Lender may require,  and including any other information
with  respect to  Borrower or  otherwise  required by part 5 of Article 9 of the
Uniform  Commercial Code of such jurisdiction as Lender may determine,  together
with any amendment and continuations with respect thereto,  which  authorization
shall apply to all  financing  statements  filed on,  prior to or after the date
hereof.  Borrower hereby ratifies and approves all financing  statements  naming
Lender or its  designee as secured  party and Borrower as debtor with respect to
the Collateral  (and any amendments  with respect to such financing  statements)
filed by or on  behalf of  Lender  prior to the date  hereof  and  ratifies  and
confirms the  authorization  of Lender to file such  financing  statements  (and
amendments,  if any).  Borrower hereby  authorizes  Lender to adopt on behalf of
Borrower any symbol required for  authenticating  any electronic  filing. In the
event that the description of the collateral in any financing  statement  naming
Lender or its  designee as the  secured  party and  Borrower as debtor  includes
assets and properties of Borrower that do not at any time constitute Collateral,
whether hereunder, under any of the other Financing Agreements or otherwise, the
filing of such financing  statement  shall  nonetheless be deemed  authorized by
Borrower to the extent of the  Collateral  included in such  description  and it
shall not render the financing statement ineffective as to any of the Collateral
or  otherwise  affect  the  financing  statement  as it  applies  to  any of the
Collateral.  In no event shall  Borrower at any time file, or permit or cause to
be filed, any correction statement or termination  statement with respect to any
financing  statement (or amendment or continuation  with respect thereto) naming
Lender or its designee as secured party and Borrower as debtor.

     (b)  Borrower  does  not  have  any  chattel  paper  (whether  tangible  or
electronic)  or  instruments  as of the date hereof,  except as set forth in the
Information  Certificate (other than checks, drafts and other items constituting
payments  in respect of  Receivables  and other  Collateral).  In the event that
Borrower  shall be entitled to or shall  receive any chattel paper or instrument
(other than checks,  drafts and other items constituting  payments in respect of
Receivables and other Collateral) after the date hereof, Borrower shall promptly
notify Lender  thereof in writing.  Promptly  upon the receipt  thereof by or on
behalf of Borrower  (including by any agent or  representative),  Borrower shall
deliver,  or cause to be delivered to Lender,  all  tangible  chattel  paper and
instruments (other than checks,  drafts and other items constituting payments in
respect of Receivables  and other  Collateral)  that Borrower or may at any time
acquire, accompanied by such instruments of transfer or assignment duly executed
in blank as Lender may from time to time specify,  in each case except as Lender
may otherwise  agree. At Lender's  option,  Borrower shall, or Lender may at any
time on behalf of Borrower, cause the original of any such instrument or chattel
paper to be conspicuously  marked in a form and manner acceptable to Lender with
the following  legend  referring to chattel paper or  instruments as applicable:
"This  [chattel  paper][instrument]  is  subject  to the  security  interest  of
Congress Financial Corporation and any sale, transfer, assignment or encumbrance
of this [chattel paper][instrument] violates the rights of such secured party."

     (c) In the  event  that  Borrower  shall at any  time  hold or  acquire  an
interest in any electronic  chattel paper or any "transferable  record" (as such
term is defined in Section 201 of the Federal  Electronic  Signatures  in Global
and  National  Commerce  Act  or  in  Section  16  of  the  Uniform   Electronic
Transactions  Act as in effect in any  relevant  jurisdiction),  Borrower  shall
promptly  notify Lender  thereof in writing.  Promptly  upon  Lender's  request,
Borrower shall take, or cause to be taken, such actions as Lender may reasonably
request to give Lender  control of such  electronic  chattel paper under Section
9-105 of the UCC and control of such  transferable  record under  Section 201 of
the Federal Electronic Signatures in Global and National Commerce Act or, as the
case may be, Section 16 of the Uniform Electronic Transactions Act, as in effect
in such jurisdiction.

     (d)  Borrower  does not have any deposit  accounts  as of the date  hereof,
except as set forth in the Information Certificate. Borrower shall not, directly
or  indirectly,  after the date hereof  open,  establish or maintain any deposit
account unless each of the following  conditions is satisfied:  (i) Lender shall
have received not less than five (5) Business  Days prior written  notice of the
intention  of Borrower to open or  establish  such  account  which  notice shall
specify in reasonable  detail and  specificity  acceptable to Lender the name of
the account, the owner of the account, the name and address of the bank at which
such account is to be opened or  established,  the  individual at such bank with
whom  Borrower is dealing and the  purpose of the  account,  (ii) the bank where
such account is opened or maintained shall be acceptable to Lender, and (iii) on
or before the  opening of such  deposit  account,  Borrower  shall as Lender may
specify either (A) deliver to Lender a Deposit  Account  Control  Agreement with
respect to such deposit  account  duly  authorized,  executed  and  delivered by
Borrower and the bank at which such deposit  account is opened and maintained or
(B)  arrange for Lender to become the  customer of the bank with  respect to the
deposit account on terms and conditions  acceptable to Lender. The terms of this
subsection (d) shall not apply to deposit accounts  specifically and exclusively
used for payroll,  payroll taxes and other employee wage and benefit payments to
or for the benefit of  Borrower's  employees.  Borrower  shall close each of the
deposit  accounts  and  investment  accounts  indicated  to  be  closed  on  the
Information  Certificate  within  sixty  (60)  days  after the date  hereof  and
including the investment account maintained at Blackrock Provident Institutional
Funds, Inc. .

     (e) Borrower does not own or hold, directly or indirectly,  beneficially or
as record owner or both, any investment property, as of the date hereof, or have
any investment account,  securities account,  commodity account or other similar
account  with any  bank or  other  financial  institution  or  other  securities
intermediary  or  commodity  intermediary  as of the date  hereof,  in each case
except as set forth in the Information Certificate.

          (i) In the event that  Borrower  shall be  entitled to or shall at any
     time after the date  hereof hold or acquire  any  certificated  securities,
     Borrower  shall  promptly  endorse,  assign and deliver the same to Lender,
     accompanied by such  instruments of transfer or assignment duly executed in
     blank as Lender may from time to time specify.  If any  securities,  now or
     hereafter  acquired  by  Borrower  are  uncertificated  and are  issued  to
     Borrower or its  nominee  directly by the issuer  thereof,  Borrower  shall
     immediately  notify Lender thereof and shall as Lender may specify,  either
     (A) cause the issuer to agree to comply with instructions from Lender as to
     such  securities,  without further consent of Borrower or such nominee,  or
     (B) arrange for Lender to become the registered owner of the securities.

          (ii) Borrower shall not, directly or indirectly, after the date hereof
     open,  establish or maintain any investment  account,  securities  account,
     commodity  account  or any  other  similar  account  (other  than a deposit
     account) with any securities  intermediary or commodity intermediary unless
     each of the  following  conditions  is  satisfied:  (A)  Lender  shall have
     received not less than five (5) Business Days prior  written  notice of the
     intention of Borrower to open or establish  such account which notice shall
     specify in reasonable detail and specificity  acceptable to Lender the name
     of the  account,  the owner of the  account,  the name and  address  of the
     securities  intermediary or commodity intermediary at which such account is
     to be opened or established,  the individual at such intermediary with whom
     Borrower  is dealing  and the purpose of the  account,  (B) the  securities
     intermediary  or  commodity  intermediary  (as the case may be) where  such
     account is opened or maintained  shall be acceptable to Lender,  and (C) on
     or before the opening of such  investment  account,  securities  account or
     other  similar   account  with  a  securities   intermediary  or  commodity
     intermediary,  Borrower  shall as  Lender  may  specify  (other  than as to
     investment accounts  exclusively used for payroll,  payroll taxes and other
     employee  wage and  benefits  payments to or for the benefit of  Borrower's
     employees)  either (1) execute and  deliver,  and cause to be executed  and
     delivered to Lender, an Investment  Property Control Agreement with respect
     thereto  duly  authorized,  executed  and  delivered  by Borrower  and such
     securities intermediary or commodity intermediary or (2) arrange for Lender
     to become the entitlement  holder with respect to such investment  property
     on terms and conditions acceptable to Lender.

     (f) Borrower is not the  beneficiary or otherwise  entitled to any right to
payment under any letter of credit, banker's acceptance or similar instrument as
of the date hereof, except as set forth in the Information  Certificate.  In the
event that  Borrower  shall be entitled to or shall receive any right to payment
under any letter of  credit,  banker's  acceptance  or any  similar  instrument,
whether as  beneficiary  thereof or otherwise  after the date  hereof,  Borrower
shall promptly notify Lender thereof in writing. Borrower shall immediately,  as
Lender may specify, either (i) deliver, or cause to be delivered to Lender, with
respect to any such letter of credit, banker's acceptance or similar instrument,
the written  agreement of the issuer and any other nominated person obligated to
make any payment in respect  thereof  (including  any  confirming or negotiating
bank),  in  form  and  substance  satisfactory  to  Lender,  consenting  to  the
assignment  of the  proceeds of the letter of credit to Lender by  Borrower  and
agreeing  to make all  payments  thereon  directly  to Lender  or as Lender  may
otherwise  direct or (ii) cause Lender to become,  at  Borrower's  expense,  the
transferee  beneficiary of the letter of credit,  banker's acceptance or similar
instrument (as the case may be).

     (g) Borrower has no commercial tort claims as of the date hereof, except as
set forth in the  Information  Certificate.  In the event that Borrower shall at
any time after the date hereof have any commercial  tort claims,  Borrower shall
promptly  notify Lender thereof in writing,  which notice shall (i) set forth in
reasonable  detail  the basis for and nature of such  commercial  tort claim and
(ii) include the express  grant by Borrower to Lender of a security  interest in
such  commercial tort claim (and the proceeds  thereof).  In the event that such
notice does not include such grant of a security  interest,  the sending thereof
by Borrower to Lender shall be deemed to constitute  such grant to Lender.  Upon
the sending of such notice,  any commercial tort claim  described  therein shall
constitute part of the Collateral and shall be deemed included therein.  Without
limiting  the  authorization  of Lender  provided  in Section  5.2(a)  hereof or
otherwise  arising by the execution by Borrower of this  Agreement or any of the
other Financing Agreements, Lender is hereby irrevocably authorized from time to
time and at any time to file  such  financing  statements  naming  Lender or its
designee as secured  party and  Borrower  as debtor,  or any  amendments  to any
financing statements,  covering any such commercial tort claim as Collateral. In
addition, Borrower shall promptly upon Lender's request, execute and deliver, or
cause to be executed and delivered,  to Lender such other agreements,  documents
and  instruments as Lender may require in connection  with such  commercial tort
claim.

     (h)  Borrower  does  not  have  any  goods,  documents  of  title  or other
Collateral in the custody, control or possession of a third party as of the date
hereof, except: (i) as set forth in the Information Certificate,  (ii) for goods
located in the United  States in transit  to a location  of  Borrower  permitted
herein in the ordinary  course of business of Borrower in the  possession of the
carrier  transporting  such goods and (iii) for goods located outside the United
States in transit to a location of  Borrower  permitted  herein in the  ordinary
course of business of Borrower  in the  possession  of the carrier  transporting
such goods that are purchased by Borrower with a Letter of Credit Accommodation.
In the event that any goods,  documents of title or other  Collateral are at any
time after the date hereof in the custody,  control or  possession  of any other
person not referred to in the Information Certificate or such carriers, Borrower
shall promptly notify Lender thereof in writing. Promptly upon Lender's request,
Borrower shall deliver to Lender a Collateral  Access Agreement duly authorized,
executed and delivered by such person and Borrower.

     (i) Borrower  shall take any other actions  reasonably  requested by Lender
from time to time to cause the attachment, perfection and first priority of, and
the ability of Lender to enforce, the security interest of Lender in any and all
of the Collateral, including, without limitation, (i) executing, delivering and,
where appropriate,  filing financing  statements and amendments relating thereto
under the UCC or other  applicable  law, to the extent,  if any, that Borrower's
signature thereon is required  therefor,  (ii) causing Lender's name to be noted
as secured party on any  certificate of title for a titled good if such notation
is a condition to attachment, perfection or priority of, or ability of Lender to
enforce,  the security  interest of Lender in such  Collateral,  (iii) complying
with any provision of any statute,  regulation or treaty of the United States as
to  any  Collateral  if  compliance  with  such  provision  is  a  condition  to
attachment,  perfection  or priority  of, or ability of Lender to  enforce,  the
security interest of Lender in such Collateral,  (iv) obtaining the consents and
approvals  of any  Governmental  Authority or third  party,  including,  without
limitation,  any consent of any  licensor,  lessor or other person  obligated on
Collateral,  and taking all actions  required by any earlier versions of the UCC
or by other law, as applicable in any relevant jurisdiction.


SECTION 6.    COLLECTION AND ADMINISTRATION
              -----------------------------

     6.1  Borrower's  Loan  Account.  Lender  shall  maintain  one or more  loan
account(s)  on its books in which  shall be  recorded  (a) all Loans,  Letter of
Credit Accommodations and other Obligations and the Collateral, (b) all payments
made by or on  behalf  of  Borrower  and (c) all other  appropriate  debits  and
credits as provided in this Agreement,  including fees, charges, costs, expenses
and  interest.  All entries in the loan  account(s)  shall be made in accordance
with Lender's customary practices as in effect from time to time.

     6.2  Statements.  Lender  shall  render to Borrower  each month a statement
setting forth the balance in the Borrower's loan account(s) maintained by Lender
for Borrower pursuant to the provisions of this Agreement,  including principal,
interest,  fees,  costs and expenses.  Each such  statement  shall be subject to
subsequent  adjustment by Lender but shall, absent manifest errors or omissions,
be considered  correct and deemed accepted by Borrower and conclusively  binding
upon Borrower as an account  stated except to the extent that Lender  receives a
written  notice from  Borrower of any specific  exceptions  of Borrower  thereto
within thirty (30) days after the date such statement has been mailed by Lender.
Until such time as Lender shall have rendered to Borrower a written statement as
provided above,  the balance in Borrower's loan account(s)  shall be presumptive
evidence of the amounts due and owing to Lender by Borrower.

       6.3    Collection of Accounts.

     (a) Borrower shall establish and maintain, at its expense, blocked accounts
or lockboxes and related blocked accounts (in either case, "Blocked  Accounts"),
as Lender may specify,  with such banks as are  acceptable  to Lender into which
Borrower shall promptly deposit and direct its account debtors to directly remit
all payments on Receivables and all payments  constituting proceeds of Inventory
or other  Collateral  in the  identical  form in which such  payments  are made,
whether by cash, check or other manner.  Borrower shall deliver,  or cause to be
delivered to Lender,  a Depository  Account Control  Agreement duly  authorized,
executed and  delivered by each bank where a Blocked  Account is  maintained  as
provided  in Section  5.2 hereof or at any time and from time to time Lender may
become bank's  customer  with respect to the Blocked  Accounts and promptly upon
Lender's  request,  Borrower  shall  execute  and  deliver  such  agreements  or
documents as Lender may require in connection therewith.

     (b)  Lender  shall  instruct  the  depository  banks at which  the  Blocked
Accounts are maintained to transfer the funds on deposit in the Blocked Accounts
to such operating bank account of Borrower as Borrower may specify in writing to
Lender  until such time as Lender shall notify the  depository  bank  otherwise.
Without  limiting  any other  rights or remedies  of Lender,  Lender may, at its
option,  instruct  the  depository  banks  at which  the  Blocked  Accounts  are
maintained  to transfer  all  available  funds  received or  deposited  into the
Blocked  Accounts to the Lender Payment  Account at any time that either:  (i) a
Default or an Event of Default shall exist or have  occurred and be  continuing,
or (ii)  Excess  Availability  is less than  $5,000,000.  Lender  shall  send to
Borrower a copy of any such written instruction sent by Lender to the depository
bank  promptly  thereafter.  In the  event  that at any time  after  Lender  has
instructed  such  depository  banks to transfer such funds to the Lender Payment
Account,  each of the  conditions set forth in clauses (i) and (ii) above do not
exist or have not occurred and are not  continuing for the period of thirty (30)
consecutive  days  immediately  prior to the date of the  receipt  by  Lender of
Borrower's  written  request  that  Lender  instruct  such  depository  banks to
transfer the funds on deposit in such accounts to such operating deposit account
of  Borrower  as  Borrower  may  specify in writing to Lender,  Lender  shall so
instruct such depository  banks (so long as such conditions do not exist or have
not occurred and are continuing as of the date of such instructions by Lender to
such depository banks) until such time as Lender is entitled to notify and shall
notify the depository  banks otherwise as provided  above.  Borrower agrees that
all payments made to such Blocked Accounts or other funds received and collected
by Lender,  whether in respect of the  Receivables,  as proceeds of Inventory or
other  Collateral or otherwise shall be treated as payments to Lender in respect
of the Obligations and therefore shall  constitute the property of Lender to the
extent of the then outstanding Obligations.

     (c) For  purposes  of  calculating  the  amount of the Loans  available  to
Borrower,  such payments will be applied  (conditional upon final collection) to
the  Obligations  on the  Business  Day of  receipt  by  Lender  of  immediately
available funds in the Lender Payment Account  provided such payments and notice
thereof are received in accordance  with Lender's usual and customary  practices
as in effect from time to time and within  sufficient time to credit  Borrower's
loan account on such day,  and if not,  then on the next  Business  Day. For the
purposes of  calculating  interest on the  Obligations,  such  payments or other
funds  received  will be  applied  (conditional  upon final  collection)  to the
Obligations  two (2) Business Days  following the date of receipt of immediately
available funds by Lender in the Lender Payment  Account  provided such payments
or other funds and notice thereof are received in accordance with Lender's usual
and  customary  practices  as in effect from time to time and within  sufficient
time to credit Borrower's loan account on such day, and if not, then on the next
Business  Day.  In the event  that at any time or from time to time there are no
Loans  outstanding,  Lender  shall be  entitled to an  administrative  fee in an
amount  equivalent  to the  Interest  Rate for Prime  Rate Loans (on a per annum
basis) multiplied by the amount of the funds received in the Blocked Account for
such day as calculated by Lender in accordance with its customary practice.

     (d)  Borrower  and  its   shareholders,   directors,   employees,   agents,
Subsidiaries or other Affiliates shall,  acting as trustee for Lender,  receive,
as the  property  of Lender,  any  monies,  checks,  notes,  drafts or any other
payment  relating to and/or proceeds of Accounts or other  Collateral which come
into their possession or under their control and shall  immediately upon receipt
thereof  deposit or cause the same to be deposited in the Blocked  Accounts,  or
remit the same or cause the same to be remitted,  in kind, to Lender at any time
that Lender has notified the depository  banks at which the Blocked Accounts are
maintained  to  transfer  funds in the Blocked  Accounts  to the Lender  Payment
Account.  In no event shall the same be commingled  with Borrower's own funds at
any time that  Lender has  notified  the  depository  banks at which the Blocked
Accounts are maintained to transfer funds in the Blocked  Accounts to the Lender
Payment  Account.  Borrower agrees to reimburse Lender on demand for any amounts
owed or paid to any bank at which a Blocked  Account is established or any other
bank or person involved in the transfer of funds to or from the Blocked Accounts
arising out of Lender's payments to or  indemnification  of such bank or person.
The obligation of Borrower to reimburse Lender for such amounts pursuant to this
Section 6.3 shall survive the termination or non-renewal of this Agreement.

     6.4 Payments.

     (a) All  Obligations  shall be  payable to the  Lender  Payment  Account as
provided in Section 6.3 or such other place as Lender may designate from time to
time. Lender shall apply payments received or collected from Borrower or for the
account of  Borrower  (including  the  monetary  proceeds of  collections  or of
realization upon any Collateral) as follows: first, to pay any fees, indemnities
or expense  reimbursements  then due to Lender  from  Borrower;  second,  to pay
interest due in respect of any Loans;  third, to pay principal due in respect of
the Loans;  fourth, to pay or prepay any other  Obligations  whether or not then
due, in such order and manner as Lender determines.  Notwithstanding anything to
the contrary contained in this Agreement, (i) unless so directed by Borrower, or
unless a Default  or an Event of Default  shall  exist or have  occurred  and be
continuing,  Lender  shall not  apply  any  payments  which it  receives  to any
Eurodollar Rate Loans,  except (A) on the expiration date of the Interest Period
applicable to any such Eurodollar Rate Loans, or (B) in the event that there are
no  outstanding  Prime  Rate  Loans  and (ii) to the  extent  Borrower  uses any
proceeds of the Loans or Letter of Credit Accommodations to acquire rights in or
the use of any Collateral or to repay any Indebtedness used to acquire rights in
or the use of any Collateral,  payments in respect of the  obligations  shall be
deemed applied first to the Obligations  arising from Loans and Letter of Credit
Accommodations  that  were  not  used  for  such  purposes  and  second  to  the
Obligations arising from Loans and Letter of Credit  Accommodations the proceeds
of which  were used to  acquire  rights in or the use of any  Collateral  in the
chronological order in which Borrower acquired such rights or use.

     (b) At Lender's option, all principal,  interest, fees, costs, expenses and
other charges  provided for in this Agreement or the other Financing  Agreements
may be charged directly to the loan account(s) of Borrower.  Borrower shall make
all  payments  to Lender on the  Obligations  free and  clear  of,  and  without
deduction  or  withholding  for or on  account  of,  any  setoff,  counterclaim,
defense,   duties,  taxes,  levies,  imposts,  fees,  deductions,   withholding,
restrictions  or  conditions of any kind. If after receipt of any payment of, or
proceeds of Collateral applied to the payment of, any of the Obligations, Lender
is required to  surrender  or return such  payment or proceeds to any Person for
any reason,  then the  Obligations  intended to be  satisfied by such payment or
proceeds shall be reinstated  and continue and this Agreement  shall continue in
full force and effect as if such  payment or proceeds  had not been  received by
Lender. Borrower shall be liable to pay to Lender, and does hereby indemnify and
hold Lender  harmless for the amount of any payments or proceeds  surrendered or
returned.  This Section 6.4 shall remain effective  notwithstanding any contrary
action  which may be taken by Lender in reliance  upon such payment or proceeds.
This  Section  6.4  shall  survive  the  payment  of  the  Obligations  and  the
termination or non-renewal of this Agreement.

     6.5 Authorization to Make Loans. Lender is authorized to make the Loans and
provide  the  Letter of Credit  Accommodations  based upon  telephonic  or other
instructions  received  from anyone  purporting  to be an officer of Borrower or
other  authorized  person or, at the  discretion  of  Lender,  if such Loans are
necessary to satisfy any Obligations. All requests for Loans or Letter of Credit
Accommodations  hereunder shall specify the date on which the requested  advance
is to be made or Letter of Credit Accommodations established (which day shall be
a Business Day) and the amount of the requested  Loan.  Requests  received after
1:00 p.m.  New York City time on any day shall be deemed to have been made as of
the opening of business on the immediately following Business Day. All Loans and
Letter of Credit  Accommodations  under  this  Agreement  shall be  conclusively
presumed  to have been made to, and at the  request of and for the  benefit  of,
Borrower  when  deposited  to the credit of Borrower or  otherwise  disbursed or
established  in accordance  with the  instructions  of Borrower or in accordance
with the terms and conditions of this Agreement.

     6.6 Use of Proceeds.  Borrower shall use the initial  proceeds of the Loans
provided by Lender to Borrower  hereunder  only for: (a) payments to each of the
persons listed in the  disbursement  direction  letter  furnished by Borrower to
Lender  on or  about  the  date  hereof  and (b)  costs,  expenses  and  fees in
connection  with the  preparation,  negotiation,  execution and delivery of this
Agreement and the other Financing Agreements.  All other Loans made or Letter of
Credit Accommodations  provided by Lender to Borrower pursuant to the provisions
hereof shall be used by Borrower only for general operating, working capital and
other proper  corporate  purposes of Borrower not  otherwise  prohibited  by the
terms hereof. None of the proceeds will be used, directly or indirectly, for the
purpose of  purchasing  or carrying  any margin  security or for the purposes of
reducing or retiring any indebtedness which was originally  incurred to purchase
or carry any margin  security or for any other  purpose which might cause any of
the Loans to be considered a "purpose credit" within the meaning of Regulation U
of the Board of Governors of the Federal Reserve System, as amended.

SECTION 7.  COLLATERAL REPORTING AND COLLATERAL COVENANTS
            ---------------------------------------------

     7.1 Collateral Reporting.

     (a) Borrower  shall provide  Lender with the following  documents in a form
satisfactory to Lender:

          (i) as soon as  possible  after the end of each week (but in any event
     by the close of business in New York City on the fourth (4th)  Business Day
     after the end of each  such  period),  or more  frequently  as  Lender  may
     request at any time that Excess  Availability  is less than $5,000,000 or a
     Default or Event of Default shall exist or have occurred and be continuing,
     a schedule of sales made,  collections received and credit memos issued for
     such period;

          (ii) as soon as possible after the end of each month (but in any event
     within twenty (20) days after the end thereof),  on a monthly basis or more
     frequently  as Lender may request at any time that Excess  Availability  is
     less than  $5,000,000  or a Default or Event of Default shall exist or have
     occurred and be continuing,  (A) perpetual inventory reports, (B) inventory
     reports by  location  and  category  (including  identifying  Inventory  at
     locations  owned and  operated  by third  parties or on  consignment),  (C)
     agings of accounts payable (and including information indicating the status
     of payments to owners and lessors of the leased  premises of Borrower)  and
     (D) agings of accounts  receivable  (together with a reconciliation  to the
     previous month's aging and general ledger);

          (iii) upon Lender's  request,  (A) copies of customer  statements  and
     credit memos,  remittance advices and reports,  and copies of deposit slips
     and bank statements, (B) copies of shipping and delivery documents, and (C)
     copies of purchase  orders,  invoices and delivery  documents for Inventory
     and Equipment acquired by Borrower;

          (iv) such other  reports as to the  Collateral as Lender shall request
     from time to time; and

     (b) If any of Borrower's  records or reports of the Collateral are prepared
or  maintained  by an accounting  service,  contractor,  shipper or other agent,
Borrower  hereby  irrevocably  authorizes such service,  contractor,  shipper or
agent to deliver such records,  reports,  and related documents to Lender and to
follow Lender's  instructions  with respect to further services at any time that
an Event of Default exists or has occurred and is continuing.

       7.2    Accounts Covenants.

     (a) Borrower  shall notify  Lender  promptly of: (i) any material  delay in
Borrower's  performance  of any of its  obligations to any account debtor or the
assertion  of any  claims,  offsets,  defenses or  counterclaims  by any account
debtor, or any disputes with account debtors,  or any settlement,  adjustment or
compromise  thereof,  (ii) all  material  adverse  information  relating  to the
financial  condition of any account  debtor and (iii) any event or  circumstance
which,  to  Borrower's  knowledge  would cause  Lender to consider  any material
amount of then existing Accounts as no longer  constituting  Eligible  Accounts.
Credits,  discounts,  allowances,  extensions  and  agreements  for  any  of the
foregoing  may be granted to any account  debtor only in the ordinary  course of
Borrower's  business  in  accordance  with  practices  and  policies  previously
disclosed  to Lender and to the extent set forth in the  schedules  delivered to
Lender  pursuant to Section 7.1(a) above.  So long as no Event of Default exists
or has occurred and is continuing,  Borrower shall settle,  adjust or compromise
any claim, offset,  counterclaim or dispute with any account debtor. At any time
that an Event of Default exists or has occurred and is continuing, Lender shall,
at its option,  have the exclusive  right to settle,  adjust or  compromise  any
claim,  offset,  counterclaim  or  dispute  with  account  debtors  or grant any
credits, discounts or allowances.

     (b) With  respect to each  Account:  (i) the  amounts  shown on any invoice
delivered  to Lender or schedule  thereof  delivered to Lender shall be true and
complete,  (ii) no payments  shall be made thereon except  payments  immediately
delivered to Lender  pursuant to the terms of this  Agreement,  (iii) no credit,
discount,  allowance or extension or agreement for any of the foregoing shall be
granted to any account  debtor except as reported to Lender in  accordance  with
this Agreement and except for credits, discounts,  allowances or extensions made
or given in the  ordinary  course of  Borrower's  business  in  accordance  with
practices and policies  previously  disclosed to Lender,  (iv) there shall be no
setoffs,  deductions,  contras, defenses,  counterclaims or disputes existing or
asserted with respect  thereto  except as reported to Lender in accordance  with
the terms of this Agreement,  (v) none of the  transactions  giving rise thereto
will  violate  any  applicable  foreign,   Federal,   State  or  local  laws  or
regulations, all documentation relating thereto will be legally sufficient under
such laws and regulations and all such documentation will be legally enforceable
in accordance with its terms.

     (c) Lender shall have the right at any time or times,  in Lender's  name or
in the name of a nominee of Lender, to verify the validity,  amount or any other
matter  relating  to any  Account  or  other  Collateral,  by  mail,  telephone,
facsimile transmission or otherwise.

     7.3 Inventory Covenants.  With respect to the Inventory: (a) Borrower shall
at all times  maintain  inventory  records  reasonably  satisfactory  to Lender,
keeping correct and accurate  records  itemizing and describing the kind,  type,
quality  and  quantity  of  Inventory,   Borrower's   cost  therefor  and  daily
withdrawals  therefrom  and  additions  thereto;  (b) Borrower  shall  conduct a
physical  count of the  Inventory  at least once each  year,  but at any time or
times as  Lender  may  request  on or after an Event of  Default,  and  promptly
following such physical  inventory shall supply Lender with a report in the form
and with such specificity as may be reasonably satisfactory to Lender concerning
such  physical  count;  (c)  Borrower  shall not remove any  Inventory  from the
locations set forth or permitted  herein,  without the prior written  consent of
Lender,  except for sales of  Inventory  in the  ordinary  course of  Borrower's
business and except to move  Inventory  directly  from one location set forth or
permitted herein to another such location and except for Inventory  shipped from
the  manufacturer  thereof to Borrower  which is in transit to the locations set
forth or permitted  herein;  (d) upon Lender's  request,  Borrower shall, at its
expense,  no more than two (2) times in any twelve (12) month period, but at any
time or times as Lender may request on or after an Event of Default,  deliver or
cause to be delivered to Lender written  appraisals as to the Inventory in form,
scope and  methodology  acceptable  to Lender and by an appraiser  acceptable to
Lender,  addressed  to Lender and upon which  Lender is  expressly  permitted to
rely; (e) Borrower shall produce, use, store and maintain the Inventory with all
reasonable care and caution and in accordance  with applicable  standards of any
insurance and in conformity with applicable laws (including the  requirements of
the  Federal  Fair  Labor  Standards  Act of 1938,  as  amended  and all  rules,
regulations  and orders  related  thereto);  (f) none of the  Inventory or other
Collateral  constitutes  farm  products or the  proceeds  thereof;  (g) Borrower
assumes  all  responsibility  and  liability  arising  from or  relating  to the
production,  use, sale or other disposition of the Inventory; (h) Borrower shall
not sell  Inventory  to any  customer  on  approval,  or any other  basis  which
entitles  the  customer to return or may obligate  Borrower to  repurchase  such
Inventory;  (i)  Borrower  shall  keep  the  Inventory  in good  and  marketable
condition; and (j) Borrower shall not, without prior written notice to Lender or
the specific  identification  of such Inventory with respect thereto provided by
Borrower to Lender  pursuant  to Section  7.1(a)  hereof,  acquire or accept any
Inventory on consignment or approval.

     7.4 Equipment and Real  Property  Covenants.  With respect to the Equipment
and Real Property:  (a) Borrower shall keep the Equipment in good order, repair,
running and marketable condition (ordinary wear and tear excepted); (b) Borrower
shall use the Equipment and Real Property with all  reasonable  care and caution
and in accordance with  applicable  standards of any insurance and in conformity
with all  applicable  laws; (c) the Equipment is and shall be used in Borrower's
business and not for  personal,  family,  household or farming use; (d) Borrower
shall not remove any Equipment from the locations set forth or permitted herein,
except to the extent  necessary to have any Equipment  repaired or maintained in
the ordinary  course of the business of Borrower or to move  Equipment  directly
from one  location set forth or  permitted  herein to another such  location and
except for the movement of motor vehicles used by or for the benefit of Borrower
in the ordinary  course of business;  (e) the  Equipment is now and shall remain
personal  property and Borrower  shall not permit any of the  Equipment to be or
become a part of or affixed  to real  property;  and (f)  Borrower  assumes  all
responsibility  and  liability  arising from the use of the  Equipment  and Real
Property.

     7.5 Power of Attorney.  Borrower hereby irrevocably designates and appoints
Lender  (and all persons  designated  by Lender) as  Borrower's  true and lawful
attorney-in-fact, and authorizes Lender, in Borrower's or Lender's name, to: (a)
at any time an Event of Default  exists or has  occurred and is  continuing  (i)
demand  payment on  Receivables  or other  Collateral,  (ii) enforce  payment of
Receivables by legal proceedings or otherwise,  (iii) exercise all of Borrower's
rights and remedies to collect any Receivable or other Collateral,  (iv) sell or
assign any Receivable upon such terms, for such amount and at such time or times
as the Lender deems advisable, (v) settle, adjust,  compromise,  extend or renew
an Account,  (vi) discharge and release any Receivable,  (vii) prepare, file and
sign  Borrower's  name on any  proof  of claim in  bankruptcy  or other  similar
document  against  an  account  debtor  or  other  obligor  in  respect  of  any
Receivables or other  Collateral,  (viii) notify the post office  authorities to
change the address for delivery of  remittances  from  account  debtors or other
obligors in respect of Receivables or other proceeds of Collateral to an address
designated by Lender, and open and hold on behalf of Borrower all mail addressed
to Borrower (which mail shall be available to Borrower at the premises of Lender
or such other  place as Lender may  specify  to the extent not  relating  to the
Collateral) and handle and store all mail relating to the  Collateral;  and (ix)
do all acts and  things  which are  necessary,  in  Lender's  determination,  to
fulfill  Borrower's  obligations  under this  Agreement and the other  Financing
Agreements  and (b) at any time to (i) take control in any manner of any item of
payment  in respect of  Receivables  or  constituting  Collateral  or  otherwise
received in or for deposit in the Blocked  Accounts if Lender has  notified  the
depository  banks at which the Blocked Accounts are maintained to transfer funds
in the Blocked  Accounts to the Lender Payment Account or in any event, any item
of payment  in  respect of  Receivables  or  constituting  Collateral  otherwise
received  by Lender,  (ii) have  access to any  lockbox or postal box into which
remittances  from account debtors or other obligors in respect of Receivables or
other  proceeds of  Collateral  are sent or received at any time that Lender has
notified the  depository  banks at which the Blocked  Accounts are maintained to
transfer  funds in the Blocked  Accounts to the Lender  Payment  Account,  (iii)
endorse  Borrower's  name upon any items of payment in respect of Receivables or
constituting  Collateral or otherwise received by Lender and deposit the same in
Lender's account for application to the Obligations,  provided,  that, if Lender
has not  notified  the  depository  banks  at which  the  Blocked  Accounts  are
maintained  to  transfer  funds in the Blocked  Accounts  to the Lender  Payment
Account  and no  Default  or Event of  Default  exists  or has  occurred  and is
continuing,  Lender shall  notify  Borrower  that it has  received  such item of
payment,  (iv)  endorse  Borrower's  name  upon  any  chattel  paper,  document,
instrument, invoice, or similar document or agreement relating to any Receivable
or any goods pertaining thereto or any other Collateral, including any warehouse
or other  receipts,  or bills of lading and other  negotiable or  non-negotiable
documents, (v) clear Inventory the purchase of which was financed with Letter of
Credit Accommodations through U.S. Customs or foreign export control authorities
in Borrower's name, Lender's name or the name of Lender's designee,  and to sign
and deliver to customs  officials powers of attorney in Borrower's name for such
purpose,  and to complete in Borrower's  or Lender's  name,  any order,  sale or
transaction,  obtain the necessary documents in connection therewith and collect
the  proceeds  thereof,  (vi)  sign  Borrower's  name  on  any  verification  of
Receivables and notices thereof to account debtors or any secondary  obligors or
other  obligors in respect  thereof.  Borrower  hereby  releases  Lender and its
officers,  employees and designees from any liabilities  arising from any act or
acts  under  this  power of  attorney  and in  furtherance  thereof,  whether of
omission or commission,  except as a result of Lender's own gross  negligence or
wilful misconduct as determined  pursuant to a final  non-appealable  order of a
court of competent jurisdiction.

     7.6 Right to Cure. Lender may, at its option,  (a) upon notice to Borrower,
cure any default by Borrower  under any  material  agreement  with a third party
that affects the Collateral, its value or the ability of Lender to collect, sell
or  otherwise  dispose of the  Collateral  or the rights and  remedies of Lender
therein or the ability of Borrower to perform its obligations hereunder or under
the other Financing  Agreements,  (b) pay or bond on appeal any judgment entered
against  Borrower,  (c)  discharge  taxes,  liens,  security  interests or other
encumbrances  at any time levied on or existing  with respect to the  Collateral
and (d) pay any amount,  incur any expense or perform any act which, in Lender's
judgment, is necessary or appropriate to preserve,  protect,  insure or maintain
the Collateral and the rights of Lender with respect thereto. Lender may add any
amounts so expended to the Obligations and charge  Borrower's  account therefor,
such  amounts to be  repayable  by Borrower on demand.  Lender shall be under no
obligation  to effect such cure,  payment or bonding and shall not, by doing so,
be deemed to have assumed any  obligation or liability of Borrower.  Any payment
made or other  action  taken by  Lender  under  this  Section  shall be  without
prejudice  to any right to assert an Event of Default  hereunder  and to proceed
accordingly.

     7.7 Access to Premises.  From time to time as  requested by Lender,  at the
cost and expense of  Borrower,  (a) Lender or its designee  shall have  complete
access to all of  Borrower's  premises  during normal  business  hours and after
notice to Borrower, or at any time and without notice to Borrower if an Event of
Default  exists  or  has  occurred  and  is  continuing,  for  the  purposes  of
inspecting,  verifying and auditing the Collateral  and all of Borrower's  books
and records,  including the Records,  and (b) Borrower shall promptly furnish to
Lender such copies of such books and records or extracts therefrom as Lender may
request,  and (c) Lender or its designee may use during  normal  business  hours
such  of  Borrower's  personnel,  equipment,  supplies  and  premises  as may be
reasonably  necessary for the foregoing and if an Event of Default exists or has
occurred and is continuing for the collection of Receivables  and realization of
other Collateral.


SECTION 8.    REPRESENTATIONS AND WARRANTIES
              ------------------------------

     Borrower  hereby  represents  and warrants to Lender the  following  (which
shall  survive the  execution  and  delivery of this  Agreement),  the truth and
accuracy  of which  are a  continuing  condition  of the  making  of  Loans  and
providing Letter of Credit Accommodations by Lender to Borrower:

     8.1 Corporate  Existence;  Power and  Authority.  Borrower is a corporation
duly organized and in good standing under the laws of its state of incorporation
and is duly  qualified  as a foreign  corporation  and in good  standing  in all
states  or other  jurisdictions  where the  nature  and  extent of the  business
transacted by it or the ownership of assets makes such qualification  necessary,
except for those jurisdictions in which the failure to so qualify would not have
a  material  adverse  effect  on  Borrower's  financial  condition,  results  of
operation  or business  or the rights of Lender in or to any of the  Collateral.
The execution,  delivery and performance of this Agreement,  the other Financing
Agreements and the  transactions  contemplated  hereunder and thereunder (a) are
all within  Borrower's  corporate  powers,  (b) have been duly authorized by all
necessary  action of Borrower,  (c) are not in contravention of law or the terms
of Borrower's  certificate of incorporation,  by-laws,  or other  organizational
documentation, or any indenture, agreement or undertaking to which Borrower is a
party or by which  Borrower or its property are bound and (d) will not result in
the  creation or  imposition  of, or require or give rise to any  obligation  to
grant,  any  lien,  security  interest,  charge  or other  encumbrance  upon any
property of Borrower other than in favor of Lender. This Agreement and the other
Financing Agreements constitute legal, valid and binding obligations of Borrower
enforceable  in  accordance  with  their  respective   terms,   except  as  such
enforceability  may  be  limited  by  an  applicable   bankruptcy,   insolvency,
reorganization, or similar law affecting creditors' rights generally and general
principles of equity.

8.2   Name; State of Organization; Chief Executive Office; Collateral Locations.
      -------------------------------------------------------------------------

     (a) The exact legal name of Borrower is as set forth on the signature  page
of this Agreement and in the Information  Certificate.  Borrower has not, during
the five years immediately prior to the date of this Agreement, been known by or
used any other  corporate  or  fictitious  name or been a party to any merger or
consolidation, or acquired all or substantially all of the assets of any Person,
or  acquired  any of its  property  or  assets  out of the  ordinary  course  of
business, except as set forth in the Information Certificate.

     (b)  Borrower  is  an  organization  of  the  type  and  organized  in  the
jurisdiction  set  forth  in  the  Information   Certificate.   The  Information
Certificate  accurately sets forth the organizational  identification  number of
Borrower or accurately  states that Borrower has none and accurately  sets forth
the federal employer identification number of Borrower.

     (c) The  chief  executive  office  and  mailing  address  of  Borrower  and
Borrower's Records concerning Accounts are, as of the date hereof,  located only
at the address identified as such in Schedule 8.2 to the Information Certificate
and  its  only  other  places  of  business  and the  only  other  locations  of
Collateral,  if  any,  are  the  addresses  set  forth  in  Schedule  8.2 to the
Information  Certificate,  subject to the right of  Borrower  to  establish  new
locations in  accordance  with Section 9.2 below.  The  Information  Certificate
correctly  identifies any of such locations  which are not owned by Borrower and
sets forth the owners and/or operators thereof.

     8.3  Financial  Statements;  No  Material  Adverse  Change.  All  financial
statements relating to Borrower which have been or may hereafter be delivered by
Borrower to Lender have been prepared in accordance  with GAAP (except as to any
interim  financial  statements,  to the extent  such  statements  are subject to
normal year-end  adjustments and do not include any notes) and fairly present in
all material  respects the  financial  condition and the results of operation of
Borrower  as at the  dates and for the  periods  set  forth  therein.  Except as
disclosed in any interim  financial  statements  furnished by Borrower to Lender
prior to the date of this Agreement,  there has been no material  adverse change
in the assets, liabilities, properties and condition, financial or otherwise, of
Borrower,  since  the  date of the  most  recent  audited  financial  statements
furnished by Borrower to Lender prior to the date of this Agreement.

     8.4 Priority of Liens;  Title to  Properties.  The security  interests  and
liens granted to Lender under this Agreement and the other Financing  Agreements
constitute  valid and perfected  first priority liens and security  interests in
and upon the Collateral  subject only to the liens  indicated on Schedule 8.4 to
the  Information  Certificate  and the other liens  permitted  under Section 9.8
hereof.  Borrower has good and marketable fee simple title to or valid leasehold
interests in all of its Real Property and good, valid and merchantable  title to
all of its other properties and assets subject to no liens, mortgages,  pledges,
security interests, encumbrances or charges of any kind, except those granted to
Lender  and such  others  as are  specifically  listed  on  Schedule  8.4 to the
Information Certificate or permitted under Section 9.8 hereof.

     8.5 Tax  Returns.  Borrower has filed,  or caused to be filed,  in a timely
manner all tax returns,  reports and declarations which are required to be filed
by it. All information in such tax returns, reports and declarations is complete
and  accurate in all material  respects.  Borrower has paid or caused to be paid
all taxes due and payable or claimed due and payable in any assessment  received
by it,  except taxes the validity of which are being  contested in good faith by
appropriate  proceedings  diligently  pursued and available to Borrower and with
respect to which  adequate  reserves have been set aside on its books.  Adequate
provision  has been made for the  payment of all  accrued  and  unpaid  Federal,
State, county, local, foreign and other taxes whether or not yet due and payable
and whether or not disputed.

     8.6  Litigation.  Except as set forth in  Schedule  8.6 to the  Information
Certificate,  there is no present  investigation by any  Governmental  Authority
pending, or to the best of Borrower's knowledge threatened, against or affecting
Borrower,  its assets or business and there is no action,  suit,  proceeding  or
claim by any Person pending, or to the best of Borrower's knowledge  threatened,
against  Borrower  or its  assets or  goodwill,  or  against  or  affecting  any
transactions contemplated by this Agreement,  which could reasonably be expected
to be adversely  determined against Borrower and if adversely determined against
Borrower would result in any material adverse change in the assets,  business or
prospects  of Borrower or would  impair in any  material  respect the ability of
Borrower  to  perform  its  obligations  hereunder  or  under  any of the  other
Financing  Agreements  to  which  it is a party  or of  Lender  to  enforce  any
Obligations or realize upon any Collateral.

     8.7 Environmental Compliance.

     (a) Except as set forth on  Schedule  8.7 to the  Information  Certificate,
Borrower  and  any  Subsidiary  have  not  generated,   used,  stored,  treated,
transported,  manufactured,  handled,  produced  or  disposed  of any  Hazardous
Materials,  on or off its  premises  (whether  or not owned by it) in any manner
which at any time  violates  any  applicable  Environmental  Law or any license,
permit,  certificate,  approval  or  similar  authorization  thereunder  and the
operations of Borrower and any Subsidiary complies in all material respects with
all Environmental Laws and all licenses,  permits,  certificates,  approvals and
similar authorizations thereunder.

     (b) Except as set forth on  Schedule  8.7 to the  Information  Certificate,
there has been no investigation, proceeding, complaint, order, directive, claim,
citation or notice by any Governmental  Authority or any other person nor is any
pending or to the best of Borrower's knowledge  threatened,  with respect to any
non-compliance with or violation of the requirements of any Environmental Law by
Borrower and any  Subsidiary or the release,  spill or discharge,  threatened or
actual, of any Hazardous  Material or the generation,  use, storage,  treatment,
transportation,  manufacture,  handling, production or disposal of any Hazardous
Materials or any other environmental  matter which adversely affects Borrower or
its  business,  operations  or assets or any  properties  at which  Borrower has
transported,  stored or  disposed of any  Hazardous  Materials  in any  material
respect.

     (c) Borrower and its Subsidiaries have no material liability (contingent or
otherwise)  in  connection  with a release,  spill or  discharge,  threatened or
actual, of any Hazardous Materials or the generation,  use, storage,  treatment,
transportation,  manufacture,  handling, production or disposal of any Hazardous
Materials.

     (d) Borrower and its Subsidiaries have all licenses, permits, certificates,
approvals  or  similar  authorizations  required  to be  obtained  or  filed  in
connection with the operations of Borrower under any  Environmental  Law and all
of such licenses, permits, certificates, approvals or similar authorizations are
valid and in full force and effect.

     8.8 Employee Benefits.

     (a) Each Plan is in compliance with the applicable provisions of ERISA, the
Code and other  federal or state law.  Each Plan  which is  intended  to qualify
under Section 401(a) of the Code has received a favorable  determination  letter
from the  Internal  Revenue  Service  and to the best of  Borrower's  knowledge,
nothing has occurred which would cause the loss of such qualification.  Borrower
and its  ERISA  Affiliates  have  made all  required  contributions  to any Plan
subject to Section 412 of the Code, and no  application  for a funding waiver or
an extension of any amortization  period pursuant to Section 412 of the Code has
been made with respect to any Plan.

     (b) There are no pending or to the best of Borrower's knowledge, threatened
claims,  actions or  lawsuits,  or action by any  Governmental  Authority,  with
respect to any Plan.  There has been no prohibited  transaction  or violation of
the fiduciary responsibility rules with respect to any Plan.

     (c)(i) No ERISA Event has occurred or is reasonably expected to occur; (ii)
the current  value of each Plan's  assets  (determined  in  accordance  with the
assumptions  used for funding such Plan pursuant to Section 412 of the Code) are
not less than such Plan's liabilities under Section  4001(a)(16) of ERISA; (iii)
Borrower and its ERISA Affiliates have not incurred and do not reasonably expect
to incur,  any liability under Title IV of ERISA with respect to any Plan (other
than premiums due and not delinquent under Section 4007 of ERISA); (iv) Borrower
and its ERISA  Affiliates  have not  incurred  and do not  reasonably  expect to
incur, any liability (and no event has occurred which, with the giving of notice
under Section 4219 of ERISA,  would result in such liability) under Section 4201
or 4243 of ERISA with respect to a Multiemployer  Plan; and (v) Borrower and its
ERISA  Affiliates  have not  engaged in a  transaction  that could be subject to
Section 4069 or 4212(c) of ERISA.

     8.9 Bank  Accounts.  All of the deposit  accounts,  investment  accounts or
other  accounts  in the name of or used by  Borrower  maintained  at any bank or
other  financial  institution  are set forth in Schedule 8.9 to the  Information
Certificate,  subject to the right of  Borrower  to  establish  new  accounts in
accordance with Section 5.2 hereof.

     8.10 Intellectual Property.  Borrower owns or licenses or otherwise has the
right  to use all  Intellectual  Property  necessary  for the  operation  of its
business as  presently  conducted  or proposed to be  conducted.  As of the date
hereof, Borrower does not have any Intellectual Property registered,  or subject
to pending applications, in the United States Patent and Trademark Office or any
similar office or agency in the United States, any State thereof,  any political
subdivision  thereof or in any other  country,  other than  those  described  in
Schedule  8.10 to the  Information  Certificate  hereto and has not  granted any
licenses  with respect  thereto  other than as set forth in Schedule 8.10 to the
Information  Certificate.  No event has occurred  which  permits or would permit
after  notice  or  passage  of time  or  both,  the  revocation,  suspension  or
termination of such rights.  To the best of Borrower's  knowledge,  no slogan or
other  advertising  device,  product,   process,   method,  substance  or  other
Intellectual  Property  or goods  bearing  or using  any  Intellectual  Property
presently  contemplated  to be sold by or  employed by  Borrower  infringes  any
patent,  trademark,   servicemark,   tradename,   copyright,  license  or  other
Intellectual  Property  owned  by any  other  Person  presently  and no claim or
litigation is pending or threatened against or affecting Borrower contesting its
right  to sell or use  any  such  Intellectual  Property.  Schedule  8.10 to the
Information  Certificate sets forth all of the agreements or other  arrangements
of Borrower  pursuant to which  Borrower has a license or other right to use any
trademarks, logos, designs, representations or other Intellectual Property owned
by  another  person  as in  effect  on the  date  hereof  and the  dates  of the
expiration of such agreements or other  arrangements of Borrower as in effect on
the  date  hereof   (collectively,   together  with  such  agreements  or  other
arrangements  as  may be  entered  into  by  Borrower  after  the  date  hereof,
collectively, the "License Agreements" and individually, a "License Agreement").
No trademark,  servicemark  or other  Intellectual  Property at any time used by
Borrower which is owned by another person,  or owned by Borrower  subject to any
security interest,  lien, collateral assignment,  pledge or other encumbrance in
favor of any person  other than Lender,  is affixed to any  Eligible  Inventory,
except to the extent permitted under the term of the License  Agreements  listed
on Schedule 8.10 to the Information Certificate.

     8.11 Subsidiaries; Affiliates; Capitalization; Solvency.

     (a)  Borrower  does  not  have  any  direct  or  indirect  Subsidiaries  or
Affiliates and is not engaged in any joint venture or partnership  except as set
forth in Schedule 8.11 to the Information  Certificate,  subject to the right of
Borrower to form or acquire Subsidiaries in accordance with Section 9.10 hereof.
Sewing Machine  Exchange,  Inc., an Illinois  corporation,  and Hirsch Equipment
Connections, Inc., a Delaware corporation, have each been dissolved on or before
the date hereof,  and do not and shall not engage in any business or  commercial
activity and do not own any assets or properties.  Borrower does not have and at
no time has had a Subsidiary known as All Pro Press Punching, Inc.

     (b)  Borrower is the record and  beneficial  owner of all of the issued and
outstanding  shares  of  Capital  Stock of each of the  Subsidiaries  listed  on
Schedule  8.11 to the  Information  Certificate  as being owned by Borrower  and
there are no proxies,  irrevocable or otherwise, with respect to such shares and
no equity securities of any of the Subsidiaries are or may become required to be
issued by reason of any  options,  warrants,  rights to  subscribe  to, calls or
commitments  of any kind or  nature  and there  are no  contracts,  commitments,
understandings or arrangements by which any Subsidiary is or may become bound to
issue  additional  shares of it Capital Stock or securities  convertible into or
exchangeable for such shares.

     (c) Borrower is Solvent and will  continue to be Solvent after the creation
of the Obligations,  the security  interests of Lender and the other transaction
contemplated hereunder.

     8.12 Labor Disputes.

     (a) Set forth on Schedule  8.12 to the  Information  Certificate  is a list
(including  dates  of  termination)  of all  collective  bargaining  or  similar
agreements  between or applicable to Borrower and any union,  labor organization
or other  bargaining  agent in respect of the  employees of Borrower on the date
hereof.

     (b) There is (i) no  significant  unfair labor practice  complaint  pending
against Borrower or, to the best of Borrower's knowledge, threatened against it,
before the National  Labor  Relations  Board,  and no  significant  grievance or
significant  arbitration  proceeding  arising  out of or  under  any  collective
bargaining  agreement is pending on the date hereof against Borrower or, to best
of Borrower's knowledge,  threatened against it, and (ii) no significant strike,
labor dispute,  slowdown or stoppage is pending against Borrower or, to the best
of Borrower's knowledge, threatened against Borrower.

     8.13  Restrictions on Subsidiaries.  Except for  restrictions  contained in
this Agreement or any other  agreement with respect to  Indebtedness of Borrower
permitted hereunder as in effect on the date hereof, there are no contractual or
consensual restrictions on Borrower or any of its Subsidiaries which prohibit or
otherwise restrict (a) the transfer of cash or other assets (i) between Borrower
and any of its  Subsidiaries or (ii) between any Subsidiaries of Borrower or (b)
the ability of  Borrower or any of its  Subsidiaries  to incur  Indebtedness  or
grant security interests to Lender in the Collateral.

     8.14 Material Contracts.  Schedule 8.14 to the Information Certificate sets
forth all Material  Contracts to which Borrower is a party or is bound as of the
date hereof.  Borrower has delivered  true,  correct and complete copies of such
Material  Contracts to Lender on or before the date  hereof.  Borrower is not in
breach of or in default under any Material  Contract (after giving effect to any
applicable  cure period provided for therein) and has not received any notice of
the intention of any other party thereto to terminate any Material Contract.

     8.15 Payable  Practices.  Borrower has not made any material  change in the
historical  accounts payable practices from those in effect immediately prior to
the date hereof.

     8.16 Accuracy and Completeness of Information. All information furnished by
or on behalf of Borrower in writing to Lender in connection  with this Agreement
or any of the other Financing Agreements or any transaction  contemplated hereby
or thereby, including all information on the Information Certificate is true and
correct in all  material  respects on the date as of which such  information  is
dated or  certified  and does not omit any material  fact  necessary in order to
make such  information not misleading in light of the  circumstances at the time
such  information is provided.  No event or circumstance  has occurred which has
had or could  reasonably  be expected to have a material  adverse  affect on the
business,  assets  or  prospects  of  Borrower,  which  has not been  fully  and
accurately disclosed to Lender in writing prior to the date hereof.

     8.17 Survival of Warranties; Cumulative. All representations and warranties
contained  in this  Agreement  or any of the other  Financing  Agreements  shall
survive the execution and delivery of this Agreement and shall be deemed to have
been  made  again to Lender on the date of each  additional  borrowing  or other
credit accommodation  hereunder and shall be conclusively  presumed to have been
relied  on by  Lender  regardless  of  any  investigation  made  or  information
possessed by Lender. The  representations  and warranties set forth herein shall
be cumulative and in addition to any other  representations  or warranties which
Borrower shall now or hereafter give, or cause to be given, to Lender.


SECTION 9.    AFFIRMATIVE AND NEGATIVE COVENANTS
              ----------------------------------

       9.1    Maintenance of Existence.

     (a) Borrower shall at all times preserve,  renew and keep in full force and
effect its corporate  existence and rights and franchises  with respect  thereto
and  maintain  in full  force and  effect  all  permits,  licenses,  trademarks,
tradenames, approvals,  authorizations,  leases and contracts necessary to carry
on the business as presently or proposed to be conducted.

     (b)  Borrower  shall  not  change  its name  unless  each of the  following
conditions  is  satisfied:  (i) Lender shall have  received not less than thirty
(30) days prior  written  notice from  Borrower of such  proposed  change in its
corporate name,  which notice shall  accurately set forth the new name; and (ii)
Lender  shall  have  received  a copy of the  amendment  to the  Certificate  of
Incorporation  of  Borrower  providing  for the  name  change  certified  by the
Secretary of State of the  jurisdiction  of  incorporation  or  organization  of
Borrower as soon as it is available.

     (c)  Borrower  shall not change its chief  executive  office or its mailing
address  or  organizational  identification  number (or if it does not have one,
shall not acquire one) unless  Lender  shall have  received not less than thirty
(30) days' prior written  notice from Borrower of such  proposed  change,  which
notice  shall set forth  such  information  with  respect  thereto as Lender may
require and Lender shall have received such  agreements as Lender may reasonably
require  in  connection  therewith.  Borrower  shall  not  change  its  type  of
organization,  jurisdiction of organization or other legal  structure.  Borrower
shall not and shall not permit any amendment to its certificate of incorporation
or enter into or consent  to any  agreement  that  amends or  modifies  so as to
limit, restrict, reduce, eliminate or condition,  directly or indirectly, any of
the voting  rights of the holders of the Class B Common  Stock of Borrower  with
respect to the election of the Board of Directors of Borrower or otherwise.

     9.2 New  Collateral  Locations.  Borrower  may only  open any new  location
within the continental United States provided Borrower (a) gives Lender ten (10)
days prior written notice from Borrower of the intended  opening of any such new
location and (b) executes and delivers,  or causes to be executed and delivered,
to Lender  such  agreements,  documents,  and  instruments  as  Lender  may deem
necessary  or  desirable  to protect its  interests  in the  Collateral  at such
location.

     9.3 Compliance with Laws, Regulations, Etc.

     (a) Borrower shall, and shall cause any Subsidiary to, at all times, comply
in all material respects with all laws, rules, regulations,  licenses,  permits,
approvals and orders  applicable to it and duly observe all  requirements of any
foreign,  Federal, State or local Governmental  Authority,  including ERISA, the
Code, the Occupational Safety and Health Act of 1970, as amended, the Fair Labor
Standards Act of 1938, as amended, and all statutes, rules, regulations, orders,
permits and stipulations relating to environmental pollution and employee health
and safety, including all of the Environmental Laws.

     (b)  Borrower  shall  give  written  notice  to  Lender   immediately  upon
Borrower's receipt of any notice of, or Borrower's otherwise obtaining knowledge
of, (i) the occurrence of any event  involving the release,  spill or discharge,
threatened or actual, of any Hazardous Material by it or (ii) any investigation,
proceeding, complaint, order, directive, claims, citation or notice with respect
to: (A) any non-compliance with or violation of any applicable Environmental Law
by Borrower or (B) the release, spill or discharge, threatened or actual, of any
Hazardous Material by it other than in the ordinary course of business and other
than  as  permitted  under  any  applicable  Environmental  Law.  Copies  of all
environmental surveys, audits,  assessments,  feasibility studies and results of
remedial  investigations shall be promptly furnished, or caused to be furnished,
by Borrower to Lender.  Borrower  shall take  prompt and  appropriate  action to
respond to any non-compliance by it with any of the Environmental Laws and shall
regularly report to Lender on such response.

     (c) Without  limiting the  generality  of the  foregoing,  whenever  Lender
reasonably determines that there is non-compliance by it, or any condition which
requires  any action by or on behalf of Borrower in order to avoid any  material
non-compliance  by it, with any  Environmental  Law, Borrower shall, at Lender's
request and Borrower's expense: (i) cause an independent  environmental engineer
acceptable  to  Lender  to  conduct  such  tests  of the site  where  Borrower's
non-compliance  or  alleged  non-compliance  with  such  Environmental  Laws has
occurred as to such non-compliance and prepare and deliver to Lender a report as
to such non-compliance  setting forth the results of such tests, a proposed plan
for responding to any environmental  problems described therein, and an estimate
of the costs  thereof and (ii) provide to Lender a  supplemental  report of such
engineer  whenever  the scope of such  non-compliance,  or  Borrower's  response
thereto or the estimated costs thereof, shall change in any material respect.

     (d) Borrower  shall  indemnify and hold  harmless  Lender,  its  directors,
officers, employees, agents, invitees, representatives,  successors and assigns,
from and against any and all losses, claims,  damages,  liabilities,  costs, and
expenses  (including  attorneys' fees and legal expenses) directly or indirectly
arising  out  of  or   attributable   to  the  use,   generation,   manufacture,
reproduction,  storage, release, threatened release, spill, discharge,  disposal
or presence  of a Hazardous  Material,  including  the costs of any  required or
necessary  repair,  cleanup or other remedial work, with respect to any property
of Borrower and the preparation and  implementation of any closure,  remedial or
other  required   plans.   All   representations,   warranties,   covenants  and
indemnifications   in  this  Section  9.3  shall  survive  the  payment  of  the
Obligations and the termination or non-renewal of this Agreement.

     9.4  Payment  of Taxes and  Claims.  Borrower  shall,  and shall  cause any
Subsidiary to, duly pay and discharge all taxes, assessments,  contributions and
governmental charges upon or against it or its properties or assets,  except for
taxes the  validity of which are being  contested  in good faith by  appropriate
proceedings diligently pursued and available to Borrower or such Subsidiary,  as
the case may be, and with respect to which adequate reserves have been set aside
on its  books.  Borrower  shall be liable  for any tax or  penalties  imposed on
Lender  as a result  of the  financing  arrangements  provided  for  herein  and
Borrower  agrees to  indemnify  and hold  Lender  harmless  with  respect to the
foregoing,  and to repay to Lender on demand the amount thereof,  and until paid
by Borrower  such amount shall be added and deemed part of the Loans,  provided,
that, nothing contained herein shall be construed to require Borrower to pay any
income or franchise taxes  attributable to the income of Lender from any amounts
charged or paid hereunder to Lender.  The foregoing  indemnity shall survive the
payment of the Obligations and the termination or non-renewal of this Agreement.

     9.5 Insurance.  Borrower  shall,  and shall cause any Subsidiary to, at all
times,  maintain with financially  sound and reputable  insurers  insurance with
respect to the Collateral  against loss or damage and all other insurance of the
kinds and in the amounts  customarily insured against or carried by corporations
of  established  reputation  engaged  in the  same  or  similar  businesses  and
similarly  situated.  Said policies of insurance shall be satisfactory to Lender
as to form, amount and insurer. Borrower shall furnish certificates, policies or
endorsements to Lender as Lender shall require as proof of such insurance,  and,
if Borrower  fails to do so, Lender is authorized,  but not required,  to obtain
such  insurance at the expense of Borrower.  All policies  shall  provide for at
least thirty (30) days prior  written  notice to Lender of any  cancellation  or
reduction  of  coverage  and that  Lender may act as  attorney  for  Borrower in
obtaining,  and at any time an Event of Default  exists or has  occurred  and is
continuing, adjusting, settling, amending and canceling such insurance. Borrower
shall cause  Lender to be named as a loss payee and an  additional  insured (but
without any  liability  for any  premiums)  under such  insurance  policies  and
Borrower shall obtain non-contributory lender's loss payable endorsements to all
insurance policies in form and substance  satisfactory to Lender.  Such lender's
loss payable  endorsements  shall  specify  that the proceeds of such  insurance
shall be payable to Lender as its interests may appear and further  specify that
Lender shall be paid regardless of any act or omission by Borrower or any of its
Affiliates.  At its option,  Lender may apply any insurance proceeds received by
Lender at any time to the cost of repairs or replacement of Collateral and/or to
payment of the  Obligations,  whether or not then due,  in any order and in such
manner as Lender may determine or hold such proceeds as cash  collateral for the
Obligations.

     9.6 Financial Statements and Other Information.

     (a) Borrower  shall,  and shall cause any  Subsidiary to, keep proper books
and records in which true and complete  entries shall be made of all dealings or
transactions  of or in relation to the  Collateral  and the business of Borrower
and its Subsidiaries in accordance with GAAP. Borrower shall promptly furnish to
Lender all such  financial  and other  information  as Lender  shall  reasonably
request  relating to the Collateral  and the assets,  business and operations of
Borrower,  and to notify the auditors and accountants of Borrower that Lender is
authorized to obtain such  information  directly from them;  provided,  that, so
long as no Default  or Event of  Default  shall  exist or have  occurred  and be
continuing,  Lender  shall not  exercise  its rights  under this  Section 9.6 to
contact the auditors and accountants  directly to obtain  information  from them
not relating to the  Collateral  without the prior  approval of Borrower,  which
approval shall not be  unreasonably  withheld,  conditioned or delayed.  Without
limiting  the  foregoing,  Borrower  shall  furnish or cause to be  furnished to
Lender,  the  following:  (i) at all times after the making of the initial  Loan
hereunder or that Excess  Availability  is less than  $5,000,000 or a Default or
Event of Default  shall exist or have occurred or be  continuing,  within thirty
(30) days after the end of each fiscal  month  (except in the case of any fiscal
month that is the last month of a fiscal quarter,  then in such case, forty-five
(45) days after the end of such fiscal month),  monthly  unaudited  consolidated
financial statements and unaudited consolidating financial statements (including
in each case balance sheets,  statements of income and loss,  statements of cash
flow, and statements of shareholders'  equity), all in reasonable detail, fairly
presenting the financial  position and the results of the operations of Borrower
and its  Subsidiaries as of the end of and through such fiscal month,  certified
to be correct by the chief  financial  officer  of  Borrower,  subject to normal
year-end adjustments and accompanied by a compliance  certificate  substantially
in the form of  Exhibit B  hereto,  along  with a  schedule  in form  reasonably
satisfactory to Lender of the calculations used in determining, as of the end of
such month,  whether  Borrower was in compliance  with the covenant set forth in
Section 9.17 of this  Agreement  for such month,  (ii) at all times prior to the
date of the  making  of the  initial  Loan  hereunder,  and as  long  as  Excess
Availability is greater than $5,000,000 and no Default or Event of Default shall
exist or have occurred and be continuing,  within forty-five (45) days after the
end  of  each  fiscal  quarter,   quarterly  unaudited   consolidated  financial
statements and unaudited  consolidating  financial statements (including in each
case balance sheets, statements of income and loss, statements of cash flow, and
statements of shareholders' equity), all in reasonable detail, fairly presenting
the  financial  position and the results of the  operations  of Borrower and its
Subsidiaries as of the end of and through such fiscal  quarter,  certified to be
correct by the chief financial  officer of Borrower,  subject to normal year-end
adjustments and  accompanied by a compliance  certificate  substantially  in the
form of Exhibit B hereto, along with a schedule in form reasonably  satisfactory
to  Lender  of the  calculations  used  in  determining,  as of the  end of such
quarter,  whether  Borrower  was in  compliance  with the  covenant set forth in
Section 9.17 of this  Agreement  for such  quarter and (iii) within  ninety (90)
days  after  the  end  of  each  fiscal  year,  audited  consolidated  financial
statements and unaudited  consolidating financial statements of Borrower and its
Subsidiaries  (including in each case balance  sheets,  statements of income and
loss,  statements of cash flow and statements of shareholders'  equity), and the
accompanying  notes thereto,  all in reasonable  detail,  fairly  presenting the
financial  position  and the  results  of the  operations  of  Borrower  and its
Subsidiaries  as of the end of and for  such  fiscal  year,  together  with  the
unqualified  opinion  of  independent   certified  public   accountants,   which
accountants  shall be an  independent  accounting  firm selected by Borrower and
reasonably  acceptable  to  Lender,  that such  financial  statements  have been
prepared in accordance  with GAAP, and present  fairly in all material  respects
the  results  of  operations  and  financial   condition  of  Borrower  and  its
Subsidiaries as of the end of and for the fiscal year then ended.

     (b) Borrower shall promptly  notify Lender in writing of the details of (i)
any loss, damage,  investigation,  action, suit, proceeding or claim relating to
the Collateral or any other  property  which is security for the  Obligations or
which  would  result in any  material  adverse  change in  Borrower's  business,
properties,  assets,  goodwill or condition,  financial or  otherwise,  (ii) any
Material  Contract of Borrower  being  terminated or amended or any new Material
Contract  entered into (in which event Borrower shall provide Lender with a copy
of such  Material  Contract),  (iii) any order,  judgment or decree in excess of
$100,000  shall have been entered  against  Borrower or any of its properties or
assets,  (iv) any  notification of violation of laws or regulations  received by
Borrower,  (v) any ERISA Event,  and (vi) the occurrence of any Default or Event
of Default.

     (c) Borrower shall promptly after the sending or filing thereof  furnish or
cause to be furnished to Lender  copies of all reports which  Borrower  sends to
its stockholders generally and copies of all reports and registration statements
which Borrower files with the Securities and Exchange  Commission,  any national
securities exchange or the National Association of Securities Dealers, Inc.

     (d) Borrower shall furnish or cause to be furnished to Lender such budgets,
forecasts,  projections and other information  respecting the Collateral and the
business of  Borrower,  as Lender may,  from time to time,  reasonably  request.
Lender is hereby authorized to deliver a copy of any financial  statement or any
other  information  relating  to  Borrower  to any  court or other  Governmental
Authority,  to any  Affiliate  of Lender or to any  participant  or  assignee or
prospective participant or assignee.  Borrower hereby irrevocably authorizes and
directs all accountants or auditors to deliver to Lender, at Borrower's expense,
copies  of the  financial  statements  of  Borrower  and any  reports  or  final
management  letters  prepared  by such  accountants  or  auditors  on  behalf of
Borrower and to disclose to Lender such  information  as they may have regarding
the business of Borrower.  So long as no Default or Event of Default shall exist
or have  occurred and be  continuing,  Lender shall not exercise its right under
this Section 9.6 to obtain such  financial  statements of Borrower or reports or
management  letters so long as it has promptly  received the same  directly from
Borrower  and shall not exercise its right under this Section 9.6 to contact the
accountants and auditors  directly to obtain  information from them not relating
to the Collateral  without the prior approval of Borrower,  which approval shall
not be unreasonably withheld, conditioned or delayed. Any documents,  schedules,
invoices or other  papers  delivered  to Lender may be  destroyed  or  otherwise
disposed  of by Lender  one (1) year  after the same are  delivered  to  Lender,
except as otherwise designated by Borrower to Lender in writing.

     9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. Borrower shall
not,  and shall not permit any  Subsidiary  to (and  Lender  does not  authorize
Borrower to), directly or indirectly,

     (a) merge into or with or  consolidate  with any other Person or permit any
other  Person  to merge  into or with or  consolidate  with it  except  that any
Obligor  incorporated  in a jurisdiction in the United States may merge with and
into  or  consolidate   with  Borrower  or  any  other  Subsidiary  of  Borrower
incorporated in a jurisdiction in the United States, provided, that, each of the
following  conditions is satisfied as  determined  by Lender in good faith:  (i)
Lender shall have received not less than ten (10)  Business  Days' prior written
notice of the intention of such  Subsidiaries to so merge or consolidate,  which
notice shall set forth in reasonable detail  satisfactory to Lender, the persons
that are merging or  consolidating,  which person will be the surviving  entity,
the  locations of the assets of the persons  that are merging or  consolidating,
and  the  material   agreements  and  documents   relating  to  such  merger  or
consolidation,  (ii) Lender  shall have  received  such other  information  with
respect to such merger or consolidation as Lender may reasonably  request within
such ten (10) Business Day period,  (iii) as of the effective date of the merger
or consolidation and after giving effect thereto, no Default or Event of Default
shall exist or have occurred, (iv) Lender shall have received, true, correct and
complete  copies of all agreements,  documents and instruments  relating to such
merger or  consolidation,  including,  but not  limited to, the  certificate  or
certificates  of merger to be filed  with each  appropriate  Secretary  of State
(with a copy as filed promptly after such filing), (v) the surviving corporation
shall  expressly  confirm,  ratify and assume the  Obligations and the Financing
Agreements to which it is a party in writing, in form and substance satisfactory
to Lender,  and  Borrower  and  Obligors  shall  execute and deliver  such other
agreements,  documents  and  instruments  as Lender may  request  in  connection
therewith,  (vi) in the case of a merger or  consolidation  of a Subsidiary with
Borrower,  Borrower  shall be the  surviving  corporation  and the amount of the
liabilities  (contingent  or  otherwise)  acquired by Borrower  pursuant to such
merger or  consolidation  shall not  exceed  the  value of the  assets  acquired
pursuant thereto and shall otherwise be acceptable to Lender; or

     (b) sell, issue, assign,  lease,  license,  transfer,  abandon or otherwise
dispose of any Capital Stock or  Indebtedness  to any other Person or any of its
assets to any other Person, except for

          (i) sales of Inventory in the ordinary course of business,

          (ii) the disposition of worn-out or obsolete  Equipment so long as (A)
     any proceeds are paid to Lender and (B) such sales do not involve Equipment
     having an  aggregate  fair market  value in excess of $200,000 for all such
     Equipment disposed of in any fiscal year of Borrower,

          (iii) the issuance  and sale by Borrower of Capital  Stock of Borrower
     after the date hereof;  provided,  that, (A) Lender shall have received not
     less than ten (10) Business Days prior written  notice of such issuance and
     sale by  Borrower,  which  notice  shall  specify  the parties to whom such
     shares are to be sold, the terms of such sale, the total amount which it is
     anticipated  will be realized  from the issuance and sale of such stock and
     the net cash proceeds which it is anticipated  will be received by Borrower
     from  such  sale,  (B)  Borrower  shall  not be  required  to pay any  cash
     dividends  or  repurchase  or redeem such  Capital  Stock or make any other
     payments in respect  thereof,  (C) the terms of such Capital Stock, and the
     terms and  conditions of the purchase and sale  thereof,  shall not include
     any terms that include any  limitation  on the right of Borrower to request
     or  receive  Loans or  Letter  of  Credit  Accommodations  or the  right of
     Borrower  to  amend or  modify  any of the  terms  and  conditions  of this
     Agreement or any of the other Financing  Agreements or otherwise in any way
     relate to or affect the  arrangements  of Borrower  with Lender or are more
     restrictive  or  burdensome to Borrower than the terms of any Capital Stock
     in effect on the date hereof,  (D) except as Lender may otherwise  agree in
     writing,  all of the proceeds from such sale and issuance  shall be paid to
     Lender  for  application  to the  Obligations  in such  order and manner as
     Lender may determine,  and (E) as of the date of such issuance and sale and
     after giving effect thereto,  no Default or Event of Default shall exist or
     have occurred,

          (iv) subject to Section 9.12 hereof, the sale,  issuance,  assignment,
     lease,  licensing,  transfer  or  other  disposition  of  any  assets  by a
     Subsidiary of Borrower to Borrower or a wholly-owned Subsidiary of Borrower
     (provided,  that, any security  interest and lien of Lender with respect to
     the assets so sold, assigned,  leased,  licensed,  transferred or otherwise
     disposed of shall continue in all respects as to such assets as acquired by
     Borrower), and

          (v) the  disposition  of cash and Cash  Equivalents by Borrower in the
     ordinary  course of business from time to time held in the Cash  Management
     Account of Borrower  the  proceeds  of which may be used to purchase  other
     Cash  Equivalents to be held in the Cash Management  Account or for deposit
     in the operating accounts of Borrower;  provided,  that, at any time on and
     after  Lender has  notified  the banks at which the  Blocked  Accounts  are
     maintained to remit funds therein to the Lender  Payment  Account the funds
     held in such  account  shall be limited  as  provided  in  Section  9.10(b)
     hereof,

          (vi) as to any Cash  Equivalents  other  than  those  held in the Cash
     Management  Account as  provided  for above,  the sale,  exchange  or other
     disposition  from  time to time of  such  Cash  Equivalents  so long as the
     proceeds  thereof  are  either  immediately  used to  purchase  other  Cash
     Equivalents and continue to be held in an investment  account subject to an
     Investment Property Control Agreement or are withdrawn from such investment
     accountant to the extent permitted under, and in accordance with, the terms
     of the Investment  Property Control Agreement  applicable to the investment
     account in which such Cash Equivalents were held;

     (c) wind up,  liquidate or dissolve,  except that a Subsidiary  of Borrower
may wind up,  liquidate  and  dissolve,  provided,  that,  each of the following
conditions is satisfied, (i) the winding up, liquidation and dissolution of such
Subsidiary  shall  not  violate  any law or any  order or decree of any court or
other Governmental Authority in any material respect and shall not conflict with
or result in the  breach  of, or  constitute  a default  under,  any  indenture,
mortgage,  deed of trust, or any other agreement or instrument to which Borrower
or such Subsidiary is a party or may be bound, (ii) such winding up, liquidation
or  dissolution  shall  be done  in  accordance  with  the  requirements  of all
applicable  laws  and  regulations,   (iii)  effective  upon  such  winding  up,
liquidation or dissolution,  all of the assets and properties of such Subsidiary
(as the case may be)  shall be duly and  validly  transferred  and  assigned  to
Borrower,  free and clear of any liens,  restrictions or encumbrances other than
the security interests and liens of Lender or other security interests expressly
permitted  hereunder  (and Lender shall have received  such evidence  thereof as
Lender  may  require),  (iv)  Lender  shall  have  received  all  documents  and
agreements  of  Borrower  or such  Subsidiary  as filed  with  any  Governmental
Authority or otherwise  required to effectuate  such winding up,  liquidation or
dissolution,   (v)  no  Borrower  or  Obligor  shall  assume  any  Indebtedness,
obligations  or  liabilities  as a result of such  winding  up,  liquidation  or
dissolution,  or  otherwise  become  liable in  respect  of any  obligations  or
liabilities of the Person which is winding up, liquidating or dissolving, unless
such Indebtedness is otherwise expressly permitted hereunder or such obligations
or  liabilities  are not  prohibited  under this  Agreement  or any of the other
Financing  Agreements,  (vi) Lender  shall have  received not less than ten (10)
Business Days prior written  notice of the intention of such  Subsidiary to wind
up,  liquidate  or  dissolve,  (vii)  Lender  shall have  received  such  deeds,
assignments  or other  agreements  as Lender may request to evidence and confirm
the  transfer  of such  assets to  Borrower,  (viii) to the  extent  the  assets
transferred are of an Obligor, Borrower shall acquire such assets subject to the
security  interests  and liens of Lender which shall  continue in full force and
effect as to the assets  transferred and upon Lender's  request,  Borrower shall
acknowledge  the same in writing  pursuant to an agreement in form and substance
satisfactory to Lender and shall execute and deliver to Lender such  agreements,
documents  and  instruments  as  Lender  may  require  (including  UCC and  PPSA
financing  statements),  and (ix) as of the date of such winding up, liquidation
or dissolution and after giving effect  thereto,  no Default or Event of Default
shall exist or have occurred;

     (d) agree to do any of the  foregoing  that will  occur  during the term of
this Agreement.

     9.8  Encumbrances.  Borrower shall not, and shall not permit any Subsidiary
to,  create,  incur,  assume,  suffer or permit to exist any security  interest,
mortgage,  pledge, lien, charge or other encumbrance of any nature whatsoever on
any of its assets or properties, including the Collateral, or file or permit the
filing  of, or permit to remain in  effect,  any  financing  statement  or other
similar notice of any security  interest or lien with respect to any such assets
or properties, except:

     (a) the security interests and liens of Lender;

     (b) liens securing the payment of taxes,  assessments or other governmental
charges or levies  either (i) not yet overdue or (ii) the  validity of which are
being contested in good faith by appropriate  proceedings diligently pursued and
available  to  Borrower,   provided,   that,  (A)  adequate  reserves  or  other
appropriate provision,  if any, as are required by GAAP have been made therefor,
(B) a stay of  enforcement  of any such  liens is in effect  and (C)  Lender may
establish a Reserve with respect thereto;

     (c) non-consensual  statutory liens of landlords,  carriers,  warehousemen,
mechanics  and other like  persons  (other  than liens  securing  the payment of
taxes,  assessments  or other  governmental  charges or  levies)  arising in the
ordinary  course of  Borrower's  business to the extent:  (i) such liens  secure
obligations which are not overdue or (ii) such liens secure obligations relating
to claims or liabilities  which are fully insured and being defended at the sole
cost and expense and at the sole risk of the insurer or being  contested in good
faith by appropriate  proceedings  diligently pursued and available to Borrower,
in  each  case  prior  to the  commencement  of  foreclosure  or  other  similar
proceedings  and with respect to which adequate  reserves have been set aside on
its books;

     (d)  zoning  restrictions,   easements,   licenses,   covenants  and  other
restrictions  affecting the use of Real  Property  which do not interfere in any
material  respect with the use of such Real Property or ordinary  conduct of the
business of Borrower as presently  conducted  thereon or  materially  impair the
value of the Real Property which may be subject thereto;

     (e) purchase  money  security  interests in  Equipment  (including  Capital
Leases) and purchase  money  mortgages on Real  Property to secure  Indebtedness
permitted under Section 9.9(b) hereof;

     (f) pledges and  deposits of cash by Borrower  after the date hereof in the
ordinary   course  of  business  in  connection   with  workers'   compensation,
unemployment  insurance and other types of social security  benefits  consistent
with the current practices of Borrower as of the date hereof;

     (g)  pledges  and  deposits  of cash by  Borrower  after the date hereof to
secure the performance of tenders, bids, leases, trade contracts (other than for
the  repayment  of  Indebtedness),   statutory  obligations  and  other  similar
obligations in each case in the ordinary course of business  consistent with the
current  practices  of  Borrower  as of the  date  hereof;  provided,  that,  in
connection  with any performance  bonds issued by a surety or other person,  the
issuer of such bond shall have  waived in writing  any rights in or to, or other
interest  in,  any of the  Collateral  in an  agreement,  in form and  substance
satisfactory to Lender;

     (h) liens arising from (i) operating  leases and the  precautionary  UCC or
PPSA financing  statement filings in respect thereof and (ii) equipment or other
materials  which are not owned by Borrower  located on the  premises of Borrower
(but not in connection with, or as part of, the financing  thereof) from time to
time in the ordinary course of business and consistent with current practices of
Borrower  and the  precautionary  UCC or PPSA  financing  statement  filings  in
respect thereof;

     (i) judgments  and other  similar  liens  arising in connection  with court
proceedings that do not constitute an Event of Default, provided, that, (i) such
liens  are  being  contested  in  good  faith  and  by  appropriate  proceedings
diligently pursued,  (ii) adequate reserves or other appropriate  provision,  if
any,  as are  required  by  GAAP  have  been  made  therefor,  (iii)  a stay  of
enforcement  of any such liens is in effect  and (iv)  Lender  may  establish  a
Reserve with respect thereto;

     (j) liens arising solely  pursuant to any statutory or common law providing
for banker's liens,  rights of set-off or similar rights,  in each case incurred
in the ordinary  course of the  business of Borrower,  except to the extent such
liens or rights of set-off or similar rights have been waived or modified;

     (k) the pledge of cash by Borrower to the issuer of the Existing Letters of
Credit  prior to the date  hereof in the  amount  of  $3,500,000  to secure  the
contingent  Indebtedness  of Borrower to the Existing  Lenders  permitted  under
Section 9.9(f) hereof;

     (l) the  security  interests  and liens set  forth on  Schedule  8.4 to the
Information Certificate.

     9.9  Indebtedness.  Borrower shall not, and shall not permit any Subsidiary
to, incur,  create,  assume,  become or be liable in any manner with respect to,
suffer or permit to exist, any Indebtedness or guarantee,  assume,  endorse,  or
otherwise  become  responsible  for (directly or  indirectly)  the  performance,
dividends or other obligations of any Person, except:

     (a) the Obligations;

     (b) purchase money  Indebtedness  (including  Capital Leases) arising after
the date hereof to the extent secured by purchase  money  security  interests in
Equipment  (including  Capital  Leases) and  purchase  money  mortgages  on Real
Property not to exceed  $1,000,000 in the aggregate at any time  outstanding  so
long as such  security  interests  and mortgages do not apply to any property of
Borrower  or any  Subsidiary  other  than  the  Equipment  or Real  Property  so
acquired,  and the Indebtedness  secured thereby does not exceed the cost of the
Equipment or Real Property so acquired, as the case may be;

     (c) guarantees by any  Subsidiaries of Borrower of the Obligations in favor
of Lender;

     (d) Indebtedness of Borrower under interest swap agreements,  interest rate
cap  agreements,   interest  rate  collar  agreements,  interest  rate  exchange
agreements and similar  contractual  agreements  entered into for the purpose of
protecting a Person against fluctuations in interest rates; provided, that, such
arrangements are with banks or other financial  institutions  that have combined
capital and surplus and undivided  profits of not less than $250,000,000 and are
not for speculative purposes and such Indebtedness shall be unsecured;

     (e) unsecured Indebtedness of Borrower arising after the date hereof to any
third person (other than  Indebtedness  otherwise  permitted  under this Section
9.9),  provided,  that,  each  of  the  following  conditions  is  satisfied  as
determined by Lender:  (i) such  Indebtedness  shall be on terms and  conditions
acceptable to Lender and shall be subject and subordinate in right of payment to
the right of Lender to receive the prior  indefeasible  payment and satisfaction
in  full  payment  of  all of  the  Obligations  pursuant  to  the  terms  of an
intercreditor  agreement  between  Lender  and  such  third  party,  in form and
substance  satisfactory to Lender, (ii) Lender shall have received not less than
ten (10) days prior  written  notice of the  intention of Borrower to incur such
Indebtedness,  which notice shall set forth in reasonable detail satisfactory to
Lender  the  amount of such  Indebtedness,  the  person or  persons to whom such
Indebtedness  will be owed,  the interest  rate,  the schedule of repayments and
maturity  date with  respect  thereto and such other  information  as Lender may
reasonably request with respect thereto,  (iii) Lender shall have received true,
correct  and  complete  copies  of all  agreements,  documents  and  instruments
evidencing or otherwise related to such Indebtedness,  (iv) except as Lender may
otherwise  agree  in  writing,  all  of  the  proceeds  of the  loans  or  other
accommodations  giving  rise to such  Indebtedness  shall be paid to Lender  for
application to the Obligations in such order and manner as Lender may determine,
(v) on and before  the date of  incurring  such  Indebtedness  and after  giving
effect  thereto,  no Default or Event of Default  shall exist or have  occurred,
(vi) Borrower shall not,  directly or indirectly,  (A) amend,  modify,  alter or
change the terms of such  Indebtedness or any agreement,  document or instrument
related  thereto,  except,  that,  Borrower may,  after prior written  notice to
Lender,  amend,  modify,  alter or change the terms  thereof so as to extend the
maturity thereof,  or defer the timing of any payments in respect thereof, or to
forgive or cancel any  portion of such  Indebtedness  (other  than  pursuant  to
payments  thereof),  or to reduce the  interest  rate or any fees in  connection
therewith,  or (B) redeem, retire,  defease,  purchase or otherwise acquire such
Indebtedness (except pursuant to regularly scheduled payments permitted herein),
or set aside or otherwise deposit or invest any sums for such purpose, and (vii)
Borrower shall furnish to Lender all notices or demands in connection  with such
Indebtedness  either  received by Borrower or on its behalf  promptly  after the
receipt  thereof,  or sent by  Borrower or on its behalf  concurrently  with the
sending thereof, as the case may be;

     (f)  contingent  Indebtedness  of Borrower to the Existing  Lenders for the
reimbursement  of amounts drawn under the Existing Letters of Credit and paid by
the issuer  thereof to the  beneficiary  of such  Existing  Letters of Credit in
accordance  with the terms  thereof and for letter of credit fees in  connection
with the Existing Letters of Credit,  provided,  that, such  Indebtedness  shall
only be secured by the cash collateral to the extent permitted under Section 9.8
hereof and in the event that there are any Loans outstanding as of the date that
any of such cash collateral is returned to Borrower, such proceeds thereof shall
be paid to Lender for application to the Obligations;

     (g) unsecured contingent  obligations of HAPL (and the guarantee thereof by
Borrower)  to ABB  Structured  Finance  (Americas)  Inc.  pursuant to the Master
Assignment  Agreement  (Non-Recourse)  (Payment Stream Plus Residual  Interest),
dated December 18, 2000, by and between ABB Structured  Finance  (Americas) Inc.
and HAPL arising  pursuant to the  obligation to repurchase  leases  pursuant to
which  HAPL is the  lessor  that have been sold by HAPL to ABB prior to the date
hereof;  provided, that, (i) Borrower shall give written notice to Lender of any
payment  required  to be made in respect of such  obligations  by either HAPL or
Borrower  in any case in excess of  $100,000,  (ii) at no time prior to the date
hereof have HAPL or Borrower made, or been required to make, any payments to ABB
Structured  Finance  (Americas) Inc. in respect of such obligations or otherwise
in connection with the  arrangements  related thereto,  (iii) within  forty-five
(45) days after the end of each fiscal quarter, Borrower shall provide to Lender
a written  report of all  amounts  paid by HAPL or Borrower in respect of any of
such  obligations  during the immediately  preceding  fiscal  quarter,  (iv) the
amount of the leases which have been assigned by HAPL to ABB Structured  Finance
(Americas) Inc. (including residuals) equals approximately  $27,667,761.92,  and
(v) HAPL will not sell,  assign or transfer any further leases to ABB Structured
Finance (Americas) Inc. pursuant to such arrangements or otherwise;

     (h) unsecured contingent  obligations of HAPL (and the guarantee thereof by
Borrower) to The CIT Group/Equipment Finance, Inc., as successor to AT&T Capital
Leasing  Services,  Inc.,  pursuant to the Master  Assignment  Agreement,  dated
November 16, 1993, by and between AT&T Capital Leasing  Services,  Inc. and HAPL
arising  pursuant to the obligation to repurchase  leases pursuant to which HAPL
is the lessor that have been sold by HAPL to AT&T Capital Leasing Services, Inc.
prior to the date hereof; provided, that, (i) Borrower shall give written notice
to Lender of any payment required to be made in respect of such  Indebtedness by
either  HAPL or  Borrower  in any case in  excess of  $100,000,  (ii) at no time
within the two (2) calander years prior to the date hereof have HAPL or Borrower
made, or been required to make, any payments to AT&T Capital  Leasing  Services,
Inc.  in  respect  of such  obligations  or  otherwise  in  connection  with the
arrangements related thereto, (iii) within forty-five (45) days after the end of
each fiscal  quarter,  Borrower  shall provide to Lender a written report of all
amounts  paid by HAPL or Borrower in respect of any of such  obligations  during
the immediately preceding fiscal quarter, (iv) none of the leases that were sold
by Borrower to AT&T Capital Leasing Services,  Inc. or any of its successors are
in existence at this time, (v) HAPL has not sold,  assigned or  transferred  any
leases pursuant to such arrangements since prior to November 1997, and (vi) HAPL
will not sell,  assign or transfer any further  leases to AT&T  Capital  Leasing
Services, Inc. or its successors pursuant to such arrangements or otherwise;

     (i)  the  Indebtedness  set  forth  on  Schedule  9.9  to  the  Information
Certificate;  provided,  that,  (i) Borrower may only make  regularly  scheduled
payments of principal and interest in respect of such Indebtedness in accordance
with the terms of the agreement or instrument  evidencing or giving rise to such
Indebtedness as in effect on the date hereof,  (ii) Borrower shall not, directly
or indirectly, (A) amend, modify, alter or change the terms of such Indebtedness
or any  agreement,  document or instrument  related  thereto as in effect on the
date hereof  except,  that,  Borrower may, after prior written notice to Lender,
amend,  modify,  alter or change the terms  thereof so as to extend the maturity
thereof,  or defer the timing of any payments in respect thereof,  or to forgive
or cancel any  portion of such  Indebtedness  (other  than  pursuant to payments
thereof), or to reduce the interest rate or any fees in connection therewith, or
(B) redeem, retire, defease, purchase or otherwise acquire such Indebtedness, or
set aside or otherwise  deposit or invest any sums for such  purpose,  and (iii)
Borrower shall furnish to Lender all notices or demands in connection  with such
Indebtedness  either  received by Borrower or on its behalf,  promptly after the
receipt  thereof,  or sent by Borrower or on its behalf,  concurrently  with the
sending thereof, as the case may be.

     9.10 Loans, Investments,  Etc. Borrower shall not, and shall not permit any
Subsidiary to, directly or indirectly,  make, or suffer or permit to exist,  any
loans or advance  money or  property  to any person,  or any  investment  in (by
capital  contribution,  dividend or  otherwise)  or purchase or  repurchase  the
Capital  Stock or  Indebtedness  or all or a  substantial  part of the assets or
property of any person, or form or acquire any Subsidiaries,  or agree to do any
of the foregoing, except:

     (a) the  endorsement  of  instruments  for  collection  or  deposit  in the
ordinary course of business;

     (b)  investments in cash or Cash  Equivalents,  provided,  that, (i) in the
event that Lender has exercised  its rights under Section  6.3(b) hereof so that
funds in the Blocked  Accounts are to be remitted to the Lender Payment Account,
only if no Loans  are then  outstanding,  except  that  even if there  are Loans
outstanding,  Borrower may have investments of Cash Equivalents held in the Cash
Management  Account that do not exceed $1,000,000 at any time and (ii) the terms
and  conditions of Section 5.2 hereof shall have been  satisfied with respect to
the  deposit  account  or  investment  account  (including  the Cash  Management
Account) in which such cash or Cash Equivalents are held;

     (c) the existing  equity  investments  of Borrower as of the date hereof in
its Subsidiaries,  provided, that, Borrower shall have no obligation to make any
other  investment  in, or loans to, or other  payments  in respect  of, any such
Subsidiaries;

     (d)  stock  or  obligations  issued  to  Borrower  by any  Person  (or  the
representative  of such Person) in respect of  Indebtedness of such Person owing
to Borrower in  connection  with the  insolvency,  bankruptcy,  receivership  or
reorganization  of such Person or a composition or  readjustment of the debts of
such  Person;  provided,  that,  the  original  of any such stock or  instrument
evidencing such obligations shall be promptly delivered to Lender, upon Lender's
request,  together with such stock power,  assignment or endorsement by Borrower
as Lender may request;

     (e) obligations of account debtors to Borrower  arising from Accounts which
are past due evidenced by a promissory  note made by such account debtor payable
to Borrower;  provided,  that,  promptly upon the receipt of the original of any
such promissory note by Borrower,  such promissory note shall be endorsed to the
order of Lender by Borrower and promptly delivered to Lender as so endorsed;

     (f) loans and  advances by Borrower to  employees of Borrower not to exceed
the principal  amount of $50,000 in the aggregate at any time  outstanding  for:
(i) reasonably  and necessary  work-related  travel or other  ordinary  business
expenses to be incurred by such employee in connection  with their work for such
Borrower or Guarantor and (ii) reasonable and necessary  relocation  expenses of
such employees (including home mortgage financing for relocated employees);

     (g) repurchases by Borrower of its Capital Stock to the extent permitted in
Section 9.11 hereof;

     (h) pledges and deposits of cash permitted under Section 9.8 hereof;

     (i) loans by a  Subsidiary  of Borrower to Borrower  after the date hereof,
provided,  that, as to all of such loans,  (i) within thirty (30) days after the
end of each fiscal month,  Borrower shall provide to Lender a report in form and
substance  reasonably  satisfactory to Lender of the outstanding  amount of such
loans as of the last day of the  immediately  preceding month and indicating any
loans made and payments  received during the immediately  preceding month,  (ii)
the  Indebtedness  arising pursuant to any such loan shall not be evidenced by a
promissory note or other instrument,  unless the single original of such note or
other  instrument  is promptly  delivered  to Lender upon its request to hold as
part of the Collateral,  with such endorsement and/or assignment by the payee of
such note or other  instrument  as Lender may  require,  (iii) the  Indebtedness
arising  pursuant to such loan shall be subject to, and  subordinate in right of
payment  to,  the  right of Lender  to  receive  the  prior  final  payment  and
satisfaction  in  full  of  all of  the  Obligations  on  terms  and  conditions
acceptable  to Lender,  (iv) Lender  may,  at its option,  from time to time and
without  limiting any  subordination  thereof  provided for in any  guarantee in
favor of  Lender,  require  that  Lender  shall have  received  a  subordination
agreement, in form and substance satisfactory to Lender, providing for the terms
of the subordination in right of payment of such Indebtedness of Borrower to the
prior final payment and  satisfaction  in full of all of the  Obligations,  duly
authorized,  executed and delivered by such  Subsidiary  and  Borrower,  and (v)
Borrower  shall not,  directly or indirectly  make, or be required to make,  any
payments in respect of such  Indebtedness  prior to the end of the then  current
term of this Agreement;

     (j)  loans of money or  property  (other  than  Collateral)  after the date
hereof by Borrower to any Person or investment after the date hereof by Borrower
by capital contribution in any Person, or the formation or acquisition after the
date hereof by Borrower of any direct  wholly-owned  Subsidiary of such Borrower
incorporated  in a  jurisdiction  in the United  States  after the date  hereof;
provided,  that,  as to any  such  loans or  investments,  or the  formation  or
acquisition  of any  such  Subsidiary,  each  of  the  following  conditions  is
satisfied as determined by Lender:

          (i) as of the date of any such loan or investment, or the formation or
     acquisition  of such  Subsidiary  or any  payments in  connection  with the
     formation or acquisition of such Subsidiary,  and in each case after giving
     effect  thereto,  no  Default  or  Event  of  Default  shall  exist or have
     occurred,

          (ii) as of the date of any such loan or  investment,  or the formation
     or  acquisition of such  Subsidiary or any payments in connection  with the
     formation or acquisition of such Subsidiary,  and in each case after giving
     effect  thereto,  the  Excess  Availability  shall  have been not less than
     $5,000,000 for each of the immediately  preceding ten (10) consecutive days
     and as of  the  date  of any  such  loan  or  investment  or  formation  or
     acquisition or any payment in connection  therewith and after giving effect
     thereto, the Excess Availability shall be not less than $5,000,000,

          (iii) in no event  shall the  aggregate  amount of all such  loans and
     investments and payments in connection  therewith exceed  $1,000,000 in the
     aggregate,

          (iv) the Person  receiving  such loan or investment or the  Subsidiary
     formed or  acquired,  as the case may be,  shall be  engaged  in a business
     related,  ancillary or complimentary to the business of Borrower  permitted
     in this Agreement,

          (v) in the case of an investment by capital contribution,  at Lender's
     option, the original stock certificate or other instrument  evidencing such
     capital  contribution  (or such other evidence as may be issued in the case
     of a limited  liability  company)  shall be promptly  delivered  to Lender,
     together  with such stock power,  assignment or  endorsement  as Lender may
     request,  and promptly upon Lender's  request,  Borrower  shall execute and
     deliver to Lender a pledge and security  agreement,  in form and  substance
     satisfactory  to Lender,  granting  to Lender a first  priority  pledge of,
     security interest in and lien upon all of the issued and outstanding shares
     of such stock or other instrument or interest (and in the case of a limited
     liability  company  take such other  actions as Lender  shall  require with
     respect to Lender's security interests therein),

          (vi) in the case of loans of money or  property,  the  original of any
     promissory note or other  instrument  evidencing the  Indebtedness  arising
     pursuant to such loans shall be delivered,  or caused to be  delivered,  to
     Lender, at Lender's option,  together with an appropriate  endorsement,  in
     form and substance satisfactory to Lender,

          (vii) in the case of the formation or  acquisition  by Borrower of any
     Subsidiary,  as to any such  Subsidiary,  (A) Borrower shall cause any such
     Subsidiary to execute and deliver to Lender,  the  following  (each in form
     and substance  satisfactory to Lender),  (1) an absolute and  unconditional
     guarantee of payment of the Obligations,  (2) a security agreement granting
     to Lender a first security interest and lien (except as otherwise consented
     to in  writing by  Lender)  upon all of the  assets of any such  Subsidiary
     (other than the real property owned by such Subsidiary), and (3) such other
     agreements, documents and instruments as Lender may require, including, but
     not limited to, supplements and amendments hereto and other loan agreements
     or instruments evidencing Indebtedness of such new Subsidiary to Lender and
     (B) Borrower shall (1) execute and deliver to Lender, a pledge and security
     agreement, in form and substance satisfactory to Lender, granting to Lender
     a first pledge of and lien on all of the issued and  outstanding  shares of
     Capital Stock of any such  Subsidiary,  and (C) deliver the original  stock
     certificates  evidencing  such  shares  of  Capital  Stock  (or such  other
     evidence  as may be  issued in the case of a  limited  liability  company),
     together with stock powers with respect  thereto duly executed in blank (or
     the equivalent  thereof in the case of a limited liability company in which
     such interests are  certificated,  or otherwise take such actions as Lender
     shall require with respect to Lender's security interests therein),

          (viii)  Lender shall have received (A) not less than ten (10) Business
     Days' prior written notice thereof  setting forth in reasonable  detail the
     nature and terms  thereof,  (B) true,  correct and  complete  copies of all
     agreements,  documents and instruments  relating thereto and (C) such other
     information with respect thereto as Lender may request;

     (k) the loans and  advances set forth on Schedule  9.10 to the  Information
Certificate;  provided,  that, as to such loans and advances, (i) Borrower shall
not, directly or indirectly,  amend,  modify,  alter or change the terms of such
loans and advances or any agreement,  document or instrument related thereto and
(ii) Borrower shall furnish to Lender all notices or demands in connection  with
such loans and advances either  received by Borrower or on its behalf,  promptly
after the receipt  thereof,  or sent by Borrower or on its behalf,  concurrently
with the sending thereof, as the case may be.

     9.11 Dividends and Redemptions. Borrower shall not, directly or indirectly,
declare or pay any  dividends on account of any shares of class of Capital Stock
of Borrower or such  Subsidiary  now or hereafter  outstanding,  or set aside or
otherwise  deposit  or invest  any sums for such  purpose,  or  redeem,  retire,
defease,  purchase or otherwise acquire any shares of any class of Capital Stock
(or set aside or otherwise  deposit or invest any sums for such purpose) for any
consideration or apply or set apart any sum, or make any other  distribution (by
reduction of capital or  otherwise) in respect of any such shares or agree to do
any of the foregoing, except

     (a) in any case in the form of shares of Capital Stock consisting of common
stock;

     (b) any Subsidiary of Borrower may pay any dividends to Borrower and in the
case of any Subsidiary of Borrower which is not  wholly-owned by Borrower,  on a
pro rata basis to each other holder of Capital Stock thereof;

     (c)  Borrower  may  repurchase  or redeem  Capital  Stock of Borrower to be
retired or held as treasury stock; provided, that,

          (i) as of the date of such repurchase or redemption and any payment in
     connection  therewith and after giving effect thereto,  no Default or Event
     of Default shall exist or have occurred and be continuing,

          (ii) as of the date of such  repurchase or redemption  and any payment
     in  connection  therewith  and after  giving  effect  thereto,  the  Excess
     Availability  shall  have  been not less  than  $5,000,000  for each of the
     immediately preceding ten (10) consecutive days and the Excess Availability
     shall be not less than $5,000,000,

          (iii) in no event shall the  aggregate of amounts  paid in  connection
     with such repurchases or redemptions exceed $2,000,000,

          (iv) such  repurchases  or  redemptions  shall not  violate any law or
     regulation or the terms of any indenture, agreement or undertaking to which
     Borrower or its property is bound,

          (v) such  repurchases  and  redemptions  shall be paid out of  legally
     available funds therefor.

     9.12  Transactions  with  Affiliates.   Borrower  shall  not,  directly  or
indirectly,  (a) purchase, acquire or lease any property from, or sell, transfer
or lease any  property to, any  Affiliate  of  Borrower,  except in the ordinary
course of and pursuant to the reasonable requirements of Borrower's business and
upon fair and  reasonable  terms no less favorable to the Borrower than Borrower
would obtain in a comparable arm's length  transaction with a person that is not
an Affiliate or (b) make any payments of  management,  consulting  or other fees
for  management  or  similar  services,  or of  any  Indebtedness  owing  to any
Affiliate of Borrower except reasonable compensation to officers,  employees and
directors for services rendered to Borrower in the ordinary course of business.

     9.13  Compliance  with  ERISA.  Borrower  shall and shall cause each of its
ERISA Affiliates to: (a) maintain each Plan (other than a Multiemployer Plan) in
compliance in all material respects with the applicable provisions of ERISA, the
Code and other  Federal  and State law;  (b) cause each Plan which is  qualified
under  Section  401(a)  of the  Code to  maintain  such  qualification;  (c) not
terminate any of such Plans so as to incur any liability to the Pension  Benefit
Guaranty  Corporation;   (d)  not  allow  or  suffer  to  exist  any  prohibited
transaction  involving any of such Plans or any trust created  thereunder  which
would  subject  Borrower  or such ERISA  Affiliate  to a tax or penalty or other
liability on prohibited  transactions  imposed under Section 4975 of the Code or
ERISA; (e) make all required  contributions to any Plan which it is obligated to
pay under  Section  302 of ERISA,  Section  412 of the Code or the terms of such
Plan;  (f) not  allow or suffer to exist  any  accumulated  funding  deficiency,
whether or not waived, with respect to any such Plan; or (g) not allow or suffer
to exist any  occurrence  of a reportable  event or any other event or condition
which presents a material risk of termination  by the Pension  Benefit  Guaranty
Corporation of any such Plan that is a single employer plan,  which  termination
could result in any liability to the Pension Benefit Guaranty Corporation.

     9.14 End of Fiscal Years;  Fiscal  Quarters.  Borrower shall, for financial
reporting purposes, cause its, and each of its Subsidiaries' (a) fiscal years to
end on January 31 of each year and (b) fiscal  quarters to end on April 30, July
31, October 31 and January 31 of each year.

     9.15 Change in Business.  Borrower  shall not engage in any business  other
than the  business of Borrower  on the date hereof and any  business  reasonably
related, ancillary or complimentary to the business in which Borrower is engaged
on the date hereof.

     9.16 Limitation of Restrictions Affecting Subsidiaries. Borrower shall not,
directly,  or  indirectly,  create  or  otherwise  cause or  suffer to exist any
encumbrance  or  restriction  which  prohibits  or  limits  the  ability  of any
Subsidiary of Borrower to (a) pay dividends or make other  distributions  or pay
any Indebtedness owed to Borrower or any Subsidiary of Borrower;  (b) make loans
or advances to Borrower or any  Subsidiary of Borrower,  (c) transfer any of its
properties or assets to Borrower or any  Subsidiary of Borrower;  or (d) create,
incur,  assume or suffer to exist any lien upon any of its  property,  assets or
revenues,  whether now owned or hereafter acquired,  other than encumbrances and
restrictions  arising  under (i)  applicable  law,  (ii) this  Agreement,  (iii)
customary provisions restricting subletting or assignment of any lease governing
a leasehold  interest of Borrower  or any of its  Subsidiaries,  (iv)  customary
restrictions  on  dispositions  of real property  interests  found in reciprocal
easement agreements of Borrower or its Subsidiary, (v) any agreement relating to
permitted Indebtedness incurred by a Subsidiary of Borrower prior to the date on
which  such  Subsidiary  was  acquired  by  Borrower  and  outstanding  on  such
acquisition  date,  and  (vi)  the  extension  or  continuation  of  contractual
obligations  in  existence  on  the  date  hereof;   provided,  that,  any  such
encumbrances or restrictions  contained in such extension or continuation are no
less  favorable  to Lender than those  encumbrances  and  restrictions  under or
pursuant to the contractual obligations so extended or continued.

     9.17 Minimum EBITDA.  As of the last day of each fiscal quarter of Borrower
as set  forth  below,  the  EBITDA  of  Borrower  and its  Subsidiaries  for the
immediately  preceding four (4) consecutive fiscal quarters (treated as a single
accounting period) shall be not less than the amount indicated for such date:

              (a)  January 31, 2003                  ($700,000)

              (b)  April 30, 2003                    ($700,000)

              (c)  July 31, 2003                     ($700,000)

              (d)  October 31, 2003                  $0

              (e)  January 31, 2004                  $300,000

              (f)   And as of the last day of each fiscal quarter thereafter $0

The numbers in parenthesis above are to indicate that they are negative numbers.

     9.18 Capital  Expenditures.  Borrower shall not permit the aggregate of all
Capital  Expenditures  of Borrower  and its  subsidiaries  in any fiscal year to
exceed $1,000,000.  To the extent that the actual amount of Capital Expenditures
by Borrower in any fiscal year shall be less than the amount permitted hereunder
for  such  fiscal  year,  Capital  Expenditures  may be made in the  immediately
subsequent  fiscal  year in the amount of such  excess in addition to the amount
otherwise   permitted   hereunder  for  such  subsequent  fiscal  year.  Capital
Expenditures  made with  proceeds of insurance to repair or replace the property
lost,  damaged or destroyed which was the basis for the insurance  claims giving
rise to such  proceeds  shall  not be  considered  in the  determination  of the
limitation set forth in this Section.

     9.19 Minimum  Excess  Availability.  The Excess  Availability  shall at all
times be equal to or greater than $1,000,000.

     9.20 License Agreements.

     (a) Borrower shall (i) promptly and  faithfully  observe and perform all of
the material terms, covenants, conditions and provisions of the material License
Agreements to be observed and  performed by it, at the times set forth  therein,
if any,  (ii) not do,  permit,  suffer or  refrain  from  doing  anything  could
reasonably  be  expected  to result  in a default  under or breach of any of the
terms of any material License Agreement,  (iii) not cancel,  surrender,  modify,
amend,  waive or release any material License  Agreement in any material respect
or any term,  provision  or right of the  licensee  thereunder  in any  material
respect,  or consent to or permit to occur any of the foregoing;  except,  that,
subject to Section 9.20(b) below, Borrower may cancel,  surrender or release any
material  License  Agreement in the ordinary course of the business of Borrower;
provided,  that, Borrower shall give Lender not less than thirty (30) days prior
written  notice of its  intention to so cancel,  surrender  and release any such
material  License  Agreement,  (iv) give  Lender  prompt  written  notice of any
material  License  Agreement  entered  into by Borrower  after the date  hereof,
together  with a  true,  correct  and  complete  copy  thereof  and  such  other
information  with respect thereto as Lender may request,  (v) give Lender prompt
written notice of any material breach of any obligation,  or any default, by any
party under any material License Agreement, and deliver to Lender (promptly upon
the  receipt  thereof  by  Borrower  in the case of a notice  to  Borrower,  and
concurrently  with the sending  thereof in the case of a notice from Borrower) a
copy of each notice of default and every  other  notice and other  communication
received or  delivered  by  Borrower in  connection  with any  material  License
Agreement which relates to the right of Borrower to continue to use the property
subject to such License Agreement, and (vi) furnish to Lender, promptly upon the
request of Lender, such information and evidence as Lender may require from time
to time concerning the observance, performance and compliance by Borrower or the
other party or parties  thereto with the terms,  covenants or  provisions of any
material License Agreement.

     (b) Borrower will either exercise any option to renew or extend the term of
each  material  License  Agreement in such manner as will cause the term of such
material License Agreement to be effectively  renewed or extended for the period
provided by such option and give prompt written notice thereof to Lender or give
Lender prior written notice that Borrower does not intend to renew or extend the
term of any such  material  License  Agreement  or that the term  thereof  shall
otherwise  be  expiring,  not less than sixty (60) days prior to the date of any
such  non-renewal or expiration.  In the event of the failure of any Borrower to
extend or renew any material License Agreement, Lender shall have, and is hereby
granted, the irrevocable right and authority,  at its option, to renew or extend
the term of such material License Agreement, whether in its own name and behalf,
or in the name and behalf of a designee  or nominee of Lender or in the name and
behalf of  Borrower,  as  Lender  shall  determine  at any time that an Event of
Default  shall exist or have occurred and be  continuing.  Lender may, but shall
not be required to, perform any or all of such obligations of any Borrower under
any of the License Agreements, including, but not limited to, the payment of any
or all sums due  from  Borrower  thereunder.  Any sums so paid by  Lender  shall
constitute part of the Obligations.

     9.21 Costs and Expenses.  Borrower shall pay to Lender on demand all costs,
expenses,  filing  fees  and  taxes  paid or  payable  in  connection  with  the
preparation,   negotiation,  execution,  delivery,  recording,   administration,
collection,  liquidation,  enforcement and defense of the Obligations,  Lender's
rights in the Collateral, this Agreement, the other Financing Agreements and all
other documents related hereto or thereto, including any amendments, supplements
or consents  which may  hereafter be  contemplated  (whether or not executed) or
entered into in respect  hereof and thereof,  including:  (a) all  out-of-pocket
costs and expenses of filing or recording  (including  Uniform  Commercial  Code
financing statement filing taxes and fees, documentary taxes,  intangibles taxes
and mortgage  recording  taxes and fees, if applicable);  (b) all  out-of-pocket
costs  and  expenses  and fees for  insurance  premiums,  environmental  audits,
surveys,  assessments,  engineering reports and inspections,  appraisal fees and
search fees, costs and expenses required to be paid by Lender to banks and other
financial  institutions in connection  with remitting loan proceeds,  collecting
checks and other items of payment,  and establishing and maintaining the Blocked
Accounts,  together  with  Lender's  customary  charges  and fees  with  respect
thereto;  (c)  charges,  fees or  expenses  charged  by any  bank or  issuer  in
connection with the Letter of Credit  Accommodations;  (d) costs and expenses of
preserving  and  protecting  the  Collateral;  (e)  costs and  expenses  paid or
incurred in connection with obtaining payment of the Obligations,  enforcing the
security interests and liens of Lender,  selling or otherwise realizing upon the
Collateral,  and otherwise  enforcing the  provisions of this  Agreement and the
other  Financing  Agreements or defending any claims made or threatened  against
Lender  arising  out  of  the  transactions   contemplated  hereby  and  thereby
(including preparations for and consultations  concerning any such matters); (f)
all out-of-pocket  expenses and costs heretofore and from time to time hereafter
incurred  by Lender  during the course of  periodic  field  examinations  of the
Collateral  and  Borrower's  operations,  plus a per  diem  charge  at the  then
standard  rate of Lender per person per day for Lender's  examiners in the field
and office (which rate is currently $750); and (g) the fees and disbursements of
counsel  (including  legal  assistants) to Lender in connection  with any of the
foregoing.  In no event  shall the costs and  expenses  in  connection  with the
administration  of the arrangements  between Lender and Borrower  required to be
paid by  Borrower  pursuant to this  Section  9.21 be  construed  to include the
compensation paid by Lender to its employees.

     9.22 Further Assurances. At the request of Lender at any time and from time
to time,  Borrower shall, at its expense,  duly execute and deliver, or cause to
be  duly  executed  and  delivered,  such  further  agreements,   documents  and
instruments, and do or cause to be done such further acts as may be necessary or
proper to evidence, perfect, maintain and enforce the security interests and the
priority thereof in the Collateral and to otherwise effectuate the provisions or
purposes of this Agreement or any of the other Financing Agreements.  Lender may
at any time and from  time to time  request a  certificate  from an  officer  of
Borrower  representing that all conditions  precedent to the making of Loans and
providing Letter of Credit Accommodations contained herein are satisfied. In the
event of such  request by Lender,  Lender may, at its option,  cease to make any
further  Loans or provide  any  further  Letter of Credit  Accommodations  until
Lender has received such  certificate  and, in addition,  Lender has  determined
that such conditions are satisfied.


SECTION 10.   EVENTS OF DEFAULT AND REMEDIES
              ------------------------------

     10.1 Events of Default.  The  occurrence or existence of any one or more of
the  following  events  are  referred  to  herein  individually  as an "Event of
Default", and collectively as "Events of Default":

     (a) (i)  Borrower  fails to pay any of the  Obligations  within  three  (3)
Business  Days after when due or (ii) any  Borrower or Obligor  fails to perform
any of the covenants contained in Sections 9.5, 9.7, 9.8, 9.9, 9.10, 9.11, 9.12,
9.17, 9.18, and 9.19 of this Agreement or (iii) Borrower or any Obligor fails to
perform any of the covenants  contained in any other  provisions of Section 9 of
this Agreement and such failure shall  continue for twenty (20) days;  provided,
that,  such twenty (20) day period shall not apply in the case of any failure to
observe any such  covenant  which is not capable of being cured at all or within
such  twenty  (20) day period or which has been the  subject of a prior  failure
within a six (6) month period or (iv)  Borrower or any Obligor  fails to perform
or comply with any of the terms,  covenants,  conditions or provisions contained
in this  Agreement  or any of the other  Financing  Agreements  other than those
described in Sections 10.1(a)(i), 10.1(a)(ii) and 10.1(a)(iii) above;

     (b) any  representation,  warranty or statement of fact made by Borrower or
any Obligor to Lender in this Agreement,  the other Financing  Agreements or any
other  agreement,  schedule,  confirmatory  assignment or otherwise  that by its
terms is qualified by reference to materiality shall when made or deemed made be
false or incorrect and any other  representation,  warranty or statement of fact
made by Borrower or any Obligor to Lender in this Agreement, the other Financing
Agreements  or  any  other  agreement,  schedule,   confirmatory  assignment  or
otherwise  shall when made or deemed made be false or  incorrect in any material
respect;

     (c) any Obligor revokes or terminates,  or purports to revoke or terminate,
or fails to perform any of the terms,  covenants,  conditions or provisions  of,
any Financing Agreement of such party in favor of Lender;

     (d) any judgment for the payment of money is rendered  against  Borrower or
any Obligor in excess of $500,000  in any one case or in the  aggregate  (to the
extent not covered by insurance where the insurer has assumed  responsibility in
writing for such  judgment)  and shall remain  undischarged  or unvacated  for a
period  in excess of  thirty  (30)  days or  execution  shall at any time not be
effectively  stayed,  or any  judgment  other than for the payment of money,  or
injunction, attachment, garnishment or execution is rendered against Borrower or
any Obligor or any of their assets;

     (e)  Borrower  or any  Obligor  makes  an  assignment  for the  benefit  of
creditors;

     (f) a case or proceeding  under the bankruptcy laws of the United States of
America  now or  hereafter  in effect or under any  insolvency,  reorganization,
receivership, readjustment of debt, dissolution or liquidation law or statute of
any  jurisdiction  now or hereafter  in effect  (whether at law or in equity) is
filed against  Borrower or any Obligor or all or any part of its  properties and
such petition or application  is not dismissed  within sixty (60) days after the
date of its filing or Borrower or any Obligor shall file any answer admitting or
not  contesting  such  petition  or  application  or  indicates  its consent to,
acquiescence  in or  approval  of, any such action or  proceeding  or the relief
requested is granted sooner;

     (g) a case or proceeding  under the bankruptcy laws of the United States of
America  now or  hereafter  in effect or under any  insolvency,  reorganization,
receivership, readjustment of debt, dissolution or liquidation law or statute of
any  jurisdiction  now or  hereafter  in effect  (whether at a law or equity) is
filed by Borrower or any Obligor or for all or any part of its property; or

     (h) any default in respect of any  Indebtedness  of Borrower or any Obligor
(other than Indebtedness owing to Lender), in any case in an amount in excess of
$750,000,  which default  continues for more than the applicable cure period, if
any, with respect  thereto,  or any default by Borrower or any Obligor under any
Material  Contract,  which default  continues for more than the applicable  cure
period, if any, with respect thereto,  provided, that, no Event of Default under
this  clause (h) shall be deemed to exist or have  occurred  upon the failure of
Borrower  or HAPL to  comply  with the  terms of the  Program  Agreement,  dated
November 24, 1993, between HAPL and The CIT Group/Equipment  Financing,  Inc. so
long as The CIT Group/Equipment Financing, Inc. has not terminated its agreement
to  forbear  from the  exercise  of any  rights  or  remedies  against  HAPL and
Borrower,  or if the agreement of The CIT Group/  Equipment  Financing,  Inc. to
forbear has  terminated,  Borrower and HAPL shall satisfy all of the obligations
of HAPL and Borrower to The CIT Group/Equipment Financing, Inc. and after giving
effect to all payments in respect  thereof Excess  Availability  is greater than
$1,000,000,  or The CIT Group/Equipment  Financing, Inc. has waived such failure
in writing;

     (i)  any  material  provision  hereof  or of  any of  the  other  Financing
Agreements shall for any reason cease to be valid,  binding and enforceable with
respect to any party hereto or thereto  (other than Lender) in  accordance  with
its terms,  or any such  party  shall  challenge  the  enforceability  hereof or
thereof,  or shall  assert in  writing,  or take any  action or fail to take any
action based on the assertion  that any provision  hereof or of any of the other
Financing  Agreements  has ceased to be or is  otherwise  not valid,  binding or
enforceable in accordance with its terms, or any security  interest provided for
herein or in any of the other Financing Agreements shall cease to be a valid and
perfected first priority security interest in any of the Collateral purported to
be subject thereto (except as otherwise permitted herein or therein);

     (j) Henry  Arnberg or Paul Levine shall cease to be members of the Board of
Directors of Borrower;

     (k) an ERISA  Event shall occur  which  results in or could  reasonably  be
expected to result in liability of Borrower in an aggregate  amount in excess of
$100,000;

     (l) any Change of Control;

     (m)  the  indictment  by  any  Governmental  Authority,  or as  Lender  may
reasonably  and in  good  faith  determine,  the  threatened  indictment  by any
Governmental Authority of Borrower or any Obligor of which Borrower, any Obligor
or Lender  receives  notice,  in either case,  as to which there is a reasonable
possibility  of an adverse  determination,  in the good faith  determination  of
Lender,  under any criminal statute, or commencement or threatened  commencement
of criminal or civil  proceedings  against Borrower pursuant to which statute or
proceedings the penalties or remedies sought or available include  forfeiture of
(i) any of the  Collateral  having a value in excess of  $1,000,000  or (ii) any
other  property of Borrower which is necessary or material to the conduct of its
business;

     (n) there  shall be an event or  circumstance  after the date  hereof  that
shall have a material adverse effect on (i) the financial  condition,  business,
performance   or   operations  of  Borrower;   (ii)  the   legality,   validity,
enforceability  or priority of the security  interests  and liens of Lender upon
the  Collateral;  (iii) the ability of Borrower to repay the  Obligations  or of
Borrower to perform its  obligations  under this  Agreement  or any of the other
Financing  Agreements  as and  when  to be  performed;  or  (iv)  the  practical
realization of the benefits of Lender's rights and remedies under this Agreement
or any of the other Financing Agreements.

     10.2 Remedies.

     (a) At any  time  an  Event  of  Default  exists  or  has  occurred  and is
continuing,  Lender  shall  have  all  rights  and  remedies  provided  in  this
Agreement, the other Financing Agreements, the UCC and other applicable law, all
of which rights and remedies  may be exercised  without  notice to or consent by
Borrower or any Obligor,  except as such notice or consent is expressly provided
for  hereunder or required by  applicable  law. All rights,  remedies and powers
granted to Lender hereunder,  under any of the other Financing  Agreements,  the
UCC or other applicable law, are cumulative,  not exclusive and enforceable,  in
Lender's discretion, alternatively,  successively, or concurrently on any one or
more occasions, and shall include,  without limitation,  the right to apply to a
court of equity for an injunction  to restrain a breach or threatened  breach by
Borrower of this Agreement or any of the other Financing Agreements. Lender may,
at any time or times,  proceed  directly  against  Borrower  or any  Obligor  to
collect  the  Obligations  without  prior  recourse to any Obligor or any of the
Collateral.

     (b) Without limiting the foregoing,  at any time an Event of Default exists
or has occurred and is continuing,  Lender may, in its discretion  and,  without
limitation,  (i) accelerate the payment of all Obligations and demand  immediate
payment thereof to Lender  (provided,  that, upon the occurrence of any Event of
Default  described  in  Sections  10.1(f) and  10.1(g),  all  Obligations  shall
automatically become immediately due and payable), (ii) with or without judicial
process or the aid or  assistance  of others,  enter upon any  premises on or in
which any of the Collateral may be located and take possession of the Collateral
or complete  processing,  manufacturing  and repair of all or any portion of the
Collateral,  (iii) require Borrower, at Borrower's expense, to assemble and make
available  to  Lender  any part or all of the  Collateral  at any place and time
designated by Lender, (iv) collect, foreclose, receive, appropriate,  setoff and
realize  upon any and all  Collateral,  (v) remove any or all of the  Collateral
from any  premises  on or in which the same may be  located  for the  purpose of
effecting the sale,  foreclosure or other  disposition  thereof or for any other
purpose, (vi) sell, lease, transfer, assign, deliver or otherwise dispose of any
and all Collateral  (including  entering into  contracts  with respect  thereto,
public or private sales at any exchange, broker's board, at any office of Lender
or elsewhere) at such prices or terms as Lender may deem  reasonable,  for cash,
upon credit or for future delivery, with the Lender having the right to purchase
the whole or any part of the  Collateral  at any such  public  sale,  all of the
foregoing  being free from any right or equity of redemption of Borrower,  which
right or equity of  redemption  is  hereby  expressly  waived  and  released  by
Borrower and/or (vii) terminate this Agreement. If any of the Collateral is sold
or leased by Lender upon credit terms or for future  delivery,  the  Obligations
shall not be reduced  as a result  thereof  until  payment  therefor  is finally
collected by Lender.  If notice of disposition of Collateral is required by law,
ten (10) days prior notice by Lender to Borrower  designating the time and place
of any public sale or the time after which any  private  sale or other  intended
disposition of Collateral is to be made, shall be deemed to be reasonable notice
thereof and Borrower waives any other notice.  In the event Lender institutes an
action to recover any  Collateral or seeks  recovery of any Collateral by way of
prejudgment  remedy,  Borrower  waives  the  posting  of any  bond  which  might
otherwise  be required.  At any time an Event of Default  exists or has occurred
and is continuing,  upon Lender's request, Borrower will either, as Lender shall
specify,  furnish  cash  collateral  to the issuer to be used to secure and fund
Lender's  reimbursement  obligations to the issuer in connection with any Letter
of Credit  Accommodations or furnish cash collateral to Lender for the Letter of
Credit Accommodations.  Such cash collateral shall be in the amount equal to one
hundred five (105%) percent of the amount of the Letter of Credit Accommodations
plus the amount of any fees and expenses payable in connection therewith through
the end of the expiration of such Letter of Credit Accommodations.

     (c) Lender may, at any time or times that an Event of Default exists or has
occurred  and is  continuing,  enforce  Borrower's  rights  against  any account
debtor,  secondary obligor or other obligor in respect of any of the Accounts or
other Receivables.  Without limiting the generality of the foregoing, Lender may
at such time or times (i) notify any or all account debtors,  secondary obligors
or other obligors in respect thereof that the Receivables  have been assigned to
Lender and that Lender has a security interest therein and Lender may direct any
or all account debtors, secondary obligors and other obligors to make payment of
Receivables  directly to Lender, (ii) extend the time of payment of, compromise,
settle or adjust for cash, credit, return of merchandise or otherwise,  and upon
any terms or conditions,  any and all Receivables or other obligations  included
in the  Collateral  and thereby  discharge or release the account  debtor or any
secondary obligors or other obligors in respect thereof without affecting any of
the Obligations,  (iii) demand, collect or enforce payment of any Receivables or
such other  obligations,  but without any duty to do so, and Lender shall not be
liable for its  failure to collect or enforce  the  payment  thereof nor for the
negligence  of its  agents  or  attorneys  with  respect  thereto  and (iv) take
whatever  other action Lender may deem necessary or desirable for the protection
of its  interests.  At any time that an Event of Default  exists or has occurred
and is continuing,  at Lender's request, all invoices and statements sent to any
account  debtor shall state that the Accounts  and such other  obligations  have
been assigned to Lender and are payable directly and only to Lender and Borrower
shall  deliver to Lender such  originals  of documents  evidencing  the sale and
delivery of goods or the  performance of services giving rise to any Accounts as
Lender may require.  In the event any account debtor  returns  Inventory when an
Event of Default exists or has occurred and is continuing,  Borrower shall, upon
Lender's request, hold the returned Inventory in trust for Lender, segregate all
returned  Inventory  from all of its other  property,  dispose  of the  returned
Inventory solely according to Lender's instructions,  and not issue any credits,
discounts or allowances  with respect  thereto  without  Lender's  prior written
consent.

     (d) To the extent that  applicable law imposes duties on Lender to exercise
remedies in a  commercially  reasonable  manner  (which  duties cannot be waived
under such law),  Borrower  acknowledges  and agrees that it is not commercially
unreasonable  for  Lender  (i) to  fail  to  incur  expenses  reasonably  deemed
significant  by Lender to prepare  Collateral  for  disposition  or otherwise to
complete raw material or work in process into finished  goods or other  finished
products for disposition, (ii) to fail to obtain third party consents for access
to  Collateral to be disposed of, or to obtain or, if not required by other law,
to fail to obtain  consents of any  Governmental  Authority or other third party
for the  collection or disposition of Collateral to be collected or disposed of,
(iii) to fail to exercise collection remedies against account debtors, secondary
obligors  or  other  persons  obligated  on  Collateral  or to  remove  liens or
encumbrances  on or any  adverse  claims  against  Collateral,  (iv) to exercise
collection  remedies  against  account  debtors and other  persons  obligated on
Collateral  directly  or  through  the  use of  collection  agencies  and  other
collection  specialists,  (v) to advertise  dispositions  of Collateral  through
publications or media of general  circulation,  whether or not the Collateral is
of a specialized  nature,  (vi) to contact other persons,  whether or not in the
same  business as Borrower for  expressions  of interest in acquiring all or any
portion of the Collateral, (vii) to hire one or more professional auctioneers to
assist in the  disposition of Collateral,  whether or not the collateral is of a
specialized nature,  (viii) to dispose of Collateral by utilizing Internet sites
that provide for the auction of assets of the types  included in the  Collateral
or that have the  reasonable  capability  of doing so, or that match  buyers and
sellers of assets,  (ix) to dispose of assets in  wholesale  rather  than retail
markets, (x) to disclaim disposition  warranties,  (xi) to purchase insurance or
credit  enhancements  to insure  Lender  against  risks of loss,  collection  or
disposition  of Collateral or to provide to Lender a guaranteed  return from the
collection  or  disposition  of  Collateral,  or  (xii)  to  the  extent  deemed
appropriate  by Lender,  to obtain the  services  of other  brokers,  investment
bankers,  consultants and other professionals to assist Lender in the collection
or disposition of any of the Collateral.  Borrower acknowledges that the purpose
of this  Section is to provide  non-exhaustive  indications  of what  actions or
omissions by Lender would not be commercially  unreasonable in Lender's exercise
of remedies against the Collateral and that other actions or omissions by Lender
shall not be deemed  commercially  unreasonable  solely on  account of not being
indicated  in  this  Section.  Without  limitation  of  the  foregoing,  nothing
contained in this Section  shall be construed to grant any rights to Borrower or
to impose  any duties on Lender  that would not have been  granted or imposed by
this Agreement or by applicable law in the absence of this Section.

     (e) For the purpose of enabling  Lender to exercise the rights and remedies
hereunder,  Borrower  hereby  grants to  Lender,  to the extent  assignable,  an
irrevocable,  non-exclusive  license  (exercisable without payment of royalty or
other compensation to Borrower) to use, assign, license or sublicense any of the
trademarks,  service-marks,  trade names, business names, trade styles, designs,
logos and other source of business  identifiers and other Intellectual  Property
and general  intangibles now owned or hereafter  acquired by Borrower,  wherever
the same maybe located, including in such license reasonable access to all media
in which any of the licensed items may be recorded or stored and to all computer
programs used for the compilation or printout thereof.

     (f) Lender may apply the cash proceeds of Collateral  actually  received by
Lender from any sale, lease,  foreclosure or other disposition of the Collateral
to payment of the  Obligations,  in whole or in part and in such order as Lender
may elect,  whether or not then due.  Borrower shall remain liable to Lender for
the payment of any  deficiency  with interest at the highest rate  applicable to
Prime Rate Loans provided for herein and all costs and expenses of collection or
enforcement, including attorneys' fees and legal expenses.

     (g) Without  limiting the  foregoing,  upon the  occurrence of a Default or
Event of Default,  Lender may, at its option,  without notice,  (i) cease making
Loans or  arranging  for Letter of Credit  Accommodations  or reduce the lending
formulas or amounts of Loans and Letter of Credit  Accommodations  available  to
Borrower (ii) terminate any provision of this Agreement providing for any future
Loans or Letter of Credit Accommodations to be made by Lender to Borrower and/or
(iii)  establish  such  Reserves  as Lender  determines  without  limitation  or
restriction, notwithstanding anything to the contrary contained herein.

SECTION 11.   JURY TRIAL WAIVER; OTHER WAIVERS
              AND CONSENTS; GOVERNING LAW
              ---------------------------

     11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver.
          ---------------------------------------------------------------------

     (a) The validity,  interpretation and enforcement of this Agreement and the
other  Financing  Agreements  and any dispute  arising  out of the  relationship
between the parties  hereto,  whether in contract,  tort,  equity or  otherwise,
shall be governed by the  internal  laws of the State of New York but  excluding
any  principles  of  conflicts  of law or other rule of law that would cause the
application of the law of any  jurisdiction  other than the laws of the State of
New York.

     (b) Borrower and Lender irrevocably consent and submit to the non-exclusive
jurisdiction  of the  Supreme  Court of the State of New York in New York County
and the United  States  District  Court for the  Southern  District of New York,
whichever  Lender may elect, and waive any objection based on venue or forum non
conveniens  with respect to any action  instituted  therein  arising  under this
Agreement or any of the other Financing  Agreements or in any way connected with
or related or  incidental  to the  dealings of the parties  hereto in respect of
this  Agreement or any of the other  Financing  Agreements  or the  transactions
related  hereto or  thereto,  in each case  whether now  existing  or  hereafter
arising, and whether in contract,  tort, equity or otherwise, and agree that any
dispute  with  respect  to any such  matters  shall be heard  only in the courts
described  above (except that Lender shall have the right to bring any action or
proceeding  against  Borrower  or its  property  in  the  courts  of  any  other
jurisdiction  which Lender deems necessary or appropriate in order to realize on
the  Collateral  or to  otherwise  enforce  its rights  against  Borrower or its
property).

     (c) Borrower hereby waives personal  service of any and all process upon it
and  consents  that all such  service of process may be made by  certified  mail
(return receipt requested)  directed to its address set forth herein and service
so made shall be deemed to be completed  five (5) days after the same shall have
been so deposited in the U.S.  mails,  or, at Lender's  option,  by service upon
Borrower in any other manner provided under the rules of any such courts. Except
as  otherwise  required  by the  applicable  court,  and only  after an Event of
Default,  within sixty (60) days after such  service,  Borrower  shall appear in
answer to such process,  failing which  Borrower  shall be deemed in default and
judgment may be entered by Lender  against  Borrower for the amount of the claim
and other relief requested.

     (d)  BORROWER  AND LENDER EACH HEREBY  WAIVES ANY RIGHT TO TRIAL BY JURY OF
ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS AGREEMENT OR
ANY OF THE  OTHER  FINANCING  AGREEMENTS  OR (ii) IN ANY WAY  CONNECTED  WITH OR
RELATED OR INCIDENTAL  TO THE DEALINGS OF THE PARTIES  HERETO IN RESPECT OF THIS
AGREEMENT OR ANY OF THE OTHER FINANCING  AGREEMENTS OR THE TRANSACTIONS  RELATED
HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR  HEREAFTER  ARISING,  AND
WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE.  BORROWER AND LENDER EACH HEREBY
AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL
BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER OR LENDER MAY FILE AN
ORIGINAL  COUNTERPART  OF A COPY OF THIS  AGREEMENT  WITH ANY  COURT AS  WRITTEN
EVIDENCE OF THE  CONSENT OF THE  PARTIES  HERETO TO THE WAIVER OF THEIR RIGHT TO
TRIAL BY JURY.

     (e) Lender  shall not have any  liability  to  Borrower  (whether  in tort,
contract,  equity or  otherwise)  for losses  suffered by Borrower in connection
with, arising out of, or in any way related to the transactions or relationships
contemplated  by this  Agreement,  or any act,  omission or event  occurring  in
connection  herewith,  unless it is  determined  by a final  and  non-appealable
judgment  or court order  binding on Lender,  that the losses were the result of
acts or omissions constituting gross negligence or willful misconduct of Lender.
In  any  such  litigation,  Lender  shall  be  entitled  to the  benefit  of the
rebuttable  presumption  that it acted in good  faith and with the  exercise  of
ordinary care in the performance by it of the terms of this Agreement. Except as
prohibited  by law,  Borrower  waives  any  right  which it may have to claim or
recover in any  litigation  with  Lender any  special,  exemplary,  punitive  or
consequential  damages or any damages  other than,  or in  addition  to,  actual
damages.  Borrower:  (i) certifies that neither  Lender nor any  representative,
agent or attorney acting for or on behalf of Lender has  represented,  expressly
or otherwise, that Lender would not, in the event of litigation, seek to enforce
any of the waivers  provided for in this Agreement or any of the other Financing
Agreements  and (ii)  acknowledges  that in entering into this Agreement and the
other  Financing  Agreements,  Lender is relying upon,  among other things,  the
waivers and  certifications  set forth in this Section 11.1 and elsewhere herein
and therein.

     11.2  Waiver  of  Notices.   Borrower  hereby   expressly   waives  demand,
presentment,  protest and notice of protest and notice of dishonor  with respect
to any and all instruments  and chattel paper,  included in or evidencing any of
the Obligations or the Collateral,  and any and all other demands and notices of
any kind or nature  whatsoever with respect to the  Obligations,  the Collateral
and this Agreement,  except such as are expressly provided for herein or may not
be waived under  applicable law. No notice to or demand on Borrower which Lender
may elect to give  shall  entitle  Borrower  to any other or  further  notice or
demand in the same, similar or other circumstances.

     11.3  Amendments  and Waivers.  Neither this  Agreement  nor any  provision
hereof shall be amended,  modified,  waived or discharged orally or by course of
conduct,  but only by a written  agreement  signed by an  authorized  officer of
Lender,  and as to  amendments,  as also  signed  by an  authorized  officer  of
Borrower.  Lender shall not, by any act, delay,  omission or otherwise be deemed
to have expressly or impliedly waived any of its rights,  powers and/or remedies
unless such waiver  shall be in writing and signed by an  authorized  officer of
Lender. Any such waiver shall be enforceable only to the extent specifically set
forth therein.  A waiver by Lender of any right,  power and/or remedy on any one
occasion  shall not be construed as a bar to or waiver of any such right,  power
and/or remedy which Lender would otherwise have on any future occasion,  whether
similar in kind or otherwise.

     11.4 Waiver of  Counterclaims.  Borrower waives all rights to interpose any
claims,  deductions,  setoffs  or  counterclaims  of any nature in any action or
proceeding with respect to this Agreement,  the  Obligations,  the Collateral or
any matter  arising  therefrom or relating  hereto or thereto;  provided,  that,
nothing  contained in this Section 11.4 shall be deemed to prevent Borrower from
raising any such claim,  deduction,  setoff or  counterclaim by separate suit or
compulsory counterclaim.

     11.5  Indemnification.  Borrower shall  indemnify and hold Lender,  and its
directors, agents, employees, counsel and their respective Affiliates (each such
person  being an  "Indemnitee"),  harmless  from and against any and all losses,
claims,  damages,  liabilities,  costs or expenses  imposed  on,  incurred by or
asserted  against any of them in connection with any litigation,  investigation,
claim  or  proceeding  commenced  or  threatened  related  to  the  negotiation,
preparation, execution, delivery, enforcement,  performance or administration of
this Agreement, any other Financing Agreements, or any undertaking or proceeding
related to any of the  transactions  contemplated  hereby or any act,  omission,
event or transaction  related or attendant  thereto,  including  amounts paid in
settlement,  court  costs,  and the fees and  expenses of  counsel,  except that
Borrower shall not have any  obligation  under this Section 11.5 to indemnify an
Indemnitee  with respect to a matter  covered  hereby  resulting  from the gross
negligence or wilful  misconduct of such Indemnitee as determined  pursuant to a
final, non-appealable order of a court of competent jurisdiction.  To the extent
that the  undertaking  to  indemnify,  pay and hold  harmless  set forth in this
Section  may be  unenforceable  because it  violates  any law or public  policy,
Borrower  shall  pay the  maximum  portion  which it is  permitted  to pay under
applicable  law to Lender in  satisfaction  of  indemnified  matters  under this
Section.  To the extent permitted by applicable law,  Borrower shall not assert,
and  Borrower  hereby  waives,  any  claim  against  Lender,  on any  theory  of
liability, for special, indirect,  consequential or punitive damages (as opposed
to direct or actual damages)  arising out of, in connection with, or as a result
of, this Agreement,  any of the other Financing Agreements or any undertaking or
transaction  contemplated  hereby.  The  foregoing  indemnity  shall survive the
payment of the Obligations and the termination or non-renewal of this Agreement.


SECTION 12.   TERM OF AGREEMENT; MISCELLANEOUS
              --------------------------------

     12.1 Term.

     (a)  This  Agreement  and  the  other  Financing  Agreements  shall  become
effective  as of the date set forth on the first page hereof and shall  continue
in full force and effect for a term ending on the  Maturity  Date.  In addition,
Borrower  may  terminate  this  Agreement  at any time upon ten (10) days  prior
written  notice to Lender  (which  notice shall be  irrevocable)  and Lender may
terminate this  Agreement at any time on or after an Event of Default.  Upon the
effective date of termination of this  Agreement,  Borrower shall pay to Lender,
in  full,  all  outstanding  and  unpaid  Obligations  and  shall  furnish  cash
collateral to Lender (or at Lender's  option,  a letter of credit issued for the
account  of  Borrower  and  at  Borrower's   expense,   in  form  and  substance
satisfactory to Lender,  by an issuer acceptable to Lender and payable to Lender
as beneficiary) in such amounts as Lender determines are reasonably necessary to
secure (or  reimburse)  Lender from loss,  cost,  damage or  expense,  including
attorneys'  fees  and  legal   expenses,   in  connection  with  any  contingent
Obligations,  including issued and outstanding  Letter of Credit  Accommodations
and checks or other payments provisionally credited to the Obligations and/or as
to which  Lender  has not yet  received  final and  indefeasible  payment.  Such
payments in respect of the Obligations and cash collateral  shall be remitted by
wire transfer in Federal funds to such bank account of Lender, as Lender may, in
its  discretion,  designate  in writing to Borrower for such  purpose.  Interest
shall be due until and  including  the next Business Day, if the amounts so paid
by Borrower to the bank account  designated  by Lender are received in such bank
account later than 12:00 noon, New York time.

     (b) No  termination  of this  Agreement or the other  Financing  Agreements
shall relieve or discharge  Borrower of its respective  duties,  obligations and
covenants  under this  Agreement  or the other  Financing  Agreements  until all
Obligations  have been  fully and  finally  discharged  and paid,  and  Lender's
continuing  security  interest in the  Collateral and the rights and remedies of
Lender hereunder, under the other Financing Agreements and applicable law, shall
remain  in effect  until  all such  Obligations  have  been  fully  and  finally
discharged and paid.  Accordingly,  Borrower waives any rights which it may have
under the UCC to demand the filing of termination statements with respect to the
Collateral, and Lender shall not be required to send such termination statements
to  Borrower,  or to file them with any  filing  office,  unless  and until this
Agreement is terminated in accordance  with its terms and all of the Obligations
are paid and satisfied in full in immediately available funds.

     (c) If for any reason this Agreement is terminated  prior to the end of the
term of this Agreement,  in view of the impracticality and extreme difficulty of
ascertaining  actual  damages  and by mutual  agreement  of the  parties as to a
reasonable  calculation of Lender's lost profits as a result  thereof,  Borrower
agrees to pay to Lender,  upon the effective date of such termination,  an early
termination  fee in the amount set forth below if such  termination is effective
in the period indicated:


                   Amount                    Period
                   ------                    ------

 (i)       Two (2%) percent of               From the date hereof to and
           the Maximum Credit                including the first  anniversary of
                                             the date hereof

 (ii)      One (1%) percent of               From and after the first
           the Maximum Credit                anniversary of the date  hereof to
                                             but not including the third
                                             anniversary of the date hereof.

Such  early  termination  fee shall be  presumed  to be the  amount  of  damages
sustained by Lender as a result of such early  termination  and Borrower  agrees
that it is reasonable under the circumstances  currently existing.  In addition,
Lender shall be entitled to such early  termination  fee upon the  occurrence of
any Event of Default  described in Sections 10.1(f) and 10.1(g) hereof,  even if
Lender does not exercise its right to terminate this Agreement,  but elects,  at
its  option,  to  provide  financing  to  Borrower  or  permit  the  use of cash
collateral under the United States  Bankruptcy  Code. The early  termination fee
provided for in this Section 12.1 shall be deemed included in the Obligations.

     12.2 Interpretative Provisions.
          -------------------------

     (a) All terms used  herein  which are  defined in Article 1 or Article 9 of
the UCC shall have the meanings given therein unless  otherwise  defined in this
Agreement.

     (b) All references to the plural herein shall also mean the singular and to
the singular shall also mean the plural unless the context otherwise requires.

     (c) All references to Borrower and Lender  pursuant to the  definitions set
forth in the recitals hereto, or to any other person herein, shall include their
respective successors and assigns.

     (d) The words "hereof", "herein",  "hereunder",  "this Agreement" and words
of similar import when used in this Agreement shall refer to this Agreement as a
whole and not any  particular  provision of this Agreement and as this Agreement
now  exists or may  hereafter  be  amended,  modified,  supplemented,  extended,
renewed, restated or replaced.

     (e) The word "including" when used in this Agreement shall mean "including,
without limitation".

     (f) All references to the term "good faith" used herein when  applicable to
Lender shall mean,  notwithstanding anything to the contrary contained herein or
in the UCC,  honesty in fact in the  conduct or  transaction  concerned  and the
observance  of reasonable  commercial  standards of fair dealing based on how an
asset based lender with similar rights  providing a credit  facility of the type
set  forth  herein  would  act in  similar  circumstances  at the time  with the
information  then available to it. Borrower shall have the burden of proving any
lack of good faith on the part of Lender alleged by Borrower at any time.

     (g) An Event of Default shall exist or continue or be continuing until such
Event of  Default is waived in  accordance  with  Section  11.3 or is cured in a
manner satisfactory to Lender in good faith, if such Event of Default is capable
of being cured as determined by Lender in good faith.

     (h) Any accounting term used in this Agreement shall have, unless otherwise
specifically  provided herein, the meaning  customarily given in accordance with
GAAP,  and  all  financial  computations  hereunder  shall  be  computed  unless
otherwise  specifically provided herein, in accordance with GAAP as consistently
applied  and  using  the same  method  for  inventory  valuation  as used in the
preparation  of the financial  statements of Borrower most recently  received by
Lender prior to the date hereof.

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

     (j) Unless otherwise  expressly  provided herein,  (i) references herein to
any agreement,  document or instrument shall be deemed to include all subsequent
amendments,  modifications,  supplements,  extensions, renewals, restatements or
replacements  with  respect  thereto,  but only to the  extent  the same are not
prohibited  by the terms hereof or of any other  Financing  Agreement,  and (ii)
references  to any statute or  regulation  are to be construed as including  all
statutory  and  regulatory  provisions   consolidating,   amending,   replacing,
recodifying, supplementing or interpreting the statute or regulation.

     (k) The captions  and headings of this  Agreement  are for  convenience  of
reference only and shall not affect the interpretation of this Agreement.

     (l) This Agreement and other Financing Agreements may use several different
limitations,  tests or measurements to regulate the same or similar matters. All
such  limitations,  tests and  measurements  are  cumulative  and shall  each be
performed in accordance with their terms.

     (m) This  Agreement and the other  Financing  Agreements  are the result of
negotiations  among and have been  reviewed  by  counsel to Lender and the other
parties,  and are the products of all parties.  Accordingly,  this Agreement and
the other  Financing  Agreements  shall not be construed  against  Lender merely
because of Lender's involvement in their preparation.

     12.3  Notices.  All  notices,  requests and demands  hereunder  shall be in
writing  and  deemed  to have  been  given  or made:  if  delivered  in  person,
immediately  upon  delivery;  if by telex,  telegram or facsimile  transmission,
immediately  upon sending and upon  confirmation  of receipt;  if by  nationally
recognized  overnight  courier  service  with  instructions  to deliver the next
Business  Day,  one (1) Business Day after  sending;  and if by certified  mail,
return receipt requested, five (5) days after mailing. All notices, requests and
demands upon the parties are to be given to the following  addresses (or to such
other  address  as any party may  designate  by notice in  accordance  with this
Section):

              If to Borrower:         Hirsch International Corp.
                                      200 Wireless Boulevard
                                      Hauppauge, New York 11788
                                      Attention: Ms. Beverly Eichel
                                              Executive Vice-President Finance
                                              and Chief Financial Officer
                                      Telephone No.: 631-701-2169
                                      Telecopy No.:  631-436-7054

              If to Lender:           Congress Financial Corporation
                                      1133 Avenue of the Americas
                                      New York, New York 10036
                                      Attention: Mr. Laurence S. Forte
                                      Telephone No.: 212-840-2000
                                      Telecopy No.: 212-545-4283

     12.4 Partial  Invalidity.  If any provision of this Agreement is held to be
invalid  or  unenforceable,   such  invalidity  or  unenforceability  shall  not
invalidate  this Agreement as a whole,  but this Agreement shall be construed as
though  it did not  contain  the  particular  provision  held to be  invalid  or
unenforceable  and the rights and  obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.

     12.5 Confidentiality.

     (a)  Lender  shall use all  reasonable  efforts  to keep  confidential,  in
accordance with its customary procedures for handling  confidential  information
and safe and sound lending practices,  any non-public information supplied to it
by Borrower pursuant to this Agreement, provided, that, nothing contained herein
shall limit the disclosure of any such  information:  (i) to the extent required
by statute,  rule,  regulation,  subpoena or court order, (ii) to bank examiners
and other  regulators,  auditors  and/or  accountants,  in  connection  with any
litigation to which Lender is a party,  (iii) to any assignee or participant (or
prospective  assignee or  participant)  or to any Affiliate of Lender so long as
such  assignee  or  participant  (or  prospective  assignee or  participant)  or
Affiliate shall have been  instructed to treat such  information as confidential
in  accordance  with this Section  12.5,  or (iv) to counsel for any assignee or
participant (or prospective assignee or participant).

     (b) In the event that Lender  receives a request or demand to disclose  any
confidential  information pursuant to any subpoena or court order, Lender agrees
(i) to the extent permitted by applicable law or if permitted by applicable law,
to the extent  Lender  determines in good faith that it will not create any risk
of liability to Lender,  Lender will promptly notify Borrower of such request so
that Borrower may seek a protective order or other appropriate  relief or remedy
and  (ii)  if  disclosure  of  such  information  is  required,   disclose  such
information  and,  subject to  reimbursement  by Borrower of Lender's  expenses,
cooperate  with Borrower in the  reasonable  efforts to obtain an order or other
reliable assurance that confidential  treatment will be accorded to such portion
of the  disclosed  information  which  Borrower  so  designates,  to the  extent
permitted by  applicable  law or if permitted by  applicable  law, to the extent
Lender determines in good faith that it will not create any risk of liability to
Lender.

     (c) In no event  shall this  Section  12.5 or any other  provision  of this
Agreement,  any of the other  Financing  Agreements or applicable law be deemed:
(i) to apply to or restrict  disclosure of information  that has been or is made
public  by  Borrower,  any  Obligor  or any  third  party or  otherwise  becomes
generally  available  to the public  other than as a result of a  disclosure  in
violation  hereof,  (ii) to apply to or restrict  disclosure of information that
was  or  becomes  available  to  Lender  (or  any  Affiliate  of  Lender)  on  a
non-confidential basis from a person other than Borrower or an Obligor, (iii) to
require  Lender to return any materials  furnished by Borrower or any Obligor to
Lender or prevent Lender from  responding to routine  informational  requests in
accordance  with the Code of  Ethics  for the  Exchange  of  Credit  Information
promulgated  by The  Robert  Morris  Associates  or  other  applicable  industry
standards  relating to the exchange of credit  information.  The  obligations of
Lender under this Section 12.5 shall  supersede and replace the  obligations  of
Lender under any confidentiality letter signed prior to the date hereof.

     12.6 Successors.

     (a) This Agreement,  the other Financing  Agreements and any other document
referred to herein or therein  shall be binding upon and inure to the benefit of
and be  enforceable  by Lender,  Borrower and their  respective  successors  and
assigns,  except that  Borrower may not assign its rights under this  Agreement,
the other  Financing  Agreements  and any other  document  referred to herein or
therein without the prior written consent of Lender. Lender may, after notice to
Borrower,  assign all or any  portion of its rights and  obligations  under this
Agreement and the other Financing Agreements (i) to any Eligible Assignee;  (ii)
to the extent of the interests of  participants as provided  herein;  (iii) upon
the merger,  consolidation,  sale,  transfer or other  disposition of all or any
substantial  portion of its business;  (iv) with the consent of Borrower,  which
shall not be  unreasonably  withheld,  delayed  or  conditioned;  and (v) to any
Person after an Event of Default.

     (b) In  addition,  Lender may sell  participations  to one or more banks or
other  financial  institutions  in or to all or a  portion  of  its  rights  and
obligations under this Agreement and the other Financing  Agreements;  provided,
that,  (i) Lender's  obligations  under this  Agreement and the other  Financing
Agreements shall remain unchanged,  (ii) Lender shall remain solely  responsible
to the  other  parties  hereto  for the  performance  of such  obligations,  and
Borrower  shall  continue to deal solely and directly  with Lender in connection
with  Lender's  rights  and  obligations  under  this  Agreement  and the  other
Financing Agreements,  and (iii) the participant shall not have any rights under
this  Agreement  or any of the other  Financing  Agreements  (the  Participant's
rights  against  such  Lender in respect of such  participation  to be those set
forth in the  agreement  executed  by such  Lender  in favor of the  participant
relating thereto) and all amounts payable by Borrower or Obligor hereunder shall
be determined as if Lender had not sold such participation.

     12.7 Entire Agreement. This Agreement, the other Financing Agreements,  any
supplements hereto or thereto,  and any instruments or documents delivered or to
be delivered in connection herewith or therewith represents the entire agreement
and  understanding  concerning the subject matter hereof and thereof between the
parties  hereto,  and  supersede  all other  prior  agreements,  understandings,
negotiations  and   discussions,   representations,   warranties,   commitments,
proposals,  offers and contracts  concerning the subject matter hereof,  whether
oral or  written.  In the event of any  inconsistency  between the terms of this
Agreement and any schedule or exhibit hereto,  the terms of this Agreement shall
govern.

     12.8  Counterparts,  Etc.  This  Agreement  or any of the  other  Financing
Agreements may be executed in any number of counterparts, each of which shall be
an original,  but all of which taken together shall  constitute one and the same
agreement.  Delivery of an executed  counterpart of this Agreement or any of the
other Financing Agreements by telefacsimile shall have the same force and effect
as the delivery of an original executed  counterpart of this Agreement or any of
such other Financing Agreements. Any party delivering an executed counterpart of
any such  agreement by  telefacsimile  shall also  deliver an original  executed
counterpart,   but  the  failure  to  do  so  shall  not  affect  the  validity,
enforceability or binding effect of such agreement.

     IN WITNESS  WHEREOF,  Lender and Borrower have caused these  presents to be
duly executed as of the day and year first above written.


<TABLE>
<CAPTION>

<S>                                               <C>
LENDER                                            BORROWER

CONGRESS FINANCIAL CORPORATION                    HIRSCH INTERNATIONAL CORP.

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

Title:                                            Title:
      -------------------------------------             -------------------------------------
</TABLE>


                                    EXHIBIT B
                                       TO
                           LOAN AND SECURITY AGREEMENT


                             Compliance Certificate


To:    Congress Financial Corporation
       1133 Avenue of the Americas
       New York, New York 10036


Ladies and Gentlemen:

     I hereby  certify to you pursuant to Section 9.6 of the Loan  Agreement (as
defined below) as follows:

     1. I am the duly elected Chief  Financial  Officer of Hirsch  International
Corp.,  a Delaware  corporation  ("Borrower").  Capitalized  terms  used  herein
without  definition  shall have the meanings given to such terms in the Loan and
Security  Agreement,  dated  ______,  2002,  by and between  Congress  Financial
Corporation  ("Lender")  and Borrower  (as such Loan and  Security  Agreement is
amended, modified or supplemented, from time to time, the "Loan Agreement").

     2. I have reviewed the terms of the Loan Agreement,  and have made, or have
caused to be made under my  supervision,  a review in  reasonable  detail of the
transactions   and  the  financial   condition  of  Borrower  and  each  of  its
Subsidiaries, during the immediately preceding fiscal month.

     3. The review  described in Section 2 above did not disclose the  existence
of, and I have no knowledge of the existence and  continuance on the date hereof
of, any  condition or event which  constitutes a Default or an Event of Default,
except as set forth on  Schedule  I attached  hereto.  Described  on  Schedule I
attached  hereto are the  exceptions,  if any,  to this  Section 3  listing,  in
detail,  the nature of the condition or event,  the period since the date of the
last  certificate  pursuant to Section 9.6 of the Loan  Agreement  that you have
received  from me during which it has existed and the action  which  Borrower or
any Obligor  has taken,  is taking,  or  proposes  to take with  respect to such
condition or event.

     4. Attached hereto as Schedule II are the calculations used in determining,
as of the  end  of  the  most  recent  fiscal  quarter  whether  Borrower  is in
compliance  with the covenant set forth in Section 9.17 and whether  Borrower is
in compliance  with the covenant set forth in Section 9.18 of the Loan Agreement
as of the date hereof.

     The  foregoing   certifications   are  made  and  delivered   this  day  of
___________, 20__.

                                             Very truly yours,

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

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

                                             Title:
                                                   --------------------

<TABLE>
<CAPTION>

                                  SCHEDULE 1.37
                                       TO
                           LOAN AND SECURITY AGREEMENT

               Existing Letters of Credit Issued by PNC to Hirsch


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

Letter of Credit #          Currency        Maturity Date        Beneficiary               Undrawn Amount (USD)
------------------          --------        -------------        -----------               --------------------

<C>   <C>                                   <C>   <C>                                      <C>         <C>
1.    251690                JPY             11/26/02             PNC Bank, National        11,395,700  (92,799)
                                                                 Association

2.    251695                JPY             12/10/02             PNC Bank, National        23,668,000 (192,736)
                                                                 Association

3.    251694                JPY             12/10/02             PNC Bank, National        3,219,400   (26,217)
                                                                 Association

4.    251388                USD             12/3/02              Hirsch International                 (283,845)
                                                                 Corp.

5.    251390                USD             12/3/02              Hirsch International                  (14,040)
                                                                 Corp.

6.    251692                JPY             1/02/03              PNC Bank, National        23,668,000 (192,736)
                                                                 Association

7.    251691                JPY             1/02/03              PNC Bank, National     140,386,700 (1,143,214)
                                                                 Association

8.    252570                USD             1/7/03               Hirsch International                  (56,160)
                                                                 Corp.

9.    252569                USD             1/7/03               Hirsch International                 (219,300)
                                                                 Corp.

10.   252711                JPY             1/15/03              Hirsch International      30,399,000 (247,549)
                                                                 Corp.

JPY  = Japanese Yen
USD = US Dollar
</TABLE>

</TEXT>
</DOCUMENT>
