VIXEL CORP
EXHIBIT 10.1
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>3
<FILENAME>v93907exv10w1.txt
<DESCRIPTION>EXHIBIT 10.1
<TEXT>
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                                                                    EXHIBIT 10.1

                           LOAN AND SECURITY AGREEMENT
                                VIXEL CORPORATION

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                                TABLE OF CONTENTS

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<S>                                                                                           <C>
1      ACCOUNTING AND OTHER TERMS.........................................................        4

2      LOAN AND TERMS OF PAYMENT..........................................................        4

       2.1      Promise to Pay............................................................        4
       2.2      Termination of Commitment to Lend.........................................        5
       2.3      Overadvances..............................................................        5
       2.4      Interest Rate, Payments...................................................        5
       2.5      Fees......................................................................        6

3      CONDITIONS OF LOANS................................................................        6

       3.1      Conditions Precedent to Initial Credit Extension..........................        6
       3.2      Conditions Precedent to all Credit Extensions.............................        6

4      CREATION OF SECURITY INTEREST......................................................        6

       4.1      Grant of Security Interest................................................        7
       4.2      Authorization To File.....................................................        7

5      REPRESENTATIONS AND WARRANTIES.....................................................        7

       5.1      Due Organization and Authorization........................................        7
       5.2      Collateral................................................................        7
       5.3      Litigation................................................................        8
       5.4      No Material Adverse Change in Financial Statements........................        8
       5.5      Solvency..................................................................        8
       5.6      Regulatory Compliance.....................................................        8
       5.7      Investments in Subsidiaries...............................................        8
       5.8      Full Disclosure...........................................................        8

6      AFFIRMATIVE COVENANTS..............................................................        9

       6.1      Government Compliance.....................................................        9
       6.2      Financial Statements, Reports, Certificates...............................        9
       6.3      Inventory; Returns........................................................        9
       6.4      Taxes.....................................................................       10
       6.5      Insurance.................................................................       10
       6.6      Primary Accounts..........................................................       10
       6.7      Financial Covenants.......................................................       10
       6.8      Registration of Intellectual Property Rights..............................       11
       6.9      Further Assurances........................................................       11

7      NEGATIVE COVENANTS.................................................................       11

       7.1      Dispositions..............................................................       11
       7.2      Changes in Business, Ownership, Management or Locations of Collateral.....       11
       7.3      Mergers or Acquisitions...................................................       12
       7.4      Indebtedness..............................................................       12
       7.5      Encumbrance...............................................................       12
       7.6      Distributions; Investments................................................       12
       7.7      Transactions with Affiliates..............................................       12
       7.8      Subordinated Debt.........................................................       12
       7.9      Compliance................................................................       12

8      EVENTS OF DEFAULT..................................................................       12

       8.1      Payment Default...........................................................       13
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<TABLE>
<S>                                                                                           <C>
       8.2      Covenant Default..........................................................       13
       8.3      Material Adverse Change...................................................       13
       8.4      Attachment................................................................       13
       8.5      Insolvency................................................................       13
       8.6      Other Agreements..........................................................       13
       8.7      Judgments.................................................................       14
       8.8      Misrepresentations........................................................       14

9      BANK'S RIGHTS AND REMEDIES.........................................................       14

       9.1      Rights and Remedies.......................................................       14
       9.2      Power of Attorney.........................................................       15
       9.3      Bank Expenses.............................................................       15
       9.4      Bank's Liability for Collateral...........................................       15
       9.5      Remedies Cumulative.......................................................       15
       9.6      Demand Waiver.............................................................       15

10     NOTICES............................................................................       15

11     CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER.........................................       16

12     GENERAL PROVISIONS.................................................................       16

       12.1     Successors and Assigns....................................................       16
       12.2     Indemnification...........................................................       16
       12.3     Time of Essence...........................................................       16
       12.4     Severability of Provision.................................................       16
       12.5     Amendments in Writing, Integration........................................       16
       12.6     Counterparts..............................................................       17
       12.7     Survival..................................................................       17
       12.8     Confidentiality...........................................................       17
       12.9     Attorneys' Fees, Costs and Expenses.......................................       17

13     DEFINITIONS........................................................................       17

       13.1     Definitions...............................................................       17
</TABLE>

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         THIS LOAN AND SECURITY AGREEMENT dated as of the Effective Date,
between SILICON VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive, Santa
Clara, California 95054 with a loan production office located at 4110 Carillon
Point, Kirkland, Washington 98033 and VIXEL CORPORATION ("Borrower"), whose
address is 11911 North Creek Parkway South, Bothell, Washington 98011 provides
the terms on which Bank will lend to Borrower and Borrower will repay Bank. The
parties agree as follows:

1        ACCOUNTING AND OTHER TERMS

         Accounting terms not defined in this Agreement will be construed
following GAAP. Calculations and determinations must be made following GAAP. The
term "financial statements" includes the notes and schedules. The terms
"including" and "includes" always mean "including (or includes) without
limitation," in this or any Loan Document.

2        LOAN AND TERMS OF PAYMENT

2.1      PROMISE TO PAY.

         Borrower promises to pay Bank the unpaid principal amount of all Credit
Extensions and interest on the unpaid principal amount of the Credit Extensions.

2.1.1    REVOLVING ADVANCES.

         (a) Bank will make Advances not exceeding (i) the lesser of (A) the
Committed Revolving Line or (B) the Borrowing Base, minus (ii) the amount of all
outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit) minus (iii) the Cash Management Services Sublimit. Amounts borrowed
under this Section may be repaid and reborrowed during the term of this
Agreement.

         (b) To obtain an Advance, Borrower must notify Bank by facsimile or
telephone by 12:00 p.m. Pacific time on the Business Day the Advance is to be
made. Borrower must promptly confirm the notification by delivering to Bank the
Payment/Advance Form attached as Exhibit B. Bank will credit Advances to
Borrower's deposit account. Bank may make Advances under this Agreement based on
instructions from a Responsible Officer or his or her designee or without
instructions if the Advances are necessary to meet Obligations which have become
due. Bank may rely on any telephone notice given by a person whom Bank believes
is a Responsible Officer or designee. Borrower will indemnify Bank for any loss
Bank suffers due to such reliance.

         (c) The Committed Revolving Line terminates on the Revolving Maturity
Date, when all Advances are immediately payable.

2.1.2    LETTERS OF CREDIT SUBLIMIT.

         Bank will issue or have issued Letters of Credit for Borrower's account
not exceeding (i) the lesser of the Committed Revolving Line or the Borrowing
Base minus (ii) the outstanding principal balance of the Advances minus the Cash
Management Sublimit; however, the face amount of outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit) may not exceed $2,500,000.
Borrower's Letter of Credit reimbursement obligation will be secured by
unencumbered cash on terms acceptable to Bank at any time upon the Revolving
Maturity Date if the term of this Agreement is not extended by Bank. Borrower
agrees to execute any further documentation in connection with the Letters of
Credit as Bank may reasonably request.

2.1.3    CASH MANAGEMENT SERVICES SUBLIMIT.

         Borrower may use up to $2,500,000 for Bank's Cash Management Services,
which may include merchant services, direct deposit of payroll, business credit
card, and check cashing

                                        4

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services identified in various cash management services agreements related to
such services (the "Cash Management Services"). All amounts Bank pays for any
Cash Management Services will be treated as Advances under the Committed
Revolving Line.

2.1.4    EQUIPMENT ADVANCES.

         (a) Through June 30, 2004 (the "Equipment Availability End Date"), Bank
will make advances ("Equipment Advance" and, collectively, "Equipment Advances")
not exceeding the Committed Equipment Line. The Equipment Advances may only be
used to finance or refinance Equipment purchased on or after 120 days before the
date of each Equipment Advance and may not exceed 100% of the equipment invoice
excluding taxes, shipping, warranty charges, freight discounts and installation
expense; provided, however, the initial Equipment Advance may be used to finance
or refinance Equipment purchased on or after January 1, 2003 through the
Effective Date. Soft Costs may constitute up to 25% of the aggregate Equipment
Advances. Each Equipment Advance must be for a minimum of $250,000.

         (b) Interest accrues from the date of each Equipment Advance at the
rate in Section 2.4 (a). Equipment Advances are payable in 36 equal monthly
installments of principal, plus accrued interest, beginning on the 1st of each
month following the respective Equipment Advance and ending 36 months thereafter
(each, the "Equipment Maturity Date"). Equipment Advances when repaid may not be
reborrowed.

         (c) Borrower shall have the option to prepay all, but not less than
all, of the Equipment Advances advanced by Bank under this Agreement, provided
Borrower (i) provides written notice to Bank of its election to prepay the
Equipment Advances at least thirty (30) days prior to such prepayment, and (ii)
pays, on the date of the prepayment (A) all unpaid Equipment Advances (including
principal and interest); (B) all unpaid accrued interest to the date of the
prepayment; (C) an amount equal to 2% of all prepaid Equipment Advances (if
prepaid or before September 7, 2004), and (D) all other sums, if any, that shall
have become due and payable hereunder with respect to this Agreement.

         (d) To obtain an Equipment Advance, Borrower must notify Bank (the
notice is irrevocable) by facsimile no later than 12:00 p.m. Pacific time 1
Business Day before the day on which the Equipment Advance is to be made. The
notice in the form of Exhibit B (Payment/Advance Form) must be signed by a
Responsible Officer or designee and include a copy of the invoice for the
Equipment being financed.

2.2      TERMINATION OF COMMITMENT TO LEND.

         Bank's obligation to lend the undisbursed portion of the Obligations
will terminate if, in Bank's sole discretion, there has been a material adverse
change in the general affairs, management, results of operation, condition
(financial or otherwise) or the prospect of repayment of the Obligations, or
there has been any material adverse deviation by Borrower from the most recent
business plan of Borrower presented to and accepted by Bank prior to the
execution of this Agreement.

2.3      OVERADVANCES.

         If Borrower's Obligations under Section 2.1.1, 2.1.2, and 2.1.3 exceed
the lesser of either (i) the Committed Revolving Line or (ii) the Borrowing
Base, Borrower must immediately pay Bank the excess.

2.4      INTEREST RATE, PAYMENTS.

         (a) Interest Rate. (i) Advances accrue interest on the outstanding
principal balance at a per annum rate of 0.75 percentage points above the Prime
Rate; and (ii) Equipment Advances

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accrue interest on the outstanding principal balance as follows: if Borrower
achieves a Liquidity Coverage of (A) equal to or greater than 2.50 then the per
annum interest rate for Equipment Advances shall be equal to the greater of 0.75
of 1 percentage point above the Prime Rate or 4.75%, or (B) equal to or greater
than 2.00 but less than 2.50, then the per annum interest rate for Equipment
Advances shall be equal to the greater of 1.00 percentage point above the Prime
Rate or 5%, or (C) less than 2.00, then the per annum interest rate for
Equipment Advances shall be equal to the greater of 1.50 percentage points above
the Prime Rate or 5.50%. Each rate shall be reset on the first day of the
following month upon Bank's receipt of Borrower's Compliance Certificate
evidencing Borrower achieving the Liquidity Coverage. After an Event of Default,
Obligations accrue interest at 5 percent above the rate effective immediately
before the Event of Default. The interest rate increases or decreases when the
Prime Rate changes. Interest is computed on a 360 day year for the actual number
of days elapsed.

         (b) Payments. Interest due on the Committed Revolving Line is payable
on the 23rd of each month. Interest due on the Equipment Advances is payable on
the 1st of each month. Bank may debit any of Borrower's deposit accounts
including Account Number _________________________ for principal and interest
payments owing or any amounts Borrower owes Bank. Bank will promptly notify
Borrower when it debits Borrower's accounts. These debits are not a set-off.
Payments received after 12:00 noon Pacific time are considered received at the
opening of business on the next Business Day. When a payment is due on a day
that is not a Business Day, the payment is due the next Business Day and
additional interest shall accrue.

2.5      FEES.

         Borrower will pay:

         (a) Facility Fee. A fully earned, non-refundable Facility Fee of $5,000
for the Committed Revolving Line and $5,000 for the Committed Equipment Line due
on the Effective Date; and

         (b) Bank Expenses. All Bank Expenses (including reasonable attorneys'
fees and reasonable expenses) incurred through and after the date of this
Agreement, are payable when due.

3        CONDITIONS OF LOANS

3.1      CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION.

         Bank's obligation to make the initial Credit Extension is subject to
the condition precedent that it receive the agreements, documents and fees it
requires.

3.2      CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS.

         Bank's obligations to make each Credit Extension, including the initial
Credit Extension, is subject to the following:

         (a) timely receipt of any Payment/Advance Form; and

         (b) the representations and warranties in Section 5 must be materially
true on the date of the Payment/Advance Form and on the effective date of each
Credit Extension and no Event of Default may have occurred and be continuing, or
result from the Credit Extension. Each Credit Extension is Borrower's
representation and warranty on that date that the representations and warranties
of Section 5 remain true.

4        CREATION OF SECURITY INTEREST

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4.1      GRANT OF SECURITY INTEREST.

         Borrower grants Bank a continuing security interest in all presently
existing and later acquired Collateral to secure all Obligations and performance
of each of Borrower's duties under the Loan Documents. Except for Permitted
Liens, any security interest will be a first priority security interest in the
Collateral. Bank may place a "hold" on any deposit account pledged as
Collateral. If this Agreement is terminated, Bank's lien and security interest
in the Collateral will continue until Borrower fully satisfies its Obligations.

4.2      AUTHORIZATION TO FILE.

         Borrower authorizes Bank to file financing statements without notice to
Borrower, with all appropriate jurisdictions, as Bank deems appropriate, in
order to perfect or protect Bank's interest in the Collateral.

5        REPRESENTATIONS AND WARRANTIES

         Borrower represents and warrants as follows:

5.1      DUE ORGANIZATION AND AUTHORIZATION.

         Borrower and each Subsidiary is duly existing and in good standing in
its state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified, except where the failure to do so could
not reasonably be expected to cause a Material Adverse Change. Borrower has not
changed its state of formation or its organizational structure or type or any
organizational number (if any) assigned by its jurisdiction of formation.

         The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it is
bound in which the default could reasonably be expected to cause a Material
Adverse Change.

5.2      COLLATERAL.

         Borrower has good title to the Collateral, free of Liens except
Permitted Liens or Borrower has Rights to each asset that is Collateral.
Borrower has no other deposit account, other than the deposit accounts described
in the Schedule. The Accounts are bona fide, existing obligations, and the
service or property has been performed or delivered to the account debtor or its
agent for immediate shipment to and unconditional acceptance by the account
debtor. The Collateral is not in the possession of any third party bailee (such
as at a warehouse). In the event that Borrower, after the date hereof, intends
to store or otherwise deliver the Collateral to such a bailee, then Borrower
will receive the prior written consent of Bank and such bailee must acknowledge
in writing that the bailee is holding such Collateral for the benefit of Bank.
Borrower has no notice of any actual or imminent Insolvency Proceeding of any
account debtor whose accounts are an Eligible Account in any Borrowing Base
Certificate. All Inventory is in all material respects of good and marketable
quality, free from material defects. Borrower is the sole owner of the
Intellectual Property, except for non-exclusive licenses granted to its
customers in the ordinary course of business. To the best of Borrower's
knowledge, each Patent is valid and enforceable and no part of the Intellectual
Property has been judged invalid or unenforceable, in whole or in part, and no
claim has been made that any part of the Intellectual Property violates the
rights of any third party, except to the extent such claim could not reasonably
be expected to cause a Material Adverse Change.

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5.3      LITIGATION.

         Except as shown in the Schedule, there are no actions or proceedings
pending or, to the knowledge of Borrower's Responsible Officers, threatened by
or against Borrower or any Subsidiary in which a likely adverse decision could
reasonably be expected to cause a Material Adverse Change.

5.4      NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS.

         All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.

5.5      SOLVENCY.

         The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower is
not left with unreasonably small capital after the transactions in this
Agreement; and Borrower is able to pay its debts (including trade debts) as they
mature.

5.6      REGULATORY COMPLIANCE.

         Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations T and U of the Federal Reserve Board of Governors). Borrower has
complied in all material respects with the Federal Fair Labor Standards Act.
Borrower has not violated any laws, ordinances or rules, the violation of which
could reasonably be expected to cause a Material Adverse Change. None of
Borrower's or any Subsidiary's properties or assets has been used by Borrower or
any Subsidiary or, to the best of Borrower's knowledge, by previous Persons, in
disposing, producing, storing, treating, or transporting any hazardous substance
other than legally. Borrower and each Subsidiary has timely filed all required
tax returns and paid, or made adequate provision to pay, all material taxes,
except those being contested in good faith with adequate reserves under GAAP.
Borrower and each Subsidiary has obtained all consents, approvals and
authorizations of, made all declarations or filings with, and given all notices
to, all government authorities that are necessary to continue its business as
currently conducted, except where the failure to do so could not reasonably be
expected to cause a Material Adverse Change.

5.7      INVESTMENTS IN SUBSIDIARIES.

         Borrower does not own any stock, partnership interest or other equity
securities except for Permitted Investments.

5.8      FULL DISCLOSURE.

         No written representation, warranty or other statement of Borrower in
any certificate or written statement given to Bank (taken together with all such
written certificates and written statements to Bank) contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements contained in the certificates or statements not misleading. It
being recognized by Bank that the projections and forecasts provided by Borrower
in good faith and based upon reasonable assumptions are not viewed as facts and
that actual results during the period or periods covered by such projections and
forecasts may differ from the projected and forecasted results.

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6        AFFIRMATIVE COVENANTS

         Borrower will do all of the following for so long as Bank has an
obligation to lend, or there are outstanding Obligations:

6.1      GOVERNMENT COMPLIANCE.

         Borrower will maintain its and all Subsidiaries' legal existence and
good standing in its jurisdiction of formation and maintain qualification in
each jurisdiction in which the failure to so qualify would reasonably be
expected to cause a material adverse effect on Borrower's business or
operations. Borrower will comply, and have each Subsidiary comply, with all
laws, ordinances and regulations to which it is subject, noncompliance with
which could have a material adverse effect on Borrower's business or operations
or would reasonably be expected to cause a Material Adverse Change.

6.2      FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.

         (a) Borrower will deliver to Bank: (i) as soon as available, but no
later than 30 days after the last day of each month, a company prepared
consolidated balance sheet and income statement covering Borrower's consolidated
operations during the period certified by a Responsible Officer and in a form
acceptable to Bank; (ii) as soon as available, but no later than 120 days after
the last day of Borrower's fiscal year, audited consolidated financial
statements prepared under GAAP, consistently applied, together with an
unqualified opinion on the financial statements from an independent certified
public accounting firm reasonably acceptable to Bank; (iii) a prompt report of
any legal actions pending or threatened against Borrower or any Subsidiary that
could result in damages or costs to Borrower or any Subsidiary of $100,000 or
more; (iv) budgets, sales projections, operating plans or other financial
information Bank reasonably requests; and (v) prompt notice of any material
change in the composition of the Intellectual Property, including any subsequent
ownership right of Borrower in or to any Copyright, Patent or Trademark not
shown in any intellectual property security agreement between Borrower and Bank
or knowledge of an event that materially adversely affects the value of the
Intellectual Property.

         (b) Within 30 days after the last day of each month, Borrower will
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in
the form of Exhibit C, with aged listings of accounts receivable.

         (c) Within 30 days after the last day of each month, Borrower will
deliver to Bank with the monthly financial statements a Compliance Certificate
signed by a Responsible Officer in the form of Exhibit D.

         (d) Allow Bank to audit Borrower's Collateral at Borrower's expense.
Such audits will be conducted no more than twice per annum unless an Event of
Default has occurred and is continuing.

6.3      INVENTORY; RETURNS.

         Borrower will keep all Inventory in good and marketable condition, free
from material defects. Returns and allowances between Borrower and its account
debtors will follow Borrower's customary practices as they exist at execution of
this Agreement. Borrower must promptly notify Bank of all returns, recoveries,
disputes and claims that involve more than $50,000.

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6.4      TAXES.

         Borrower will make, and cause each Subsidiary to make, timely payment
of all material federal, state, and local taxes or assessments and will deliver
to Bank, on demand, appropriate certificates attesting to the payment.

6.5      INSURANCE.

         Borrower will keep its business and the Collateral insured for risks
and in amounts, as Bank may reasonably request. Insurance policies will be in a
form, with companies, and in amounts that are satisfactory to Bank in Bank's
reasonable discretion. All property policies will have a lender's loss payable
endorsement showing Bank as an additional loss payee and all liability policies
will show the Bank as an additional insured and provide that the insurer must
give Bank at least 20 days notice before canceling its policy. At Bank's
request, Borrower will deliver certified copies of policies and evidence of all
premium payments. Proceeds payable under any policy will, at Bank's option, be
payable to Bank on account of the Obligations. Statutory notice regarding
insurance:

                                     WARNING

         Unless you provide us with evidence of the insurance coverage as
required by our contract or loan agreement, we may purchase insurance at your
expense to protect our interest. This insurance may, but need not, also protect
your interest. If the collateral becomes damaged, the coverage we purchase may
not pay any claim you make or any claim made against you. You may later cancel
this coverage by providing evidence that you have obtained property coverage
elsewhere.

         You are responsible for the cost of any insurance purchased by us. The
cost of this insurance may be added to your contract or loan balance. If the
cost is added to your contract or loan balance, the interest rate on the
underlying contract or loan will apply to this added amount. The effective date
of coverage may be the date your prior coverage lapsed or the date you failed to
provide proof of coverage.

         This coverage we purchased may be considerably more expensive than
insurance you can obtain on your own and may not satisfy any need for property
damage coverage or any mandatory liability insurance requirements imposed by
applicable law.

6.6      PRIMARY ACCOUNTS.

         Borrower will maintain its primary operating, deposit and investment
accounts with or through Bank. Collectively, the primary operating, deposit and
investment accounts will include cash and marketable securities exceeding 51% of
Borrower's total cash and marketable securities.

6.7      FINANCIAL COVENANTS.

         Borrower will maintain as of the last day of each month (unless
otherwise stated):

                  (i) TANGIBLE NET WORTH. A Tangible Net Worth of at least
$12,500,000 plus 100% of new equity and 50% of quarterly net income (no
adjustment for losses).

                  (ii) MAXIMUM UNFUNDED CAPITAL EXPENDITURES. Borrower's
unfunded capital expenditures shall not exceed $1,000,000 per fiscal quarter.

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6.8      REGISTRATION OF INTELLECTUAL PROPERTY RIGHTS.

         Borrower shall not register any Copyrights or Mask Works with the
United States Copyright Office unless it: (i) has given at least fifteen (15)
days' prior notice to Bank of its intent to register such Copyrights or Mask
Works and has provided Bank with a copy of the application it intends to file
with the United States Copyright Office (excluding exhibits thereto); (ii)
executes a security agreement or such other documents as Bank may reasonably
request in order to maintain the perfection and priority of Bank's security
interest in the Copyrights proposed to be registered with the United States
Copyright Office; and (iii) records such security documents with the United
States Copyright Office contemporaneously with filing the Copyright
application(s) with the United States Copyright Office. Borrower shall promptly
provide to Bank a copy of the Copyright application(s) filed with the United
States Copyright Office, together with evidence of the recording of the security
documents necessary for Bank to maintain the perfection and priority of its
security interest in such Copyrights or Mask Works. Borrower shall provide
written notice to Bank of any application filed by Borrower in the United States
Patent Trademark Office for a patent or to register a trademark or service mark
within 30 days of any such filing.

         Borrower will (i) protect, defend and maintain the validity and
enforceability of the Intellectual Property and promptly advise Bank in writing
of material infringements and (ii) not allow any Intellectual Property to be
abandoned, forfeited or dedicated to the public without Bank's written consent.

6.9      FURTHER ASSURANCES.

         Borrower will execute any further instruments and take further action
as Bank reasonably requests to perfect or continue Bank's security interest in
the Collateral or to effect the purposes of this Agreement.

7        NEGATIVE COVENANTS

         For so long as Bank has an obligation to lend or there are any
outstanding Obligations, Borrower shall not, without Bank's prior written
consent (which shall be a matter of its good faith business judgment), do any of
the following:

7.1      DISPOSITIONS.

         Convey, sell, lease, transfer or otherwise dispose of (collectively
"Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of
its business or property, except for Transfers (i) of Inventory in the ordinary
course of business; (ii) of non-exclusive licenses and similar arrangements for
the use of the property of Borrower or its Subsidiaries in the ordinary course
of business; or (iii) of worn-out or obsolete Equipment.

7.2      CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR LOCATIONS OF COLLATERAL.

         Engage in or permit any of its Subsidiaries to engage in any business
other than the businesses currently engaged in by Borrower or reasonably related
thereto or have a material change in its ownership or management of greater than
49% (other than by the sale of Borrower's equity securities in a public offering
or to venture capital investors so long as Borrower identifies the venture
capital investors prior to the closing of the investment). Borrower will not,
without at least 30 days prior written notice, relocate its chief executive
office, change its state of formation (including reincorporation), change its
organizational number or name or add any new offices or business locations (such
as warehouses) in which Borrower maintains or stores over $100,000 in
Collateral.

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7.3      MERGERS OR ACQUISITIONS.

         Merge or consolidate, or permit any of its Subsidiaries to merge or
consolidate, with any other Person, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person, except where (i) no Event of Default has occurred
and is continuing or would result from such action during the term of this
Agreement and (ii) such transaction would not result in a decrease of more than
25% of Tangible Net Worth. A Subsidiary may merge or consolidate into another
Subsidiary or into Borrower.

7.4      INDEBTEDNESS.

         Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so, other than Permitted Indebtedness.

7.5      ENCUMBRANCE.

         Create, incur, or allow any Lien on any of its property, or assign or
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries to do so, except for Permitted Liens, or permit
any Collateral not to be subject to the first priority security interest granted
here, subject to Permitted Liens.

7.6      DISTRIBUTIONS; INVESTMENTS.

         Directly or indirectly acquire or own any Person, or make any
Investment in any Person, other than Permitted Investments, or permit any of its
Subsidiaries to do so. Pay any dividends or make any distribution or payment or
redeem, retire or purchase any capital stock, except for Permissible Dividends.

7.7      TRANSACTIONS WITH AFFILIATES.

         Directly or indirectly enter into or permit to exist any material
transaction with any Affiliate of Borrower except for transactions that are in
the ordinary course of Borrower's business, upon fair and reasonable terms that
are no less favorable to Borrower than would be obtained in an arm's length
transaction with a non-affiliated Person.

7.8      SUBORDINATED DEBT.

         Make or permit any payment on any Subordinated Debt, except under the
terms of the Subordinated Debt, or amend any provision in any document relating
to the Subordinated Debt without Bank's prior written consent.

7.9      COMPLIANCE.

         Become an "investment company" or a company controlled by an
"investment company," under the Investment Company Act of 1940 or undertake as
one of its important activities extending credit to purchase or carry margin
stock, or use the proceeds of any Credit Extension for that purpose; fail to
meet the minimum funding requirements of ERISA, permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the
Federal Fair Labor Standards Act or violate any other law or regulation, if the
violation could reasonably be expected to have a material adverse effect on
Borrower's business or operations or would reasonably be expected to cause a
Material Adverse Change, or permit any of its Subsidiaries to do so.

8        EVENTS OF DEFAULT

         Any one of the following is an Event of Default:

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8.1      PAYMENT DEFAULT.

         If Borrower fails to pay any of the Obligations within 3 days after
their due date, however, during such period no Credit Extensions will be made;

8.2      COVENANT DEFAULT.

         (a) If Borrower fails to perform any obligation under Sections 6.2 or
6.7 or violates any of the covenants contained in Section 7 of this Agreement,
or

         (b) If Borrower fails or neglects to perform, keep, or observe any
other material term, provision, condition, covenant, or agreement contained in
this Agreement, in any of the Loan Documents, or in any other present or future
agreement between Borrower and Bank and as to any default under such other term,
provision, condition, covenant or agreement that can be cured, has failed to
cure such default within ten (10) days after the occurrence thereof; provided,
however, that if the default cannot by its nature be cured within the ten (10)
day period or cannot after diligent attempts by Borrower be cured within such
ten (10) day period, and such default is likely to be cured within a reasonable
time, then Borrower shall have an additional reasonable period (which shall not
in any case exceed thirty (30) days) to attempt to cure such default, and within
such reasonable time period the failure to have cured such default shall not be
deemed an Event of Default (provided that no Credit Extensions will be made
during such cure period);

8.3      MATERIAL ADVERSE CHANGE.

         If there (i) occurs a material adverse change in the business,
operations, or financial condition of the Borrower, or (ii) is a material
impairment of the prospect of repayment of any portion of the Obligations; or
(iii) is a material impairment of the value or priority of Bank's security
interests in the Collateral (the foregoing being defined as a "Material Adverse
Change").

8.4      ATTACHMENT.

         If any material portion of Borrower's assets is attached, seized,
levied on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in 10 days, or if Borrower is enjoined,
restrained, or prevented by court order from conducting a material part of its
business or if a judgment or other claim becomes a Lien on a material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed against
any of Borrower's assets by any government agency and not paid within 10 days
after Borrower receives notice. These are not Events of Default if stayed or if
a bond is posted pending contest by Borrower (but no Credit Extensions will be
made during the cure period);

8.5      INSOLVENCY.

         If Borrower becomes insolvent or if Borrower begins an Insolvency
Proceeding or an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within 30 days (but no Credit Extensions will be made before
any Insolvency Proceeding is dismissed);

8.6      OTHER AGREEMENTS.

         If there is a default in any agreement between Borrower and a third
party that gives the third party the right to accelerate any Indebtedness
exceeding $100,000 or that could cause a Material Adverse Change;

                                       13

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8.7      JUDGMENTS.

         If a money judgment(s) in the aggregate of at least $50,000 is rendered
against Borrower and is unsatisfied and unstayed for 10 days (but no Credit
Extensions will be made before the judgment is stayed or satisfied); or

8.8      MISREPRESENTATIONS.

         If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document.

9        BANK'S RIGHTS AND REMEDIES

9.1      RIGHTS AND REMEDIES.

         When an Event of Default occurs and continues Bank may, without notice
or demand, do any or all of the following:

         (a) Declare all Obligations immediately due and payable (but if an
Event of Default described in Section 8.5 occurs all Obligations are immediately
due and payable without any action by Bank);

         (b) Stop advancing money or extending credit for Borrower's benefit
under this Agreement or under any other agreement between Borrower and Bank;

         (c) Settle or adjust disputes and claims directly with account debtors
for amounts, on terms and in any order that Bank considers advisable; notify any
Person owing Borrower money of Bank's security interest in the funds and verify
the amount of the Account. Borrower must collect all payments in trust for Bank
and, if requested by Bank, immediately deliver the payments to Bank in the form
received from the account debtor, with proper endorsements for deposit;

         (d) Make any payments and do any acts it considers necessary or
reasonable to protect its security interest in the Collateral. Borrower will
assemble the Collateral if Bank requires and make it available as Bank
designates. Bank may enter premises where the Collateral is located, take and
maintain possession of any part of the Collateral, and pay, purchase, contest,
or compromise any Lien which appears to be prior or superior to its security
interest and pay all expenses incurred. Borrower grants Bank a license to enter
and occupy any of its premises, without charge, to exercise any of Bank's rights
or remedies;

         (e) Apply to the Obligations any (i) balances and deposits of Borrower
it holds, or (ii) any amount held by Bank owing to or for the credit or the
account of Borrower;

         (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell the Collateral. Bank is granted a
non-exclusive, royalty-free license or other right to use, without charge,
Borrower's labels, Patents, Copyrights, Mask Works, rights of use of any name,
trade secrets, trade names, Trademarks, service marks, and advertising matter,
or any similar property as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section, Borrower's
rights under all licenses and all franchise agreements inure to Bank's benefit;
and

         (g) Dispose of the Collateral according to the Code.

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9.2      POWER OF ATTORNEY.

         Effective only when an Event of Default occurs and continues, Borrower
irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's name
on any checks or other forms of payment or security; (ii) sign Borrower's name
on any invoice or bill of lading for any Account or drafts against account
debtors, (iii) make, settle, and adjust all claims under Borrower's insurance
policies; (iv) settle and adjust disputes and claims about the Accounts directly
with account debtors, for amounts and on terms Bank determines reasonable; and
(v) transfer the Collateral into the name of Bank or a third party as the Code
permits. Bank may exercise the power of attorney to sign Borrower's name on any
documents necessary to perfect or continue the perfection of any security
interest regardless of whether an Event of Default has occurred. Bank's
appointment as Borrower's attorney in fact, and all of Bank's rights and powers,
coupled with an interest, are irrevocable until all Obligations have been fully
repaid and performed and Bank's obligation to provide Credit Extensions
terminates.

9.3      BANK EXPENSES.

         If Borrower fails to pay any amount or furnish any required proof of
payment to third persons, Bank may make all or part of the payment or obtain
insurance policies required in Section 6.5, and take any action under the
policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and
immediately due and payable, bearing interest at the then applicable rate and
secured by the Collateral. No payments by Bank are deemed an agreement to make
similar payments in the future or Bank's waiver of any Event of Default.

9.4      BANK'S LIABILITY FOR COLLATERAL.

         If Bank complies with reasonable banking practices and Section 9-207 of
the Code, it is not liable for: (a) the safekeeping of the Collateral; (b) any
loss or damage to the Collateral; (c) any diminution in the value of the
Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or
other person. Except as provided above, Borrower bears all risk of loss, damage
or destruction of the Collateral.

9.5      REMEDIES CUMULATIVE.

         Bank's rights and remedies under this Agreement, the Loan Documents,
and all other agreements are cumulative. Bank has all rights and remedies
provided under the Code, by law, or in equity. Bank's exercise of one right or
remedy is not an election, and Bank's waiver of any Event of Default is not a
continuing waiver. Bank's delay is not a waiver, election, or acquiescence. No
waiver is effective unless signed by Bank and then is only effective for the
specific instance and purpose for which it was given.

9.6      DEMAND WAIVER.

         Borrower waives demand, notice of default or dishonor, notice of
payment and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.

10       NOTICES

         All notices or demands by any party about this Agreement or any other
related agreement must be in writing and be personally delivered or sent by an
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to the addresses set forth at the beginning of
this Agreement. A party may change its notice address by giving the other party
written notice.

                                       15

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11       CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER

         Washington law governs the Loan Documents without regard to principles
of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction
of the State and Federal courts in King County, Washington.

BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS
WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.
EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.

12       GENERAL PROVISIONS

12.1     SUCCESSORS AND ASSIGNS.

         This Agreement binds and is for the benefit of the successors and
permitted assigns of each party. Borrower may not assign this Agreement or any
rights under it without Bank's prior written consent which may be granted or
withheld in Bank's discretion. Bank has the right, without the consent of or
notice to Borrower, to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
under this Agreement.

12.2     INDEMNIFICATION.

         Borrower will indemnify, defend and hold harmless Bank and its
officers, employees, and agents against: (a) all obligations, demands, claims,
and liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank from, following, or consequential to transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.

12.3     TIME OF ESSENCE.

         Time is of the essence for the performance of all obligations in this
Agreement.

12.4     SEVERABILITY OF PROVISION.

         Each provision of this Agreement is severable from every other
provision in determining the enforceability of any provision.

12.5     AMENDMENTS IN WRITING, INTEGRATION.

         All amendments to this Agreement must be in writing and signed by
Borrower and Bank. This Agreement represents the entire agreement about this
subject matter, and supersedes prior negotiations or agreements. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties about the subject matter of this Agreement merge into this
Agreement and the Loan Documents. UNDER WASHINGTON LAW, MOST AGREEMENTS,
PROMISES AND COMMITMENTS MADE BY THE BANK AFTER OCTOBER 3, 1989 CONCERNING LOANS
AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD
PURPOSES OR SECURED SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN WRITING,
EXPRESS CONSIDERATION AND BE SIGNED BY US TO BE ENFORCEABLE.

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12.6     COUNTERPARTS.

         This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, are an original, and all taken together, constitute one Agreement.

12.7     SURVIVAL.

         All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The obligations
of Borrower in Section 12.2 to indemnify Bank will survive until all statutes of
limitations for actions that may be brought against Bank have run.

12.8     CONFIDENTIALITY.

         In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made (i) to Bank's subsidiaries or affiliates
in connection with their business with Borrower, (ii) to prospective transferees
or purchasers of any interest in the loans (provided, however, Bank shall use
commercially reasonable efforts in obtaining such prospective transferee or
purchasers agreement of the terms of this provision), (iii) as required by law,
regulation, subpoena, or other order, (iv) as required in connection with Bank's
examination or audit and (v) as Bank considers appropriate exercising remedies
under this Agreement. Confidential information does not include information that
either: (a) is in the public domain or in Bank's possession when disclosed to
Bank, or becomes part of the public domain after disclosure to Bank; or (b) is
disclosed to Bank by a third party, if Bank does not know that the third party
is prohibited from disclosing the information.

12.9     ATTORNEYS' FEES, COSTS AND EXPENSES.

         In any action or proceeding between Borrower and Bank arising out of
the Loan Documents, the prevailing party will be entitled to recover its
reasonable attorneys' fees and other reasonable costs and expenses incurred, in
addition to any other relief to which it may be entitled.

13       DEFINITIONS

13.1     DEFINITIONS.

         In this Agreement:

         "ACCOUNTS" are all existing and later arising accounts, contract
rights, and other obligations owed Borrower in connection with its sale or lease
of goods (including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all merchandise
returned or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing, as such definition may be amended from time to time according to the
Code.

         "ADVANCE" or "ADVANCES" is a loan advance (or advances) under the
Committed Revolving Line.

         "AFFILIATE" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.

                                       17

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         "BANK EXPENSES" are all audit fees and expenses and reasonable costs
and expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).

         "BORROWER'S BOOKS" are all Borrower's books and records including
ledgers, records regarding Borrower's assets or liabilities, the Collateral,
business operations or financial condition and all computer programs or discs or
any equipment containing the information.

         "BORROWING BASE" is 80% of Eligible Accounts as determined by Bank from
Borrower's most recent Borrowing Base Certificate; provided, however, that Bank
may lower the percentage of the Borrowing Base after performing an audit of
Borrower's Collateral.

         "BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on
which the Bank is closed.

         "CASH MANAGEMENT SERVICES" are defined in Section 2.1.3.

         "CODE" is the Washington Uniform Commercial Code, as applicable.

         "COLLATERAL" is the property described on Exhibit A.

         "COMMITTED EQUIPMENT LINE" is a Credit Extension of up to $2,500,000.

         "COMMITTED REVOLVING LINE" is an Advance of up to $2,500,000.

         "CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
the Person in good faith; but the amount may not exceed the maximum of the
obligations under the guarantee or other support arrangement.

         "COPYRIGHTS" are all copyright rights, applications or registrations
and like protections in each work or authorship or derivative work, whether
published or not (whether or not it is a trade secret) now or later existing,
created, acquired or held.

         "CREDIT EXTENSION" is each Advance, Equipment Advance, Letter of
Credit, or any other extension of credit by Bank for Borrower's benefit.

         "EFFECTIVE DATE" is the date Bank executes this Agreement.

         "ELIGIBLE ACCOUNTS" are Accounts in the ordinary course of Borrower's
business that meet all Borrower's representations and warranties in Section 5;
but Bank may change eligibility standards by giving Borrower notice. Unless Bank
agrees otherwise in writing, Eligible Accounts will not include:

         (a) Accounts that the account debtor has not paid within 90 days of
         invoice date;

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         (b) Accounts for an account debtor, 50% or more of whose Accounts have
         not been paid within 90 days of invoice date;

         (c)  Credit balances over 90 days from invoice date;

         (d) Accounts for an account debtor, including Affiliates, whose total
         obligations to Borrower exceed 25% of all Accounts, for the amounts
         that exceed that percentage, unless the Bank approves in writing,
         except for those certain Accounts from HP, for which the percentage may
         be 50%;

         (e) Accounts for which the account debtor does not have its principal
         place of business in the United States unless individually qualified.
         Accounts owing from NEC, Fujitsu and Hitachi will be included up to
         $1,000,000 in the aggregate;

         (f) Accounts for which the account debtor is a federal, state or local
         government entity or any department, agency, or instrumentality;

         (g) Accounts for which Borrower owes the account debtor, but only up to
         the amount owed (sometimes called "contra" accounts, accounts payable,
         customer deposits or credit accounts);

         (h) Accounts for demonstration or promotional equipment, or in which
         goods are consigned, sales guaranteed, sale or return, sale on
         approval, bill and hold, or other terms if account debtor's payment may
         be conditional;

         (i) Accounts for which the account debtor is Borrower's Affiliate,
         officer, employee, or agent;

         (j) Accounts in which the account debtor disputes liability or makes
         any claim and Bank believes there may be a basis for dispute (but only
         up to the disputed or claimed amount), or if the Account Debtor is
         subject to an Insolvency Proceeding, or becomes insolvent, or goes out
         of business;

         (k) Accounts for which Bank reasonably determines collection to be
         doubtful.

         "EQUIPMENT" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.

         "EQUIPMENT ADVANCE" is defined in Section 2.1.4.

         "EQUIPMENT AVAILABILITY END DATE" is defined in Section 2.1.4.

         "EQUIPMENT MATURITY DATE" is defined in Section 2.1.4.

         "ERISA" is the Employment Retirement Income Security Act of 1974, and
its regulations.

         "GAAP" is generally accepted accounting principles.

         "INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred
price of property or services, such as reimbursement and other obligations for
surety bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.

         "INSOLVENCY PROCEEDING" are proceedings by or against any Person under
the United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for

                                       19

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the benefit of creditors, compositions, extensions generally with its creditors,
or proceedings seeking reorganization, arrangement, or other relief.

         "INTELLECTUAL PROPERTY" is all of Borrower's:

         (a) Copyrights, Trademarks, Patents, and Mask Works including
amendments, renewals, extensions, and all licenses or other rights to use and
all license fees and royalties from the use;

         (b) Any trade secrets and any intellectual property rights in computer
software and computer software products now or later existing, created, acquired
or held;

         (c) All design rights which may be available to Borrower now or later
created, acquired or held;

         (d) Any claims for damages (past, present or future) for infringement
of any of the rights above, with the right, but not the obligation, to sue and
collect damages for use or infringement of the intellectual property rights
above;

         All proceeds and products of the foregoing, including all insurance,
indemnity or warranty payments.

         "INVENTORY" is present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.

         "INVESTMENT" is any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.

         "LETTER OF CREDIT" is defined in Section 2.1.2.

         "LIEN" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.

         "LIQUIDITY COVERAGE" is a ratio of Borrower's unrestricted cash (and
equivalents, including marketable securities) held with or through Bank plus 50%
of Borrower's gross accounts receivables divided by Borrower's outstanding
Obligations.

         "LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes
or guaranties executed by Borrower or Guarantor, and any other present or future
agreement between Borrower and/or for the benefit of Bank in connection with
this Agreement, all as amended, extended or restated.

         "MASK WORKS" are all mask works or similar rights available for the
protection of semiconductor chips, now owned or later acquired.

         "MATERIAL ADVERSE CHANGE" is defined in Section 8.3.

         "OBLIGATIONS" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including cash management services,
letters of credit and foreign exchange contracts, if any and including interest
accruing after Insolvency Proceedings begin and debts, liabilities, or
obligations of Borrower assigned to Bank.

                                       20

<PAGE>

         "PATENTS" are patents, patent applications and like protections,
including improvements, divisions, continuations, renewals, reissues, extensions
and continuations-in-part of the same.

         "PERMISSIBLE DIVIDENDS" are those certain dividend payments required by
the terms of Borrower's Series B round of equity financing.

         "PERMITTED INDEBTEDNESS" is:

         (a)  Borrower's indebtedness to Bank under this Agreement or any other
Loan Document;

         (b)  Indebtedness existing on the Effective Date and shown on the
Schedule;

         (c)  Subordinated Debt;

         (d)  Indebtedness to trade creditors incurred in the ordinary course of
business; and

         (e)  Indebtedness secured by Permitted Liens.

         "PERMITTED INVESTMENTS" are:

         (a)  Investments shown on the Schedule and existing on the Effective
Date; and

         (b)  Certificates of deposit issued by a U.S. Bank with a maximum
maturity of two years;

         (c)  Money market mutual funds that allow for the transfer of funds
into and out of the fund;

         (d)  Marketable securities included in the following list having a
stated maturity no greater than two years from the date of purchase and having
been rated as investment grade by Standard & Poor's or Moody's Investors
Service:

              (i)      Obligations issued by the U.S. Treasury;

              (ii)     Obligations issued by any Federal agency;

              (iii)    Obligations of U.S. municipalities;

              (iv)     Obligations of U.S. commercial banks, limited to bankers'
                       acceptances, Eurodollar certificates of deposit, and
                       Eurodollar time deposits;

              (v)      Obligations of non-U.S. banks which are headquartered in
                       approved countries: Canada, France, Germany, Sweden,
                       Switzerland, United Kingdom, and Japan, and limited to
                       Eurodollar certificates of deposit, Eurodollar time
                       deposits, Yankee certificates of deposit, and Yankee
                       bankers' acceptances;

              (vi)     Obligations of major U.S. corporations and U.S bank
                       holding companies;

              (vii)    Repurchase agreements with major banks and authorized
                       dealers over collateralized (102-103%) by U.S.
                       government and/or agency securities included in these
                       guidelines and delivered into the custody account of the
                       client. The market value of the securities used as
                       collateral plus the accrued interest thereon on the day
                       of the agreement must exceed and be maintained at a
                       level, which exceeds the value of the agreement;

              (viii)   Auction rate securities that re-price no less frequently
                       than 30 days.

         "PERMITTED LIENS" are:

         (a) Liens existing on the Effective Date and shown on the Schedule or
arising under this Agreement or other Loan Documents;

         (b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority over
any of Bank's security interests;

                                       21

<PAGE>

         (c) Purchase money Liens (i) on Equipment acquired or held by Borrower
or its Subsidiaries incurred for financing the acquisition of the Equipment, or
(ii) existing on equipment when acquired, if the Lien is confined to the
property and improvements and the proceeds of the equipment;

         (d) Licenses or sublicenses granted in the ordinary course of
Borrower's business and any interest or title of a licensor or under any license
or sublicense, if the licenses and sublicenses permit granting Bank a security
interest;

         (e) Leases or subleases granted in the ordinary course of Borrower's
business, including in connection with Borrower's leased premises or leased
property;

         (f) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase.

         "PERSON" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or government agency.

         "PRIME RATE" is Bank's most recently announced "prime rate," even if it
is not Bank's lowest rate.

         "RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.

         "REVOLVING MATURITY DATE" is September 22, 2004.

         "RIGHTS", as applied to the Collateral, means the Borrower's rights and
interests in, and powers with respect to, that Collateral, whatever the nature
of those rights, interests and powers and, in any event, including Borrower's
power to transfer rights in such Collateral to Bank.

         "SCHEDULE" is any attached schedule of exceptions.

         "SOFT COSTS" is leasehold improvements, intangible property such as
computer software and software licenses, and soft costs including without
limitation taxes, shipping, warranty charges, freight discounts and installation
expense.

         "SUBORDINATED DEBT" is debt incurred by Borrower subordinated to
Borrower's indebtedness owed to Bank and which is reflected in a written
agreement in a manner and form acceptable to Bank and approved by Bank in
writing.

         "SUBSIDIARY" is for any Person, or any other business entity of which
more than 50% of the voting stock or other equity interests is owned or
controlled, directly or indirectly, by the Person or one or more Affiliates of
the Person.

         "TANGIBLE NET WORTH" is, on any date, the consolidated total assets of
Borrower and its Subsidiaries minus, (i) any amounts attributable to (a)
goodwill, (b) intangible items such as unamortized debt discount and expense,
patents, trade and service marks and names, copyrights and research and
development expenses except prepaid expenses, and (c) reserves not already
deducted from assets, and (ii) Total Liabilities.

                                       22

<PAGE>

         "TOTAL LIABILITIES" is on any day, obligations that should, under GAAP,
be classified as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness, and current portion Subordinated Debt allowed to be paid, but
excluding all other Subordinated Debt.

         "TRADEMARKS" are trademark and servicemark rights, registered or not,
applications to register and registrations and like protections, and the entire
goodwill of the business of Assignor connected with the trademarks.

BORROWER:

Vixel Corporation

By: /s/ Kurtis L. Adams
   --------------------------------------------------
Title: CFO
      -----------------------------------------------
BANK:

SILICON VALLEY BANK

By: /s/ Annette Sager
   --------------------------------------------------
Title: Vice President
      -----------------------------------------------
Effective Date: September 23, 2003
               --------------------------------------

                                       23


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