pdf.secdatabase.compdf.secdatabase.com/636/0000950109-99-001338.pdf · 7.5. The address set forth below the Company's signature hereon is, and for at least the last six months has

Business Address2030 MAIN STREET SUITE1250IRVINE CA 926149498511085

Mailing Address2030 MAIN STREET SUITE1250IRVINE CA 92614

SECURITIES AND EXCHANGE COMMISSION

FORM S-1/AGeneral form of registration statement for all companies including face-amount certificate

companies [amend]

Filing Date: 1999-04-08SEC Accession No. 0000950109-99-001338

(HTML Version on secdatabase.com)

FILERLITRONIC INCCIK:1078717| IRS No.: 330757190 | State of Incorp.:DE | Fiscal Year End: 1231Type: S-1/A | Act: 33 | File No.: 333-72151 | Film No.: 99589265SIC: 3577 Computer peripheral equipment, nec

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As filed with the Securities and Exchange Commission on April 8, 1999Registration No. 333-72151

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

Securities and Exchange CommissionWashington, D.C. 20549___________________

Amendment No. 1 toForm S-1

Registration StatementUnder

The Securities Act of 1933__________________

Litronic Inc.

(Exact name of registrant as specified in its charter)

<TABLE><S> <C> <C>

Delaware 3577 33-0757190(State or other jurisdiction of (Primary Standard Industrial Classification Number) (I.R.S. Employer Identification Number)incorporation or organization)

</TABLE>

Litronic Inc.2030 Main Street, Suite 1250

Irvine, California 92614(949) 851-1085

(Address, including zip code, and telephone number, including area code, ofregistrant's principal executive offices)

__________________

Kris ShahChief Executive Officer and Chairman of the Board

Litronic Inc.2030 Main Street, Suite 1250

Irvine, California 92614(949) 851-1085

(Name, address, including zip code, and telephone number, including area code,of agent for service)

________________

Copies to:

Arent Fox Kintner Plotkin & Kahn, PLLC Tenzer Greenblatt LLP1050 Connecticut Avenue, N.W. 405 Lexington AvenueWashington, D.C. 20036-5339 New York, New York 10017

Attention: Gerald P. McCartin, Esq. Attention: Robert J. Mittman, Esq.Telephone No.: (202) 857-6090 Telephone No.: (212) 885-5000Facsimile No.: (202) 857-6395 Facsimile No.: (212) 885-5001

___________________

Approximate date of commencement of proposed sale to public: As soon aspracticable after this registration statement becomes effective.

___________________

If any of the securities being registered on this form are to be offered ona delayed or continuous basis pursuant to Rule 415 under the Securities Act of1933, check the following box. [_]

If this form is filed to register additional securities for an offeringpursuant to Rule 462(b) under the Securities Act, check the following box andlist the Securities Act registration statement number of the earlier effectiveregistration statement for the same offering. [_] _____________

If this form is a post-effective amendment filed pursuant to Rule 462(c)under the Securities Act, check the following box and list the Securities Actregistration number of the earlier effective registration statement for the sameoffering. [_] ______________

If this form is a post-effective amendment filed pursuant to Rule 462(d)under the Securities Act, check the following box and list the Securities Actregistration statement number of the earlier effective registration statement



for the same offering. [_] _______________

If delivery of the prospectus is expected to be made pursuant to Rule 434,check the following box. [_]

The registrant hereby amends this registration statement on such date ordates as may be necessary to delay its effective date until the registrant shallfile a further amendment which specifically states that this registrationstatement shall thereafter become effective in accordance with Section 8(a) ofthe Securities Act of 1933, or until this registration statement shall becomeeffective on such date as the Commission, acting pursuant to said section 8(a),may determine.

[The information in this prospectus is not complete and may be changed. We maynot sell these securities until the registration statement filed with theSecurities and Exchange Commission is effective. This prospectus is not anoffer to sell these securities and it is not soliciting an offer to buy thesesecurities in any state where the offer or sale is not permitted.]

SUBJECT TO COMPLETION

dated April 8, 1999

LITRONIC INC.

3,000,000 shares of common stock

This is an initial public offering of 3,000,000 shares of the common stockof Litronic Inc. We expect that the initial public offering price will bebetween $9.00 and $11.00 per share. We anticipate that our common stock will belisted on the Nasdaq National Market under the symbol "LTNX."

______________________

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNINGON PAGE 14.

______________________

<TABLE><CAPTION>

Per Share Total--------- -----

<S> <C> <C>Public offering price.......................................... $ $Underwriting discounts and commissions......................... $ $Proceeds, before expenses, to Litronic......................... $ $</TABLE>

______________________

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIESCOMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THEADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY ISA CRIMINAL OFFENSE.

We have granted BlueStone Capital Partners, L.P. and Pacific CrestSecurities Inc., the representatives of the underwriters, a 45-day option topurchase up to 450,000 additional shares of our common stock to cover any over-allotments.

______________________

BLUESTONE CAPITAL PARTNERS, L.P. PACIFIC CREST SECURITIES INC.

, 1999

We own or otherwise have rights to trademarks and trade names that we usein conjunction with the sale and licensing of our products. The followingtrademarks mentioned in this prospectus are our registered trademarks: ProFileManager, NetSign, NetSign Pro, CryptOS, CryptOS SDK, CryptOS SDK+, ARGUS,Moniker, CryptoCard, CipherServer and Forte. We also own the trade namesLitronic, Pulsar, Pulsar Data and Pulsar Data Systems, Inc. We have applied forthe trademarks Forte PKIcard and Maestro. All other trademarks or trade namesreferred to in this prospectus are the property of their respective owners.

PROSPECTUS SUMMARY

This is a summary of the information contained in this prospectus. To



understand this offering fully, you should read the entire prospectus,especially the risk factors and financial statements.

As of the date of this prospectus, all of the stockholders of LitronicIndustries, Inc. will exchange all of the outstanding common stock of thatcompany for all of the outstanding common stock of Litronic Inc. Upon theclosing of this offering, the newly reorganized Litronic Inc. will acquire allof the outstanding common stock of Pulsar Data Systems, Inc.

In this prospectus, unless the context indicates otherwise, the term"Litronic" refers to Litronic Inc. and its subsidiaries, after giving effect toits reorganization with Litronic Industries, Inc., and the terms "we," "our" or"our company" refer to Litronic Inc. and its subsidiaries after giving effect toboth its reorganization with Litronic Industries, Inc. and its acquisition ofPulsar.

The historical financials for Litronic in this prospectus have beenretroactively adjusted to reflect the reorganization. Since Litronic Inc. hashad no operations of its own, the information presented in those financials,other than the capital structure, relates solely to Litronic Industries, Inc.The pro forma financial data in this prospectus has been prepared to illustratethe effect of the Pulsar acquisition and this offering on data derived fromLitronic's historical financials.

OUR COMPANY

OUR BUSINESS

Litronic provides professional Internet data security services and developsand markets software and microprocessor-based products needed to secureelectronic commerce and communications over the Internet and othercommunications networks based on Internet protocols. To increase sales capacityfor its proprietary products and to capitalize on opportunities in the rapidlygrowing Internet-based information technology security market, Litronic isacquiring Pulsar, a network integration solutions company that develops large-scale network solutions for commercial and government organizations.

OUR PRODUCTS

Our primary data security products use an advanced form of computersecurity technology referred to as public key infrastructure, or PKI, which isthe standard technology for securing Internet-based commerce and communications.As a result, our products enable customers to integrate PKI security into theirInternet networks, existing database applications and customized softwareapplications.

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Our data security products can be used with world-wide-web browsers,including Netscape Communicator and Microsoft Internet Explorer, to providesecure E-mail or other data communications and facilitate secure electroniccommerce transactions. In addition, our products use digital certificatetechnology to uniquely identify the sender of an electronic message. Digitalcertificates can be securely contained in hardware tokens, such as PKI cards andsecure-keys, and in software tokens, such as the software security files foundin most web browsers. Our products also support numerous types of operatingsystems and facilitate the process of issuing, managing and recovering digitalcertificates throughout a customer's enterprise.

In addition, we are currently developing PKI cards that will be capable ofintegrating multiple digital certificates, provide for greater processing power,versatility and storage capacity than today's conventional PKI cards, and stillbe credit card sized and competitively priced. Working with Atmel Corporation, aleading semi-conductor manufacturer, we are leading the development of the Fortemicroprocessor. Under a contract with the National Security Agency some ofour development efforts for this project are being reimbursed. We are designingthis 32-bit RISC microprocessor to be embeded in an advanced PKI card that weare developing. We expect our Forte PKI card to be the fastest, most versatileand most cryptographically advanced PKI card available.

We have also established strategic relationships with other industryleaders who have adopted PKI as a core feature of their secure productofferings, including:

. Netscape Communications Corporation . Microsoft Corporation

. VeriSign, Inc. . International Business Machines

. RSA Data Security, Inc. Corp.

. Atmel Corporation . SCM Microsystems, Inc.. U.S. National Security Agency

OUR CUSTOMERS

Our data security customers come from diverse industries, such as the



finance, healthcare, telecommunications, electronic commerce and governmentindustries, and include:

. Bank of America . VeriSign, Inc.

. Lucent Technologies Inc. . Lockheed Martin Corporation

. Deloitte & Touche LLP . Netscape Communications Corporation

. the U.S. Army Corps of Engineers . Schlumberger Limited

. the National Security Agency . Nippon Telegraph andTelecommunications Data Corporation

In addition, our newly acquired Pulsar client base will include over 100federal agencies, such as the Executive Offices of the President of the UnitedStates, the Federal

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Bureau of Investigation and the Federal Communications Commission, as well asover 40 commercial, state and local customers.

OUR MARKET AND MARKET OPPORTUNITY

The increasing proliferation of, and reliance upon, Internet communicationsand transactions has caused data security to become a paramount concern. Demandfor information security products is forecast by Datamonitor, an independentresearch firm, to increase from $1.6 billion in 1997 to almost $7.0 billion by2001, an annual growth rate of 44%. In addition, Datamonitor forecasts the PKIsegment to be the fastest growing segment of the Internet security market, withthe demand for PKI-based products increasing from $75 million in 1997 toapproximately $1.9 billion by 2001, an annual growth rate of 124%.

OUR STRATEGY

We intend to leverage the direct sales force, distribution channels andstrategic partners of our new Pulsar operations to aggressively expand our datasecurity distribution capabilities. Pulsar's strategic partners includeelectronic commerce companies, Internet service providers, value-addedresellers, systems integrators and original equipment manufacturers. Inaddition, we believe that our newly acquired network integration solutionsexpertise will provide us with significant competitive advantages with respectto our Internet data security offerings, as the implementation of Internetnetwork security solutions and infrastructure requires specialized skills whichare typically limited in corporate information technology departments.

To capitalize on the expanding market opportunities in the informationsecurity market, we intend to exploit:

. the substantial experience and knowledge of Litronic's existingmanagement team in the Internet data security, computer networking andsemi-conductor industries, and

. Pulsar's extensive expertise in the sale and implementation of large-scale networking systems, as well as its significant market access.

OUR POTENTIAL ACQUISITION OF THE ASSURE TECHNOLOGY

Subject to our due diligence review, we expect to enter into an agreementunder which we will, after the close of this offering, bid shares of our commonstock valued at $6.0 million in a foreclosure sale for the purchase of theproprietary encryption-based information security technology for client/servernetworks and related intellectual property known as the Assure technology. Ifour bid is the winning bid, we will seek to complete the development of productsbased on this technology in order to expand our data security product offerings.

The judgment holders in the foreclosure action hold judgments in theaggregate amount of approximately $6.0 million. Included among these judgmentholders are

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affiliates of BlueStone, who hold judgments aggregating approximately $750,000,including a judgment in the amount of approximately $150,000 held by AnthonyGiraudo, a director nominee of our company and a limited partner of BlueStone.If our bid is the winning bid at the foreclosure sale, all of the judgmentholders, including the BlueStone affiliates, will receive their proportionatepercentage of the shares of our common stock included in the bid. See "CertainTransactions."

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

Litronic Inc. was incorporated under the laws of the State of Delaware in1997 but has conducted no operations to date. Its predecessor, Litronic



Industries, Inc., was incorporated under the laws of the State of California in1970. Our principal executive offices are located at 2030 Main Street, Suite1250, Irvine, California 92614, and our telephone number is (949) 851-1085. Wealso maintain executive offices in Lanham, Maryland. Our website is located atwww.litronic.com. Information contained in our website is not part of thisprospectus.

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THE OFFERING

Common stock offered by Litronic................. 3,000,000 shares

Common stock to be outstanding afterthis offering............................... 9,040,631 shares, including

2,169,938 shares to be issuedin connection with the Pulsaracquisition. This does notinclude:

. 281,419 shares reservedfor issuance uponexercise of optionsgranted under our 1998stock option plan;

. an aggregate of 600,000shares reserved forissuance upon exercise ofoptions available forfuture grant under our1999 stock option plan;

. 300,000 shares reservedfor issuance uponexercise of warrants tobe issued upon theclosing of this offeringto BlueStone and PacificCrest for serving as therepresentatives of theunderwriters; and

. shares which will beissued if our bid in theforeclosure sale for theAssure technology issuccessful.

Use of proceeds.................................. We intend to use the netproceeds of this offering forreduction of debt, sales andmarketing, product developmentand working capital andgeneral corporate purposes.

Risk factors..................................... Investing in our common stockinvolves a high degree of riskand immediate and substantialdilution.

Proposed Nasdaq National Marketsymbol........................................... LTNX

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SUMMARY FINANCIAL INFORMATIONLITRONIC

(DOLLARS IN THOUSANDS)

The following table presents summary financial information for Litronic forthe periods, and as of the dates, indicated. The data is derived from, andshould be read in conjunction with, the consolidated financial statements ofLitronic, including the related notes, appearing elsewhere in this prospectus.The information presented below is qualified in its entirety by, and should beread in conjunction with, "Selected Financial Data-Litronic," "Management'sDiscussion and Analysis of Financial Condition and Results of Operations" andthe consolidated financial statements of Litronic and related notes includedelsewhere in this prospectus.

STATEMENTS OF OPERATIONS INFORMATION:



<TABLE><CAPTION>

YEAR ENDED DECEMBER 31,-----------------------------

1996 1997 1998-------- -------- --------

<S> <C> <C> <C>Net product revenue...................... $7,855 $ 8,627 $ 5,214

License and service revenue.............. 1,541 1,539 1,439-------- ------- --------

Total revenue............................ 9,396 10,166 6,653-------- ------- --------

Product cost of revenue.................. 4,098 3,211 2,821

License and service cost of revenue...... 581 643 950-------- ------- --------

Total cost of revenue.................... 4,679 3,854 3,771-------- ------- --------

Gross margin............................. 4,717 6,312 2,882

Selling, general, andadministrative expenses............. 2,052 3,487 2,631

Research and development expenses........ 725 1,172 1,334-------- ------- --------

Operating income (loss).................. 1,940 1,653 (1,083)-------- ------- --------

</TABLE>

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<TABLE><S> <C> <C> <C>Interest expense, net..................... 19 42 418

-------- ------- --------Earnings (loss) from continuingoperations before income taxes............ 1,921 1,611 (1,501)

Provision for (benefit from)income taxes.......................... 29 22 (95)

-------- ------- --------Earnings (loss) from

continuing operations................. $1,892 $ 1,589 $(1,406)======== ======= ========

</TABLE>

BALANCE SHEET INFORMATION:

<TABLE><CAPTION>

DECEMBER 31,-----------------------------

1996 1997 1998------- ------- ------

<S> <C> <C> <C>Cash and cash equivalents................. $ 862 $ 490 $ 898

Working capital........................... 1,662 385 758

Total assets.............................. 7,409 2,347 2,791

Short-term debt........................... 545 -- 580

Long-term debt, less current installments. 4,997 3,506 5,200

Total liabilities......................... 7,510 5,148 6,998

Net stockholders'deficiency............................. (101) (2,801) (4,207)

</TABLE>

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SUMMARY FINANCIAL INFORMATIONPULSAR




The following table presents summary financial information for Pulsar for theperiods, and as of the dates, indicated. The data is derived from, and should beread in conjunction with, the financial statements of Pulsar, including therelated notes, appearing elsewhere in this prospectus. The information presentedbelow is qualified in its entirety by, and should be read in conjunction with,"Selected Financial Data-Pulsar," "Management's Discussion and Analysis ofFinancial Condition and Results of Operations" and the financial statements ofPulsar and related notes included elsewhere in this prospectus.

STATEMENTS OF OPERATIONS INFORMATION:

<TABLE><CAPTION>

YEAR ENDED DECEMBER 31,--------------------------------

1996 1997 1998---------- --------- --------

<S> <C> <C> <C>Service revenue........................ $ 10,253 $ 8,818 $ 3,373

Product revenue........................ 155,705 142,702 77,159---------- --------- --------

Total revenue.......................... 165,958 151,520 80,532---------- --------- --------

Cost of service revenue................ 4,870 4,115 1,553

Cost of product revenue................ 144,494 138,086 71,818---------- --------- --------

Total cost of revenue.................. 149,364 142,201 73,371---------- --------- --------

Gross margin........................... 16,594 9,319 7,161

Selling, general, andadministrativeexpense............................. 13,545 17,152 12,519

---------- --------- --------Operating income

(loss)............................. 3,049 (7,833) (5,358)

Interest income........................ 639 457 61

Interest expense....................... 3,564 3,640 2,099---------- --------- --------

Net earnings (loss).................... $ 124 $(11,016) $(7,396)========== ========= ========

</TABLE>

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BALANCE SHEET INFORMATION:

<TABLE><CAPTION>

DECEMBER 31,-----------------------------

1996 1997 1998-------- ------- --------

<S> <C> <C> <C>Cash and cash equivalents.................... $ 2,451 $ 2,236 $ 352

Working capital (deficit).................... 1,553 (2,436) (8,168)

Total assets................................. 59,785 40,871 12,187

Short-term debt.............................. 41,352 28,982 14,435

Long-term debt, less currentinstallments.............................. 53 4,203 3,241

Total liabilities............................ 52,077 42,681 22,681

Net stockholders' equity (deficit)........... 7,708 (1,810) (10,494)</TABLE>

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SUMMARY PRO FORMA FINANCIAL INFORMATION(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The following table presents unaudited summary pro forma financial



information for the periods, and as of the dates, indicated. This information isbased on data derived from the historical financial statements of Litronic andPulsar and has been prepared to illustrate the effects of the Pulsar acquisitionand this offering on that data, as if they had occurred as of January 1, 1998,with respect to the statements of operations information, and as of December 31,1998, with respect to the balance sheet information. This financial informationis provided for comparative purposes only and is not intended to reflect theresults that actually would have been obtained if the acquisition and thisoffering had been effected on the dates indicated. The information presentedbelow is qualified in its entirety by, and should be read in conjunction with,"Pro Forma Financial Data," "Selected Financial Data-Litronic," "SelectedFinancial Data-Pulsar," "Management's Discussion and Analysis of FinancialCondition and Result of Operations" and the financial statements and relatednotes included elsewhere in this prospectus.

PRO FORMA STATEMENTS OF OPERATIONS INFORMATION:

<TABLE><CAPTION>

YEAR ENDEDDECEMBER 31,

1998--------------

<S> <C>

Net product revenue..................................... 82,373License and service revenue............................. 4,812

--------------Total revenue........................................... 87,185

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

Product cost of revenue................................. 74,639License and service cost of revenue..................... 2,503

--------------Total cost of revenue................................... 77,142

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

Gross margin............................................ 10,043Selling, general, and

administrative expenses............................ 15,150Research and development expenses....................... 1,334Amortization of goodwill and other

intangibles........................................ 2,146--------------

Operating loss.......................................... (8,587)Interest expense........................................ 1,893Interest income......................................... 61

--------------Loss from continuing operations before

income taxes....................................... (10,419)</TABLE>

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<TABLE><S> <C>

-Benefit from income taxes................................ --------------Loss from continuing operations.......................... $(10,419)

==============

Loss per share from continuing operations -basic and diluted.................................... $ (1.15)

==============

Shares used in per-share computations -basic and diluted.................................... 9,040,631

==============</TABLE>

PRO FORMA BALANCE SHEET INFORMATION:

<TABLE><CAPTION>

DECEMBER 31,1998

---------------<S> <C>Cash and cash equivalents................................. 15,250Working capital........................................... 9,954Total assets.............................................. 61,171Short-term debt........................................... 11,651Long-term debt, less current installments................. 5



Total liabilities......................................... 17,879Net stockholders' equity.................................. 43,292</TABLE>

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RISK FACTORS

An investment in our common stock is speculative and involves a high degreeof risk. In addition to the other information in this prospectus, you shouldcarefully consider the following risk factors in evaluating our company and ourprospects before purchasing shares of our common stock.

WE HAVE A HISTORY OF LOSSES AND MAY INCUR FUTURE LOSSES.

Even with the proceeds of this offering, we may not become profitable orsignificantly increase our revenue. Litronic incurred a net loss of $1.4million for the year ended December 31, 1998. Pulsar incurred net losses of$7.4 million for the year ended December 31, 1998 and $11.0 million for the yearended December 31, 1997. Our pro forma combined statement of operationsreflects a net loss of $10.4 million for the year ended December 31, 1998.

PULSAR'S INDEPENDENT AUDITORS HAVE EXPRESSED DOUBT ABOUT PULSAR'S ABILITY TOCONTINUE AS A GOING CONCERN.

For the year ended December 31, 1998, Pulsar's independent auditors notedin their report that as a result of Pulsar's loss, its net capital deficiencyand its default on financing agreement debt covenants, there was a substantialdoubt about Pulsar's ability to continue as a going concern. After thisoffering, we will have positive working capital and be in compliance with allfinancing debt agreements. We believe working capital, including proceeds fromthis offering, and available borrowings under credit facilities will besufficient to satisfy our cash flow requirements for at least the 12 monthsfollowing this offering.

OUR INABILITY TO INTEGRATE, OR IMPLEMENT OUR PLANS FOR, THE OPERATIONS OF PULSARMAY ADVERSELY AFFECT OUR BUSINESS.

Integration of the Pulsar acquisition may place strain on our managerialand financial resources, which could, in turn, adversely affect our business. Toachieve the full benefits of the Pulsar acquisition, we will need to:

. integrate our administrative, financial and engineering resources;

. coordinate our marketing and sales efforts; and

. implement appropriate operational, financial and managementsystems and controls.

We may not be able to successfully integrate Pulsar's operations. In addition,we are acquiring Pulsar assuming that we can roll out our enterprise-wide datasecurity products to Pulsar's existing client base, successfully complete theimplementation of Pulsar's recent shift in product reselling focus, expandPulsar's professional service offerings and increase sales of Pulsar's productsand professional services to commercial customers and state and localgovernments. We may not be able to successfully implement any of these plans.Our

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failure to do so would significantly diminish the value of the Pulsaracquisition and adversely affect our future operations.

THE GOODWILL AND OTHER INTANGIBLES ACQUIRED IN THE PULSAR ACQUISITION MAY HAVEAN ADVERSE IMPACT ON OUR OPERATING RESULTS AND THE MARKET PRICE OF OUR COMMONSTOCK.

Approximately $32.2 million, or 53%, of our pro forma combined, asadjusted, assets as of December 31, 1998, consisted of intangible assets,including goodwill, arising from the acquisition of Pulsar. This amount, whichwill be amortized over 15 years, constitutes a non-cash expense in eachamortization period, which is not deductible for tax purposes, that will reducenet income or increase net loss for that period. The reduction in our netearnings or an increase in our net loss resulting from the amortization ofgoodwill and other intangibles may have an adverse impact on our operatingresults and the market price of our common stock. There is also a risk that wemay never realize the value of our intangible assets.

A DEFAULT UNDER OUR SECURED CREDIT ARRANGEMENTS COULD RESULT IN A FORECLOSURE OFOUR ASSETS BY OUR CREDITORS.

All of our assets are pledged as collateral to secure portions of our debt.As of December 31, 1998, Litronic had $5.8 million and Pulsar had $13.6 millionin outstanding secured debt. We expect to enter into a new $20.0 million credit



facility following this offering which will also be secured by a pledge of allof our assets. This means that if we default on our secured debt obligationsthe lenders could foreclose on our assets. From time to time we have been inviolation of financial covenants under our existing credit arrangements and havereceived either waivers for these violations or forbearance agreements throughthe date of this prospectus. Although we expect to be in compliance with all ofour financial covenants upon the closing of this offering, if we fail to complywith our secured debt loan covenants or otherwise default on our obligations inthe future without obtaining waivers or forbearance agreements for theseviolations, our indebtedness could become immediately due and payable and thelenders could foreclose on our assets.

THE TERMS OF OUR LOAN AGREEMENTS COULD LIMIT OUR ABILITY TO IMPLEMENT OURBUSINESS STRATEGY.

The terms of our loan agreements with our credit providers could limit ourability to implement our strategy. In addition to substantially prohibiting usfrom incurring additional indebtedness, our loan agreements with these creditorsgenerally limit or prohibit us from:

. declaring or paying cash dividends;

. making capital distributions or other payments to stockholders;

. merging or consolidating with another corporation; or

. selling all or substantially all of our assets.

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WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUE FROM A SMALL NUMBER OF CUSTOMERSAND, THEREFORE, THE LOSS OF EVEN ONE OF THESE CUSTOMERS COULD SIGNIFICANTLY ANDNEGATIVELY IMPACT OUR OPERATING RESULTS.

We depend on a limited number of customers for a substantial portion of ourrevenue and many of our contracts with our significant customers are short-termcontracts. For the year ended December 31, 1998, Litronic derived 81% of itsrevenue from three customers and Pulsar derived 23% of its revenue from onecustomer. The nonrenewal of any significant contract upon expiration or, asubstantial reduction in sales to any of our significant customers, wouldadversely affect our business unless we were able to replace the revenue wereceived from these customers. We expect to continue to depend upon a limitednumber of large customers for a substantial portion of our revenue.

DOING BUSINESS WITH THE U.S. GOVERNMENT ENTAILS MANY RISKS WHICH COULD ADVERSELYAFFECT US.

Sales to U.S. government agencies accounted for 90% of our pro formacombined revenue for the year ended December 31, 1998. Our sales to theseagencies are subject to risks, including:

. potential reduction in the federal funding available for them topurchase our products and services;

. early termination of our contracts;

. disallowance of costs upon audit;

. changes in the government contract procurement process; and

. the necessity to participate in competitive bidding and proposalprocesses.

In addition, the government may be in a position to obtain greater rightswith respect to our intellectual property than we would grant to other entities.Government agencies also have the power, based on financial difficulties orinvestigations of its contractors, to deem contractors unsuitable for newcontract awards. Because we engage in the government contracting business, wehave been and will be subject to audits and may be subject to investigation bygovernmental entities. Failure to comply with the terms of any of ourgovernmental contracts could result in substantial civil and criminal fines andpenalties, as well as our suspension from future government contracts for asignificant period of time, any of which could adversely affect our business.

IF USE OF THE INTERNET AND OTHER COMMUNICATIONS NETWORKS BASED ON INTERNETPROTOCOLS DOES NOT CONTINUE TO GROW, DEMAND FOR OUR PRODUCTS MAY NOT INCREASE.

Increased demand for our products depends in large part on the continuedgrowth of the Internet and Internet protocol-based networks and the widespreadacceptance and use

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of these mediums for electronic commerce and communications. Because electroniccommerce and communications over these networks are evolving, we cannot predictthe size of the market and its sustainable growth rate. A number of factors mayaffect market size and growth rate, including:

. the use of electronic commerce and communications may not increase, ormay increase more slowly than we expect, as a result of the cost ofthe infrastructure required to support its widespread use;

. the Internet may continue to experience significant growth both in thenumber of users and the level of use, but the Internet infrastructuremay not be able to continue to support the demands placed on it bycontinued growth;

. continued growth may affect the Internet's performance andreliability;

. the growth and reliability of electronic commerce and communicationscould be harmed by delays in development or adoption of new standardsand protocols to handle increased levels of activity or by increasedgovernmental regulation; and

. changes in, or insufficient availability of, communications servicesto support electronic commerce and communication could result in poorperformance and also adversely affect usage.

THERE ARE RISKS RELATING TO OUR OFFER TO PURCHASE THE ASSURE TECHNOLOGY.

Although we expect, subject to our due diligence review, to enter into anagreement under which we will agree to bid at least $6.0 million of our commonstock to purchase the Assure technology, we do not, at this time, know how manyshares we will have to include in our bid because we cannot be certain at whatprice our common stock will be trading during the five-day measurement periodprior to the foreclosure sale. Based on the initial public offering price andassuming an initial public offering price of $10.00 per share, our bid wouldconsist of at least 600,000 shares of our common stock. However, if, at the timeof our bid, the average closing price of our common stock on Nasdaq during themeasurement period is below the initial public offering price, we will have tobid more shares. In addition, regardless of the number of shares which areincluded in our bid, our bid for the Assure technology may not be the winningbid in the foreclosure sale and, thus, we may not be able to acquire thetechnology.

In addition, even if we successfully acquire the Assure technology, ourfailure to upgrade the technology and complete the development of products basedon the technology would adversely affect our business. Our development effortswill be subject to many risks, including:

. we were not involved in the initial development of the technology andwill need to devote financial and personal resources to becomefamiliar with the technology;

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. we may not become sufficiently familiar with the technology to upgradethe technology or develop products based on the technology in a costeffective or timely manner, or at all;

. we may face technical problems or other difficulties or othersignificant delays; and

. in addition to the stock we would issue if our bid was the winningbid, we have allocated $1.2 million of the net proceeds of thisoffering to the development of Assure-based products and we may expendthis and significant additional resources without ever successfullydeveloping a commercial product.

In addition, there may be an adverse impact on our operating results due toin-process research and development charges and/or amortization of assetsrelated to the purchase of the Assure technology. See "Certain Transactions."

SOME OF OUR PRODUCTS AND SERVICES HAVE LENGTHY SALES AND IMPLEMENTATION CYCLESWHICH, IF DELAYED, COULD ADVERSELY AFFECT FORECASTED OPERATING RESULTS.

Evaluating customers' data security needs and designing and implementingcustom networks typically requires significant expenditure of time, capital andother resources. Customers' purchasing decisions for our products and systemsmay be subject to delay due to many factors not within our control, such as thesignificant expense of many data security products and network systems,customers' internal budgeting process, year 2000 concerns and the otherprocedures customers may require for the approval of large purchases. Further,the implementation process is subject to delays resulting from administrativeconcerns associated with incorporating new technologies into existing networks,



deployment of a new network system and data migration to the new system. Thesales and implementation cycles associated with our product sales and networkdesign and implementation activities can, as a result, be lengthy, potentiallylasting from 45 to 90 days. Our quarterly and annual operating results could beadversely affected if sales forecasted for a particular quarter from aparticular customer are delayed.

IF PKI TECHNOLOGY IS COMPROMISED, OUR BUSINESS WOULD BE ADVERSELY AFFECTED.

Many of our products are based on PKI technology, which involves the use ofa public key and a private key to encrypt and decrypt messages. The securityafforded by this technology depends on the integrity of a user's private key,which depends in part on the application of algorithms, or advanced mathematicalfactoring equations. This integrity is based on the premise that factoring largenumbers into their prime number components is difficult. The occurrence of anyof the following could result in a decline in demand for our data securityproducts:

. development of an easy factoring method would reduce or eliminatesecurity of encryption products using PKI technology;

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. any significant advance in techniques for attacking PKI systems couldrender some or all of our products based on cryptographic technologyobsolete or unmarketable;

. computer systems significantly faster and more powerful than thosepresently available could theoretically solve factoring problems evenwithout a breakthrough in factoring or other methods of attacking PKIsystems;

. publicity of the successful decoding of cryptographic messages or themisappropriation of private keys, as has happened in the past, couldadversely affect public perception as to the safety of PKI technology;and

. current or future government regulation regarding the use, scope andstrength of PKI could limit our ability to develop and sell productswith encryption technology strong enough to maintain the integrity ofa user's private key against factoring by more powerful computersystems.

IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS AND SERVICEOFFERINGS COULD BECOME OBSOLETE.

The markets we serve are characterized by rapidly changing technology,emerging industry standards and frequent introduction of new products. Theintroduction of products embodying new technologies and the emergence of newindustry standards may render our products obsolete or less marketable. Theprocess of developing our products and services is extremely complex andrequires significant continuing development efforts. If we are unable to modifyexisting products and develop new products that are responsive to changingtechnology and standards and meet customer needs in a timely and cost effectivemanner, our business could be adversely affected.

IF WE FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS, OUR ABILITY TODEVELOP AND MARKET OUR PRODUCTS WOULD BE ADVERSELY AFFECTED.

The loss of any of our existing strategic relationships, or our inabilityto create new strategic relationships in the future, could adversely affect ourability to develop and market our products. We depend upon our partners todevelop and market products and to fund and otherwise perform their obligationsas contemplated by our agreements with them. We do not control the time andresources devoted by our partners to these activities. These relationships maynot continue or may require us to spend significant financial, personnel andadministrative resources from time to time. We may not have the resourcesavailable to satisfy our commitments, which may adversely affect our strategicrelationships. Further, our products and services may compete with the productsand services of our strategic partners. This competition may adversely affectour relationships with our strategic partners, which could adversely affect ourbusiness.

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WE DEPEND ON KEY MANAGEMENT PERSONNEL.

Our success will depend largely on the continuing efforts of our executiveofficers and senior management, especially those of Kris Shah, our chairman ofthe board and chief executive officer, and William W. Davis, Sr., our president



and chief operating officer. Our business may be adversely affected if theservices of any of our key personnel become unavailable to our company. We havenot entered into employment agreements with any employees other than Messrs.Shah and Davis, and even with these agreements there is a risk that theseindividuals will not continue to serve for any particular period of time. Whilewe intend to obtain key person life insurance policies on the lives of Messrs.Shah and Davis, each in the amount of $3.0 million, these amounts may not besufficient to offset the loss of their services.

THERE IS SIGNIFICANT COMPETITION IN OUR INDUSTRY FOR HIGHLY SKILLED EMPLOYEESAND OUR FAILURE TO ATTRACT AND RETAIN TECHNICAL PERSONNEL WOULD ADVERSELY AFFECTOUR BUSINESS.

We may not be able to successfully attract or retain highly skilledemployees. Our inability to hire or retain highly qualified individuals mayimpede our ability to develop, install, implement and otherwise service oursoftware and hardware systems, customers and potential customers or otherwiseefficiently conduct our operations, all of which may adversely affect ourbusiness. The data security and networking solution industries arecharacterized by a high level of employee mobility, and the market for highlyqualified individuals in the computer-related fields is intense. Thiscompetition means there are fewer highly qualified employees available to hire,the costs of hiring and retaining these individuals are high and these personnelmay not remain with our company once hired. Furthermore, there is increasingpressure to provide technical employees with stock options and other equityinterests in our company, which may dilute earnings per share.

POTENTIAL PRODUCT DEFECTS COULD SUBJECT US TO CLAIMS FROM CUSTOMERS.

Products as complex as those we offer may contain undetected errors orresult in failures when first introduced or when new versions are released.Despite our product testing efforts and testing by current and potentialcustomers, it is possible that errors will be found in new products orenhancements after commencement of commercial shipments. The occurrence of theseerrors could result in adverse publicity, delay in product introduction,diversion of resources to remedy defects, loss of or a delay in marketacceptance or claims by customers against our company, or could cause us toincur additional costs, any of which could adversely affect our business.

WE MAY BE EXPOSED TO POTENTIAL LIABILITY FOR ACTUAL OR PERCEIVED FAILURE TOPROVIDE REQUIRED PRODUCTS OR SERVICES.

Because our customers rely on our products for critical securityapplications, we may be exposed to potential liability claims for damage causedto an enterprise as a result of an actual or perceived failure of our products.An actual or perceived breach of enterprise network or data security systems ofone of our customers, regardless of whether the breach is attributable toour

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products or solutions, could adversely affect the market's perception of ourcompany, products and solutions and therefore our business.

Furthermore, the nature of many of our professional services exposes us toa variety of risks. Many of our professional service engagements involveprojects that are critical to the operations of our customers' businesses. Ourfailure or inability to meet a customer's expectations in the performance of ourservices, or to do so in the time frame required by the customer, regardless ofour responsibility for the failure could

. result in a claim for substantial damages against us by the customer;

. discourage customers from engaging us for these services; or

. damage our business reputation.

In addition, as a professional services provider, a portion of our businessinvolves employing people and placing them in the workplace of other businesses.Therefore, we are also exposed to liability for actions taken by our employeeswhile on assignment, such as:

. damages caused by employee errors and omissions;

. misuse of customer proprietary information;

. misappropriation of funds;

. discrimination and harassment;

. theft of customer property;

. other criminal activity or torts; and

. other claims.

WE MAY NOT HAVE SUFFICIENT INSURANCE TO COVER POTENTIAL LIABILITIES.

Although we maintain general liability insurance coverage, that insurancemay not continue to be available to us on commercially reasonable terms or insufficient amounts to cover one or more large claims, or the insurer may



disclaim coverage as to any future claim. The successful assertion of one ormore large claims against us that exceed available insurance coverage, orchanges in our insurance policies, including premium increases or the impositionof large deductibles or co-insurance requirements, could adversely affect ourbusiness.

PROBLEMS RELATING TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR BUSINESS.

We are in the process of surveying our major vendors regarding year 2000compliance. Until we complete our survey we cannot fully assess the year 2000status of any of our vendors or suppliers. The failure of our significantvendors and customers to make their products and systems year 2000 compliant mayadversely affect the performance of our products, which may in turn adverselyaffect our business. It is possible that customers or third parties might seekindemnification or damages from us as a result of year 2000 issue-related errorscaused by or not prevented by our products of services. We cannot predict theextent to which we might be liable for these costs, but it is conceivable ingeneral that year 2000

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errors could result in substantial judgments against providers of informationtechnology such as our company. If we were to suffer an adverse judgment as aresult of prior year 2000 noncompliance of our products, it may have an adverseimpact on our business.

Customers' purchasing decisions could be affected by the year 2000 issue asthey may need to expend significant resources to correct their existing systems.This situation may result in reduced funds available to implement theinfrastructure needed to conduct trusted and secure electronic commerce andcommunications over the Internet, intranets and extranets. These factors couldlead to a decline in sales of our products and services, which could, in turn,adversely affect our business.

The extent of the potential impact of the year 2000 issue generally is notknown, and we cannot predict the likelihood that the year 2000 issue will causea significant disruption in the economy as a whole.

OUR PARTICIPATION IN COMPETITIVE BIDDING FOR CONTRACTS EXPOSES US TO THEPOTENTIAL LOSS OF FINANCIAL AND OTHER RESOURCES.

We generate a portion of our revenue from contracts and purchase ordersawarded through the competitive bidding process. Our bids may not be acceptedor, if accepted, awarded contracts may not generate sufficient revenue to resultin profitable operations. The competitive bidding process is typically lengthyand often results in the expenditure of financial and other resources inconnection with bids that are not accepted. Additionally, inherent in thecompetitive bidding process is the risk that our costs may exceed projectedcosts upon which a submitted bid or contract price is based.

WE FACE INTENSE COMPETITION FROM A NUMBER OF SOURCES.

The markets for our products and services are intensely competitive and, asa result, we face significant competition from a number of different sources. Wemay be unable to compete successfully as many of our competitors are moreestablished, benefit from greater name recognition and have substantiallygreater financial, technical and marketing resources than we have. In addition,there are several smaller and start-up companies with which we compete from timeto time. We also expect that competition will increase as a result ofconsolidation in the information security technology and product resellerindustries.

THIRD PARTIES COULD OBTAIN ACCESS TO OUR PROPRIETARY INFORMATION ORINDEPENDENTLY DEVELOP SIMILAR TECHNOLOGIES BECAUSE OF THE LIMITED PROTECTION FOROUR INTELLECTUAL PROPERTY.

Notwithstanding the precautions we take, third parties may copy orotherwise obtain and use our proprietary technologies, ideas, know-how and otherproprietary information without authorization or independently developtechnologies similar or superior to our technologies. In addition, theconfidentiality and non-competition agreements between us and our employees,distributors, and clients may not provide meaningful protection

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of our proprietary technologies or other intellectual property in the event ofunauthorized use or disclosure. Policing unauthorized use of our technologiesand other intellectual property is difficult, particularly because the globalnature of the Internet makes it difficult to control the ultimate destination orsecurity of software or other data transmitted. Furthermore, the laws of otherjurisdictions may afford little or no effective protection of our intellectual



property rights. Our business, financial condition and operating results couldbe adversely affected if we are unable to protect our intellectual propertyrights.

WE MAY FACE CLAIMS OF INFRINGEMENT OF PROPRIETARY RIGHTS.

There is a risk that our products infringe the proprietary rights of thirdparties. While we do not believe that our products infringe on proprietaryrights of third parties, infringement or invalidity claims may nevertheless beasserted or prosecuted against us and our products may be found to haveinfringed the rights of third parties. If any claims or actions are assertedagainst us, we may be required to modify our products or may seek to obtain alicense for these intellectual property rights in a timely manner. We may notbe able to modify our products or obtain a license on commercially reasonableterms, or at all. Our failure to do so could adversely affect our business.

OUR BUSINESS COULD BE ADVERSELY AFFECTED BY CURRENT AND POSSIBLE FUTUREGOVERNMENT REGULATION.

As a result of government regulation of our products, we may be at adisadvantage in competing for international sales compared to foreign companiesthat are not subject to these restrictions. This could adversely affect ourbusiness. Because we sell our products internationally, we must comply withfederal laws regulating the export of, and applicable foreign government lawsregulating the import of, our products. Although we have obtained approval toexport our NetSign and ProFile Manager products, the federal government mayrescind this approval at any time. Additionally, we may apply for exportapproval, on a specific criteria basis, for our future products. We may notreceive approval to export any future products on a timely basis, on the basiswe request or at all.

OUR OPERATIONS COULD SUBJECT US TO TAXATION IN UNFORSEEN JURISDICTIONS.

Many companies conducting electronic commerce do not collect sales or othersimilar taxes with respect to shipments of goods into other states or foreigncountries. It is possible that federal, state or foreign governments may seekto impose sales taxes on companies that engage in electronic commerce. Due tothe increasing popularity of the Internet, intranets and extranets, it ispossible that laws and regulations may be enacted covering issues such as userprivacy, pricing, content and quality of products and services. Widespreadadoption of laws and regulations of this type or the imposition of sales orother taxes on electronic commerce could slow substantially the growth of theInternet, intranets and extranets, which could result in decreased demand forour products and adversely affect our business.

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OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.

Our quarterly operating results may fluctuate significantly as a result ofa variety of factors, many of which are outside our control. These factorsinclude:

. the short-term or long-term nature of customer commitments;

. the length of the sales and implementation cycle for our products andservices;

. patterns of information technology spending by customers;

. the timing, size, mix and customer acceptance of our product andservice product offerings and those of our competitors;

. the timing and magnitude of required capital expenditures;

. the need to use outside contractors to complete some assignments; and

. general economic conditions.

Accordingly, comparisons of quarterly results may not be meaningful andshould not be relied upon, nor will they necessarily reflect on futureperformance. Because of the foregoing factors, it is likely that in some futurequarters our operating results will be below the expectations of public marketanalysts and investors. If this were to happen, the price of our common stockwould likely be adversely affected.

OUR EFFORTS TO EXPAND INTERNATIONAL OPERATIONS ARE SUBJECT TO A NUMBER OF RISKS.

We are seeking to increase international sales which are not currentlymaterial to our business. While we believe our current products and servicesare designed to meet the regulatory standards of foreign markets, our inabilityto maintain or to obtain foreign regulatory approvals on a timely basis in thefuture could adversely affect our business. Additionally, our international



operations could be subject to a number of risks, any of which could adverselyaffect our business, including:

. establishing or maintaining international distribution channels;

. increased collection risks;

. trade restrictions;

. export duties and tariffs; and

. uncertain political, regulatory and economic developments.

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OUR ABILITY TO PRODUCE THE FORTE PKICARD ON A TIMELY AND COST-EFFECTIVE BASISDEPENDS ON THE AVAILABILITY OF A COMPUTER CHIP FROM ATMEL, WITH WHOM WE DO NOTEXPECT TO MAINTAIN A SUPPLY AGREEMENT.

Any inability to receive adequate supplies of Atmel Corporation's speciallydesigned Forte microprocessor would adversely affect our ability to complete andsell the Forte PKIcard. We do not anticipate maintaining a supply agreementwith Atmel Corporation for the Forte microprocessor. If Atmel were unable todeliver the Forte microprocessor for a lengthy period of time or terminated itsrelationship with us, we would be unable to produce the Forte PKIcard until wecould design a replacement computer chip for the Forte microprocessor. Weanticipate this would take substantial time and resources to complete.

AFTER THIS OFFERING, A SMALL NUMBER OF STOCKHOLDERS, INCLUDING OFFICERS ANDDIRECTORS, WILL HAVE THE ABILITY TO CONTROL STOCKHOLDER VOTES.

Upon the closing of this offering, Kris Shah and members of his family,William W. Davis, Sr. and Lillian A. Davis will beneficially own, in theaggregate, approximately 66.8% of our outstanding common stock. Thesestockholders, if acting together, would have the ability to elect our directorsand to determine the outcome of corporate actions requiring stockholderapproval, irrespective of how other stockholders may vote. This concentrationof ownership may also have the effect of delaying or preventing a change incontrol.

A SIGNIFICANT PORTION OF THE PROCEEDS OF THIS OFFERING WILL BE USED TO REPAYINDEBTEDNESS AND THUS WILL BE UNAVAILABLE TO FUND FUTURE GROWTH.

We have allocated $12,500,000 (48.7%) of the net proceeds of this offeringto repay outstanding indebtedness, including approximately $6.2 million ofindebtedness assumed in connection with the acquisition of Pulsar. Consequently,these funds will not be available to fund future growth. All of thisindebtedness is personally guaranteed by, and/or secured by pledges of assetsof, Kris Shah, William Davis or Lillian Davis. These persons will receive abenefit from the release of these guarantees and security pledges.

THERE ARE LAWSUITS PENDING AGAINST PULSAR WHICH COULD ADVERSELY AFFECT OURBUSINESS IF THEY ARE RESOLVED AGAINST PULSAR.

Lawsuits are pending against Pulsar claiming (a) damages of approximately$10.3 million resulting from Pulsar's alleged breach of a contract forgovernment contract bid preparation services and (b) unspecified damagesresulting from alleged race and age discrimination in connection with thetermination of a Pulsar employee. While Pulsar believes these lawsuits arewithout merit, if these lawsuits were resolved against Pulsar, our business andfinancial condition could be materially adversely affected. See "Business --Legal Proceedings."

THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK AND THE OFFERINGPRICE HAS BEEN ARBITRARILY DETERMINED.

Before this offering there has been no public market for our common stock.There may not be an active trading market for our common stock after theoffering. The initial public offering price has been determined by negotiationsbetween our management and the representatives of the underwriters and does notnecessarily reflect the assets, book value or potential earnings of our companyor any other recognized criteria of value. Additionally, investors may not beable to resell their shares at or above the initial public offering price.

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OUR STOCK PRICE COULD BE EXTREMELY VOLATILE.

The trading price of our common stock may be highly volatile as a result offactors specific to us or applicable to our market and industry in general.These factors, include:

. variations in our annual or quarterly financial results or those ofour competitors;

. changes by financial research analysts in their recommendations or



estimates of our earnings;

. conditions in the economy in general or in the information technologyservice sector in particular;

. announcements of technological innovations or new products or servicesby us or our competitors; and

. unfavorable publicity or changes in applicable laws and regulations(or their judicial or administrative interpretations) affecting us orthe information technology service sectors.

In addition, the stock market has recently been subject to extreme priceand volume fluctuations. This volatility has significantly affected the marketprices of securities issued by many companies for reasons unrelated to theoperating performance of these companies. In the past, following periods ofvolatility in the market price of a company's securities, some companies havebeen sued by their stockholders. If we were sued, it could result in substantialcosts and a diversion of management's attention and resources, which couldadversely affect our business.

WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION ANDCOULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.

Our certificate of incorporation and bylaws contain provisions that maydeter a takeover or a change in control not approved by our board of directorsor otherwise adversely affect the price of our common stock, including:

. authority of our board of directors to issue common stock andpreferred stock and to determine the price, rights, including votingrights, preferences, privileges and restrictions of each series ofpreferred stock, without any vote or action by our stockholders;

. the existence of large amounts of authorized but unissued common stockand preferred stock;

. staggered, three-year terms for our board of directors;

. limitations on who may call special meetings of stockholders;

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. prohibition of stockholders' action by written consent; and

. advance notice requirements for board of directors nominating andstockholder proposals.

The rights and preferences of any series of preferred stock could include apreference over our common stock on the distribution of the assets upon aliquidation or sale of our company, preferential dividends, redemption rights,the right to elect one or more directors and other voting rights. The rights ofthe holders of any series of preferred stock that may be issued in the futuremay adversely affect the rights of the holders of our common stock. Inaddition, provisions of Delaware law may discourage, delay or prevent a changein control or unsolicited acquisition proposals.

PURCHASERS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION OFTHEIR INVESTMENT.

Purchasers of common stock in this offering will pay a price per sharewhich substantially exceeds the per share value of our assets after subtractingour liabilities. In addition, purchasers of common stock in this offering willhave contributed 48% of the aggregate price paid by all purchasers of our stockbut will own only 33% of the common stock outstanding after this offering.

THE NUMBER OF SHARES ELIGIBLE FOR FUTURE SALE AND THE EXISTENCE OF REGISTRATIONRIGHTS COULD DEPRESS THE MARKET FOR OUR COMMON STOCK.

The possibility that a substantial number of additional shares of commonstock may become tradeable in the public market following this offering mayadversely affect prevailing market prices for our common stock and could impairour ability to raise capital through the sale of existing securities. Anaggregate of 3,870,693 of the 6,040,631 shares currently restricted from tradingin the public market will become eligible for sale 90 days following the date ofthis prospectus, subject to agreements with BlueStone restricting their sale forperiods of at least six months. We cannot predict the effect, if any, thatsales of these additional securities or the availability of these additionalsecurities for sale will have on the market prices prevailing from time to time.In addition, the representatives of the underwriters have also been grantedregistration rights commencing one year from the date of this prospectusproviding for the registration under the Securities Act of the securitiesissuable upon exercise of the representatives' warrants. The exercise of theserights could result in substantial expense to us. Furthermore, if therepresentatives exercise their registration rights, they will be unable to make



a market in our securities for up to nine days before the initial sales of thewarrants until the discontinuation of sales. If the representatives ceasemaking a market, the market and market prices for the securities may beadversely affected and the holders of these securities may be unable to sellthem.

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FORWARD-LOOKING STATEMENTS

You should not rely on forward-looking statements in this prospectus. Thisprospectus contains forward-looking statements that involve risks anduncertainties. These statements relate to our future plans, objectives,expectations and intentions and may be identified by the use of words such as"expects," "anticipates," "intends," and "plans" and other similar expressions.Our actual results will differ from those discussed in these statements and youmay consider these differences important to your investment decision. Factorsthat could contribute to these differences include, but are not limited to,those discussed in the "Risk Factors" section and elsewhere in this prospectus.This prospectus also contains forward-looking statements attributed to thirdparties relating to their estimates regarding market growth. You should notplace undue reliance on the forward-looking statements in this prospectus, whichspeak only as of the date the statement is made.

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USE OF PROCEEDS

The net proceeds we will receive from the sale of common stock in thisoffering are estimated to be approximately $25.7 million ($29.8 million if therepresentatives' over-allotment option is exercised in full), assuming aninitial public offering price of $10.00 per share (the midpoint of the currentlyanticipated range of the initial public offering price) and after deductingunderwriting discounts and estimated offering expenses. We expect to use thenet proceeds approximately as follows:

<TABLE><CAPTION>

APPROXIMATEAPPROXIMATE PERCENTAGE OF

ANTICIPATED USE OF NET PROCEEDS DOLLAR AMOUNT NET PROCEEDS---------------------------------------------------- ------------- --------------<S> <C> <C>

Reduction of debt................................ $12,500,000 48.7%Sales and marketing.............................. 6,000,000 23.3%Product development.............................. 6,200,000 24.1%Working capital and general corporate purposes... 1,000,000 3.9%

------------- -------Total......................................... $25,700,000 100.0%

============= =======</TABLE>

REDUCTION OF DEBT

We expect to use proceeds to reduce debt as follows:

. $5.9 million to repay BYL Bank Group for anticipated borrowingsthrough the date of this prospectus. This debt bears interest at theannual rate of 6.6% and matures on February 28, 2000, except that itis required to be repaid upon a change of control of our wholly-ownedsubsidiary, Litronic Industries. It is guaranteed by Kris Shah, ourchief executive officer and chairman of the board, and is secured bypersonal assets pledged by Mr. Shah.

. $4.2 million to repay in full the principal amount of notes toWilmington Trust Company. The Wilmington Trust Company debt bearsinterest at the prime rate as in effect from time to time and maturesin December 2002. The Wilmington Trust Company debt is personallyguaranteed by William W. Davis, Sr., our president and chief operatingofficer, and Lillian A. Davis, a principal stockholder of our company,and is secured by property pledged by a family member of Mr.Davis.

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. $1.3 million to IBM Global Finance Corporation (IGFC) to reduce theamount outstanding under an asset-based inventory and working capitalfinancing agreement. The financing line bears interest at an annual

. rate of prime plus 2.375% and is guaranteed by Mr. Davis and Ms. Davisand is secured by assets pledged by Mr. Davis.



. $650,000 to pay IGFC under its forbearance agreement with Pulsar whichbecomes payable upon closing of this offering. The obligation underthe forbearance agreement are guaranteed and are secured by Mr. Davisand Ms. Davis and secured by assets pledged by Mr. Davis.

. $450,000 to repay in full a line of credit from Fidelity Funding, Inc.The Fidelity Funding, Inc. debt currently bears interest at an annualrate of prime plus 1.5%, is due on February 28, 2000, and ispersonally guaranteed by Mr. Shah.

SALES AND MARKETING

We expect to use the proceeds allocated to sales and marketing as follows:

. to expand our sales and marketing efforts, primarily to commercialmarkets, including hiring approximately 20 additional sales andmarketing personnel;

. to open additional sales and support offices;

. to expand our Internet and other advertising efforts;

. to improve our web site; and

. to expand strategic alliances.

PRODUCT DEVELOPMENT

We expect to use the proceeds allocated to product development to pay ourestimated costs of software and product development, including compensation andbenefits payable to additional software and hardware engineers and developers.Of the proceeds allocated to product development, $1.2 million represents fundsallocated to the development of Assure technology-based products. If our bidfor the Assure technology is not the winning bid in its foreclosure sale, this$1.2 million will be added to working capital.

WORKING CAPITAL AND GENERAL CORPORATE PURPOSES

We may use a portion of the proceeds for potential acquisitions oftechnologies, product lines and businesses and to upgrade our existingmanagement information systems and

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supporting information technology equipment. We currently have no commitments,understandings or arrangements with respect to any future acquisitions.

If the representatives of the underwriters exercise their over-allotmentoption in full, we will realize additional net proceeds of approximately $4.1million. We would use these proceeds for working capital and general corporatepurposes. Pending the uses described above, we intend to invest the netproceeds of this offering in U.S. government securities, short-term certificatesof deposit or other short-term, investment grade, interest-bearing securities.

The allocations described above represent our best estimate of theanticipated use of the offering proceeds. Our estimate is based upon ouroperating plans and our assumptions about research and development progress,general economic conditions and industry factors. If any of these factorschange, we may find it necessary or advisable to reallocate our use of proceeds.

In addition to the proceeds of this offering, we expect to obtain a new$20.0 million revolving line of credit facility with Fidelity Funding, Inc. andto borrow under this facility as needed to finance our operations and workingcapital requirements. We have entered into a letter of intent with Fidelityrelating to this new facility and expect to enter into a definitive agreementpermitting us to borrow under this facility commencing with the closing of thisoffering. The letter of intent contemplates a three-year term, subject to one-year renewals at Fidelity's option, an annual interest rate of prime plus .625%and a pledge of all our personal and real property as collateral.

We believe that the net proceeds of this offering, together withanticipated cash flow from operations, availability under our new $20.0 millioncredit facility and existing cash and cash equivalents, will be sufficient tosatisfy our contemplated cash requirements for at least 12 months following theclosing of this offering, including planned capital expenditures of $1.0million. We could be required to seek additional financing, however, if:

. our plans change due to changes in market conditions, competitivefactors, progress of our research and development efforts or newopportunities that may become available in the future;



. our assumptions change or prove to be inaccurate; or

. the net proceeds of this offering or our cash flows prove to beinsufficient to finance our growth strategy.

DIVIDEND POLICY

Before the date of this prospectus, Litronic Industries was an Scorporation for federal and California state income tax purposes. As an Scorporation, Litronic

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Industries made cash distributions of approximately $18.0 million to itsstockholders during the year ended December 31, 1997. We do not anticipatepaying cash dividends in the foreseeable future. We intend to retain futureearnings for the development and expansion of our business. The declaration andpayment of dividends or other distributions is currently prohibited by the termsof financing agreements we have with our lenders and is likely to continue to berestricted for the foreseeable future.

DILUTION

The difference between the initial public offering price per share ofcommon stock and the net tangible book value per share of common stock after theoffering constitutes the dilution to new investors. Our net tangible book valueper share is calculated by dividing the difference between our total tangibleassets and our total liabilities by the number of shares of our common stockoutstanding.

At December 31, 1998, the net tangible book value (deficit) of Litronic was$(4.2 million), or $(1.09) per share. After giving retroactive effect to (a)the Pulsar acquisition and (b) Litronic's receipt and anticipated application ofthe net proceeds from the sale of the 3,000,000 shares of our common stock inthis offering, at an assumed price of $10.00 per share, Litronic's as adjustednet tangible book value at December 31, 1998 would have been $11.1 million or$1.23 per share. This represents an immediate increase in net tangible bookvalue of $2.32 per share to existing stockholders and an immediate dilution of$8.77 per share to new investors.

The following table illustrates this per share dilution to new investors:

<TABLE><S> <C> <C>Assumed initial public offering price...................... $10.00

Net tangible book value before the offering........... $(1.09)Increase attributable to investors in theoffering............................................. 2.32

------Adjusted net tangible book value after the offering........ 1.23

------Dilution to new investors.................................. $ 8.77

======</TABLE>

The following table summarizes, on a pro forma basis, as of December 31,1998, and giving retroactive effect to the Pulsar acquisition, the differencesbetween the number of shares of common stock purchased from us, the aggregateconsideration paid, and the average price per share paid by existingstockholders and new investors purchasing common stock in this offering. Insummarizing this information, we have:

. calculated the total consideration paid by existing stockholders basedon the historical value of Litronic's common stock and the fair valueof the common stock issued in connection with the Pulsar acquisition;and

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. assumed an average price per share of $10.00 for new investors and forthe fair value of the common stock issued in connection with thePulsar acquisition.

<TABLE><CAPTION>

SHARES ACQUIRED TOTAL CONSIDERATION AVERAGE---------------------- -----------------------------



PRICENUMBER PERCENT AMOUNT PERCENT PER SHARE

----------- --------- ------------ ------------ --------------<S> <C> <C> <C> <C> <C>Existing

stockholders... 6,040,631 66.8% $32,154,000 51.7% $ 5.32New investors.... 3,000,000 33.2% 30,000,000 48.3 $ 10.00

---------- ------- ------------ ------9,040,631 100.0% $62,154,000 100.0%

========== ======= ============ ======</TABLE>

The table above assumes the representatives of the underwriters have notexercised their over-allotment option. If this option is exercised in full, thenew investors will have paid $34.5 million (based on an assumed offering priceof $10.00 per share) for 3,450,000 shares of common stock, representingapproximately 51.8% of the total consideration for 36.4% of the total number ofshares outstanding. In making the computations in the table, we excluded:

. 281,419 shares of common stock reserved for issuance upon the exerciseof outstanding options under our 1998 stock option plan, at anexercise price of $.70 per share;

. 600,000 shares of common stock reserved for issuance upon the exerciseof options available for future grant under our 1999 stock optionplan; and

. 300,000 shares of common stock reserved for issuance upon the exerciseof warrants to be issued to the representatives of the underwriters inconnection with this offering.

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CAPITALIZATION(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

The following table presents Litronic's short-term debt and capitalization,as of December 31, 1998, on (a) an historical basis, (b) a pro forma combinedbasis to reflect the Pulsar acquisition, and (c) a pro forma combined, asadjusted, basis to reflect the anticipated application of the proceeds of saleof 3,000,000 shares of our common stock at an assumed price of $10.00 per share.This table should be read in conjunction with "Use of Proceeds," "Pro FormaFinancial Data" and the financial statements, including the related notes,appearing elsewhere in this prospectus.

<TABLE><CAPTION>

DECEMBER 31, 1998-----------------------------------

PRO FORMAHISTORICAL PRO FORMA COMBINED,

COMBINED ASADJUSTED

------------ ---------- -----------<S> <C> <C> <C>Short-term debt:

Financing arrangement - IGFC............... $ - $ 9,403 $ 7,453Notes payable - vendors.................... - 3,948 3,948Current installments of debt............... 580 1,664 250

------- ------- -------Total short-term debt..................... $ 580 $15,015 $11,651

======= ======= =======Long-term debt:

Long-term debt............................. $ 5,200 $ 5,200 $ --Notes payable, net of current installments. - 3,241 $ 5

------- ------- -------Total long-term debt........................ $ 5,200 $ 8,441 $ 5

------- ------- -------Stockholders' equity:

Preferred stock, $.01 par value; authorized5,000,000 shares; no shares issued oroutstanding (historical, pro formacombined and pro forma combined, asadjusted)................................ - - -

------- ------- -------</TABLE>

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<TABLE><S> <C> <C> <C>Common stock, $.01 par value: 20,000,000



shares authorized; 3,870,693 shares issuedand outstanding (historical), 6,040,631shares issued and outstanding (pro formacombined), and 9,040,631 shares issuedand outstanding (pro forma combined, asadjusted).................................. 39 61 91

Additional paid-in capital................... - 17,431 43,201Accumulated deficit.......................... (4,246) - -

------- ------- -------Total stockholders' equity (deficit)... (4,207) 17,492 43,292

------- ------- -------Total capitalization................... $ 993 $25,933 $43,297

======= ======= =======</TABLE>

THE ABOVE TABLE EXCLUDES THE FOLLOWING SHARES:

. 600,000 shares of common stock reserved for issuance upon exercise ofoptions available for future grant under our 1999 stock option plan;

. 281,419 shares of common stock reserved for issuance upon exercise ofoptions granted under our 1998 stock option plan; and

. 300,000 shares of common stock reserved for issuance upon exercise ofthe representatives' warrants.

-35-

SELECTED FINANCIAL DATALITRONIC


The following table presents selected financial data as of and for each ofthe years in the five-year period ended December 31, 1998, derived from theconsolidated financial statements of Litronic. The consolidated financialstatements of Litronic as of December 31, 1997 and 1998 and for each of theyears in the three-year period ended December 31, 1998 have been audited by KPMGLLP, independent certified public accountants. The consolidated financialstatements of Litronic as of December 31, 1997 and 1998, and for each of theyears in the three-year period ended December 31, 1998, and the related report,are included in this prospectus.

The selected data should be read in conjunction with the consolidatedfinancial statements of Litronic for the three-year period ended December 31,1998, the related notes and the independent auditors' report, appearingelsewhere in this prospectus.

SELECTED STATEMENTS OF OPERATIONS DATA:

<TABLE><CAPTION>

YEARS ENDED DECEMBER 31,----------------------------------------------------------

1994 1995 1996 1997 1998---------- ---------- ---------- ---------- ----------

<S> <C> <C> <C> <C> <C>Net product revenue $1,447 $1,525 $7,855 $ 8,627 $ 5,214License and service revenue 487 1,181 1,541 1,539 1,439

---------- ---------- ---------- ---------- ----------Total revenue 1,934 2,706 9,396 10,166 6,653

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

Product cost of revenue 486 793 4,098 3,211 2,821License and service cost of revenue 169 465 581 643 950

---------- ---------- ---------- ---------- ----------Total cost of revenue 655 1,258 4,679 3,854 3,771

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

Gross margin 1,279 1,448 4,717 6,312 2,882Selling, general, and administrative expenses 773 977 2,052 3,487 2,631Research and development expenses 226 341 725 1,172 1,334

---------- ---------- ---------- ---------- ----------Operating income (loss) 280 130 1,940 1,653 (1,083)Interest expense, net 12 38 19 42 418

---------- ---------- ---------- ---------- ----------</TABLE>

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<TABLE><S> <C> <C> <C> <C> <C>Earnings (loss) from continuing



operations before income taxes 268 92 1,921 1,611 (1,501)Provision for (benefit from) income taxes 4 1 29 22 (95)

---------- ---------- ---------- ---------- ----------Earnings (loss) from continuing operations $ 264 $ 91 $1,892 $ 1,589 ($1,406)

========== ========== ========== ========== ==========</TABLE>

SELECTED BALANCE SHEET DATA:

<TABLE><CAPTION>

DECEMBER 31,-----------------------------------------------------------

1994 1995 1996 1997 1998---------- ---------- ---------- ---------- ----------

<S> <C> <C> <C> <C> <C>Cash and cash equivalents $ 6 $ 95 $ 862 $ 490 $ 898Working capital 87 (372) 1,662 385 758Total assets 3,827 5,476 7,409 2,347 2,791Short-term debt 421 472 545 - 580Long-term debt, less

current installments 3,718 4,313 4,997 3,506 5,200Total liabilities 5,045 6,483 7,510 5,148 6,998Net stockholders'

deficiency (1,218) (1,007) (101) (2,801) (4,207)</TABLE>

During the year ended December 31, 1997, Litronic paid a cash dividendof $9,534 to its shareholders. No other dividends have been paid during theperiods presented.

-37-

SELECTED FINANCIAL DATAPULSAR


The following table presents selected financial data as of and for each ofthe years in the four-year period ended December 31, 1997, derived from thefinancial statements of Pulsar, which have been audited by Keller Bruner &Company, L.L.C., independent certified public accountants. The selectedfinancial data as of and for the year ended December 31,1998 is derived from thefinancial statements of Pulsar which have been audited by KPMG LLP, independentcertified public accountants. The financial statements of Pulsar as of December31, 1997 and 1998, and for each of the years in the three year period endedDecember 31, 1998, and the related reports are included elsewhere in thisprospectus.

The selected data should be read in conjunction with the financialstatements of Pulsar for the three-year period ended December 31, 1998, therelated notes and the independent auditors' reports, which contain explanatoryparagraphs that state that Pulsar's recurring losses from operations, violationof debt covenants and net capital deficiency raise substantial doubt about theentity's ability to continue as a going concern. The financial statements andthe selected data do not include any adjustments that might result from theoutcome of this uncertainty.

SELECTED STATEMENT OF OPERATIONS DATA:

<TABLE><CAPTION>

YEARS ENDED DECEMBER 31,------------------------------------------------------------

1994 1995 1996 1997 1998----------- ---------- ---------- ---------- ----------

<S> <C> <C> <C> <C> <C>Service revenue $ * $ * $ 10,253 $ 8,818 $ 3,373Product revenue * * 155,705 142,702 77,159

----------- ---------- ---------- ---------- ----------Total revenue 118,739 163,991 165,958 151,520 80,532

----------- ---------- ---------- ---------- ----------Cost of service revenue * * 4,870 4,115 1,553Cost of product revenue * * 144,494 138,086 71,818

----------- ---------- ---------- ---------- ----------Total cost of revenue 104,416 146,682 149,364 142,201 73,371

----------- ---------- ---------- ---------- ----------Gross margin 14,323 17,309 16,594 9,319 7,161Selling, general, and

administrative expense 8,580 10,410 13,545 17,152 12,519----------- ---------- ---------- ---------- ----------

Operating income (loss) 5,743 6,899 3,049 (7,833) (5,358)Other income 325 - - - -



Interest income 276 392 639 457 61Interest expense 1,377 2,412 3,564 3,640 2,099

----------- ---------- ---------- ---------- ----------Net earnings (loss) $ 4,967 $ 4,879 $ 124 $(11,016) $(7,396)

=========== ========== ========== ========== ==========</TABLE>

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_________________________

* The breakdown of revenue and cost of revenue between services and productsis not available for the years ended December 31, 1994 and 1995 because,prior to 1996, Pulsar's accounting system did not track product and servicerevenue separately. In 1996, Pulsar installed a new accounting system andhas since been able to break out product and service revenue.

SELECTED BALANCE SHEET DATA:

<TABLE><CAPTION>

DECEMBER 31,------------------------------------------------------------

1994 1995 1996 1997 1998----------- ---------- ---------- ---------- ----------

<S> <C> <C> <C> <C> <C>Cash and cash equivalents................. $ 2,895 $ 2,144 $ 2,451 $ 2,236 $ 352Working capital (deficit)................. 8,145 8,090 1,553 (2,436) (8,168)Total assets.............................. 60,820 82,930 59,785 40,871 12,187Short-term debt........................... 35,139 61,970 41,352 28,982 14,435Long-term debt, less current

installments............................ 41 84 53 4,203 3,241Total liabilities......................... 52,070 73,862 52,077 42,681 22,681Net stockholders' equity

(deficit)............................... 8,750 9,068 7,708 (1,810) (10,494)</TABLE>

-39-

PRO FORMA FINANCIAL DATA

The following pro forma financial data is based upon data derived fromLitronic's and Pulsar's historical consolidated financial statements and hasbeen prepared to illustrate the effects on this data of the Pulsar acquisitionand this offering. The Unaudited Pro Forma Statements of Operations for the yearended December 31, 1998 gives effect to the acquisition and the closing of thisoffering as if these transactions had occurred as of January 1, 1998. TheUnaudited Pro Forma Balance Sheet as of December 31, 1998 gives effect to theacquisition and this offering as if these transactions had occurred as ofDecember 31, 1998. The Pulsar acquisition will become effective simultaneouslywith, and as a condition to, the closing of this offering. The acquisition willbe recorded using the purchase method of accounting.

The pro forma adjustments are based upon preliminary estimates, currentlyavailable information and assumptions that management deems appropriate. Wehave assumed for the purpose of determining the purchase price of the Pulsaracquisition that our common stock issued to the Pulsar stockholders is valued atthe initial public offering price. The preliminary estimates regardingallocation of the purchase price are subject to uncertainties, including, amongothers, the final offering price per share and final determination of the fairvalue of the net assets acquired. In management's opinion, the preliminaryestimates regarding allocation of the purchase price of Pulsar are not expectedto differ materially from the final allocation. The purchase price allocationwill be finalized after the closing of the acquisition. The pro forma financialdata presented herein are not necessarily indicative of the results we wouldhave obtained had these events occurred at the beginning of the period, asassumed, or of our future results as a combined entity.

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UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE><CAPTION>

YEAR ENDED DECEMBER 31, 1998----------------------------------------------------------------------------------------

Pro Forma



Acquisition Offering Combined,Adjustments Pro Forma Proceeds As

Litronic Pulsar (AA) Combined Adjustments Adjusted---------- -------- ------------ ---------- ------------ ----------

<S> <C> <C> <C> <C> <C> <C>Net product revenue $ 5,214 $77,159 $ $ 82,373 $ $ 82,373License and service revenue 1,439 3,373 4,812 4,812

---------- --------- ------------ ---------- ------------ ----------Total revenue $ 6,653 $80,532 $ 87,185 $ 87,185

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

Product cost of revenue 2,821 71,818 74,639 74,639License and service cost of

revenue 950 1,553 2,503 2,503---------- --------- ------------ ---------- ------------ ----------

Total cost of revenue 3,771 73,371 77,142 77,142---------- --------- ------------ ---------- ------------ ----------

Gross margin 2,882 7,161 10,043 10,043Selling, general, and

administrative expenses 2,631 12,519 15,150 15,150Research and development

expenses 1,334 - 1,334 1,334Amortization of goodwill and

other intangibles - - 2,146 (BB) 2,146 2,146---------- --------- ------------ ---------- ------------ ----------

Operating loss (1,083) (5,358) (2,146) (8,587) (8,587)Interest expense 418 2,099 2,517 (624) (CC) 1,893Interest income - 61 61 61

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

Loss from continuingoperations before incometaxes (1,501) (7,396) (2,146) (11,043) 624 ( 10,419)

Benefit from income taxes (95) - 95 (DD) - ----------- --------- ------------ ---------- ------------ ----------

Loss from continuingoperations $(1,406) $(7,396) $(2,241) $ (11,043) $ 624 (10,419)

========== ========= ============ ========== ============ ==========

Loss per share fromcontinuing operations -Basic and diluted $ (1.83) $ (1.15)

========== ==========Shares used in per-share

computations -Basic and diluted 6,040,631 9,040,631

========== ==========</TABLE>

___________________

(AA) Includes adjustments directly attributable to the Pulsar acquisition.(BB) Reflects the amortization of goodwill and other intangibles of $32.2

million attributable to the acquisition, amortized on a straight line basisover a 15-year period.

(CC) Reflects the reduction of interest expense which would result from therepayment of $12.5 million of debt as set forth in "Use of Proceeds."

-41-

(DD) Reflects the income tax effect of the change from an S corporation to a Ccorporation.

-42-

UNAUDITED PRO FORMA BALANCE SHEETS(DOLLARS IN THOUSANDS)

<TABLE><CAPTION>

DECEMBER 31, 1998-------------------------------------------------------------------------------------

Offering Pro FormaProceeds Combined,

Acquisition Pro Forma Adjustments As AdjustedLitronic Pulsar Adjustments Combined (D)

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



<S> <C> <C> <C> <C> <C> <C>ASSETS:Cash and cash equivalents $ 898 $ 352 $ $ 1,250 $ 14,000 (B) $15,250

Accounts receivable, net 740 10,145 10,885 10,885Inventories 533 775 1,308 1,308Other current assets 385 - 385 385

---------- --------- ------------ --------- ----------- -----------Total current assets 2,556 11,272 13,828 14,000 27,828

Property and equipment, net 235 581 816 816Goodwill and other intangibles --- --- 32,193 (A) 32,193 32,193Other assets --- 334 334 334

---------- --------- ------------ --------- ----------- -----------Total assets $ 2,791 12,187 $32,193 $47,171 $14,000 $61,171

========== ========= ============ ========= =========== ===========

LIABILITIES AND STOCKHOLDERS'EQUITY (DEFICIENCY):

Financing arrangement - IGFC $ -- $ 9,403 $ $ 9,403 $(1,950) (C) $ 7,453

Current installments oflong-term debt 580 964 1,544 (1,414) (C) 130

Notes payable - vendors --- 3,948 3,948 3,948Accounts payable 456 3,933 4,389 4,389Accrued liabilities 762 1,072 1,834 1,834Notes payable to shareholders --- 120 120 120

---------- --------- ------------ --------- ----------- -----------Total current liabilities 1,798 19,440 21,238 (3,364) 17,874

Long-term debt 5,200 --- 5,200 (5,200) (B)(C) ---

Notes payable, net ofcurrent maturities --- 3,241 3,241 (3,236) (C) 5

Stockholders' equity(deficiency): 39 1 22 (A) 61 30 91

Common stockAdditional paid-in capital --- (1) (A)

21,677 (A) 17,431 25,770 43,201--- 1,663 (1,663) (A)

(4,246) (E)12,158 (A)

Accumulated deficit (4,246) (12,158) 4,246 (E) ------------- --------- ------------ --------- ----------- -----------

Net stockholders' equity(deficiency) (4,207) (10,494) 32,193 17,492 25,800 43,292

---------- --------- ------------ --------- ----------- -----------$ 2,791 $ 12,187 $32,193 $47,171 $14,000 $61,171

========== ========= ============ ========= =========== ===========</TABLE>

_______________

(A) The adjustment reflects the Pulsar acquisition under the purchase method ofaccounting through the issuance of 2,169,938 shares of common stock with afair value of $21.7 million and the assumption of net liabilities of $10.5million. The allocation of fair value is preliminary.

(B) The adjustment reflects anticipated additional borrowings of $700,000subsequent to December 31, 1998, as well as the repayment of debt in theamount of $5.9 million from the use of proceeds.

(C) Reflects the repayment of debt from the proceeds of this offering.

-43-

(D) Reflects the net proceeds from the sale of 3,000,000 shares of our commonstock, at an assumed price of $10.00 per share.

(E) The adjustment gives effect to the change from an S corporation to a Ccorporation.

-44-

MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the SelectedFinancial Data of Litronic and Pulsar, the Pro Forma Financial Data, and thefinancial statements and related notes appearing elsewhere in thisprospectus.



GENERAL

Litronic provides professional Internet data security services and developsand markets software and microprocessor-based products needed to secureelectronic commerce and communications over the Internet and othercommunications networks based on Internet protocols. Litronic's primarytechnology offerings use public key infrastructure, which is the standardtechnology for securing Internet-based commerce and communications.

Prior to 1990, Litronic was solely a provider of electronic interconnectproducts to government and commercial entities. In 1990, Litronic formed itsdata security division, which forms the basis of its operations today. The datasecurity division was engaged primarily in research and development until 1993when it began to generate meaningful revenue. In September 1997, Litronic soldits Intercon division, which consisted of the assets relating to itsinterconnect operations, for cash to Allied Signal Inc., a non-related,publicly-traded company. The gain on sale was $15 million, net of tax expense of$241,000. In addition to the cash proceeds received, the sales agreementprovided for Litronic's right to receive a contingent purchase price. EffectiveNovember 30, 1997, this right was distributed pro rata to the shareholders ofLitronic. Except for senior management, these operations were operatedindependently from Litronic's data security operations. Litronic charged directcosts to the division incurring them. Indirect or shared costs, such as seniormanagement compensation and benefits, rent, utilities and costs of tax, legaland other advisory services, were allocated on the basis of actual usage andhead count. Litronic's historical consolidated financial statements have beenrestated to reflect the sale of the Intercon division as discontinuedoperations. See Note 2 to Notes to Consolidated Financial Statements ofLitronic.

Upon the closing of this offering, Litronic is acquiring Pulsar, a providerof network-based information technology consulting services to commercialaccounts and federal, state and local government agencies, in exchange for2,169,938 shares of our common stock valued at $10.00 per share, the anticipatedinitial public offering price. In addition to its consulting services, Pulsaralso has an established product reseller business, which focuses on resales togovernment agencies, large corporate accounts and state and localgovernments.

-45-

PRO FORMA INFORMATION AND FUTURE TRENDS

Following this offering, we intend to roll out our enterprise-wide datasecurity products to Pulsar's significant existing client base. We believe thatPulsar's custom-designed secure PCs will provide us with another type of datasecurity product offering, thereby broadening the scope of our offerings andenabling us to provide our customers with a comprehensive data securitysolution. Our strategy also involves continuing Pulsar's recent shift inproduct reselling focus to higher margin products, expanding Pulsar'sprofessional service offerings and increasing sales of Pulsar's products andprofessional services to commercial customers and state and local governments.We also intend to leverage Pulsar's direct sales force, distribution channelsand partners to expand our marketing of our Internet data security products.

REVENUE

During the year ended December 31, 1998, sales of Internet data securityproducts, including NetSign, Pro File Manager and CryptOS, accounted for 6% ofour revenue on a pro forma combined basis.

We are currently experiencing increased demand for our Internet data securityproducts, including NetSign, ProFile Manager and CryptOS, from commercialcustomers. Our recently released Internet-related products such as NetSign,NetSign Pro, CipherServer, and developer toolkits such as CryptOS SDK, have alsoexperienced favorable market acceptance. We expect to continue to experiencesignificant increases in sales of these products as a result of the expectedcontinued growth in electronic commerce and communications over the Internet andour plan to roll out our data security products to Pulsar's existing andsignificant client base.

During the year ended December 31, 1998, on a pro forma combined basis,product reselling accounted for 89% of our revenue and license and servicerevenue accounted for 6% of our revenue. As we expand our professional serviceofferings and grow our sales of Internet data security products, we expectlicense and service revenue to increase as a percentage of revenue and productreselling to account for a decreasing portion of our revenue.

On a pro forma combined basis, one of our customers, the U.S. Immigration andNaturalization Service, accounted for more than 10% of revenue (21%) during theyear ended December 31, 1998. Sales to U.S. government agencies accounted forapproximately 90% of our pro forma combined revenue for the year ended December31, 1998.



-46-

GROSS MARGINS

During the year ended December 31, 1998, Litronic's data security productshad gross margins of 46% and Pulsar's product reselling activities had grossmargins of 7%. Pulsar recently shifted its product reselling focus toward highermargin computer and network security products, including intrusion detectionsoftware and firewalls. We intend to continue to focus our product resellingefforts toward these products. As a result, we expect product reselling grossmargin to increase as a percentage of corresponding revenue. Our license andservice revenue has relatively high gross margins with a gross margin of 48% forthe year ended December 31, 1998 on a pro forma combined basis. Because weexpect our higher gross margin sources of revenue to increase as a percentage ofrevenue and our gross margin from product reselling to increase, we expect ourgross margin to increase as a percentage of total revenue.

COST CUTTING MEASURES

Pulsar has taken several cost cutting measures since the beginning of 1998which have significantly reduced the expenses associated with selling, generaland administrative activities, including an overall reduction of staff from 75persons at December 31, 1997 to 44 persons at April 1, 1999, enhanced creditprocedures and reduced rent expense. As a combined entity, we expect to furtherdecrease our rent expense through the consolidation of Litronic's Washington,D.C. area offices into Pulsar's offices in Lanham, Maryland.

FOCUSED MARKETING EFFORTS

We have recently begun to focus our marketing efforts on commercialcustomers. The commercial markets for PKI security products are expected to beintensely competitive. In addition, as we intensify our focus on the commercialmarkets and expand the marketing of our Internet data security products, weanticipate increasing expenditures for sales and marketing, particularlyexpenses associated with

. opening additional marketing channel support offices;

. adding commercial sales personnel to focus on sales to commercialmarkets; and

. continually introducing and refining products in response to marketdemands.

Our sales and marketing expenses are generally incurred in advance ofassociated revenue and we expect these expenses to increase in the near termboth as a percentage of revenue as well as in amount. These measures couldadversely affect our operating income.

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As a result of the cost cutting measures and focused marketing effortsdescribed above we expect a net reduction in selling, general and administrativeexpenses.

RESEARCH AND DEVELOPMENT

In an effort to increase our research and development activities, we haveallocated $6.2 million of the net proceeds of this offering to research anddevelopment activities for the next 12 months. We expect expenses related toresearch and development to increase significantly as a consequence of ourincreased focus on these activities.

INTANGIBLE ASSETS

The Pulsar acquisition will result in a significant increase in ourintangible assets. Approximately $32.2 million, or 53%, of our pro formacombined, as adjusted, assets as of December 31, 1998, consisted of intangibleassets arising from the acquisition. This amount represents goodwill and otherintangibles, which will be amortized over 15 years and represents the excess ofthe aggregate purchase price paid in connection with the acquisition over thefair value of net assets acquired. The amount of goodwill and other intangiblesamortized in a particular period constitutes a non-cash expense, which is nottax deductible, that reduces our net earnings or increases our net loss.

RESULTS OF OPERATIONS--COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1997 AND1998

LITRONIC

TOTAL REVENUE. Total revenue increased 8% from $9.4 million during the yearended December 31, 1996 to $10.2 million during the year ended December 31, 1997and decreased 35% from 1997 to $6.7 million during the year ended December 31,



1998. The increase from 1996 to 1997 was primarily attributable to increasedsales of the ARGUS 300 products to the U.S. Army Corps of Engineers. Thedecrease from 1997 to 1998 was primarily attributable to the decreased sales ofthe ARGUS 300 products, as described below.

During the year ended December 31, 1996, Litronic derived 39%, 29% and 18% ofits revenue from sales to Lockheed Martin Corporation, U.S. Army Corps ofEngineers and the National Security Agency. During the year ended December 31,1997, Litronic derived 45%, 20%, and 19% of its revenue from sales to U.S. ArmyCorps of Engineers, Lockheed Martin Corporation and the National SecurityAgency. During the year ended December 31, 1998, Litronic derived 44%, 20% and17% of its revenue from sales to Lockheed Martin Corporation, the NationalSecurity Agency and the U.S. Army Corps of Engineers. Sales to federalgovernment agencies accounted for approximately 84% and 81% of Litronic's salesduring the years ended December 31, 1997 and 1998.

-48-

PRODUCT REVENUE. Product revenue increased 10% from $7.9 million in the yearended December 31, 1996 to $8.6 million in the year ended December 31, 1997 anddecreased 40% from 1997 to $5.2 million in the year ended December 31, 1998. Theincrease from 1996 to 1997 was primarily attributable to increased sales of ourArgus 300 products to the U S. Army Corps of Engineers. The decrease from 1997to 1998 is primarily attributable to reduced sales of our ARGUS 300 products tothe U.S. Army Corps of Engineers as a result of the substantial completion ofthe Corp of Engineers Financial Management Services contract (the CEFMScontract). We expect that sales of the ARGUS 300 product under the CEFMScontract will continue to diminish; however, we expect significant additionalsales of the ARGUS 300 and other products to the U.S. Army Corps of Engineers asa result of its recently commenced program to upgrade its information technologysystems periodically. Based on our experience with the U.S. Army Corps ofEngineers, we expect to participate in the program through sales of the ARGUS300 and other products. The CEFMS contract with the U.S. Army Corps of Engineersexpired September 30, 1998. The Defense Messaging System contract expires inNovember 1999, but it may be renewed by Lockheed Martin for up to four one-yearperiods.

LICENSE AND SERVICE REVENUE. License and service revenue was $1.5 millionduring the years ended December 31, 1996 and 1997 and declined from 1997 by 7%to $1.4 million for the year ended December 31, 1998. The decline from 1997 to1998 was attributable primarily to reduced service revenue from the NationalSecurity Agency as a result of its determination that it will no longer pay forLitronic-provided support services for the Defense Messaging System and thesubsequent decline in support requests from users of Litronic's supportservices. Also included in license and service revenue for the year endedDecember 31, 1998 is $398,000 of reimbursements related to the Forte projectwhich Litronic received for its research and development efforts.

TOTAL GROSS MARGIN. Gross margin increased as a percentage of revenue from50% during the year ended December 31, 1996 to 62% during the year endedDecember 31, 1997 and decreased as a percentage of revenue to 43% during theyear ended December 31, 1998. The increase from 1996 to 1997 was due primarilyto a change in product mix comprised of increased sales of the ARGUS 300products to the U.S. Army Corps of Engineers and sales of higher margin softwareproducts. The decline from 1997 to 1998 is primarily attributable to reducedproduct sales as described below.

PRODUCT GROSS MARGIN. Product gross margins increased as a percentage of netproduct revenue from 48% during the year ended December 31, 1996 to 63% duringthe year ended December 31, 1997 and decreased to 46% during the year endedDecember 31, 1998. The increase from 1996 to 1997 resulted primarily fromincreased sales of ARGUS data encryption products to the U.S. Army Corps ofEngineers. The decrease from 1997 to 1998 is primarily attributable to reducedsales under the CEFMS contract and sales of low margin pass-through products tothe National Security Agency.

LICENSE AND SERVICE GROSS MARGIN. License and service gross margin decreasedas a percentage of its revenue from 62% during the year ended December 31, 1996to 58% during the year ended December 31, 1997 and decreased from 1997 to 34%during the year

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ended December 31, 1998. The decrease from 1996 to 1997 was due to additionalhead count and higher per employee costs. The decrease from 1997 to 1998resulted primarily from higher compensation costs associated with the reductionof support services revenue under the Defense Messaging System contract. Allcosts relating to the Forte project are included in research and developmentexpenses during the year ended December 31, 1998.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and



administrative expenses increased 70% from $2.1 million during the year endedDecember 31, 1996 to $3.5 million during the year ended December 31, 1997 anddecreased 25% from 1997 to $2.6 million during the year ended December 31, 1998.As a percentage of revenue, selling, general and administrative expensesincreased from 22% during the year ended December 31, 1996 to 34% during theyear ended December 31, 1997 and increased from 1997 to 40% during the yearended December 31, 1998. Selling, general and administrative expenses during1997 were higher due to bonuses paid to shareholder employees following the saleof the Intercon division. In addition, selling, general and administrativeexpenses increased as a percentage of revenue due to increased staffing tosupport the anticipated expansion of Litronic's business.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expensesincreased 62% from $725,000 during the year ended December 31, 1996 to $1.2million during the year ended December 31, 1997 and increased 14% from 1997 to$1.3 million during the year ended December 31, 1998. The increases from 1996 to1998 were primarily attributable to increased costs associated with increasednew product development, including expenses associated with the developmentefforts of the Forte microprocessor, which we are designing in conjunction withAtmel Corporation to be embedded in our Forte PKIcard. As a percentage ofrevenue, research and development expenses increased from 8% during the yearended December 31, 1996 to 12% during the year ended December 31, 1997 andincreased from 1997 to 20% during the year ended December 31, 1998. Theseincreases reflected our continued investment in research and development offuture products and services coupled with the reduction in revenue in 1998described above.

INTEREST EXPENSE, NET. Interest expense, net, increased by 121% from $19,000during the year ended December 31, 1996 to $42,000 during the year endedDecember 31, 1997 and increased almost tenfold from 1997 to $418,000 during theyear ended December 31, 1998. The increases in interest expense from 1996 to1998 were attributable to increased levels of borrowings required foroperations.

INCOME TAXES. Prior to this offering, Litronic elected to be treated as an Scorporation under the provisions of Section 1362 of the Internal Revenue Code of1986 and used the accrual basis of reporting for income tax purposes.Accordingly, Litronic did not provide for federal income taxes at the corporatelevel. Litronic was subject to state taxes on earnings before taxes. Theprovision for state income taxes was $29,000 and $22,000 for the years endedDecember 31, 1996 and 1997. For the year ended December 31, 1998 Litronic hada

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benefit of $95,000 as a result of losses from continuing operations beforeincome taxes of $1.5 million.

BACKLOG. At December 31, 1998, Litronic had total backlog of $717,000,including $109,000 attributable to Lockheed Martin Corporation and $596,000attributable to the National Security Agency. Backlog represents signed purchaseorders received but not filled and, in the case of the $596,000 attributable tothe National Security Agency, reimbursements for funding of future research anddevelopment expense. At December 31, 1997, we had total backlog of $1.1 million,including $466,000 attributable to Lockheed Martin Corporation and $578,000attributable to the National Security Agency.

PULSAR

TOTAL REVENUE. Total revenue decreased 9%, from $166.0 million during theyear ended December 31, 1996 to $151.5 million during the year ended December31, 1997 and decreased 47% from 1997 to $80.5 million during the year endedDecember 31, 1998.

During the years ended December 31, 1997 and 1998, Pulsar derived 23% and 11%of its revenue from sales to the U.S. Immigration and Naturalization Service.Total revenue to federal government agencies decreased 10% from $101.0 millionduring the year ended December 31, 1996 to $91.4 million for the year endedDecember 31, 1997 and declined 21% from 1997 to $72.5 million during the yearended December 31, 1998. The decrease is attributable primarily to a decrease inPulsar's sales to the U.S. government under its Section 8(a) contracts,partially offset by an increase in General Services Administration schedulerevenue and National Institutes of Health contract revenue.

PRODUCT REVENUE. Product revenue declined 8%, from $155.7 million during theyear ended December 31, 1996 to $142.7 million during the year ended December31, 1997, and declined 46% from 1997 to $77.2 million during the year endedDecember 31, 1998. This decrease was primarily attributable to the followingfactors:

. In 1997, Pulsar made a strategic decision to eliminate its high volume,low margin Federal Systems Integration (FSI) program activities, whichaccounted for 23% of its revenue during 1996, 24% of its revenue during



1997 and 4% of its revenue during 1998. Sales under the FSI program werephased out during this period due to the diminishing margins produced bythese sales. FSI revenue decreased 4% from $38.1 million in the yearended December 31, 1996 to $36.7 million in the year ended December 31,1997 and decreased 92% from 1997 to $3.2 million in the year endedDecember 31, 1998.

. Pulsar voluntarily withdrew from the Section 8(a) program in June 1997in anticipation of its scheduled graduation from the program in November1997. Section 8(a) contract revenue decreased by 71% from $50.1 million

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during the year ended December 31, 1996 to $14.3 million during the yearended December 31, 1997 and decreased 78% to $3.1 million during the yearended December 31, 1998.

. Commercial, state and local government revenue decreased by 8% from $24.8million during the year ended December 31, 1996 to $22.9 million duringthe year ended December 31, 1997, primarily due to a sales staff focus onFSI program revenues, and decreased 83% to $3.9 million during the yearended December 31, 1998 primarily due to the loss of a contract withMontgomery County, Maryland and the closing of Pulsar's Atlanta salesoffice.

. The reductions in revenue were partially offset by an increase in GSAschedule revenue commencing in 1996 and NIH revenue commencing in 1998.This revenue increased 61%, from $42.7 million during the year endedDecember 31, 1996 to $68.8 million during the year ended December 31,1997, and declined 3% from 1997 to $67.0 million during the year endedDecember 31, 1998. The overall increase in GSA and NIH contract revenuewas primarily due to Pulsar's shift in sales focus in response to theFederal Streamline Act of 1996, which encourages all agencies to use theGSA or the NIH vehicle to procure products and services in support ofinformation technology requirements in lieu of traditional time-restrictive contracting methods. The decrease in GSA revenue from 1997 to1998 was due in part to the government's reallocation of budget dollarsfrom hardware and software procurements toward resolving year 2000issues.

SERVICE REVENUE. Service revenue declined by 14%, from $10.3 million duringthe year ended December 31, 1996 to $8.8 million during the year ended December31, 1997 and declined 62% from 1997 to $3.4 million during the year endedDecember 31, 1998. The decrease from 1996 to 1997 was attributable primarily tothe completion of a contract with Samsung Electronics. The decrease from 1997 to1998 was attributable primarily to a reduction in service revenue from expiringSection 8(a) contracts with the U.S. Department of Education and the NavalResearch Lab contract.

TOTAL GROSS MARGINS. Pulsar's gross margin decreased as a percentage ofrevenue from 10% during the year ended December 31, 1996 to 6% during the yearended December 31, 1997 and increased from 1997 to 9% during the year endedDecember 31, 1998. The gross margin declined from $16.6 million for the yearended December 31, 1996 to $9.3 million for the year ended December 31, 1997 anddeclined from 1997 to $7.2 million for the year ended December 31, 1998. Theoverall decrease from 1996 to 1997 was attributable primarily to the reductionin total revenue combined with a decrease in gross margin percentage. Thedecrease from 1997 to 1998 was attributable only to a reduction in totalrevenue.

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PRODUCT GROSS MARGIN. Product gross margins declined as a percentage ofrevenue from 7% during the year ended December 31, 1996 to 3% during the yearended December 31, 1997 and increased from 1997 to 7% during the year endedDecember 31, 1998. The decrease in product margins from 1996 to 1997 wasattributable to industry competition and write-off of obsolete inventory.Consistent with Pulsar's business plan, the increase from 1997 to 1998 isattributable primarily to reduced FSI sales, which are lower margin product, andPulsar's successful bidding for higher margin product contracts, partiallyoffset by the write-off of obsolete inventory.

SERVICE GROSS MARGIN. Service gross margins remained unchanged at 53% duringthe years ended December 31, 1996 and 1997 and increased slightly from 1997 to54% during the year ended December 31, 1998.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general andadministrative expenses increased 27% from $13.5 million during the year endedDecember 31, 1996 to $17.2 million during the year ended December 31, 1997 anddecreased 27% from 1997 to $12.5 million during the year ended December 31,



1998. The increase from 1996 to 1997 was attributable primarily to bad debtexpenses associated with accounts receivables and notes receivables. Thedecrease from 1997 to 1998 reflects a reduction in the total amount of bad debtexpense and a reduction in administrative and sales staffing. Selling, generaland administrative expenses increased as a percentage of revenue from 8% duringthe year ended December 31, 1996 to 11% during the year ended December 31, 1997and increased from 1997 to 16% during the year ended December 31, 1998.

BAD DEBT EXPENSE AND MEASURES DESIGNED TO REDUCE BAD DEBTS. Bad debt write-offs increased from $403,000 during the year ended December 31, 1996 to $5.3million during the year ended December 31, 1997 and decreased from 1997 to $3.4million during the year ended December 31, 1998. Bad debt expense in 1997 wasprimarily attributable to extending credit to commercial clients who did notmeet their obligations ($3.9 million), commercial loans outside of the normalcourse of business that were deemed uncollectible ($702,000), and notesreceivable and related accrued interest to related parties that were deemeduncollectible ($682,000). Bad debt expense in 1998 was incurred from commercialclients who did not meet their obligations ($1.8 million) and rebate receivablesthat expired because they were incomplete or not collected on a timely basis($1.6 million). Pulsar has implemented procedures to reduce the exposure tocommercial bad debts, including:

. performing thorough credit reviews on all new and existing non-government customers, including verifying references and analyzingcustomer's Dun and Bradstreet reports before extending credit;

. changing its customer profile by significantly reducing FSI resellerclients from the federal government to Fortune 500 clients, thusreducing credit risk;

. implementing a tickler system to ensure that rebates are filed in atimely manner; and

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. establishing a collections staff to follow-up on payments related torebates.

COST CUTTING MEASURES DESIGNED TO REDUCE SELLING, GENERAL AND ADMINISTRATIVEEXPENSES. In an effort to reduce selling, general and administrative expenses infuture periods, Pulsar has taken significant cost cutting measures, including:

. automating administrative job functions through business processreengineering and other reductions, thus reducing head count by 31positions from January 30, 1998 to April 1, 1999; and

. relocating to less expensive office space beginning October 1, 1998,thus decreasing monthly rent expense from $45,000 to $11,500.

INTEREST EXPENSE. Interest expense increased by 2%, from $3.6 million duringthe year ended December 31, 1996 to $3.6 million during the year ended December31, 1997, and decreased by 42% from 1997 to $2.1 million during the year endedDecember 31, 1998. Pulsar's average daily borrowings decreased during 1996, butadditional interest expense was recognized due to a new agreement Pulsar enteredinto with its creditor, IGFC. Interest expense decreased in 1998 due to asignificant decrease in borrowings.

INTEREST INCOME. Interest income decreased by 28%, from $639,000 during theyear ended December 31, 1996 to $457,000 during the year ended December 31, 1997and decreased by 87% to $61,000 during the year ended December 31, 1998. Thesedecreases are attributable primarily to a reduction in the outstanding notesreceivable balances. Also, during 1998, Pulsar did not recognize interest incomeon the related party notes receivable.

LIQUIDITY AND CAPITAL RESOURCES

On a pro forma combined, as adjusted, basis, we had working capital of $10.0million as of December 31, 1998.

We have entered into a letter of intent with Fidelity Funding relating to anew $20.0 million secured revolving line of credit facility and expect to enterinto a definitive agreement permitting us to borrow under this facilitycommencing upon the closing of this offering. The letter of intent contemplates:

. a three-year term, subject to one-year renewals at the lender'soption;

. an annual interest rate of prime plus .625%;

. a pledge of all of our personal and real property as collateral; and

. a cap on our borrowings equal to 85% of our accounts receivable plusthe lesser of (a) 50% or (b) $1.0 million of our on-hand



inventory.

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We believe that the net proceeds of this offering, together with availabilityunder our new $20.0 million revolving line of credit and existing cash and cashequivalents, will be sufficient to satisfy our contemplated cash requirementsfor at least 12 months following the closing of this offering, including plannedcapital expenditures of approximately $1.0 million. We could be required to seekadditional financing if:

. our plans change due to changes in market conditions, competitivefactors, progress of our research and development efforts or newopportunities that may become available in the future;

. our assumptions change or prove to be inaccurate; or

. the net proceeds of this offering or our cash flows prove to beinsufficient to finance our growth strategy.

LITRONIC

Historically, Litronic's cash requirements have been financed through acombination of cash flow from operations, except in the year ended December 31,1998, bank financing and loans from its principal shareholders and affiliates.Some of Litronic's borrowings contain covenants and restrictions, includingmaintenance of minimum tangible net worth and working capital, and they prohibitthe payment of dividends. Litronic was in compliance with or had receivedwaivers for these covenants as of December 31, 1998 and March 31, 1999.

During the year ended December 31, 1998, cash used in operations for Litronicwas $1.7 million, primarily due to a net loss of $1.4 million, a decrease inaccrued liabilities of $465,000, primarily due to the payment of accruedbonuses, and an increase in other current assets of $249,000. These werepartially offset by a decrease in accounts receivable of $256,000 due toimproved collections in the latter part of 1998.

During the year ended December 31, 1998, cash provided by financingactivities was $2.3 million, consisting primarily of borrowings of $6.5 millionunder the revolving note payable to the bank and $5.2 million under the long-term notes payable, partially offset by repayments of $3.5 million under arelated party note payable and $6.5 million under the revolving note payable toa bank.

Litronic's capital expenditures, including computer equipment, test equipmentand furniture and fixtures, were $118,000 during the year ended December 31,1998. Litronic's capital expenditures were funded through cash generated fromoperations and through its secured revolving credit line and borrowing from itsprincipal shareholders.

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PULSAR

Pulsar's capital requirements have been and will continue to be significant.To date, its cash requirements have exceeded its cash flow from operations.Pulsar historically has satisfied cash requirements through borrowings. Pulsar'sfinancial statements include an explanatory paragraph in the independentauditors' report that states that Pulsar's losses from operations, violation ofdebt covenants and net capital deficiency raise substantial doubt about Pulsar'sability to continue as a going concern. The debt covenants violated by Pulsarwere contained in its inventory and working capital financing agreement withIGFC and in a series of subsequent forbearance agreements. These covenantsrequired Pulsar to maintain at various times financial ratios of annualizedrevenue to working capital, net profit after tax to revenue and totalliabilities to tangible net worth. Pulsar has received a forbearance from IGFCthrough the closing of this offering and expects to repay IGFC in full followingthe closing of this offering.

Total cash used for the year ended December 31, 1998 was $1.9 million.Pulsar's cash provided from operations for the year ended December 31, 1998, was$18.5 million. This primarily resulted from collections of accounts receivableof $17.7 million, reduction of inventory of $1.6 million and an increase inaccounts payable of $2.6 million, offset by a net loss of $7.4 million,including a non-cash bad debt expense of $3.4 million.

Cash used in financing activities for the year ended December 31, 1998, was$21.5 million, resulting primarily from $18.7 million in payments made todecrease indebtedness outstanding under its financing arrangement with IGFC, aportion of which was funded by borrowings of $1.5 million against the cash



surrender value of life insurance policies.

Pulsar's capital expenditures, including computer equipment, warehouseequipment, and furniture and fixtures, were $58,000 for the year ended December31, 1998. Pulsar has notes receivable from related parties of approximately$1,198,000 as of December 31, 1998 which are classified as a component ofstockholders' equity and have been fully reserved. Proceeds from loans from cashsurrender value of life insurance net of premium payments were $1.2 million.Accounts payable of $5.9 million were converted to notes payable during 1998.

Pulsar funded its operations during the year ended December 31, 1998 throughits financing agreement with IGFC. Under this agreement, Pulsar purchaseshardware and software from authorized suppliers and finances the purchasesthrough IGFC. The agreement provides for an initial credit line up to $18million, which has been increased and decreased over time through amendments tothe forbearance agreement, based on Pulsar's hardware and software procurementrequirements financed through the line of credit, and as a result of defaultsthat have occurred related to the forbearance agreements. As of March 31, 1999,the maximum amount available under the line of credit was $9.0 million. The lineof credit allows Pulsar to finance up to 85% of its eligible accounts receivable

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and 100% of the value of its on-hand inventory. The credit line is secured bysubstantially all assets of Pulsar and is personally guaranteed by William W.Davis, Sr. and Lillian A. Davis.

IGFC has agreed to forbear Pulsar's violations of financial covenants in theIGFC financing agreement in exchange for Pulsar's agreement to pay to IGFC, onor before October 1999, either (a) warrants to purchase for a nominal amount afully diluted 4% ownership interest in Pulsar or (b) the lesser of:

. $650,000,

. 4% of the sale price upon the sale of all or substantially all ofPulsar's assets, or

. a pro rata share of $650,000 upon the sale of less than substantially allof Pulsar's assets.

We intend to satisfy this obligation to IGFC by paying $650,000 to it upon theclosing of this offering.

Pulsar has the following additional amounts due within the next twelvemonths:

. Nine promissory notes payable to various vendors, which accrueinterest ranging from 10% to 12% and have an aggregate principalbalance of $3.4 million as of March 31, 1999. Balloon payments in theaggregate amount of $1.9 million are due in May 1999 and the balanceis due by November 1999;

. total payments of $608,000 are due in May 1999 under negotiated payoutagreements with ten accounts payable vendors.

Additionally, Pulsar has approximately $1.2 million of accounts payable balanceswhich are more than 90 days overdue. We expect to use our newly acquired line ofcredit and cash from operations to fund these obligations to the extent we arenot able to negotiate extended payment arrangements.

We have allocated $12.5 million of the net proceeds of this offering torepay outstanding indebtedness, including $6.2 million of indebtedness assumedin the Pulsar acquisition. All of the indebtedness being repaid is required tobe paid upon the closing of this offering, as a result of change of controlprovisions or to effect the release of personal guarantees.

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YEAR 2000 ISSUES

An issue affecting us and others is the inability of many computer systemsand applications to process the year 2000 date change, the date 9/9/99 and theleap year 2000. Many currently installed computer systems and softwareapplications are coded to accept only two digit entries in the date code field.These date code fields will need to accept entries to distinguish 21st centurydates from 20th century dates. The inability to recognize or properly treat theyear 2000 issue may cause Litronic's systems and applications to processcritical financial and operational information incorrectly.

We have established a committee to determine the extent to which we may be



vulnerable to the year 2000 issue. The committee is responsible for the ongoingassessment, renovation of, testing, and certification of all business-criticalinfrastructure systems and applications software. In the process of itsevaluation of the year 2000 issue, the committee has developed potentialbusiness disruption scenarios and is developing a contingency plan, which weanticipate will be completed by July 1999. The costs incurred to date relatedto the year 2000 issue have related primarily to time spent by employees in year2000 compliance matters and have not been significant. We do not believe futurecosts will be significant. The following is a description of how we havecategorized and are addressing the year 2000 issue.

INTERNAL SYSTEMS

We have evaluated our internal computer systems in an effort to determinethe actions, if any, necessary to make them year 2000 compliant. Our evaluationhas involved testing our systems to ensure that they are year 2000 compliant.Based on its present review of our systems, the committee has determined that wedo not have a high risk of computer-related internal systems problems from theyear 2000 issue.

EMBEDDED SYSTEMS

We also recognize that there are risks with respect to embedded systemsthat are not necessarily part of our information technology systems but containmicroprocessor chips which may not function properly with the change of date tothe year 2000. The majority of the embedded systems on which we rely in ourday-to-day operations are owned and managed by the lessors of the buildings inwhich our offices are located, or by agents of these lessors. We have receivedletters from our lessors and, as applicable, their agents indicating the year2000 compliance of the embedded systems. Based upon these responses we do notbelieve there are any year 2000 compliance issues with our embedded systems.

Because we believe that our information technology and embedded systemswill be substantially year 2000 compliant in advance of the year 2000 datechange, we have no contingency plan to address non-compliance. We expect that,as we complete testing of

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information technology and embedded systems, we will develop contingency plansif we determine that any business critical systems will not be year 2000compliant.

OUTSIDE VENDORS AND CUSTOMERS

Disruptions with respect to the computer systems of vendors or customers,which are outside our control, could impair our ability to obtain services orconduct business with our customers. Disruptions of our utilities ortelecommunications systems could have a material adverse effect upon ourfinancial condition and results of operations. We believe that no otherproviders are material to our business. Disruptions of customers' computersystems could interfere with customers' ability to make timely payments onaccounts, could disrupt our customers' ability to manage the installationprocess of our products, which could adversely affect our ability to reach ourmilestones, and thus to recognize revenue, and could disrupt otheradministrative activities.

The committee has sent year 2000 issue questionnaires to our significantvendors, suppliers and customers. Although the responses we have received do notindicate any significant year 2000 issues, we do not have any assurances thatall of our significant vendors, suppliers and customers will take the necessarysteps to ensure that their respective systems will be protected against the year2000 issue or that even if such steps are taken, they will be successful. As wecontinue to assess the risk of our significant vendors', customers' andsuppliers' systems, we will develop and implement, if necessary, curative plansand contingency plans to address any year 2000 compliance issues.

OUR PRODUCTS

We have determined that our products, to the extent that underlyinghardware platforms, operating systems and databases will accommodate the year2000 date change, are year 2000 compliant and will accommodate the year 2000date change.

We anticipate that virtually all of our customers and potential customerswill be required to evaluate their information technology systems with respectto the year 2000 date change and that some of our customers and potentialcustomers may incur material costs in connection with this evaluation and anynecessary repairs and replacements. Customers and potential customers may berequired to devote material portions of their information technology budgets tothese evaluations, repairs and replacements, which could materially reduce theirother information technology purchases in 1999, including their purchases ofLitronic's products, particularly as the year 2000 date change draws closer. We



do not have any information as to the degree to which this issue will affect ourcustomers or potential customers.

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SUMMARY

There can be no assurance that any year 2000 issue-related precautions withrespect to our internal information technology systems, embedded systems or ourproducts will eliminate the numerous and varied risks associated with the year2000 date change. Further, there is a risk that we will be adversely affectedby the year 2000 issue or related difficulties encountered by vendors orcustomers or by any downturn in information technology purchases or in theeconomy in general as the year 2000 date change draws nearer. Any of theserisks could adversely affect our business.

Management believes that the most likely worst case scenario related to theyear 2000 issues that we may experience would be either an inability to obtaininventory components from suppliers or delays in receiving orders or paymentsfrom customers due to year 2000 problems experienced by these third parties.These events, if experienced, could have a material adverse effect on ourbusiness, results of operations, financial condition and/or liquidity.

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

Our quarterly operating results may fluctuate significantly as result of avariety of factors, many of which are outside our control. These factorsinclude:

. the short-term nature of some of our customer commitments;

. the lengthy sales and implementation cycle for some of our of ourproducts and projects;

. patterns of information technology spending by customers;

. the timing, size, mix and customer acceptance of our product andservice product offerings and those of our competitors;

. the timing and magnitude of required capital expenditures;

. the need to use outside contractors to complete some assignments; and

. general economic conditions.

As a result of these fluctuations, comparisons of quarterly results may not bemeaningful and should not be relied upon, nor will they necessarily reflect onfuture performance.

NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued Statement133, Accounting for Derivative Instruments and Hedging Activities. The newstatement established accounting and reporting standards for derivativeinstruments and for hedging activities and is effective for all fiscal quartersof fiscal years beginning after June 15, 1999.

In March 1998, the American Institute of Certified Public Accountantsissued Statement of Position (SOP) 98-1, Accounting for the Costs of ComputerSoftware Developed

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or Obtained for Internal Use. SOP 98-1 provides guidance on accounting for thecosts of computer software developed or obtained for internal use, and iseffective for fiscal years beginning after December 15, 1998.

In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs, and requires these costs to be expensed asincurred. SOP 98-5 is effective for fiscal years beginning after December 15,1998.

In December 1998, the AICPA issued SOP 98-9. SOP 98-9 amends paragraphs ofSOP 97-2 to require recognition of revenue using the residual method under somecircumstances, and is effective for fiscal years beginning after March 15, 1999.

The adoption of these new standards is not expected to have a materialimpact on our consolidated financial statements.

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INDUSTRY INFORMATION

INTERNET DATA SECURITY INDUSTRY

THE INTERNET DATA SECURITY MARKET

Consumers, government agencies and corporations are increasingly relyingupon Internet Protocol Networks to conduct electronic commerce andcommunications. International Data Corporation estimates that the number ofInternet users will grow from 97 million in 1998 to 320 million in 2002, withelectronic commerce growing from $32 billion to $426 billion over the sameperiod. The increasing proliferation of, and reliance upon, shared electronicdata has caused data security to become a paramount concern of businesses,government, educational institutions and consumers.

Demand for information security products is forecast by Datamonitor, anindependent research firm, to increase from $1.6 billion in 1997 to almost $7.0billion by 2001, an annual growth rate of 44%. In addition, Datamonitorforecasts the Internet-security PKI segment to be the fastest growing segment ofthis market, increasing from $75 million in 1997 to approximately $1.9 billionby 2001, an annual growth rate of 124%. The market for encryption technology isestimated by Datamonitor to be the second fastest growing segment of the marketincreasing from $168 million in 1997 to more than $1 billion in 2001.

We believe our data security products provide the solution for entities andconsumers seeking to provide protection for their proprietary data.

INCREASING NEED FOR INTERNET DATA SECURITY

In addition to protecting against unauthorized access to proprietaryinformation, data security affects an enterprise's ability to conduct electroniccommerce. Companies such as Amazon.com, Inc., Bank of America, Cisco Systems,Inc., Dell Computer Corp., eBay and E*Trade Group, Inc. have enjoyed dramaticgrowth in their online customer base and revenue as consumers execute anincreasing number of transactions over the Internet. The Internet's ease ofuse, 24-hour availability, speed of delivery, global reach and ability tosimplify product and vendor comparisons are fueling this growth. However,consumer concerns about the trustworthiness and security of the Internet havebeen one of the main impediments to even faster growth of electronic commerceand other communications. Hacking tools, such as password guessing and addressspoofing (or impersonation) programs, are freely available on the Internet andbulletin board systems. Merchants and consumers need assurances that consumersmaking electronic purchases are correctly identified and confirmed and that theconfidentiality of information such as credit card and bank account numbers aremaintained.

We believe that continued expansion of electronic commerce will require theimplementation of improved PKI security measures which will irrefutably verifythe identity of a party over the Internet and ensure that the information beingtransmitted between that party and

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the other party is kept private. We also believe the security required to fuelthis continued expansion of electronic commerce and communication will beprovided through the continued advancement in PKI mathematical formulas referredto as algorithms. Algorithms enable digital document signing and encryption ofproprietary data.

As enterprises place an increasing reliance on electronic commerce andcommunication, the need to protect confidential data from unauthorized intrusionhas become paramount. According to the Computer Security Institute, 78% ofrespondents to its 1998 CSI/FBI Computer Crime and Security Survey reported thatthey are connected to the Internet, but 39% of the respondents did not have afirst line of defense against unauthorized intrusion into their networks.Unauthorized use of computer systems within the previous 12 months was reportedby 64% of these respondents, representing a 16% increase from the prior year.

The consequences of unauthorized access, which is often undetected, canrange from theft of proprietary information or other assets to the alteration ordestruction of stored data. The Computer Security Institute survey reports thatapproximately 72% of respondent companies experienced a financial loss relatedto information security and disaster recovery in the past two years. Accordingto estimates by the Federal Bureau of Investigation, U.S. companies experienceestimated losses of $5 to $10 billion per year as a result of unauthorizedaccess to information and data. The Yankee Group, an independent research firm,estimates that network security breaches cost corporations in the U.S. over $5.0billion per year in business losses, including productivity, customer confidenceand competitive advantage.

REQUIREMENTS FOR TRUSTED END-TO-END DATA SECURITY

Today's client operating systems and Internet protocol-based networks lack



basic security and key Internet security features such as data privacy andintegrity, identification, authentication and auditing.

End-to-end data security concerns can be addressed by a variety of means.Traditionally, enterprises relied heavily on passwords to restrict access toproprietary information and materials. However, because of the risk of loss ortheft, more advanced protective measures have been developed to includecombinations of passwords and tokens with message encryption and personalidentification devices. Regardless of the form of the data security device, thelevel of security provided is evaluated based on a set of fundamentalprinciples, which include the following:

. IDENTIFICATION AND AUTHENTICATION. Verifies the identity of theauthorized users to prevent unauthorized access to proprietaryinformation and resources.

. CONFIDENTIALITY. Involves the encryption of data transmissions sothat only the intended recipient can access the information to ensureprivacy.

. DATA INTEGRITY. Ensures that data is not compromised ormanipulated.

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. NON-REPUDIATION. Prevents the sender of data transmissions fromdisclaiming or "repudiating" authorship so that the sender cannot denythe occurrence of the transaction.

. AUDIT CONTROL. Retraces information access and facilities use over aparticular time period at a systems administration level so anenterprise can monitor and record authorized and unauthorized useractivity.

. SECURED SYSTEM ADMINISTRATION. Maintains and controls corporateintranets centrally through file encryption, password maintenance,audit control, certificate and cryptographic key management and deviceaccessibility control.

The process of implementing Internet Protocol Network solutions requiresspecialized skills lacking in most corporate information technology departments.We provide the technology, products and services necessary for most companies toimplement or manage their data security infrastructure.

CRYPTOGRAPHIC TECHNOLOGIES

Cryptography is the process of encoding and decoding electronic messagesusing mathematical algorithms, or ciphers, to enable the confidentialtransmission of electronic messages to authorized persons. Digital cryptographyis performed using a combination of symmetric ciphers (commonly referred to assymmetric-key or secret-key cryptography) and asymmetric ciphers (commonlyreferred to as asymmetric key or public-key cryptography), to achieve each ofthe basic data security elements of identification and authentication,confidentiality, integrity and non-repudiation.

Both symmetric-key and asymmetric-key cryptography use an encrypting and adecrypting key. The decrypting key is user's unique number that is input to themathematical algorithm, or the cipher, used to encrypt or decrypt the message.In symmetric-key cryptography, the encrypting key and the decrypting key, whichis secret, are identical. Thus, to transmit a message, a secure key exchangemust be performed so that the key can be shared with the recipient of themessage. In asymmetric-key cryptography, the encrypting key--a public key--andthe decrypting key--a secret key--are different and thus the public key can bedistributed to authorized recipients without risk of security breach. Becauseasymmetric cryptography allows for wide distribution of the encrypting key, itpermits secure communication among a large group of people without requiringmanual distribution of the key. Additionally, asymmetric-key cryptographyrelies on the generation of digital certificates which can be used to providethe user authentication, data integrity and non-repudiation elements of theinformation security system. However, public-key cryptography requires the useof extremely complicated ciphers, so that encryption of large messages isrelatively slow when compared to encryption using secret-key cryptography.Thus, asymmetric-key cryptography is commonly used to protect symmetric keys andsymmetric key cryptography is commonly used for bulk encryption.

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IDENTIFICATION AND AUTHENTICATION

Authentication of a user's identity is generally accomplished by passwords.Because passwords are vulnerable to decoding or observation and subsequent useby unauthorized persons, they are less secure than if used with tokens. Tokens



are small devices ranging from simple credit card-like objects, rings, proximitycards and plastic keys to more advanced secure tokens, including smartcards, PKIcards and PCMCIA cards. For greater protection, two-factor identification andauthentication is implemented by combining tokens with a password or personalidentification number to verify authentication of the user. For added security,three factor authentication which consists of token, password and biometriccomparisons, can be implemented.

PKI cards are credit card-sized semiconductor plastic cards that contain anembedded microprocessor, memory, a secure operating system and the user's secretkey, password and digital certificates. PKI cards have significant advantagesbecause of their ability to perform basic cryptographic functions on the carditself rather than on the computer, thus reducing the risk that a breach ofsecurity on the computer will lead to the unauthorized release of proprietaryinformation. Through the use of PKI cards, E-mail messages, purchase orders,credit card numbers, videoclips, data inquiries and other confidentialtransmissions are secured as they are sent and therefore can be opened only bythe intended recipient.

PCMCIA cards are parallel computer peripherals similar in size to a creditcard, though thicker, which contain multiple microprocessor chips. PCMCIA cardshave greater storage capacity, higher data exchange rate and greater processingpower than conventional smartcards and therefore are capable of performingadvanced cryptographic functions that cannot be performed on a conventionalsmartcard. These advanced functions allow for use of more powerful algorithmsand thus provide for a greater overall level of security through the use ofPCMCIA cards.

We are currently leading a joint effort with Atmel Corporation under acontract with the National Security Agency to develop Forte, an ultra fast 32-bit RISC microprocessor. We are embedding the Forte chip into our new FortePKIcard, which we expect will be the world's fastest and most cryptographicallyadvanced PKI card. We expect that Forte will provide PCMCIA level performanceat a price competitive with advanced smartcards. Further, Forte is beingdesigned to be International Standards Organization compliant and therefore ableto be used in conventional reader/writers.

PKI DIGITAL CERTIFICATES

The basic element of PKI, a cutting-edge development in the informationsecurity field, is the digital certificate. Digital certificate technologyprovides a highly advanced form of authentication and secure key exchange. PKIdigital certificates are specially prepared software files through which thesender can digitally sign a message with a unique identification code. Therecipient of the message can authenticate the identity of the sender and verifythe integrity of the data through the use of a trusted third party known as acertificate authority by

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obtaining the sender's public key from the certificate digitally signed by thecertificate authority. Furthermore, the uniqueness of the certificates providesfor non-repudiation, which prevents the sender from denying that it sent themessage and which is not available with less sophisticated techniques. With thedevelopment of secure-token technology, digital certificates can now beincorporated into smartcards, PKI cards and PCMCIA cards to provide aninformation security system that provides two-factor identification andauthentication or three-factor identification and authentication with theincorporation of biometric technology.

Biometric technology utilizes fingerprints or other unique characteristicsof an individual to serve as a digital identification. The use of digitalcertificates is expanding rapidly across the Internet. In fact, several statesnow consider digital signatures contractually binding and there is a growingacceptance within the federal government to effectuate transactions through theuse of digital certificates.

SYSTEMS INTEGRATION AND NETWORKING SOLUTIONS INDUSTRY

In recent years, there has been an increasing demand for open systemapproaches designed to create interoperability among commercial off-the-shelfcomputer software and hardware products manufactured by different suppliers. Inaddition, excessive development costs and the rapid pace of technological changehave led both governmental and commercial customers to demand more flexiblesystems created by adapting readily-available commercial off-the-shelf softwareand hardware.

The emergence of the rapidly developing Internet protocol-based networktechnologies in the 1990s has further fueled the demand for network computersystems. Although information technologies, secure data transmissions, and dataencryption have long been in use in the military intelligence arena, recenttechnological advancements in computer hardware and software have now made theseapplications economically viable for use by private companies. This has given



rise to the need for specialized expertise in the areas of local and wide areanetwork design and installation, network management and operation and networksecurity, using new and complex information technology hardware and softwareproducts. Typically, the design and implementation of these systems in bothcommercial enterprises and government agencies also involves the resale of thehardware and software required for the system to the customer.

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BUSINESS

OVERVIEW

Litronic provides professional Internet data security services and developsand markets software and microprocessor-based products needed to secureelectronic commerce and communications over the Internet and othercommunications networks based on Internet protocols. Litronic's primarytechnology offerings utilize PKI, which is the standard technology for securingInternet-based commerce and communications. PKI helps ensure the integrity andprivacy of information being transmitted and verifies the identity, authenticityand authority of the sender and the recipient of that information. To increasesales capacity for its proprietary products and to capitalize on opportunitiesin the rapidly growing Internet security market, simultaneously with the closingof this offering, Litronic is acquiring Pulsar, a network integration solutionscompany that specializes in deploying large-scale network solutions toorganizations in the commercial and government sectors.

STRATEGY

We believe that significant market opportunities exist due to theincreasing prevalence of electronic communication resulting from advancements inInternet and electronic commerce technologies. These opportunities are expectedto create a primary need for PKI. Thus, we intend to pursue a strategy ofgrowth which is designed to capitalize on the market opportunities and thecompetitive advantages we believe will result from the Pulsar acquisition. Keyelements of our long-term business strategy include:

. INCREASING INTERNET MARKET PENETRATION. We intend to capitalize onPulsar's existing and significant client base and sales and marketinginfrastructure to broaden and accelerate the market penetration of ourcomprehensive data security product offerings. In our experience,large commercial accounts frequently seek to secure total integratednetwork security solutions from a limited number of suppliers. Weintend to utilize our brand recognition in the Internet ProtocolNetwork security market and Pulsar's network implementation expertiseand integration capabilities to support our efforts to gain greatermarket penetration.

. INCREASING MARKETING OPPORTUNITIES. The creation of a largermarketing and service organization, a higher market profile andgreater financial strength is expected to generate greateropportunities for marketing our products in the U.S. andinternationally.

. MAINTAINING TECHNOLOGICAL LEADERSHIP IN INTERNET PROTOCOL-BASEDNETWORK SECURITY. Through our industry-recognized research anddevelopment capabilities, we intend to upgrade and enhance ourexisting security products and develop new products to meet theexpanding market's continually evolving requirements, technologies andstandards. Enhanced versions of ProFile Manager and

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Maestro are expected to be released in the third quarter of 1999. Webelieve that our research and development capabilities and thecombined expertise of our technical staff position us to respondquickly and effectively to technological change, increased competitionand market demands.

. EXPANDING PROFESSIONAL INTERNET PROTOCOL-BASED NETWORK SECURITYSERVICES. We intend to provide our customers with a full rangesecurity services, including security policy assessments andevaluations, custom software development, integration and maintenancefor the Internet and other Internet protocol based communicationsnetwork.

. EXPANDING AND LEVERAGING STRATEGIC ALLIANCES. We intend to maintainand leverage existing strategic alliances and develop new strategicalliances with vendors with complementary technologies, products andservices to maximize sales and market development opportunities.

. STRATEGIC ACQUISITIONS. To the extent opportunities arise, we will



seek to acquire other technologies, product lines and businesses whichcomplement our products.

. INCREASING SALES PER CUSTOMER. We will seek to increase average salesper customer based on our enhanced ability to offer system integrationservices in addition to our suite of data security products.

. MINIMIZING RISK OF SALES AND SERVICE DELAYS. The unavailability ofskilled professionals in the information technology and Internetsecurity solution outsourcing and integration sectors has in the pastcaused companies with advanced proprietary technologies to experiencesales and service delays. By bringing together our research anddevelopment staff and Pulsar's existing sales and technical personneland procedures, we aim to minimize the risk of these delays.

. INCREASING INTERNATIONAL SALES. We will seek to generate additionalsales in foreign markets by establishing a network of internationaldistributors and value-added resellers. The U.S. government hasrecently relaxed the export restrictions for our ProFile Manager,NetSign and other strong encryption products. These products may nowbe exported without a license to most countries for use by banks,online merchants, healthcare, insurance organizations and overseassubsidiaries of U.S. companies. To capitalize on these opportunities,we are in the process of building or have built relationships withdistributors and resellers with computer security expertise in thesemarket sectors:

. we have appointed distributors in Japan and Spain;

. we are negotiating with potential distributors andresellers in

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Europe, Africa and Asia; and

. we intend to appoint a director of international sales whowill be responsible for the management of ourinternational distributor network.

In addition, we expect to experience the following synergistic benefits as aresult of our acquisition of Pulsar:

. EXPERIENCE OF MANAGEMENT, KEY PERSONNEL AND CONSULTANTS. We believethe added depth, breadth and experience of Pulsar's management team,key employees and consultants enhances our ability to successfullyimplement our business strategy.

. COMPREHENSIVE DATA SECURITY PRODUCTS AND SERVICES OFFERING. Webelieve we can satisfy the comprehensive requirements of enterprisesthrough the combination of our open-architecture, open-platform, open-token and algorithm-independent technologies and products and Pulsar'snetworking solution services. We believe our ability to offersynergistic products and services distinguishes us from other PKIinformation technology solution providers by enabling us to providecomprehensive information security systems rather than addressing onlyselected aspects of customers' data security needs.

. SOLUTIONS ADDRESSING THE KEY ELEMENTS OF INTERNET DATA SECURITY.Unlike other integrators that rely on reselling of products producedby other vendors to respond to the needs of an enterprise, we develop,manufacture and market many of the applications, software,cryptographic libraries, readers/writers and tokens that are requiredto create comprehensive token-based PKI security solutions thataddress the key data security elements of: identification andauthentication; confidentiality; data integrity; non-repudiation;audit control; and system administration.

Additionally, because our applications are open standards, we can integrateproducts and services of other vendors into our products to enhance oursolutions capability.

INTERNET DATA SECURITY PRODUCTS

GENERAL

Our Internet data security products provide the highest level ofcommercially-available security for secure E-mail, secure file transport, fileprotection, remote access, authentication and authorization in an open multi-platform standards-based framework. The foundation of our Internet datasecurity products is our extensive cryptographic library and device driverssupporting numerous different operating system platforms and token managementsystems which enable users to seamlessly integrate token-based security



enhancements into existing networking

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environments or into newly designed and implemented networks. Our products canalso be used by software developers to add token-based information security toapplications such as browsers, firewalls, E-mail systems, database managementsystems and other client/server applications.

Our data security products are designed with an open architecture, so theycan operate independently of:

. algorithms -- the security products are designed to use differentsuites of algorithms depending upon the application requirements, forexample, military or banking and finance.

. platforms -- the security products may be used with many differentcomputer types and operating systems, for example, Windows, UNIX, andMacIntosh.

. applications -- the security products may be used with varioussoftware applications, for example, e-mail, e-commerce, databasesystems or word processors.

. tokens -- the security products function with various types of tokens,for example, software tokens, smartcards and PC cards.

As a result of this open architecture, these products are compatible withvirtually all commonly used network hardware. Algorithm independence allows ourproducts to be tailored to numerous encryption algorithms through softwareselection. As a result, our libraries, drivers and security devices arecompatible with a variety of encryption algorithms, and popular softwareapplications and operating systems. We develop and embed these cryptographictechnologies in a multitude of devices and tokens, including smartcards, PKIcards, PCMCIA cards, embedded industry standard architecture (ISA) andperipheral component interconnect (PCI) bus cards. We are also working withother companies to implement use of PCMCIA cards, PKI cards and smartcards tosupport biometric technologies such as fingerprint and voice recognition. Theseproducts provide the added protection of a security token utilizing public keycryptography, key exchange techniques and electronic signatures on most popularoperating systems and hardware platforms. In addition, our technologies permitfunctions to be scaled as performance and pricing requirements dictate.

INTERNET APPLICATION SOFTWARE

NETSIGN AND NETSIGN PRO. These products are software adapters thatintegrate smartcards and digital certificate technology to enhance security insoftware systems designed to provide electronic commerce, E-mail, Internetaccess, file access and world-wide-web browsers such as Netscape Communicatorand Microsoft Explorer. NetSign and NetSign PRO software products are bundledwith a smartcard reader/writer and smartcards. NetSign PRO has the addedsecurity feature of file encryption capabilities and other security utilities.

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PROFILE MANAGER. ProFile Manager is a complete, stand-alone, PKI solutionfor the management of token-based security systems from initialization to securebackup and recovery. For the recovery of token-based information, ProFileManager provides an optional integration with a secured database of private keysand other user identification information and the use of third-party certificateauthorities. ProFile Manager integrates with NetSign, NetSign PRO and othertoken-enabled products to provide a complete solution for an enterprise'ssecurity needs, including secure Internet access, digitally signed and encryptedE-mail, desk-top file encryption and secure remote network access.

INTERNET CRYPTOGRAPHIC API DEVELOPER TOOLKITS

CRYPTOS SDK AND CRYPTOS SDK+. CryptOS SDK products are cryptographic APIsthat allow application developers to use off-the-shelf or custom applicationsoftware to integrate smartcard technology into existing systems, thus addinghardware-strength security to software-only systems. CryptOS SDK is bundledwith a smartcard reader/writer and smartcards. CryptOS SDK+ has additional toolsfor Java programming.

MAESTRO. Maestro, a product we have only recently introduced to themarket, is a multi-protocol cryptographic library that enables softwaredevelopers to incorporate secure token-based, symmetric and asymmetric keycryptography into their application software. Maestro is a multi/concurrentaccess, cross-platform system that supports multiple types of tokens such assmartcards, PCMCIA cards and cryptographic algorithms. Coupled with token



reader/writers, Maestro supports devices over commonly-used interfaces,including keyboard, serial, small computer system interface (SCSI), parallelport and Universal Serial Bus. Maestro currently supports two commonly usedcryptographic interface protocols. We are developing additional protocoladapters to expand the functionality of Maestro. Maestro is compatible withWindows 95, 98 and NT operating systems as well as all popular UNIXplatforms.

TOKENS

ISO SMARTCARDS. We offer a family of off-the-shelf international standardorganization (ISO) standard smartcards ranging from storage-only cards to cardscontaining cryptographic capabilities.

MONIKER, PC-CRYPTOCARD. We also offer Moniker, a Fortezza standard PCMCIAcard. The Fortezza standard PCMCIA cards are commonly used by the Department ofDefense, as well as by other governmental and commercial entities.

FORTE PKICARD. We are in the process of developing a next generation PKIcard, the Forte PKIcard, in cooperation with Atmel Corporation. Forte is a 32-bit RISC microprocessor which is being designed with a high speed UniversalSerial Bus interface in addition to the ISO interface. Forte is also to bedesigned with a larger storage capacity and processing speed than existingsmartcards. The Forte PKIcard is expected to be manufactured in the U.S. and weanticipate shipments to begin in late 1999.

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OTHER TOKENS. Because our products are open-architecture, open-platform,open-token, algorithm and API-independent, we offer third-party tokens, such asPCMCIA cards, smartcards, rings, proximity cards and plastic keys and othercommercially available tokens, for use with our reader/writers and applicationsoftware.

TOKEN READER/WRITERS

A token reader/writer is a hardware component that electronically reads thecontent of a smartcard, PCMCIA card, or PKI card. We manufacture severaldifferent types of reader/writers. Following is a brief description of theirfeatures.

SERIAL AND KEYBOARD PORT SMARTCARD AND PKI CARD READER/WRITERS. We sellour reader/writers as a security product component or bundled with otherproducts such as ProFile Manager, NetSign and/or CryptOS SDK to provide token-based data security solutions.

We manufacture and sell compact, hand-held smartcard reader/writers thatinterface through the RS-232 serial port of a PC or workstation. The Series 215and 220 reader/writers are compatible with Windows 95, 98, NT and UNIX andMacIntosh operating systems. The Series 220 reader/writer can optionally beconnected through the keyboard port which provides the added security of aprotected personal identification number, or PIN, path. With a protected PINpath, the password authentication is intercepted by the reader/writer thuspreventing a hacker from implanting an unauthorized program in the PC tointercept the password. We offer a Series 230 reader/writer which is integratedinto a keyboard, and also offer a Series 410 reader/writer which connects to acomputer through its PCMCIA slot.

ARGUS 300. The ARGUS 300 consists of a tamper-resistant ISA board andexternal reader/writer and is connected to the keyboard. The ARGUS 300incorporates DES encryption technologies and offers additional security featuressuch as boot protection, electronic commerce security and protected PIN pathdirectly through the board rather than through an external device that might betampered with by an unauthorized user. The ARGUS 300 is validated forelectronic signature by the National Institute of Standards and Technology(NIST), the U.S. Treasury Department and General Accounting Office.

PCMCIA CLIENT READER/WRITER. We offer a series of single-and dual-socketPCMCIA card reader/writers that interface via various ports such as SCSI(internal and external reader/writer), ISA bus (internal reader/writer), PCI bus(internal reader/writer), Universal Serial Bus and parallel port (externalreader/writer). These reader/writers incorporate our proprietary device driverswhich provide the interface between the reader/writer and its applicationsoftware such as Maestro and third-party application software.

CIPHERSERVER. We offer a reader/writer that contains sockets for up toeight PCMCIA cards, is used on the enterprise's server side and incorporates thedevice drivers and other technologies of our other PCMCIA readers. CipherServerinterfaces with the host server to enable the host server to providerapid/simultaneous processing of cryptographic functions received from numerousclients.

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OTHER CUSTOM-DESIGNED SECURITY PRODUCTS

SECURE PCS

We offer a family of secure, year 2000 compliant, servers which are basedon a two-state workstation technology that operate in either the secured stateor the public state. A transition between the two states causes all temporarydata in the volatile memory to be fully erased. This process precludes anunauthorized subsequent user from accessing the classified information thatwould otherwise be resident in the system's memory.

MANAGED FIREWALL AND VIRTUAL PRIVATE NETWORKS SOLUTIONS

We offer secure architecture based firewall and virtual private networksgateway technology using intrusion detection software for high data capacity andscalable security solutions. These software and hardware systems provide formulti-user remote administration, and integrated management of multiple securitypolicies and firewalls.

NETWORK SECURITY AND MANAGEMENT TOOLS

Our network security and management tools are a scalable, comprehensivecollection of network security and management solutions assembled into anintegrated security suite of hardware and software. The tools include a multi-tiered approach to virus protection covering the client, server and Internetgateway through a combination of encryption, firewall and virtual privatenetworks technologies. These tools protect networking systems against attacks,and compromise and loss, while maintaining the integrity of business functionsand data. These products ensure full network performance with a proactiveapproach by fixing problems, planning growth and optimizing functionality andreliability.

THE ASSURE TECHNOLOGY

The Assure technology which we will seek to purchase, subject to thesatisfactory completion of our due diligence, was developed to createinformation security products to protect information in a client/server networkoperating system with a high level of security. The Assure technology wasdesigned to equip client/server networks with a proprietary encryption processto encrypt data before it is transmitted, generate unique message authenticationcodes and encode the data upon receipt by an authenticated user. Therefore, alldata transmitted through the network would be in a encrypted format, renderingit unintelligible to recipients who do not have a proprietary decrypting key.

A product based on the Assure technology, Assure EC4.11, was evaluated bythe National Computer Security Center in connection with an early version ofNovell's 4.11 network operating system. Assure EC4.11 received a Class C2rating as a result of this evaluation, but no product based on the technologywas ever marketed. If we successfully purchase the Assure technology, we intendto use a portion of the proceeds of this offering

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to upgrade the technology and complete the development of products based on thetechnology.

PROFESSIONAL DATA SECURITY SERVICES

We offer comprehensive networking solutions with a particular emphasis ondesigning, developing, implementing, supporting and maintaining networks thatprovide for a high level of data security. We develop and implement completeturn-key networks or enhance or expand existing networks, as the customerrequires.

Our services include:

. strategic consulting, including site risk and requirements analysisand design;

. custom design and development;

. project management;

. construction, installation and implementation;

. on-site or remote system support, maintenance and repair; and

. on-site system management.

We take a "needs analysis" approach to the design and development of oursolutions for our customers by evaluating their existing infrastructure,architecture and technologies to optimize the performance of their existing



system and augment their systems as necessary to meet their changingrequirements. Project responsibilities typically require the integration ofaccess control, intrusion detection and biometric validation.

Because of our expertise designing and implementing systems providing forrobust security, our solutions address the networking and data security needs ofour customers, including:

. Internet access and security;

. secured intranet/extranet capabilities;

. enterprise security procedures and administration;

. secured critical private network and remote dial-in networkcapabilities;

. secured distributive applications;

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. open-systems migration of data;

. information security communication services; and

. artificial intelligence technologies.

We provide our network solutions through the implementation of the latesttechnologies, including high speed baseband and broadband media, fiber optics,hard wired connect systems, and wireless and satellite transmission systems. Wealso provide information technology outsourcing services for our customers,including ongoing management of network systems. We deliver our professionalservices on either fixed-price delivery or time-based delivery modes through ourdata security group, which provides consulting and integration services and ourenterprise information group, which provides network design, implementation andmanagement, legacy systems migration, and systems configuration andevaluation.

Our staff has specific expertise in the following areas of networkingsystems:

. INTERNET ENTERPRISE NETWORK CONSULTING: As computer networks becomemore complex the assistance of knowledgeable network professionals iscritical for maximum performance. Our network consulting staff canhelp organizations realize their business goals and objectives.

. NETWORK MANAGEMENT: Today's network managers must cope with a maze ofnetwork protocols, configuration options and computing platforms. Ournetwork management staff supports information systems departments intheir effort to manage these diverse networking platforms by assistingwith the training, configuration and implementation of networkmanagement systems and products.

. REMOTE COMPUTING: As companies increasingly decentralize theirbusiness functions, they must consider connectivity options for remoteusers. Our remote computing team can effectively deliver the mostcost-effective and reliable methods to allow users access to corporatesystems. Whether a business requires dial-in dial-out capability orInternet access, we can provide a complete solution that incorporatestraining and implementation.

PRODUCT RESELLING

Historically, a substantial portion of our product resale revenues werederived from sales of low-end, low-margin computer and network securityproducts. We are increasingly shifting our focus in the reseller market,primarily in the government information technology segment, to sales of high-end, high-margin specialized computer and network security products andcustomized configurations of these products.

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Examples of these high-end, high-margin computer and network securityproducts include:

. INTRUSION DETECTION SOFTWARE - used to detect unauthorized access, andidentify the source of the access, within a network. These productsinclude Net Ranger and PIX.

. FIREWALLS - custom designed software and hardware configurationsinstalled into a network to prevent unauthorized access from outsidethe network. We offer high-end firewall solutions from leading



vendors, including Lucent Technologies, Inc., Network Associates,Inc., Cyberguard Corporation, Cisco Systems, Inc., and Bay Networks,Inc.

. NETWORK HARDWARE COMPONENTS - servers, routers, hubs and switchesconfigured to the customer's networking requirements. We offercomponents manufactured by leading vendors, including Cisco Systems,Inc., Bay Networks, Inc., Hewlett-Packard Company, Bell Computers,International Business Machines Corp., Lucent Technologies, Inc. andSun MicroSystems, Inc.

. ANTI-VIRUS SOFTWARE - high-end software programs installed at serverlevel to prevent viruses from entering the network, and client-levelsoftware programs to prevent virus corruption to client-serverapplications.

. VIRTUAL PRIVATE NETWORKS - a secure point-to-point connection over theInternet through which encrypted messages can be transmitted toprotect communications between remote locations.

. DATA SECURITY PRODUCTS - access control products, including our ownand third-party APIs, device drivers, token reader/writers andtokens.

We believe that focusing on these high-end, high-margin products will leadto higher rates of customer retention. This is because of the complex nature ofthe product configurations, which results in customers' making purchasingdecisions based on factors other than simply the lowest price. Further, becausethe products are highly customized, we are not required to make substantialinvestments in inventory.

After the offering, we will, where appropriate, include our own datasecurity products within our product configuration solutions.

CUSTOMERS

Our customers represent a wide range of commercial enterprises, includingfinancial, telecommunications, healthcare and information service companies,airlines, automobile manufacturers, as well as Federal, state, local and foreigngovernment agencies. We believe significant cross-marketing opportunities existwith the integration of Pulsar's customer base.

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Our customers include:

. Netscape Communications . Federal National MortgageCorporation Association

. Walt Disney Company . S.W.I.F.T.

. Nippon Telephone and . Executive Offices of theTelecommunications Data President of the United StatesCorporation

. American Express Company . U.S. Army Corps of Engineers

. Bank of America, N.A. . Lockheed Martin Corporation

. National Security Agency . Booz Allen & Hamilton Inc.

. Federal Communications . Other U.S. GovernmentCommission departments and agencies

. Deloitte & Touche LLP

CUSTOMER SERVICE AND SUPPORT

We believe that customer service and support is critical to retainingexisting customers and attracting prospective customers. Our customer serviceand support staff consists of 16 persons, including engineers and technicalsupport personnel, and works closely with customers and prospective customers toprovide comprehensive service and support for our products and systems.

We provide enhanced customer support by maintaining a toll-free customerservice line, and a two-tier support system. The first tier consists of helpdesk support personnel responding to phone and mail requests for service andaccessing customer information and a problem database for solutions. For moresophisticated problems, second tier support is provided by systems technicalsupport staff.

SALES AND MARKETING



We market our products and services through the Internet, our direct salesforces, third-party distribution channels, including systems-integrators, value-added resellers and original equipment manufacturers, strategic alliances andinternational distributors. We intend to devote significant resources tomarketing and business development activities to expand our business toadditional distribution channels.

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DIRECT MARKETING EFFORT

As of April 1, 1999, we employed a direct sales and marketing force of 31individuals located in offices in California, the Washington, D.C. area andAtlanta, Georgia to market our products and services to industry and verticalmarket segments, including e-commerce, financial, telecommunications, healthcareand information services companies and federal, state, local and foreigngovernment agencies. Our sales force is responsible for soliciting prospectivecustomers and providing technical advice and support with respect to ourproducts and services. Additionally, we use telemarketing efforts to targetcommercial accounts and federal government agencies. We seek to achieve greatervertical market penetration by using direct sales personnel with significantmarket expertise, as well as consultants with established relationships in thecommercial marketplace.

Following the closing of this offering, we intend to expand our directsales force to increase the number of representatives located in our California,Georgia and Washington, D.C. offices. We may also open direct sales forceoffices in other geographic locations as we determine our clients' needs and ourmarket opportunities.

INDIRECT MARKETING EFFORT

An important component of our sales strategy is the development of indirectsales channels such as systems integrators, value-added network serviceproviders and original equipment manufacturers. Currently, we use theseindirect sales channels to augment the efforts of our direct sales forces.

We also use the services of third-party consultants with establishedrelationships and contacts with prospective customers to which we would nototherwise have access. As part of our expansion strategy, we will seek todevelop relationships with additional third-party sales channels.

STRATEGIC ALLIANCES

We plan to increase our vertical market penetration by continuing todevelop strategic alliances with other companies in the data security andnetwork integration industries. We have developed significant strategicalliances with companies in an effort to:

. incorporate our products into third-parties' products;

. jointly develop products and services;

. conduct joint research and development efforts;

. jointly conduct proposals and presentations for products and servicesand reseller arrangements.

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These alliances assist us in expanding our marketing and technicalcapabilities and are intended to increase the distribution and market acceptanceof our Internet, intranet and extranet security products and services.

We believe that strategic alliances allow us to cost-effectively integratethird-party products into our product offerings to provide our clients withcustomized information technology solutions. Our strategic alliances currentlyinclude the following:

. NETSCAPE AND MICROSOFT - we provide enhanced E-mail security featuresto their browser programs through integration of our NetSign productlines.

. VERISIGN - we have a marketing agreement with VeriSign and act asVeriSign's recommended PKI card partner.

. ATMEL CORPORATION - we have an alliance with Atmel Corporation inwhich we are jointly developing Forte, an advanced microprocessor,which we are embedding in our next generation PKI cards, the FortePKIcard.



. KEYTRONIC - Keytronic and our company sell versions of NetSign bundledwith the Keytronic keyboard, which currently incorporate an integratedPKI card/smartcard reader and will incorporate our Forte PKIcardreader.

. RSA DATA SECURITY - we have a distribution license agreement with RSAwhich allows us to incorporate RSA technology into our products.

. DATACARD - Datacard serves as an official distributor of our PKI cardproducts and integrates our NetSign and ProFile Manager and CryptOSproducts into our PKI card printers.

. SCM MICROSYSTEMS, INC. - we engage in cooperative marketing andselling of SCM hardware produced with our software.

Additionally, Pulsar has formed alliances with a number of equipmentmanufacturers to generate leads for its technology product sales, includingLucent Technologies, Inc., Photon Vision Systems LLC, Northern Computers, Inc.,Hewlett-Packard Company and International Business Machines Corp. We expectthese alliances to generate qualified leads for our sales force to contact andclose.

SALES TO THE GOVERNMENT INFORMATION TECHNOLOGY MARKET

The government information technology market is generally characterized byhighly-structured procurement rules and procedures, large contracts, arelatively long sales cycle, significant barriers to entry and low collectionrisks. In response to these characteristics and requirements, a number ofavenues, such as General Service Administration schedule

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contracts, blanket purchase agreements and bidding procedures, have beendeveloped to access this market.

The General Services Administration, which is the central procurementagency for the U.S. government, negotiates schedule contracts. Governmentagencies and other authorized purchasers, although not required to do so, maypurchase goods and professional services under GSA schedule contracts atpredetermined price ceilings, terms and conditions. GSA schedule contracts areawarded on the basis of a number of factors, the most important of which arecompliance with applicable government regulations and the prices of the productsto be sold. A blanket purchase agreement, or BPA, is a simplified but non-mandatory, fixed-price,indefinite delivery-indefinite quantity, contract for thegovernment to purchase products, at pre-negotiated terms and conditions.Purchases made under BPAs are often paid for with a government-issued creditcard. Federal government agencies are authorized to enter into BPAs with GSAschedule holders. The GSA-authorized BPAs incorporate many terms and conditionsof GSA schedule contracts, often at lower prices than available on the GSAschedules.

A significant portion of the purchases of computer products and services bythe federal government are made under contracts or purchase orders awardedthrough formal competitive bids and negotiated procurements. Substantially allof these bids are awarded on the basis of a number of factors, including thebest value to the government, which, depending on the bid, can be a combinationof price, technical expertise, past performance on other government contracts.Major procurements can exceed millions of dollars in total revenue for areseller, span many years, and provide a purchasing vehicle for many agencies.In addition, networking products are purchased by the federal government throughopen-market procurements. These procurements are separate and apart from GSAschedules, and include simplified acquisition procedures, requests for quotes,invitations for bids and requests for proposals. Most purchases in the state andlocal government market are made through individual competitive procurements.State and local procurements typically require formal responses and the postingof bid bonds or performance bonds to ensure complete and proper service by aprospective bidder. Each state maintains a separate code of procurementregulations that must be understood and complied with by entities sellingproducts to the state.

We are on most government bid lists relevant to our product offerings andrespond with proposals to hundreds of bid solicitations each year. In addition,our marketing employees actively prepare bids for federal, state and localgovernment agencies for open market procurements. After the closing of thisoffering, we intend to expand our bid proposal unit to compete and captureadditional projects submitted for proposal.

ADVERTISING

Our marketing efforts include maintaining a web site, Internet advertising,including hot links with other web sites, direct mail, public relations, events,sales tools, broadcast messaging, telemarketing and corporate marketingmaterials. We believe that our future business activity depends in part on our



marketing and sales through the Internet. Our website describes

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our business, products and services. We are currently in the process ofintegrating Pulsar's website material and upgrading our site to allow forautomated on-line purchases.

Our public relation efforts are designed to target the appropriate presscoverage and consist of press kits, targeted media lists and press releases.These efforts are designed to complement our sales and marketing efforts.

TRADE SHOWS AND PRESENTATIONS

We attend and exhibit our products and services at trade shows in the U.S.and internationally each year in an effort to increase our market exposure. Weintend to continue to attend trade shows as well as to make joint presentationswith strategic partners to prospective customers relating to products andservices.

SUPPLIERS

Some of the components incorporated into our Internet data securityproducts are produced by other vendors. We also integrate third-party productsand components into the networks we design and develop for our customers. Tomaintain quality control and enhance working relationships, we generally rely onmultiple vendors for these products. However, some of these products areproduced or sold only by a single supplier, thus presenting a risk that they maynot be available on commercially reasonable terms in the future or at all. Whilewe believe that alternative sources of supply could be obtained, our inabilityto develop alternative sources if, and as required, in the future could resultin delays or reductions in product shipments that could adversely affect ourbusiness.

RESEARCH AND DEVELOPMENT

We conduct extensive research and development efforts which focus on thedevelopment of cryptographic PKI software and hardware products that can bereadily integrated and adapted to the expanding requirements of the Internet,intranets and extranets. After the closing of this offering, we expect to devotesubstantial additional research and development resources to enhance our datasecurity product line.

Our current research and development efforts include:

. Expanding Maestro to offer additional application program interfaces,including Microsoft's CAPI (a cryptographic API) for Windows 95/98 andWindows NT; further, expanding the suite of tokens supported byMaestro;

. Expanding the capabilities of ProFile Manager to provide certificateexchange features with additional third-party certificate authoritiesand increased capability for the PKI enterprise manager;

. Developing Forte, an advanced 32-bit RISC microprocessor which we areembedding in our Forte PKIcard. We expect the Forte PKIcard will bean ISO

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standard smartcard with greater flexibility and a higher degree ofprocessing power than existing PKI cards, due in part to the inclusionof a Universal Serial Bus interface on-board the microprocessor chip.Given that Forte is an advanced security chip that will provideadvanced security features, we expect to be able to embed it in avariety of devices, including PC mother boards;

. Developing series of Universal Serial Bus interfacereader/writers;

. Developing technologies to incorporate biometric technologies intoLitronic PKI products to provide further advanced identification andauthentication protection;

. Expanding the security features of applications programs such asNetSign and NetSign PRO; and

. Developing a version of the ARGUS 300 for the PCI bus while retainingits validation by the NIST. The ARGUS 300 is currently an ISA bussecurity product that has been validated by the NIST for a securitylevel approved for digital signature operations. Newer computerdesigns now have the PCI architecture. The PCI version of the ARGUS



300 is being designed to enable the NIST to extend the certificationto the new PCI design without a complete new laboratory validationprocess.

The process of developing our products and services is extremely complexand requires significant continuing development efforts. There is a risk that wewill not successfully develop and market new products or product enhancementsthat respond to technological change and evolving industry standards andcustomer requirements in a timely manner.

As of April 1, 1999, our research and development staff consisted of 25employees, of whom 22 were engineers. Approximately 90% of these engineers wereengaged principally in the development of software, including cryptographiclibraries and device drivers. Our retention rate for our research anddevelopment staff over the past three years is 80%. We believe that our abilityto attract and retain qualified development personnel is essential to thecontinued success of our development programs. The market for these personnel ishighly competitive and our development activities could be adversely affected ifwe are unsuccessful in attracting and retaining skilled technical personnel.

During the years ended December 31, 1996, 1997 and 1998, our net expensesfor research and development were $752,000, $1.2 million and $1.3 million. Wehave allocated $6.2 million of the proceeds of this offering for research anddevelopment activities.

COMPETITION

We compete in numerous markets, including;

. Internet and intranet electronic security;

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. access control;

. token authentication;

. smartcard-based security applications;

. electronic commerce applications;

. systems integration;

. product reselling; and

. government information technology markets.

The markets for our products and services are intensely competitive and arecharacterized by rapidly changing technology and industry standards, evolvinguser needs and the frequent introduction of new products. We believe that theprincipal factors affecting competition in our markets include:

. product functionality;

. performance;

. flexibility and features;

. use of open standards technology;

. quality of service and support;

. company reputation; and

. price.

We face significant competition from a number of different sources. Many ofour competitors are more established, benefit from greater name recognition andhave substantially greater financial, technical and marketing resources than wehave. One of our significant competitors is Microsoft Corporation, which hasrecently announced its intention to begin making smartcards. Some of our othersignificant data security competitors include:

. International Business Machines Corp.

. Motorola, Inc.

. RSA Data Security, Inc.

. Network Associates, Inc.

. Secure Computing Corporation

. Rainbow Technologies, Inc.

Some of our competitors for systems integration and product resellinginclude:

. BTG, Inc.

. Inacom Corporation

. Government Technology Services, Inc.

In addition there are several smaller or start-up companies with which wecompete from time to time. We also expect that competition will increase as aresult of consolidation in the information security technology and productreseller industries. We may be unable to compete successfully in the future withour competitors, which may adversely affect our business.

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INTELLECTUAL PROPERTY

We depend substantially on our proprietary information and technologies. Werely on a combination of trademark, patent, copyright and trade secret laws,employee and third-party non-disclosure agreements, technical measures and othermethods to protect our software products and other proprietary technologies andknow-how. We also rely on standardized license agreements that are not signed bythe end user to license our products and, therefore, may not always beunenforceable.

We currently have two patents registered with the U.S. Patent and TrademarkOffice and three patent applications pending with the U.S. Patent and TrademarkOffice that cover aspects of data security technology. Prosecution of thesepatent applications and any other patent applications that we may subsequentlydetermine to file may require the expenditure of substantial resources. Theissuance of a patent from the filing of a patent application is a lengthyprocess. Our technology may become obsolete while our applications for patentsare pending. Further, any pending or future patent may not be granted, and anyfuture patents may be challenged, invalidated or circumvented and the scope ofany patents may be reduced. The rights granted to us through our patents may notprovide us with any advantages. We have not pursued any patent protectionoutside the U.S. for any technology.

Our technical measures and non-disclosure agreements may not be adequate toprevent misappropriation or provide any meaningful protection for ourproprietary technology in the event of misappropriation. Further, others mayindependently develop substantially equivalent or superior technologies orduplicate any technology we develop, or our technology may infringe on thepatents, copyrights or other intellectual property rights owned by others.

We may also be at risk when we enter into transactions in countries whereintellectual property laws are not well developed or are poorly enforced. Legalprotection of our rights may be ineffective in foreign markets, and technologymanufactured or sold abroad may not be protectable in jurisdictions incircumstances where protection is ordinarily available in the U.S.

We believe that, due to the rapid pace of technological innovation fornetwork security products, our ability to establish, and if established,maintain a position of technological leadership in the industry, is dependentmore upon the skills of our development personnel than upon legal protectionsafforded our existing or future technology.

Because our products are designed with an open architecture and arealgorithm-independent, they can be utilized with a variety of encryptionalgorithms. Some algorithms are in the public domain and can be incorporatedinto our products at no charge. To the extent that a customer desires toincorporate a proprietary algorithm into a security solution, we or the customermust obtain a license from the algorithm owner. Depending on the algorithm andits owner, the license fee may be a flat fee, a per unit royalty or acombination of the two.

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We are developing Forte under a task order issued under a contract withNational Security Agency. The contract incorporates the Department of Defense'sstandard licenses for technical data and computer software, commonly known asthe data rights clauses. Data rights clauses are only applicable to data orsoftware actually delivered to the federal government under a contract. If thedata rights clauses were applicable to our agreement with the National SecurityAgency to develop Forte, one of the data rights licenses, commonly called agovernment purpose rights license, would permit the federal government to createsecond sources of supply of the Forte technical data and source code for itselfwithout paying us royalties. The government purpose license clause would notauthorize the Federal government to create competitors to us in the commercialmarket. We do not believe the data rights clauses generally, or the governmentpurpose license specifically, apply to Forte because our contract with theNational Security Agency does not provide for the delivery of Forte to thefederal government. The task order provides that the National Security Agencywill obtain detailed design information about Forte.

GOVERNMENT REGULATION

Because we sell our products internationally, we must comply with federallaws regulating the export of, and applicable foreign government laws regulatingthe import of, our products. The U.S. government has recently relaxed the exportrestrictions for our NetSign and ProFile Manager products. However, the federalgovernment may rescind these approvals at any time. Under current regulationsthese products can be exported without a license to most countries for use bybanks, healthcare, insurance organizations and overseas subsidiaries of U.S.companies.

Additionally, we may apply for export approval, on a specific criteria



basis, for our future products. Government export regulation for securityproducts is less stringent for products designed for banking and finance, e-commerce, health, insurance and for use by U.S. subsidiaries. We may not receiveapproval to export any future products on a timely basis, on the basis werequest or at all. As a result of government regulation of our products, we maybe at a disadvantage in competing for international sales compared to foreigncompanies that are not subject to these restrictions.

EMPLOYEES

As of April 1, 1999, Litronic employed 64 full-time and four part-timepeople, including 40 in product management, research, development and support,two in professional services, 14 in field operations including sales, marketingand customer management, and 12 in finance, human resources, businessdevelopment, legal and administration. As of April 1, 1999, Pulsar employed 61people, including four in product management, 17 in professional services, 17 infield operations including sales, marketing and customer management, and 23 infinance, human resources, business development, legal and administration. Afterthe closing of this offering, we expect to integrate Pulsar's workforce.

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Our employees are not represented by labor unions. We do not expect thatany of our employees will be represented by any labor unions after the closingof this offering. We consider our relations with our employees to be good.

FACILITIES

After the closing of this offering, we will be headquartered in Irvine,California where we currently lease approximately 12,000 square feet of officespace for our executive offices with a lease expiring in September 2001 andapproximately 1,800 square feet of space in a production and warehouse facilityand which has a lease expiring in June 1999. In addition, after the closing ofthis offering, we will conduct a significant portion of our operations atPulsar's offices in our 12,700 square foot Lanham, Maryland facility, which weuse as office space for our executive offices and as warehouse space, under alease that expires in 2003.

LEGAL PROCEEDINGS

We are involved from time to time in routine litigation that arises in theordinary course of business. We are not currently involved in any litigationwhich we believe will have a material impact on our results of operations,financial condition or liquidity, other than the following:

In the course of its business, Pulsar has been extended credit from severaltrade vendors for the purchase of supplies, equipment, merchandise and services.Pulsar's accounts for several of these trade vendors have been past due for asignificant amount of time. As a result, several of these trade vendors havefiled lawsuits against Pulsar seeking to collect the amounts owed by Pulsar. Inaddition, Prince George's County, Maryland has filed a lawsuit against Pulsarto collect personal property taxes in the amount of $38,500. Aggregate amountclaimed under these lawsuits was approximately $1.6 million, exclusive ofinterest and costs. Pulsar has entered into settlement agreements covering someof the lawsuits and as of April 1, 1999 has paid in excess of $600,000 underthose agreements. As of April 1, 1999, the aggregate amount Pulsar owes onclaims that have been filed and settled is approximately $250,000. The aggregateamount of claims that have been filed but not settled is approximately $731,000.We intend to use our new term loan and anticipated cash flow from operations toresolve and pay these claims and settlements. See "Management Discussion &Analysis of Financial Condition and Results of Operation."

On January 16, 1998, G2 Resources Inc. filed a complaint against Pulsar inthe Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida. G2claims that Pulsar breached a contract under which G2 agreed to provide servicesrelated to the monitoring of government contracts available for bid and thepreparation and submission of bids on behalf of Pulsar. The contract providesthat Pulsar pay G2 $500,000 in 30 monthly installments of $16,666 and anadditional fee of 2% of the gross dollar amount generated by awards. In itscomplaint, G2 alleged that Pulsar failed to make payments

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under the contract and claimed damages in excess of $525,000 plus interest,costs and attorneys fees. In the course of discovery G2 asserted that itslosses/costs arising out of its claim amount to approximately $10.3 million.Pulsar has asserted that G2 failed to perform the services required under thecontract and Pulsar filed a claim for compensatory damages, interest andattorneys fees against G2. Classical Financial Services, LLC intervened in thecase. Classical claims that G2 assigned its accounts receivable to Classicalunder a financing program and that Pulsar breached its obligations to Classicalby failing to make payments under the contract with G2. Pulsar has asserted



defenses to Classical's claim. Pulsar believes that the claims of G2 andClassical against Pulsar are without merit and intends to continue to vigorouslydefend against the claims. If G2 or Classical were to prevail in this lawsuit,our business and financial condition could be materially adversely affected.

On July 11, 1997, Rudolph Menna filed a complaint against Pulsar andWilliam W. Davis, Sr. in the U.S. District Court for Northern District ofGeorgia, Atlanta Division. Mr. Menna alleges that he was wrongfully terminatedas a Pulsar employee and that Pulsar and Mr. Davis unlawfully discriminatedagainst him on the basis of race and age. Mr. Menna's complaint seeks anunspecified amount of damages including back pay, front pay, benefits,compensatory and punitive damages, interest and attorneys fees. Pulsar and Mr.Davis have filed an answer denying the material allegations in the complaint.Pulsar and Mr. Davis believe that Mr. Menna's lawsuit is without merit andintend to continue to vigorously defend against it. If Mr. Menna were to prevailin the suit our business and financial condition could be materially adverselyaffected.

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MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The following table contains information concerning our directors, directornominees, officers, persons who have agreed to serve as executive officers uponthe closing of this offering and other key employees, and their respective agesas of April 1, 1999:

<TABLE><CAPTION>NAME AGE POSITION---- --- --------<S> <C> <C>Kris Shah................... 59 Chairman of the Board and Chief

Executive Officer

William W. Davis, Sr........ 48 President, Chief Operating Officerand Director

Thomas W. Seykora........... 55 Chief Financial Officer

Robert J. Brich............. 55 Vice President, GovernmentMarketing and Sales

Robert J. Gray.............. 62 Vice President, ProductDevelopment

William S. Holmes........... 52 Vice President, CommercialMarketing and Sales

Anthony Giraudo............. 47 Director Nominee

Matthew Medeiros............ 42 Director Nominee</TABLE>

Kris Shah is our chairman of the board and chief executive officer. Mr.Shah has been Litronic's president and chief executive officer since he foundedthe company in 1970. Mr. Shah's career has involved every major aspect ofcircuit design and chip packaging technology, including research anddevelopment, manufacturing, engineering, marketing and strategic planning.Before forming Litronic, Mr. Shah held management level positions at HughesAircraft Co., Fiberite Inc. and Bell Industries, Inc. Mr. Shah earned his B.S.and M.S. degrees in mechanical engineering from the University of SouthernCalifornia in 1962 and 1964.

William W. Davis, Sr. is our president and chief operating officer. Mr.Davis served as Pulsar's president and chief executive officer since he foundedthe company in 1982. Mr. Davis sits on the advisory boards of IBM, Ingram Microand Pinacor Corporation. Over the past 16 years, Mr. Davis grew Pulsar into adiversified technology company, specializing in providing network-basedinformation technology services and customized products to Fortune 1000 andgovernment accounts. Before founding Pulsar, Mr. Davis

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held various management positions with several Fortune 1000 companies, includingDuPont, Chevron and Occidental Petroleum Corporation. He is the recipient ofnumerous industry awards, including awards for outstanding leadership andperformance from the Government Computer News (1994-1997), Lockheed MartinCorporation and various industry associations. Mr. Davis earned his B.S. in



agronomy from Southern University in 1972 and completed advanced executivemanagement programs at Dartmouth University in 1994 and the University of Miamiin 1995.

Thomas W. Seykora is our chief financial officer. Mr. Seykora joinedLitronic in July 1995 as its chief financial officer. Before joining Litronic,Mr. Seykora was an independent management consultant to companies and financialinstitutions from 1986 to July 1995. From 1982 to 1986, he served as chieffinancial officer and senior vice president-finance and operations for CurleyBates Co., a closely held distribution company. Before that, Mr. Seykora workedfor KPMG LLP (then known as Peat, Marwick, Mitchell & Co.), most recently as anaudit manager. Mr. Seykora also served as an officer, achieving the rank ofcaptain, in the U.S. Marine Corps. He received a B.A. degree in accounting fromMinnesota State University.

Robert J. Brich has agreed to serve as our vice president, governmentmarketing and sales, upon closing of this offering. Mr. Brich will beresponsible for the development, management and performance of Litronic'snetworking and data security solutions and services. Mr. Brich has served asexecutive vice president of technical services of Pulsar since September 1998.From January 1998 to September 1998, Mr. Brich served as president of InfotexLtd., a developer of data security products. From September 1997 to December1997, Mr. Brich served as director of business development for SFA, Inc., anengineering services company. Mr. Brich served as executive vice president ofManagement Systems Applications, Inc., a worldwide information and electronicsecurity provider, from June 1994 to September 1997. Mr. Brich served as seniorvice president of SEACOR, an engineering consulting firm from January 1990 toJune 1994. Mr. Brich retired as a commander in the U.S. Navy after 22 years ofservice. Mr. Brich serves as chairman of the board of directors for theTidewater Center for Technology Access, a community charitable organization. Mr.Brich holds a B.S. in education from East Stroudsburg University, an M.S. fromthe Naval War College and an MBA from Marymount College. He also attendedstrategic management curriculums at Wharton School of Business. Mr. Brich iscurrently a Ph.D. candidate in business and education at Old DominionUniversity.

Robert J. Gray has agreed to serve as our vice president, productdevelopment upon the closing of this offering. Mr. Gray joined Litronic in May1990. Mr. Gray served as president of Cyphernet, Inc., a division of Codercard,Inc., a data security company, from January 1985 to May 1990. Mr. Gray has alsoserved as president of Genisco Computers Corp., a leading manufacturer ofcomputer graphics and imaging hardware for the computer aided design, imageprocessing and simulation markets. After obtaining his education in meteorology,oceanography and computer sciences from various military schools including theNaval Postgraduate School in Monterey, California, Mr. Gray served as an officerin the

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U.S. Navy for 22 years, specializing in meteorology and computer sciences.During his Naval career, Mr. Gray completed numerous assignments within theDepartment of Defense, the National Security Agency and the Naval SecurityService.

William S. Holmes, has agreed to serve as our vice president, commercialmarketing and sales, upon closing of this offering. Mr. Holmes has over thirtyyears experience in the computer industry. Mr. Holmes joined Litronic in October1998 as vice president, marketing and sales. From September 1996 to September1998, Mr. Holmes served as vice president, sales and marketing for GigatronSoftware Corporation, a private information management company. From April 1996to September 1996, Mr. Holmes served as consultant to Novaquest InfosystemsInc., a computer reseller. From October 1985 to April 1996, Mr. Holmes served asvice president, managing director of California Software Products, Inc. FromJune 1984 to October 1985, Mr. Holmes served as sales manager of Data Logic Ltd.(a subsidiary of Raytheon Corporation). From February 1971 to June 1984, Mr.Holmes served in project management for International Computer Limited inEngland and South Africa. Mr. Holmes attended Watford College of Technology inEngland.

Anthony Giraudo has agreed to serve as a director of our company upon theclosing of this offering. Since 1986, Mr. Giraudo has worked for AtmelCorporation (and its predecessor, Honeywell), most recently as vice presidentand general manager. Before joining Honeywell, Inc., Mr. Giraudo worked for NCRCorporation in various positions from 1980 through 1986, his most recentposition being director of research and development. Mr. Giraudo served asanalog I.C. designer for International Business Machines from 1977 to 1980. Mr.Giraudo received his B.S. in electrical engineering in 1972 and his M.S. inelectrical engineering in 1976, both from the University of New Mexico. He alsocompleted the cooperative electrical engineering program at the University ofNew Mexico from 1970 to 1974.

Matthew Medeiros has agreed to serve as a director of our company upon theclosing of this offering. Since February 1998, Mr. Medeiros has served as



chairman and chief executive officer of Phillips Flat Display Systems. Beforejoining Phillips, Mr. Medeiros served as vice president and general manager forthe optical polymers group, and as vice president of business development forthe electronic materials division, of Allied Signal Inc. from January 1996 toFebruary 1998. Mr. Medeiros served as an executive officer of Radius, Inc.,including as its vice president and general manager, MacIntosh systems, and asits vice president operations and information systems, from March 1993 toJanuary 1996. Mr. Medeiros also previously served in executive positions withRadius, Inc., NeXT Computer and Apple Computer, Inc. in which positions hedeveloped an extensive background in personal computer manufacturing, operationsand materials management. Mr. Medeiros received his B.S. in businessadministration, management science and finance from the University of SanFrancisco.

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BOARD OF DIRECTORS

Our board of directors consists of three classes of directors. Class I, IIand III directors serve until our 2000, 2001 and 2002 annual meeting ofstockholders. After these initial terms, directors serve until the third annualmeeting of stockholders following their election or until a successor is dulyelected and qualified. Executive officers are elected by the board of directorsto serve until their successors are elected and qualified. Mr. Medeiros willserve as a Class I director, Mr. Giraudo will serve as a Class II director, andMessrs. Shah and Davis will serve as Class III directors.

We have agreed that for a period of three years from the date of thisprospectus, at BlueStone's request, we will nominate and use our best efforts toelect two designees of BlueStone as directors of our company or, at BlueStone'soption, as non-voting advisors to our board of directors. Our officers,directors and stockholders have agreed to vote their common stock in favor ofBlueStone's designees. BlueStone has not yet exercised its designation right.

DIRECTORS COMPENSATION. Except for grants of stock options, directors willnot receive any cash compensation for their services as board members althoughthey will be reimbursed for expenses in attending board and committee meetings.

COMMITTEES OF THE BOARD OF DIRECTORS. Upon the closing of this offering,the board of directors will establish a compensation committee and an auditcommittee. The initial members of each of the committees will be independentdirectors. The compensation committee will be responsible for receiving andmaking recommendations to the board on all compensation and hiring issuesrelating to officers and senior staff members and administering the 1999 stockoption plan. The audit committee will be responsible for making recommendationsto the board regarding the selection of our independent accountants, consultingwith our independent accountants and financial and accounting staff andreviewing and reporting to the board on the scope of audit procedures,accounting practices and internal accounting and financial controls.

EXECUTIVE COMPENSATION

The following table sets forth the total compensation paid or accrued forthe year ended December 31, 1998 for our chief executive officer, who was theonly executive officer whose compensation was over $100,000 during the fiscalyear ended December 31, 1998.

<TABLE><CAPTION>

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATIONNAME AND PRINCIPAL POSITION YEAR SALARY AND BONUS ALL OTHER COMPENSATION--------------------------- ---- -------------------- -----------------------<S> <C> <C> <C></TABLE>

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<TABLE><S> <C> <C> <C>Kris Shah..................... 1998 $231,998 (See below)

Chief Executive Officerand Chairman of the Board

</TABLE>

Mr. Shah also received other fringe benefits from Litronic in his capacityas chief executive officer and chairman of the board; however, those benefitswere less than $50,000 during the year ended December 31, 1998.

We anticipate that during the fiscal year ending December 31, 1999 the onlyexecutive officers that will earn $100,000 or more will be Messrs. Shah, Davis



and Gray.

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<TABLE><CAPTION>

OPTION/SARS GRANTS IN LAST FISCAL YEAR

POTENTIAL REALIZABLE VALUEAT ASSUMED ANNUAL RATES OFSTOCK PRICE APPRECIATION

INDIVIDUAL GRANTS FOR OPTION TERM------------------------------------------------------------------------------- --------------------------

(a) (b) (c) (d) (e) (f) (g)NUMBER OF % OF TOTALSECURITIES OPTIONS/SARSUNDERLYING GRANTED TO EXERCISEOPTIONS/ EMPLOYEES IN OR BASE EXPIRATION

NAME SARS GRANTED FISCAL YEAR PRICE ($/SH) DATE 5% ($) 10% ($)---- ------------ ----------- ------------ ---------- ------ -------<S> <C> <C> <C> <C> <C> <C>Bob Gray 77,419 27.5% $0.70 None $34,082 $86,370Thomas Seykora 11,613 4.1% 0.70 12/31/03 5,112 12,956---------------------------------------------------------------------------------------------------------------</TABLE>

No other executive officer whose name appears in the table under"Management-Executive officers, directors and key employees" received stockoptions or stock appreciation rights in the year ended December 31, 1998.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

<TABLE><CAPTION>

VALUE OF UNEXERCISEDNUMBER OF SECURITIES UNDERLYING IN-THE-MONEY OPTIONS AT FISCAL

UNEXERCISED OPTIONS AT FISCAL YEAR END YEAR END------------------------------------------ -----------------------------------------

NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE-------------- ----------------- -------------------- ----------------- -------------------<S> <C> <C> <C> <C>Robert Gray 77,419 -- $410,321 --Thomas Seykora 2,323 9,310 $ 12,312 $49,343</TABLE>

The value of the options described above is based upon the differencebetween the exercise price per share and the estimated fair market value pershare at December 31, 1998, as determined by the board of directors, multipliedby the number of shares subject to the options.

EMPLOYMENT AGREEMENTS

GENERAL

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Kris Shah and William Davis have each entered into a 2-year employmentagreement with Litronic, effective as of the date of the offering. Theagreement provides that after the initial term it will automatically renew forsuccessive one year terms unless it is terminated by us or by the employeethrough written notice given to the other party 90 days before the expiration ofthe then current term. The agreements provide that Messrs. Shah and Davis willeach receive an annual salary of $175,000 for the 12-month period following thedate of this prospectus. Thereafter, their salaries may be adjusted by ourcompensation committee. Each of Messrs. Shah and Davis are also entitled toreceive annual bonus awards of $100,000 if we have earnings of $2.5 million ormore and an additional $37,500 for each additional $1 million of earnings inexcess of $2.5 million.

In making the calculation for the bonuses we will measure earnings beforeinterest and taxes and will add back the amortization of goodwill resulting fromthe Pulsar acquisition.

TERMINATION OF EMPLOYMENT

Each employment agreement provides that, in addition to being terminatedthrough the notice features described above, employment may be terminated asfollows:

. by the employee if the employee has good reason to terminate theagreement. Good reason exists if:



. the employee is relieved of his position as, or is notreappointed as, an officer of our company;

. the employee's title, office or responsibilities changesubstantially;

. the employee's base salary is reduced to an amount that is lessthan $175,000 or by more than 10%;

. we fail to maintain our employee benefit plan;

. we sell or transfer our company and fail to obtain thesuccessor's assumption of the employment agreement; or

. we fail to comply with a material term of the employmentagreement and fail to cure our default after appropriate notice.

. by us if we determine that due cause for termination exists. Due causeexists if we find that the employee:

. intentionally misapplied our money or property;

. committed an act of dishonesty that harmed our company;

. was convicted of a felony or a crime involving moral turpitude;

. has used a controlled substance, including alcohol, which affectshis ability to perform his job duties; or

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. breached the terms of the employee agreement.

. Additionally, we can terminate the agreement upon the employee's:

. death;

. disability for more than 180 days after we give 30 days notice ofour intention to terminate the agreement; or

. retirement.

Finally, we can terminate the employment agreement for any other reason, atany time, but we will be deemed to have constructively terminated the agreementand will be liable to pay the employee the severance payment described below.

PAYMENT UPON TERMINATION

We may be obligated to make payments to the employee upon termination ofemployment depending on the circumstances surrounding the termination.Following is a description of situations in which we may or may not be obligatedto make severance payments:

. If the employment agreement is terminated by the employee after givingnotice, by us for cause or by the employee in breach of the agreement,we will not be obligated to pay any compensation after the terminationdate, except:

. employee benefits;

. unpaid base salary the employee has earned which we have not yetpaid; and

. vested stock options.

. If the employment agreement is terminated by the employee for goodcause or by us through a constructive termination, we will beobligated to pay the employee:

. his annual salary through the latter of the end of the employmentagreement term or a period of two years;

. a pro rata bonus for the fiscal year in which the terminationoccurs;

. continuing medical and life employee benefits for six monthsafter the termination; and

. vested stock options.



CONFIDENTIALITY AND NONCOMPETE CLAUSES

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Each of the employment agreements also contains noncompete, confidentialityand nondisclosure clauses designed to protect our intellectual property.Additionally, each agreement contains a provision designed to preclude theemployee from claiming rights to any products or technologies he developed whilein our employ or for a two-year period following his termination.

STOCK OPTION PLANS

1998 STOCK OPTION PLAN

Our 1998 stock option plan was established to provide directors, officersand employees with an opportunity to invest in our company and to advance ourinterest and our stockholders' interests by enabling our company to attract andretain qualified personnel. Under the plan our board of directors has authorityto grant incentive stock options intended to qualify under Section 422 of theInternal Revenue Code of 1986 to our employees and non-qualified stock optionsto our employees, officers and directors or to some other individuals as theboard determined. Generally, the board of directors has discretion to amend,suspend or terminate the plan from time to time. Administration of the plan maybe delegated to a committee appointed by the board of directors. The optionperiod and provisions for exercise of each option granted are determined by thecommittee at the time of each the grant. Unless it is terminated earlier, theplan terminates on April 1, 2008.

Options to purchase an aggregate of 281,419 shares of common stock havebeen granted under the 1998 stock option plan at an exercise price of $.70 pershare. Of these, options to purchase 142,927 shares are vested as of the dateof this prospectus. Of these options,

. options to purchase 77,419 shares have been granted to Mr. Gray, allof which have vested;

. options to purchase 11,613 shares have been granted to Mr. Seykora,of which options to purchase 2,323 shares have vested and theremaining 9,073 options will vest at a rate of 2,323 per year.

No additional options will be granted under the 1998 stock option plan.

1999 STOCK OPTION PLAN

Our 1999 stock option plan is intended to provide directors, officers andemployees with an opportunity to invest in our company and to advance ourinterest and our stockholders' interests by enabling our company to attract andretain qualified personnel. Under the plan our board of directors has authorityto grant incentive stock options intended to qualify under Section 422 of theInternal Revenue Code of 1986 to our employees and non-qualified stock optionsto our employees, officers and directors or to

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some other individuals as the board may determine. Generally, the board ofdirectors has discretion to amend, suspend or terminate the plan from time totime. Administration of the plan may be delegated to a committee appointed bythe board of directors. The option period and provisions for exercise of eachoption granted shall be determined by the committee at the time of the grant. Atotal of 600,000 shares of common stock have been reserved for issuance in theaggregate under the plan. No options have been granted under the plan. Unless itis terminated earlier, the plan will terminate on March 31, 2009. Options orother awards that are granted under the plan but which expire unexercised areavailable for future grants.

PRINCIPAL STOCKHOLDERS

The following table presents, as of the date of this prospectus,information we know regarding the beneficial ownership of our common stock by(a) each person or entity known to us to own beneficially more than 5% of thecommon stock, (b) each director, (c) each director nominee, (d) each namedexecutive officer, and (e) all directors and executive officers as a group. Inpresenting this information, we have:

. given effect to the Pulsar acquisition;

. assumed that there are 6,040,631 shares outstanding as of the date of thisprospectus and 9,040,631 shares outstanding immediately after theconsummation of this offering.

The address of each person in the table below is the address of our



company.

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<TABLE><CAPTION>

NUMBER OF PERCENTAGE OF OUTSTANDINGSHARES SHARES BENEFICIALLY OWNED

-----------------------------NAME AND ADDRESS OF BENEFICIALLY BEFORE AFTERBENEFICIAL OWNER OWNED OFFERING OFFERING

------------------------------------------ ------------ -------- -------<S> <C> <C> <C>Kris Shah................................. 3,220,479 53.3% 35.6%William W. Davis, Sr...................... 1,084,969 18.0 12.0Lillian Davis............................. 1,084,969 18.0 12.0Ramesh R. Shah

Patricia L. Shah....................... 463,657 7.7 5.1Robert J. Gray............................ 77,419 1.3 0.8Anthony Giraudo........................... 0 0 0Matthew Medeiros.......................... 0 0 0All directors and executiveofficers as a group (6 persons)........... 4,367,019 71.3 47.8</TABLE>

_______________

In calculating the information in this table, we relied on the followingassumptions:

. all the persons named in the table have sole voting and investmentpower over all shares they beneficially own, subject to communityproperty laws, where applicable;

. a person or entity is considered the beneficial owner of securitiesthat it can acquire through the exercise of options within 60 daysfrom the date of this prospectus;

. In calculating each beneficial owner's percentage ownership weassumed that only options held by that person that are exercisablewithin 60 days of the date of this prospectus have been exercised.

The shares beneficially owned by Kris Shah include (a) 435,301 shares heldby the Chandra L. Shah Trust, of which Mr. Shah is the trustee, (b) 435,301shares held by the Leena Shah Trust, of which Mr. Shah is the trustee and (c)2,349,877 shares held by the Kris and Geraldine Shah Family Trust, of which Mr.Shah and his wife are the trustees and beneficiaries.

The shares beneficially owned by Ramesh R. Shah and Patricia L. Shah areheld by the Ramesh R. Shah and Patricia L. Shah Living Trust, of which Ramesh R.Shah and

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Patricia L. Shah are trustees and beneficiaries. Ramesh Shah is the brother ofKris Shah and Patricia Shah is the sister-in-law of Kris Shah.

The shares beneficially owned by Mr. Gray are shares issuable upon exerciseof his currently exercisable options.

The shares beneficially owned by all directors and executive officers as agroup include 80,904 shares issuable upon exercise of currently exercisableoptions and exclude 69,846 shares issuable upon exercise of options which becomeexercisable at various times commencing December 31, 1999. The inclusion ofshares in this table as beneficially owned is not an admission of beneficialownership.

CERTAIN TRANSACTIONS

THE PULSAR ACQUISITION

Litronic entered into a stock acquisition agreement with Pulsar and WilliamW. Davis, Sr., our president and chief operating officer, and Lillian Davis, theformer stockholders of Pulsar. The agreement provides that Mr. Davis and Ms.Davis will exchange all of their stock for an aggregate of 2,169,938 shares ofour common stock simultaneously with the closing of this offering. The sharesof our common stock that Mr. Davis and Ms. Davis will receive are valued atapproximately $21.7 million, based on an assumed initial public offering priceof $10 per share. As a result of the Pulsar acquisition, Pulsar will become awholly-owned subsidiary of our company and William Davis and Lillian Davis willbecome principal stockholders of our company.



THE POTENTIAL ASSURE TECHNOLOGY ACQUISITION

Creditors of Sistex, Inc., the current owner of the Assure technology, haveobtained judgments against Sistex aggregating approximately $6.0 million. Asa result, Sistex has turned over to a Commissioner in Chancery the Assuretechnology for sale or other disposition.

We intend to enter into an agreement with the judgment holders on or beforeApril 16, 1999 by which:

. the judgment holders will agree to postpone the foreclosure sale untilafter the closing of this offering so that we will have an opportunityto bid on and possibly acquire the technology, and

. in return, we will agree to make a minimum bid at the foreclosure saleof least $6.0 million, payable in unregistered shares of our commonstock

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valued at the average closing price of our common stock on Nasdaq onthe five days prior to the day of the foreclosure sale.

Our decision to enter into this agreement will be subject to our being satisfiedwith the results of our due diligence investigation relating to the Assuretechnology, which investigation must be completed prior to April 16, 1999.

Included among the judgment holders in the foreclosure action areaffiliates of BlueStone, who hold judgments aggregating approximately $750,000,including a judgment in the amount of approximately $150,000 held by AnthonyGiraudo, a director nominee of our company and a limited partner of BlueStone.If our bid is the winning bid at the foreclosure sale, all of the judgmentholders, including the BlueStone affiliates, will receive their proportionatepercentage of the shares of our common stock included in the bid.

OTHER TRANSACTIONS WITH RELATED PARTIES

We had obligations aggregating approximately $211,000 to Kris Shah, ourchief executive officer and chairman of the board, for accrued compensation atDecember 31, 1994. On January 2, 1995, this obligation was converted into anunsecured note, bearing interest at an annual rate of 8%, which was due onDecember 31, 1998. On October 29, 1997, the aggregate principal and interestamounting to approximately $252,000 due on the note was repaid.

In 1996 and 1997, in the ordinary course of business, we have financedequipment for our operations in the aggregate amount of approximately $1.5million. These obligations were personally guaranteed by Kris Shah, and weresatisfied in full during 1997.

In June 1995, Davis Holding, Inc., a privately held corporation ownedentirely by the son of William W. Davis, Sr., purchased a building in Atlanta,Georgia. This purchase was financed through loans to Davis Holding, Inc. fromWilmington Trust Company in the amount of $2.4 million. These loans wereguaranteed by Pulsar and personally guaranteed by William W. Davis, Sr. andLillian Davis.

Between July 1995 and June 1996, Pulsar made a series of eight loansaggregating $2.8 million to Davis Holding, Inc. These loans bear interest atannual rates varying from 7.5% to 10.0% and are due on demand. Two of theseloans were in the form of assignment of notes receivable to Pulsar from thirdparties in the aggregate principal amount of $623,000, which were assigned backto Pulsar in December 1997. The notes were written off as bad debt expense inthe year ended December 31, 1997.

In October 1995, Davis Holding, Inc. and Mr. Davis' son purchased PalmerIII Limited Partnership. At the time of the purchase, the principal asset ofPalmer was a building in Lanham, Maryland. This purchase was financed through aloan to Davis Holding, Inc. from Wilmington Trust Company in the amount of $2.8million which was guaranteed by Pulsar and personally guaranteed by William W.Davis, Sr. and Lillian Davis. Following the acquisition of the building, DavisHolding, Inc. leased a portion of the Lanham, Maryland building to Pulsarat

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fair market rate rents. Payments of rent under the lease were $1,042,000,$955,500 and $409,500 during the years ended December 31, 1996, 1997 and 1998. Aportion of the rent expense incurred under the related party lease was used tooffset the notes receivable balance of the related party. The amount of rentexpense used to offset the notes receivables from Davis Holding, Inc. for the



years ended December 31, 1997 and 1998 was $182,000 and $344,000. In addition,principal and interest under the notes were reduced by $750,000 as payment of afee for terminating the lease as of September 30, 1998. As of January 1, 1999,the approximately $1.3 million outstanding under these loans was converted intoa $543,000 promissory note and a $804,000 promissory note, each bearing interestat an annual rate of interest of 7.5%, payable monthly, and maturing upon thesales of the Lanham, Maryland and Atlanta, Georgia properties. Previously, itwas anticipated that these sales would occur in 1999; however, the transactionshave been delayed for an unspecified period of time. Consequently, Pulsar can nolonger determine the recoverability of these notes and therefore reclassifiedthe notes as a reduction of stockholders' equity and fully reserved for them asof December 31, 1998. The notes are being retained by Pulsar.

In May 1996, Pulsar entered into a line of credit with Wilmington TrustCompany which was personally guaranteed by William W. Davis, Sr., and LillianDavis. Under the line of credit, Pulsar could borrow up to the lesser of itsaccounts receivable or $22 million secured by a pledge of eligible accountsreceivable, inventory, machinery and equipment. Interest on the outstandingline of credit accrues at a variable rate of interest. In October 1997, theline of credit was converted to a term loan of $5.20 million which is guaranteedby William W. Davis, Sr., Lillian Davis, Palmer III Limited Partnership andDavis Holding, Inc., and is secured by an indemnity mortgage and security deedfrom Palmer III Limited Partnership on its Lanham, Maryland property and asecurity deed from Davis Holding, Inc. on its Atlanta, Georgia property.

We had an unsecured revolving line of credit up to $1 million from KrisShah which accrued interest at an annual rate of 8%. All unpaid principal andinterest under this line was repaid during 1996. During the year ended December31, 1996, $30,000 of the interest under this line was paid to Mr. Shah. Theline of credit expired on January 31, 1997 and was not renewed.

In June 1996, we entered into a one-year loan and security agreement withFidelity Funding, Inc., which was personally guaranteed by Kris Shah. Under theagreement, Fidelity extended a variable rate credit line of up to $5.95 million,of which $1.0 million was collateralized by fixed assets, $2.2 million wascollateralized by real estate, $2.5 million was collateralized by accountsreceivable and inventory and $250,000 in the form of a standby line of credit.In September 1997, we sold the building securing the $2.2 million real estateline and repaid the line. In March 1998, the $2.5 million revolving creditfacility was extended to February 2000. As of December 31, 1998, $580,000 wasoutstanding under this facility. We intend to repay the outstandingindebtedness under this credit facility out of the proceeds from this offering,at which time Mr. Shah's guarantee will be released.

In December 1996, we entered into a line of credit at a fixed annual rateof interest of 6.6% with the Bank of Yorba Linda for up to $1.04 million, whichwas personally guaranteed by

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Kris Shah and his wife Geraldine Shah and secured by a pledge of their personalassets. This line was repaid in June 1997.

In January 1997, we formed KRDS, Inc. as a wholly owned subsidiary inconnection with the acquisition of real estate. In connection with the formationof KRDS, Inc. we made a capital contribution in the amount of $8.5 million toKRDS, Inc. Following the acquisition, KRDS leased to us at market a portion ofthe property acquired to use in our former Intercon division. In December 1997,we made a cash distribution of $9.5 million to our stockholders. Subsequently,we distributed the capital stock and net assets of KRDS (discussed below) to ourstockholders. As a result of the KRDS distribution, we removed the property andthe corresponding mortgage and related liabilities from our consolidated balancesheet. Following the distribution, we borrowed $2.9 million from KRDS which wasevidenced by an unsecured promissory note. In February 1998, we borrowed anadditional $600,000 from KRDS which borrowing was evidenced by an unsecuredpromissory note. Each of these notes bore interest at an annual rate of 10% andwere paid in full in September 1998 with the proceeds of our loan from BYL BankGroup.

In October 1997, Pulsar entered into an inventory and working capitalfinancing agreement with IGFC which provides that Pulsar can finance purchasesof products through IGFC. As amended on February 2, 1999, the agreement providesfor a credit line up to the lesser of $8 million, a specified percentage ofPulsar's eligible accounts receivable or a specified percentage of Pulsar's on-hand inventory. The credit line is secured by substantially all Pulsar's assetsand personal assets of William W. Davis, Sr. and is personally guaranteed by Mr.Davis and Lillian Davis. We intend to repay a portion of the indebtednessoutstanding under this financing agreement using proceeds from this offering, atwhich time Mr. Davis' guarantee and the assets pledged by Mr. Davis will bereleased.

During the year ended December 31, 1997 we made pro rata distributions toour stockholders of (a) $9.5 million in cash, (b) the rights to the contingentpayment relating to the sale of our Intercon division, (c) the rights to a



gross-up payment for expected tax liability resulting from the gain on the saleof our Intercon division and (d) the capital stock and net assets of KRDS ($8.5million of cash).

In September 1998, we executed two promissory notes aggregating $5.2million in favor of BYL Bank Group at a fixed annual rate of interest of 6.6%.Both notes were personally guaranteed by Kris Shah and secured by a pledge ofpersonal assets of Mr. Shah. We intend to use a portion of the proceeds of thisoffering to repay the indebtedness under this loan, at which time Mr. Shah'sguarantee and the assets pledged by Mr. Shah will be released.

Mr. Davis loaned to Pulsar $120,000 on November 23, 1998 and $222,000 onJanuary 5, 1999. These loans bear interest at the annual rate of 6% beginningApril 1, 1999.

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DESCRIPTION OF SECURITIES

Upon the closing of the offering, our authorized capital stock will consistof 25,000,000 shares of common stock, $0.01 par value per share and 5,000,000shares of preferred stock, $0.01 par value per share. As of the date of thisprospectus, there are 3,870,693 shares of our common stock held of record byfive stockholders, and, after giving effect to the Pulsar acquisition, therewill be 6,040,631 shares of our common stock outstanding held of record by sevenstockholders.

We have summarized below selected provisions of Delaware law applicable toour company, and the principal provisions of our common stock, our certificateof incorporation and our bylaws. However, our descriptions are only a summaryand you should refer to the actual provisions of Delaware law, our certificateof incorporation and our bylaws which we included as exhibits to theregistration statement, for a more complete explanation of theirprovisions.

COMMON STOCK

Holders of our common stock are entitled to one vote for each share held onall matters submitted to a vote of stockholders and do not have cumulativevoting rights. Therefore, holders of a majority of the shares of common stockmay elect all of the directors standing for election. Holders of common stockare entitled to receive any dividends that are declared by the board ofdirectors. Upon our liquidation, dissolution or winding up, and after payment ofall debts and other liabilities holders of our common stock are entitled toreceive our remaining net assets. Holders of common stock have no preemptive,subscription or redemption rights. The outstanding shares of common stock are,and the shares we are offering in this offering will be when issued and paidfor, fully paid and non-assessable.

PREFERRED STOCK

Our certificate of incorporation authorizes our board of directors to issueup to 5,000,000 shares of preferred stock with a par value of $0.01 per share.The board may issue the stock in one or more series and may fix the rights,voting process and preferences of the stock. As of the date of this prospectus,no shares of preferred stock have been issued.

REGISTRATION RIGHTS

We have entered into a registration rights agreement with our stockholderswhich grants our stockholders the right to include their shares in anyregistration of our common stock in an underwritten offering that occurs afterthis offering. All of the stockholders have agreed not to exercise this rightfor two years following the closing of this offering, without the prior writtenconsent of BlueStone. We have also

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granted the representatives of the underwriters registration rights with respectto their warrants to purchase up to 300,000 shares of our common stock.

DELAWARE LAW AND CHARTER AND BYLAW PROVISIONS LIMITING LIABILITY OF OFFICERS ANDDIRECTORS

Section 203 of the General Corporation Law of Delaware generally prohibitsus from engaging in a merger, asset sale and other transaction with aninterested stockholder that results in a financial benefit to the interestedstockholder for a three year period from the date the person became aninterested stockholder. Generally, an interested stockholder is a person who,together with affiliates and associates, owns, or within three years did own,15% or more of our voting stock.



Under Delaware General Corporation Law the affirmative vote of a majorityof the shares entitled to vote on any matter is required to amend ourcertificate of incorporation or bylaws.

Our certificate of incorporation contains provisions limiting the liabilityof our directors. Specifically, the provisions eliminate a director's liabilityfor monetary damages for a breach of fiduciary duty, except in cases involvingwrongful acts, such as the breach of a director's duty of loyalty, or acts oromissions which involve intentional misconduct or a knowing violation of law.Further, our certificate of incorporation contains provisions to indemnify ourdirectors and officers to the fullest extent permitted by the Delaware GeneralCorporation Law. We believe these provisions will assist us in attracting andretaining qualified individuals to serve as directors.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock is Continental StockTransfer & Trust Company, Two Broadway, New York, New York 10004.

SHARES ELIGIBLE FOR FUTURE SALE

An aggregate of 3,870,693 of the 6,040,631 shares currently restricted fromtrading in the public market will become eligible for sale 90 days following thedate of this prospectus, subject to agreements with BlueStone restricting theirsale for periods of at least six months. We cannot predict the effect, if any,that sales of these additional securities or the availability of theseadditional securities for sale will have on the market prices prevailing fromtime to time. In addition, the representatives have been granted registrationrights commencing one year from the date of this prospectus providing for theregistration under the Securities Act of the securities issuable upon exerciseof the representatives' warrants. The exercise of these rights could result insubstantial expense to us. Furthermore, if the representatives exercise theirregistration rights, they will be

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unable to make a market in our securities for up to nine days before the initialsales of the warrants until the discontinuation of sales. If the representativescease making a market, the market and market prices for the securities may beadversely affected and the holders of these securities may be unable to sellthem.

Upon completion of this offering, we will have outstanding an aggregate of9,040,631 shares of our common stock, assuming no exercise of therepresentatives' over-allotment option and no exercise of outstanding options.Of these shares, all of the shares sold in this offering will be freely tradablewithout restriction or further registration under the Securities Act, unlessthese shares are purchased by our affiliates. The remaining 6,040,631 shares ofcommon stock held by existing stockholders are restricted securities under Rule144 under the Securities Act. Restricted securities may be sold in the publicmarket only if registered or if they qualify for an exemption from registrationunder Rules 144 or 701 under the Securities Act.

CONTRACTUAL RESTRICTIONS ON RESALES

All of our officers, directors and security holders have agreed not totransfer or dispose of, directly or indirectly, any of their shares of ourcommon stock, or any securities convertible into or, exchangeable or exercisablefor shares of our common stock, for a period of 24 months from the date of thisprospectus. Transfers or dispositions may be made sooner than 24 months asfollows:

. BlueStone may waive the restrictions on transfer or sale at any time morethan six months after the date of this prospectus; or

. beginning twelve months after the date of this prospectus, owners subjectto the restrictions may transfer or dispose of their common stock, withoutBlueStone's permission, if aggregate sales by them in any 90-day period arenot more than the greater of :

. one percent of our common stock outstanding at the time of the sale;or

. the average weekly trading volume of our common stock during the fourcalendar weeks preceding the holder's sale.

.

beginning 12 months after the date of this prospectus, existing optionholderswho have exercised their options may transfer or dispose of in the aggregate upto 100,000 shares of their common stock registered under a Form S-8 registration



statement.

Subject to these contractual restrictions and to the provisions of Rule 144,3,870,693 shares of common stock will be available for sale in the public marketcommencing six months after the date of this prospectus, and an additional2,169,938 shares of common stock will be available for sale in the public marketcommencing twelve months after the date of this prospectus.

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RULE 144

In general, under Rule 144 as currently in effect, beginning 90 days afterthe date of this prospectus, a person who has beneficially owned shares of ourcommon stock for at least one year would be entitled to sell, within any three-month period, a number of those shares that does not exceed the greater of:

. one percent of the number of common shares then outstanding, whichwill equal approximately 90,400 shares immediately after thisoffering; or

. the average weekly trading volume in the common stock on the NasdaqNational Market during the four calendar weeks preceding the filing ofa notice on Form 144 for the sale.

Sales under Rule 144 are also subject to restrictions on the manner of sale andrequire notice to the Securities and Exchange Commission of the sale. Salesunder Rule 144 are also restricted based on the availability of publicinformation about us.

RULE 144(K)

Under Rule 144(k), a person who is not deemed to have been one of ouraffiliates at any time during the 90 days preceding a sale, and who hasbeneficially owned the shares proposed to be sold for at least two years,including the holding period of any prior owner other than an affiliate, isentitled to sell those shares without complying with the manner of sale, publicinformation, volume limitation or notice provisions of Rule 144. Therefore,unless otherwise restricted, 144(k) shares may be sold immediately upon thecompletion of this offering.

RULE 701

In general, under Rule 701 of the Securities Act as currently in effect,any of our employees, consultants or advisors who purchases securities,including options, from us before the date of this prospectus through our stockoption plans or through some other written agreement is eligible to resell thoseshares, including shares issued upon the exercise of options, 90 days after theeffective date of this offering in reliance on Rule 144, but without compliancewith the holding period, information and volume restrictions contained in Rule144.

UNDERWRITING

BlueStone Capital Partners, L.P. and Pacific Crest Securities Inc. areacting as representatives of the several underwriters named below. Theunderwriters have agreed, severally and not jointly, subject to the terms andconditions contained in the underwriting agreement relating to this offering, topurchase the 3,000,000 shares of common stock offered by

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our company. The number of shares of common stock that each underwriter hasagreed to purchase is set forth opposite its name below:

Underwriter Number of Shares----------- ----------------BlueStone Capital Partners, L.P.Pacific Crest Securities Inc.

---------Total 3,000,000

=========

The underwriters are committed to purchase and pay for all of the shares ofcommon stock offered by this prospectus (other than shares offered through theover-allotment option) if any shares are purchased. The obligations of theunderwriters under the underwriting agreement are subject to approval of legalmatters by counsel and to various other conditions.



The representatives have advised us that the underwriters propose to offerthe shares of common stock to the public at the public offering price set forthon the cover page of this prospectus. The underwriters may allow to dealers whoare members of the National Association of Securities Dealers, Inc. concessions,not in excess of $ . per share, of which not in excess of $ . per share may bereallowed to other dealers who are members of the NASD.

We have granted to the representatives an option, exercisable not laterthan 45 days after the date of this prospectus, to purchase up to 450,000additional shares of our common stock at the public offering price set forth onthe cover page of this prospectus, less underwriting discounts and commissions.The representatives may exercise this option only to cover over-allotments, ifany, made in connection with the sale of the shares of common stock offered bythis prospectus. If the representatives exercise the over-allotment in full, thetotal price to public would be $ , the total underwriting discounts andcommissions would be $ and the total proceeds, before payment of the expensesof this offering, to our company would be $ . We estimate the expenses of thisoffering, including those payable to or on behalf of the representatives and/orthe underwriters described below, to be $2.2 million, or $2.3 million if therepresentatives' over-allotment option is completely exercised.

We have agreed to reimburse the representatives for their accountable out-of-pocket expenses incurred in connection with this offering, up to a maximumamount equal to 1-1/2% of the gross proceeds derived from the sale of the sharesoffered by this prospectus, including shares sold, if any, as a result of theexercise of all or part of the representatives' over-allotment option. We havealso agreed to pay all expenses in connection with qualifying the shares offeredunder the laws of the states designated by the

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representatives, including expenses of counsel retained for this purpose by therepresentatives.

At the closing of this offering, we will sell to the representatives andtheir designees, for an aggregate of $300, warrants to purchase up to 300,000shares of our common stock. The representatives' warrants will be exercisable atany time, in whole or in part, during the four-year period commencing one yearfrom the date of this prospectus, at an exercise price of $ per share, which is165% of the public offering price per share. The representatives' warrants areassignable or transferable only to the officers and partners of therepresentatives or the underwriters or members of the selling group during theone-year period following the date of this prospectus. During the exerciseperiod, the holders of the representatives' warrants will have the opportunityto profit from a rise in the market price of the common stock, which will dilutethe interests of our stockholders. We expect that the representatives' warrantswill be exercised when we would, in all likelihood, be able to obtain anycapital we need on terms more favorable than those provided by therepresentatives' warrants. Any profit realized by the representatives on thesale of their warrants or the underlying shares of common stock may be deemedadditional underwriting compensation. The representatives's warrants contain acashless exercise provision. We have agreed that, upon the request of theholders of a majority of the representatives's warrants, we will at our ownexpense, on one occasion during the exercise period, register therepresentatives' warrants and the shares of common stock underlying therepresentatives' warrants under the Securities Act. We have also agreed toinclude the representatives' warrants and all shares of common stock underlyingthe warrants in any appropriate registration statement which we file under theSecurities Act during the seven years following the date of this prospectus.

In connection with the acquisition of Pulsar, BlueStone has served as ourfinancial advisor and will receive a fee of $500,000 for these services uponclosing of this offering.

All of our officers, directors and securityholders have agreed not to sell,offer for sale, transfer, pledge or otherwise dispose of any of their shares ofour common stock, or securities convertible, exchangeable or exercisable forshares of our common stock, for a period of 24 months from the date of thisprospectus, provided that, after the first six months of this period, thisrestriction can be waived by BlueStone, in its sole discretion, and providedfurther that, after the first 12 months of this period, sales may be made,without BlueStone's consent, as long as the number of shares (or shareequivalents) sold by any of these holders does not exceed, during any 90-dayperiod, the greater of (a) 1% of the then outstanding shares of our common stockand (b) the average weekly trading volume of our common stock during the fourcalendar weeks preceding the holder's sale.

The representatives have informed us that they do not expect sales of thesecurities offered to discretionary accounts to exceed 3% of the shares offeredby this prospectus.

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We have agreed to indemnify the underwriters against certain civilliabilities, including liabilities under the Securities Act.

Before this offering there has been no public market for our common stock.Accordingly, the initial public offering price of the common stock will bedetermined by negotiation between us and the representatives and may notnecessarily be related to our asset value, net worth or other establishedcriteria of value. Factors to be considered in determining the price include ourfinancial condition and prospects, an assessment of our management, marketprices of similar securities of comparable publicly-traded companies, financialand operating information of companies engaged in activities similar to those ofour company and the general condition of the securities market.

In connection with this offering, the underwriters may engage in passivemarket making transactions in the shares on Nasdaq in accordance with Rule 103of Regulation M promulgated under the Exchange Act.

In connection with this offering, the underwriters may purchase and sellthe common stock in the open market. These transactions may include over-allotment and stabilizing transactions. Stabilizing transactions consist of bidsor purchases for the purpose of preventing or retarding a decline in the marketprice of the common stock. The underwriters may also place bids or purchaseshares to reduce a short position created in connection with the offering. Shortpositions are created by persons who sell shares which they do not own inanticipation of purchasing shares at a lower price in the market to deliver inconnection with the earlier sale. Short positions tend to place downwardpressure on the market price of a stock. In addition, the representatives and/orthe underwriters may impose a penalty bid by reclaiming the selling concessionto be paid to an underwriter or selected dealer when the securities sold by theunderwriter or selected dealer are purchased to reduce a short position createdin connection with this offering. These activities may stabilize, maintain orotherwise affect the market price of the common stock, which may be higher thanthe price that might otherwise prevail in the open market, and these activities,if commenced, may be discontinued at any time. These transactions may beeffected on Nasdaq, the over-the-counter market or otherwise.

Anthony Giraudo, a director nominee of our company, is a limited partner ofBlueStone.

LEGAL MATTERS

The validity of the shares of our common stock offered by this prospectuswill be passed upon for us by Arent Fox Kintner Plotkin & Kahn, PLLC,Washington, D.C. Certain legal matters in connection with this offering will bepassed upon for the underwriters by Tenzer Greenblatt LLP, New York, New York.

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EXPERTS

The consolidated financial statements of Litronic Inc. as of December 31,1997 and 1998, and for each of the years in the three-year period ended December31, 1998, have been included herein and in the registration statement inreliance upon the report of KPMG LLP, independent certified public accountants,appearing elsewhere herein, and upon the authority of said firm as experts inaccounting and auditing.

The financial statements of Pulsar Data Systems, Inc. as of and for theyear ended December 31, 1998 have been included herein and in the registrationstatement in reliance upon the report of KPMG LLP, independent certified publicaccountants, appearing elsewhere herein, and upon the authority of said firm asexperts in accounting and auditing. The report of KPMG LLP covering the December31, 1998 financial statements contains an explanatory paragraph that statesPulsar Data Systems, Inc.'s losses from operations and working capitaldeficiency raise substantial doubt about the entity's ability to continue as agoing concern. The financial statements do not include any adjustments thatmight result from the outcome of that uncertainty.

The financial statements and schedules of Pulsar Data Systems, Inc. as ofDecember 31, 1997, and for each of the years in the two-year period endedDecember 31, 1997, have been included herein and in the registration statementin reliance upon the report of Keller Bruner & Company, L.L.C., independentcertified public accountants, appearing elsewhere herein, and upon the authorityof Keller Bruner & Company, L.L.C. as experts in accounting and auditing. Thereport of Keller Bruner & Company, L.L.C. covering the December 31, 1997,financial statements contains an explanatory paragraph that states that Pulsar'srecurring losses from operations and net capital deficiency raise substantialdoubt about the entity's ability to continue as a going concern. The financialstatements do not include any adjustments that might result from the outcome ofthat uncertainty.



ADDITIONAL INFORMATION

We intend to furnish to our stockholders annual reports containing auditedconsolidated financial statements examined by an independent accounting firm andquarterly reports for the first three quarters of each fiscal year containinginterim unaudited consolidated financial information.

We have filed with the Securities and Exchange Commission a registrationstatement (including this prospectus and exhibits) on Form S-1 under theSecurities Act for the common stock offered by this prospectus. This prospectusdoes not contain all of the information contained in the registration statement.References in this prospectus to any contract, agreement or other document arenot necessarily complete. For a more complete description of any of thesecontracts, agreements or other documents, you should refer to the registrationstatement and the exhibits attached to the registration statement, which may beobtained for a fee from the Securities and Exchange Commission at Room 1024,Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 or at itsregional offices located

-110-

at Seven World Trade Center, 13th Floor, New York, New York 10048 and CiticorpCenter, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Also, wehave filed electronic versions of this registration statement (including itsexhibits and this prospectus) with the Securities and Exchange Commissionthrough its Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.The Securities and Exchange Commission maintains a worldwide web site athttp://www.sec.gov that contains reports, proxy and information statements andother information regarding registrants that file electronically with theSecurities and Exchange Commission.

-111-

LITRONIC INC. AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Independent Auditors' Report F-2

Consolidated Balance Sheets as of December 31, 1997 and 1998, andDecember 31, 1998 Pro Forma (unaudited) F-3

Consolidated Statements of Operations for the years ended December 31,1996, 1997 and 1998 F-4

Consolidated Statements of Shareholders' Deficiency for the years endedDecember 31, 1996, 1997 and 1998 F-6

Consolidated Statements of Cash Flows for the years ended December 31,1996, 1997 and 1998 F-7

Notes to Consolidated Financial Statements F-10

F-1

INDEPENDENT AUDITORS' REPORT

(WHEN THE REORGANIZATION AS DESCRIBED IN NOTE 1 OF THE ACCOMPANYING CONSOLIDATEDFINANCIAL STATEMENTS HAS BEEN CONSUMMATED, WE WILL BE IN A POSITION TO RENDERTHE FOLLOWING OPINION.)

/s/ KPMG LLP

The Board of DirectorsLitronic Inc.:

We have audited the accompanying consolidated financial statements of LitronicInc. and subsidiary as of December 31, 1997 and 1998 and for each of the yearsin the three-year period ended December 31, 1998 as listed in the accompanyingindex. These consolidated financial statements are the responsibility of theCompany's management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supporting



the amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Litronic Inc. andsubsidiary as of December 31, 1997 and 1998 and the results of their operationsand their cash flows for each of the years in the three-year period endedDecember 31, 1998, in conformity with generally accepted accounting principles.

Orange County, CaliforniaFebruary 26, 1999

F-2

LITRONIC INC.AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE><CAPTION>

DECEMBER 31 DECEMBER 31,------------------------------

19981997 1998 PRO FORMA

------------ ---------- ---------ASSETS (NOTE 5) (UNAUDITED)<S> <C> <C> <C>Cash and cash equivalents $ 490 898 898Accounts receivable (note 8) 996 740 740Inventories (note 3) 405 533 533Other current assets 136 385 385

------------ ---------- ---------Total current assets 2,027 2,556 2,556

Property and equipment, net (note 4) 320 235 235------------ ---------- ---------

$ 2,347 2,791 2,791============ ========== =========

LIABILITIES AND SHAREHOLDERS' DEFICIENCYCurrent installments of long-term debt (note 5) $ -- 580 580Accounts payable 415 456 456Accrued liabilities (note 6) 1,227 762 762

------------ ---------- ---------Total current liabilities 1,642 1,798 1,798

Long-term debt, less current installments(note 5) 606 5,200 5,200

Notes payable to related parties (note 7) 2,900 -- -------------- ---------- ---------

Total liabilities 5,148 6,998 6,998Shareholders' deficiency (note 10):

Preferred stock, no par value.Authorized 5,000,000 shares; noshares issued or outstanding -- -- --

Common stock, $0.01 par value.Authorized 20,000,000 shares; issuedand outstanding 3,870,693 shares 39 39 39

Additional paid-in capital -- -- (4,246)Accumulated deficit (2,840) (4,246) --

------------ ---------- ---------Net shareholders' deficiency (2,801) (4,207) (4,207)Commitments and contingencies (note 9)

------------ ---------- ---------$ 2,347 2,791 2,791

============ ========== =========</TABLE>

See accompanying notes to consolidated financial statements.

F-3


Consolidated Statements of Operations(in thousands except share and per share data)

<TABLE><CAPTION>

YEAR ENDED DECEMBER 31,--------------------------



1996 1997 1998-------- ------ ------

<S> <C> <C> <C>Net product revenue (note 8) $7,855 8,627 5,214License and service revenue (note 8) 1,541 1,539 1,439

-------- ------ ------Total revenue 9,396 10,166 6,653

-------- ------ ------Product cost of revenue 4,098 3,211 2,821License and service cost of revenue 581 643 950

-------- ------ ------Total cost of revenue 4,679 3,854 3,771

-------- ------ ------Gross margin 4,717 6,312 2,882

Selling, general andadministrative expenses 2,052 3,487 2,631

Research and developmentexpenses 725 1,172 1,334

-------- ------ ------Operating income (loss) 1,940 1,653 (1,083)

Interest expense, net (notes 5 and 7) 19 42 418-------- ------ ------

Earnings (loss) from continuingoperations before income taxes 1,921 1,611 (1,501)

Provision for (benefit from) income taxes 29 22 (95)-------- ------ ------

Earnings (loss) from continuingoperations 1,892 1,589 (1,406)

Discontinued operations (note 2):Loss from discontinued operations,

net of applicable income taxbenefit of $13 in 1996 and $23in 1997 (986) (1,278) --

Gain on disposal of discontinuedoperations, net of income taxexpense of $241 -- 15,023 --

-------- ------ ------Net earnings (loss) $ 906 15,334 (1,406)

======== ====== ======</TABLE>

(continued)

F-4


Consolidated Statements of Operations (continued)(in thousands except share and per share data)

<TABLE><CAPTION>

YEAR ENDED DECEMBER 31,-----------------------------------

1996 1997 1998------------ --------- ---------

<S> <C> <C> <C>Pro forma net earnings (loss) (unaudited):

Historical earnings (loss) from continuingoperations before income taxes $ 1,921 1,611 (1,501)

Pro forma provision for (benefit from)income taxes 672 547 (510)

------------ --------- ---------Pro forma earnings (loss) from

continuing operations 1,249 1,064 (991)

Discontinued operations, net of applicablepro forma income tax effect (599) 8,377 --

------------ --------- ---------Pro forma net earnings (loss) $ 650 9,441 (991)

============ ========= =========

Pro forma earnings (loss) fromcontinuing operations per share -basic and diluted $ 0.32 0.28 (0.26)

Discontinued operations, net ofapplicable pro forma income taxeffect, per share - basic and diluted (0.15) 2.16 --

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

Pro forma net earnings (loss) per share -



basic and diluted $ 0.17 2.44 (0.26)============ ========= =========

Pro forma common shares outstanding 3,870,693 3,870,693 3,870,693============ ========= =========

</TABLE>


F-5


Consolidated Statements of Shareholders' Deficiency

(in thousands)

<TABLE><CAPTION>

COMMON STOCK NET------------------------

ACCUMULATED SHAREHOLDERS'SHARES AMOUNT DEFICIT DEFICIENCY

<S> <C> <C> <C> <C>Balance, December 31, 1995 3,871 $39 (1,046) (1,007)

Net earnings -- -- 906 906

Balance, December 31, 1996 3,871 39 (140) (101)

Net earnings -- -- 15,334 15,334

Cash dividends to shareholders(note 7) -- -- (9,534) (9,534)

Distribution of KRDS, Inc. stockto shareholders (note 7) -- -- (8,500) (8,500)

-------- ------- --------- ---------Balance, December 31, 1997 3,871 39 (2,840) (2,801)

Net loss -- -- (1,406) (1,406)-------- ------- --------- ---------

Balance, December 31, 1998 3,871 $39 (4,246) (4,207)======== ======= ========= =========

</TABLE>


F-6


Consolidated Statements of Cash Flows(in thousands)

<TABLE><CAPTION>

YEAR ENDED DECEMBER 31,---------------------------------------

1996 1997 1998---------- ---------- ---------

<S> <C> <C> <C>Cash flows from operating activities:

Net earnings (loss) $ 906 15,334 (1,406)Adjustments to reconcile net earnings

(loss) to net cash provided by (used in)operating activities:Depreciation and amortization 61 129 203Gains on disposal of discontinued

operations, net of tax -- (15,023) --Cash payments related to

discontinued operations 942 152 --Changes in assets and liabilities:

Accounts receivable (896) 1,048 256Inventories (586) 715 (128)Other current assets (126) 13 (249)Accounts payable (305) (418) 41Accrued liabilities 574 92 (465)

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



Net cash provided by (used in)operating activities 570 2,042 (1,748)

---------- ---------- ---------Cash flows from investing activities:

Purchases of property and equipment (560) (4,919) (118)Proceeds from disposal of discontinued

operations -- 20,567 ------------ ---------- ---------

Net cash provided by (used in)investing activities (560) 15,648 (118)

---------- ---------- ---------Cash flows from financing activities:

Discontinued operations financingactivities -- (698) --

Proceeds from revolving notepayable to bank 11,049 18,649 6,496

Proceeds from related partyrevolving line of credit 190 -- --

Proceeds from related party note payable -- 2,900 600Proceeds from long-term debt 4,645 3,038 5,200Principal payments on revolving

</TABLE>

F-7

<TABLE><S> <C> <C> <C>notes payable to bank (11,122) (18,445) --

</TABLE>

F-8


Consolidated Statements of Cash Flows (continued)

(in thousands)

<TABLE><CAPTION>

YEAR ENDED DECEMBER 31,------------------------------------------

1996 1997 1998--------- ---------- ---------

<S> <C> <C> <C>Repayment of related party revolving

line of credit $ (944) -- --Repayment of related party note

payable -- (248) (3,500)Principal payments on long-term debt (3,061) (5,224) (6,522)Cash dividends to shareholders -- (9,534) --Cash distribution to shareholders -- (8,500) --

--------- ---------- ---------Net cash provided by (used in) financing

activities 757 (18,062) 2,274--------- ---------- ---------

Net increase (decrease) in cash 767 (372) 408--------- ---------- ---------

Cash and cash equivalents at beginningof year 95 862 490

--------- ---------- ---------Cash and cash equivalents at end of year $ 862 490 898

========= ========== =========Supplemental disclosures of cash

flow information:Cash paid during the year for:

Interest $ 589 119 418Income taxes 1 204 --

========= ========== =========</TABLE>

(Continued)

F-9


Consolidated Statements of Cash Flows (continued)



(in thousands)

<TABLE><CAPTION>

YEAR ENDED DECEMBER 31,---------------------------------

1996 1997 1998------- -------- ---------

<S> <C> <C> <C>Supplemental disclosure of noncash investingand financing activities:

Liabilities transferred in connection with saleof Intercon division (note 2) $ -- (366) --

Mortgage transferred in connection withdistribution of KRDS, Inc. (note 7) -- (3,038) --

======= ======== =========</TABLE>


F-10


Notes to Consolidated Financial Statements

December 31, 1997 and 1998

(in thousands, except per share data)

(1) GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

Litronic Inc. (through a reorganization with Litronic Industries, Inc., asdescribed further below) (the Company) designs and produces high gradeinformation security solutions. In addition, the Company also providesengineering and other services to various government agencies on a time andmaterial basis. Through its Intercon division (Intercon), which wasdiscontinued during 1997 (see note 2), Litronic Industries, Inc. providedstate-of-the-art electronic interconnect products for both government andcommercial entities.

PROPOSED PUBLIC OFFERING AND REORGANIZATION

During 1998, Litronic Industries, Inc. engaged attorneys and investmentbankers to assist in the effectuation of an initial public offering ofcommon stock of Litronic Inc., a newly formed corporation with nooperations (the "Offering"). Litronic Industries, Inc. has also initiatedcertain events (the "Reorganization") in connection with the Offering whichwill result in it becoming a wholly-owned subsidiary of Litronic Inc. asof the effective date of the Offering. The Reorganization will beaccomplished through a stock-for-stock exchange between Litronic Inc. andLitronic Industries, Inc. and will be accounted for as an "as if pooling ofinterests" for entities under common control. The Company has also enteredinto a plan of merger with Pulsar Data Systems, Inc. to be effectedsimultaneously with the Offering. This merger is contingent upon thesuccessful completion of the Offering.

All of the outstanding shares of Litronic Industries, Inc. will beexchanged for 3,870,693 shares of the Company's common stock.Consequently, upon the effective date of the Offering and the relatedReorganization, the consolidated group will include the operations ofLitronic Inc. and its wholly-owned subsidiary, Litronic Industries, Inc.

BASIS OF FINANCIAL STATEMENT PRESENTATION

The consolidated financial statements and related notes presented hereinhave been retroactively adjusted to reflect the Reorganization. Thecapital structure presented in these financial statements is that ofLitronic Inc., but all other information presented relates to thehistorical and pro forma operations of Litronic Industries, Inc., asLitronic Inc. had no operations during the periods presented and will haveno operations until the consummation of the Reorganization. All referencesherein to "the Company" refer to Litronic Inc. as consolidated withLitronic Industries, Inc.

PRO FORMA PRESENTATION

F-11

LITRONIC INC.



AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

Concurrently with the Reorganization, Litronic Industries, Inc. willterminate its Subchapter S corporation status and will become subject tofederal and state income taxes. The accompanying pro forma consolidatedbalance sheet reflects this change from an S corporation to a Ccorporation. The accompanying pro forma consolidated financial statementsof operations include a pro forma presentation to reflect a provision forincome taxes in accordance with Statement of Financial Accounting StandardsNo. (Statement) 109, "Accounting for Income Taxes." Statement 109 is anasset and liability approach that requires the recognition of deferred taxassets and liabilities for the expected future tax consequences of eventsthat have been recognized in the Company's financial statements or taxreturns. Measurement of deferred income tax is based on enacted tax lawsincluding tax rates, with the measurement of deferred income tax assetsbeing reduced by available tax benefits not expected to be realized. TheCompany has not recorded any deferred tax assets in the accompanyingunaudited consolidated pro forma balance sheet as management believes it isnot more likely than not that the Company will realize the benefit of suchdeferred tax assets.

Unaudited pro forma earnings (loss) for the years ended December 31, 1996,1997 and 1998 reflect a provision for (benefit from) income taxes as if theCompany had been subject to federal and state income taxes at an estimatedeffective tax rate of approximately 34%.

PRO FORMA EARNINGS (LOSS) PER SHARE

In 1997, the Financial Accounting Standards Board issued Statement 128,"Earnings Per Share." Statement 128 provides for the calculation of basicand diluted earnings per share. Basic earnings per share includes nodilution and is computed by dividing earnings (loss) available to commonshareholders by the weighted average number of common shares outstandingfor the period. Diluted earnings per share reflects the potential dilutionof securities that could share in the earnings of an entity. Such sharesare not included when there is a loss as the effect would be anti-dilutive.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of LitronicInc., its wholly-owned subsidiary Litronic Industries, Inc. and, in 1997,Litronic Industries, Inc.'s wholly owned subsidiary, KRDS, Inc., which wasformed as a corporation on January 30, 1997. All significant intercompanybalances and transactions have been eliminated in consolidation. OnDecember 31, 1997, the Company distributed KRDS, Inc. to the Company'sprimary shareholders (note 7).

REVENUE RECOGNITION

Revenue from product sales, including embedded software, is recognized uponshipment unless contract terms call for a later date, net of an allowanceto cover estimated warranty costs. Customers do not have the right ofreturn except for product defects, and product sales are not contingentupon customer testing, approval and/or acceptance. The costs of providing

F-12



postcontract customer support are not significant. Revenue under serviceand development contracts is recorded as services are rendered. TheCompany's revenue recognition policies are in compliance with the AmericanInstitute of Certified Public Accountants Statement of Position 97-2,Software Revenue Recognition. Reimbursements under consortium agreementswere recorded as revenue as they became payable to the Company uponcompletion of related milestones.

Included in license and service revenue in 1998 is $398 related to acontract with a branch of the Federal government, whereby the Company isbeing partially reimbursed for certain research and development efforts.The related research and development costs are not separatelyidentifiable, therefore the corresponding costs of the entire developmenteffort are included in research and development expenses.

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or market



(net realizable value).

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation of property andequipment is computed on a straight-line basis over the estimated usefullives of 2 to 7 years.

Long-lived assets and certain identifiable intangibles are reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. Recoverability ofassets to be held and used is measured by comparison of the carrying amountof an asset to future net cash flows expected to be generated by the asset.If such assets are considered to be impaired, the impairment to berecognized is measured by the amount by which the carrying amount of theassets exceed the fair value of the assets. Assets to be disposed of arereported at the lower of the carrying amount or fair value less costs tosell.

BUSINESS SEGMENTS

As of January 1, 1998, the Company adopted Statement 131, "Disclosure aboutSegments of an Enterprise and Related Information," which requires entitiesto report financial and descriptive information about its reportableoperating segments. The Company historically operated in two businesssegments, information security solutions and electronic interconnectproducts. On September 30, 1997, the Company sold its Intercon division,which produced electronic interconnect products. Accordingly, the Intercondivision operations have been accounted for as discontinued operations(note 2). The Company's remaining operations pertain only to itsinformation security solutions segment.

ACCOUNTING FOR STOCK OPTIONS

F-13



The Company applies the provisions of Statement 123, "Accounting for Stock-Based Compensation," which requires entities to recognize as expense overthe vesting period the fair value as of the date of grant of all stockbased awards. Alternatively, Statement 123 allows entities to apply theprovisions of Accounting Principles Board (APB) Opinion No. 25, "Accountingfor Stock Issued to Employees," and related interpretations, and to providepro forma net income and pro forma net income per share disclosures foremployee stock option grants made in 1996 and future years as if the fair-value-based method defined in Statement 123 had been applied. The Companyhas elected to apply the provisions of APB Opinion No. 25, under whichcompensation expense would be recorded on the date of grant only if thecurrent market price of the underlying stock exceeded the exercise price,and provide the pro forma disclosure provisions of Statement 123 in itsannual financial statements (see note 10).

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company applies the provisions of Statement 107, "Disclosures aboutFair Value of Financial Instruments." Statement 107 requires all entitiesto disclose the fair value of financial instruments, both assets andliabilities recognized and not recognized on the balance sheet, for whichit is practicable to estimate fair value. Statement 107 defines fair valueof a financial instrument as the amount at which the instrument could beexchanged in a current transaction between willing parties. As of December31, 1997 and 1998, management believes the fair value of all financialinstruments approximated carrying value.

INCOME TAXES

The Company has elected to be taxed as an S Corporation under theprovisions of Section 1362 of the Internal Revenue Code and uses theaccrual basis of reporting for income tax purposes. Accordingly, theCompany has not provided for Federal income taxes since the liability isthat of the shareholders. The Company is subject to state income taxes onearnings before taxes. The provision (benefit) for state income taxes was$29 for continuing operations and $(13) for discontinued operations for theyear ended December 31, 1996. The provision (benefit) for state incometaxes was $22 for continuing operations, $(23) for discontinued operations,and $241 for the gain on disposal of discontinued operations for the yearended December 31, 1997. The benefit for state income taxes was $95 forcontinuing operations for the year ended December 31, 1998.



COMPREHENSIVE INCOME

As of January 1, 1998, the Company adopted Statement 130, "ReportingComprehensive Income." Statement 130 establishes new rules for thereporting and display of comprehensive income and its components; however,the adoption of Statement 130 had no impact on the Company's consolidatedfinancial statements as the Company had no transactions that would beconsidered other comprehensive income.

ESTIMATES

F-14



The consolidated financial statements have been prepared in conformity withgenerally accepted accounting principles. In preparing the consolidatedfinancial statements, management is required to make estimates andassumptions that affect the reported amounts of assets and liabilities asof the dates of the balance sheets and revenues and expenses for theperiods. Actual results could differ from those estimates.

NEW ACCOUNTING STANDARDS

In December 1998, the AICPA issued Statement of Position (SOP) 98-9. SOP98-9 amends certain paragraphs of SOP 97-2 to require recognition ofrevenue using the "residual method" under certain circumstances. The"residual method" established by SOP 98-9 is effective for fiscal yearsbeginning after March 15, 1999. The Company believes the adoption of SOP98-9 will not have a significant impact on its financial position orresults of operations.

(2) DISCONTINUED OPERATIONS

The Company sold its Intercon division on September 30, 1997 for cash toAlliedSignal Inc., a non-related publicly-traded company. The gain on salewas $15,023, net of tax expense of $241. The results of the Intercondivision have been classified as discontinued operations in theaccompanying consolidated financial statements. For the year endedDecember 31, 1996, Intercon revenues were $8,175. Intercon's 1997 revenuesthrough the sale date were $7,653.

In addition to the cash proceeds received upon the close of thetransaction, the agreement provided for the right to receive a contingentpurchase price as well as a "gross-up" payment based upon the approximateexpected tax benefit related to the assets transferred. Effective November30, 1997, this right was distributed pro rata to the Company'sshareholders.

On December 31, 1997, the Company spun-off its subsidiary, KRDS, Inc., tothe Company's shareholders. The results of KRDS, Inc. have been classifiedas discontinued operations in the accompanying consolidated financialstatements. For the year ended December 31, 1997, KRDS, Inc.'s revenueswere $380.

F-15



(3) INVENTORIES

A summary of inventories follows:

DECEMBER 31,-----------------------

1997 1998---------- ---------

Raw materials $ 230 239Work-in-process 45 25Finished goods 130 269

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



$ 405 533========== =========

(4) PROPERTY AND EQUIPMENT

A summary of property and equipment follows:

DECEMBER 31,-----------------------

1997 1998---------- ---------

Machinery and equipment $ 68 68Furniture and fixtures 458 576

---------- ---------526 644

Less accumulated depreciation andamortization 206 409

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

$ 320 235========== =========

(5) LONG-TERM DEBT

A summary of long-term debt follows:

DECEMBER 31,-----------------------

1997 1998--------- ---------

Notes payable to bank secured by substantially allassets of the Company and personal assets of, and aguarantee by, the Company's president andmajority shareholder, bearing interest at 6.6%payable monthly, maturing February 28, 2000 -- 5,200

F-16



Revolving note payable to bank (the Revolver)bearing interest at prime plus 1.5% (9.75% atDecember 31, 1998) payable in monthly interest-only payments through maturity on February 28,2000; secured by substantially all assets of theCompany and by personal assets of, and aguarantee by, the Company's president andmajority shareholder; renewable at the bank'soption for additional one-year periods 606 580

-------- --------606 5,780

Less current installments -- 580-------- --------

606 5,200======== ========

Principal maturities of long-term debt as of December 31, 1998 are as follows:

Year ending December 31:1999 5802000 5,2002001 and thereafter --

--------

$5,780========

The Revolver contains certain covenants and restrictions, including maintenanceof certain financial ratios and a restriction on future borrowings. As ofDecember 31, 1998, the Company was not in compliance with certain of thesecovenants, and has received a waiver of these covenants until April 1, 1999.In addition, the Revolver was amended through the earlier of the closing of the



Offering or May 31, 1999.

As of December 31, 1998, the Company had available borrowings of $1,920 underthe Revolver.

F-17



(6) ACCRUED LIABILITIES

A summary of accrued liabilities follows:

<TABLE><CAPTION>

DECEMBER 31,---------------------

1997 1998--------- --------

<S> <C> <C>Professional fees $ 395 350Deferred revenue 165 107Accrued vacation 145 127Accrued compensation 346 93Other 176 85

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

$ 1,227 762========= ========

</TABLE>

(7) RELATED PARTY TRANSACTIONS

At December 31, 1994, the Company had an obligation of $248 to two of theCompany's executive officers for accrued compensation. On January 2, 1995,such obligation was converted to two unsecured notes payable bearinginterest at 8%, which were due and payable on December 31, 1998. OnOctober 29, 1997, the principal and interest amounting to $305 due on thenotes was repaid. The Company incurred interest expense on these notesaggregating $20 and $18 in 1996 and 1997, respectively.

The Company had an unsecured revolving line of credit with the Company'spresident and majority shareholder, which permitted borrowings of up to$1,000. All unpaid principal and accrued interest at 8% per annum were dueand payable on January 31, 1997. The Company incurred interest expenseunder this line of credit aggregating $30 in 1996. All outstandingborrowings and accrued interest under this line of credit were repaidduring 1996. The line was not renewed when it expired on January 31, 1997.

The primary shareholders of Litronic Industries, Inc. formed KRDS, Inc.,for the sole purpose of purchasing real estate property. The majority ofthe property acquired was leased to the Intercon division and the acquirerof the Intercon division has subsequently executed a continuing leasearrangement with KRDS, Inc. KRDS's only operations consisted of a mortgageobligation, interest, depreciation and rental income from the Companyrelated to the real estate property. The operations of KRDS, Inc. wereconsolidated with the operations of Litronic Industries, Inc. throughDecember 31, 1997, when concurrent with the sale of the Intercon division,the Company distributed KRDS, Inc. to the Company's shareholders. As theoperations of KRDS, Inc. were related to the Intercon operations, the 1997net income for

F-18

LITRONIC INC.AND SUBIDIARY


KRDS, Inc. of $2 (after intercompany eliminations) is included in the lossfrom discontinued operations in the accompanying consolidated statement ofoperations.

As a result of the sale of the Intercon division on September 30, 1997, theCompany distributed $9,534 in cash dividends and distributed the commonstock of KRDS, Inc., to the shareholders of Litronic on a pro rata basis in1997. The net assets of KRDS, Inc. consisted of $8,500 in cash at the timeof the distribution.

On December 31, 1997, the Company entered into two unsecured notes payable



with KRDS, Inc., it is which the Company was extended $900 and $2,000 inworking capital funds and a total of $2,900 was outstanding under theserelated party notes at December 31, 1997. In February 1998, the Companyentered into a third unsecured note payable with KRDS, Inc., under whichthe Company was extended $600 in working capital funds. Interest was at 10%for each of the unsecured notes payable and each of these unsecured notesand accrued interest were paid in full during 1998. The Company incurred$252 of interest expense on these notes in 1998.

(8) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

Financial instruments that potentially subject the Company to concentrationof credit risk are trade receivables. Credit risk on trade receivables islimited as a result of the Company's customer base and their dispersionacross different industries and geographic regions. As of December 31, 1997and 1998, accounts receivable included $447 and $308, respectively, duefrom the U.S. Government and related agencies.

The Company had sales to three customers which represented 39%, 29% and 18%of 1996 total revenue, respectively. The Company had sales to threecustomers which represented 45%, 20% and 19% of 1997 total revenue,respectively. The Company had sales to three customers which represented44%, 17% and 20% of 1998 total revenues, respectively. No other customersaccounted for more than 10% of net revenues in 1996, 1997 or 1998. Tradeaccounts receivable aggregated $709 and $493 from the aforementioned majorcustomers as of December 31, 1997 and 1998, respectively.

(9) COMMITMENTS AND CONTINGENCIES

The Company leases office space under noncancelable operating leases. Theterms of the leases range up to four years. The following summarizes thefuture minimum lease payments under all noncancelable operating leaseobligations:

Year ending December 31,1999 $ 2902000 2432001 162

---------

F-19



$ 695=========

Rental expense under noncancelable operating leases was $206, $215 and $310for the years ended December 31, 1996, 1997 and 1998.

As the Company provides engineering and other services to variousgovernment agencies, it is subject to retrospective audits which mayresult in adjustments to amounts recognized as revenues, and the Companymay be subject to investigation by governmental entities. Failure to complywith the terms of any governmental contracts could result in civil andcriminal fines and penalties, as well as suspension from future governmentcontracts. The Company is not aware of any adjustments, fines or penaltieswhich could have a material adverse effect on its financial position orresults of operations.

(10) STOCK OPTION PLANS

Under the Company's Employee Stock Option Plan (the Plan), which wasestablished in April 1998, the exercise price of options granted will notbe less than the fair market value of the related common stock at the dateof grant. The total number of shares of common stock available for grantunder the Plan is 600. All stock options granted have 10 year terms. Unlessotherwise provided by the Board of Directors or a committee of the Boardadministering the Plan, each option granted under the Plan vested onDecember 31, 1998 as to 10-15%, plus an additional 2.5% for each year ofservice with the Company, and 20% each December 31 thereafter until fullyvested.

Following is a summary of stock option transactions:

<TABLE><CAPTION>

WEIGHTEDNUMBER AVERAGE



OF EXERCISE PRICESHARES PER SHARE

---------- --------------<S> <C> <C>Options outstanding atDecember 31, 1997 --- $ --

Granted 285 0.70Cancelled 4 0.70

----------Options outstanding at

December 31, 1998 281 0.70===========

</TABLE>

F-20



As of December 31, 1998, the number of options exercisable was 143.

The Company applies APB Opinion No. 25 and related interpretations inaccounting for its stock option plans. Accordingly, no compensation costhas been recognized for its stock options in the consolidated financialstatements. Had the Company determined compensation cost based on the fairvalue at the grant date for its stock options under Statement 123, theCompany's net loss would have been increased to the pro forma amountindicated below.

<TABLE><CAPTION>

YEAR ENDEDDECEMBER 31,

1998<S> <C>Net loss as reported $ (1,406)Assumed stock compensation cost 16

---------------Pro forma net loss $ (1,422)

===============</TABLE>

The fair value of each option grant was estimated on the date of grantusing the Black-Scholes option-pricing model with the followingassumptions: risk-free interest rate of 5%; dividend yield of 0.0%; averageexpected lives of 6 years; and volatility of 0%. The weighted-average fairvalue per option granted in 1998 was $0.70. The Black-Scholes model, aswell as other currently accepted option valuation models, was developed toestimate the fair value of freely-tradable, fully-transferable optionswithout vesting restrictions, which significantly differ from the Company'sstock option plans. These models also require highly subjectiveassumptions, including future stock price volatility and expected timeuntil exercise, which greatly affect the calculated fair value on the grantdate.

(11) EMPLOYEE RETIREMENT SAVINGS PLAN

Effective January 1, 1998, the Company established a retirement plan, whichis intended to qualify under Section 401(k) of the Internal Revenue Code.Under the plan, eligible employees are able to contribute up to 20% oftheir compensation not to exceed the maximum IRS deferral amount. TheCompany may also match employee contributions at its discretion. During1998, the Company made contributions of $40 to this plan.

F-21



PULSAR DATA SYSTEMS, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE><CAPTION>



<S> <C>Independent Auditors' Reports F- 23

Balance sheets F- 25

Statements of operations F- 26

Statements of stockholders' equity (deficit) F- 27

Statements of cash flows F- 28

Notes to financial statements F- 29

Schedule II - Valuation and qualifying accounts S - 1</TABLE>

F-23

INDEPENDENT AUDITORS' REPORT

The Board of DirectorsPulsar Data Systems, Inc.

We have audited the accompanying balance sheet of Pulsar Data Systems, Inc. asof December 31, 1998 and the related statements of operations, stockholders'equity (deficit) and cash flows for the year then ended. In connection with ouraudit of the financial statements, we also have audited the financial statementschedule for the year ended December 31,1998 as listed in the accompanyingindex. These financial statements and financial statement schedule are theresponsibility of the Company's management. Our responsibility is to express anopinion on these financial statements and financial statement schedule based onour audit.

We conducted our audit in accordance with generally accepted auditing standards.Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, inall material respects, the financial position of Pulsar Data Systems, Inc. as ofDecember 31, 1998, and the results of its operations and its cash flow for theyear ended December 31, 1998, in conformity with generally accepted accountingprinciples. Also in our opinion, the related financial statement schedule, whenconsidered in relation to the basic financial statements take as a whole,presents fairly, in all materials respects, the information set forth therein.

The accompanying financial statements and financial statement schedule have beenprepared assuming that the Company will continue as a going concern. Asdiscussed in Note 14 to the financial statements, the Company has suffered a netloss of $7,396,000 in 1998 and has a net capital deficiency of $10,494,000 thatraise substantial doubt about its ability to continue as a going concern.Management's plans in regard to these matters are also described in Note 14.The financial statements and financial statement schedules do not include anyadjustments that might result from the outcome of this uncertainty.

/s/ KPMG LLP

McLean, VirginiaMarch 31, 1999

F-24

INDEPENDENT AUDITOR'S REPORT

To the Board of DirectorsPulsar Data Systems, Inc.Lanham, Maryland

We have audited the accompanying balance sheet of Pulsar Data Systems, Inc. asof December 31, 1997, and the related statements of operations, stockholders'deficit, and cash flows for each of the years in the two year period endedDecember 31, 1997 and the financial statement schedule for each of years in thetwo year period ended December 31, 1997. These financial statements are theresponsibility of the Company's management. Our responsibility is to express anopinion on these financial statements based on our audits.



We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, inall material respects, the financial position of Pulsar Data Systems, Inc. as ofDecember 31, 1997, and the results of its operations and its cash flows for eachof the years in the two year period ended December 31, 1997 in conformity withgenerally accepted accounting principles. Also in our opinion the relatedfinancial statement schedule, when considered in relation to the basic financialstatements taken as a whole, present fairly in all material respects, theinformation set forth therein.

The accompanying financial statements have been prepared assuming that theCompany will continue as a going concern. As discussed in note 14 to thefinancial statements, the Company incurred a net loss of approximately$11,016,000 during the year ended December 31, 1997 and has a net capitaldeficiency of approximately $1,810,000 at December 31, 1997. In addition, as ofDecember 31, 1997, the Company is in violation of its financing agreement debtcovenants. These factors, among others, as discussed in Note 14 to the financialstatements, raise substantial doubt about the Company's ability to continue as agoing concern. The financial statements do not include any adjustments thatmight result from the outcome of this uncertainty.

/s/ Keller Brunner & Company, L.L.C.

Bethesda, MarylandApril 27, 1998

F-25


Balance Sheets(in thousands)

<TABLE><CAPTION>

DECEMBER 31,---------------------------

ASSETS 1997 1998---------- ----------

<S> <C> <C>Cash and cash equivalents $ 2,236 $ 352Accounts receivable 31,213 10,145Inventory 2,348 775Other current assets 245 ---

---------- ----------Total current assets 36,042 11,272

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

Property and equipment, net ofaccumulated depreciation of $1,748 and $1,764, respectively 1,100 581

Notes receivable-related parties 2,218 ---Cash surrender value of life insurance, net 1,416 216Deposits and other assets 95 118

---------- ----------4,829 915

---------- ----------$40,871 $ 12,187

========== ==========

LIABILITIES AND STOCKHOLDERS' DEFICITFinancing arrangement - IBM $28,067 $ 9,403Current installments of long-term debt 915 964Notes payable - vendors --- 3,948Accounts payable 7,267 3,933Accrued liabilities 2,229 1,072Notes payable to shareholder --- 120

---------- ----------Total current liabilities 38,478 19,440

Notes payable, net of current maturities 4,203 3,241---------- ----------

Total liabilities 42,681 22,681---------- ----------

Commitments and Contingencies



Stockholders' DeficitCommon stock; par value $1; authorized, issued and outstanding1,000 shares 1 1

Additional paid-in capital 1,663 1,663Accumulated deficit (3,474) (12,158)

---------- ----------Net stockholders' deficit (1,810) (10,494)

---------- ----------$40,871 $ 12,187

========== ==========</TABLE>

See accompanying notes to financial statements

F-26


Statements of Operations(in thousands)

<TABLE><CAPTION>

YEARS ENDED DECEMBER 31,----------------------------------

1996 1997 1998----------- --------- -------

<S> <C> <C> <C>Revenues $165,958 $151,520 $80,532

Cost of revenues 149,364 142,201 73,371----------- -------- -------

Gross margin 16,594 9,319 7,161

Selling, general and administrative expenses 13,545 17,152 12,519----------- -------- -------

Operating income (loss) 3,049 (7,833) (5,358)----------- -------- -------

Other income (expense)Interest expense (3,564) (3,640) (2,099)Interest income 639 457 61

----------- -------- -------(2,925) (3,183) (2,038)

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

Net earnings (loss) $ 124 $(11,016) $(7,396)=========== ======== =======

</TABLE>


F-27


Statements of Stockholders' Equity (Deficit)(in thousands)

<TABLE><CAPTION>

COMMON STOCK---------------------- ADDITIONAL NOTES ACCUMULATED

PAID IN RECEIVABLE EARNINGSSHARES AMOUNT CAPITAL RELATED PARTY (DEFICIT) TOTAL

---------- ---------- ----------- ------------- ---------- ----------<S> <C> <C> <C> <C> <C> <C>Balance, January 1, 1996 1 $ 1 $ 21 $ - $ 9,045 $ 9,067Net earnings - - - 124 124Distributions to stockholders - - - - (1,483) (1,483)

---------- ---------- ----------- ----------- ---------- ----------Balance, December 31, 1996 1 1 21 - 7,686 7,708Additional paid-in capital

contributed by stockholders - 291 - - 291Forgiveness of stockholder's deferred

compensation - - 1,351 - - 1,351Net loss - - - (11,016) (11,016)Distributions to stockholders - - - - (144) (144)

---------- ---------- ----------- ----------- ---------- ----------Balance, December 31, 1997 1 1 1,663 - (3,474) (1,810)



Net loss - - - - (7,396) (7,396)Transfer of related party notes receivable - - - (1,198) (1,198)Reserve for related party notes receivable - - - 1,198 (1,198)Distributions to stockholders - - - - (90) (90)

---------- ---------- ----------- ----------- ---------- ----------Balance, December 31, 1998 1 $ 1 $ 1,663 $ - $ (12,158) $ (10,494)

========== ========== =========== =========== ========== ==========</TABLE>

See accompanying notes to financial statements.

F-28


Statements of Cash Flows(in thousands)

<TABLE><CAPTION>

YEAR ENDED DECEMBER 31,----------------------------------------

1996 1997 1998---------- ----------- ------------

<S> <C> <C> <C>Cash Flows from Operating Activities:

Net earnings (loss) $ 124 $(11,016) $ (7,396)

Adjustments to reconcile net earnings (loss) to netcash provided by operating activities:

Depreciation and amortization 467 585 415Loss on disposal of assets 63 - 162Deferred compensation 364 - -Provisions for doubtful accounts and notes receivable 403 5,303 3,370Deferred rent (28) - -Changes in assets and liabilities

Accounts receivable 11,743 10,236 17,698Inventories 11,789 1,312 1,573Other assets 33 (11) 222Deferred governmental agency contract costs 1,833 817 -Accounts payable (2,184) 2,761 2,550Accrued liabilities 310 842 (137)Customer deposit 2,098 (2,098) -Deferred governmental agency contract revenue (1,697) (1,327) -

----------- ----------- ------------Net cash provided by operating activities 25,318 7,404 18,457

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

Cash Flows from Investing Activities:Increase in cash surrender value of life insurance (355) (65) (294)Net collections (issuance) of notes receivable 392 (291) -Net collections (issuance) of notes receivable - related parties (1,975) 1,175 -Proceeds from loans on cash surrender value of life insurance - - 1,494Purchase of equipment (942) (364) (58)

----------- ----------- ------------Net cash provided by (used in) investing activities (2,880) 455 1,142

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

Cash Flows from Financing Activities:Net repayments on line of credit (7,600) (2,000) -Net repayments on financing arrangement - IBM (13,023) (6,058) (18,664)Proceeds from notes payable to stockholder - - 120Repayments of long term borrowing (25) (163) (913)Repayment of vendors notes payable - - (1,936)Additional paid-in capital from stockholders - 291 -Distributions to stockholders (1,483) (144) (90)

----------- ----------- ------------Net cash used in financing activities (22,131) (8,074) (21,483)

----------- ----------- ------------Net increase (decrease) in cash 307 (215) (1,884)Cash and cash equivalents at beginning of period 2,144 2,451 2,236

----------- ----------- ------------Cash and cash equivalents at end of period $ 2,451 $ 2,236 $ 352

=========== =========== ============Supplemental Schedule of Non-cash Investing and Financing Activities:

Conversion of line of credit to term note payable $ - $ 5,200 $ -=========== =========== ============

Forgiveness of deferred compensation recorded as capital contribution $ - $ 1,351 $ -=========== =========== ============

Conversion of accounts payable to vendors notes payable $ - $ - $ 5,884=========== =========== ============

Distribution of assets and related notes to stockholders $ - $ - $ 28=========== =========== ============



Supplemental Disclosures of Cash Flow Information:Cash paid during the year for:

Interest $ 3,649 $ 2,812 $ 2,502=========== =========== ============

</TABLE>


F-29


NOTES TO FINANCIAL STATEMENTS--------------------------------------------------------------------------------

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of business: Pulsar Data Systems, Inc. (the Company) was incorporated in------------------1984 under the laws of the State of Delaware. The Company is engaged primarilyin the sale of computer hardware, software, peripheral equipment, and supportservices to governmental agencies and commercial enterprises throughout theUnited States. The Company was certified by the Small Business Administrationunder Section 8(a) of the Small Business Act and was therefore eligible to enterinto contracts with agencies of the Federal Government on a limited competitivebasis. The Company voluntarily withdrew in anticipation of graduation from the8(a) program in June 1997.

A summary of the Company's significant accounting policies follows:

Revenue and cost recognition: Revenue is primarily derived from short-term----------------------------firm-fixed price delivery order type contracts. Revenue from these contracts isrecognized upon transfer of title, generally upon delivery. The Company also hastime and material contracts. Revenue from time and material contracts isrecognized on the basis of man-hours provided plus other reimbursable contractcosts incurred during the period.

Cash and cash equivalents: For the purpose of reporting cash flows, the Company-------------------------considers all highly-liquid investments purchased with a maturity of threemonths or less to be cash equivalents.

Inventory: Inventory consists primarily of computer hardware, purchased---------software and peripheral equipment. Inventory is stated at the lower of cost ormarket using the first-in, first-out (FIFO) method.

Property and equipment: Property and equipment are stated at cost.----------------------Depreciation and amortization is computed using straight-line and acceleratedmethods over the estimated useful lives of the related assets.

Income taxes: The Company has elected to be treated as an "S" Corporation under------------Subchapter "S" of the Internal Revenue Code. Consequently, the Company is notliable for Federal and state income taxes except to the extent that the Companyoperates in state jurisdictions that do not recognize "S" corporations. For theincome related to activity in these states, the Company has provided for theresulting income taxes. Otherwise the stockholders are liable individually forincome taxes on the Company's income.

F-30



NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Financial credit risk: The Company's accounts receivable are derived primarily---------------------from contracts with governmental agencies and commercial enterprises. Allaccounts receivable are made on an unsecured basis.

Additionally, the Company maintains its cash in bank deposit accounts, which attimes may exceed Federally insured limits. The Company has not experienced anylosses in such accounts. The Company believes it is not exposed to anysignificant credit risk on cash.

Estimates: The preparation of financial statements in conformity with generally---------



accepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenue and expenses during the reportingperiod. Actual results could differ from those estimates.

NOTE 2. ACCOUNTS RECEIVABLE

Accounts receivable consist of the following as of December 31, 1997 and 1998:

<TABLE><CAPTION>

(in thousands)-------------------

December 31,-------------------

1997 1998---------- --------

<S> <C> <C>8(a) government receivables $ 2,095 $ -GSA receivables 16,483 9,135Commercial receivables 10,902 1,382Recoverable costs and accrued profit on progress

completed-not billed 497 -Other receivables 2,489 628

---------- --------32,466 11,145

Less allowance for doubtful accounts (1,253) (1,000)---------- --------

$31,213 $10,145========== ========

</TABLE>

F-31



NOTE 3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following as of December 31, 1997 andDecember 31, 1998:

<TABLE><CAPTION>

(in thousands)

Estimated December 31,Useful Life(in years) 1997 1998

-------------------<S> <C> <C> <C>Furniture and fixtures 7 $ 628 $ 407Office equipment 5-7 511 508Computer equipment 5 706 756Software 5 545 553Vehicles 5 273 17Leasehold improvements 7 162 78Warehouse equipment 5-7 23 26

-------- --------2,848 2,345

Less accumulated depreciation andamortization (1,748) (1,764)

-------- --------$ 1,100 $ 581======== ========

</TABLE>

F-32



NOTE 4. DEFERRED COMPENSATION AND LIFE INSURANCE

Through December 31, 1996 the Company had a deferred compensation agreement withits President, which was funded through Company-owned life insurance policies.



The cash surrender value of these policies as of December 31, 1997 and 1998, was$1,416,000 and $216,000, respectively.

On December 31, 1997, the deferred compensation liability of $1,351,000 wasforgiven by the President of the Company, and the liability was removed from theCompany's balance sheet and included as a contribution to additional paid-incapital. In April 1998, the Company borrowed $1,494,000 against the cashsurrender value of the life insurance policies to reduce amounts owed under thefinancing arrangement with IBM.

NOTE. 5. NOTES RECEIVABLE - RELATED PARTIES

Between July 1995 and June 1996, the Company made a series of eight loansaggregating $2.8 million to a related party. These loans bear interest atannual rates varying from 7.5% to 10.0% and were due on demand. Two of theseloans were in the form of assignment of notes receivable to the Company fromthird parties in the aggregate principal amount of $623,000, which were assignedback to Pulsar in December 1997. At that time these notes were deemeduncollectible and written off to bad debt expense. The outstanding balance ofthese notes as of December 31, 1997 was $2,218,000.

In October 1995, a related party purchased the building to be occupied by theCompany. This purchase was financed through a loan to the related party from alending institution in the amount of $2.8 million, which was guaranteed by theCompany and personally guaranteed by the shareholders of the Company. Followingthe acquisition of the building, the related party leased a portion of theproperty to the Company at fair market rents. Payments of rent under the leasewere $1,042,000, $955,500 and $409,500 during the years ended December 31, 1996,1997 and 1998, respectively. A portion of the rent expense incurred under therelated party lease was used to offset the related party notes receivablebalance. The amount of rent expense used to offset the notes receivable fromthe related party for the years ended December 31, 1996, 1997 and 1998 was $0,$182,000 and $344,000, respectively. In addition, the principal amount underthe notes was reduced by $750,000 as payment of a fee for terminating the leaseas of September 30, 1998. As of January 1, 1999, outstanding loans of $1,347,000were converted into two promissory notes of $543,000 and $804,000, bearinginterest at the rate of 7.5% per annum, payable monthly, and maturing upon thesales of each individual property. The face amount of these notes includesaccrued interest of $149,000 which has not been reflected within the financialstatements. Because of the relationship to the related party and the change inthe terms of the notes receivable the notes have been classified as a componentof stockholders equity as of December 31, 1998.

The Company had expected the collateral underlying the notes receivable fromrelated party to be liquidated. The Company has been advised that thistransaction is being delayed for an unspecified period of time. As therecoverability of the notes is dependent upon the liquidation of the collateral,the Company is unable to determine the recoverability of the notes receivable

F-33



and has established an allowance for the full amount of the notes as of December31, 1998.

NOTE 6. LINE OF CREDIT

In May 1996, the Company obtained a line of credit from a financial institution.Under the line of credit, the Company may borrow up to the lessor of eligiblereceivables or $22,000,000. Interest accrued on the outstanding balance at avariable rate consistent with the bank's national commercial rate. The line iscollateralized by all eligible accounts receivable, inventory, machinery, andequipment. In October 1997, the line of credit was converted to a term loan of$5,200,000. (See Note 8)

F-34



NOTE 7. FINANCING ARRANGEMENT - IBM

The Company entered into an Inventory and Working Capital Financing Agreement,with IBM Global Finance Corporation (IBM) whereby the Company purchases,hardware and software from authorized suppliers and finances the purchasesthrough IBM. The agreement provides for a credit line up to $35,000,000, whichallows the Company to borrow up to 85% of the Company's eligible accounts



receivable, and up to 100% of the Company's on-hand inventory. The credit lineis secured by substantially all assets of the Company and is personallyguaranteed by the Company's stockholders.

At December 31, 1997 the interest rate on the line of credit was prime plus1.75% or 2.00% depending on the nature of the borrowings. The effective interestrate at that date was 10.25% or 10.5%. Effective February 1, 1998, the financingagreement interest rate was increased to prime plus 2.375%. The effectiveinterest rate at December 31, 1998 was 10.125%. For any amount that theoutstanding advances exceed the formula borrowing base, interest was accrued atthe rate of prime plus 6.5%.

The agreement provides for certain financial covenants to be met by the Company.At December 31, 1998 the Company was in violation of these covenants.

In August 1997, the Company was in violation of the related debt covenants andentered into a forbearance agreement with IBM. Subsequently the Company violatedthe forbearance agreement and received several amendments to the agreement.Pursuant to amendments of the forbearance agreement the Company is currentlyobligated to pay, at the Company's option, the lesser of: (i) warrantsrepresenting 4% of the Company on a fully diluted to basis, or (ii) pay$650,000, or (iii) pay a pro rata portion of the $650,000 is less thansubstantially all of the assets are sold. As the Company intends to pay$650,000, the Company has accrued this amount as of December 31, 1997. Infurther consideration of the forbearance agreement and the related amendments,the Company was obligated to pay $50,000 or issue warrants representing 0.5% ofthe Company on a fully diluted basis, per month from February through May, 1998.The Company has paid an aggregate of $200,000 which has been recorded asadditional interest expense in 1998. These payments were made in lieu of theissuance of warrants to IBM.

An October 1998 amendment to the forbearance agreement decreased the credit lineto $18,000,000 for the period through January 6, 1999, at which time the linewill be further reduced to $15,000,000. The financing arrangement has atermination date of October 30, 1999.

A February 1999 amendment to the forbearance agreement decreased the credit lineto $8,000,000 until further amended. A March 1999 amendment to the forbearanceagreement increased the credit line to $9,000,000 for the period through April30, 1999, at which time the line will be reduced to $8,000,000. The forbearanceagreement expires on the anticipated merger and initial public offering (Note14).

F-35



NOTE 8. NOTES PAYABLE

Long-term debt consists of the following notes payable as of December 31, 1997,and 1998:

<TABLE><CAPTION>

(in thousands)

December 31,

1997 1998-------------------

<S> <C> <C>Note payable - financing company; secured by an automobilewith a cost of $71,000; bears interest at an effective rate of13.183%; liquidated by monthly principal and interestpayments of $1,000. On December 31, 1998 the note andrelated automobile were transferred to the shareholders of theCompany. $ 17 $ --

Note payable - financing company; secured by an automobilewith a cost of $85,000; bears interest at an effective rate of10.460%; liquidated by monthly principal and interestpayments of $2,000. On December 31, 1998, the note andrelated automobile were transferred to the shareholders of theCompany. 39 --

Note payable - financial institution; collateralized byinventory, accounts receivable, machinery and equipment, themortgages on the assets of a related party and the president ofthe Company; bears interest at the financial institution's primelending rate; 8.5% at December 31, 1997, 7.75% atDecember 31, 1998 liquidated by monthly principal and



interest payments of $104,000; due to mature December 2002. 5,062 4,205-------- -------$ 5,118 $ 4,205

Less current maturities (915) (964)-------- -------$ 4,203 $ 3,241======== =======

</TABLE>

F-36



NOTE 8. NOTES PAYABLE (CONTINUED)

Maturities on the notes payable as of December 31, 1998 due in future years areas follows:

<TABLE><CAPTION>

Years ending December 31, (in thousands)<S> <C>1999 $ 9642000 1,0412001 1,1252002 1,075

---------------$4,205

===============</TABLE>

NOTE 9. NOTES PAYABLE - VENDORS

Notes payable - vendors consist of notes payable to nine vendors which wereentered into in August to December 1998 for a total of $5,884,216. The notesaccrue interest at rates ranging from 10% to 12%, and are due in full during1999. The balance at December 31, 1998 was approximately $3,948,000.

NOTE 10. REVENUE AND COST OF REVENUE

The breakout of service and product revenue and cost of revenue are as followsfor the years ended December 31, 1996, 1997, and 1998.

<TABLE><CAPTION>

(in thousands)--------------------------------

Years ended December 31,--------------------------------

1996 1997 1998--------------------------------

<S> <C> <C> <C>Revenue:

Service revenue $ 10,253 $ 8,818 $ 3,373Product revenue 155,705 142,702 77,159

------------ ---------- ----------TOTAL REVENUE $165,958 $151,520 $80,532

============ ========== ==========Cost of revenue

Cost of service revenue $ 4,870 $ 4,115 $ 1,553Cost of product revenue 144,494 138,086 71,818

------------ ---------- ----------TOTAL COST OF REVENUE $149,364 $142,201 $73,371

============ ========== ==========</TABLE>

F-37



NOTE 11. LEASING ARRANGEMENTS

In January 1996, the Company entered into a lease with a related party foroffice space, which was due to expire in December 2000. In September 1998 thislease was terminated and the Company paid a $750,000 termination fee to therelated party. The fee was offset against notes receivable owed from the relatedparty. Deposits and other assets includes a deposit to be refunded from the



related party of approximately $87,000. The Company has leased other office andwarehouse space under separate lease agreements expiring through September 2003.Rent expense was $1,690,000, $811,000 and $1,252,000 for the years endedDecember 31, 1996, 1997 and 1998, respectively. Lease payments for the yearended December 31, 1998 were offset against interest receivable and notesreceivable from the related party (see Note 5).

Future minimum rental payments required under these leasing arrangements as ofDecember 31, 1998 are as follows:

<TABLE><CAPTION>

Years ending December 31, (in thousands)<S> <C>1999 $ 1442000 1252001 1122002 1152003 88

-------------$ 584=============

</TABLE>

NOTE 12. EMPLOYEE RETIREMENT PLAN

The Company has adopted a retirement plan under Section 401(k) of the InternalRevenue Code. The plan provides benefits to all employees who meet certain ageand service eligibility requirements. Under the terms of the plan, the Companywill match 50% of the first 6% of an employee's elective contribution. Companycontributions for the years ended December 31, 1996, 1997 and 1998 were $71,000,$66,000, and $28,119, respectively.

NOTE 13. MAJOR CUSTOMERS

During the years ended December 31, 1996, 1997, and 1998, 61%, 60%, and 90%,respectively, of the Company's revenue was derived from contracts with theFederal Government. The receivable balance for these contracts at December 31,1997 and 1998 was $19,075,000, and $9,135,000, respectively.

F-38



NOTE 14. GOING CONCERN

As shown in the accompanying financial statements, the Company incurred a netoperating loss of $11,016,000 and $7,396,000 for the years ended December 31,1997, and 1998, respectively, and has a net capital deficiency of $1,810,000 and$10,494,000 at December 31, 1997 and 1998, respectively. At December 31, 1998,the Company is in violation of the financial covenants related to its financingagreement. These factors create a substantial doubt about the Company's abilityto continue as a going concern. The Company is in negotiations to be acquired byanother company. The combined company is in the process of preparing an initialpublic offering. The ability of the Company to continue as a going concern isdependent upon the success of the pending merger and initial public offering.The financial statements do not include any adjustments that might be necessaryif the Company is unable to continue as a going concern.

NOTE 15. CONTINGENT LIABILITIES

The Company had cost reimbursable type contracts with the Federal Government.Consequently, the Company is reimbursed based upon their direct expensesattributable to the contract, plus a percentage based upon overhead, materialhandling, and general and administrative expenses. The overhead, materialhandling, and general and administrative rates are estimates. Accordingly, ifthe actual rates as determined by the Defense Contract Audit Agency are belowthe Company's estimates, a refund for the difference would be due to the FederalGovernment. It is management's opinion that no material liability will resultfrom any cognizant audit agency audits.

The Company is subject to several lawsuits and threatened actions relating tothe non-payment of debts. Each of these amounts have been included asliabilities in the financial statements.

The Company has been named as a defendant in a lawsuit which claims breach ofcontract under which the Company was required to pay $500,000 over a thirty



month period plus a commission on contracts awarded as a result of the contract.The plaintiff claims damages in an amount in excess of $10 million. Based upondiscussions with counsel, the Company believes that the case is without meritand intends to vigorously defend against the claim; however, the outcome of thismatter cannot currently be determined. No amounts have been accrued in thefinancial statements relating to this matter.

The Company is also involved in various routine legal actions arising in thenormal course of business. After taking into consideration legal counsel'sevaluation of such actions, management is of the opinion that any potentialliability, arising from these claims against the Company not covered byinsurance would be minimal.

F-39

The Company has guaranteed the mortgages on properties owned by a related partyof approximately $5,100,000. Should the related party fail to perform under theterms of the agreement, the Company would incur a loss for the full amount ofthe guarantee.

As of March 31, 1999, the Company had not yet filed the Form 5500 AnnualReturn/Report for 1997 for its Employee Retirement Plan. The Form 5500 alongwith an audit report was due October 15, 1998. The Company may be assessedpenalties by both the Department of Labor and the Internal Revenue Service forits late filing. The Company has provided for such penalties.

F-40

================================================================================We have not authorized any dealer, salesperson or any other person to give anyinformation or to represent anything not contained in this prospectus. You mustnot rely on any unauthorized information. This prospectus does not offer to sellor buy any shares in any jurisdiction where it is unlawful.

______________

TABLE OF CONTENTS

<TABLE><CAPTION>

Page----

<S> <C>Prospectus Summary......................................................... 3Risk Factors............................................................... 14Forward-Looking Statements................................................. 28Use of Proceeds............................................................ 29Dividend Policy............................................................ 31Dilution................................................................... 32Capitalization............................................................. 34Selected Financial Data - Litronic......................................... 36Selected Financial Data - Pulsar........................................... 38Pro Forma Financial Data................................................... 40Management's Discussion and Analysis

of Financial Condition and Resultsof Operations........................................................... 45

Industry Information....................................................... 62Business................................................................... 67Management................................................................. 88Principal Stockholders..................................................... 97Certain Transactions....................................................... 99Description of Securities.................................................. 103Shares Eligible for Future Sale............................................ 104Underwriting............................................................... 106Legal Matters.............................................................. 109Experts.................................................................... 110Additional Information..................................................... 110Index to Consolidated Financial Statements

- Litronic Inc.......................................................... F-1Index to Financial Statements - Pulsar

Data Systems, Inc..................................................... F-23</TABLE>

Until ______, 1999, all dealers that effect transactions in the registeredsecurities, whether or not participating in this offering, may be required todeliver a prospectus. This is in addition to the dealers' obligation to delivera prospectus when acting as underwriters and with respect to their unsoldallotments or subscriptions.

3,000,000 SHARES



LITRONIC INC.

COMMON STOCK

__________

PROSPECTUS

__________

BLUESTONE CAPITAL PARTNERS, L.P.PACIFIC CREST SECURITIES INC.

____________, 1999

================================================================================

PART IIINFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following is a statement of expenses incurred by Registrant inconnection with the issuance and distribution of the securities being registeredhereunder, other than underwriting discounts. All amounts are estimated exceptthe Securities and Exchange Commission registration fee, the NationalAssociation of Securities Dealers, Inc. filing fee and the NASDAQ/NMS quotationfee

<TABLE><S> <C>Securities and Exchange Commission registration fee ............ $ 10,550

National Association of Securities Dealers, Inc. filing fee .... 4,295

NASDAQ/NMS quotation fee ....................................... 17,500

Printing and engraving expenses ................................ *

Legal fees and expenses ........................................ *

Accounting fees and expenses ................................... *

Transfer Agent and Registrar fees and expenses ................. *

Blue Sky fees and expenses (including legal fees) .............. *

Miscellaneous .................................................. *------------

Total ................................................. $ 1,250,000============

</TABLE>

* To be provided by amendment

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law, as amended, providesthat a corporation may indemnify any person who was or is a party to or isthreatened to be made a party to any threatened, pending or completed action orproceeding, whether civil, criminal, administrative or investigative, by reasonof the fact that he is or was a director, officer, employee or agent of thecorporation or is or was serving at its request in such capacity in anothercorporation or business association, against expenses (including attorney'sfees), judgments, fines and amounts paid in settlement actually and reasonablyincurred by him in connection with such action, suit or proceeding if her actedin good faith and in a manner he reasonably believed to be in or not opposed tothe best interests of the corporation, and with respect to any criminal actionor proceeding, had no reasonable cause to believe his conduct was unlawful.

Section 107(b)(7) of the Delaware General Corporation Law, as amended,permits a corporation to provide in its certificate of incorporation that adirector of the corporation shall not

II-1

be personally liable to the corporation or its shareholders for monetary damagesfor breach of fiduciary duty as a director, except for liability (a) for anybreach of the director's duty of loyalty to the corporation or its shareholders,(b) for acts or omissions not in good faith or which involve intentional



misconduct or a knowing violation of law, (c) under Section 174 of the DelawareGeneral Corporation Law, or (d) for any transaction from which the directorderived an improper personal benefit.

Article V of the Registrant's Amended and Restated Certificate ofIncorporation provides for the elimination of personal liability for a directorfor breach of fiduciary duty as permitted by 102(b)(7) of the Delaware GeneralCorporation Law. Article VI of the Registrant's Amended and Restated By-Lawsprovide that the Registrant shall indemnify its directors, officers andemployees to the full extent permitted by Section 145 of the Delaware GeneralCorporation Law.

The Underwriting Agreement (filed as Exhibit 1 hereto) provides forindemnification by the Underwriters of the Registrant and its directors,officers and controlling persons for certain liabilities arising under theSecurities Act or otherwise.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

In February 1999 Registrant issued 100 shares of its common stock to KrisShah, its promoter, in connection with the organization of the Registrant andthis offering for $100. On the date of this prospectus, Registrant issued3,870,593 shares of common stock to the shares of Litronic Industries, Inc. inexchange for all the outstanding capital stock of Litronic Industries, Inc.

The issuance of the securities in the transactions described above weredeemed to be exempt from registration under the Securities Act in reliance on(a) Section 4(2) of the Securities Act and Regulation D promulgated thereunderas a transaction by an issuer not involving any public offering.

II-2

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

Exhibit No. Description

1 Form of Underwriting Agreement among the Registrantand the Underwriters*

2 Stock Exchange Agreement and Plan ofReorganization*

3.1 Certificate of Incorporation, as amended onFebruary 5, 1999*

3.2 By-Laws of the Registrant*

3.3 Form of Amended and Restated Certificate ofIncorporation*

4.1 Registration Rights Agreement*

4.2 Warrant Agreement*

5 Form of Opinion of Arent Fox Kintner Plotkin &Kahn, PLLC re validity [to be filed by amendment]

10.1 Employment Agreement with Kris Shah*

10.2 Employment Agreement with William Davis*

10.3 Promissory Note from Dril-Tron, Inc. (LitronicIndustries, Inc.) To Kris Shah dated December 12,1994 in the principal amount of $210,822*

10.4 Commercial Guaranty from Pulsar Data Systems, Inc.to Wilmington Trust Company dated June 23, 1995+

10.5 Business Loan Agreement between Pulsar DataSystems, Inc. and Wilmington Trust Company datedJuly 24, 1995+

10.6 Commercial Security Agreement between Pulsar DataSystems, Inc. and Wilmington Trust Company datedJuly 24, 1995+

10.7 Commercial Guaranty from Pulsar Data Systems, Inc.to Wilmington Trust Company dated October 23, 1995+

10.8 Purchase Order between Loral Federal SystemsCompany and Litronic Industries, Inc. dated



November 17, 1995*

10.9 Loan and Security Agreement between LitronicIndustries, Inc. and Fidelity Funding ofCalifornia, Inc. dated June 27, 1996+

10.10 First Amendment to Loan and Security Agreementbetween Litronic Industries Inc. and FidelityFunding, Inc. dated June 27,

II-3

1997*

10.11 Award Contract between Maryland Procurement Officeand Litronic Industries, Inc. dated June 27, 1997+

10.12 Forbearance Agreement between Pulsar Data Systems,Inc. and IBM Credit Corporation dated August 8,1997*

10.13 Letter Agreement between Pulsar Data Systems, Inc.and IBM Credit Corporation dated October 10, 1997*

10.14 Sublease Agreement between Litronic Industries,Inc. and E. I. du Pont de Nemours and Company datedOctober 20, 1997+

10.15 Inventory Working Capital and Finance Agreementbetween Pulsar Data Systems, Inc. and IBM CreditCorporation dated October 30, 1997+

10.16 Lease and Service Agreement between AllianceBusiness Centers and Litronic Industries, Inc.dated January 6, 1999+

10.17 Lease Agreement between Airport Industrial Complexand Litronic Industries, Inc. dated December 4,1997+

10.18 Promissory Note from Litronic Industries, Inc. toKRDS, Inc. dated December 31, 1997 in the principalamount of $900,000*

10.19 Revolving Promissory Note from Litronic Industries,Inc. to KRDS, Inc. dated December 31, 1997 in theprincipal amount of $2,900,000*


10.21 Letter Agreement between Pulsar Data Systems, Inc.and IBM Credit Corporation dated February 4, 1998*

10.22 Revolving Promissory Note from Litronic Industries,Inc. to KRDS, Inc. dated February 24, 1998 in theprincipal amount of $600,000*

10.23 Second Amendment to Loan and Security Agreementbetween Litronic Industries, Inc. and FidelityFunding, Inc. dated March 1, 1998*

10.24 Litronic Industries, Inc. Stock Option Plan datedApril 1, 1998*

10.25 Litronic Industries, Inc. Stock Option Plan datedFebruary __, 1999*

10.26 Modification dated February 3, 1999 of Original GSAContract+

II-4

GS-35F-4232D dated May 3, 1996+

10.27 Deed of Lease Agreement between Pulsar DataSystems, Inc. and Massachusetts Mutual LifeInsurance Company dated August 11, 1998+




10.29 Business Loan Agreement between LitronicIndustries, Inc. and BYL Bank Group dated September29, 1998+

10.30 Promissory Note from Litronic Industries, Inc. toBYL Bank Group dated September 29, 1998 in theprincipal amount of $3,800,000*


10.32 Amendment to Forbearance Agreement between PulsarData Systems, Inc. and IBM Credit Corporation datedOctober 8, 1998+

10.33 Promissory Note from Davis Holding Company toPulsar Data Systems, Inc. dated January 1, 1999 inthe principal amount of $804,342.08+

10.34 Promissory Note from Davis Holding Company toPulsar Data Systems, Inc. dated January 1, 1999 inthe principal amount of $543,017.40*

10.35 Letter Agreement between Pulsar Data Systems, Inc.and Wilmington Trust Company dated June 20, 1997*

10.36 Third Amendment to Loan and Security Agreementdated March 31, 1999

23.1 Form of Consent of KPMG LLP+


23.3 Form of Consent of Keller Bruner & Company, LLC+

27 Financial Data Schedule [To be filed by amendment]

99.1 Consent of Anthony Giraudo

(b) Financial Statement Schedules.

The following financial statement schedules are filed herewith:

Report of Independent Public Accountants

Schedule II -- Valuation and qualifying accounts

Other schedules have been omitted because of the absence of conditionsunder which they are required or because the required information is included inthe financial statements or notes thereto.

_________* Previously filed.

+ Supercedes previously filed exhibit.

II-5

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes to provide to theunderwriters at the closing specified in the underwriting agreementscertificates in such denominations and registered in such names as required bythe underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the SecuritiesAct of 1933 may be permitted to directors, officers and controlling persons ofthe Registrant pursuant to the foregoing provisions, or otherwise, theRegistrant has been advised that in the opinion of the Securities and ExchangeCommission such indemnification is against public policy as expressed in the Actand is, therefore, unenforceable. In the event that a claim for indemnificationagainst such liabilities (other than the payment by the Registrant of expensesincurred or paid by a director, officer or controlling person of the Registrantin the successful defense of any action, suit or proceeding) is asserted by suchdirector, officer or controlling person in connection with the securities beingregistered, the Registrant will, unless in the opinion of its counsel the matterhas been settled by controlling precedent, submit to a court of appropriatejurisdiction the question whether such indemnification by it is against publicpolicy as expressed in the Act and will be governed by the final adjudication ofsuch issue.

The undersigned Registrant hereby undertakes that:



(1) For purposes of determining any liability under the Securities Actof 1933, the information omitted from the form of prospectus filedas part of this registration statement in reliance upon Rule 430Aand contained in a form of prospectus filed by the Registrantpursuant to Rule 424(b)(1) or (4) or 497(h) under the SecuritiesAct shall be deemed to be part of this registration statement asof the time it was declared effective.

(2) For the purpose of determining any liability under the SecuritiesAct of 1933, each post-effective amendment that contains a form ofprospectus shall be deemed to be a new registration statementrelating to the securities offered therein, and the offering ofsuch securities at that time shall be deemed to be the initialbona fide offering thereof..

II-6

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registranthas duly caused this registration statement to be signed on its behalf by theundersigned, hereunto duly authorized, in the District of Columbia, on the 6thday of April, 1999.

Litronic Inc.

By: /s/ Kris Shah-----------------------Kris ShahChief Executive Officer and Chairmanof the Board

Pursuant to the requirements of the Securities Act of 1933, thisregistration statement has been signed by the following persons in thecapacities and on the dates indicated:

Signature Title Date

/s/ Kris Shah Director, Chairman of the Board April 6, 1999---------------------------Kris Shah and Chief Executive Officer

* Chief Financial Officer and April 6, 1999---------------------------Thomas W. Seykora principal accounting officer

* Director, President and April 6, 1999---------------------------William W. Davis, Sr. Chief Operating Officer

* By: /s/ Kris Shah----------------------

Kris ShahAttorney-in-Fact

II-7


SCHEDULE II

Valuation and Qualifying Accounts and ReservesYears ended December 31, 1996, 1997 and 1998

(Amounts in thousands)

<TABLE><CAPTION>

Column A Column B Column C Column D Column E---------------------------------------------------------- -------------- ------------- ---------------

AdditionsBalance at Charged to

Classification Beginning Costs and Amounts Balance atof Period Expenses Written Off End of Period

------------- ----------------- ------------- ---------------<S> <C> <C> <C> <C>Year Ended December 31, 1996

Allowance for doubtful accounts 450 403 33 820============= ================= ============= ===============

Allowance for notes receivable - - - -============= ================= ============= ===============



Allowance for notesreceivable-related party - - - -

============= ================= ============= ===============Year Ended December 31, 1997

Allowance for doubtful accounts 820 3,460 3,027 1,253============= ================= ============= ===============

Allowance for notes receivable - 1,220 1,220 -============= ================= ============= ===============

Allowance for notesreceivable-related party - 623 623 -

============= ================= ============= ===============Year Ended December 31, 1998

Allowance for doubtful accounts 1,253 3,370 3,623 1,000============= ================= ============= ===============

Allowance for notes receivable - - - -============= ================= ============= ===============

Allowance for notesreceivable-related party - 1,198* - 1,198

============= ================= ============= ===============</TABLE>

_______________________

* Amount charged directly to returned earnings as related balance isclassified as an equity account.

S-1

EXHIBIT INDEX

Exhibit No. Description

1 Form of Underwriting Agreement among the Registrantand the Underwriters*

2 Stock Exchange Agreement and Plan ofReorganization*

3.1 Certificate of Incorporation, as amended onFebruary 5, 1999*

3.2 By-Laws of the Registrant*

3.3 Form of Amended and Restated Certificate ofIncorporation*

4.1 Registration Rights Agreement*

4.2 Warrant Agreement*

5 Form of Opinion of Arent Fox Kintner Plotkin &Kahn, PLLC re validity [to be filed by amendment]

10.1 Employment Agreement with Kris Shah*

10.2 Employment Agreement with William Davis*

10.3 Promissory Note from Dril-Tron, Inc. (LitronicIndustries, Inc.) To Kris Shah dated December 12,1994 in the principal amount of $210,822*

10.4 Commercial Guaranty from Pulsar Data Systems, Inc.to Wilmington Trust Company dated June 23, 1995+

10.5 Business Loan Agreement between Pulsar DataSystems, Inc. and Wilmington Trust Company datedJuly 24, 1995+

10.6 Commercial Security Agreement between Pulsar DataSystems, Inc. and Wilmington Trust Company datedJuly 24, 1995+

10.7 Commercial Guaranty from Pulsar Data Systems, Inc.to Wilmington Trust Company dated October 23, 1995+

10.8 Purchase Order between Loral Federal SystemsCompany and Litronic Industries, Inc. datedNovember 17, 1995*

10.9 Loan and Security Agreement between LitronicIndustries, Inc. and Fidelity Funding ofCalifornia, Inc. dated June 27, 1996+



10.10 First Amendment to Loan and Security Agreementbetween Litronic Industries Inc. and FidelityFunding, Inc. dated June 27,

1997*

10.11 Award Contract between Maryland Procurement Officeand Litronic Industries, Inc. dated June 27, 1997+


10.13 Letter Agreement between Pulsar Data Systems, Inc.and IBM Credit Corporation dated October 10, 1997*

10.14 Sublease Agreement between Litronic Industries,Inc. and E. I. du Pont de Nemours and Company datedOctober 20, 1997+

10.15 Inventory Working Capital and Finance Agreementbetween Pulsar Data Systems, Inc. and IBM CreditCorporation dated October 30, 1997+

10.16 Lease and Service Agreement between AllianceBusiness Centers and Litronic Industries, Inc.dated January 6, 1999+

10.17 Lease Agreement between Airport Industrial Complexand Litronic Industries, Inc. dated December 4,1997+

10.18 Promissory Note from Litronic Industries, Inc. toKRDS, Inc. dated December 31, 1997 in the principalamount of $900,000*



10.21 Letter Agreement between Pulsar Data Systems, Inc.and IBM Credit Corporation dated February 4, 1998*

10.22 Revolving Promissory Note from Litronic Industries,Inc. to KRDS, Inc. dated February 24, 1998 in theprincipal amount of $600,000*

10.23 Second Amendment to Loan and Security Agreementbetween Litronic Industries, Inc. and FidelityFunding, Inc. dated March 1, 1998*

10.24 Litronic Industries, Inc. Stock Option Plan datedApril 1, 1998*

10.25 Litronic Industries, Inc. Stock Option Plan datedFebruary __, 1999*

10.26 Modification dated February 3, 1999 of Original GSAContract+

GS-35F-4232D dated May 3, 1996

10.27 Deed of Lease Agreement between Pulsar DataSystems, Inc. and Massachusetts Mutual LifeInsurance Company dated August 11, 1998+


10.29 Business Loan Agreement between LitronicIndustries, Inc. and BYL Bank Group dated September29, 1998+





10.32 Amendment to Forbearance Agreement between PulsarData Systems, Inc. and IBM Credit Corporation datedOctober 8, 1998+

10.33 Promissory Note from Davis Holding Company toPulsar Data Systems, Inc. dated January 1, 1999 inthe principal amount of $804,342.08+

10.34 Promissory Note from Davis Holding Company toPulsar Data Systems, Inc. dated January 1, 1999 inthe principal amount of $543,017.40*

10.35 Letter Agreement between Pulsar Data Systems, Inc.and Wilmington Trust Company dated June 20, 1997*

10.36 Third Amendment to Loan and Security Agreementdated March 31, 1999


23.2 Form of Consent of KPMG LLP

23.3 Form of Consent of Keller Bruner & Company, LLC+

27 Financial Data Schedule [To be filed by amendment]

99.1 Consent of Anthony Giraudo

_________* Previously filed.

+ Supercedes previously filed exhibit.



EXHIBIT 10.4

COMMERCIAL GUARANTY

BORROWER: DAVIS HOLDING COMPANYC/O PULSAR DATA SYSTEMS, INC. 5000 PHILADELPHIA WAY SUITE HLANHAM, MD 20706

LENDER: WILMINGTON TRUST COMPANYC/L W H MAJORRODNEY SQUARE NORTH1100 NORTH MARKET STREETWILMINGTON, DE 19890

GUARANTOR:PULSAR DATA SYSTEMS, INC.5000 PHILADELPHIA WAY SUITE HLANHAM, MD 20706

AMOUNT OF GUARANTY. This is a guaranty of payment of the Note, including withoutlimitation the principal Note amount of Two Million Three Hundred Sixty Thousand& 00/100 Dollars ($2,360,000.00).

GUARANTY. For good and valuable consideration, PULSAR DATA SYSTEMS, INC.("Guarantor") absolutely and unconditionally guarantees and promises to pay toWILMINGTON TRUST COMPANY ("Lender") or its order, in legal tender of the UnitedStates of America, the Indebtedness (as that term is defined below) of DAVISHOLDING COMPANY ("Borrower") to Lender on the terms and conditions set forth inthis Guaranty.

DEFINITIONS. The following words shall have the following meanings when used inthis Guaranty:

BORROWER. The word "Borrower" means DAVIS HOLDING COMPANY.GUARANTOR. The word "Guarantor" means PULSAR DATA SYSTEMS, INC.GUARANTY. The word ''Guaranty" means this Guaranty made by Guarantor for thebenefit of Lender dated JUNE 23, 1995.

INDEBTEDNESS. The word "Indebtedness" means the Note, including (a) allprincipal, (b) all interest, (c) all late charges, (d) all loan fees and loancharges, and (e) all collection costs and expenses relating to the Note or toany collateral for the Note. Collection costs and expenses include withoutlimitation all of Lender's reasonable attorneys' fees and Lender's legalexpenses, including court costs and fifteen percent (15%) of the principal plusaccrued interest as attorneys' fees, if any sums owing under this Guaranty are



collected by or through an attorney-at-law, whether or not suit is instituted,and reasonable attorneys' fees and legal expenses for bankruptcy

PAGE 2

proceedings (including efforts to modify or vacate any automatic stay orinjunction), appeals, and any anticipated post-judgment collection services.

LENDER. The word "Lender" means WILMINGTON TRUST COMPANY, its successors andassigns.

NOTE. The word "Note" means the promissory note or credit agreement dated JUNE23, 1995, in the original principal amount of $2,360,000.00 from Borrower toLender, together with all renewals of, extensions of, modifications of,refinancings of, consolidations of, and substitutions for the promissory note oragreement.

RELATED DOCUMENTS. The words "Related Documents" mean and include withoutlimitation all promissory notes, credit agreements, loan agreements,environmental agreements, guaranties, security agreements, mortgages, deeds oftrust, and all other instruments, agreements and documents, whether now orhereafter existing, executed in connection with the Indebtedness.

MAXIMUM LIABILITY. The maximum liability of Guarantor under this guaranty shallnot exceed at any one time the amount of the Indebtedness described above, plusall costs and expenses of (a) enforcement of this Guaranty and (b) collectionand sale of any collateral securing this Guaranty.

The above limitation on liability is not a restriction on the amount of theIndebtedness of Borrower to Lender either in the aggregate or at any one time.If Lender presently holds one or more guaranties, or hereafter receivesadditional guaranties from Guarantor, the rights of Lender under all guarantiesshall be cumulative. This Guaranty shall not (unless specifically provided belowto the contrary) affect or invalidate any such other guaranties. The liabilityof Guarantor will be the aggregate liability of Guarantor under the terms ofthis Guaranty and any such other unterminated guaranties.

NATURE OF GUARANTY. Guarantor intends to guarantee at all times the performanceand prompt payment when due, whether at maturity or earlier by reason ofacceleration or otherwise, of all Indebtedness within the limits set forth inthe preceding section of this Guaranty.

DURATION OF GUARANTY. This Guaranty will take effect when received by Lenderwithout the necessity of any acceptance by Lender, or any notice to Guarantor orto Borrower, and will continue in full force until all Indebtedness shall havebeen fully and finally paid and satisfied and all other obligations of Guarantorunder this Guaranty shall have been performed in full. Release of any otherguarantor or termination of any other guaranty of the Indebtedness shall notaffect the liability of Guarantor under this Guaranty. A revocation received by



Lender from any one or more Guarantors shall not affect the liability of anyremaining Guarantors under this Guaranty.

GUARANTOR'S AUTHORIZATION TO LENDER. GUARANTOR AUTHORIZES LENDER, without noticeor demand and without lessening Guarantor's liability under this Guaranty, fromtime to time: (a) to make one or more additional secured or unsecured loans toBorrower, to lease equipment or other goods to Borrower, or otherwise to extendadditional credit to Borrower; (b) to alter, compromise, renew, extend,accelerate, or otherwise change one or

PAGE 3

more times the time for payment or other terms of the indebtedness or any partof the Indebtedness, including increases and decreases of the rate of intereston the Indebtedness; extensions may be repeated and may be for longer than theoriginal loan term; (c) to take and hold security for the payment of thisGuaranty or the indebtedness, and exchange, enforce, waive, fail or decide notto perfect, and release any such security, with or without the substitution ofnew collateral; (d) to release, substitute, agree not to sue, or deal with anyone or more of Borrower's sureties, endorsers, or other guarantors on any termsor in any manner Lender may choose; (e) to determine how, when and whatapplication of payments and credits shall be made on the Indebtedness; (f) toapply such security and direct the order or manner of sale thereof, includingwithout limitation, any nonjudicial sale permitted by the terms of thecontrolling security agreement or deed of trust, as Lender in its discretion maydetermine; (g) to sell, transfer, assign, or grant participations in all or anypart of the Indebtedness; and (h) to assign or transfer this Guaranty in wholeor in part.

GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants toLender that (a) no representations or agreements of any kind have been made toGuarantor which would limit or qualify in any way the terms of this Guaranty;(b) this Guaranty is executed at Borrower's request and not at the request ofLender; (c) Guarantor has not and will not, without the prior written consent ofLender, sell, lease, assign, encumber, hypothecate, transfer, or otherwisedispose of all or substantially all of Guarantor's assets, or any interesttherein; (d) Lender has made no representation to Guarantor as to thecreditworthiness of Borrower; (e) upon Lender's request, Guarantor will provideto Lender financial and credit information in form acceptable to Lender, and allsuch financial information provided to Lender is true and correct in allmaterial respects and fairly presents the financial condition of Guarantor as ofthe dates thereof, and no material adverse change has occurred in the financialcondition of Guarantor since the date of the financial statements; and (f)Guarantor has established adequate means of obtaining from Borrower on acontinuing basis information regarding Borrower's financial condition. Guarantoragrees to keep adequately informed from such means of any facts, events, orcircumstances which might in any way affect Guarantor's risks under thisGuaranty, and Guarantor further agrees that, absent a request for information,Lender shall have no obligation to disclose to Guarantor any information or



documents acquired by Lender in the course of its relationship with Borrower.

GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waivesany right to require Lender (a) to continue extending money or to extend othercredit to Borrower; (b) to make any presentment, protest, demand, or notice ofany kind, including notice of any nonpayment of the Indebtedness or of anynonpayment related to any collateral, or notice of any action or nonaction onthe part of Borrower, Lender, any surety, endorser, or other guarantor inconnection with the Indebtedness or in connection with the creation of new oradditional loans or obligations; (c) to resort for payment or to proceeddirectly or at once against any person, including Borrower or any otherguarantor; (d) to proceed directly against or exhaust any

PAGE 4

collateral held by Lender from Borrower, any other guarantor, or any otherperson; (e) to give notice of the terms, time, and place of any public orprivate sale of personal property security held by Lender from Borrower or tocomply with any other applicable provisions of the Uniform Commercial Code; (f)to pursue any other remedy within Lender's power; or (g) to commit any act oromission of any kind, or at any time, with respect to any matter whatsoever.

If now or hereafter (a) Borrower shall be or become insolvent, and (b) theIndebtedness shall not at all times until paid be fully secured by collateralpledged by Borrower, Guarantor hereby forever waives and relinquishes in favorof Lender and Borrower, and their respective successors, any claim or right topayment Guarantor may now have or hereafter have or acquire against Borrower, bysubrogation or otherwise, so that at no time shall Guarantor be or become a"creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or anysuccessor provision of the Federal bankruptcy laws.

Guarantor also waives any and all rights or defenses arising by reason of (a)any "one action" or "anti-deficiency" law or any other law which may preventLender from bringing any action, including a claim for deficiency, againstGuarantor, before or after Lender's commencement or completion of anyforeclosure action, either judicially or by exercise of a power of sale; (b) anyelection of remedies by Lender which destroys or otherwise adversely affectsGuarantor's subrogation rights or Guarantor's rights to proceed against Borrowerfor reimbursement, including without limitation, any loss of rights Guarantormay suffer by reason of any law limiting, qualifying, or discharging theIndebtedness; (c) any disability or other defense of Borrower, of any otherguarantor, or of any other person, or by reason of the cessation of Borrower'sliability from any cause whatsoever, other than payment in full in legal tender,of the Indebtedness; (d) any right to claim discharge of the Indebtedness on thebasis of unjustified impairment of any collateral for the Indebtedness; (e) anystatute of limitations, if at any time any action or suit brought by Lenderagainst Guarantor is commenced there is outstanding Indebtedness of Borrower toLender which is not barred by any applicable statute of limitations; or (f) anydefenses given to guarantors at law or in equity other than actual payment and



performance of the Indebtedness. If payment is made by Borrower whethervoluntarily or otherwise, or by any third party, on the Indebtedness andthereafter Lender is forced to remit the amount of that payment to Borrower'strustee in bankruptcy or to any similar person under any federal or statebankruptcy law or law for the relief of debtors, the Indebtedness shall beconsidered unpaid for the purpose of enforcement of this Guaranty. Guarantorfurther waives and agrees not to assert or claim at any time any deductions tothe amount guaranteed under this Guaranty for any claim of setoff, counterclaim,counter demand, recoupment or similar right, whether such claim, demand or rightmay be asserted by the Borrower, the Guarantor, or both.

GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agreesthat each of the waivers set forth above is made with Guarantor's full knowledgeof its significance and consequences and that, under the circumstances, thewaivers are reasonable and not contrary to public policy or law. If any suchwaiver is determined to be

PAGE 5

contrary to any applicable law or public policy, such waiver shall be effectiveonly to the extent permitted by law or public policy.

SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that theIndebtedness of Borrower to Lender, whether now existing or hereafter created,shall be prior to any claim that Guarantor may now have or hereafter acquireagainst Borrower, whether or not Borrower becomes insolvent. Guarantor herebyexpressly subordinates any claim Guarantor may have against Borrower, upon anyaccount whatsoever, to any claim that Lender may now or hereafter have againstBorrower. In the event of insolvency and consequent liquidation of the assets ofBorrower, through bankruptcy, by an assignment for the benefit of creditors, byvoluntary liquidation, or otherwise, the assets of Borrower applicable to thepayment of the claims of both Lender and Guarantor shall be paid to Lender andshall be first applied by Lender to the Indebtedness of Borrower to Lender.Guarantor does hereby assign to Lender all claims which it may have or acquireagainst Borrower or against any assignee or trustee in bankruptcy of Borrower;provided however, that such assignment shall be effective only for the purposeof assuring to Lender full payment in legal tender of the Indebtedness. IfLender so requests, any notes or credit agreements now or hereafter evidencingany debts or obligations of Borrower to Guarantor shall be marked with legendthat the same are subject to this Guaranty and shall be delivered to Lender.Guarantor agrees, and Lender hereby is authorized, in the name of Guarantor,from time to time to execute and file financing statements and continuationstatements and to execute such other documents and to take such other actions asLender deems necessary or appropriate to perfect, preserve and enforce itsrights under this Guaranty.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part ofthis Guaranty:



AMENDMENTS. This Guaranty, together with any Related Documents, constitutes theentire understanding and agreement of the parties as to the matters set forth inthis Guaranty. No alteration of or amendment to this Guaranty shall be effectiveunless given in writing and signed by the party or parties sought to be chargedor bound by the alteration or amendment.

APPLICABLE LAW. This Guaranty has been delivered to Lender and accepted byLender in the State of Delaware. This Guaranty shall be governed by andconstrued in accordance with the laws of the State of Delaware.

ATTORNEYS' FEES; EXPENSES. Guarantor agrees to pay upon demand all of Lender'scosts and expenses, including reasonable attorneys' fees and Lender's legalexpenses, incurred in connection with the enforcement of this Guaranty. Lendermay pay someone else to help enforce this Guaranty, and Guarantor shall pay thecosts and expenses of such enforcement. Costs and expenses include Lender'sreasonable attorneys' fees and legal expenses whether or not there is a lawsuit,including reasonable attorneys' fees and legal expenses for bankruptcyproceedings (and including efforts to modify or vacate any automatic stay orinjunction), appeals, and any anticipated post-judgment collection services.Guarantor also shall pay all court costs and such additional fees as may bedirected by the court.

PAGE 6

NOTICES. All notices required to be given by either party to the other underthis Guaranty shall be in writing and shall be effective when actually deliveredor when deposited with a nationally recognized overnight courier, or whendeposited in the United States mail, first class postage prepaid, addressed tothe party to whom the notice is to be given at the address shown above or tosuch other addresses as either party may designate to the other in writing. Ifthere is more than one Guarantor, notice to any Guarantor will constitute noticeto all Guarantors. For notice purposes, Guarantor agrees to keep Lender informedat all times of Guarantor's current address.

INTERPRETATION. In all cases where there is more than one Borrower or Guarantor,then all words used in this Guaranty in the singular shall be deemed to havebeen used in the plural where the context and construction so require; and wherethere is more than one Borrower named in this Guaranty or when this Guaranty isexecuted by more than one Guarantor, the words "Borrower" and "Guarantor"respectively shall mean all and any one or more of them. The words "Guarantor,""Borrower," and "Lender" include the heirs, successors, assigns, and transfereesof each of them. Caption headings in this Guaranty are for convenience purposesonly and are not to be used to interpret or define the provisions of thisGuaranty. If a court of competent jurisdiction finds any provision of thisGuaranty to be invalid or unenforceable as to any person or circumstance, suchfinding shall not render that provision invalid or unenforceable as to any otherpersons or circumstances, and all provisions of this Guaranty in all otherrespects shall remain valid and enforceable. If any one or more of Borrower orGuarantor are corporations or partnerships, it is not necessary for Lender to



inquire into the powers of Borrower or Guarantor or of the officers, directors,partners, or agents acting or purporting to act on their behalf, and anyIndebtedness made or a created in reliance upon the professed exercise of suchpowers shall be guaranteed under this Guaranty.

WAIVER. Lender shall not be deemed to have waived any rights under this Guarantyunless such waiver is given in writing and signed by Lender. No delay oromission on the part of Lender in exercising any right shall operate as a waiverof such right or any other right. A waiver by Lender of a provision of thisGuaranty shall not prejudice or constitute a waiver of Lender's right otherwiseto demand strict compliance with that provision or any other provision of thisGuaranty. No prior waiver by Lender, nor any course of dealing between Lenderand Guarantor, shall constitute a waiver of any of Lender's rights or of any ofGuarantor's obligations as to any future transactions. Whenever the consent ofLender is required under this Guaranty, the granting of such consent by Lenderin any instance shall not constitute continuing consent to subsequent instanceswhere such consent is required and in all cases such consent may be granted orwithheld in the sole discretion of Lender.

LIMITATION ON GUARANTY. Notwithstanding any other provision of this Guaranty,-----------------------the liability of Guarantor under this Guaranty shall not exceed the amount whichwould render this Guaranty unenforceable, void or voidable under (s)548 of theBankruptcy Code or by application of any Fraudulent Transfer or FraudulentConveyance statute. In the event that the Guarantor shall claim that the amountof its liability hereunder is less

PAGE 7

than the amount of the indebtedness, the burden of proof with respect to theamount of such liability shall rest with Guarantor in light of the fact that theinformation concerning and circumstances of the financial condition of suchGuarantor are more readily available to and under the control of such Guarantor.

Waiver of Right to Trial by Jury. IN RECOGNITION OF THE HIGHER COSTS AND DELAY---------------------------------WHICH MAY RESULT FROM A JURY TRIAL, GUARANTOR AND LENDER WAIVE ANY RIGHT TOTRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (1) ARISINGHEREUNDER, OR (2) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THEDEALINGS OF THE PARTIES HERETO WITH RESPECT HERETO OR ANY OTHER INSTRUMENT,DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, IN EACH CASEWHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT ORTORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCHCLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUTA JURY, AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OFTHIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIESHERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.

Waiver and Subordination. Guarantor irrevocably waives, disclaims and



-------------------------relinquishes all claims against Borrower which Guarantor otherwise has or wouldhave by virtue of having executed this Guaranty, specifically including but notlimited to all rights of indemnity, contribution or exoneration. In the event ofthe payment by Guarantor to Lender of any amount whatsoever and the resultantsubrogation of Guarantor to the rights of Lender by reason of such payment, theamount of the remaining Indebtedness of Borrower to Lender after the payments byGuarantor pursuant to this Guaranty shall have priority over any claim thatGuarantor may have against Borrower, whether or not Borrower is at such time orthereafter becomes insolvent. Guarantor further expressly subordinates any claimagainst Borrower upon any account whatsoever to any claim that Lender may haveagainst Borrower at any time and for any reason.

EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THISGUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THATTHIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THISGUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THEMANNER SET FORTH IN THE SECTION TITLED "DURATION OF

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GUARANTY." NO FORMAL ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTYEFFECTIVE. THIS GUARANTY IS DATED JUNE 23, 1995.

GUARANTOR:


BY: /s/ William W. Davis President/CEO (SEAL)-------------------------------------------------------

WILLIAM W. DAVIS, SR., PRESIDENT

BY: /s/ LILLIAN A. DAVIS (SEAL)-----------------------------------------------

LILLIAN A. DAVIS, EXECUTIVE VICE PRESIDENT

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EXHIBIT 10.05

WILMINGTON TRUST

BUSINESS LOAN AGREEMENT

<TABLE><S> <C> <C> <C> <C> <C> <C> <C> <C>--------------------------------------------------------------------------------------------------------------------------------

Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials$22,000,000.00 07-24-1995 10 0777 938

--------------------------------------------------------------------------------------------------------------------------------References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particularloan or item.

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

Borrower: PULSAR DATA SYSTEMS, INC. Lender: WILMINGTON TRUST COMPANY5000 PHILADELPHIA WAY SUITE H C/L WH MAJORLANHAM, MD 20706 RODNEY SQUARE NORTH

1100 NORTH MARKET STREETWILMINGTON, DE 19890

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THIS BUSINESS LOAN AGREEMENT between PULSAR DATA SYSTEMS, INC. ("Borrower")and WILMINGTON TRUST COMPANY ("Lender") is made and executed on thefollowing terms and conditions. Borrower has received prior commercialloans from Lender or has applied to Lender for a commercial loan or loansand other financial accommodations, including those which may be describedon any exhibit or schedule attached to this Agreement. All such loans andfinancial accommodations, together with all future loans and financialaccommodations from Lender to Borrower, are referred to in this Agreementindividually as the "Loan" and collectively as the "Loans." Borrowerunderstands and agrees that: (a) in granting, renewing, or extending anyLoan, Lender is relying upon Borrower's representations, warranties, andagreements, as set forth in this Agreement; (b) the granting, renewing, orextending of any Loan by Lender at all times shall be subject to Lender'ssole judgment and discretion; and (c) all such Loans shall be and shallremain subject to the following terms and conditions of this Agreement.

TERM. This Agreement shall be effective as of July 24, 1995, and shallcontinue thereafter until all Indebtedness of Borrower to Lender has beenperformed in full and the parties terminate this Agreement in writing.

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

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

BORROWER. The word "Borrower" means PULSAR DATA SYSTEMS, INC.. Theword "Borrower" also includes, as applicable, all subsidiaries andaffiliates of Borrower as provided below in the paragraph titled"Subsidiaries and Affiliates."

BUSINESS LOAN AGREEMENT Page 2(continued)

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

COLLATERAL. The word "Collateral" means and includes without limitationall property and assets granted as collateral security for a Loan, whetherreal or personal property, whether granted directly or indirectly, whethergranted now or in the future, and whether granted in the form of a securityinterest, mortgage, deed of trust, assignment, pledge, chattel mortgage,chattel trust, factor's lien, equipment trust, conditional sale, trustreceipt, lien, charge, lien or title retention contract, lease orconsignment intended as a security device, or any other security or lieninterest whatsoever, whether created by law, contract, or otherwise.

ERISA. The word "ERISA" means the Employee Retirement Income Security Act



of 1974, as amended.

EVENT OF DEFAULT. The words "Event of Default" mean and include withoutlimitation any of the Events of Default set forth below in the sectiontitled "EVENTS OF DEFAULT."

GRANTOR. The word "Grantor" means and includes without limitation each andall of the persons or entities granting a Security Interest in anyCollateral for the Indebtedness, including without limitation all Borrowersgranting such a Security Interest.

GUARANTOR. The word "Guarantor" means and includes without limitation eachand all of the guarantors, sureties, and accommodation parties inconnection with any Indebtedness.

INDEBTEDNESS. The word "Indebtedness" means and includes withoutlimitation all Loans, together with all other obligations, debts andliabilities of Borrower to Lender, or any one or more of them, as well asall claims by Lender against Borrower, or any one or more of them; whethernow or hereafter existing, voluntary or involuntary, due or not due,absolute or contingent, liquidated or unliquidated; whether Borrower may beliable individually or jointly with others; whether Borrower may beobligated as a guarantor, surety, or otherwise; whether recovery upon suchIndebtedness may be or hereafter may become barred by any statute oflimitations; and whether such Indebtedness may be or hereafter may becomeotherwise unenforceable.

LENDER. The word "Lender" means WILMINGTON TRUST COMPANY, its successorsand assigns.

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


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NOTE. The word "Note" means and includes without limitation Borrower'spromissory note or notes, if any, evidencing Borrower's Loan obligationsin favor of Lender, as well as any substitute, replacement or refinancingnote or notes therefor.

PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and securityinterests securing indebtedness owned by Borrower to Lender; (b) liens fortaxes, assessments, or similar charges either not yet due or beingcontested in good faith; (c) liens of materialmen, mechanics, warehousemen,or carriers, or other like liens arising in the ordinary course of businessand security obligations which are not yet delinquent; (d) purchase moneyliens or purchase money security interests upon or in any property acquiredor held by Borrower in the ordinary course of business to secureindebtedness outstanding on the date of this Agreement or permitted to beincurred under the paragraph of this Agreement titled "Indebtedness andLiens"; (e) liens and security interests which, as of the date of thisAgreement, have been disclosed to and approved by the Lender in writing;and (f) those liens and security interests which in the aggregateconstitute an immaterial and insignificant monetary amount with respect tothe net value of Borrower's assets.

RELATED DOCUMENTS. The words "Related Documents" mean and include withoutlimitation all promissory notes, credit agreements, loan agreements,environmental agreements, guaranties, security agreements, mortgages, deedsof trust, and all other instruments, agreements and documents, whether nowor hereafter existing, executed in connection with the indebtedness.

SECURITY AGREEMENT. The words "Security Agreement" mean and includewithout limitation any agreements, promises, covenants, arrangements,understandings or other agreements, whether created by law, contract, orotherwise, evidencing, governing, representing, or creating a SecurityInterest.

SECURITY INTEREST. The words "Security Interest" mean and include withoutlimitation any type of collateral security, whether in the form of a lien,charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,chattel trust, factor's lien, equipment trust, conditional sale, trustreceipt, lien or title retention contract, lease or consignment intended asa security device, or any other security or lien interest whatsoever,whether created by law, contract, or otherwise.



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

CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initialLoan Advance and each subsequent Loan Advance under this Agreement shall besubject to the fulfillment to Lender's satisfaction of all of the conditions setforth in this Agreement and in the Related Documents.


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LOAN DOCUMENTS. Borrower shall provide to Lender in form satisfactory toLender the following documents for the Loan: (a) the Note; (b) SecurityAgreements granting to Lender security interests in the Collateral; (c)Financing Statements perfecting Lender's Security Interests; (d) evidenceof insurance as required below; and (e) any other documents required underthis Agreement or by Lender or its counsel, including without limitationany guaranties described below.

BORROWER'S AUTHORIZATION. Borrower shall have provided in form andsubstance satisfactory to Lender properly certified resolutions, dulyauthorizing the execution and delivery of this Agreement, the Note and theRelated Documents, and such other authorizations and other documents andinstruments as Lender or its counsel, in their sole discretion, mayrequire.

PAYMENT OF FEES AND EXPENSES. Borrower shall have paid to Lender all fees,charges, and other expenses which are then due and payable as specified inthis Agreement or any Related Document.

REPRESENTATIONS AND WARRANTIES. The representations and warranties setforth in this Agreement, in the Related Documents, and in any document orcertificate delivered to Lender under this Agreement are true and correct.

NO EVENT OF DEFAULT. There shall not exist at the time of any advance acondition which would constitute an Event of Default under this Agreement.

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

ORGANIZATION. Borrower is a corporation which is duly organized, validlyexisting, and in good standing under the laws of the State of Delaware andis validly existing and in good standing in all states in which Borrower isdoing business. Borrower has the full power and authority to own itsproperties and to transact the businesses in which it is presently engagedor presently proposes to engage. Borrower also is duly qualified as aforeign corporation and is in good standing in all states in which thefailure to so qualify would have a material adverse effect on itsbusinesses or financial condition.

AUTHORIZATION. The execution, delivery, and performance of this Agreementand all Related Documents by Borrower, to the extent to be executed,delivered or performed by Borrower, have been duly authorized by allnecessary action by Borrower; do not require the consent or approval of anyother person, regulatory authority or governmental body; and do notconflict with, result in a violation of, or constitute a default under (a)any provision of its articles of incorporation or organization, or bylaws,or any agreement or other instrument


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binding upon Borrower or (b) any law, governmental regulation, courtdecree, or order applicable to Borrower.

FINANCIAL INFORMATION. Each financial statement of Borrower supplied toLender truly and completely disclosed Borrower's financial condition as ofthe date of the statement, and there has been no material adverse change inBorrower's financial condition subsequent to the date of the most recentfinancial statement supplied to Lender. Borrower has no materialcontingent obligations except as disclosed in such financial statements.

LEGAL EFFECT. This Agreement constitutes, and any instrument or agreementrequired hereunder to be given by Borrower when delivered will constitute,legal, valid and binding obligations of Borrower enforceable againstBorrower in accordance with their respective terms.



PROPERTIES. Except as contemplated by this Agreement or as previouslydisclosed in Borrower's financial statements or in writing to Lender and asaccepted by Lender, and except for property tax liens for taxes notpresently due and payable, Borrower owns and has good title to all ofBorrower's properties free and clear of all Security Interests, and has notexecuted any security documents or financing statements relating to suchproperties. All of Borrower's properties are titled in Borrower's legalname, and Borrower has not used, or filed a financing statement under, anyother name for at least the last five (5) years.

HAZARDOUS SUBSTANCES. The term "hazardous waste," "hazardous substance,""disposal," "release," and "threatened release," as used in this Agreement,shall have the same meanings as set forth in the "CERCLA," "SARA," theHazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.,the Resource Conservation and Recovery Act, 49 U.S.C. Section 6901, etseq., or other applicable state or Federal laws, rules or regulationsadopted pursuant to any of the foregoing. Except as disclosed to andacknowledged by Lender in writing, Borrower represents and warrants that:(a) During the period of Borrower's ownership of the properties, there hasbeen no use, generation, manufacture, storage, treatment, disposal, releaseor threatened release of any hazardous waste or substance by any person on,under, about or from any of the properties. (b) borrower has no knowledgeof, or reason to believe that there has been (i) any use, generation,manufacture, storage, treatment, disposal, release, or threatened releaseof any hazardous waste or substance on, under, about or from the propertiesby any prior owners or occupants of any of the properties, or (ii) anyactual or threatened litigation or claims of any kind by any personrelating to such matters. (c) Neither Borrower nor any tenant, contractor,agent or other authorized user of any of the properties shall use,generate, manufacture, store, treat, dispose of, or release any hazardouswaste or substance on, about or from any of the properties; and any suchactivity shall be conducted in compliance with all applicable federal,state, and local laws, regulations, and ordinances, including withoutlimitation those laws, regulations and ordinances described above. Borrowerauthorizes Lender and its agents to


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enter upon the properties to make such inspections and tests as Lender maydeem appropriate to determine compliance of the properties with thissection of the Agreement. Any inspections or tests made by Lender shall beat Borrower's expense and for Lender's purposes only and shall not beconstrued to create any responsibility or liability on the part of Lenderto Borrower or to any other person. The representations and warrantiescontained herein are based on Borrower's due diligence in investigating theproperties for hazardous waste and hazardous substances. Borrower hereby(a) releases and waives any future claims against Lender for indemnity orcontribution in the event Borrower becomes liable for cleanup or othercosts under any such laws, and (b) agrees to indemnify and hold harmlessLender against any and all claims, losses, liabilities, damages, penalties,and expenses which Lender may directly or indirectly sustain or sufferresulting from a breach of this section of the Agreement or as aconsequence of any use, generation, manufacture, storage, disposal, releaseor threatened release occurring prior to Borrower's ownership or interestin the properties, whether or not the same was or should have been known toBorrower. The provisions of this section of the Agreement, including theobligation to indemnify, shall survive the payment of the indebtedness andthe termination or expiration of this Agreement and shall not be affectedby Lender's acquisition of any interest in any of the properties, whetherby foreclosure or otherwise.

LITIGATION AND CLAIMS. No litigation, claim, investigation, administrativeproceeding or similar action (including those for unpaid taxes) againstBorrower is pending or threatened, and no other event has occurred whichmay materially adversely affect Borrower's financial condition orproperties, other than litigation, claims, or other events, if any, thathave been disclosed to and acknowledged by Lender in writing.

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

LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,Borrower has not entered into or granted any Security Agreements, orpermitted the filing or attachment of any Security Interests on oraffecting any of the Collateral directly or indirectly securing repayment



of Borrower's Loan and Note, that would be prior or that may in any way besuperior to Lender's Security Interests and rights in and to suchCollateral.

BINDING EFFECT. This Agreement, the Note, all Security Agreements directlyor indirectly securing repayment of Borrower's Loan and Note and all of theRelated Documents are binding upon Borrower as well as upon Borrower'ssuccessors, representatives and assigns, and are legally enforceable inaccordance with their respective terms.


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COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely forbusiness or commercial related purposes.

EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrowermay have any liability complies in all material respects with allapplicable requirements of law and regulations, and (i) no Reportable Eventnor Prohibited Transaction (as defined in ERISA) has occurred with respectto any such plan, (ii) Borrower has not withdrawn from any such plan orinitiated plan or initiated steps to do so, and (iii) no steps have beentaken to terminate any such plan.

LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business,or Borrower's Chief executive office, if Borrower has more than one placeof business, is located at 5000 PHILADELPHIA WAY SUITE H, LANHAM, MD 20706.Unless Borrower has designated otherwise in writing this location is alsothe office or offices where Borrower keeps its records concerning theCollateral.

INFORMATION. All information heretofore or contemporaneously herewithfurnished by Borrower to Lender for the purposes of or in connection withthis Agreement or any transaction contemplated hereby is, and allinformation hereafter furnished by or on behalf of Borrower to Lender willbe, true and accurate in every material respect on the date as of whichsuch information is dated or certified; and none of such information is orwill be incomplete by omitting to state any material fact necessary to makesuch information not misleading.

SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands andagrees that Lender, without independent investigation, is relying upon theabove representations and warranties in extending Loan Advances toBorrower. Borrower further agrees that the foregoing representations andwarranties shall be continuing in nature and shall remain in full force andeffect until such time as Borrower's Indebtedness shall be paid in full, oruntil this Agreement shall be terminated in the manner provided above,whichever is the last to occur.

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

LITIGATION. Promptly inform Lender in writing of (a) all material adversechanges in Borrower's financial condition, and (b) all existing and allthreatened litigation, claims, investigations, administrative proceedingsor similar actions affecting Borrower or any Guarantor which wouldmaterially affect the financial condition of Borrower or the financialcondition of any Guarantor.


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FINANCIAL RECORDS. Maintain its books and records in accordance withgenerally accepted accounting principles, applied on a consistent basis,and permit Lender to examine and audit Borrower's books and records at allreasonable times.

FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in noevent later than ninety (90) days after the end of each fiscal year,Borrower's balance sheet and income statement for the year ended, auditedby a certified public accountant satisfactory to Lender. All financialreports required to be provided under this Agreement shall be prepared inaccordance with generally accepted accounting principles, applied on aconsistent basis, and certified by Borrower as being true and correct.

ADDITIONAL INFORMATION. Furnish such additional information andstatements, lists of assets and liabilities, agings of receivables andpayables, inventory schedules, budgets, forecasts, tax returns, and other



reports with respect to Borrower's financial condition and businessoperations as Lender may request from time to time.

INSURANCE. Maintain fire and other risk insurance, public liabilityinsurance, and such other insurance as Lender may require with respect toBorrower's properties and operations, in form, amounts, coverages and withinsurance companies reasonably acceptable to Lender. Borrower, uponrequest of Lender, will deliver to Lender from time to time the policies orcertificates of insurance in form satisfactory to Lender, includingstipulations that coverages will not be cancelled or diminished without atleast twenty (20) days' prior written notice to Lender. Each insurancepolicy also shall include an endorsement providing that coverage in favorof Lender will not be impaired in any way by any act, omission or defaultof Borrower or any other person. In connection with all policies coveringassets in which Lender holds or is offered a security interest for theLoans, Borrower will provide Lender with such loss payable or otherendorsements as Lender may require.

INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports oneach existing insurance policy showing such information as Lender mayreasonably request, including without limitation the following: (a) thename of the insurer; (b) the risks insured; (c) the amount of the policy;(d) the properties insured; (e) the then current property values on thebasis of which insurance has been obtained, and the manner of determiningthose values; and (f) the expiration date of the policy. In addition, uponrequest of Lender (however not more often than annually), Borrower willhave an independent appraiser satisfactory to Lender determine, asapplicable, the actual cash value or replacement cost of any Collateral.The cost of such appraisal shall be paid by Borrower.

GUARANTIES. Prior to disbursement of any Loan proceeds, furnish executedguaranties of the Loans in favor of Lender, on Lender's forms, and in theamounts and by the guarantors named below:


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Guarantors Amounts---------- -------WILLIAM W. DAVIS, SR. $22,000,000.00LILLIAN A. DAVIS $22,000,000.00

OTHER AGREEMENTS. Comply with all terms and conditions of all otheragreements, whether now or hereafter existing, between Borrower and anyother party and notify Lender immediately in writing of any default inconnection with any other such agreements.

LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's businessoperations, unless specifically consented to the contrary by Lender inwriting.

TAXES, CHARGES AND LIENS. Pay and discharge when due all of itsindebtedness and obligations, including without limitation all assessments,taxes, governmental charges, levies and liens, of every kind and nature,imposed upon Borrower or its properties, income, or profits, prior to thedate on which penalties would attach, and all lawful claims that, ifunpaid, might become a lien or charge upon any of Borrower's properties,income, or profits. Provided however, Borrower will not be required to payand discharge any such assessment, tax, charge, levy, lien or claim so longas (a) the legality of the same shall be contested in good faith byappropriate proceedings, and (b) Borrower shall have established on itsbooks adequate reserves with respect to such contested assessment, tax,charge, levy, lien, or claim in accordance with generally acceptedaccounting practices. Borrower, upon demand of Lender, will furnish toLender evidence of payment of the assessments, taxes, charges, levies,liens and claims and will authorize the appropriate governmental officialto deliver to Lender at any time a written statement of any assessments,taxes, charges, levies, liens and claims against Borrower's properties,income or profits.

PERFORMANCE. Perform and comply with all terms, conditions, and provisionsset forth in this Agreement and in the Related Documents in a timelymanner, and promptly notify Lender if Borrower learns of the occurrence ofany event which constitutes an Event of Default under this Agreement orunder any of the Related Documents.

OPERATIONS. Maintain executive and management personnel with substantiallythe same qualifications and experience as the present executive andmanagement personnel; provide written notice to Lender of any change inexecutive and management personnel; conduct its business affairs in a



reasonable and prudent manner and in compliance with all applicablefederal, state and municipal laws, ordinances, rules and regulationsrespecting its properties, charters, businesses and operations, includingwithout limitation, compliance with the Americans With Disabilities Actand will all minimum funding standards and other requirements of ERISA andother laws applicable to Borrower's employee benefit plans.


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INSPECTION. Permit employees or agents of Lender at any reasonable time toinspect any and all Collateral for the Loan or Loans and Borrower's otherproperties and to examine or audit Borrower's books, accounts, and recordsand to make copies and memoranda of Borrower's books, accounts, andrecords. If Borrower now or at any time hereafter maintains any records(including without limitation computer generated records and computersoftware programs for the generation of such records) in the possession ofa third party, Borrower, upon request of Lender, shall notify such party topermit Lender free access to such records at all reasonable times and toprovide Lender with copies of any records it may request, all at Borrower'sexpense.

COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lenderat least annually and at the time of each disbursement of Loan proceedswith a certificate executed by Borrower's chief financial officer, or otherofficer or person acceptable to Lender, certifying that the representationsand warranties set forth in this Agreement are true and correct as of thedate of the certificate and further certifying that, as of the date of thecertificate, no Event of Default exists under this Agreement.

ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respectswith all environmental protection federal, state and local laws, statutes,regulations and ordinances; not cause or permit to exist, as a result of anintentional or unintentional action or omission on its part or on the partof any third party, on property owned and/or occupied by Borrower, anyenvironmental activity where damage may result to the environment, unlesssuch environmental activity is pursuant to and in compliance with theconditions of a permit issued by the appropriate federal, state or localgovernmental authorities; shall furnish to Lender promptly and in any eventwithin thirty (30) days after receipt thereof a copy of any notice,summons, lien, citation, directive, letter or other communication from anygovernmental agency or instrumentality concerning any intentional orunintentional action or omission on Borrower's part in connection with anyenvironmental activity whether or not there is damage to the environmentand/or other natural resources.

ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissorynotes, mortgages, deeds of trust, security agreements, financingstatements, instruments, documents and other agreements as Lender or itsattorneys may reasonably request to evidence and secure the Loans and toperfect all Security Interests.

RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,rule, regulation or guideline, or the interpretation or application of anythereof by any court or administrative or governmental authority (including anyrequest or policy not having the force of law) shall impose, modify or makeapplicable any taxes (except U.S. federal, state or local income or franchisetaxes imposed on Lender), reserve requirements, capital adequacy requirements orother obligations which would (a) increase the cost to Lender for extending ormaintaining the credit facilities to which this Agreement relates, (b) reducethe amounts payable to Lender under this


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Agreement or the Related Documents, or (c) reduce the rate of return on Lender'scapital as a consequence of Lender's obligations with respect to the creditfacilities to which this Agreement relates, then Borrower agrees to pay Lendersuch additional amounts as will compensate Lender therefor, within five (5) daysafter Lender's written demand for such payment, which demand shall beaccompanied by an explanation of such imposition or charge and a calculation inreasonable detail of the additional amounts payable by Borrower, whichexplanation and calculations shall be conclusive in the absence of manifesterror.

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



INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normalcourse of business and indebtedness to Lender contemplated by thisAgreement, create, incur or assume indebtedness for borrowed money,including capital leases, (b) except as allowed as a Permitted Lien, sell,transfer, mortgage, assign, pledge, lease, grant a security interest in, orencumber any of Borrower's assets, or (c) sell with recourse any ofBorrower's accounts, except to Lender.

CONTINUITY OF OPERATIONS. (a) Engage in any business activitiessubstantially different than those in which Borrower is presently engaged,(b) cease operations, liquidate, merge, transfer, acquire or consolidatewith any other entity, change ownership, change its name, dissolve ortransfer or sell Collateral out of the ordinary course of business, (c) payany dividends on Borrower's stock (other than dividends payable in itsstock), provided, however that notwithstanding the foregoing, but only solong as no Event of Default has occurred and is continuing or would resultfrom the payment of dividends, if Borrower is a "Subchapter S Corporation"(as defined in the Internal Revenue Code of 1986, as amended), Borrower maypay cash dividends on its stock to its shareholders from time to time inamounts necessary to enable the shareholders to pay income taxes and makeestimated income tax payments to satisfy their liabilities under federaland state law which arise solely from their status as Shareholders of aSubchapter S Corporation because of their ownership of shares of stock ofBorrower, or (d) purchase or retire any of Borrower's outstanding shares oralter or amend Borrower's capital structure.

LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money orassets, (b) purchase, create or acquire any interest in any otherenterprise or entity, or (c) incur any obligation as surety or guarantorother than in the ordinary course of business.

CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan toBorrower, whether under this Agreement or under any other agreement, Lendershall have no obligation to make Loan Advances or to disburse Loan proceeds if(a) Borrower or any Guarantor is in default under the terms of this Agreement orany of the Related Documents or any other agreement that Borrower or anyGuarantor has


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with Lender; (b) Borrower or any guarantor becomes insolvent, files a petitionin bankruptcy or similar proceedings, or is adjudicated a bankrupt; (c) thereoccurs a material adverse change in Borrower's financial condition, in thefinancial condition of any Guarantor, or in the value of any Collateral securingany Loan; or (d) any Guarantor seeks, claims or otherwise attempts to limit,modify or revoke such Guarantor's guaranty of the Loan or any other loan withLender.

EVENT OF DEFAULT. Each of the following shall constitute an Event of Defaultunder this Agreement:

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

OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or toperform when due any other term, obligation, covenant or conditioncontained in this Agreement or in any of the Related Documents, or failureof Borrower to comply with or to perform any other term, obligation,covenant or condition contained in any other agreement between Lender andBorrower.

DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor defaultunder any loan, extension of credit, security agreement, purchase or salesagreement, or any other agreement, in favor of any other creditor or personthat may materially affect any of Borrower's property or Borrower's or anyGrantor's ability to repay the Loans or perform their respectiveobligations under this Agreement or any of the Related Documents.

FALSE STATEMENTS. Any warranty, representation or statement made orfurnished to Lender by or on behalf of Borrower or any Grantor under thisAgreement or the Related Documents is false or misleading in any materialrespect at the time made or furnished, or becomes false or misleading atany time thereafter.

DEFECTIVE COLLATERALIZATION. This Agreement or any of the RelatedDocuments ceases to be in full force and effect (including failure of anySecurity Agreement to create a valid and perfected Security Interest) atany time or for any reason.



INSOLVENCY. The dissolution or termination of Borrower's existence as agoing business, the insolvency of Borrower, the appointment of a receiverfor any part of Borrower's property, any assignment for the benefit ofcreditors, any type of creditor workout, or the commencement of anyproceeding under any bankruptcy or insolvency laws by or againstBorrower.

CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure orforfeiture proceedings, whether by judicial proceeding, self-help,repossession or any other method, by


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any creditor of Borrower, any creditor of any Grantor against anycollateral securing the indebtedness, or by any governmental agency. Thisincludes a garnishment, attachment, or levy on or of any of Borrower'sdeposit accounts with Lender.

EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs withrespect to any Guarantor of any of the indebtedness or any Guarantor diesor becomes incompetent, or revokes or disputes the validity of, orliability under, any Guaranty of the indebtedness.

CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%)or more of the common stock of Borrower.

ADVERSE CHANGE. A material adverse change occurs in Borrower's financialcondition, or Lender believes the prospect of payment or performance of theindebtedness is impaired.

EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, exceptwhere otherwise provided in this Agreement or the Related Documents, allcommitments and obligations of Lender under this Agreement or the RelatedDocuments or any other agreement immediately will terminate (including anyobligation to make Loan Advances or disbursements), and, at Lender's option, allindebtedness immediately will become due and payable, all without notice of anykind to Borrower, except that in the case of an Event of Default of the typedescribed in the "Insolvency" subsection above, such acceleration shall beautomatic and not optional. In addition, Lender shall have all the rights andremedies provided in the Related Documents or available at law, in equity, orotherwise. Except as may be prohibited by applicable law, all of Lender'srights and remedies shall be cumulative and may be exercised singularly orconcurrently. Election by Lender to pursue any remedy shall not exclude pursuitof any other remedy, and an election to make expenditures or to take action toperform an obligation of Borrower or of any Grantor shall not affect Lender'sright to declare a default and to exercise its rights and remedies.

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

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

APPLICABLE LAW. This Agreement has been delivered to Lender and acceptedby Lender in the State of Delaware. If there is a lawsuit, Borrower agreesupon Lender's request to submit to the jurisdiction of the courts of NEWCASTLE County, the State of Delaware. Lender and Borrower hereby waive theright to any jury trial in any action, proceeding, or


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counterclaim brought by either Lender or Borrower against the other. ThisAgreement shall be governed by and construed in accordance with the laws ofthe State of Delaware.

CAPTION HEADINGS. Caption headings in this Agreement are for conveniencepurposes only and are not to be used to interpret or define the provisionsof this Agreement.

MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under



this Agreement shall be joint and several, and all references to Borrowershall mean each and every Borrower. This means that each of the Borrowerssigning below is responsible for all obligations of this Agreement.

CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender'ssale or transfer, whether now or later, of one or more participationinterests in the Loans to one or more purchasers, whether related orunrelated to Lender. Lender may provide, without any limitationwhatsoever, to any one or more purchasers, or potential purchasers, anyinformation or knowledge Lender may have about Borrower or about any othermatter relating to the Loan, and Borrower hereby waives any rights toprivacy it may have with respect to such matters. Borrower additionallywaives any and all notices of sale of participation interests, as well asall notices of any repurchase of such participation interests. Borroweralso agrees that the purchasers of any such participation interests will beconsidered as the absolute owners of such interests in the Loans and willhave all the rights granted under the participation agreement or agreementsgoverning the sale of such participation interests. Borrower furtherwaives all rights of offset or counterclaim that it may have now or lateragainst Lender or against any purchaser of such a participation interestand unconditionally agrees that either Lender or such purchaser may enforceBorrower's obligation under the Loans irrespective of the failure orinsolvency of any holder of any interest in the Loans. Borrower furtheragrees that the purchaser of any such participation interests may enforceits interests irrespective of any personal claims or defenses that Borrowermay have against Lender.

COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender'sexpenses, including without limitation reasonable attorneys' fees, incurredin connection with the preparation, execution, enforcement, modificationand collection of this Agreement or in connection with the Loans madepursuant to this Agreement. Lender may pay someone else to help collectthe Loans and to enforce this Agreement, and Borrower will pay that amount.This includes, subject to any limits under applicable law, Lender'sreasonable attorneys' fees and Lender's legal expenses, whether or notthere is a lawsuit, including reasonable attorneys' fees for bankruptcyproceedings (including efforts to modify or vacate any automatic stay orinjunction), appeals, and any anticipated post-judgment collectionservices. Borrower also will pay any court costs, in addition to all othersums provided by law.


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

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

SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of anyprovisions of this Agreement makes it appropriate, including withoutlimitation any representation, warranty or covenant, the word "Borrower" asused herein shall include all subsidiaries and affiliates of Borrower.Notwithstanding the foregoing however, under no circumstances shall thisAgreement be construed to require Lender to make any Loan or otherfinancial accommodation to any subsidiary or affiliate of Borrower.

SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or onbehalf of Borrower shall bind its successors and assigns and shall inure tothe benefit of Lender, its successors and assigns. Borrower shall not,however, have the right to assign its rights under this Agreement or anyinterest therein, without the prior written consent of Lender.

SURVIVAL. All warranties, representations, and covenants made by Borrower



in this Agreement or in any certificate or other instrument delivered byBorrower to Lender under this Agreement shall be considered to have beenrelied upon by Lender and will survive the making of the Loan and deliveryto Lender of the Related Documents, regardless of any investigation made byLender or on Lender's behalf.

TIME IS OF THE ESSENCE. Time is of the essence in the performance of thisAgreement.

WAIVER. Lender shall not be deemed to have waived any rights under thisAgreement unless such waiver is given in writing and signed by Lender. Nodelay or omission on the part of Lender in exercising any right shalloperate as a waiver of such right or any other right. A


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waiver by Lender of a provision of this Agreement shall not prejudice orconstitute a waiver of Lender's right otherwise to demand strict compliancewith that provision or any other provision of this Agreement. No priorwaiver by Lender, nor any course of dealing between Lender and Borrower, orbetween Lender and any Grantor, shall constitute a waiver of any ofLender's rights or of any obligations of Borrower or of any Grantor as toany future transactions. Whenever the consent of Lender is required underthis Agreement, the granting of such consent by Lender in any instanceshall not constitute continuing consent in subsequent instances where suchconsent is required, and in all cases such consent may be granted orwithheld in the sole discretion of Lender.


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BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOANAGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF JULY24, 1995.

BORROWER:


By: /s/ WILLIAM W. DAVIS, SR. (SEAL) By: /s/ LILLIAN A. DAVIS (SEAL)------------------------------- --------------------------WILLIAM W. DAVIS, SR., PRESIDENT LILLIAN A. DAVIS, EXECUTIVE VICE

PRESIDENT

LENDER:

WILMINGTON TRUST COMPANY

By: [AUTHORIZED SIGNATORY]-----------------------Authorized Officer

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EXHIBIT 10.06

WILMINGTON TRUST

COMMERCIAL SECURITY AGREEMENT

<TABLE><CAPTION><S> <C> <C> <C> <C> <C> <C> <C> <C>

------------------------------------------------------------------------------------------------------------------------------Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials$22,000,000.00 07-24-1995 10 0777 938

------------------------------------------------------------------------------------------------------------------------------References in the shaded area are for Lender's use only and do not limit the applicability of this document to anyparticular loan or item.

------------------------------------------------------------------------------------------------------------------------------</TABLE>

Borrower: PULSAR DATA SYSTEMS, INC. Lender: WILMINGTON TRUST COMPANY5000 PHILADELPHIA WAY SUITE H C/L WH MAJORLANHAM, MD 20706 RODNEY SQUARE NORTH


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THIS COMMERCIAL SECURITY AGREEMENT is entered into between PULSAR DATA SYSTEMS,INC. (referred to below as "Grantor"); and WILMINGTON TRUST COMPANY (referred tobelow as "Lender"). For valuable consideration, Grantor grants to Lender asecurity interest in the Collateral to secure the Indebtedness and agrees thatLender shall have the rights stated in this Agreement with respect to theCollateral, in addition to all other rights which Lender may have by law.

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

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

COLLATERAL. The word "Collateral" means the following described propertyof Grantor, whether now owned or hereafter acquired, whether now existingor hereafter arising, and wherever located:

All inventory, accounts, general intangibles and equipment, togetherwith the following specifically described property:

ALL RECORDS OF ANY KIND RELATING TO ANY OF THE FOREGOING; ALLPROCEEDS RELATING TO ANY OF THE FOREGOING (INCLUDING INSURANCE,GENERAL INTANGIBLES AND OTHER ACCOUNTS PROCEEDS).

07-24-1995 COMMERCIAL SECURITY AGREEMENT Page 2(Continued)

In addition, the word "Collateral" includes all the following, whether nowowned or hereafter acquired, whether now existing or hereafter arising, andwherever located:

(a) All attachments, accessions, accessories, tools, parts, supplies,increases, and additions to and all replacements of and substitutionsfor any property described above.

(b) All products and produce of any of the property described in thisCollateral section.

(c) All accounts, contract rights, general intangibles, instruments,rents, monies, payments, and all other rights, arising out of a sale,lease, or other disposition of any of the property described in thisCollateral section.



(d) All proceeds (including insurance proceeds) from the sale,destruction, loss, or other disposition of any of the propertydescribed in this Collateral section.

(e) All records and data relating to any of the property described inthis Collateral section, whether in the form of a writing, photograph,microfilm, microfiche, or electronic media, together with all ofGrantor's right, title, and interest in and to all computer softwarerequired to utilize, create, maintain, and process any such records ordata on electronic media.

EVENT OF DEFAULT. The words "Event of Default" mean and include withoutlimitation any of the Events of Default set forth below in the sectiontitled "Events of Default."

GRANTOR. The word "Grantor" means PULSAR DATA SYSTEMS, INC., itssuccessors and assigns.

GUARANTOR. The word "Guarantor" means and includes without limitation eachand all of the guarantors, sureties, and accommodation parties inconnection with the Indebtedness and their personal representatives,successors and assigns.

INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced bythe Note, including all principal, interest, and fees, costs, and expenses,if any, together with all modifications of and renewals, replacements andsubstitutions for any of the foregoing.



NOTE. The word "Note" means the note or credit agreement dated July 24,1995, in the principal amount of $22,000,000.00 from Grantor to Lender,together with all modifications of and renewals, replacements, andsubstitutions for the note or credit agreement.

RELATED DOCUMENTS. The words "Related Documents" mean and include withoutlimitation all promissory notes, credit agreements, loan agreements,environmental agreements, guaranties, security agreements, mortgages, deedsof trust, and all other instruments, agreements and documents, whether nowor hereafter existing, executed in connection with the Indebtedness.

OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:

PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financingstatements and to take whatever other actions are requested by Lender toperfect and continue Lender's security interest in the Collateral. Uponrequest of Lender, Grantor will deliver to Lender any and all of thedocuments evidencing or constituting the Collateral, and Grantor will noteLender's interest upon any and all chattel paper if not delivered to Lenderfor possession by Lender. Grantor hereby appoints Lender as its irrevocableattorney-in-fact for the purpose of executing any documents necessary toperfect or to continue the security interest granted in this Agreement.Lender may at any time, and without further authorization from Grantor,file a carbon, photographic or other reproduction of any financingstatement or of this Agreement for use as a financing statement. Grantorwill reimburse Lender for all expenses for the perfection and thecontinuation of the perfection of Lender's security interest in theCollateral. Grantor promptly will notify Lender before any change inGrantor's name including any change to the assumed business names ofGrantor. This is a continuing Security Agreement and will continue ineffect even though all or any part of the Indebtedness is paid in full andeven though for a period of time Grantor may not be indebted to Lender.

NO VIOLATION. The execution and delivery of this Agreement will notviolate any law or agreement governing Grantor or to which Grantor is aparty, and its certificate or articles of incorporation and bylaws do notprohibit any term or condition of this Agreement.

ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists ofaccounts, chattel paper, or general intangibles, the Collateral isenforceable in accordance with its terms, is genuine, and complies withapplicable laws concerning form, content and manner of preparation andexecution, and all persons appearing to be obligated on the Collateral haveauthority and capacity to contract and are in fact obligated as they appear



to be on the Collateral. At the time any account becomes subject to asecurity interest in favor of Lender, the account shall be a good and validaccount representing an undisputed, bona fide indebtedness incurred by theaccount debtor, for merchandise held subject to delivery instructions ortheretofore shipped or delivered pursuant to a contract of sale, or


for services theretofore performed by Grantor with or for the accountdebtor; there shall be no setoffs or counterclaims against any suchaccount; and no agreement under which any deductions or discounts may beclaimed shall have been made with the account debtor except those disclosedto Lender in writing.

LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliverto Lender in form satisfactory to Lender a schedule of real properties andCollateral locations relating to Grantor's operations, including withoutlimitation the following: (a) all real property owned or being purchased byGrantor; (b) all real property being rented or leased by Grantor; (c) allstorage facilities owned, rented, leased, or being used by Grantor; and (d)all other properties where Collateral is or may be located. Except in theordinary course of its business, Grantor shall not remove the Collateralfrom its existing locations without the prior written consent of Lender.

REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the extentthe Collateral consists of intangible property such as accounts, therecords concerning the Collateral) at Grantor's address shown above, or atsuch other locations as are acceptable to Lender. Except in the ordinarycourse of its business, including the sales of inventory, Grantor shall notremove the Collateral from its existing locations without the prior writtenconsent of Lender. To the extent that the Collateral consists of vehicles,or other titled property, Grantor shall not take or permit any action whichwould require application for certificates of title for the vehiclesoutside the State of Maryland, without the prior written consent ofLender.

TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accountscollected in the ordinary course of Grantor's business, Grantor shall notsell, offer to sell, or otherwise transfer or dispose of the Collateral.While Grantor is not in default under this Agreement, Grantor may sellinventory, but only in the ordinary course of its business and only tobuyers who qualify as a buyer in the ordinary course of business. A salein the ordinary course of Grantor's business does not include a transfer inpartial or total satisfaction of a debt or any bulk sale. Grantor shallnot pledge, mortgage, encumber or otherwise permit the Collateral to besubject to any lien, security interest, encumbrance, or charge, other thanthe security interest provided for in this Agreement, without the priorwritten consent of Lender. This includes security interests even if juniorin right to the security interests granted under this Agreement. Unlesswaived by Lender, all proceeds from any disposition of the Collateral (forwhatever reason) shall be held in trust for Lender and shall not becommingled with any other funds; provided however, this requirement shallnot constitute consent by Lender to any sale or other disposition. Uponreceipt, Grantor shall immediately deliver any such proceeds to Lender.

TITLE. Grantor represents and warrants to Lender that it holds good andmarketable title to the Collateral, free and clear of all liens andencumbrances except for the lien of this Agreement. No financing statementcovering any of the Collateral is on file in any public


office other than those which reflect the security interest created by thisAgreement or to which Lender has specifically consented. Grantor shalldefend Lender's rights in the Collateral against the claims and demands ofall other persons.

COLLATERAL SCHEDULES AND LOCATIONS. As often as Lender shall require, andinsofar as the Collateral consists of accounts and general intangibles,Grantor shall deliver to Lender schedules of such Collateral, includingsuch information as Lender may require, including without limitation namesand addresses of account debtors and agings of accounts and generalintangibles. Insofar as the Collateral consists of inventory andequipment, Grantor shall deliver to Lender, as often as Lender shallrequire, such lists, descriptions, and designations of such Collateral asLender may require to identify the nature, extent, and location of suchCollateral. Such information shall be submitted for Grantor and each of



its subsidiaries or related companies.

MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain alltangible Collateral in good condition and repair. Grantor will not commitor permit damage to or destruction of the Collateral or any part of theCollateral. Lender and its designated representatives and agents shallhave the right at all reasonable times to examine, inspect, and audit theCollateral wherever located.

TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,assessments and liens upon the Collateral, its use or operation, upon thisAgreement, upon any promissory note or notes evidencing the Indebtedness,or upon any of the other Related Documents. Grantor may withhold any suchpayment or may elect to contest any lien if Grantor is in good faithconducting an appropriate proceeding to contest the obligation to pay andso long as Lender's interest in the Collateral is not jeopardized inLender's sole opinion. If the Collateral is subjected to a lien which isnot discharged within fifteen (15) days, Grantor shall deposit with Lendercash, a sufficient corporate surety bond or other security satisfactory toLender in an amount adequate to provide for the discharge of the lien plusany interest, costs, reasonable attorneys' fees or other charges that couldaccrue as a result of foreclosure or sale of the Collateral. In anycontest Grantor shall defend itself and Lender and shall satisfy any finaladverse judgment before enforcement against the Collateral. Grantor shallname Lender as an additional obligee under any surety bond furnished in thecontest proceedings.

COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptlywith all laws, ordinances, rules and regulations of all governmentalauthorities, now or hereafter in effect, applicable to the ownership,production, disposition, or use of the Collateral. Grantor may contest ingood faith any such law, ordinance or regulation and withhold complianceduring any proceeding, including appropriate appeals, so long as Lender'sinterest in the Collateral, in Lender's opinion, is not jeopardized.


HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateralnever has been, and never will be so long as this Agreement remains a lienon the Collateral, used for the generation, manufacture, storage,transportation, treatment, disposal, release or threatened release of anyhazardous waste or substance, as those terms are defined in theComprehensive Environmental Response, Compensation, and Liability Act of1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the SuperfundAmendments and Reauthorization Act of 1986, Publ L. No. 99-499 ("SARA"),the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, etseq., the Resource Conservation and Recovery Act, 49 U.S.C. Section 6901,et seq., or other applicable state or Federal laws, rules, or regulationsadopted pursuant to any of the foregoing. The terms "hazardous waste" and"hazardous substance" shall also include, without limitation, petroleum andpetroleum by-products or any fraction thereof and asbestos. Therepresentations and warranties contained herein are based on Grantor's duediligence in investigating the Collateral for hazardous wastes andsubstances. Grantor hereby (a) releases and waives any future claimsagainst Lender for indemnity or contribution in the event Grantor becomesliable for cleanup or other costs under any such laws, and (b) agrees toindemnify and hold harmless Lender against any and all claims and lossesresulting from a breach of this provision of this Agreement. Thisobligation to indemnify shall survive the payment of the Indebtedness andthe satisfaction of this Agreement.

MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain allrisks insurance, including without limitation fire, theft and liabilitycoverage together with such other insurance as Lender may require withrespect to the Collateral, in form, amounts, coverages and basis acceptableto Lender and issued by a company or companies acceptable to Lender.Grantor, upon request of Lender, will deliver to Lender from time to timethe policies or certificates of insurance in form satisfactory to Lender,including stipulations that coverages will not be cancelled or diminishedwithout at least twenty (20) days' prior written notice to Lender and notincluding any disclaimer of the insurer's liability for failure to givesuch a notice. Each insurance policy also shall include an endorsementproviding that coverage in favor of Lender will not be impaired in any wayby any act, omission or default of Grantor or any other person. Inconnection with all policies covering assets in which Lender holds or isoffered a security interest, Grantor will provide Lender with such losspayable or other endorsements as Lender may require. If Grantor at anytime fails to obtain or maintain any insurance as required under thisAgreement, Lender may (but shall not be obligated to) obtain such insurance



as Lender deems appropriate, including if it so chooses "single interestinsurance," which will cover only Lender's interest in the Collateral.

APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender ofany loss or damage to the Collateral. Lender may make proof of loss ifGrantor fails to do so within fifteen (15) days of the casualty. Allproceeds of any insurance on the Collateral, including accrued proceedsthereon, shall be held by Lender as part of the Collateral. If Lender


consents to repair or replacement of the damaged or destroyed Collateral,Lender shall, upon satisfactory proof of expenditure, pay or reimburseGrantor from the proceeds for the reasonable cost of repair or restoration.If Lender does not consent to repair or replacement of the Collateral,Lender shall retain a sufficient amount of the proceeds to pay all of theIndebtedness, and shall pay the balance to Grantor. Any proceeds whichhave not been disbursed within six (6) months after their receipt and whichGrantor has not committed to the repair or restoration of the Collateralshall be used to prepay the Indebtedness.

INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish toLender reports on each existing policy of insurance showing suchinformation as Lender may reasonably request including the following: (a)the name of the insurer; (b) the risks insured; (c) the amount of thepolicy; (d) the property insured; (e) the then current value on the basisof which insurance has been obtained and the manner of determining thatvalue; and (f) the expiration date of the policy. In addition, Grantorshall upon request by Lender (however not more often than annually) have anindependent appraiser satisfactory to Lender determine, as applicable, thecash value or replacement cost of the Collateral.

GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and exceptas otherwise provided below with respect to accounts, Grantor may havepossession of the tangible personal property and beneficial use of all theCollateral and may use it in any lawful manner not inconsistent with thisAgreement or the Related Documents, provided that Grantor's right to possessionand beneficial use shall not apply to any Collateral where possession of theCollateral by Lender is required by law to perfect Lender's security interest insuch Collateral. Until otherwise notified by Lender, Grantor may collect any ofthe Collateral consisting of accounts. At any time and even though no Event ofDefault exists, Lender may exercise its rights to collect the accounts and tonotify account debtors to make payments directly to Lender for application tothe Indebtedness. If Lender at any time has possession of any Collateral,whether before or after an Event of Default, Lender shall be deemed to haveexercised reasonable care in the custody and preservation of the Collateral ifLender takes such action for that purpose as Grantor shall request or as Lender,in Lender's sole discretion, shall deem appropriate under the circumstances, butfailure to honor any request by Grantor shall not of itself be deemed to be afailure to exercise reasonable care. Lender shall not be required to take anysteps necessary to preserve any rights in the Collateral against prior parties,nor to protect, preserve or maintain any security interest given to secure theIndebtedness.

EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (butshall not be obligated to) discharge or pay any amounts required to bedischarged or paid by Grantor under this Agreement, including without limitationall taxes, liens, security interests, encumbrances, and other claims, at anytime levied or placed on the Collateral. Lender also may (but shall not beobligated to) pay all costs for insuring, maintaining and preserving theCollateral. All such expenditures incurred or paid by Lender for such purposeswill then bear interest at the rate charged under the Note from the dateincurred or paid by Lender to the date of repayment by Grantor. All such


expenses shall become a part of the Indebtedness and, at Lender's option, will(a) be payable on demand, (b) be added to the balance of the Note and b eapportioned among and be payable with any installment payments to become dueduring either (i) the term of any applicable insurance policy or (ii) theremaining term of the Note, or (c) be treated as a balloon payment which will bedue and payable at the Note's maturity. This Agreement also will secure paymentof these amounts. Such rights shall be in addition to all other rights andremedies to which Lender may be entitled upon the occurrence of an Event ofDefault.

EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default



under this Agreement:

DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when dueon the Indebtedness.

[PARAGRAPH ILLEGIBLE]

CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure orforfeiture proceedings, whether by judicial proceeding, self-help,[illegible] or any other method by any creditor of Grantor or by anygovernmental agency against the Collateral or any other collateral[illegible] Indebtedness. This includes a garnishment of any of Grantor'sdeposit accounts with Lender.

[illegible] INDEBTEDNESS. Any of the [illegible] events occurs withrespect to any Guarantor of any of the Indebtedness or such Guarantor[illegible].

[illegible] CHANGE. A material adverse change occurs in [illegible]financial condition or Lender believes the prospect of payment or[illegible] of the Indebtedness is impaired.

RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under thisAgreement, at any time thereafter, Lender shall have all the rights of a securedparty under the Maryland Uniform Commercial Code. In addition and withoutlimitation, Lender may exercise any one or more of the following rights andremedies:

[illegible] INDEBTEDNESS. Lender may Declare the entire Indebtedness,including any prepayment penalty which Grantor would be required to pay[illegible] and payable, without notice.

[illegible] COLLATERAL. Lender may require Grantor to deliver to Lenderall or any portion of the Collateral and any and all certificates of titleand other documents relating to the Collateral. Lender may require Grantorto assemble the Collateral and make it available to Lender at a place to bedesignated by Lender. Lender also shall full power to enter upon theproperty of Grantor to take possession of and remove the Collateral. Ifthe


Collateral contains other goods not covered by [illegible] at the timeof repossession, grantor agrees Lender may take such other goods, providedthat Lender [illegible] after repossession.

Sell THE COLLATERAL. Lender shall have full power to sell, [illegible]with the Collateral or proceeds thereof in its own name or that of Grantor.Lender may sell the Collateral at public [illegible]. Unless the Collateralthreatens to decline speedily in value or is of a type customarily sold ona [illegible] after which any private sale or any other [illegible] met ifsuch notice is given at least ten (10) days before the time of the sale ordisposition. All expenses relating to the disposition of the Collateral,including without limitation the expenses of retaking, holding, insuring,preparing for sale and selling the Collateral, shall become a part of theIndebtedness secured by this Agreement and shall be payable on demand, withinterest at the Note rate from date of expenditure until repaid.

APPOINT RECEIVER. To the extent permitted by applicable law, Lender shallhave the following rights and remedies regarding the appointment of areceiver: (a) Lender may have a receiver appointed as a matter of right,(b) the receiver may be an employee of Lender and may serve without bond,and (c) all fees of the receiver and his or her attorney shall become partof the Indebtedness secured by this Agreement and shall be payable ondemand, with interest at the Note rate from date of expenditure untilrepaid.

COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a receiver,may collect the payments, rents, income and revenues from the Collateral. Lendermay at any time in its discretion transfer any Collateral into its own name orthat of its nominee and receive the payments, rents, income and revenuestherefrom and hold the same as security for the Indebtedness or apply it topayment of the Indebtedness in such order of preference as Lender may determine.Insofar as the Collateral consists of accounts, general intangibles, insurancepolicies, instruments, chattel paper [illegible] in action, or similar property,Lender may [illegible] receipt for, settle, compromise, adjust, sue for,



foreclose, or [illegible] on the Collateral as Lender may determine, whether ornot [illegible] or Collateral is then due. For these purposes, Lender may, onbehalf of and in the name of Grantor, receive, open and dispose of mailaddressed to Grantor; change any address to which mail and payments are to besent; and endorse notes, checks, drafts, money orders, [illegible], instrumentsand items pertaining to payment, shipment, or storage of any Collateral. Tofacilitate collection, Lender may notify account debtors and obligors on anyCollateral to make payments directly to Lender.

OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral,Lender may obtain a judgment against Grantor for any deficiency remaining on theIndebtedness due to Lender after application of all amounts received from theexercise of the rights provided in this Agreement. Grantor shall be liable fora deficiency even if the transaction described in this subsection is a sale ofaccounts or chattel paper.


OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies of asecured creditor under the provisions of the Uniform Commercial Code, as may beamended from time to time. In addition, Lender shall have and may exercise anyor all other rights and remedies it may have available at law, in equity, orotherwise.

CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether evidenced bythis Agreement or the Related Documents or by any other writing, shall becumulative and may be exercised singularly or concurrently. Election by Lenderto pursue any remedy shall not exclude pursuit of any other remedy, and anelection to make expenditures or to take action to perform an obligation ofGrantor under this Agreement, after Grantor's failure to perform, shall notaffect Lender's right to declare a default and to exercise its remedies.

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

AMENDMENT. This Agreement, together with any Related Documents, constitutes theentire understanding and agreement of the parties as to the matters set forth inthis Agreement. No alteration of or amendment to this Agreement shall beeffective unless given in writing and signed by the party or parties sought[illegible] or bound by the [illegible].

APPLICABLE LAW. This Agreement shall be governed by, controlled and enforced inaccordance with the laws of the State of Maryland. LENDER AND GRANTOR EACHHEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH LENDER ORGRANTOR MAY BE PARTIES, ARISING OUT OF, OR IN ANY WAY PERTAINING TO, THISAGREEMENT. IT IS AGREED THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURYOF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS. THIS WAIVER ISKNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY LENDER AND GRANTOR, AND LENDER ANDGRANTOR EACH HEREBY REPRESENT THAT NO REPRESENTATIONS OF FACT OR OPINION HAVEBEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANYWAY MODIFY OR [illegible] ITS EFFECT. GRANTOR FURTHER REPRESENTS THAT GRANTORHAS BEEN REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THISWAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF GRANTOR'S OWN FREE WILL, ANDTHAT GRANTOR HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.

ATTORNEYS' FEES; EXPENSES. Grantor agrees that if Lender hires an attorney tohelp enforce this Agreement or to collect any sums owing under this Agreement,Grantor will pay, subject to any limits under applicable law, Lender'sreasonable attorneys fees, and all of Lender's other collection expenses,Whether or not there is a lawsuit and including without limitation additionallegal expenses for bankruptcy proceedings.


CAPTION HEADINGS. Caption headings in this Agreement and for conveniencepurposes only and are not to be used to interpret or define the provisions ofthis Agreement.

[ILLEGIBLE]; CORPORATE AUTHORITY. All obligations of Grantor under thisAgreement shall be joint and several, and all references to Grantor [illegible]below is responsible for all obligations in this Agreement.

[ILLEGIBLE]. All notices required to be given [illegible] in writing, may besent by facsimile, and shall be effective when actually delivered if handdelivered or when deposited [illegible] recognized overnight courier or



deposited as certified or registered mail in the United States mail, firstclass, postage prepaid, addressed to the party to whom the notice is to be givenat the address shown above, [illegible] formal written notice to the otherparties, specifying that the purpose of the notice is to change the party'saddress. To the extent [illegible] by applicable law. If there is more thanone Grantor, notice to any Grantor will constitute notice to all Grantors. Fornotice purposes, Grantor agrees to keep Lender informed at all times ofGrantor's current address(es).

POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and lawfulattorney-in-fact, irrevocably, with full power of substitution to do thefollowing: (a) to demand, collect [illegible] or other property which may nowor hereafter become [illegible] all claims, instruments, receipts, checks,drafts or warrants [illegible] under the Collateral, and, in the place and steadof Grantor, to [illegible] claims or to take any action or institute or takepart in any proceedings, either in its own [illegible] of Grantor, or otherwise,which in the discretion of Lender may seem to be [illegible] or advisable. Thispower is given as security for the Indebtedness, and the authority herebyconferred is and shall be irrevocable and shall remain in full force and effectuntil renounced by Lender.

SEVERABILITY. If a court of competent jurisdiction finds any provision of thisAgreement to be invalid or unenforceable as to any person or circumstance, suchfinding shall not render that provision invalid or unenforceable as to any otherperson or circumstances. If feasible, any such offending provision shall bedeemed to be modified to be within the limits of enforceability or validity;however, if the offending provision cannot be so modified, it shall be strickenand all other provisions of this Agreement in all other respects shall remainvalid and enforceable.

SUCCESSOR INTERESTS. Subject to the limitations set forth above on transfer ofthe Collateral, this Agreement shall be binding upon and inure to the benefit ofthe parties, their successors and assigns.

WAIVER. Lender shall not be deemed to have waived any rights under thisAgreement unless such waiver is given in writing and signed by Lender. No delayor omission on the part of Lender in exercising any right shall operate as awaiver of such right or any other right. A waiver by Lender of a provision ofthis Agreement shall not prejudice or constitute a waiver of Lender's rightotherwise to demand strict compliance with that provision or any other provisionof this Agreement. No prior waiver by Lender, nor any course of dealing betweenLender and Grantor, shall constitute


a waiver of any of Lender's rights or of any of Grantor's obligations as to anyfuture transactions. Whenever the consent of the Lender is required under thisAgreement, the granting of such consent by Lender in any instance shall notconstitute continuing consent to subsequent instances where such consent isrequired and in all cases such consent may be granted or withheld in the solediscretion of Lender.

GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITYAGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JULY 24,1995.

GRANTOR:


By: /s/ William W. Davis, Sr. (SEAL) By: /s/ LILLIAN A. DAVIS (SEAL)--------------------------------------- -------------------------------WILLIAM W. DAVIS, SR., PRESIDENT LILLIAN A. DAVIS, EXECUTIVE

VICE PRESIDENT

LENDER:

WILMINGTON TRUST COMPANY

By: [AUTHORIZED SIGNATORY]----------------------

Authorized Officer



EXHIBIT 10.07

COMMERCIAL GUARANTY(CONTINUED)

================================================================================

COMMERCIAL GUARANTY

<TABLE>--------------------------------------------------------------------------------------------------------------------------------PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS<S> <C> <C> <C> <C> <C> <C> <C> <C>

10 5100 2405008 938================================================================================================================================</TABLE>

References in the shaded area are for Lender's use only and do not limit theapplicability of this document to any particular loan or item.--------------------------------------------------------------------------------

BORROWER: DAVIS HOLDING COMPANY, INC. LENDER: WILMINGTON TRUST COMPANY5000 PHILADELPHIA WAY, SUITE H C/L W H MAJORLANHAM, DE 20706 RODNEY SQUARE NORTH


GUARANTOR: PULSAR DATA SYSTEMS, INC.5000 PHILADELPHIA WAY, SUITE HLAHNHAM MD 20706

================================================================================

AMOUNT OF GUARANTY. THIS IS GUARANTY OF PAYMENT OF THE NOTE, INCLUDING WITHOUTLIMITATION THE PRINCIPAL NOTE AMOUNT OF TWO MILLION EIGHT HUNDRED THOUSAND &00/100 DOLLARS ($2,800,000.00)

GUARANTY. FOR GOOD AND VALUABLE CONSIDERATION, PULSAR DATA SYSTEMS,INC."GUARANTOR") ABSOLUTELY AND UNCONDITIONALLY GUARANTEES AND PROMISES TO PAYTO WILMINGTON TRUST COMPANY ("LENDER") OR ITS ORDER, IN LEGAL TENDER OF THEUNITED STATES OF AMERICA, THE INDEBTEDNESS (AS THAT TERM IS DEFINED BELOW) OFDAVIS HOLDING COMPANY, INC. ("BORROWER") TO LENDER ON THE TERMS AND CONDITIONSSET FORTH IN THIS GUARANTY.

DEFINITIONS. The following words shall have the following meanings when used inthis Guaranty:

BORROWER. The word "Borrower" means DAVIS HOLDING COMPANY, INC.

GUARANTOR. The word "Guarantor" means PULSAR DATA SYSTEMS, INC.

GUARANTY. The word "Guaranty" means this Guaranty made by Guarantor forthe benefit of Lender dated October 23, 1995.

INDEBTEDNESS. The word "Indebtedness" means the Note, including (a) allprincipal, (b) all interest, (c) all late charges, (d) all loan fees andcharges, and (e) all collection costs and expenses relating to the Note orto any collateral for the Note or to any collateral for the Note.Collection costs and expenses include without limitation all of Lender'sreasonable attorneys' fees and Lender's legal expenses, whether or not suitis instituted, and reasonable attorneys' fees and legal expenses forbankruptcy proceedings (including efforts to modify or vacate any automaticstay or injunction), appeals, and any anticipated post-judgment collectionservices.


NOTE. The word "Note" means the promissory note or credit agreement datedOctober 23, 1995, IN THE ORIGINAL PRINCIPAL AMOUNT OF $2,800,000.00 fromBorrower to Lender, together with all renewals of, extensions of,modifications of, refinancing of, consolidations of , and substitutionsfor the promissory note or agreement.

RELATED DOCUMENTS. The word "Related Documents" mean and include withoutlimitation all promissory notes, credit agreements, loan agreements,environmental agreements, guaranties, security agreements, mortgages, deedsof trust, and all other instruments, agreements, documents, whether now orhereafter existing, executed in connection with the Indebtedness.



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MAXIMUM LIABILITY. THE MAXIMUM LIABILITY OF GUARANTOR UNDER THIS GUARANTY SHALLNOT EXCEED AT ANY ONE TIME THE AMOUNT OF THE INDEBTEDNESS DESCRIBED ABOVE, PLUSALL COSTS AND EXPENSES OF (A) ENFORCEMENT OF THIS GUARANTY AND (B) COLLECTIONAND SALE OF ANY COLLATERAL SECURING THIS GUARANTY.

The above limitation on liability is not a restriction on the amount of theIndebtedness of Borrower to Lender either in the aggregate or at any one time.If Lender presently holds one or more guaranties, or hereafter receivesadditional guaranties from Guarantor, the rights of Lender under all guarantiesshall be cumulative. This Guaranty shall not (unless specifically providedbelow to the contrary) affect or invalidate any such other guaranties. Theliability of Guarantor will be the aggregate liability of Guarantor under theterms of this Guaranty and any such other unterminated guaranties.

NATURE OF GUARANTY. Guarantor intends to guarantee at all times the performanceand prompt payment when due, whether at maturity or earlier by reason ofacceleration or otherwise, of all Indebtedness within the limits set forth inthe preceding section of this Guaranty.

DURATION OF GUARANTY. This Guaranty will take effect when received by Lenderwithout the necessity of any acceptance by Lender, or any notice to Guarantor orto Borrower, and will continue in full force until all Indebtedness shall havebeen fully and finally paid and satisfied and all other obligations of Guarantorunder this Guaranty shall have been performed in full. Release of any otherguarantor or termination of any other guaranty of the Indebtedness shall notaffect the liability of Guarantor under this Guaranty. A revocation received byLender from any one or more Guarantors shall not affect the liability of anyremaining Guarantors under this Guaranty.

GUARANTOR'S AUTHORIZATION TO LENDER. GUARANTOR AUTHORIZES LENDER, WITHOUTNOTICE OR DEMAND AND WITHOUT LESSENING GUARANTOR'S LIABILITY UNDER THISGUARANTY, FROM TIME TO TIME: (A) TO MAKE ONE OR MORE ADDITIONAL SECURED ORUNSECURED LOANS TO BORROWER, TO LEASE EQUIPMENT OR OTHER GOODS TO BORROWER, OROTHERWISE TO EXTEND ADDITIONAL CREDIT TO BORROWER; (B) TO ALTER, COMPROMISE,RENEW, EXTEND, ACCELERATE, OR OTHERWISE CHANGE ONE OR MORE TIMES THE TIME FORPAYMENT OR OTHER TERMS OF THE INDEBTEDNESS OR ANY PART OF THE INDEBTEDNESS,INCLUDING INCREASES AND DECREASES OF THE RATE OF INTEREST ON THE INDEBTEDNESS;EXTENSIONS MAY BE REPEATED AND MAY BE FOR LONGER THAN THE ORIGINAL LOAN TERM;(C) TO TAKE AND HOLD SECURITY FOR THE PAYMENT OF THIS GUARANTY OR THEINDEBTEDNESS, AND EXCHANGE, ENFORCE, WAIVE, SUBORDINATE, FAIL OR DECIDE NOTTO PERFECT, AND RELEASE ANY SUCH SECURITY, WITH OR WITHOUT THE SUBSTITUTIONOF NEW COLLATERAL; (D) TO RELEASE, SUBSTITUTE, AGREE NOT TO SUE, OR DEALWITH ANY ONE OR MORE OF BORROWER'S SURETIES, ENDORSERS, OR OTHER GUARANTORS ONANY TERMS OF IN ANY MANNER LENDER MAY CHOOSE; (E) TO DETERMINE HOW, WHEN ANDWHAT APPLICATION OF PAYMENTS AND CREDITS SHALL BE MADE ON THE INDEBTEDNESS; (F)TO APPLY SUCH SECURITY AND DIRECT THE ORDER OR MANNER OF SALE THEREOF, INCLUDINGWITHOUT LIMITATION, ANY NONJUDICIAL SALE PERMITTED BY THE TERMS OF THECONTROLLING SECURITY AGREEMENT OR DEED OF TRUST, AS LENDER IN ITS DISCRETION MAYDETERMINE; (G) TO SELL, TRANSFER, ASSIGN, OR GRANT PARTICIPATIONS IN ALL OR ANYPART OF THE INDEBTEDNESS; AND (H) TO ASSIGN OR TRANSFER THIS GUARANTY IN WHOLEOR IN PART.

GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrantsto Lender that (a) no representations or agreements of any kind have been madeto Guarantor which would limit or quality in any way the terms of this Guaranty;(b) this Guaranty is executed at Borrower's request and not at the request ofLender; (c) Guarantor has not and will not, without the prior written consent ofLender, sell, lease, assign, encumber, hypothecate, transfer, or otherwisedispose of all or substantially all of Guarantor's assets, or any interesttherein; (d) Lender has made no representation to Guarantor as to thecreditworthiness of Borrower; (e) upon Lender's request, Guarantor will provideto Lender financial and credit information in form acceptable to Lender, and allsuch financial information provided to Lender is true and correct in allmaterial respects and fairly presents the financial condition of Guarantoras of the dates thereof, and no material adverse change has occurred in thefinancial condition of Guarantor since the date of the financial statements; and(f) Guarantor has established adequate means of obtaining from Borrower on acontinuing basis information regarding Borrower's financial condition.Guarantor agrees to keep adequately informed from such means of any facts,events, or circumstances which might in any way affect Guarantor's risks underthis Guaranty, and Guarantor further agrees that, absent a request forinformation, Lender shall have no obligation to disclose to Guarantor anyinformation or documents acquired by Lender in the course of its relationshipwith Borrower.

GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waivesany right to require Lender (a) continue lending money or to extend other creditto Borrower; (b) to make any presentment, protest, demand, or notice of anykind, including notice of any nonpayment of the Indebtedness or of any



nonpayment related to any collateral, or notice of any action or nonaction onthe part of the Borrower, Lender, any surety, endorser, or other guarantor inconnection with the Indebtedness or in connection

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with the creation of new or additional loans or obligations; (c) to resort forpayment or to proceed directly or at once against any person, including Borroweror any other guarantor; (d) to proceed directly against or exhaust anycollateral held by Lender from Borrower, any other guarantor, or any otherperson; (e) to give notice of the terms, time, and place of any public orprivate sale of personal property security held by Lender from Borrower or tocomply with any other applicable provisions of the Uniform Commercial Code; (f)to pursue any other remedy within Lender's power; or (g) to commit any act oromission of any kind, or at any time, with respect to any matterwhatsoever.

If now or hereafter (a) Borrower shall be or become insolvent, and (b) theIndebtedness shall not at all times until paid be fully secured by collateralpledged by Borrower, Guarantor hereby forever waives and relinquishes in favorof Lender and Borrower, and their respective successors, any claim or right topayment Guarantor may now have or hereafter have or acquires against Borrower,by subrogation or otherwise, so that at no time shall Guarantor be or become a"creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or anysuccessor provision of the Federal bankruptcy laws.

Guarantor also waives any and all rights or defenses arising by reason of (a)any "one action" or "anti-deficiency" law or any other law which may preventLender from bringing any action, including a claim for deficiency, againstGuarantor, before or after Lender's commencement or completion of anyforeclosure action, either judicially or by exercise of a power of sale; (b) anyelection of remedies by Lender with destroys or otherwise adversely affectsGuarantor's subrogation rights or Guarantor's rights to proceed against Borrowerfor reimbursement, including without limitation, any loss of rights Guarantormay suffer by reason of any law limiting, qualifying, or discharging theIndebtedness; (c) any disability or other defense of Borrower, of any otherguarantor, or of any other person, or by reason of the cessation of Borrower'sliability from any cause whatsoever, other than payment in full in legal tender,of the Indebtedness; (d) any right to claim discharge of the Indebtedness on thebasis of unjustified impairment of any collateral for the Indebtedness; (e) anystatute of limitations, if at any time any action or suit brought by Lenderagainst Guarantor is commenced there is outstanding Indebtedness of Borrower toLender which is not barred by any applicable statute of limitations; or (f) anydefenses given to guarantors at law or in equity other than actual payment andperformance of the Indebtedness. It payment is made by Borrower, whethervoluntarily or otherwise, or by any third party, on the Indebtedness andthereafter Lender is forced to remit the amount of that payment to borrower'strustee in bankruptcy or to any similar person under any federal or statebankruptcy law or law for the relief of debtors, the Indebtedness shall beconsidered unpaid for the purpose of enforcement of this Guaranty.

Guarantor further waives and agrees not to assert or claim at any time anydeductions to the amount guaranteed under this Guaranty for any claim of setoff,counterclaim, counter demand, recoupment or similar right, whether such claim,demand or right may be asserted by the Borrower, the Guarantor, or both.

GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agreesthat each of the waivers set forth above is made with Guarantor s full knowledgeof its significance and consequences and that, under the circumstances, thewaivers are reasonable and not contrary to public policy or law. If any suchwaiver is determined to be contrary to any applicable law or public policy, suchwaiver shall be effective only to the extent permitted by law or publicpolicy.

SUBORDINATION OF BORROWERS DEBTS TO GUARANTOR. Guarantor agrees that theIndebtedness of Borrower to Lender, whether now existing or hereafter created,shall be prior to any claim that Guarantor may now have or hereafter acquireagainst Borrower, whether or not Borrower becomes insolvent. Guarantor herebyexpressly subordinates any claim Guarantor may have against Borrower, upon anyaccount whatsoever, to any claim that Lender may now or hereafter have againstBorrower. In the event of insolvency and consequent liquidation of the assetsof Borrower, through bankruptcy, by an assignment for the benefit of creditors,by voluntary liquidation, or otherwise, the assets of Borrower applicable to thepayment of the claims of both Lender and Guarantor shall be paid to Lender andshall be first applied by Lender to the Indebtedness of Borrower to Lender.Guarantor does hereby assign to Lender all claims which it may have or acquireagainst Borrower or against any assignee or trustee in bankruptcy of Borrower;provided however, that such assignment shall be effective only for the purposeof assuring to Lender full payment in legal tender of the Indebtedness. IfLender so requests, any notes or credit agreements now or hereafter evidencingany debts or obligations of Borrower to Guarantor shall be marked with a legendthat the same are subject to this Guaranty and shall be delivered to Lender.



Guarantor agrees, and Lender hereby is authorized, in the name of Guarantor,from time to time to execute and file financing statements and continuationstatements and to execute such other documents and to take such other actions asLender deems necessary or appropriate to perfect, preserve and enforce itsrights under this Guaranty.

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CONFESSION OF JUDGMENT. Guarantor hereby irrevocably authorizes and empowers anyattorney-at-law to appear in any court of record and to confess judgmentagainst Guarantor for the unpaid amount of this Guaranty as evidenced by anaffidavit signed by an officer of Lender setting forth the amount then due, plusattorneys' fees as provided in this Guaranty, plus costs of suit, and torelease all errors, and waive all rights of appeal. If a copy of thisGuaranty, verified by an affidavit, shall have been filed in the proceeding, itwill not be necessary to file the original as a warrant of attorney. Guarantorwaives the right to any say of execution and the benefit of all exemption lawsnow or hereafter in effect. No single exercise of the foregoing warrant andpower to confess judgment will be deemed to exhaust the power whether or not anysuch exercise shall be held by any court to be invalid voidable or void; but thepower will continue undiminished and may be exercised from time to time asLender may elect until all amounts owing on this Guaranty have been paid infull.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part ofthis Guaranty:

AMENDMENTS. This Guaranty, together with any Related Documents, constitutesthe entire understanding and agreement of the parties as to the matters setforth in this Guaranty. No alteration of or amendment to this Guarantyshall be effective unless given in writing and signed by the party orparties sought to be charged or bound by the alteration or amendment.

APPLICABLE LAW. This Guaranty has been delivered to Lender and accepted byLender in the state of Delaware. If there is a lawsuit, Guarantor agreesupon lender's request to submit to the jurisdiction of the courts of NEWCASTLE County State of Delaware. Lender and Guarantor hereby waive theright to any jury trial in any action, proceeding, or counterclaim broughtby either Lender or Guarantor against the other. This Guaranty shall begoverned by and construed in accordance with the laws of the State ofDelaware.

ATTORNEYS' FEES; EXPENSES. Guarantor agrees to pay upon demand all ofLender's costs and expenses including reasonable attorneys' fees andLenders legal expenses incurred in connection with the enforcement of thisGuaranty. Lender may pay someone else to help enforce this Guaranty, andGuarantor shall pay the costs and expenses of such enforcement. Costs andexpenses include Lender's reasonable attorneys' Fees and legal expenseswhether or not there is a lawsuit including reasonable attorneys' fees andlegal expenses for bankruptcy proceedings (and including efforts to modifyor vacate any automatic stay or injunction), appeals, and any anticipatedpost-judgment collection services. Guarantor also shall pay all court costsand such additional lees as may be directed by the court.

NOTICES. All notices required to be given by either party to the otherunder this Guaranty shall be in writing, may be sent by telefacsimile, andshall be effective when actually delivered or when deposited with anationally recognized overnight courier, or when deposited in the UnitedStates mail, first class postage prepaid, addressed to the party to whomthe notice is to be given at the address shown above or lo such otheraddresses as either party may designate to the other in writing. If thereis more than one Guarantor, notice to any Guarantor will constitute noticeto all guarantors. For notice purposes, Guarantor agrees to keep Lenderinformed at all times of Guarantor's current address.

INTERPRETATION. In all cases where there is more than one Borrower orGuarantor, then all words used in this Guaranty in the singular shall bedeemed to have been used in the plural where the context and constructionso require; and where there is more than one Borrower named in thisGuaranty or when this Guaranty is executed by more than one Guarantor, thewords "Borrower" and "Guarantor" respectively shall mean all and any one ormore of them. The words "Guarantor," "Borrower," and "Lender" include theheirs, successors, assigns, and transferees of each of them. Captionheadings in this Guaranty are for convenience purposes only and are not tobe used to interpret or define the provisions of this Guaranty. If a courtof competent jurisdiction finds any provision of this Guaranty to beinvalid or unenforceable as to any person or circumstance, such findingshall not render that provision invalid or unenforceable as to any otherpersons or circumstances, and all provisions of this Guaranty in all otherrespects shall remain valid and enforceable. If any one or more of Borroweror Guarantor are corporations or partnerships, it is not necessary for



Lender to inquire into the powers of Borrower or Guarantor or of theofficers, directors, partners, or agents acting or purporting to act ontheir behalf, and any Indebtedness made or created in reliance upon theprofessed exercise of such powers shall be guaranteed under thisGuaranty.

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WAIVER. Lender shall not be deemed to have waived any rights under thisGuaranty unless such waiver is given in writing and signed by Lender. Nodelay or omission on the part of Lender in exercising any right shalloperate as a waiver of such right or any other right. A waiver by Lenderof a provision of this Guaranty shall not prejudice or constitute a waiverof Lender's right otherwise to demand strict compliance with that provisionor any other provision of this Guaranty. No prior waiver by Lender, norany course of dealing between Lender and Guarantor, shall constitute awaiver of any of Lender's rights or of any of Guarantor's obligations as toany future transactions. Whenever the consent of Lender is required underthis Guaranty, the granting of such consent by Lender in any instance shallnot constitute continuing consent to subsequent instances where suchconsent is required and in all cases such consent may be granted orwithheld in the sole discretion of Lender.

LIMITATION ON GUARANTY. Notwithstanding any other provision of this Guaranty,the liability of Guarantor under this Guaranty shall not exceed the amount whichwould render this Guaranty unenforceable, void or voidable under 548 of theBankruptcy Code or by application of any Fraudulent Transfer or FraudulentConveyance statue. In the event that Guarantor shall claim that the amount ofits liability hereunder is less than the amount of the Indebtedness, the burdenof proof with respect to the amount of such liability shall rest withguarantor in light of the fact that the information concerning and circumstancesof the financial condition of such Guarantor are more readily available to andunder the control of such Guarantor.

WAIVER OF RIGHT TO TRIAL BY JURY. In recognition of the higher costs and delaywhich may result from a jury trial, guarantor and lender waive any right totrial by jury of any claim, demand, action or cause of action (1) arisinghereunder, or (2) in any way connected with or related or incidental to thedealings of the parties hereto with respect hereto or any other instrument,document or agreement executed or delivered in connection herewith, in each casewhether now existing or hereafter arising, and whether sounding in contract ortort or otherwise; and each party hereby agrees and consents that any suchclaim, demand, action or cause of action shall be decided by court trialwithout a jury, and that any party hereto may file an original counterpart or acopy of this section with any court as written evidence of the consent of theparties hereto to the waiver of their right to trial by jury.

WAIVER AND SUBORDINATION. Guarantor irrevocably waives, disclaims andrelinquishes all claims against Borrower which Guarantor otherwise has or wouldhave by virtue of having executed this Guaranty, specifically including but notlimited to all rights of indemnity, contribution or exoneration. In the eventof the payment by Guarantor to Lender of any amount whatsoever and the resultantsubrogation of Guarantor to the rights of Lender by reason of such payment, theamount of the remaining Indebtedness of Borrower to Lender after the payments byGuarantor pursuant to this Guaranty shall have priority over any claim thatGuarantor may have against Borrower, whether or not Borrower is at such time orthereafter becomes insolvent. Guarantor further expressly subordinates anyclaim against Borrower upon any account whatsoever to any claim that Lender mayhave against Borrower at any time and for any reason.

EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THISGUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THATTHIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THISGUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THEMANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY." NO FORMALACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTYIS DATED OCTOBER 23, 1995.

GUARANTOR:


BY: /s/ WILLIAM H. DAVIS, SR.--------------------------------WILLIAM H. DAVIS, SR., PRESIDENT



EXHIBIT 10.09

LOAN AND SECURITY AGREEMENT

This Loan and Security Agreement (this "Agreement"), dated as of June27, 1996, is entered into by and between Litronic Industries, Inc., a Californiacorporation (the "Company"), and Fidelity Funding of California, Inc., aCalifornia corporation ("Fidelity"). In consideration of the mutual covenantsand agreements contained herein, the Company and Fidelity hereby agree asfollows:

Section 1. Definitions and Construction.

1.1. When used herein, the following terms shall have the followingmeanings:

"Account" means the right of the Company to payment for goods sold orleased or for services rendered which is not evidenced by an instrument orchattel paper, whether or not earned by performance.

"Account Debtor" means the Person obligated to make payment on anAccount.

"Affiliate" means, with respect to any Person, any other Person thatdirectly or indirectly controls, or is controlled by or under common controlwith, such Person.

"Applicable Rate" means, as applicable, the Revolving Loan Rate, theFixed Asset Loan Rate, the Standby Facility Rate or the Real Estate ContractRate.

"Borrowing Base" means an amount equal to the sum, determined byFidelity from time to time in its sole discretion, of (a) 85% of the face amountof Eligible Accounts, plus at Fidelity's option, (b) the lesser of (i) $600,000or (ii) 50 % of the value of Eligible Inventory.

"Borrowing Base Certificate" means a certificate in the form attachedhereto as Exhibit A, duly executed by an authorized officer of the company.

"Cash Collateral" has the meaning given to it in Section 10.

"Collateral" means all Personal Property Collateral and all RealProperty.

"Concentration Limit" means, as of any date, an amount equal to 20% ofthe face amount of Accounts outstanding on such date; provided that with respectto Accounts owed by the United States or any department or instrumentalitythereof, "Concentration Limits" means, as of any date, an amount equal to 50% ofthe face amount of such Accounts outstanding on such date.

"Current Assets" means, as of any date, only those assets of theCompany that may, in the ordinary course of business, be converted into cashwithin a period of one year from such date, but excluding (a) amounts due fromemployees, officers, shareholders or directors of the

Company, (b) prepaid expenses for services or for supplies that are notpurchased for resale, and (c) amounts due from Affiliates of the Company.

"Current Liabilities" means, as of any date, all obligations of theCompany that are due within one year from such date.

"Debt" means, with respect to any Person, all indebtedness, obligationsand liabilities of such Person, including without limitation: (a) allliabilities which would be reflected on a balance sheet of such Person preparedin accordance with GAAP, (b) all obligations of such Person in respect of anyguaranty of a Debt or another Person, or (c) all obligations, indebtedness andliabilities secured by any lien on or security interest in any property orassets of such Person.

"Debt Coverage Ratio" means, for any period of three consecutivecalendar months, the ratio of EBITDA for such period to the sum of InterestExpense for such period plus the Principal Repayment. For purposes of thisdefinition, the term "Principal Repayment" means, as of any date, the CurrentLiabilities as of such date divided by four.

"EBITDA" means, for any period, the sum (determined withoutduplication, on a consolidated basis and in accordance with GAAP) of (a) theCompany's net income (or net loss) for such period (including gains and lossesfrom sales of assets in the ordinary course of business) before provision forincome taxes, (b) the Interest Expense of the Company for such period, and (c)



depreciation, amortization and all other non-cash charges of the Company duringsuch period to the extent deducted in determining such net income.

"Eligible Accounts" means, at the time of determination thereof, allAccounts other than (i) any Account which is payable more than 30 days frominvoice date, (ii) any Account which has been outstanding for more than 90 daysfrom invoice date, (iii) any Account as to which Fidelity does not have a validand perfected, first priority security interest, (iv) to the extent that theaggregate outstanding Accounts owed by any single Account Debtor exceeds theConcentration Limit, any Account owed by such Account Debtor, (v) any Accountthat is owed by an Account Debtor that is an Affiliate of the Company or anofficer or employee of the Company, (vi) any Account that arises out of a salemade or services performed outside of the Untied States or that is owed by anAccount Debtor located outside the United States, (vii) any Account that is owedby a creditor or supplier of the Company or with respect to which any defense,counterclaim or right of set off has been asserted, (viii) any Account owed byan Account Debtor if more than 25% (in dollar amount) of such Account Debtor'sAccounts are 90 or more days past due, (ix) any Account that is owed by theUnited States or any department, agency or instrumentality thereof, unless theright to payment under such Account is assigned to Fidelity as Collateral infull compliance with the Assignment of Claims Act of 1940, as amended (31 U.S.C.3727) and (x) any Account that has not been approved by Fidelity, in its soleand absolute discretion, for including in the Borrowing Base.

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"Eligible Inventory" means, at the time of determination, all rawmaterials and finished goods that are part of the Company's Inventory, valued atthe lower of cost or market value, that (i) are owned by the Company, arelocated in the United States of America and, if located on leased or mortgagedpremises, are subject to the terms of a lien waiver letter executed by thelandlord or mortgagee of such premises if deemed necessary by Fidelity in itssole discretion, (ii) are ready for sale, and are not, in the opinion ofFidelity,damaged, obsolete or otherwise not readily salable at full value,(iii) have been held in Inventory for not more than 120 days, (iv) are not onlease or consignment or furnished under any contract of service from or to anyPerson, (v) are subject to an enforceable, first priority, perfected securityinterest in favor of Fidelity, (vi) are not the subject of an invoice givingrise to an Eligible Account, and (vii) have been approved by Fidelity, in itssole and absolute discretion for inclusion in the Borrowing Base.

"Eligible Machinery and Equipment" means, at the time ofdetermination, all machinery and equipment, valued at the lower of cost orliquidation value, that (i) are owned by the Company, are located in the UnitedStates of America and, if located on leased or mortgaged premises, are subjectto the terms of a lien waiver letter executed by the landlord or mortgagee ofsuch premises if deemed necessary by Fidelity in its sole discretion, (ii) arenot on lease or consignment to any Person, (iii) are subject to an enforceable,first priority, perfected security interest in favor of Fidelity, (iv) are not,in the opinion of Fidelity, damaged or obsolete, (v) are not fixtures, and (vi)have been approved by Fidelity, in its sole and absolute discretion forinclusion in the Borrowing Base.

"Environmental Laws" means any and all federal, state, local andforeign statutes, laws, regulations, rules, orders, licenses, agreements orother governmental restrictions relating to the environment or to emissions,discharges or releases of pollutants or industrial, toxic or hazardoussubstances into the environment, or otherwise relating to the manufacture,processing, treatment, transport or handling of pollutants or industrial, toxicor hazardous substances.

"ERISA" means the Employee Retirement Income Security Act of 1974, asamended from time to time, together with all rules and regulations promulgatedwith respect thereto.

"ERISA Plan" means any pension benefit plan subject to Title IV ofERISA maintained by the Company or any Affiliate thereof with respect to whichthe Company has a fixed or contingent liability.

"Event of Default" has the meaning given it in Section 12.

"Fixed Asset Loan" has the meaning given to it in Section 3.

"Fixed Asset Loan Amount" means the lesser of (a) $1,000,000 or (ii)85% of the forced liquidation value of the Eligible Machinery and Equipment asdetermined by an appraisal satisfactory to Fidelity.

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"Fixed Asset Loan Maturity Date" means the earlier to occur of (a) theFixed Asset Loan Term Date or (b) the last day of the Term.

"Fixed Asset Loan Rate" means a rate of interest equal to the lesser of



(a) the Prime Rate in effect from time to time plus three percent (3%) per annumand (b) the maximum rate permitted by applicable law. The Fixed Asset Loan shallbe automatically increased or decreased, as the case may be, without notice tothe Company from time to time as of the effective date of each change in thePrime Rate.

"Fixed Asset Loan Term Date" means the date which is five years fromthe date hereof.

"GAAP" means generally accepted accounting principles and practices aspromulgated by the American Institute of Certified Public Accountants, appliedon a basis consistent with past practices.

"Indemnified Claims" means any and all claims, demands, actions, causesof action, judgments, liabilities, damages and consequential damages, penalties,fines, costs, fees, expenses and disbursements (including, without limitation,fees and expenses of attorneys and other professional consultants and experts inconnection with any investigation or defense) of every kind, known or unknown,existing or hereafter arising, foreseeable or unforeseeable, which may beimposed upon, threatened or asserted against or incurred or paid by anyIndemnified Person at any time and from time to time, because of, resulting from, in connection with or arising out of any transaction, act, omission, event orcircumstance in any way connected with the Collateral or the TransactionDocuments (including but not limited to enforcement of Fidelity's rightsthereunder or the defense of Fidelity's actions thereunder), excluding withrespect to any Indemnified Persons, any of the foregoing resulting from suchIndemnified Person's gross negligence or willful misconduct.

"Indemnified Persons" means Fidelity and its officers, directors,shareholders, employees, attorneys, representatives and Affiliates.

"Intangible Assets" means such of the Company's assets as are treatedas intangible pursuant to GAAP, including without limitation: (a) obligationsowing by officers, directors, shareholders, employees, subsidiaries, Affiliatesor any Person in which any such officer, director, shareholder, employee,subsidiary, or Affiliate owns any interest and (b) any asset which is intangibleor lacks intrinsic or marketable value or collectibility, including but notlimited to; goodwill, noncompetition agreements, patents, copyrights,trademarks, franchises, organization or research and development costs.

"Interest Expense" means, for any period, all interest charges paid oraccrued by the Company during such period.

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"Inventory" means all goods, now owned or hereafter acquired by theCompany, wherever located, that are held for sale or lease or are to befurnished under any contract of service (including, but not limited to rawmaterials, work in process, finished goods and materials used or consumed in themanufacture or production thereof, goods in which the Company has an interest inmass or a joint or other interest or rights of any kind, and goods which havebeen returned to or repossessed or stopped in transit by the Company).

"Late Payment Rate " means a per annum rate of interest equal to thelesser of (a) the Applicable Rate plus four percent (4%) and (b) the maximumrate permitted by applicable law.

"Mortgage" means the Deed of Trust, Assignment of Rents, SecurityAgreement and Fixture Filing dated of even date herewith by and among theCompany, First American Title Insurance Company, as trustee, and Fidelity, asbeneficiary.

"Obligations" means all indebtedness, obligations and liabilities ofthe Company to Fidelity arising under the Transaction Documents, and all otherindebtedness, obligations and liabilities of the Company to Fidelity, whetherpresently existing or hereafter arising, direct or indirect, primary orsecondary, joint or several, fixed or contingent, and whether originally payableto Fidelity or to a third party and subsequently acquired by Fidelity.

"Person" means any individual, corporation, joint venture, partnership,trust, unincorporated organization or governmental entity or agency.

"Personal Property Collateral" has the meaning given it in Section 9.

"Prime Rate" means the rate per annum published from time to time byThe Wall Street Journal as the base rate for corporate loans at large commercialbanks (or, if more than one such rate is published, the higher or highest of therates so published). If such rate is no longer published by The Wall StreetJournal, then Fidelity shall, in its sole discretion substitute the base orprime rate for corporate loans at a large commercial bank for the base ratepublished in The Wall Street Journal. Such rate may not necessarily be thelowest or best rate actually charged to any customer of such commercial bank.

"Real Estate Loan" has the meaning given to it in Section 4.



"Real Estate Loan Amount" means the lesser of (a) $2,200,000 or (ii)75% of the appraised value of the Real Property as determined by an appraisalperformed in accordance with the provisions of Section 6.1.

"Real Estate Loan Maturity Date" means the earlier to occur of (a) theReal Estate Term Date or (b) the last day of the Term.

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"Real Estate Loan Rate" means a rate of interest equal to the lesser of(a) the Prime Rate in effect from time to time plus three and one-half percent(3.5%) per annum and (b) the maximum rate permitted by applicable law. The RealEstate Loan Rate shall be automatically increased or decreased, as the case maybe, without notice to the Company from time to time as of the effective date ofeach change in the Prime Rate.

"Real Estate Term Date" means the date which is seven years from thedate hereof.

"Real Property" means the Company's administrative office,manufacturing, research and development facility located at 2950 Redhill Avenue,Costa Mesa, California.

"Remittance Address" means the address designated in writing byFidelity.

"Revolver Advance" has the meaning given to it in Section 2.1.

"Revolver Commitment" means $2,500,000.

"Revolving Loan Rate" means a rate of interest equal to the lesser of(a) the Prime Rate in effect from time to time plus two percent (2%) per annumand (b) the maximum rate permitted by applicable law. The Revolving Loan Rateshall be automatically increased or decreased, as the case may be, withoutnotice to the Company from time to time as of the effective date of each changein the Prime Rate.

"Shareholders Equity" means, as of any date, the shareholders' equityof the Company as of such date determined in accordance with GAAP.

"Standby Facility" has the meaning given it in Section 3A.1.

"Standby Facility Amount" means $250,000.

"Standby Facility Maturity Date" means the earlier to occur of (a) theStandby Facility Term Date or (b) the last day of the Term.

"Standby Facility Rate" means a rate of interest equal to the lesser of(a) the Prime Rate in effect from time to time plus three percent (3%) per annumand (b) the maximum rate permitted by applicable law. The Standby Facility Rateshall be automatically increased or decreased, as the case may be, withoutnotice to the Company from time to time as of the effective date of each changein the Prime Rate.

"Standby Facility Term Date" means the date which is five years fromthe date hereof.

"Tangible Net Worth" means, as of any date, the amount obtained bysubtracting the Company's Intangible Assets as of such date from the sum of (i)the Company's Shareholders'

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Equity as of such date plus (ii) all obligations for borrowed money owed by theCompany to its shareholders, provided that such obligations have beensubordinated to the Obligations on terms satisfactory to Fidelity in its solediscretion.

"Term" has the meaning given to it in Section 14.4.

"Termination Event" means (a) the occurrence with respect to any ERISAPlan of (i) a reportable event described in Sections 4043(b)(5) of ERISA or (ii)any other reportable event described in Section 4043(b) of ERISA other than areportable event not subject to the provision for 30-day notice to the PensionBenefit Guaranty Corporation pursuant to a waiver by such corporation underSection 4043(a) of ERISA or (b) the withdrawal of the Company or any Affiliateof the Company from any ERISA Plan during a plan year in which it was a"substantial employer" as defined in Section 4001(a)(2) of ERISA, or (c) anyevent or condition which might constitute grounds under Section 4042 of ERISAfor the termination of, or the appointment of a trustee to administer, any ERISAPlan.



"Transactions Documents" means this Agreement, the Mortgage, and allother documents and instruments executed and delivered in connection therewith.

"UCC" means the Uniform Commercial Code as in effect in the applicablejurisdiction.

"Working Capital" means, as of any date, the excess of Current Assetsover Current Liabilities as of such date, provided that any Revolver Advancesoutstanding as of such date shall, for purposes of the calculation of WorkingCapital be treated as Current Liabilities regardless of their characterizationunder GAAP.

1.2. Terms defined in the UCC and used but not defined herein shallhave the meanings ascribed to them in the UCC.

1.3. References herein to a particular agreement, instrument ordocument also shall be deemed to refer to and include all renewals, extensionsand modifications of such agreement, instrument or document. All addenda,exhibits and schedules attached to this Agreement are a part hereof for allpurposes. Words in the singular form shall be construed to include the pluraland vice versa, unless the context otherwise requires.

1.4. All interest accruing on the outstanding Revolver Advances shallbe calculated on the basis of actual days elapsed (including the first butexcluding the last day) plus three (3) business days and a year of 360 days. Allinterest otherwise accruing hereunder shall be calculated on the basis of actualdays elapsed (including the first but excluding the last day) and a year of 360days. Unless otherwise expressly provided herein or unless Fidelity otherwiseconsents, all financial statements and reports furnished to Fidelity hereundershall be prepared, and all financial computations and determinations pursuanthereto shall be made, in accordance with GAAP. All payments received by Fidelityafter its internally established time for closing

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business on any business day shall be applied as of the next succeeding businessday. Any payment which is due on a day which is not a business day shall insteadbe deemed to be due on the next succeeding business day, and interest thereonshall accrue and be payable at the then applicable rate during the time of suchextension. Fidelity's records in respect of loans advanced, accrued interest,payments received and applied and other matters in respect of calculation of theamount of the Obligations shall be deemed conclusive absent demonstration oferror. All statements of account rendered by Fidelity to the Company relating toprincipal, accrued interest or costs owing by the Company under this Agreementshall be presumed to be correct and accurate unless, within 30 days afterreceipt thereof, the Company shall notify Fidelity in writing of any claimederror therein.

Section 2. Revolver Advances.

2.1. Subject to the terms of this Agreement, including, withoutlimitation, Section 6, Fidelity shall make advances to the Company (each a"Revolver Advance and collectively the "Revolver Advances") from time to timeduring the Term; provided, however, that the aggregate principal amount ofRevolver Advances outstanding at any time shall not exceed the lesser of (i)Borrowing Base determined by Fidelity from time to time and (ii) the RevolverCommitment. Ech Revolver Advance must be greater than or equal to $5,000 or mustequal the unadvanced portion of the Borrowing Base. The Company hereby agrees torepay to Fidelity all Revolver Advances made to the Company hereunder, togetherwith interest thereon, in the manner provided herein. The principal owinghereunder in respect of the Revolver Advances at any given time shall equal theaggregate amount of Revolver Advances made hereunder minus all principalpayments on the Revolver Advances received by Fidelity hereunder. Subject to theterms and conditions hereof, the Company may borrow, repay and reborrow RevolverAdvances under this Agreement.

2.2 Each request by the Company to Fidelity for a Revolver Advancehereunder must be in writing or promptly confirmed in writing. Each such writtenrequest or confirmation shall be accompanied by a "Borrowing Base Certificate"in the form attached hereto as Exhibit "A," together with (i) one copy of aninvoice for each Account described in such Borrowing Base Certificate andevidence of shipment of the sale of goods or services covered thereby, (ii) anynecessary waivers and releases for labor, services, equipment or material of theCompany or any other Person on Fidelity's form, and (iii) a schedule of EligibleInventory, setting forth the location of all such Inventory, including EligibleInventory not in the possession of the Company and the name of the Person inpossession thereof.

2.3. Promptly after receiving each Borrowing Base Certificate, Fidelityshall, based upon such Borrowing Base Certificate and such other informationavailable to Fidelity, redetermine the Borrowing Base, which redeterminationshall take effect immediately and remain in effect until the next suchredetermination. If all conditions precedent to any Revolver Advance requestedhave been met, Fidelity will on the date requested make such Revolver Advance



available to the Company by wire transfer to the account designated in writingby the

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Company. In the event Fidelity does not receive an appropriately completedBorrowing Base Certificate, Fidelity shall have no obligation to redetermine theBorrowing Base or make any additional Revolver Advances hereunder.

2.4. If the aggregate unpaid principal balance of the Revolver Advancesexceeds the Borrowing Base at any time, the Company shall, upon receipt ofnotice thereof from Fidelity, immediately repay the principal of the RevolverAdvances in an amount at least equal to such excess. Any principal repaidpursuant to this Section 2.4. shall be in addition to, and not in lieu of, allpayments otherwise required to be paid under the Transaction Documents.

2.5. The aggregate unpaid principal balance of the Revolver Advancesshall bear interest at the Revolving Loan Rate in effect from time to time. Allaccrued and unpaid interest on the Revolver Advances shall be due and payable bythe Company to Fidelity on the last day of each calendar month.

2.6. The aggregate unpaid principal balance of the Revolver Advancesplus all accrued but unpaid interest thereon shall be payable by the Company toFidelity on the last day of the Term.

Section 3. Fixed Asset Loan.

3.1. Subject to the terms and conditions hereof, including, withoutlimitation, Section 6, Fidelity agrees to make a loan to the Company in anamount equal to the Fixed Asset Loan Amount. The Company hereby agrees to repayto Fidelity the Fixed Asset Loan, together with interest thereon, in the mannerprovided herein. The principal owing hereunder in respect of the Fixed AssetLoan at any given time shall equal the Fixed Asset Loan Amount minus allprincipal payments on the Fixed Asset Loan received by Fidelity hereunder.

3.2. If upon receipt of any appraisal of the Eligible Machinery andEquipment (or upon such other information then available to Fidelity) Fidelitydetermines that the liquidation value of the Eligible Machinery and Equipment isless than the outstanding principal balance of the Fixed Asset Loan, the Companyshall, upon receipt of notice thereof from Fidelity, immediately repay theprincipal of the Fixed Asset Loan in an amount at least equal to such excess.Any principal repaid pursuant to this Section 3.2 shall be in addition to, andnot in lieu of, all payments otherwise required to be paid under the TransactionDocuments.

3.3. The aggregate unpaid principal balance of the Fixed Asset Loanshall bear interest at the Fixed Asset Loan Rate in effect from time to time.All accrued and unpaid interest on the Fixed Asset Loan shall be due and payableby the Company to Fidelity on the last day of each calendar month.

3.4. Prior to the Fixed Asset Loan Maturity Date, principal of theFixed Asset Loan shall be payable in monthly installments, due and payable onthe last day of each calendar month,

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in an amount which would amortize the principal of the Fixed Asset Loan in fullon the Fixed Asset Loan Term Date, which amounts shall be set forth in aschedule prepared by Fidelity and provided to the Company. The aggregateprincipal balance of the Fixed Asset Loan plus all accrued but unpaid interestthereon shall be due and payable by the Company to Fidelity on the Fixed AssetLoan Maturity Date.

Section 3A. Standby Facility.

3A.1. Subject to the terms and conditions hereof, including, withoutlimitation, Section 6, Fidelity agrees to make a loan to the Company in anamount equal to the Standby Facility Amount. The Company hereby agrees to repayto Fidelity the Standby Facility, together with interest thereon, in the mannerprovided herein. The principal owing hereunder in respect of the StandbyFacility at any given time shall equal the Standby Facility Amount minus allprincipal payments on the Standby Facility received by Fidelity hereunder.

3A.2. The aggregate unpaid principal balance of the Standby Facilityshall bear interest at the Standby Facility Rate in effect from time to time.All accrued and unpaid interest on the Standby Facility shall be due and payableby the Company to Fidelity on the last day of each calendar month.

3A.3. Prior to the Standby Facility Maturity Date, principal of theStandby Facility shall be payable in monthly installments, due and payable onthe last day of each calendar month, in an amount which would amortize theprincipal of the Standby Facility in full on the Standby Facility Term Date,which amounts shall be set forth in a schedule prepared by Fidelity and provided



to the Company. The aggregate principal balance of the Standby Facility plus allaccrued but unpaid interest thereon shall be due and payable by the Company toFidelity on the Standby Facility Maturity Date.

Section 4. Real Estate Loan.

4.1. Subject to the terms and conditions hereof, including, withoutlimitation, Section 6, Fidelity agrees to make a loan to the Company in anamount equal to the Real Estate Loan Amount. The Company hereby agrees to repayto Fidelity the Real Estate Loan, together with interest thereon, in the mannerprovided herein. The principal owing hereunder in respect of the Real EstateLoan at any given time shall equal the Real Estate Loan Amount minus allprincipal payments on the Real Estate Loan received by Fidelity hereunder.

4.2. The aggregate unpaid principal balance of the Real Estate Loanshall bear interest at the Real Estate Loan Rate in effect from time to time.All accrued and unpaid interest on the Real Estate Loan shall be due and payableby the Company to Fidelity on the last day of each calendar month.

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4.3. Beginning one year after the date hereof and prior to the RealEstate Loan Maturity Date, principal shall be payable in monthly installments,due and payable on the last day of each calendar month, in an amount which wouldamortize the principal of the Real Estate Loan in full on the Real Estate LoanTerm Date, which amounts shall be set forth in a schedule prepared by Fidelityand provided to the Company. The aggregate principal balance of the Real EstateLoan plus all accrued but unpaid interest thereon shall be due and payable bythe Company to Fidelity on the Real Estate Loan Maturity Date.

Section 5. Fees.

5.1. The Company shall pay to Fidelity an annual commitment fee in theamount of $44,000, payable on the date hereof and on each anniversary of thedate hereof during the Term; provided that when the Real Estate Loan has beenrepaid in full, the commitment fee shall be reduced to 1% of sum of (i) theRevolver Commitment and (ii) the then outstanding principal balance of the FixedAsset Loan (prorated during the year in which such reduction occurs). TheCompany hereby authorizes Fidelity, at its sole discretion, to deduct thecommitment fee from any Advance hereunder.

5.2. As consideration for Fidelity's commitment to advance fundshereunder the Company shall pay to Fidelity a minimum usage fee (in this sectioncalled the "Minimum Usage Fee") of not less than $15,000 for each calendar month(or fraction thereof, on a prorated basis) during the Term. In the event thatthe income earned by Fidelity during any calendar month (or fraction thereof ona prorated basis) pursuant to Sections 2.5 and 5.3 is less than the MinimumUsage Fee, the Company shall pay to Fidelity the difference between the amountso earned by Fidelity and the Minimum Usage Fee, regardless of Fidelity's priorcompensation. The Minimum Usage Fee for each calendar month shall be due andpayable on the first day of the next calendar month.

5.3. The Company shall pay to Fidelity a monthly servicing fee in anamount equal to .13% of the average monthly outstanding balance of the RevolverAdvances for each calendar month. The monthly servicing fee for each calendarmonth shall be due and payable on the first day of the next calendar month.

5.4. In addition to, and not in lieu of, any termination fee requiredby Section 14.4, the Company shall pay to Fidelity a liquidation fee (in thissection called the "Liquidation Fee") in the amount of two percent (2%) of theface amount of each Eligible Account included in the Borrowing Base that isoutstanding at any time during the Liquidation Period (as defined below) andthat Fidelity collects following collection efforts by Fidelity and excludingcollections in the ordinary course of business (i.e. paid within 30 days). TheLiquidation Fee shall be payable on the date on which Fidelity collects theapplicable Eligible Account. For purposes of this section, the term "LiquidationPeriod" means a period beginning on the earliest of (i) the date of commencementagainst or by the Company of any voluntary or involuntary case under the federalBankruptcy Code, (ii) the date of any general assignment by the Company for thebenefit of its

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creditors; (iii) the date of any appointment or taking possession by a receiver,liquidator, assignee, custodian or similar official of all or a substantial partof the Company's assets, or (iv) the date of the cessation of business of theCompany and ending on the date on which Fidelity has actually received all fees,costs, expenses and other amounts owing to it hereunder.

5.5. Contemporaneously with the execution and delivery hereof, theCompany shall pay to Fidelity (i) a fee of $12,000 to cover the costs of thenegotiation, preparation, execution and delivery of the Transaction Documents,including the fees, if any, of outside legal counsel, and (ii) costs of



preparation of mortgage on the Real Property and a review of the titlecommitment and title insurance policy on the Real Property. In addition, theCompany shall pay or reimburse Fidelity upon demand for all other costs andexpenses incurred by Fidelity in connection with its due diligence review of theCompany and the closing of the transactions contemplated hereby and allreasonable attorney's fees, court costs and other expenses incurred by Fidelity(whether or not litigation is commenced or judgment issued, and if litigation iscommenced whether at trial or any appellate level) in connection with theenforcement by Fidelity of this Agreement or any other Transaction Document, theprotection or enforcement of Fidelity's interest in the Collateral, thecollection by Fidelity of the Collateral, or the representation of Fidelity inconnection with any bankruptcy case or insolvency proceeding involving theCompany, the Collateral, or any Account Debtor, including, without limitation,any representation involving relief rom a stay motion, a cash collateraldispute, an assumption or rejection motion or a dispute concerning any proposeddisclosure statement and plan proposed in any such proceeding.

5.6. Fidelity shall be entitled to collect upon demand its normal andcustomary charges for the following routine services provided or obtained in thecourse of performing its functions with respect to the Collateral: lock boxcharges and wire transfers.

5.7. All interest, fees and other amounts due to Fidelity pursuant tothis Section 5 shall be payable on demand, and may, in Fidelity's solediscretion, be deducted from Revolver Advances or paid from the Cash Collateral.All past due amounts owed hereunder, including but not limited to, past dueinterest, fees and other amounts, that are not paid when due shall bear interestfrom the date due until paid at the Late Payment Rate.

Section 6. Conditions Precedent to the Loans.

6.1. Fidelity shall not be obligated to make the Fixed Asset Loan, theReal Estate Loan, the Standby Facility or any Revolver Advance hereunder(including the first) until it shall have received the following documents, dulyexecuted in form and substance satisfactory to Fidelity and its counsel:

(a) continuing unconditional and absolute guaranty by Kris Shah of allObligations;

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(b) a certificate executed by the President and the Secretary of theCompany certifying (i) the names and signatures of the officers of the Companyauthorized to execute Transaction Documents, (ii) the resolutions duly adoptedby the Board of Directors of the Company authorizing the execution of thisAgreement and the other Transaction Documents, and (iii) correctness andcompleteness of the copy of the bylaws of the Company attached thereto;

(c) a certificate executed by the President and the Chief FinancialOfficer of the Company certifying the satisfaction of the conditions set forthin Section 7;

(d) certificates regarding the due formation, valid existence and goodstanding of the Company in the state of its organization issued by theappropriate governmental authorities in such jurisdiction;

(e) a release executed by the Bank of Yorba Linda releasing all liensand security interests of the Bank of Yorba Linda in the Collateral;

(f) a release executed by Finova releasing all liens and securityinterests of Finova in the Collateral;

(g) endorsements naming Fidelity as an additional insured or losspayee, as appropriate, on all liability insurance and all property insurancepolicies of the Company;

(h) a satisfactory appraisal of the Real Property by an appraiseracceptable to Fidelity;

(i) a satisfactory appraisal of the eligible Machinery and Equipmentdated within one month of the date hereof by an appraiser acceptable toFidelity;

(j) a commitment for title insurance on the Real Property, acceptableto Fidelity;

(k) the Mortgage;

(l) a Subordination Agreement executed by Kris Shah (the "SubordinationAgreement").

6.2. Fidelity shall not be obligated to make the Fixed Asset Loan, theReal Estate Loan, the Standby Facility or any Revolver Advance hereunder(including the first), unless (i) all representations and warranties made by the



Company in the Transaction Documents are true on and as of the date of themaking of the Fixed Asset Loan, the Real Estate Loan, the Standby Facility orsuch Revolver Advance as if such representations and warranties had been made asof the date thereof, (ii) the Company has performed and complied with allagreements and conditions required in the Transactions Documents to be performedor complied with by it on or prior to such date, (iii) no Event of Default orany event or circumstance that, with the passage of time, the giving of noticeor both, would become an Event of Default shall have occurred, (iv)

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the making of the Fixed Asset Loan, the Real Estate Loan, the Standby Facilityor such Revolver Advance shall not be prohibited by any law or any regulation orany order of any court or governmental agency or authority, (v) the Companyshall have not repudiated or made any anticipatory breach of any of itsobligations under any Transaction Document, and (vi) Fidelity shall haveapproved the Fixed Asset Loan, the Real Estate Loan, the Standby Facility orsuch Revolver Advance in its sole discretion.

Section 7. The Company's Representations and Warranties. The Companyrepresents and warrants to Fidelity on the date hereof, and shall be deemed torepresent and warrant to Fidelity on the date on which the Fixed Asset Loan, theReal Estate Loan, the Standby Facility or any Revolver Advance is made to theCompany hereunder, that:

7.1. The Company is a corporation duly organized, validly existing andin good standing under the laws of the state of its incorporation, with allrequisite power and authority to execute, deliver and perform its obligationsunder this Agreement and the other Transaction Documents to which it is a partyand to conduct its business as presently conducted. The Company is dulyqualified and authorized to do business as a foreign corporation and is in goodstanding in all states in which such qualification and good standing arenecessary for the conduct by the Company of its business or the performance bythe Company of its obligations hereunder. The execution, delivery andperformance by the Company of this Agreement and the other Transaction Documentsto which it is a party do not and will not constitute (a) a violation of anyapplicable law or the Company's articles or certificate of incorporation orbylaws or (b) a material breach of any other document, agreement or instrumentto which the Company is a party or by which the Company is bound. This Agreementand the other Transactions Documents to which the Company is a party have beenduly authorized, executed and delivered by the Company, and are legal, valid andbinding obligations of the Company enforceable against the Company in accordancewith their terms. No consent of, approval by, registration or filing with orauthorization from any governmental authority or agency is required inconnection with the execution, delivery or performance by the Company of thisAgreement or the other Transaction Documents to which it is a party.

7.2. None of the Eligible Accounts, the Eligible Inventory, theEligible Machinery and Equipment, the Real Property or any other Collateral issubject to any lien, encumbrance, security interest or other claim of any kindor nature, except for those liens that will be released upon the funding of thefirst advance hereunder. The Company has not transferred, sold, pledged or givena security interest in any of its Accounts, Inventory, machinery or equipment toanyone other than Fidelity. There are no financing statements on file in anypublic office governing any property of the Company of any kind, real orpersonal, in which the Company is named in or has signed as the debtor, exceptthe financing statement or statements filed or to be filed in respect of thisAgreement or those statements on file that were disclosed in writing by theCompany to Fidelity prior to the execution and delivery of this Agreement.

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7.3. The Company is the sole owner and holder of, and has good anddefensible title to, all Collateral.

7.4. The amount of each Eligible Account is due and owing to theCompany and represents an accurate statement of a bona fide sale, delivery andacceptance of Inventory or performance of service by the Company to or for anAccount Debtor. The terms for payment of the Eligible Accounts are 30 days fromdate of invoice and the payment of the Eligible Accounts is not contingent uponthe fulfillment by the Company of any further performance of any naturewhatsoever. There are no set-offs, allowances, discounts, deductions,counterclaims against the Eligible Accounts or any claims by Account Debtors, ofany kind whatsoever, valid or invalid, that have been or may be asserted as abasis for refusing to pay an Eligible Account, in whole or in part, either atthe time it is accepted by Fidelity for inclusion in the Borrowing Base or priorto the date it is to be paid. To the best of the Company's knowledge, eachAccount Debtor's business is solvent. The Company has served or caused to beserved any and all preliminary notices required by law to perfect or enforce anymechanic's lien or stop notice or bonded stop notice for the Eligible Accountsand the information contained in those notices is true and correct to the bestof the Company's knowledge.



7.5. The address set forth below the Company's signature hereon is, andfor at least the last six months has been, the Company's mailing address, itschief executive office, its principal place of business, the office where all ofthe books and records concerning the Eligible Accounts are maintained and thelocation of all Collateral. Prior to January 4, 1995, the Company's legal namewas Dril-Tron, Inc. The Company does not transact business, and has nottransacted business during the past five years, under any trade, fictitious orassumed name, other than Dril-Tron, Inc. and those set forth under the Company'ssignature hereon. During the past five years, the Company has not been a partyto a merger or consolidation and has not acquired all or substantially all ofthe assets of any Person.

7.6. The Company has filed all tax reports and returns required to befiled by it and has paid, when due and payable, all federal, state and localtaxes and governmental charges imposed upon the Company.

7.7. The Company is in compliance with ERISA, and is not required tocontribute to any "multiemployer plan" as defined in Section 4001 of ERISA. TheCompany has conducted its business in material compliance with all applicablelaws, including but not limited to, applicable Environmental Laws, and maintainsand is in compliance with all licenses and permits required under any such lawsto conduct its business and perform its obligations hereunder. The Company doesnot have any known material contingent liability under any EnvironmentalLaw.

7.8. The application made by the Company to Fidelity in connection withthis Agreement and the statements made therein and in any materials furnished inconnection therewith are true and correct as of the date hereof. All financialstatements furnished by the

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Company to Fidelity in connection with such application were prepared inaccordance with GAAP and fairly present the financial condition and results ofoperations of the Company as of the dates and for the periods indicated therein.

7.9. There is no fact which the Company has not disclosed to Fidelityin writing which could materially adversely affect the properties, business orfinancial condition of the Company, or any of the Collateral, or which it isnecessary to disclose in order to keep the foregoing representations andwarranties from being misleading.

Section 8. Covenants of the Company. From the date hereof and until thepayment and performance is full of all of the Obligations, the Company covenantswith Fidelity that:

8.1. The Company shall preserve and maintain its corporate existence,good standing and authority to transact business in all jurisdiction wherenecessary for the proper conduct of its business, and shall maintain all of itsproperties, rights, privileges and franchises necessary in the normal conduct ofits business.

8.2. The Company shall permit Fidelity and its representatives,including any appraisers, auditors and accountants selected by Fidelity, toinspect any of the Collateral at any time during normal business hours. Inaddition, Fidelity shall have the right, from time to time, to audit theCompany's books and records upon reasonable notice to the Company; provided thatso long as no Event of Default has occurred and is continuing, Fidelity shallnot conduct more than one audit per calendar quarter. The Company shall pay allcosts associated with any such audits at the rate of $700 per day per auditorplus reasonable out-of-pocket expenses.

8.3. The Company shall maintain its books and records in accordancewith GAAP. The Company shall furnish Fidelity, upon request, such informationand statements as Fidelity shall request from time to time regarding theCompany's business affairs, financial condition and results of its operations.Without limiting the generality of the foregoing, the Company shall provideFidelity, on or prior to the last day of each month, unaudited consolidated andconsolidating financial statements with respect to the prior month and, within90 days after the end of each of the Company's fiscal years, audited annualconsolidated financial statements and such certificates relating to theforegoing as Fidelity may request including, without limitation, a monthlycertificate from the president and chief financial officer of the Companystating whether any events of Defaults have occurred and stating in detail thenature thereof. The Company shall provide Fidelity a Borrowing Base Certificate,appropriately completed and with all attachments, at any time that Fidelityshall request and on or before the last day of any calendar week in which thecompany does not request a Revolver Advance. In addition, the Company shallfurnish to Fidelity upon request a current listing of all open and unpaidaccounts payable and accounts receivable, names, addresses and contact personsfor Account Debtors, and such other items of information that Fidelity may deemnecessary or appropriate from time to time. The Company immediately shall notifyFidelity in writing upon becoming aware of the existence of any condition orcircumstance that constitutes an Event of Default or that would, with the giving



of

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notice, the passage of time or both, constitute an Event of Default. Any suchwritten notice shall specify the nature of such condition or circumstance, theperiod of the existence thereof and the action that the Company proposes to takewith respect thereto.

8.4. The Company promptly shall notify Fidelity of any attachment orany other legal process levied against the Company and any action, suit,proceeding or other similar claim of $25,000 or more initiated against theCompany.

8.5. The Company shall keep and maintain adequate insurance by insurersacceptable to Fidelity with respect to its business and all Collateral, providedthat in no event shall such insurance coverage be less than the coverage setforth on Exhibit "B." Fidelity agrees that as to the Collateral in existence asof the date hereof, the coverage set forth on Exhibit "B" is satisfactory. Suchinsurance shall cover loss, damages and liability of amounts not less thanreasonably requested by Fidelity and shall include, at a minimum, businessinterruption insurance, insurance for workers compensation, general premisesliability, fire, casualty, theft and all risk. The Company shall cause Fidelityto be an additional insured and loss payee under all policies of insurancecovering any of the Collateral, to the extent of Fidelity's interest. TheCompany shall deliver copies of each insurance policy to Fidelity upon request.

8.6. The Company shall file all tax reports and returns required to befiled by it in the manner and at the times required by applicable law, and shallpay all federal, state and local taxes and charges imposed upon the Company whendue.

8.7. The Company shall comply with ERISA and shall not become requiredto contribute to any "multiemployee plan" as defined in Section 4001 of ERISA.The Company shall conduct its business in material compliance with allapplicable laws, and shall maintain and comply with all licenses and permitsrequired under any such laws to conduct its business and perform its obligationshereunder. Without limiting the generality of the foregoing, the Company shallcomply in all material respects with all Environmental Laws now or hereafterapplicable to the Company and shall obtain, at or prior to the time required byapplicable Environmental Laws, all environmental, health and safety permits,licenses and other authorizations necessary for its operations. The Companypromptly shall furnish to Fidelity all written notices of violation, complaints,penalty assessments, suits or other proceedings received by the Company withrespect to any alleged violation of or non-compliance with any EnvironmentalLaws.

8.8. The Company shall maintain a Tangible Net Worth of not less than(i) a negative $100,000 at any time after the date hereof, and (ii) the sum of anegative $100,000 plus the greater of (A) $750,000 or (B) the net income of theCompany for its fiscal year 1996 at any time after December 30, 1996.

8.9. The Company shall maintain an Debt Coverage Ratio (determined asof the last day of each calendar month) of not less than 1.5 to 1.0.

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8.10. The Company shall at all times maintain Working Capital of notless than (i) a negative $750,000 at any time after the date of the firstfunding hereunder and (ii) a negative $250,000 at any time after December 30,1996.

8.11. The Company shall not grant, create or allow to exist anysecurity interest, lien or other encumbrance on any of the collateral other than(i) the lien and security interest granted to Fidelity herein, (ii) the existingsecurity interest of Phoenixcor on equipment of the Company, and (iii) purchasemoney security interests in equipment of the Company at to which the Company hasgiven Fidelity written notice. The Company shall not execute any financingstatement in favor of any Person other than Fidelity, except a continuationstatement in favor of Phoenixcor or the holder of such a purchase money securityinterest. The Company shall not change its mailing address, chief executiveoffice, principal place of business or place where such records are maintained,open any new place of business, close any existing place of business or changethe location of any of the Collateral or transact business under any trade,fictitious or assumed name other than those set forth under the company'ssignature hereon without providing at least 30 days' prior written noticethereof to Fidelity.

8.12. The Company shall not accept any returns or grant any allowanceor credit (other than those returns, allowances and credits accepted or grantedin the ordinary course of the Company's business) to any Account Debtor withoutnotice to and the prior written approval of Fidelity. The Company shall provideto Fidelity for each Account Debtor on Eligible Accounts a weekly report, in for



and substance satisfactory to Fidelity, itemizing all such returns andallowances made during the previous week with respect to such Eligible Accounts.

8.13. The Company shall not incur, directly, or indirectly, anyobligations for borrowed money or otherwise under any promissory note, bond,indenture or similar instrument, or in connection with the obligations of anyPerson (whether by guaranty, suretyship, purchase or repurchase agreement oragreement to make investments or otherwise), other than in favor of Fidelity orKris Shah, provided that, pursuant to the Subordination Agreement, anyobligations for borrowed money owed by the Company to Kris Shah shall beexpressly subordinated to the Obligations, in the normal and ordinary course ofthe Company's business.

8.14. The Company shall not use any of the funds paid to the Companyhereunder directly or indirectly for personal, family, household or agriculturalpurposes.

8.15. The Company shall not directly or indirectly become liable inconnection with the obligations of any Person, whether by guarantee, surety,endorsement (other than endorsement of negotiable instruments for collection inthe ordinary course of business), agreement to purchase or repurchase, agreementto make investments, agreement to provide funds or maintain working capital, orany agreement to assure a creditor against loss, other than in favor ofFidelity.

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8.16. The Company shall not discontinue, or make any material changein, its business as currently established, or enter any new or different line ofbusiness not directly related to the Company's existing line of business.

8.17. The Company shall not make any loans or advances to or for thebenefit of any officer, director or shareholder of the Company except advancesfor routine expense allowances in the ordinary course of business. The Companyshall not make any loans or advances to or for the benefit of any Affiliate ofthe Company. The Company shall not make any payment on any obligation owing toany officer, director, shareholder or Affiliate of the Company other thanpayments to Kris Shah that are permitted under the Subordination Agreement.

8.18. The Company shall not purchase or otherwise acquire assets fromany Person outside the ordinary course of business of the Company.

8.19. The Company shall not invest in or otherwise purchase or acquirethe securities of any Person.

8.20. The Company shall not sell or dispose of any of its assets otherthan the sale of Inventory in the ordinary course of business, and the Companyshall not dissolve or liquidate or become a party to any merger or consolidationwith any Person.

Section 9. Personal Property Collateral. In order to secure the paymentof all Obligations, the Company hereby grants to Fidelity a security interest inand lien upon all of the Company's right, title and interest in and to (a) allAccounts, contract rights and general intangibles, receivables and claimswhether now or hereafter arising, all guaranties and security therefor and allof the Company's right title and interest in the goods purchased and representedthereby including all of the Company's rights in and to returned goods andrights of stoppage in transit, replevin and reclamation as unpaid vendor; (b)all Inventory and all accessions thereto and products thereof and documentstherefor; (c) all equipment and machinery, wherever located and whether now orhereafter existing, and all parts thereof, accessions thereto, and replacementstherefor and all documents and general intangibles covering or relating thereto;(d) except to the extent prohibited by law or contract, all books and recordspertaining to the foregoing, including but not limited to computer programs,data, certificates, records, circulation lists, subscriber lists, advertiserlists, supplier lists, customer lists, customer and supplier contracts, salesorders, and purchasing records; and (e) all proceeds of the foregoing(collectively, the "Personal Property Collateral"). The Company agrees to complywith all appropriate laws in order and to take all actions necessary ordesirable in Fidelity's judgment to perfect Fidelity's security interest in andto the Personal Property Collateral, to execute any financing statement oradditional documents as Fidelity may request and to deliver to Fidelity a listof all locations of its Inventory, equipment and machinery and landlord and ormortgagee lien waivers with respect to each site where Inventory, equipment ormachinery is located and which is either leased by the Company or has beenmortgaged by the Company, upon request by Fidelity.

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Section 10. Collection. Each invoice representing an Account shallstate on its face that amounts payable thereunder are payable only at the



Remittance Address. Fidelity shall have the right at any time, either before orafter the occurrence of an Event of Default and without notice to the Company,to notify any or all Account Debtors on the Personal Property Collateral of theassignment of the Personal Property Collateral to Fidelity and to direct suchAccount Debtors to make payment of all amounts due or to become due to theCompany directly to Fidelity, and to the extent permitted by law, to enforcecollection of any Personal Property Collateral and to adjust, settle orcompromise the amount or payment thereof. So long as no Event of Default orevent that, with the passage of time, the giving of notice or both, would becomean Event of Default has occurred and is continuing, all collections of PersonalProperty Collateral or any other evidences of payment received by Fidelity shallbe applied by Fidelity to the payment of the Obligations of the Company toFidelity whether or not then due and any remaining funds shall be delivered tothe Company. Upon the occurrence of an Event of Default or an event that, withthe passage of time, the giving of notice or both, would become an Event ofDefault, any such remaining funds may be held by Fidelity as cash collateral("Cash Collateral") until all Obligations have been paid in full and Fidelityhas no further obligation to advance funds to the Company. All amounts andproceeds (including instruments and writings) received by the Company in respectof the Personal Property Collateral shall be received in trust for the benefitof Fidelity hereunder, shall be segregated from other funds of the Company andshall be promptly paid over to Fidelity in the same form as received (with anynecessary endorsement) to be applied in the same manner as payments receiveddirectly by Fidelity.

Section 11. Power of Attorney. The Company grants to Fidelity anirrevocable power of attorney coupled with an interest authorizing andpermitting Fidelity, at its option, with or without notice to the Company, to doany or all of the following: (a) endorse the name of the Company on any checksor other evidences of payment whatsoever that may come into the possession ofFidelity regarding Personal Property Collateral, including checks received byFidelity pursuant to Section 10 hereof; (b) receive, open and forward any mailaddressed to the Company and put Fidelity's address on any statements mailed toAccount Debtors; (c) upon the occurrence of an Event of Default, pay, settle,compromise, prosecute or defend any action, claim, conditional waiver andrelease, or proceeding relating to Personal Property Collateral; (d) upon theoccurrence of an Event of Default, notify, in the name of the Company, the U.S.Post Office to change the address for delivery of mail addressed to the Companyto such address as Fidelity may designate (provided that Fidelity shall turnover to the Company all such mail not relating to Personal Property Collateral);(e) upon the occurrence of an Event of Default, verify, sign, acknowledge,record, file for recording, serve as required by law, any claim of mechanic'slien, stop notice or bonded stop notice in the sole and absolute discretion ofFidelity relating to any Personal Property Collateral; (f) upon the occurrenceof an Event of Default, insert all recording or service information in anymechanic's lien or assignment of rights under stop notice/bonded stop noticewhich the Company has signed in connection with this Agreement, recorded orserved to enforce payment of the Personal Property Collateral; (g) execute andfile on behalf of the Company any financing statement, amendment thereto orcontinuation thereof (i) deemed necessary or appropriate by Fidelity to protectFidelity's interest in and to the Personal

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Property Collateral or (ii) required or permitted under any provision of thisAgreement; and (h) upon the occurrence of an Event of Default, do all otherthings necessary and proper in order to carry out this Agreement. The authoritygranted to Fidelity herein is irrevocable until this Agreement is terminated andall amounts due to Fidelity hereunder have been paid in full.

Section 12. Default. An event of default ("Event of Default") shall bedeemed to have occurred hereunder, Fidelity shall have no further obligation tomake any further Revolver Advances and may immediately exercise its rights andremedies with respect to the Collateral under this Agreement, the UniformCommercial Code and applicable law, upon the happening of one or more of thefollowing:

(a) The Company shall fail to pay as and when due any amount owed bythe Company to Fidelity, whether hereunder or otherwise.

(b) The Company shall breach any covenant or agreement made herein orin any other Transaction Document or any warranty or representation made hereinor in any other Transaction Document shall be untrue when made, and in eithercase, the same shall not be cured to Fidelity's satisfaction within ten daysafter such covenant or agreement is breached or such representation or warrantyis made; provided that if any such breach is impossible to remedy within tendays, so long as the Company has undertaken (within the initial ten day cureperiod) the steps necessary to remedy such breach and the Company diligentlycontinues to take all steps necessary to cure such failure, the ten day cureperiod will be extended, but in no event shall the cure period exceed sixtydays.

(c) Any report, certificate, schedule, financial statement, profit andloss statement or other statement furnished by the Company, or by any other



person on behalf of the Company, to Fidelity is not true and correct in anymaterial respect.

(d) There shall be commenced by the Company or any guarantor of theObligations any voluntary case under the federal Bankruptcy Code, or the Companyor any guarantor of the Obligations shall make an assignment for the benefit ofits creditors, or of a receiver or custodian shall be appointed for the Companyor any guarantor of the Obligations for a substantial portion of its assets.

(e) There shall be commenced against the Company or any guarantor ofthe Obligations any involuntary case under the federal Bankruptcy Code, whichremains undismissed for a period of sixty days.

(f) The Company shall become insolvent in that its debts are greaterthan the fair value of its assets, or the Company is generally not paying itsdebts as they become due.

(g) Any involuntary lien, garnishment, attachment or the like shall beissued against or shall attach to the Collateral and the same is not releasedwithin ten days.

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(h) An event or circumstance shall have occurred which has or mayresult in a material adverse change in the Company's financial condition,business or operations.

(i) The Company shall have a federal or state tax lien filed againstany of its properties, or shall fail to pay any federal or state tax when due,or shall fail to file any federal or state tax form or report as and when due.

(j) Either (i) any "accumulated funding deficiency" (as defined inSection 412(a) of the Internal Revenue Code of 1986, as amended) in excess of$25,000 exists with respect to any ERISA Plan, or (ii) any Termination Eventoccurs with respect to any ERISA Plan and the then current value of such ERISAPlan's benefit liabilities exceeds the then current value of such ERISA Plan'sassets available for the payment of such benefit liabilities by more than$25,000.

(k) The Company suffers the entry against it a final judgment for thepayment of money in excess of $35,000.

(l) Fidelity believes that the prospect for payment or performance ofthe Obligations has become impaired.

(m) Any guarantor of the Obligations shall repudiate his, her or itsobligations in respect of such guaranty.

(n) Kris Shah, his spouse, the blood relatives of Kris Shah and anytrusts for the exclusive benefit of any blood relatives of Kris Shah, Kris Shah,his spouse or lineal descendants cease to own or control in the aggregate atleast 51% of the outstanding capital stock of the Company.

Upon the occurrence of an Event of Default described in subsections (d) or (e)of this section, all of the Obligations owing by the Company to Fidelity underany of the Transaction Documents shall thereupon be immediately due and payable,without demand, presentment, notice of demand or of dishonor and nonpayment, orany other notice or declaration of any kind, all of which are hereby expresslywaived by the Company. During the continuation of any other Event of Default,Fidelity, at any time and from to time to time, may declare any or

22

all of the Obligations owing by the Company to Fidelity under any of theTransaction Documents immediately due and payable, all without notice, demand,presentment, notice of demand or of dishonor and nonpayment, or any notice ordeclaration of any kind, all of which are hereby expressly waived by theCompany. After any such acceleration (whether automatic or due to declaration byFidelity), any obligation of Fidelity to make any further Revolver Advances orloans of any kind under this Agreement or any other agreement with the Companyshall terminate. All Revolver Advances hereunder are subject to approval byFidelity in its sole discretion, and may be declined in whole or in part,without prior notice to the Company, whether or not an Event of Default may thenbe in existence.

Section 13. Remedies and Application of Proceeds.

13.1. In addition to, and with limitation of, the foregoing provisions



of this Agreement, if an Event of Default shall have occurred and be continuing,Fidelity may from time to time in its discretion, without limitation and withoutnotice except as expressly set forth herein: (A) exercise in respect of theCollateral, in addition to other rights and remedies provided for herein, underthe other Transaction Documents or otherwise available to it, all the rights andremedies of a secured party on default under the UCC (whether or not the UCCapplies to the affected Collateral); (b) require the Company to, and the Companyhereby agrees that it will at its expense, assemble all or part of theCollateral as directed by Fidelity and make it available to Fidelity at a placeto be designated by Fidelity that is reasonably convenient to both parties; (c)reduce its claim to judgment or foreclose or otherwise enforce, in whole or inpart, the security interest created hereby by any available judicial procedure;(d) dispose of, at its office, on the premises or the Company or elsewhere, allor any part of the Collateral, as a unit or in parcels, by public or privateproceedings; (e) buy the Collateral, or any part thereof, at any public sale, orat any private sale if the Collateral is of a type customarily sold in arecognized market or is of a type that is the subject to widely distributedstandard price quotations; (f) apply by appropriate judicial proceedings forappointment of a receiver for the Collateral, or any part thereof, and theCompany hereby consents to any such appointment; and (g) at its discretion,retain the Collateral in satisfaction of the Obligations whenever thecircumstances are such that Fidelity is entitled to do so under the UCC orotherwise. The Company agrees that, to the extent notice of sale shall berequired by law, unless a longer period of notice is prescribed by law, at leastfive days' notice to the Company of the time and place of any public sale or thetime after which any private sale is to be made shall constitute reasonablenotification. Fidelity shall not be obligated to make any sale of Collateralregardless of whether any notice of sale has been given. Fidelity may adjournany public or private sale from time to time by announcement at the time andplace fixed therefor, and such sale may, without further notice, be made at thetime and place to which it was so adjourned.

13.2. If any Event of Default shall have occurred and be continuing,Fidelity may in its discretion apply any Cash Collateral, and any cash proceedsreceived by Fidelity in respect of any sale of, collection from, or otherrealization upon all or any part of the Collateral, to any or all of thefollowing in such order as Fidelity may elect: (a) the repayment of all or anyportion of the

23

Obligations; (b) the repayment of reasonable costs and expenses, includingreasonable attorneys' fees and legal expenses, incurred by Fidelity inconnection with (i) the administration of this Agreement, (ii) the custody,preservation, use or operation of, or the sale of, collection from, or otherrealization upon, any Collateral, (iii) the exercise or enforcement of any ofthe rights of Fidelity hereunder, or (iv) the failure of the Company to performor observe any of the provisions hereof; (c) the payment or other satisfactionof any liens and other encumbrances upon any of the Collateral; (d) thereimbursement of Fidelity for the amount of any obligations of the Company paidor discharged by Fidelity, and of any expenses of Fidelity payable by theCompany hereunder or under the other Transaction Documents; (e) by holding thesame as Collateral; (f) the payment of any other amounts required by applicablelaw (including, without limitation, Part 5 of Article 9 of the UCC or anysuccessor or similar applicable statutory provision); and (g) by delivery to theCompany or to whomsoever shall be lawfully entitled to receive the same or as acourt of competent jurisdiction shall direct.

Section 14. Miscellaneous.

14.1. In the event that the Company commits any act or omission thatprevents or unreasonably interferes with (a) Fidelity's exercise of the rightsand privileges arising under the power of attorney granted in Section 11 of thisAgreement or (b) Fidelity's perfection of or levy upon the security interestgranted in the Collateral, including any seizure of any Collateral, the Companyacknowledges that such conduct will cause immediate, severe, incalculable andirreparable harm and injury, and agrees that such conduct shall constitutesufficient grounds to entitle Fidelity to an injunction, writ of possession, orother applicable relief in equity, and to make such application for such reliefin any court of competent jurisdiction, without any prior notice to theCompany.

14.2. All rights, remedies and powers granted to Fidelity in thisAgreement, or in any other instrument or agreement given by the Company toFidelity or otherwise available to Fidelity in equity or at law, are cumulativeand may be exercised singularly or concurrently with such other rights asFidelity may have. These rights may be exercised from time to time as to all orany part of the Collateral as Fidelity in its discretion may determine. In theevent that Fidelity elects to purchase the Eligible Accounts hereunder, suchtransaction shall constitute a purchase of Accounts under the UCC, and theCompany shall be deemed to have sold, assigned, transferred, conveyed anddelivered to Fidelity, as absolute owner, all of the rights, title and interestof the Company in and to all Eligible Accounts. No waiver by Fidelity of itsrights and remedies shall be effective unless the waiver is in writing and



signed by Fidelity. A waiver by Fidelity of a right or remedy under thisAgreement or any other Transaction Document on one occasion shall not be deemedto be a waiver of such right or remedy on any subsequent occasion. A RevolverAdvance by Fidelity during the-continuation of an Event of Default shall notobligate Fidelity to make any further Revolver Advances during the continuationof such Event of Default.

24

14.3. Any notice or communication with respect to this Agreement or anyother Transaction Document shall be given in writing, sent by (i) personaldelivery, (ii) expedited delivery service with proof of delivery, (iii) UnitedStates mail, postage prepaid, registered or certified mail, or (iv) prepaidtelegram, telex or telecopy, addressed to each party hereto at its address setforth below its signature hereon or to such other address or to the attention ofsuch other Person as hereafter shall be designated in writing by the applicableparty sent in accordance herewith. Any such notice or communication shall bedeemed to have been given either at the time of personal delivery or, in thecase of delivery service or mail, as of the date of first attempted delivery atthe address and in the manner provided herein, or in the case of telegram, telexor telecopy, upon receipt The Company hereby agrees that Fidelity may publicizethe transaction contemplated by this Agreement in newspapers, trade and similarpublications including, without limitation, the publication of a"tombstone".

14.4. The term of this Agreement shall be for one year from the datehereof (the original term, and any extension thereof made by Fidelity pursuantto this section, are herein called the "Term"); provided, however, that Fidelitymay extend the term hereof for additional one-year periods, if Fidelity electsto do so in its sole discretion, by notifying the Company in writing at least 30days before the end of the term then in effect; and provided further thatFidelity may terminate this Agreement at any time effective immediately upon theoccurrence of an Event of Default. The Company acknowledges that it shall haveno right to terminate this Agreement prior to the end of the Term, thattermination of this Agreement at any time prior to the end of the Term wouldresult in the loss by Fidelity of benefits under this Agreement and that thedamages incurred by Fidelity as a result of such termination would be difficultand impractical to ascertain. Therefore, in the event this Agreement isterminated prior to the end of the Term for any reason or the Fixed Asset Loanis repaid in full (no termination fee shall be due solely as a result of theprepayment of the Real Estate Loan), the Company shall pay to Fidelity an earlytermination fee in an amount equal to (x) the average monthly accrued interestand fees earned by Fidelity hereunder prior to the date of terminationmultiplied by (y) the number of months remaining in the Term as of the date oftermination, but in no event shall such early termination fee exceed the maximumamount permitted by applicable law. Any termination of this Agreement shall notaffect Fidelity's security interest in the Collateral, and this Agreement shallcontinue to be effective, until all Obligations have been paid in full.

14.5. Fidelity agrees that, so long as no Event of Default has occurredand is continuing, upon receipt by Fidelity of payment in full of theoutstanding principal balance of the Real Estate Loan, together with interestthereon, Fidelity shall at the expense of the Company execute and deliver suchinstruments and documents as the Company may reasonably request to release theMortgage.

14.6. Each and every provision, condition, covenant and representationcontained in this Agreement is, and shall be construed, to be a separate andindependent covenant and agreement. If any term or provision of this Agreementshall to any extent be invalid or unenforceable, the remainder of the Agreementshall not be affected thereby.

25

14 7. The Company hereby indemnifies and agrees to hold harmless anddefend all Indemnified Persons from and against any and all Indemnified Claims.THE FOREGOING INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH INDEMNIFIED CLAIMSARE IN ANY WAY OR TO ANY EXTENT OWNED, IN WHOLE OR IN PART, UNDER ANY CLAIM ORTHEORY OF STRICT LIABILITY, OR ARE CAUSED, IN WHOLE OR IN-PART, BY ANY NEGLIGENTACT OR OMISSION OF ANY INDEMNIFIED PERSON.

If any Indemnified Claim is asserted against any Indemnified Person,such Indemnified Person shall promptly notify the Company (but the failure to sopromptly notify the Company shall not affect the Company's obligations underthis section unless such failure materially prejudices the Company's right toparticipate in the contest of such Indemnified Claim). The Company shall havethe obligation to assume the defense thereof, including the employment ofAdvisors to take the lead role in asserting claims and defenses common to boththe Company and the various Indemnified Persons ("Lead Advisors"), provided thatall Persons chosen to be Lead Advisors must be consented to by Fidelity, whichconsent will not be unreasonably withheld. If Lead Advisors are employed andconsented to in accordance with the preceding sentence, each Indemnified Person



shall nonetheless have the right to employ its own Advisors and to determine itsown defense of such action in any case, but the fees and expenses of suchAdvisors shall be at the expense of such Indemnified Person except to the extentthat: (i) the employment of such Advisors shall have been authorized in writingby the Company, or (ii) such Indemnified Person's counsel shall have reasonablyconcluded that there appear to be claims or defenses available to it which arenot shared by the Company and such Advisors are engaged in reasonable efforts toassert such claims and defense, in either of which events the reasonable feesand expenses of such Indemnified Person shall be born by the Company. NoIndemnified Person shall settle or compromise any Indemnified Claim for whichthe Company may be liable for payment hereunder nor shall the Company settle orcompromise any Indemnified Claim for which any Indemnified Person may be liablefor payments in addition to those actually and concurrently made by the Company,without the consent of the other, which consent shall not be unreasonablywithheld. As used herein the term "Advisors" means attorneys, accountants,experts, and other advisors.

Except as specifically provided in this section, the Company waives allnotices from any Indemnified Person. The provisions of this Section 14.7 shallsurvive the termination of this Agreement.

14.8. All grants, covenants and agreements contained in this Agreementshall bind and inure to the benefit of the parties hereto and their respectivesuccessors and assigns; provided, however, that the Company may not delegate orassign any of its duties or obligations under this agreement without the priorwritten consent of Fidelity. FIDELITY RESERVES THE RIGHT TO ASSIGN ITS RIGHTSAND OBLIGATIONS UNDER THIS AGREEMENT IN WHOLE OR IN PART TO ANY PERSON ORENTITY. Without limiting the generality of the foregoing, Fidelity may from timeto time grant participations in all or any part

26

of the Obligations to any Person on such terms and conditions as may bedetermined by Fidelity in its sole and absolute discretion, provided that thegrant of such participation shall not relieve Fidelity of its obligationshereunder nor create any additional obligation of the Company.

14.9. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED INACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REFERENCE TO THERULES THEREFORE RELATING TO CONFLICTS OF LAW. THE COMPANY HEREBY IRREVOCABLYSUBMITS ITSELF TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTSLOCATED IN CALIFORNIA AND AGREES AND CONSENTS THAT SERVICE OF PROCESS MAY BEMADE UPON IT IN ANY LEGAL PROCEEDING RELATING TO THIS AGREEMENT, ANY BORROWINGHEREUNDER OR ANY OTHER RELATIONSHIP BETWEEN FIDELITY AND THE COMPANY BY ANYMEANS ALLOWED UNDER STATE AND FEDERAL LAW. ANY LEGAL PROCEEDING ARISING OUT OFOR IN ANY WAY RELATED TO THIS AGREEMENT, ANY BORROWING HEREUNDER OR ANY OTHERRELATIONSHIP BETWEEN FIDELITY AND THE COMPANY SHALL BE BROUGHT AND LITIGATEDEXCLUSIVELY IN ANY ONE OF THE STATE OR FEDERAL COURTS LOCATED IN THE STATE OFCALIFORNIA HAVING JURISDICTION. THE PARTIES HERETO HEREBY WAIVE AND AGREE NOT TOASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, THAT ANY SUCH PROCEEDING ISBROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS IMPROPER.

14.10. EACH OF THE COMPANY AND FIDELITY HEREBY (A) IRREVOCABLY WAIVES,TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BYJURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUTOF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATEDHEREBY OR ASSOCIATED HEREWITH; (B) IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT NOTPROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCHLITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGESOTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (C) CERTIFIES TEAT NO PARTYHERETO NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HASREPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, INTHE EVENT OF LITIGATION, SEEK-TO ENFORCE THE FOREGOING WAIVERS, AND (D)ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THETRANSACTIONS CONTEMPLATED HEREBY, AMONG OTHER THINGS, THE MUTUAL WAIVERS ANDCERTIFICATIONS CONTAINED IN THIS PARAGRAPH.

14.11. THIS AGREEMENT, THE SECURITY DOCUMENTS DESCRIBED HEREBY AND THEACKNOWLEDGMENT DELIVERED IN CONNECTION

27

HEREWITH SET FORTH THE ENTIRE UNDERSTANDING AND AGREEMENT OF THE PARTIES HERETOWITH RESPECT TO THE TRANSACTIONS CONTEMPLATED HEREIN AND MAY NOT BE CONTRADICTEDBY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THEPARTIES. NO MODIFICATION OR AMENDMENT OF OR SUPPLEMENT TO THIS AGREEMENT OR TOSUCH ACKNOWLEDGMENT SELL BE VALID OR EFFECTIVE UNLESS THE SAME IS IN WRITING ANDSIGNED BY THE PARTY AGAINST WHOM IT IS SOUGHT TO BE ENFORCED.

14.12. Fidelity hereby acknowledges that the Company is consideringincorporating the Company's divisions, INTERCON and INFOSEC, into separate



corporations and filing registration statements with the Securities and ExchangeCommission or other similar governmental authority. In the event the Companyproceeds with its plans to so incorporate and publicly register its divisions,the Company and Fidelity shall enter into discussions concerning any waivers orconsents that may be required to effect such incorporation and publicregistration.

28

The undersigned have entered into this Agreement as of the date firstwritten above.

FIDELITY FUNDING OFCALIFORNIA, INC. LITRONIC INDUSTRIES, INC.a California corporation a California corporation

By: [AUTHORIZED SIGNATORY] By: /S/ KRIS SHAH--------------------------

Name: James E. [illegible] Kris ShahTitle: Senior Vice President President

Mailing Address:

275 East Baker Street, Suite A 2950 Redhill AvenueCosta Mesa, California 92626 Costa Mesa, California 92626

Street Address:

Same Same

Trade, Fictitious and Assumed NamesUsed by the Company

___________________________________

29

EXHIBIT ABORROWING BASE CERTIFICATELITRONIC INDUSTRIES, INC.

DATE: JUNE 27, 1996REPORT #: 1

<TABLE><CAPTION>

FINISHED RAW STANDBYCOLLATERAL ACCOUNTS GOODS MATERIALS FACILITY

RECEIVABLE INVENTORY INVENTORY AMOUNT-----------------------------------------------------------------------------------------------------------------------------------<S> <C> <C> <C> <C>1 GROSS COLLATERAL AS OF LAST REPORT #:

INITIAL DATA REPORT DATE: JUNE 25,1996 INITIAL DATA LINE 6 PRIOR REPORT 1,261,829 16,127 438,088 250,000

2 ADD SALES ASSIGNED AND INVENTORY N/A

ADDITIONS

3 ADD DEBIT MEMOS AND OTHER ADJUSTMENTS N/A

4 LESS CASH COLLECTIONS AND INVENTORY N/A

REDUCTIONS

5 LESS DISCOUNTS, CREDIT MEMOS AND N/A

ADJUSTMENTS

6 GROSS COLLATERAL PER THIS REPORT 1,261,829 16,127 438,088 250,000

7 INELIGIBLE COLLATERAL

ACCOUNTS RECEIVABLE INVENTORY----------------------------------------------------------



A PAST DUE OVER 90 DAYS OBSOLETE 24,317 0 0 N/A

B CREDITS OVER 90 DAYS SLOW MOVE 0 0 0 N/A

C CROSS AGING CONSIGNED 0 0 0 N/A

D COD SALES LESS THAN 4 MONTHS 0 0 99,341 N/A

E FOREIGN RECEIVABLES PACKAGING 19,332 0 0 N/A

F CONTRA ACCOUNTS OTHER 0 0 0 N/A

G UNRECONCILED A/R OVERAGE 0 N/A

H OTHER 0 N/A

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

8 TOTAL INELIGIBLE PER THIS REPORT (SUM7A THROUGH 7H) 43,649 0 99,341 N/A

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

9 NET ELIGIBLE PER COLLATERAL (6-8) 1,218,180 16,127 338,747 N/A

10 ADVANCE RATE 85% 50% 50% N/A

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

11 COLLATERAL AVAILABILITY TOTAL---------1,462,890 1,035,453 8,064 169,374 250,000

12 BORROWING BASELESSER OF 11 OR REVOLVER COMMITMENTTOTAL OF: $2,750,000 1,462,890

13 LESS SPECIAL RESERVE N/A N/A N/A N/A N/A

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

14 NET AVAILABILITY BEFORE LOAN BALANCE(12-13) 1,462,890 1,035,453 8,064 169,374 250,000

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

LOAN-----------------------------------------------</TABLE>

<TABLE><CAPTION>

FINISHED RAW STANDBYCOLLATERAL ACCOUNTS GOODS MATERIALS FACILITY

RECEIVABLE INVENTORY INVENTORY AMOUNT-----------------------------------------------------------------------------------------------------------------------------------<S> <C> <C> <C> <C> <C>15 LOAN BALANCE - LAST REPORT LINE 22 0 0 0 0 0

16 LESS PAYMENTS FROM COLLECTIONS-----------------------------------------------------------------------

17 BALANCE PER FIDELITY FUNDING OFCALIFORNIA REPORT PRIOR TO NEW ACTIVITY 0 0 0 0 0

18 LESS NON-COLLECTION PAYMENTS

19 ADD LOAN ADJUSTMENTS:INTERESTMONTHLY SERVICE FEE - .13% OF AVERAGEMONTHLY REVOLVERWIRE TRANSFER FEESOTHER - SPECIFY:



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

0 0 0 0 0

10 ADD LINE MAINTENANCE FEE N/A N/A N/A N/A N/A

21 ADD ADVANCE REQUEST THIS REPORT 500,000 500,000 0 0 0

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

22 NEW LOAN BALANCE 500,000 500,000 0 0 0

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

23 EXCESS AVAILABILITY 962,890 535,453 8,064 169,374 250,000

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

</TABLE>

EXHIBIT ABORROWING BASE CERTIFICATELITRONIC INDUSTRIES, INC.

DATE: JUNE 27, 1996REPORT#: 1

THE UNDERSIGNED HEREBY CERTIFIES TO FIDELITY FUNDING OF CALIFORNIA, INC.("FIDELITY") THAT:

1 HE IS THE DULY ELECTED AND QUALIFIED CHIEF FINANCIAL OFFICER OF LITRONIC,INDUSTRIES, INC. (THE "COMPANY"), IS FAMILIAR WITH THE FACTS HEREINCERTIFIED AND IS DULY AUTHORIZED TO CERTIFY SUCH FACTS AND MAE AND DELIVERTHIS BORROWING BASE CERTIFICATE FOR AN ON BEHALF OF THE COMPANY, PURSUANT TOTHAT CERTAIN LOAN AND SECURITY AGREEMENT, (THE "AGREEMENT"), DATED AS OFJUNE ____, 1996 BETWEEN THE COMPANY AND FIDELITY.

2 ALL REPRESENTATIONS AND WARRANTIES MADE BY THE COMPANY IN THE AGREEMENT ORANY OTHER INSTRUMENT DOCUMENT, CERTIFICATE OR OTHER AGREEMENT EXECUTED INCONNECTION THEREWITH (COLLECTIVELY, THE "TRANSACTION DOCUMENTS") DELIVEREDON OR BEFORE THE DATE HEREOF ARE TRUE ON AND AS OF THE DATE HEREOF AS IFSUCH REPRESENTATIONS AND WARRANTIES HAD BEEN MADE AS OF THE DATE HEREOF.

3 NO EVENTS OF DEFAULT OR ANY EVENT, THAT WITH THE GIVING OF NOTICE, THEPASSAGE OF TIME OR BOTH, WOULD CONSTITUTE AN EVENT OF DEFAULT HAS OCCURREDAND IS EXISTING.

4 THE COMPANY HAS PERFORMED AND COMPLIED WITH ALL AGREEMENTS AND CONDITIONSREQUIRED IN THE TRANSACTION DOCUMENTS TO BE PERFORMED OR COMPLIED WITH BY ITON OR PRIOR TO THE FUNDING OF THE ADVANCE REQUESTED HEREBY.

5 AFTER FIDELITY MAKES THE ADVANCE REQUESTED HEREBY, THE AGGREGATE AMOUNT OFALL OUTSTANDING ADVANCES WILL NOT EXCEED THE LESSER OF (i) THE COMMITMENTAND (ii) THE BORROWING BASE.

6 ALL INFORMATION CONTAINED IN THIS BORROWING BASE CERTIFICATE IS TRUE,CORRECT AND COMPLETE.

TERMS USED AND NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANING ASSIGNED TOTHEM IN THE AGREEMENT, IF SO DEFINED UNDER SECTION 1. "DEFINITIONS ANDCONSTRUCTION" OF THE AGREEMENT.

IN WITNESS WHEREOF, THIS INSTRUMENT IS EXECUTED BY THE UNDERSIGNED AS OF JUNE27, 1996:

LITRONIC INDUSTRIES, INC.

---------------------------THOMAS W. SEYKORA

CHIEF FINANCIAL OFFICER33

EXHIBIT B



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

ACORD CERTIFICATE OF LIABILITY INSURANCE DATE: 6/25/96------------------------------------------------------------------------------PRODUCER THIS CERTIFICATE IS ISSUED AS A MATTERWIGMORE INSURANCE AGENCY, INC. OF INFORMATION ONLY AND CONFERS NO2970 HARBOR BLVD. #215 RIGHTS UPON THE CERTIFICATE HOLDER, THISCOSTA MESA, CA 92626 CERTIFICATE DOES NOT AMEND, EXTEND OR

ALTER THE COVERAGE AFFORDED BY THEPOLICIES BELOW.

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

COMPANIES AFFORDING COVERAGE------------------------------------------------------------------------------

COMPANYA ZURICH AMERICAN

------------------------------------------------------------------------------INSURED COMPANYDRIL-TRON, INC., DBA: LITRONICS B SCOTTSDALE2950 REDHILL AVE. ---------------------------------------COSTA MESA, CA 92627 COMPANY

C PACIFIC NATIONAL---------------------------------------COMPANYD

------------------------------------------------------------------------------COVERAGES

THIS IS TO CERTIFY THAT THE POLICIES OF INSURANCE LISTED BELOW HAVE BEENISSUED TO THE INSURED NAMED ABOVE FOR THE POLICY PERIOD INDICATED,NOTWITHSTANDING ANY REQUIREMENT, TERM OR CONDITION OF ANY CONTRACT OR OTHERDOCUMENT WITH RESPECT TO WHICH THIS CERTIFICATE MAY BE ISSUED OR MAY PERTAIN,THE INSURANCE AFFORDED BY THE POLICIES DESCRIBED HEREIN IS SUBJECT TO ALL THETERMS, EXCLUSIONS AND CONDITIONS OF SUCH POLICIES. LIMITS SHOWN MAY HAVE BEENREDUCED BY PAID CLAIMS.

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

<TABLE><CAPTION>

CO POLICY POLICYLTR TYPE OF INSURANCE POLICY NUMBER EFFECTIVE EXPIRATION LIMITS

DATE DATE(MM/DD/YY) (MM/DD/YY)

-----------------------------------------------------------------------------------------------------------------------------------<S> <C> <C> <C> <C> <C> <C>

A GENERAL LIABILITY

# COMMERCIAL GENERAL LIABILITY CPO134189807 04/28/96 04/28/97 GENERAL AGGREGATE $ 2,000,000-----------------------------------

CLAIMS MADE # OCCUR PRODUCTS - COMP/OP $OWNER'S & CONTRACTORS PROT AGG

-----------------------------------PERSONAL & ADV $ 1,000,000INJURY-----------------------------------EACH OCCURRENCE $ 1,000,000------------------------------------FIRE DAMAGE (any $ 50,000one fire)-----------------------------------MED EXP (any one $ 5,000person)

-----------------------------------------------------------------------------------------------------------------------------------AUTOMOBILE LIABILITY COMBINED SINGLE $

ANY AUTO LIMIT-----------------------------------

ALL OWNED AUTOS BODILY INJURY (per $SCHEDULED AUTOS person)HIRED AUTOS -----------------------------------NON-OWNED AUTOS BODILY INJURY (per $

accident)-----------------------------------PROPERTY DAMAGE $

-----------------------------------------------------------------------------------------------------------------------------------GARAGE LIABILITY AUTO ONLY - EA $

ANY AUTO ACCIDENT-----------------------------------OTHER THAN AUTOONLY:-----------------------------------

EACH ACCIDENT $-----------------------------------

AGGREGATE $-----------------------------------------------------------------------------------------------------------------------------------



A EXCESS LIABILITY EACH OCCURRENCE $ 2,000,000-----------------------------------

UMBRELLA FORM CC13419007 04/28/96 04/28/97 AGGREGATE $ 2,000,000-----------------------------------

# OTHER THAN U</TABLE>

<TABLE><S> <C> <C> <C> <C> <C> <C>

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

$-----------------------------------------------------------------------------------------------------------------------------------C WORKERS COMPENSATION AND WC STATUTORY LIMITS OTHER

EMPLOYERS= LIABILITY LIMITS OTHER-----------------------------------

THE PROPRIETOR/ INC WC2386063 10/01/95 10/01/96 EL EACH ACCIDENT $ 1,000,000-----------------------------------

PARTNERS/EXECUTIVES EL DISEASE - POLICY $ 1,000,000OFFICERS ARE # EXCL LIMIT

-----------------------------------EL DISEASE - EA $ 1,000,000EMPLOYEE

-----------------------------------------------------------------------------------------------------------------------------------B OTHER

EARTHQUAKE BLDG CS029449 02/03/96 02/03/97 3,500,000

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

DESCRIPTION OF OPERATIONS/LOCATIONS/VEHICLES/SPECIAL ITEMSZURICH POLICY: BLDG COVERAGE $3,500,000 CONTENTS $5,500,000CERTIFICATE HOLDER IS NAMED ADDITIONAL INSURED----------------------------------------------------------------------------------------------------------------------------------

CERTIFICATE HOLDER CANCELLATIONFIDELITY FUNDING OF CAL. SHOULD ANY OF THE ABOVE DESCRIBED POLICIES BE CANCELED BEFORE275 E. BAKER SUITE A EXPIRATION DATE THEREOF,THE ISSUING COMPANY WILL ENDEAVOR TOCOSTA MESA, CA 92626 MAIL 30 DAYS WRITTEN NOTICE TO THE CERTIFICATE HOLDER NAMED TOATTN: JIM ALDREDGE THE LEFT, BUT FAILURE TO MAIL SUCH NOTICE SHALL IMPOSE NO

OBLIGATION OR LIABILITY OF ANY KIND UPON THE COMPANY, ITS AGENTSOR REPRESENTATIVES.

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

AUTHORIZED REPRESENTATIVE------------------------------------------------------------------------------------------------------------------------------------</TABLE>



EXHIBIT 10.11

AWARD/CONTRACT1. This contract is rated order under DPAS (15 CFR 350)Rating DO: S10Page 1 of Pages 342. Contract (Proc. Inst. Indent.) NO. MDA904-97-C-04243. Effective date 27 June '974. Requisition/Purchase Request/Project No. 16-97-2093-00005. Issued ByMaryland Procurement Office9800 Savage Road, FANX IIIFort George G. Meade, MD 20755-6000Attn: Margaret L. Miller, (N141)Code H982306. Administered By (If other than Item 5) CODE7. Name and Address of Contractor (No., street, county, State and ZIP Code)Litronic IndustriesAttn: James Prohaska43088 Winter Grove DriveAshburn, VA 22011 (703-729-1700)and U.S. Small Business Administration409 3rd Street, S.W.Washington, DC 20416Code Facility Code8. Delivery FOB Origin X Other (See below)9. Discount for Prompt Payment NET 3010. Submit Invoices (4 copies unless otherwise specified) to the address shownin: Item See Section G.411. Ship to/Mark for See Section F.412. Payment will be made by contracts -- Accounts Payable Finance andAccounting Office, P.O. Box 400, Ft. Meade, MD 20755-6000 (410) 684-7538 CodeH9823013. Authority for using other than full and open competition: X 10 U.S.C.2304(c) (6) and 10 U.S.C. 637(a) ___ 41 U.S.C. 253(c)( )14. Accounting and Appropriation Data: See Section G.115A. Item No.:15B. Supplies/Services15C. Quality15D. Unit15E. Unit Price15F. AmountThis is a firm fixed price level of effort award fee type contractThis contract is subject to the Prompt Payment Act, Public Law 97-177, asamended.15G. Total amount of contract $369,736.0016. Table of Contents(x) SEC. DESCRIPTION PAGE(S)

Part I - The ScheduleX A Solicitation/Contract Form 1-2X B Supplies or Services and Prices/Costs 3X C Description/Specs./Work Statement 4X D Packaging and Marking 4X E Inspection and Acceptance 5X F Delivers or Performance 6-7X G Contract Administration Data8-11

X H Special Contract Requirements11-21

Part II - Contract ClausesX I Contract Clauses 22-33Part III - List of Documents, Exhibits and Other AttachmentsX J List of Attachments 34Part IV - Representations and InstructionsK Representations, CertificationsL Instrs., Cond., and Notices to OfferorsM Evaluation Factors for Award

Contracting Officer will complete item 17 or 18 as applicable

17. X Contractor's Negotiated Agreement (Contractor is required to sign thisdocument and return 3 copies to issuing office.) Contractor agrees to furnishand deliver all items or perform all the service set forth or otherwiseidentified above and on any continuation sheets for the consideration stated



herein. The rights and obligations of the parties to this contract shall besubject to and governed by the following documents: (a) this award/contract, (b)the solicitation, if any, and (c) such provisions, representations,certifications, and specifications, as are attached or incorporated by referenceherein. (Attachments are listed herein)

18. ____ Award (Contractor is not required to sign this document.) You offer onSolicitation Number _________________ including the additions or changes made byyou which additions or changes are set forth in full above, is hereby acceptedas to the items listed above or on any continuation sheets. This awardconsummates the contract which consists of the following documents: (a) theGovernment solicitation and your offer, and (b) this award/contract. No furthercontractual document is necessary.

19A. Name and title of signer (Type or print) See Page Two19B. Contractor/Offeror By (Signature of person authorized to sign)19C Date signed20A. Name and Title of Contracting Officer (Type or Print) See Page Two20B. United States of America By (Signature of Contracting Officer)20C. Date SignedNSN 7540-01-152-8069Standard Form 26 (Rev 4) Prescribed by GSA

MDA904-97-C-04243 of 34

SECTION B - SUPPLIES OR SERVICES AND PRICES COSTS

<TABLE><CAPTION>B.1 SUPPLIES/SERVICES

UNITCLIN SUPPLIES/SERVICES UNIT QTY PRICE TOTAL<S> <C> <C> <C> <C> <C>000l The contractor shall furnish the necessary HRS 3425 XXX $312,707.00

materials, facilities, equipment, supplies $421,116.00and services of skilled professional, technicaland support personnel to fulfill the requirementsset forth in the Statement of Work entitled, "MultiLevel Information System Security Initiative CryptoCard System Analysis and Library and DriverArchitecture and Development," dated 10 January1997 and the documents referenced in Section C. Thecontractor's management shall provide for the effectivetimely and integrated implementation of contractrequirements.

0001AA Program Manager X XX $118.06 XXXX0001AB Sr. Electrical Eng. X XX $ 75.41 XXXX0001AC Electronic Technician X XX $ 69.32 XXXX0001AD Systems Analyst X XX $ 75.38 XXXX0001AE Sr. Software Engineer X XX $ 98.38 XXXX0001AF Software Engineer X XX $ 62.60 XXXX

Total Amount CLIN 0001 Not-To-Exceed $312.707.00

0002 Award Fee Pool, to be determined in For the Period $ 31,271.00accordance with the Award Fee Plan for Multi-Level Information System Security InitiativeCrytp Card System Analysis and Library and DriverArchitecture and Development, dated 10 June 1997(Rev. 2). There shall be one evaluation of performanceat the end of the period of performance (Date ofcontract award through 30 September 1997.) If theGovernment exercises the options to extend the termof the contract, there shall be an evaluation ofperformance at the conclusion of each optionyear. The contractor is authorized to bill for up to 50% ofthe available award fee ($15,635.50), on a monthly basisin equal amounts of $3,908.88.

0003 TRAVEL For The Job Not-To-Exceed $15,000.00(Includes Applicable Burdens)

0004 OTHER DIRECT COSTS For The Job Not-To-Exceed $10,758.00(Includes Applicable Burdens)

0005 Data in accordance with the Contact For The Lot Not-Separately PricedData Item Requirements List (CDRL)Dated 13 February 1997.

</TABLE>



MDA904-97-C-04244 of 34

NOTE 1: OTHER DIRECT COSTS (ODCs) shall be reimbursed at actual costs plusapplicable burdens. ODCs are non fee bearing.

NOTE 2: TRAVEL shall be reimbursed at cost. Lodging shall be reimbursed atactual costs; meals and incidental expenses shall be reimbursed at theapplicable flat rate. The total of lodging, meals, and incidental expenses shallnot exceed the established rate for each location set forth in the "FederalTravel Regulations (FTR);" the "Joint Travel Regulations," Volume 2 (JTR); andthe Standardized Regulation (Government Civilians Foreign Areas), Section 925,"as applicable. These costs shall be directly chargeable to this contract inaccordance with the contractor's established method of distributing such costs.First class travel shall not be reimbursed. Contractor shall be reimbursed forcoach rates only. Travel is non fee bearing. Invoices which requestreimbursement of travel expenses must be accompanied by airline ticket subs,hotel/motel receipts, and rental car receipts.

SECTION C - DESCRIPTION/SPECIFICATION/WORK STATEMENTS

C.1 Statement of Work entitled, "Multi Level Information System SecurityInitiative, Crypto Card System Analysis and Library and Driver Architecture andDevelopment," dated 10 January 1997.

C.2 Contract Data Requirements List, DD Form 1423, dated 13 February 1997.

C.3 Award Fee Plan (Revision 2), dated 10 June 1997.

SECTION D - PACKAGING AND MARKING

D.l 352.247-9002 PACKAGING AND PACKING (OCT 1993)

Packaging and packing shall be in accordance with the contractor's bestcommercial practice for domestic shipment to insure safe arrival at destination.

(End of clause)

D.2 352.247-9003 MARKING OF DOCUMENTS (SEP 1994)

(a) All Contractor-generated technical reports shall bear the statement"Not Releasable to the Defense Technical Information Center per DoD Directive3200.12."

(b) In addition to the above marking all unclassified technical reportsphotographs, drawings, schematics, design circuits and description of equipmentdesigned and/or produced under the contract shill be marked with the legend"DISTRIBUTION LIMITED TO U.S. GOVERNMENT AGENCIES ONLY, THIS DOCUMENT CONTAINSNSA INFORMATION (Applicable Date). REQUEST FOR THIS DOCUMENT MUST BE REFERRED TOTHE DIRECTOR, NSA." Where SF Form 298 is required to accompany a document, thelegend shall be entered in Block 12a thereof.

MDA904-97-C-04245 of 34

(c) The Contractor shall be responsible for inserting the appropriateapplication date in the aforementioned legend. This date shall be the date uponwhich the document was completed.

SECTION E - INSPECTION AND ACCEPTANCE

E.l REFERENCED CLAUSES - The following contract clauses pertinent to thissection are hereby incorporated by reference:

FAR CLAUSESCLAUSE NO. TITLE52.246-4 Inspection of Services - Fixed Price (AUG 1996)52.246-16 Responsibility for Supplies (APR 1984)

E.2 352.246-9003 NOTICE: MATERIAL AND WORKMANSHIP (OCT 1993)

All material incorporated in the work shall be new and the work shall beperformed in a skillful and workmanlike efficient manner. Both materials andworkmanship shall be subject to the inspection of the Contracting Officer or hisduly authorized representative who may require the Contractor to correctdefective workmanship or materials without cost to the Government.

(End of clause)



E.3 INSPECTION AND ACCEPTANCE

a. Preliminary inspection of the work called for herein shall be conductedat the contractor's facilities or the site of the sponsoring Agency by theContracting Officer or his duly designated Contracting Officer'sRepresentative(s). Such inspections may be conducted from time to time and atany time upon prior notification by the Government that such an inspection is tooccur.

b. Final inspection and acceptance of the work and all deliverables will beconducted at destination by the Contracting Officer or duly authorized Agencypersonnel.

(End of clause)

MDA904-97-C-04246 of 34

SECTION F - DELIVERIES OR PERFORMANCE

F.1 REFERENCED CLAUSES - The following contract clauses pertinent to thissection arc hereby incorporated by reference:

FAR CLAUSESCLAUSE NO. TITLE52.212-13 Stop Work Order (AUG 1989)52.247-34 F.O.B. Destination (NOV 1991)52.247-54 Diversion of Shipment Under F.O.B. Destination Contracts (MAR1989)

F.2 352.247-9000 NOTICE: F.O.B. DESTINATION (OCT 1993)

Supplies shall be shipped F.O.B. destination with delivery service required tothe consignee's receiving dock.

(End of clause)

F.3 352.215-9011 PLACE OF PERFORMANCE (OCT 93)

Unless the written approval of the Contracting Officer is obtained inadvance, the work herein shall not be performed at any facility other than thecontractor's plants located at Costa Mesa, CA, and Ashburn, VA, or the site ofthe sponsoring Agency.

(End of Clause)

F.4 352.247-9006 SHIPPING INSTRUCTIONS - DORSEY ROAD (SEP 1996)

Supplies shall be shipped to the following:Dorsey Road Warehouse1472 Dorsey Rd, Doors 1, 2 or 3Hanover, MD 21076Attn: S71 Receiving OfficerREF: MDA904-97-C-0424

NOTE: Schedule shipments to arrive at destination from 7:00 AM to 2:30 PMMonday through Friday, excluding Federal holidays. Call 410-691-2735 no lessthan 24 hours in advance of delivery if any pallet will exceed 60" in height or2,000 lbs in weight so that the receiving personnel will be prepared to acceptyour shipment.

(End of clause)

MDA904-97-C-04247 of 34

F.5 352.247-9009 SHIPPING INSTRUCTIONS - TECHNICAL DATA (MAR 1996)

Technical Data shall be shipped F.O.B. Destination to:Director, National Security AgencyChief, Central Security ServiceAttn: (See Block 14 of DD 1423)9800 Savage RoadFort George G. Meade, MD 20755-6000REF: MDA904-97-C-0424

NOTE: Schedule shipments to arrive at destination from 7:00 AM to 12:00 NoonMonday through Friday, excluding Federal holidays. Shipments will not beaccepted on Saturday or Sunday.

F.6 352.211-9004 PERIOD OF PERFORMANCE (OCT 1990) - ALTERNATE III (OCT 1990)



This contract shall extend from the date of contract award to 30 September 1997,unless performance is sooner terminated under the contract. However. theGovernment reserves the right to exercise the option to renew the contract forup to TWO (2) years, as set forth elsewhere in this contract.

MDA904-97-C-04248 of 34

SECTION G - CONTRACT ADMINISTRATION DATA

<TABLE><CAPTION>

G.1 ACCOUNTING AND APPROPRIATION DATAACR: Obligate<S> <C>AA: 977/80400.4500 574E51 999-2520 S18119 03200106 1X 0000X22 120BPR: 16-97-2093-0000Obligated for CLINs 0001, 0003 and 0004 $338.465.00Obligated for Provisional Award Fee Payments $ 15,635.50Obligated for Future Award Fee Payments $ 15,635.50Total Amount Obligated $369,736.00</TABLE>

G.2 352.216-9007 NOTICE: AWARD FEE FUNDING (JUL 1993)

Funds in the amount of $ 15,635.50 have been obligated under this contracttowards future award fee determinations but are not available for the Contractorto bill against or incur costs against. Obligated award fee funds identifiedabove will be released to the Contractor via subsequent modifications after theGovernment has rendered an award fee determination in accordance with the AwardFee Plan currently in force under this contract. Upon receipt of theaforementioned modifications, the Contractor is authorized to bill for theearned fee.

G.3 352.242-9002 CONTRACT ADMINISTRATION DATA (OCT 1993)

The Procuring Contracting Officer will retain all administration functions underthis contract.

(End of clause)

G.4 352.216-9003 INVOICING AND PAYMENT (OCT 1993)

Invoices shall be submitted to:CONTRACTS - ACCOUNTS PAYABLEFINANCE AND ACCOUNTING OFFICEPO BOX 400 (MDA904-97-C-0424)FT MEADE MD 20755-6000Through:William Nace, X22, FANX IIIContracting Officer's RepresentativeMDA904-97-C-04249800 Savage RoadFort George G. Meade, MD 20755-6000

MDA904-97-C-04249 of 34

Copy to:MARYLAND PROCUREMENT OFFICEATTN: N141 (MDA904-97-C-0424)9800 SAVAGE RDFT MEADE, MD 20755-6720

NOTE: Invoices are subject to verification by the Contracting Officer'sRepresentative(s) (CORs) that the actual expenses for the billing period havebeen incurred.

G.5 INVOICING AND PAYMENT

Invoices shall be submitted monthly by the contractor and shall include at aminimum:

a. Period of Performance covered by the invoice.



b. Number of Labor Hours, by category, expended on the contract andcovered by the invoice.

c. The contractor shall be paid by multiplying the hourly rate set forthin Section B by the number of direct labor hours performed. Final payment shallbe subject to verification by the Government as to the actual amount of effortapplied by the contractor in the performance therein.

NOTE 1: Contractor requests for Travel reimbursement shall be accompanied byairline, hotel and rental car receipts.

NOTE 2: Contractor requests for Other Direct Cost Reimbursements shall beaccompanied by vendor receipts/invoices.

G.6 352.242-9001 CONTRACTING OFFICER'S REPRESENTATIVE (OCT 1993)

(a) The Contracting Officer may appoint one or more Government employees asContracting Officer's Representatives (COR) for technical purposes applicable tothis contract. "Technical" is restricted to scientific, engineering, or field-of-discipline matters directly applicable to the work performed by theContractor under the requirements of this contract.

(b) The appointment(s) will be in writing, signed by the ContractingOfficer, and will set forth the authority granted to and the limitations on theCOR. Two copies of the letter of appointment will be provided to the Contractorwho shall acknowledge receipt of the appointment by immediately signing andreturning one copy of the letter. Such signing shall represent the Contractor'sacknowledgement of the limited authority of the COR.

(c) When, in the opinion of the contractor, the COR or anyone else requestseffort outside of the existing scope of the contract, the contractor shallpromptly notify the Contracting Officer in writing. No action shall be taken bythe contractor under such direction until the Contracting Officer has issued acontractual change or otherwise resolved the issue.

(d) Appointments may be changed or revoked by the Contracting Officer. TheContracting Officer will notify the Contractor, in writing of any such changesor revocations. (End of clause)

MDA904-97-C-042410 of 34

G.7 352.229-9001 MD TAX EXEMPTION NUMBER (APR 1989)

Certain transactions which occur pursuant to this contract, for examples,the purchase of materials or supplies, may be exempt from the imposition ofstate or local taxes. It is the contractor's responsibility to determine whetherany transactions under the contract are exempt under the particular tax statuteand to take advantage of any applicable exemptions. In addition, it may beuseful for the contractor to inform the taxing authorities that the MarylandProcurement Office (MPO) is a federal government agency. In Maryland, it may beuseful to inform Maryland taxing authorities that the MPO has been assignedMaryland State Tax Exemption Certificate Number 3000500 4.

(End of clause)

G.8 352.232-9025 NOTICE OF PROMPT PAYMENT ACT APPLICABILITY (OCT 1993)

This contract is subject to the Prompt Payment Act, Public Law 97-177, asamended.

(End of clause)

G.9 352.229-9000 NOTICE OF TAXATION (SEP 94)

The Contractor shall provide the Contracting Officer with written notice ofany proposed tax assessments, exemptions, exclusions or refunds which couldincrease or decrease costs or liabilities to the contractor and/or theGovernment. The notice shall be submitted in sufficient time to provide theGovernment a meaningful opportunity to assert its immunity, participate innegotiations or litigation with the taxing authority concerning theapplicability of the tax, and/or adjust the parties' liability for costsaccording to the increase or decrease in tax.

(End of Clause)

G.10 352.229-9001 CONTRACTOR LIABILITY FOR STATE AND LOCAL TAXES (SEP 1994)

Generally, the contractor is liable for payment of state or local taxes onthis contract to the same extent that it would be liable for such taxes on acontract with a non-governmental entity. Although it may be useful for thecontractor to inform the taxing authorities that the Maryland Procurement Office(MPO) is a federal government agency, this fact alone does not in and of itself



create a tax exemption for the contractor. While some transactions undertaken bythe contractor pursuant to this contract may be exempt from a state or localtax, it is the contractor's responsibility to identify such exemption under theapplicable statute, and to resolve the applicability of such with state or localtaxing authorities.

(End of Clause)

G.ll 352.232-9012 SMALL DISADVANTAGED BUSINESS CONCERN PAYMENTS (JUN 1994)

In accordance with DFARS 232.905(2), this award is made to a smalldisadvantaged business concern and is subject to payment as quickly as possibleafter receipt of a proper invoice by our Finance and Accounting Office.

MDA904-97-C-042411 of 34

G.12 352.932-9020 ALLOCATION OF CONTACT COSTS (OCT 1993)

lt is anticipated that this contract will be supported by two or more fundcitations. Therefore, all invoices submitted for payment shall allocate costsbased on the Accounting Classification References (ACR) tasks defined in SectionB. An invoice not properly allocated shall be considered an improper invoiceunder the Prompt Payment Act.

SECTION H - SPECIAL CONTRACT REQUIREMENTS

H.1 352.204-900l DISCLOSURE OF INFORMATION - CONTRACT (SEP 1996)

(a) DFARS 252.204-7000 and this clause shall govern any disclosure ofinformation regarding this contract. In using information authorized by thisclause, the contractor (i) shall not disclose any information concerning thesponsorship of this contract, or (ii) the nature of the Government's interest inand application of the subject matter of this contract unless this type ofinformation is expressly allowed to be disclosed by paragraph (b) and/or (c)below, or by written approval of the cognizant Contracting Officer.

(b) The information listed below may be disclosed in proposals to UnitedStates Government Agencies in response to requests for past performanceassessments: When this information is completed at time of contract award, thedocument shall be marked "FOR OFFICIAL USE ONLY." If any of the information thatfollows changes in your disclosure, the Contracting Officer must be notified inwriting of the change.

CONTRACT NUMBER: (complete at award) _____________________CONTRACT TYPE: (complete at award) _______________________AWARD DATE: (complete at award) _________________________GOVERNMENT CONTRACTING ACTIVITY:

MARYLAND PROCUREMENT OFFICE9800 SAVAGE ROADFORT GEORGE G. MEADE, MD 20755-6000

ORIGINAL CONTRACT VALUE: (complete at award) ___________________CURRENT OR COMPLETED CONTRACT VALUE: (contractor may update)

_______________________PERIOD OF PERFORMANCE: from: (complete at award) _______________to: (contractor may update) _______________________COMPETITIVE/NONCOMPETITIVE/FOLLOW-ON (circle, underline or highlight appropriatedescription)PROGRAM TITLE: (complete at award) ______________________CONTACT EFFORT DESCRIPTION: (unclassified - as provided in solicitation packageand completed as part of the award document)PLACE OF PERFORMANCE: (complete at award) ______________________POINTS OF CONTACT/PHONE NUMBER:Contracting Officer: (complete at award) (contractor may update)______________________ Program Manager: (complete at award) (contractor mayupdate) ________________________

MDA904-97-C-042412 of 34

(c) For additional disclosures which require specific prior approval by theContracting Officer, once authorization to use any specific information has beenapproved by the Contracting Officer, the contractor is authorized to reuse suchspecific information without obtaining additional authorizations from theContracting Officer. The contractor shall maintain a log of the additional usesand submit a copy of the log to the Contracting Officer when each additional



disclosure is made.

(End of clause)

H.2 352.904-90l0 NOTICE: CONTRACT ADMINISTRATION AND CLOSEOUT GUIDANCE (AUG1996)

The following guidance is provided for your use in administering andclosing out the contract. When the contract is complete, the contractor shallinitiate final accounting and disposition. This shall be done in accordance withthe following instructions. If a portion of the instructions are not applicableto this contract, then disregard that portion.

(a) Government Furnished Property/Documents.

(1) The cognizant property administration office (Defense ContractManagement Command (DCMC), Office of Naval Research (ONR), and/or L14) isdesignated to administer the maintenance by the contractor of officialGovernment Property Records for all Government property/documents. See Section G- Contract Administration Data for the cognizant office for this contract.

(2) The contractor shall sign (1) copy of the shipping or inspectiondocument acknowledging receipt of property/documents and forward same to thedesignated property administrator.

(3) At the end of the contract, the contractor shall submit the GovernmentFurnished Property/Documents Inventory Schedule, requesting disposition, to thecognizant office. The cognizant property administration office shall then obtainthe disposition instructions from the contracting Officer's Representative(COR), and they will forward them to the contractor. The contractor shallprovide the cognizant office with a declaration that all Government furnishedproperty/documents have been accounted for or expended (disposition is complete)in the performance of the contract. The cognizant property administration officewill provide the Maryland Procurement Office (MPO) and the COR with theappropriate releases.

(b) Contractor Acquired Property. At the end of the contract, thecontractor shall submit the Contractor Acquired Property list, requestingdisposition, to the cognizant property administration office. This office willthen obtain the disposition instructions from the COR, and then will forwardthem to the contractor. The contractor shall provide the cognizant office with adeclaration that Contractor Acquired Property has been dispositioned asrequested. The cognizant property ad ministration office will provide the MPOand the COR with the appropriate releases.

(c) Plant Clearance. The cognizant property administration office isautomatically delegated plant clearance procedures.

MDA904-97-C-042413 of 34

(d) Classified Material/Documents (DD254 on the contract). Thedisposition/retention action of classified holding should be initiated pursuantto paragraphs 5.1 and 5.m of the Industrial Security Manual. The inventory,shall be submitted to the Director, NSA/CSS. ATTN: _____ (the applicable CORwith office designator), 9800 Savage Road, Ft. George G. Meade. Maryland 20755-6000. After compliance with the COR's disposition instructions, the contractorshall submit evidence of compliance, certified by the CSSO, to the MPO (ATTN:N1_______ (Contracting Officer's name), Maryland Procurement Office, 9800 SavageRoad, Fort George G. Meade, MD 20755-6000), with a courtesy copy to S41 and theCOR.

(e) Report of Inventions and Subcontracts (Form DD882). Pursuant to thePatent Rights Clause of this contract, the contractor shall submit the DD Form882 to the Director, NSA/CSS, ATTN: ______ (the applicable COR with officedesignator), 9800 Savage Road, Ft. George G. Meade, Maryland 20755-6000, with acourtesy copy to the MPO (ATTN: N141 (Contracting Officer's name), MarylandProcurement Office, 9800 Savage Road, Fort George G. Meade, MD 20755-6000).

(f) Final Payment.

(1) For contracts requiring final DCAA audit, the contractor shall submitthe final voucher with release and assignment documentation to the cognizantDefense Contract Audit Agency (DCAA) office for processing in accordance withFAR 4.804 (within 180 days).

(2) For all contracts not requiring final DCAA audit, the contractor shallsubmit the final invoice, DD250, to the COR for processing.

(g) Contract Data Requirements List (CDRL) - DD Form 1423. If notpreviously provided to the COR, the contractor shall provide the COR with status



of the documentation for final resolution. This shall be submitted to theDirector, NSA/CSS, ATTN :_____ (the applicable COR with the office designator),9800 Savage Road, Ft. George G. Meade, Maryland 20755-600, with a courtesy copyto the MPO (ATTN: Nl___(Contracting Officer's name), Maryland ProcurementOffice, 9800 Savage Road, Fort George G. Meade, MD 20755-6000).

(h) Quick Closeout.

(1) The contractor shall review the contract for applicability of the QuickClose Out Procedures, in accordance with the FAR 42.708, and determine if thismethod applies. If applicable, the contractor may request, in writing, QuickClose Out authorization from the CO.

(2) The MPO will authorize Quick Closeout Procedures, if applicable. TheContractor shall then submit a copy of the letter, the final voucher, etc.,directly to the cognizant DCAA office (see Section G).

(End of notice)

MDA904-97-C-042414 of 34

H.3 352.215-9000 NOTICE: INCORPORATION OF SECTION K BY REFERENCE (OCT 1993)

In accordance with FAR 15.406-1(b), Part IV of the Uniform Contract Formatshall not be physically included in the contract, but Section K,Representations, Certifications, and Other Statements of Offerors (as completedby the Contractor) shall be deemed incorporated by reference in the contract.

(End of clause)

H.4 352.244-9001 NOTICE: SUBCONTRACTING WITH CANADIAN CONTRACTORS (OCT 1993)

Provided the sponsoring Government Activity is not disclosed, the Offeroris not prohibited from subcontracting with Canadian Contractors, unless the workto be performed under any resulting contract is classified in nature.

Federal Acquisition Regulation (FAR), Part 44, Subcontracting Policies andProcedures, particularly Subpart 44.2 - Consent to Subcontract, applies.

In addition to those clauses which the prime contractor is normallyrequired to insert in subcontracts, the following must be included, as required.

FAR 52.225-11 Restrictions on Certain Foreign Purchases (APR 91)DFARS 252.225-7026 Reporting of Overseas Subcontracts (DEC 1991)

(End of Notice)

H.5 352.290-9006 UTILIZATION OF PROJECT PERSONNEL (OCT 1993)

Any technical personnel who, during the performance of the contract, areassigned by the Con tractor to replace the technical personnel identified bythe Contractor in his technical proposal (or during negotiations) for work onthe Project shall possess at least the same technical qualifications and becapable of assuring satisfactory performance of the work required by thiscontract.

H.6 352.227-9001 SOFTWARE CERTIFICATION (OCT 1993)

The Contractor certifies that, to the best of its knowledge and belief,software provided under this contract does not contain any malicious code,program, or other internal component (e.g., computer virus) which could damage,destroy, or alter software, firmware, or hardware or which could reveal any dataor other information accessed through or processed by the software. Further, theContractor shall immediately inform the Contracting Officer upon reasonablesuspicion that any software provided hereunder may cause the harm describedabove.

(End of clause)

MDA904-97-C-042415 of 34

H.7 352.243-9000 NOTICE: UNAUTHORIZED CHANGE ORDERS (APR 1989)

The Contracting Officer (CO) may appoint a Contracting Officer'sRepresentative, Inspector, or other technical representative. No order,statement or conduct of any such person shall constitute a change under the"Changes" clause of this contract or entitle the Contractor to an equitableadjustment of the contract price or delivery schedule under that or any other



clause. No appointee of the CO is acting within the limits of his/her authoritywhen he/she attempts to change the contract. The contract shall not be changedexcept by issuance of a written change order signed by the CO. No representativeof the CO shall be authorized to issue a written change order under the"Changes" clause of this contract.

H.8 IMPORTANT NOTICE

(a) The Contractor shall not accept any instruction issued by any personother than the Contracting Officer or the Contracting Officer'sRepresentative(s) (CORs) acting within the limits of their authority. CORs willbe designated in writing to the Contractor, and the scope of their authoritywill be set forth therein.

(b) No information, other than that which may be contained in an authorizedamendment to the contract duly issued by the Contracting Officer will beconsidered as grounds for deviation from any stipulation of the contract, thespecifications, or reference drawings.

H.9 SUBCONTRACTS

The contractor shall not enter into a subcontract involving the type ofwork specified herein without obtaining, in advance, the written approval of theContacting Officer and subject to the conditions that he may prescribe.

H.10 352.204-9009 ACQUISITION OF COMSEC EQUIPMENT, COMPONENTS, AND PARTS OUTSIDETHE UNITED STATES (OCT 1993)

(a) Definitions

(1) "COMSEC equipment", as used in this clause, means equipmentdesigned to provide security to telecommunications by converting information toa form unintelligible to an unauthorized interceptor and by reconverting suchinformation to its original form for authorized recipients, as well as equipmentdesigned specifically to aid in, or as an essential element of, the conversionprocess. COMSEC equipment is crypto-equipment, crypto-ancillary equipment,crypto-production equipment, and authentication equipment.

(2) "Component", as used in this clause, means any assembly orsubassembly incorporated directly into an end product. An assembly is a group ofparts, elements, subassemblies and circuits assembled as a separately removableitem of COMSEC equipment. A subassembly is a major subdivision of an assembly.

MDA904-97-C-042416 of 34

(3) "Part", as used in this clause, means any single. unassembledelement of a major or minor subassembly, accessory, or attachment which is notnormally subject to disassembly without the destruction or the impairment of thedesign use.

(4) "Contractor", as used in this clause, means the supplier of theend item and associated support items to the Government under the terms of aspecific contract.

(5) "Subcontractor", as used in this clause, means a person orbusiness that contracts to provide some service or material necessary for theperformance of another's contract.

(6) "Vendor", as used in this clause, means a person or agency thatsells supplies or mat erials to a Contractor or subcontractor.

(7) "United States", as used in this clause, means all areas under theterritorial sovereignty of the United States (U.S.) and the Trust Territory ofthe Pacific Islands.

(b) No subcontracts or purchase orders which involve design, manufacture,production, assembly, inspection, or test in a location not in the U.S., ofCOMSEC equipment, components, or parts, which are not covered by a specificationor standard listed in MIL-P-11268, MIL-E-16400, or MIL-E-5400 shall be madeunder this contract without the prior written approval of the ContractingOfficer. The Contractor further agrees to include this clause in any or allsubcontracts or purchase orders he may let pursuant to this contract for COMSECequipment, components, or parts, except those subcontracts/purchase orders forwhich waiver is required (i.e., non-US sources). Under no circumstances will anycustom large scale integrated circuit or likeness thereof be sent outside theU.S. for any reason.

(c) Requests for permission to deviate from the requirements of paragraph(b) will be handled on a case-by-case-basis through the Contracting Officer.



Each waiver request must provide a strong and compelling reason why the waivershould be granted in addition to the benefit the Government would gain by thegranting of a waiver. Furthermore, prior to the approval of any waiver, theContractor shall demonstrate to the Government through submission of anacceptable Anonymity Plan (data item Dl-NDTl-80566), that procedures are inplace to ensure that the offshore vendor remains unaware of the relationshipbetween the prime contractor and the Department of Defense and/or MarylandProcurement Office (MPO). As a minimum, the following conditions will be imposedif a waiver is granted:

(1) Purchase orders and drawings provided to a subcontractor or vendoroutside the United States shall not carry any identification that reveals acontractor relationship with the Department of Defense and the MPO. Thisrestriction includes the Contractor's prime contract number with the Governmentand 98230/0NXXXXXX parts identification numbers.

(2) The prime contractor, when required to mark items with themanufacturer's code 98230 or drawing numbers 0NXXXXXX, shall only mark theseitems at a facility located within the U.S. Marking parts with 0N markings andthe 98230 code specifics that the parts are for MPO use only. lf parts markedwith the MPO identification code (including rejects and parts not usable for MPOprograms) are allocated for non-MPO programs or for resale to other customers,then markings as-

MDA904-97-C-042417 of 34

sociated with the MPO identification code must be removed from the parts beforethe parts are sent to non-MPO programs or other customers.

(3) The Government has the right to an equitable adjustment to the contractprice as consideration for granting approval to acquire COMSEC equipment,components and parts from sources outside the United States (unless the waiver *as granted prior to contract award).

H.l l 352.204-9008 CONTROL OF COMMUNICATIONS SECURITY (COMSEC) MATERIAL (OCT1993)

The accountable COMSEC material produced under the contract, or provided asGovernment Furnished Property. will be distributed through COMSEC distributionchannels. The Contractor shall establish a COMSEC account, nominate a custodianand alternate custodian, and control the material in accordance with proceduresspecified in the "COMSEC Supplement to the Industrial Security Manual forSafeguarding Information" dated April 1975. Existing COMSEC accounts establishedas a result of previous or other contracts may be used.

H.12 352.227-9004 YEAR 2000 COMPLIANCE - NON-COMMERCIAL ITEMS (JAN 1997)

Definition: INFORMATION TECHNOLOGY means any equipment or interconnected systemor subsystem of equipment, that is used in the automatic acquisition, storage,manipulation, management, movement, control, display, switching, interchange,transmission, or reception of data or information. This is for equipment used bythe government directly or is used by a contractor under a contract with theAgency which (1) requires the use of such equipment, or (2) requires the use, toa significant extent, of such equipment in the performance of a service of thefurnishing of a product. Information technology includes computers, ancillaryequipment, software, firmware and similar procedures, services (includingsupport services), and related resources. lt does NOT include any equipment thatis acquired by a Federal Contractor incidental to a Federal contract.

The contractor warrants that each non-commercial item of informationtechnology delivered or developed under this contract and listed below shall beable to accurately process date data (including but not limited to:calculating, comparing, and sequencing) from, into and between the twentieth andtwenty-first centuries, including Leap year calculations, when used inaccordance with the item documentation provided by the contractor, provided thatall listed or unlisted items (e.g., hardware, software, firmware) used incombination with such listed item properly exchange date data with it. The words"listed below" refer to products that the offeror has identified as being Year2000 compliant in response to the procuring agency's specifications. If thecontract requires that specific listed items must perform as a system inaccordance with the foregoing warranty, then that warranty shall apply to thoselisted items as a system. he duration of this warranty and the remediesavailable to the Government for breach of this warranty shall be as defined in,and subject to, the terms and limitations of any general warranty provisions ofthis contract. Nothing in this warranty shall be construed to limit any rightsor remedies the Government may otherwise have under this contract with respectto defects other than Year 2000 performance.



* greater than

MDA904-97-C-042418 of 34

H.13 352.217-9001 OPTION TO EXTEND THE TERM OF THE CONTRACT (OCT 1993)

(a) The Government may unilaterally extend the term of this contract by writtennotice to the Contractor within 60 days following the President's signing of theannual Appropriations Act or October 1, whichever is later, for each respectiveoption, provided that the Contracting Officer has given preliminary notice. inwriting, to the Contractor, of the Government's intent to renew, at least 60days prior to the expiration date of the current period of performance. Suchpreliminary notice will not be deemed to commit the Government to renewals. Ifthe Government exercises this right to renew, the contract, as renewed shall bedeemed to include this option clause. The total duration of this contract,including the exercise of any option to renew under this clause, shall notexceed 36 months.

(b) The composition of the total man-hours of direct labor and other directcosts for each option is as follows:OPTION YEAR 1 - FISCAL YEAR 1998 (I October 1997 - 30 September 1998)

<TABLE><CAPTION>CLIN SUPPLIES/SERVICES UNIT QTY UNIT PRICETOTAL<S> <C> <C> <C>0001 The contractor shall furnish the HRS 11,400 XXX$1,071,465.00

necessary materials, facilities, equipment,supplies and services of skilled professional,technical and support personnel to fulfill therequirements set forth in the Statement of Workentitled, "Multi Level Information System SecurityInitiative Crypto Card System Analysis andLibrary and Driver Architecture and Development,"dated 10 January 1997 and the documents referencedin Section C. The contractor's management shallprovide for the effective timely and integratedimplementation of contract requirements.


Total Amount CLIN 0001 Not-To-Exceed $1,071,465.00</TABLE>

MDA904-97-C-042419 of 34

<TABLE><S> <C> <C> <C>0002 Award Fee Pool, to be determined in accordance For the Period $l07,147.00

with the Award Fee Plan for Multi-Level InformationSystem Security Initiative Crypt Card SystemAnalysis and Library and Driver Architecture andDevelopment, dated 10 June 1997 (Rev. 2). Thereshall be one evaluation of performance at the end of theperiod of performance (Date of contract award through30 September 1997.) If the Government exercises theoptions to extend the term of the contract, there shall be anin equal amounts of $4,464.46.

0003 TRAVEL For The Job Not-To-Exceed $ 50,000.00(Includes Applicable Burdens)

0004 OTHER DIRECT COSTS For The Job Not-To-Exceed $ 12,500.00(Includes Applicable Burdens)

0005 Data in accordance with the Contract For the Lot Not-Separately PricedData Item Requirements List (CDRL)Dated 13 February 1997.

</TABLE>



OPTION YEAR 2 - FISCAL YEAR 1999 (1 October 1998 - 30 September 1999)

<TABLE><CAPTION>

UNITCLIN SUPPLIES/SERVICES UNIT QTY PRICE TOTAL<S> <C> <C> <C> <C> <C>0001 The contractor shall furnish the necessary HRS 6838 XXX $645,526.00

materials, facilities, equipment, suppliesand services of skilled professional, technicaland support personnel to fulfill the requirementsset forth in the Statement of Work entitled, "MultiLevel Information System Security Initiative CryptoCard System Analysis and Library and DriverArchitecture and Development," dated 10 January1997 and the documents referenced in Section C. Thecontractor's management shall provide for the effectivetimely and integrated implementation of contractrequirements.


Total Amount CLIN 0001 Not-To-Exceed $645,526.00</TABLE>

MDA904-97-C-042420 of 34

0002 Award Fee Pool, to be determined in For the Period $64,553.00accordance with the Award Fee Plan forMulti-Level Information System SecurityInitiative Crypt Card System Analysis andLibrary and Driver Architecture andDevelopment, dated 10 June 1997 (Rev. 2).There shall be one evaluation of performanceat the end of the period of performance (Date ofcontract award through 30 September 1997.) If theGovernment exercises the options to extend the termof the contract, there shall be an evaluation ofin equal amounts of $2,689.71.

<TABLE><CAPTION><S> <C> <C> <C> <C>0003 TRAVEL For The Job Not-To-Exceed $32,000.00

(Includes Applicable Burdens)

0004 OTHER DIRECT COSTS For The Job Not-To-Exceed $ 6,400.00(Includes Applicable Burdens)

0005 Data in accordance with the Contact For The Lot Not-Separately PricedData Item Requirements List (CDRL)

Dated 13 February 1997.</TABLE>

NOTE 1: OTHER DIRECT COSTS (ODCs) shall be reimbursed at actual costs plusapplicable burdens. ODCs are non fee bearing.

NOTE 2: TRAVEL shall be reimbursed at cost. Lodging shall be reimbursed atactual costs; meals and incidental expenses shall be reimbursed at theapplicable flat rate. The total of lodging, meals, and incidental expenses shallnot exceed the established rate for each location set forth in the "FederalTravel Regulations (FTR);" the "Joint Travel Regulations," Volume 2 (JTR); andthe Standardized Regulation (Government Civilians Foreign Areas), Section 925,"as applicable. These costs shall be directly chargeable to this contract inaccordance with the contractor's established method of distributing such costs.First class travel shall not be reimbursed. Contractor shall be reimbursed forcoach rates only. Travel is non fee bearing. Invoices which requestreimbursement of travel expenses must be accompanied by airline ticket subs,hotel/motel receipts, and rental car receipts.

H.14 Contractor Participation in Contractor Performance EvaluationAssessments



This contract will be subject to periodic Contractor Performance EvaluationAssessments. In accordance with FAR 42.1502, the Maryland Procurement Officemaintains a database on Contractor past performance applicable to all contractsover $500,000. Information on the performance of this contract will bemaintained in the database and updated on a yearly basis (if contract period ofperformance exceeds one year) and at the completion of the contract. TheContractor's participation in this process, in terms of review of the ContractorPerformance Evaluation Assessment form, shall not cause an increase in theestimated cost/price of this contract. Any costs which are anticipated to beexpended towards participation in this review process should be (have been)proposed in the initial price of this contract.

MDA904-97-C-042421 of 34

H.15 DELINQUENT AWARD FEE MODIFICATION PENALTY

The Contracting Officer shall issue a contract modification identifying theresults of the fee determination official's findings for each performanceevaluation period in accordance with a schedule set forth in the current AwardFee Plan as cited in the contract. If a contract modification is not issued incompliance with the timeframe specified in the Award Fee Plan, the contractorshall be entitled to interest on the determined award fee amount for thatspecific period at the rate established by the secretary of the Treasury underSection 12 of the Contract Disputes Act of 1978 (41 U.S.C. 611) that is ineffect on the modification issuance date. This rate is referred to as the"Treasury Rate", and is published in the FEDERAL REGISTER semiannually or aboutJanuary 1 and July 1. The interest on any late award fee determination amountwill be calculated using the following formula from the first day after theexpiration of the timeframe specified in the current Award Fee Plan through theactual date of the contract modification identifying what award fee has beenearned for that specific period. In the event that provisional billing has beenauthorized under the contract, the Government shall only be liable for intereston the balance between the final Award Fee determination for the specifiedperiod and what has been authorized under the Provisional Billing clause.Notwithstanding the above, the Government shall not be liable for any interestpenalty that is in excess of the sum total of the Award Fee available in thecurrent evaluation period and the unearned Award Fee from the prior evaluationperiod at the time of the contract modification.

However, in the event that the Government has exercised an option or renewedthe contract into a subsequent fiscal year, where annual appropriations (O&Mfunds) were utilized to fund the action, the Government's liability for anyinterest penalty in the first evaluation period of that year shall be restrictedto the amount of the Award Fee available in the first evaluation period ONLY.Subsequent Award Fee modifications for evaluation periods during that fiscalyear shall be subject to aforementioned terms where the Government's liabilityfor interest will be restricted to the sum total of the amount of Award Feeavailable in the current evaluation period and the unearned Award Fee from theprior evaluation period.

Current Treasury Rate % x No. of days Govt. is delinquent x (Amount of Award Feeearned # of Annual Calendar Days (Beyond 60 Calendar Days) in the period -Amount of Provisional Award Fee authorized for the period)

IF:Available Award Fee in the Period $250,000Amount authorized for Provisional Billing 50.00% $125,000Amount Earned in the Period 90.00% $225,000Award Fee Plan Modification Time Frame 60Government Days Late (beyond 60 days) 60Current Treasury Rate 5.50%

CALCULATION:[(5.5% / 360) X 60] X (225,000 - 125,000) = 916.67

(End of Clause)

MDA904-97-C-042422 of 34

SECTION I - CONTRACT CLAUSES

l.l REFERENCED CLAUSES. The following contract clauses pertinent to thissection are hereby incorporated by reference:

CLAUSE NO. TITLE

FAR CLAUSES



<TABLE><CAPTION><S> <C>52.202-1 Definitions (SEP 1991)52.203-5 Covenant Against Contingent Fees (APR 1984)52.203-6 Restriction on Subcontractor Sales to the Government (JUL 1985)52.203-7 Anti-Kickback Procedures (OCT 1988)52.203-8 Cancellation, Rescission, and Recovery of Funds for Illegal or

Improper Activity (JAN 1997))52.203-10 Price or Fee Adjustment for Illegal or Improper Activity (SEP 1990)52.204-4 Contractor Establishment Code (MAY 1995)52.209-6 Protecting the Government's Interest When Subcontracting With

Contractors Debarred, Suspended, or Proposed for Debarment (NOV1992)

52.211-5 New Material (MAY 1995)52 211-15 Defense Priority and Allocation Requirements (SEP 1990)52 215-33 Order of Precedence (JAN 1986) 52.219-8 Utilization of Small

Business Concerns and Small Disadvantaged Business Concerns (OCT1995)

52.222-4 Contract Work Hours and Safety Standards Act - Overtime Compensation(JUL 1995)

52.225-11 Restrictions on Certain Foreign Purchases (OCT 1996)52.232-1 Payments (APR 1984)52.232-11 Extras (APR 1984)52.232-17 Interest (JUN 1996)52.232-23 Assignment of Claims (JAN 1986)52.233-3 Protest After Award (AUG 1996)52.242-13 Bankruptcy (JUL 1995)52.249-8 Default (Fixed Price Supply and Service) (APR 1984)52.253-1 Computer Generated Forms (JAN 1991)

<CAPTION>

DFARS CLAUSES<S> <C>252.203-7001 Special Prohibition on Employment (NOV 1995)252.204-7003 Control of Government Personnel Work Product (APR 1992)252.209-7000 Acquisition From Subcontractors Subject to On-Site

Inspection Under the Intermediate-Range Nuclear Forces (INF)Treaty (NOV 1995)

252.223-7004 Drug-Free Work Force (SEP 1988)252.225-7012 Preference for Certain Domestic Commodities (NOV 1995)252.225-7016 Restriction on Acquisition of Ball and Roller Bearings (SEP

1996)252.225-7031 Secondary Arab Boycott of Israel (JUN 1992)252.231-7000 Supplemental Cost Principles (DEC 1991)</TABLE>

MDA904-97-C-042423 of 34

252.232-7006 Reduction or Suspension of Contract Payments Upon Finding ofFraud (AUG 1992)

252.243-7001 Pricing of Contract Modifications (DEC 1991)252.247-7023 Transportation of Supplies by Sea (NOV 1995

1.2 52.252-2 CLAUSES INCORPORATED BY REFERENCE (JUN 1988)

This contract incorporates one or more clauses by reference, with the sameforce and effect as if they were given in full text. Upon request, theContracting Officer will make their full text available.

(End of clause)

1.3 52.232-33 MANDATORY INFORMATION FOR ELECTRONIC FUNDS TRANSFER PAYMENT (AUG1996)

(a) Method of payment. Payments by the Government under this contract,including invoice and contract financing payments, may be made by check orelectronic funds transfer (EFT) at the option of the Government. If payment ismade by EFT, the Government may, at its option, also forward the associatedpayment information by electronic transfer. As used in this clause, the term"EFT" refers to the funds transfer and may also include the informationtransfer.

(b) Mandatory submission of Contractor's EFT information.

(1) The Contractor is required, as a condition to any payment underthis contract, to provide the Government with the information required to makepayment by EFT as described in paragraph (d) of this clause, unless the paymentoffice determines that submission of the information is not required. However,until January 1, 1999, in the event the Contractor certifies in writing to thepayment office that the Contractor does not have an account with a financial



institution or an authorized payment agent, payment shall be made by other thanEFT. For any payments to be made after January 1, 1999, the Contractor shallprovide EFT information as described in paragraph (d) of this clause.

(2) If the Contractor provides EFT information applicable to multiplecontracts, the Contractor shall specifically state the applicability of this EFTinformation in terms acceptable to the payment office.

(c) Contractor's EFT information. Prior to submission of the first requestfor payment (whether for invoice or contract financing payment) under thiscontract, the Contractor shall provide the information required to make contractpayment by EFT, as described in paragraph (d) of this clause, directly to theGovernment payment office named in this contract. If more than one paymentoffice is named for the contract, the Contractor shall provide a separate noticeto each office. ln the event that the EFT information changes, the Contractorshall be responsible for providing the changed information to the designatedpayment office(s).

(d) Required EFT information. The Government may make payment by EFTthrough either an Automated Clearing House (ACH) subject to the banking laws ofthe United States or the Federal Reserve Wire Transfer System at theGovernment's option. The Contractor shall provide

MDA904-97-C-042424 of 34

the following information for both methods in a form acceptable to thedesignated payment office. The Contractor may supply this data for this ormultiple contracts (sec paragraph (b) of this clause).

(1) The contract number to which this notice applies.

(2) The Contractor's name and remittance address, as stated in thecontract, and account number at the Contractor's financial agent.

(3) The signature (manual or electronic, as appropriate), title, andtelephone number of the Contractor official authorized to provide thisinformation.

(4) For ACH payments only:

(i) Name, address, and 9-digit Routing Transit Number ofthe Contractor's financial agent.

(ii) Contractor's account number and the type of account(checking, saving, or lockbox).

(5) For Federal Reserve Wire Transfer System payments only:

(i) Name, address, telegraphic abbreviation, and the 9-digit Routing Transit Number for the Contractor's financial agent.

(ii) If the Contractor's financial agent is not directlyon-line to the Federal Reserve Wire Transfer System and, therefore, not thereceiver of the wire transfer payment, the Contractor shall also provide thename, address, and 9-digit Routing Transit Number of the correspondent financialinstitution receiving the wire transfer payment.

(e) Suspension of payment.

(1) Notwithstanding the provisions of any other clause of thiscontract, the Government is not required to make any payment under this contractuntil after receipt, by the designated payment office, of the correct EFTpayment information from the Contractor or a certificate submitted in accordancewith paragraph (b) of this clause. Until receipt of the correct EFT information,any invoice or contract financing request shall be deemed not to be a validinvoice or contact financing request as defined in the Prompt Payment clause ofthis contract.

(2) If the EFT information changes after submission of correct EFTinformation, the Government shall begin using the changed EFT information nolater than the 30th day after its receipt to the extent payment is made by EFT.However, the Contractor may request that no further payments be made until thechanged EFT information is implemented by the payment office. If such suspensionwould result in a late payment under the Prompt Payment clause of this contract,the Contractor's request for suspension shall extend the due date for payment bythe number of days of the suspension.

MDA904-97-C-049425 of 34



(f) Contractor EFT arrangements. The Contractor shall designate a singlefinancial agent capable of receiving and processing the electronic fundstransfer using the EFT methods described in paragraph (d) of this clause. TheContractor shall pay all fees and charges for receipt and processing oftransfers.

(g) Liability for uncompleted or erroneous transfers.

(1) If an uncompleted or erroneous transfer occurs because theGovernment failed to use the Contractor-provided EFT information in the correctmanner, the Government remains responsible for (i) making a correct payment,(ii) paying any prompt payment penalty due, and (iii) recovering any erroneouslydirected funds.

(2) If an uncompleted or erroneous transfer occurs becauseContractor-provided EFT information was incorrect at the time of Governmentrelease of the EFT payment transaction instruction to the Federal ReserveSystem, and-

(i) If the funds are no longer under the control of thepayment office, the Government is deemed to have made payment and the Contractoris responsible for recovery of any erroneously directed funds; or

(ii) If the funds remain under the control of the paymentoffice, the Government retains the right to either make payment by mail orsuspend the payment in accordance with paragraph (e) of this clause.

(h) EFT and prompt payment.

(1) A payment shall be deemed to have been made in a timely manner inaccordance with the Prompt Payment clause of this contract if, in the EFTpayment transaction instruction given to the Federal Reserve System, the datespecified for settlement of the payment is on or before the prompt payment duedate, provided the specified payment date is a valid date under the rules of theFederal Reserve System.

(2) When payment cannot be made by EFT because of incorrect EFTinformation provided by the Contractor, no interest penalty is due after thedate of the uncompleted or erroneous payment transaction, provided that noticeof the defective EFT information is issued to the Contractor within 7 days afterthe Government is notified of the defective EFT information.

(i) EFT and assignment of claims. If the Contractor assignsthe proceeds of this contract as provided for in the Assignment of Claims clauseof this contract, the assignee shall provide the assignee EFT informationrequired by paragraph (d) of this clause. In all respects, the requirements ofthis clause shall apply to the assignee as if it were the Contractor. EFTinformation which shows the ultimate recipient of the transfer to be other thanthe Contractor, in the absence of a proper assignment of claims acceptable tothe Government, is incorrect EFT information within the meaning of paragraph (e)of this clause.

(j) Payment office discretion. If the Contractor does not wish to receivepayment by EFT methods for one or more payments, the Contractor may submit arequest to the designated

MDA904-97-C-042426 of 34

payment office to refrain from requiring EFT information or using the EFTpayment method. The decision to grant the request is solely that of theGovernment.

(k) Change of EFT information by financial agent. The Contractor agreesthat the Contractor's financial agent may notify the Government of a change tothe routing transit number, Contractor account number, or account type. TheGovernment shall use the changed data in accordance with paragraph (e)(2) ofthis clause. The Contractor agrees that the information provided by the agent isdeemed to be correct information as if it were provided by the Contractor. TheContractor agrees that the agent's notice of changed EFT data is deemed to be arequest by the Contractor in accordance with paragraph (e)(2) that no furtherpayments be made until the changed EFT information is implemented by the paymentoffice.

(End of clause)

1.4 252.247-7023 TRANSPORTATION OF SUPPLIES BY SEA (DEC 1991)

(a) Definitions.



As used in this clause --

(1) "Components" means articles materials, and supplies incorporateddirectly into end products at any level of manufactures fabrication, or assemblyby the Contractor or any subcontractor.

(2) "Department of Defense" (DoD) means the Army, Navy, Air Force,Marine Corps, and defense agencies.

(3) "Foreign flag vessel" means any vessel that is not a U.S. - flagvessel.

(4) "Ocean transportation" means any transportation aboard a ship,vessel, boat, barge, or ferry through international waters.

(5) "Subcontractor" means a supplier, materialman, distributor, orvendor at any level below the prime contractor whose contractual obligation toperform results from, or is conditioned upon, award of the prime contract andwho is performing any part of the work or other requirement of the primecontract.

(6) "Supplies" means all property, except land and interests in land,that is clearly identifiable for eventual use by or owned by the DoD at the timeof transportation by sea.

(i) An item is clearly identifiable for eventual use by theDoD if, for example, the contract documentation contains a reference to a DoDcontract number or a military destination.

(ii) "Supplies" includes (but is not limited to) publicworks; buildings and facilities; ships; floating equipment and vessels of everycharacter, type, and description, with parts, subassemblies, accessories, andequipment; machine tools; material; equipment; stores of all kinds; end items;construction materials; and components of the foregoing.

(7) "U.S.-flag vessel" means a vessel of the United States orbelonging to the United States, including any vessel registered or havingnational status under the laws of the United States.

(b) The Contractor shall employ U.S.-flag vessels in the transportation bysea of any supplies to be furnished in the performance of this contract. TheContractor and its

MDA904-97-C-049427 of 34

subcontractors may request that the Contracting Officer authorize shipment inforeign-flag vessels, or designate available U.S.-flag vessels, if theContractor or a subcontractor believes that --

(1) U.S.-flag vessels are not available for timely shipment;(2) The freight charges are inordinately excessive or unreasonable; or(3) Freight charges are higher than charges to private persons for

transportation of like goods.

(c) The Contractor must submit any request for use of other than U.S.-flagvessels in writing to the Contracting Officer at least 45 days prior to thesailing date necessary to meet its delivery schedules. The Contracting Officer'sfailure to grant approvals to meet the shipper's sailing date will not of itselfconstitute a compensable delay under this or any other clause of this contract.Requests shall contain at a minimum --

(1) Type, weight, and cube of cargo;(2) Required shipping date;(3) Special handling and discharge requirements;(4) Loading and discharge points;(5) Name of shipper and consignee;(6) Prime contract number; and

(7) A documented description of efforts made to secure U.S.-flag vessels,including points of contact (with names and telephone numbers) with at least twoU.S.-flag carriers contacted. Copies of telephone notes, telegraphic andfacsimile message or letters will be sufficient for this purpose.

(d) The Contractor shall, within 30 days after each shipment covered bythis clause, provide the Contracting Officer and the Division of National Cargo,Office of Market Development, Maritime Administration, U.S. Department ofTransportation, Washington, DC 20590, one copy of the rated on board vesseloperating carrier's ocean bill of lading, which shall contain the followinginformation --



(1) Prime contract number;(2) Name of vessel;(3) Vessel flag of registry;(4) Date of loading;(5) Port of loading;(6) Port of final discharge;(7) Description of commodity;(8) Gross weight in pounds and cubic feet if available;(9) Total ocean freight in U.S. dollars; and(10) Name of the steamship company.

(c) The Contractor agrees to provide with its final invoice under thiscontract a representation that to the best of its knowledge and belief --

(1) No ocean transportation was used in the performance of this contract;

MDA904-97-C-042428 of 34

(2) Ocean transportation was used and only U.S.-flag vessels were used forall ocean shipments under the contract;

(3) Ocean transportation was used and the Contractor has the writtenconsent of the Contacting Officer for all non-U.S.-flag ocean transportation; or

(4) Ocean transportation was used, and some or all of the shipments weremade on non-U.S.-flag vessels without the written consent of the ContractingOfficer. The Contractor shall describe these shipments in the following format:

ITEM CONTRACTDESCRIPTION LINE ITEMS QUANTITY

TOTAL

(f) If the final invoice does not include the required representation. theGovernment will reject and return it to the Contractor as an improper invoicefor the purposes of the Prompt Payment clause of this contract. In the eventthere has been unauthorized use of non-U.S.-flag vessels in the performance ofthis contract, the Contracting Officer is entitled to equitably adjust thecontract, based on the unauthorized use.

(g) The Contractor shall include this clause, including this paragraph (g)in all subcontracts under this contract, which exceed the small purchaselimitation of section 13.000 of the Federal Acquisition Regulation.

(End of clause)

I.5 REFERENCED CLAUSES - WHEN APPLICABLE. The following clause(s) marked (X)when applicable) pertinent to this section is/are hereby incorporated byreference:

<TABLE><CAPTION>

CLAUSE NO. TITLE

FAR CLAUSES<S> <C>(X) 52.203-3 Gratuities (NOV 1990)(X) 52.203-12 Limitation on Payments to Influence Certain

FederalTransactions (JAN 1990)( ) 52.204-2 Security Requirements (AUG 1996)( ) 52.207-5 Option to Purchase Equipment (FEB 1995)( ) 52.208-8 Helium Requirement Forecast and Required Sources

for Helium (FEB 1995)( ) 52.209-1 Qualification Requirements (FEB 1995)(X) 52.210-7 Other Than New Material, Residual Inventory, and

Former Government Surplus Property (MAY 1995)( ) 52.215-2 Audits and Records - Negotiations (AUG 1996)( ) 52.215-2 Audits and Records - Negotiations (AUG 1996) -

Alternate II (JAN 1997)( ) 52.215-2 Audits and Records - Negotiations (AUG 1996) -

Alternate III (JAN 1997)( ) 52.215-21 Changes or Additions to Make-Or Buy Program (APR

1984)( ) 52.215-21 Changes or Additions to Make-Or-Buy Program (APR

1984) - Alternate I (APR 1984)(X) 52.215-22 Price Reduction for Defective Cost or Pricing Data

(OCT 1995)( ) 52.215-23 Price Reduction for Defective Cost or Pricing

Data -Modifications (OCT 1995)



(X) 52.215-24 Subcontractor Cost or Pricing Data (OCT 1995)( ) 52.215-25 Subcontractor Cost or Pricing Data - Modifications

(OCT 1995)( ) 52.215-26 Integrity of Unit Prices (FEB 1997) - Alternate I

(APR 1991)( ) 52.215 27 Termination of Defined Benefit Pension Plans (MAR

1996)</TABLE>

<TABLE><S> <C>( ) 52.215-31 Waiver of Facilities Capital Cost of Money (SEP 1987)( ) 52.215-39 Reversion or Adjustment of Plans for Postretirement

Benefits Other Than Pensions (PRB) (MAR 1996)( ) 52.215-40 Notification of Ownership Changes (FEB 1995)( ) 52.215-42 Requirements for Cost or Pricing Data or Information

Other Than Cost or Pricing Data- Modifications (JAN 1997) Modifications (JAN 1997) - Alternate II (OCT 1995)

( ) 52.215-42 Requirements for Cost or Pricing Data or InformationOther Than Cost or Pricing Data

( ) 52.217-2 Cancellation Under Multiyear Contracts (JUL 1996)(X) 52.217-8 Option to Extend Services (AUG 1989)( ) 52.219-6 Notice of Total Small Business Set-Aside (JUL 1996)</TABLE>

MDA904-97-C-042429 of 34

<TABLE><S> <C>( ) 52.219-7 Notice of Partial Small Business Set Aside (JUL 1996)( ) 52.219-9 Small, Small Disadvantaged and Women-Owned Small

Business Subcontracting Plan (AUG 1996)( ) 52.219-9 Small, Small Disadvantaged and Women-Owned Small

Business Subcontracting Plan (AUG(X) 52.219-14 Limitations on Subcontracting (DEC 1996)( ) 52.219-16 Liquidated Damages - Subcontracting Plan (OCT 1995)( ) 52.222-1 Notice to the Government of Labor Disputes (FEB 1997)( ) 52.222-3 Convict Labor (AUG 1996)( ) 52.222-20 Walsh-Healey Public Contracts Act (DEC 1996)(X) 52.227-26 Equal Opportunity (APR 1984)(X) 52.222-28 Equal opportunity Pre-Award Clearance of Subcontracts

(APR 1984)( ) 52.222-29 Notification of Visa Denial (APR 1984)(X) 52.222-35 Affirmative Action for Special Disabled and Vietnam Era

Veterans (APR 1984)(X) 52.222-36 Affirmative Action for Handicapped Workers (APR 1984)(X) 52.222-37 Employment Reports on Special Disabled Veterans and

Veterans of the Vietnam Era (JAN( ) 52.222-41 Service Contract Act of 1965, as Amended (MAY 1989)( ) 52.222-43 Fair Labor Standards Act and Service Contract Act -

Price Adjustment (Multiple Year and Option Contracts)(MAY 1989)

( ) 52.222-44 Fair Labor Standards Act and Service Contract Act -Price Adjustment (MAY 1989)

( ) 52.222-48 Exemption from Application of Service Contract ActProvisions for Contracts for

(X) 52.223-2 Clean Air and Water (JAN 1997)( ) 52.223-3 Hazardous Material Identification and Material Safety

Data (NOV 1991)(X) 52.223-6 Drug-Free Workplace (JAN 1997)( ) 52.223-9 Certification of Percentage of Recovered Material

Consent for EPA Designated Items Used( ) 52.223-10 Waste Reduction Program (MAY 1995)( ) 52.223-12 Refrigeration Equipment and Air Conditioners (MAY l995)( ) 52.223-14 Toxic Chemical Release Reporting (OCT 1996)( ) 52.224-1 Privacy Act Notification (APR 1984)( ) 52.224-2 Privacy Act (APR 1984)( ) 52.225-10 Duty-Free Entry (APR 1984)( ) 52.225-14 Inconsistency Between English Version and Translation

of Contract (AUG 1989)( ) 52.225-17 Buy American Act - Supplies Under European Community

Agreement (MAY 1995)( ) 52.226-1 Utilization of Indian Organizations and Indian-Owned

Economic Enterprises (SEP 1996)(X) 52.227-1 Authorization and Consent (JUL 1995)( ) 52.227-1 Authorization and Consent (JUL 1995) - Alternate II

(APR 1984)( ) 52.227-2 Notice and Assistance Regarding Patent and Copyright

Infringement (AUG 1996)



( ) 52.227 3 Patent Indemnity (APR 1984)( ) 52.227-9 Refund of Royalties (APR 1984)( ) 52.227-10 Filing of Patent Applications - Classified Subject

Matter (APR 1984)( ) 52.227-11 Patent Rights - Retention by the Contractor (Short

Form) (JUN 1989)( ) 52.227-11 Patent Rights - Retention by the Contractor (Short

Form) (JUN 1989) - Alternate II (JUN 1989)(X) 52.227-12 Patent Rights - Retention by the Contractor (Long Form)

(JAN 1997)( ) 52.227-12 Patent Rights - Retention by the Contractor (Long Form)

(JAN 1997) - Alternate II (JUN 1989)( ) 52.227-13 Patent Rights - Acquisition by the Government (JAN

1997)( ) 52.227-13 Patent Rights - Acquisition by the Government (JAN

1997) - Alternate II (JUN 1989)( ) 52.228-3 Workers Compensation Insurance (Defense Base Act) (APR

1984)( ) 52.228-4 Workers Compensation and War Hazard Insurance Overseas

(APR 1984)( ) 52.228-5 Insurance - Work on a Government Installation (JAN

1997)( ) 52.228-14 Irrevocable Letter of Credit (JUN 1996)( ) 52.228-16 Performance and Payment Bonds - Other Than Construction

(SEP 1996)( ) 52.228-16 Performance and Payment Bonds - Other Than Construction

(SEP 1996) -Alternate I (SEP 1996)( ) 52.229-3 Federal, State and Local Taxes (JAN 1991)(X) 52.229-4 Federal, State and Local Taxes (Noncompetitive

Contract) (JAN 1991)(X) 52.229-5 Taxes - Contracts Performed in U S Possessions or

Puerto Rico (APR 1984)( ) 52.229-6 Taxes - Foreign Fixed Price Contracts (JAN 1991)</TABLE>

( ) 52.230-2 Cost Accounting Standards (AUG 1992)( ) 52.230-3 Disclosure and Consistency of Cost Accounting Practices (APR

1996)( ) 52.230-4 Consistency in Cost Accounting Practices (AUG 1992)( ) 52.230-5 Cost Accounting Standards - Educational Institution (APR

1996)( ) 52.230-6 Administration of Cost Accounting Standards (APR 1996)( ) 52.232-4 Payments Under Transportation Contracts and Transportation

Related Service Contracts (APR 1984)(X) 52.232-9 Limitation on Withholding of Payments (APR 1984)( ) 52.232-16 Progress Payments (JUL 1991)( ) 52.232-16 Progress Payments (JUL 1991) Alternate I (AUG 1987)( ) 52.232-18 Availability of Funds (APR 1984)( ) 52.23224 Prohibition of Assignment of Claims (JAN 1986)(X) 52.232-25 Prompt Payment (MAR 1994)( ) 52.232-33 Mandatory Information for Electronic Funds Transfer Payment

(AUG 1996)( ) 52.232-34 Optional Information for Electronic Funds Transfer Payment

(AUG 1996)(X) 52.233-1 Disputes (OCT 1995)

MDA904-97-C-042430 of 34

<TABLE><S> <C>( ) 52.233-1 Disputes (OCT 1995) - Alternate I (DEC 1991)( ) 52.237-2 Protection of Government Buildings, Equipment and Vegetation (APR 1984)( ) 52.237-3 Continuity of Services (JAN 1991)( ) 52.237-9 Waiver of Limitation on Severance Payments to Foreign Nationals (OCT 1998)( ) 52.239-1 Privacy or Security safeguards (AUG 1996)( ) 52.242-1 Notice of Intent to Disallow Costs (APR 1984)( ) 52.242-2 Production Progress Reports (APR 1991)(X) 52.242-3 Penalties for Unallowable Costs (OCT 1995)( ) 52.242-4 Certification of Final Indirect Costs (JAN 1997)( ) 52.242-10 F. O. B. origin - Government Bills of Lading or Prepaid Postage (APR 1984)( ) 52.243-1 Changes - Fixed Price (AUG 1987) - Alternate I (APR 1984)(X) 52.243-1 Changes - Fixed Price (AUG 1987) - Alternate II (APR 1984)( ) 52.243-1 Changes - Fixed Price (AUG 1987) - Alternate III (APR 1984)(X) 52.244-5 Competition in Subcontracting (DEC 1996)( ) 52.244-6 Subcontracts for Commercial Items and Commercial Components (OCT 1995)( ) 52.245-1 Property Records (APR 1984)( ) 52.245-2 Government Property (Fixed-Price Contracts) (DEC 1989)( ) 52.245-2 Government Property (Fixed Price Contracts) (DEC 1989) - Alternate I (APR 1984)



( ) 52.245-4 Government - Furnished Property (Short Form) (APR 1984)( ) 52.245-18 Special Test Equipment (FEB 1993)( ) 52.245-19 Government Property Furnished "As Is" (APR 1984)( ) 52.246 23 Limitation of Liability (FEB 1997)( ) 52.246 24 Limitation of Liability - High Value Items (FEB 1997)( ) 52.246-24 Limitation of Liability - High Value Items (FEB 1997) - Alternate I (APR 1984)(X) 52.246-25 Limitation of Liability - Services (FEB 1997)( ) 52.247-1 Commercial Bill of Lading Notations (APR 1984)( ) 52.247 64 Preference for Privately Owned U.S. Flag Commercial Vessels (AUG 1996)( ) 52.247-64 Preference for Privately Owned U.S. Flag Commercial Vessels (AUG 1996) - Alternate I

(APR 1984)( ) 52.248-1 Value Engineering (MAR 1989)( ) 52.248-1 Value Engineering (MAR 1989) - Alternate I (APR 1984)( ) 52.248-1 Value Engineering (MAR 1989) - Alternate II (APR 1984)( ) 52.248-1 Value Engineering (MAR 1989) - Alternate III (APR 1984)( ) 52.249-2 Termination for Convenience of the Government (Fixed Price) (SEP 1996)( ) 52.249-2 Termination for Convenience of the Government (Fixed Price) (SEP 1996) Alternate II

(SEP 1996)(X) 52.249-4 Termination for Convenience of the Government (Services) (Short Form) (APR 1984)(X) 52.251-1 Government Supply sources (APR 1984)

DFARS CLAUSES

(X) 252.201-7000 Contracting Officer s Representative (DEC 1991)(X) 252.203-7000 Statutory Prohibitions on Compensation to Former Department of Defense Employees (NOV

1995)( ) 252.203-7002 Display of DoD Hotline Poster (DEC 1991)(X) 252.204-7000 Disclosure of Information (DEC 1991)( ) 252.204-7002 Payment for Subline Items Not Separately Priced (DEC 1991)(X) 252.205-7000 Provision of Information to Cooperative Agreement Holders (DEC 1991)( ) 252.209-7004 Reporting of Commercial Transactions With The Government of a Terrorist Country (SEP 1994)( ) 252.209-7005 Military Recruiting on Campus (FEB 1996)( ) 252.211-7000 Acquisition Streamlining (DEC 1991)( ) 252.215-7000 Pricing Adjustments (DEC 1991)( ) 252.215-7002 Cost Estimating System Requirements (DEC 1991)( ) 252.219-7001 Notice of Partial Small Business Set-Aside with

Preferential consideration for Small( ) 252.219-7001 Notice of Partial Small Business Set-Aside with

Preferential Consideration for Small( ) 252.219-7003 Small Business and Small Disadvantaged Business

subcontracting Plan (DoD Contracts) (APR 1996)( ) 252.219-7006 Notice of Evaluation Preference for Small Disadvantaged Business Concerns (MAY 1995)( ) 252.219-7006 Notice of Evaluation Preference for Small

Disadvantaged Business Concerns (MAY 1998)Alternate I (DEC 1991)

( ) 252.223-7001 Hazard Warning Labels (DEC 1991)( ) 252.223-7005 Hazardous Waste Liability and Indemnification (OCT 1992)( ) 252.223-7006 Prohibition on Storage and Disposal of Toxic and Hazardous Materials (APR 1993)( ) 252.223-7006 Prohibition on Storage and Disposal of Toxic and

Hazardous Waste (APR 93) - Alternate I (NOV 1995)</TABLE>

<TABLE><S> <C>( ) 252.225-7001 Buy American Act and Balance of Payments Program (JAN 1994)( ) 252.225-7002 Qualifying Country Sources as Subcontractors (DEC 1991)( ) 252.225-7005 Identification of Expenditures in the United States (DEC 1991)(X) 252.225-7007 Trade Agreements Act (JUL 1996)( ) 252.225-7008 Supplies to be Accorded Duty Free Entry (DEC 1991)( ) 252.225-7009 Duty Free Entry - Qualifying Country End Products and Supplies (DEC 1991)( ) 252.225-7010 Duty-Free Entry - Additional Provisions (DEC 1991)( ) 252.225-7011 Restriction on Acquisition of Supercomputers (JUL 1995)( ) 252.225-7014 Preference for Domestic Speciality Metals (NOV 1995)( ) 252.225-7015 Preference for Domestic Hand or Measuring Tools (DEC 1991)</TABLE>

MDA904-97-C-042431 of 34

( ) 252.225-7022 Restriction on Acquisition of Polyacrylonitrile (PAN) BasedCarbon Fiber (DEC 1991)

( ) 252.225-7024 Restriction on Acquisition of Night Vision Image IntensifierTubes and Devices (DEC 1991)

( ) 252.225-7025 Foreign Source Restrictions (SEP 1996)( ) 252.225-7026 Reporting of Overseas Subcontracts (NOV 1995)( ) 252.225-7028 Exclusionsay Policies and Practices of Foreign Governments

(DEC 1991)( ) 252.225-7032 Waiver of United Kingdom Levies (OCT 1992)( ) 252.225-7036 North American Free Trade Agreement Implementation Act (JAN

1994)( ) 252.225-7036 North American Free Trade Agreement Implementation Act (JAN



1994) - Alternate I (MAY 1995)( ) 252.225-7037 Duty-Free Entry - NAFTA Country End Products and Supplies (JAN

1994)( ) 252.226-7000 Notice of Historically Black Colleges or Universities and

Minority Institution Set-asides (APR 1994)(X) 252.227-7013 Rights in Technical Data - Noncommercial Items (NOV 1995)(X) 252.227-7014 Rights in Noncommercial Computer Software and Noncommercial

Computer Software Documentation (JUN 1995)( ) 252.227-7014 Rights in Noncommercial Computer Software and Noncommercial

Computer Software Documentation (JUN 1995)( ) 252.227-7019 Validation of Asserted Restrictions - Computer Software (JUN

1995)( ) 252.227-7020 Rights in Data--Special Works (JUN 1995)( ) 252.227-7021 Rights in Data--Existing Work (MAR 1979)( ) 252.227-7025 Limitation on the Use or Disclosure of Government-Furnished

Information Marked With Restrictive Legends (JUN 1995)( ) 252.227-7026 Deferred Delivery of Technical Data or Computer Software (APR

1988)( ) 252.227-7027 Deferred Ordering of Technical Data or Computer Software (APR

1988)(X) 252.227-7030 Technical Data-Withholding of Payments (OCT 1988)( ) 252.227-7032 Rights in Technical Data and Computer Software (Foreign) (JUN

1975)(X) 252.227-7036 Certification of Technical Data Conformity (MAY 1987)(X) 252.227-7037 Validation of Restrictive Markings Technical Data (NOV 1995)( ) 252.227-7039 Patents - Reporting of Subject Inventions (APR 1990)( ) 252.228-7000 Reimbursement for War-Hazard Losses (DEC 1991)( ) 252.228-7003 Capture and Detention (DEC 1991)( ) 252.232-7002 Progress Payments for Foreign Military Sales Acquisitions (DEC

1991)( ) 252.232-7004 DoD Progress Payment Rates (FEB 1996)( ) 252.232-7007 Limitation of Government's Obligation (AUG 1993)( ) 252.232-7007 Limitation of Government s Obligation (AUG 1993) - Alternate I

(AUG 1993)(X) 252.233-7000 Certification of Claims and Requests for Adjustment or Relief

(MAY 1994)( ) 252.234-7001 Cost/Schedule Control Systems (DEC 1991)( ) 252.239-7000 Protection Against Compromising Emanations (DEC 1991)( ) 252.239-7002 Access (DEC 1991)( ) 252.242-7000 Postaward Conference (DEC 1991)( ) 252.242-7003 Application for U.S. Government Shipping

Documentation/Instructions (DEC 1991)( ) 252.242-7004 Material Management and Accounting System (SEP 1996)( ) 252.245-7000 Government-Furnished Mapping, Charting and Geodesy Property

(DEC 1991)( ) 252.245-7001 Reports of Government Property (MAY 1994)(X) 252.246-7000 Material Inspection and Receiving Report (DEC 1991)( ) 252.246-7001 Warranty of Data (DEC 1991)( ) 252.246-7001 Warranty of Data (DEC 1991) - Alternate I (DEC 1991)( ) 252.246-7001 Warranty of Data (DEC 1991) - Alternate II (DEC 1991)( ) 252.249-7001 Notification of substantial Impact on Employment (DEC 1991)( ) 252.249-7002 Notification of Proposed Program Termination or Reduction (MAY

1995)(X) 252.251-7000 Ordering From Government Supply Sources (MAY 1995)

FULL TEXT CLAUSES - WHEN APPLICABLE. Pursuant to FAR 52 102-2, the followingclauses (marked (X) when applicable) shall be incorporated in this solicitationand/or contract in full text Therefore, a copy of the applicable clause(s)follows:

CLAUSE NO. TITLE

FAR CLAUSES

( ) 52.209-1 Qualification Requirement (FEB 1995)( ) 52.209-3 First Article Approval - Contractor Testing (SEP 1989)( ) 52.209-3 First Article Approval - Contractor Testing (SEP 1989) -

Alternate I (JAN 1997)( ) 52.209-3 First Article Approval - Contractor Testing (SEP 1989) -

Alternate II (SEP 1989)( ) 52.209-4 First Article Approval - Government Testing (SEP 1989)

( ) 52.209-4 First Article Approval - Government Testing (SEP 1989) -Alternate I (JAN 1996)

( ) 52.209-4 First Article Approval - Government Testing (SEP 1989) -Alternate II (SEP 1989)

(X) 52.215-42 Requirements for Cost or Pricing Data or Information OtherThan Cost or Pricing Data Modifications (JAN 1997) -Alternative 1 (OCT 1995)

( ) 52.215 42 Requirements for Cost or Pricing Data or Information Other



Than Cost or Pricing Data Modifications (JAN 1997) -Alternate III (OCT 1995)

( ) 52.215-42 Requirements for Cost or Pricing Data or Information OtherThan Cost or Pricing Data Modifications (JAN 1997) -Alternate IV (OCT 1995)

( ) 52.216-16 Incentive Price Revision - Firm Target (FEB 1997)( ) 52.216-16 Incentive Price Revision - Firm Target (FEB 1997) -

Alternate I (APR 1984)( ) 52.216-17 Incentive Price Revision - Successive Targets (FEB 1997)( ) 52.216-17 Incentive Price Revision - Successive Targets (FEB 1997) -

Alternate I (APR 1984)

MDA904-97-C-042432 of 34

( ) 52.216-23 Execution and Commencement of Work (APR 1984)( ) 52.216-24 Limitation of Government Liability (APR 1984)( ) 52.216-25 Contract Definitization (APR 1984)( ) 52.216 25 Contract Definitization (APR 1984) - Alternate I (APR 1984)( ) 52.217-6 Option for Increased Quantity (APR 1984)(X) 52.217-9 Option to Extend the Term of the Contract (MAR 1989)( ) 52.222-26 Equal Opportunity (APR 1984) - Alternate (APR 1984)( ) 52.222-42 Statement of Equivalent Rates for Federal Hires (MAY 1989)( ) 52.222-47 SCA Minimum Wages and Fringe Benefits Applicable to

Successor Contract Pursuant to Predecessor ContractorCollective Bargaining Agreements (CBA) (MAY 1989)

( ) 52.222-49 Service Contract Act - Place of Performance Unknown (MAY1989)

( ) 52.227-3 Patent Indemnity (APR 1984) - Alternate I (APR 1984)( ) 52.227-3 Patent Indemnity (APR 1984) Alternate II (APR 1984)( ) 52.227-3 Patent Indemnity (APR 1984) - Alternate III (JUN 1995)( ) 52.227-5 Waiver of Indemnity (APR 1984)( ) 52.227-11 Patent Rights - Retention by the Contractor (Short Form)

(JUN 1989) - Alternate I (JUN 1989)( ) 52.227-12 Patent Rights - Retention by the Contractor (Long Form) (JAN

1997) Alternate I (JUN 1989)( ) 52.227-13 Patent Rights - Acquisition by the Government (JAN 1997) -

Alternate I (JUN 1989)( ) 52.229-7 Taxes--Fixed-Price Contracts with Foreign Governments (JAN

1991)( ) 52.232-16 Progress Payments (JUL 1991) - Alternate II (AUG 1987)( ) 52.243-7 Notification of Changes (APR 1984)( ) 52.244 1 Subcontracts (Fixed Price Contracts) (FEB 1995)( ) 52.244-1 Subcontracts (Fixed Price Contracts) (FEB 1995) Alternate I

(APR 1984)( ) 52.244-2 Subcontracts Under Cost-Reimbursement and Letter Contracts

(FEB 1997) - Alternate I (AUG 1996)( ) 52.246 20 Warranty of Services (APR 1984)( ) 52.247-66 Returnable Cylinders (MAY 1994)( ) 52.252-4 Alterations in Contract (APR 1984)( ) 52.252-6 Authorized Deviations in Clauses (APR 1984)

DFARS CLAUSES

( ) 252.217-7027 Contract Definitization (FEB 1996)( ) 252.219-7005 Incentive for Subcontracting with small Businesses, Small

Disadvantaged Businesses, Historically Black Colleges andUniversities and Minority Institutions (NOV 1995)

( ) 252.219-7005 Incentive for Subcontracting with Small Businesses, SmallDisadvantaged Businesses, Historically Black Colleges andUniversities and Minority Institutions (NOV 1995) -Alternate I (DEC 1991)

( ) 252.225-7027 Limitation on Sales Commissions and Fees (DEC 1991)( ) 252.232-7003 Flexible Progress Payments (DEC 1991)( ) 252.232-7007 Limitation of Government's Obligation (AUG 1993)( ) 252.239-7016 Telecommunications Security Equipment, Devices, Techniques

and Services (DEC 1991)( ) 252.243-7000 Engineering Change Proposals (MAY 1994)( ) 252.243-7000 Engineering Change Proposals (MAY 1994) - Alternate I (MAY

1994)( ) 252.247-7024 Notification of Transportation of Supplies by Sea (NOV 1995)( ) 252.249-7000 Special Termination Costs (DEC 1991)

I.6 THE FOLLOWING 8(A) CLAUSES, PROVISIONS, AND CERTIFICATIONS ARE INCORPORATED:

PART 1 - CERTIFICATION OF SUBCONTRACTING

I certify that at least the percentage of work required by 13 CFR 124.314 shallbe performed by employees of my firm and the SBA approval will be obtained prior



to entering a subcontract with any other concern. Those percentages are:

[X] SERVICES (except construction) -- At least 50 percent of the cost ofcontract performance incurred for labor must be expended for employees of an8(a) concern.

[_] SUPPLIES (other than from regular dealers) -- At least 50 percent of thecost of manufacturing that supplies, not including the ocst of material.

MDA904-97-C-042433 of 34

[_] GENERAL CONSTRUCTION -- At least 15 percent of the cost of the contract,not including the cost of materials. must be expended or employees of the 8 (a)concern.

[_] CONSTRUCTION BY SPECIAL TRADE CONTRACTORS -- At least 25 percent of the costof the contract, not including the cost of materials must be expended foremployees of the 8 (a) concern.

PART 2

I hereby request permission to subcontract with ___________________for theamount specified in our Best and Final Offer.

PART 3 - COMPETITIVE BUSINESS MIX CERTIFICATION

(A) [X] FIRM NAME: LITRONICS INC _____________________is in the developmentstage.

(B) [ ] FIRM NAME: _________________________________acknowledges that it iscurrently in the transition stage of the 8 (a) Program Participation andcertifies that it is in compliance with the non-8(a) business activity targetsestablished pursuant to 13 CFR 124.312(c) (4) and (5).

(C) [ ] FIRM NAME: _________________________________certifies that it is incompliance with the remedial measures imposed by SBA, if any, pursuant to 13 CFR124.312(c) (12). Disrep resentation by falsely certifying to past compliancewith the non-8(a) business activity targets established in the business planapproved by SBA shall subject that individual to:

(1) Punishment by a fine of not more than $500,000 or imprisonment for notmore than 10 years, or both;

(2) The administrative remedies prescribed by th eProgram fraud CivilRemedies Act of 1986 (31 USC 3801.3812);

(3) Suspension and debarment as specified in 13 CFR 145 of Subpart 9.4 ofTitle 48 Code of Federal Regulations (or any successor regulation) on the basisthat such misrepresentation indicates a lack of business integrity thatseriously and directly affects the present responsibility of a person or entityto transact business with the Federal Government; and

(4) Ineligibility for participation in any program or activity conductedunder the authority of the Small Business Act or the Small Business investmentAct for a period of not to exceed 3 years.

MDA904-97-C-042434 of 34

FIRM NAME: ______________________________

ADDRESS: ________________________________

CITY, STATE, ZIP: _________________________

_______________________________________Signature of President, Partner or Proprietor Date: _________________

ORIGINAL SIGNATURES ONLY, REPRODUCTIONS WILL NOT BE ACCEPTED.

PART 4 - ADDITIONAL CLAUSES AND PROVISIONS

52.219-11 Special 8(a) Contract Conditions (FEB 1990)Name of Agency: Maryland Procurement Office

52.219-12 Special 8(a) Subcontract Conditions (FEB 1990)Prime Contract Number:Name of Agency: Maryland Procurement Office



Name of Subcontractor:

52.219-14 Limitations on Subcontracting (JAN 1991)

52.219-17 Section 8(a) Award (DEC 1996)Name of Agency: Maryland Procurement Office

52.203-11 Certification and Disclosure Regarding Payment s to InfluenceCertain Federal Transactions (APR 1991)

Certification of Subcontracting

Certification of Competitive Business Mix

SECTION J - LIST OF ATTACHMENTS

J.1 Statement of Work entitled, "Multi Level Information System SecurityInitiative, Crypto Card System Analysis and Library and Driver Architecture andDevelopment," dated 10 January 1997, 7 pages.

J.2 Contract Data Requirements List, DD Form 1423, dated 13 February 1997, 18pages.

J.3 Award Fee Plan (Rev. 2), dated 10 June 1997, 5 pages.

MDA904.97-C-0424P00009Page 2 of 7

SECTION B - SUPPLIES/SERVICES AND PRICES is revised to include:

B.3 SUPPLIES/SERVICES (Date of Contract Modification P00009 - 30 September 1998)

UNITCLIN ITEM DESCRIPTION UNIT QTY PRICE TOTAL

0001 The contractor shall furnish the HRS Gov't 6,400 XXXnecessary materials. facilities, Cont'r 5,237equipments, supplies and servicesof skilled professional, technicaland support personnel to fulfillthe requirements set forth in theStatement of Work entitled"Task Order for an AdvancedFortezza and CommercialAlgorithm Smartcard, Version2.0," dated 27 May 1998.

0001AA Program Manager X XXX $118.06 XXXX0001AB Sr. Electrical Engineer X XXX $ 75.41 XXXX0001AC Electronic Technician X XXX $ 69.32 XXXX0001AD Systems Analyst X XXX $ 75.38 XXXX0001AE Sr. Software Engineer X XXX $ 98.38 XXXX0001AF Software Engineer X XXX $ 62.60 XXXX

Total Amount CLIN 0001 Not-To-ExceedACR. AC Government's Share $519,434.00

Contractor's Share $424,991.00

0002 Award Fee Pool, to be determined For the Period$519,934.00in accordance with the Award FeeDetermination Plan for MultiLevel Information SystemSecurity Initiative Crypto CardSystem Analysis and Library andDriver Architecture andDevelopment, dated 10 June1997 (Rev. 2). There shall be oneevaluation for the period, date ofcontract modification - 30September 1998. The contractoris authorized to bill for up to 50%of the available award fee ($), ona monthly basis in equal amounts.ACR: AC

03 Travel For the Job Not-To-Exceed(Inclusive of Burdens) Government's Share $8,37l.00



ACR: AC Contractor's Share $6,849.00

MDA904-97-C-0424P00009Page 3 of 7

<TABLE><CAPTION>CLIN ITEM DESCRIPTION UNIT QTY UNIT PRICE TOTAL<S> <C> <C> <C> <C> <C>0004 Other Direct Costs For the Job Not-To-Exceed

(Inclusive of Burdens) Government's Share $214,252.00ACR: AC Contractor's Share $288,050.00

0005 Data, in accordance with the For the Lot Not-Separately-PricedContract Data RequirementsList (CDRL), DD Form 1423,dated 13 February 1997ACR: AC

TOTAL NOT TO-EXCEED GOVERNMENT'S SHARE $794,000.00TOTAL CONTRACTOR'S SHARE $721,890,00

</TABLE>

SECTION C - DESCRIPTION/SPECIFICATION WORK STATEMENTS is revised to include:

C.4 Statement of Work entitled, "Task Order for an Advanced Fortezza andCommercial Algorithm Smartcard, Version 2.0" dated 27 May 1998.

C.5 The Government shall submit individual task orders to the Contractor. Uponreview of the task, the contractor will review the task requirement and providethe Government with an estimate of the required labor hours, by category,material and travel for performance. If acceptable, the Government willauthorize the work to proceed by signing the task order and returning it to theContractor. The Contractor is not authorized to deviate from the specified laborhours, per labor category, by more than ten percent (10%) without priorauthorization from the Contracting Officer. In the event the Contractor cannotperform the effort within the authorized deviation, a revised estimate shall besubmitted to the Government for approval. If acceptable, the task order will beamended accordingly. However, in no event shall the Contractor exceed the totalNot-to-Exceed portion of the contract regardless of the authorized deviationspecified herein. Man Hours expended in preparing Task Order estimates shall notbe directly charged to this contract.


F.7 352.211-9004 PERIOD OF PERFORMANCE (APR 1989) is added:

Section B.3 of this contract shall extend from date of contractmodification to 30 September 1998, unless performance is sooner terminated underthe terms of the contract.

(End of Clause)

MDA904-97-C-0424P00009Page 4 of 7

SECTION C - CONTRACT ADMINISTRATION DATA

G.l ACCOUNTING AND APPROPRIATION DATA is revised to include ACR: AC:

<TABLE><CAPTION>ACR: AA Obligate<S> <C>977/80400.4500 574E51 999-2520 S18119 03200106 IX 0000 X22 I20B

Previously Obligated for Section B.1 CLINs 000l, 0003 and 0004 $ 446,874.00Previously Obligated for Provisional Award Fee Payments $ 0.00Previously Obligated for Future Award Fee Payments $ 0.00Previously Obligated for Award Fee Earned $ 36,433.00Total Amount Previously Obligated ACR: AA $ 483,307.00

ACR: AB Obligate978/90400.4500 584E51 999-2520 S18119 04700400 IX 0000 X22 I25D

Previously Obligated for section B.2 CLINs 0001, 0003 and 0004 $1,154,441.00Previously Obligated for Provisional Award Fee Payments $ 42,279.50Previously Obligated for Future Award Fee Payments $ 42,279.50Total Amount Previously Obligated (PR: I6-97-9093-0003) $ 850,000.00Total Amount Previously Obligated (PR: I6-97-2093-0004) $ 205,000.00Total Amount Previously obligated (PR: I6-97-2093-0005) $ 184,000.00



Total Amount Previously Obligated ACR: AB $1,239,000.00

ACR: AC Obligate978/90400.4500 584E51 999-2550 S18119 04700100 IX 0000 X21 I25D

Obligate This Action for section B.3 CLINs 0001, 0003 and 0004 $ 742,057.00Obligate This Action for Provisional Award Fee Payments $ 25,971.50Obligate This Action for Future Award Fee Payments $ 25,971.50Total Obligated This Action (PR: I6-98-3701-0000) ACR: AC $ 794,000.00

</TABLE>

MDA904-97-C-0424P00009Page 5 of 7

G.2 352.216-9007 NOTICE: AWARD FEE FUNDING (JUL 1993) is restated as follows:

Funds in the amount of $42,279.50 Section B.2, and $25,971.50, Section B.3,have been obligated under this con tract towards future award feedeterminations but are not available for the Contractor to bill against or incurcosts against. Obligated award fee funds identified above will be released tothe Contractor via subsequent modifications after the Government has rendered anaward fee determination in accordance with the Award Fee Plan currently in forceunder this contract. Upon receipt of the aforementioned modifications, theContractor is authorized to bill for the earned fee.

G.14 METHOD OF INVESTMENT CALCULATION / INVOICING (applicable to Section B.3only)

The Contractor agrees that it will make an investment of 45% of total costsincurred up to a maximum investment contribution of $721,890.00. In order toimplement this investment, the Contractor agrees that each of its invoices forincurred costs on the effort contained in Section B.3 will include the followinginformation:

Total costs incurred55% of those costs charged to the Government45% of those costs charged to the ContractorTotal amount to be paid by the GovernmentTotal investment to date by Contractor

It is further agreed by the parties that, once the maximum investment isreached, any additional costs incurred above the estimated costs containedherein that are otherwise allowable, allocable, and reasonable and in accordancewith the other provisions of the contract, will be invoiced up to a total of$1,515,890.00, which total includes the contractor's maximum investment of$721,890.00, and the government's investment of $794,000.00 for the currentperiod of performance. The contractor's maximum investment is $721,890.00. Allinvoices will be paid in accordance with the payment provisions stated in thiscontract. In no case will the contractor invoice the government for more thanthe Not-To-Exceed amount listed in the contract. The Contractor shall notify theContracting Officer in writing whenever it has reason to believe that the costsit expects to incur under this contract in the next 60 days, when added to allcosts previously incurred, will exceed 75 percent of the amount currentlyobligated on the contract. The Contractor's notice shall include an estimate offunds required to continue performance. If, after notification by the Contractorpursuant to this clause, additional funds are required to be obligated for afurther period, the government will negotiate an appropriable resolution.

(End of Clause)

SECTION H - SPECIAL CONTRACTOR REQUIREMENTS IS REVISED TO INCLUDE:

H.19 352.227-9005 NOTIFICATION OF FOREIGN ORIGIN SOFTWARE AND/OR FIRMWARE (OCT1997)

Offerors/Contractor shall notify the Contracting Officer in writing if anyforeign manufactured, developed, main tained and/or modified software and/orfirmware will be used or included in the deliverables under this contract. Foreign-origin software and/or firmware that is merely a possible candidate for useunder this contract shall also be identified. Notification pursuant to thisclause must include the identity of the foreign source and the nature of thesoftware application, and is required as soon as there is a reason to know orsuspect foreign origin.

NSA reserves the right to exclude foreign-origin software and/or firmwarefrom use under contract on a case-by-case basis.

(End of clause)

H.20 352.216-9012 TECHNICAL TASK ORDERS (OCT 1993)

(a) Technical Task Orders shall be issued by the Contracting Officer or



his/her duly authorized representative. The TTOs will include a ceiling price,beyond which the Contractor shall not incur costs.

(b) The performance of the work under each TTO order shall be subject tothe technical direction and surveillance of the Contracting Officer'sRepresentatives (CORs) who are identified under separate letter. "TechnicalDirection",

MDA904-97-C-0424P00009Page 6 of 7

as used herein, is direction to the Contractor which fills in details orotherwise completes or explains the scope of the work and specific requirementsas set forth in the Statement of Work and in each TTO. Furthermore, the COR maysuggest to the Contractor lines of inquiry or methods of approach with respectto work under this order. It is intended that the Technical Task Orders (TTOs)or suggestions furnished shall be within the general scope of the work as setforth in the Statement of Work and shall not constitute changes as described inthe "Changes" clause.

(c) The following procedures shall be followed in initiating tasks underthis order:

A TTO setting forth the detailed requirements of a particular task,together with any necessary attachments (draw ings, schematics, etc.,) shall befurnished to the Contractor in writing by a designated COR. The Contractor isobligated to perform all TTOs issued pursuant to the technical specificationcited in paragraph (b), above. TTOs shall not constitute a basis for anyincrease in the fee or extension to the period of performance. Nothing containedin this clause authorizes the Contractor to incur costs in excess of theestimated cost or fund limitation set forth in the order.

(d) All TTOs furnished to the Contractor shall be incorporated into thisorder by reference.

(End of Clause)

H.21 MPO 232-9009 CEILING PRICE

The price negotiated for this contract and for any subsequent job ordersresulting hereunder shall be a ceiling once which the contractor exceeds at hisown risk without prior approval of the Contracting Officer.


1.5 REFERENCED CLAUSES IS REVISED TO INCLUDE:

52.215-2 Audits and Records - Negotiations (AUG 1996)

SECTION J - LIST OF ATTACHMENTS IS REVISED TO INCLUDE:

J.4 Statement of Work entitled, "Task Order for an Advanced Fortezza andCommercial Algorithm Smartcard, Version 2.0," dated 21 May 1998, 22 pages(previously provided).

MDA904-97-C-0424P00009Page 7 of 7

C. As a result of the foregoing, the total contract price is restated asfollows:

<TABLE><CAPTION>

Section B.l FROM BY TO<S> <C> <C> <C>Cost of CLINs 0001, 0003 and 0004 $ 446,874.00 $ 0.00 $ 446,874.00

Award Fee Pool $ 0.00 $ 0.00 $ 0.00

Earned Award Fee $ 36,433.00 $ 0.00 $ 36,433.00

Total FPAF Amount $ 483,307.00 $ 0.00 $ 483,307.00

Section B.2 FROM BY TO

Cost of CLINs 0001, 0003 and 0004 $1,154,441.00 $ 0.00 $1,154,441.00

Award Fee Pool $ 84,559.00 $ 0.00 $ 84,559.00

Earned Award Fee $ 0.00 $ 0.00 $ 0.00



Total FPAF Amount $1,239,000.00 $ 0.00 $1,239,000.00


Cost of CLINs 0001, 0003 and 0004 $ 0.00 $742,057.00 $ 742,057.00

Award Fee Pool $ 0.00 $ 51,943.00 $ 51,943.00

Earned Award Fee $ 0.00 $ 0.00 $ 0.00

Total FPAF Amount $ 0.00 $794,000.00 $ 794,000.00

FROM BY TO

Total Contract Price $1,722,307.00 $794,000.00 $2,516,307.00</TABLE>

D. Except as provided herein, all terms and conditions of this contract, aspreviously modified, remain unchanged and in full force and effect.

LITRONIC INDUSTRIESPURCHASE ORDER WORKSHEET

PO Number:MDA904-97-C-0424, P00008 Customer Number:Date: June 12, 1998 Customer: NSA

Maryland Procurement OfficeAddress: 9800 Savage Road

FANX IIIFort George G. Meade, MD 20755-6000

Buyer: M. Quansy

REMARKS SECTION

1. ADDITIONAL FUNDING FOR FY98. TOTAL CONTRACT AMOUNT IS$1,239,000.00.

2. PROVIDE COPY TO BOB GRAY.

ITEM PART NUMBER QUANTITY UNIT PRICE DUE DATE TOTAL

0001 See Page 3 of Contract for 184,000.00 N/A $184,000.00Appropriate Labor Categories

Total Price $184,000.00Taxable NOInitiated by: ProhaskaRep: Prohaska

P00006Page 2 of 3

SECTION B - SUPPLIES OR SERVICES AND PRICES/COSTS

B.1 SUPPLIES/SERVICES (Basic period 27 June 1997 - 30 September 1997) is revisedto read:

CLIN ITEM DESCRIPTION UNIT QTY UNIT PRICE TOTAL0001 The contractor shall furnish HRS 4,832 XXX $443,445.57

the necessary materials,facilities, equipment,supplies, and services ofskilled professional,technical and supportpersonnel to fulfill therequirements set forth in theStatement of Work for MultiLevel Information SystemSecurity Initiative CryptoCard System Analysis andLibrary and DriverArchitecture andDevelopment, dated 10January 1997.

NOTE: The above stated amounts reflect the following revisions:

<TABLE><CAPTION>



FROM BY TO<S> <C> <C> <C> <C> <C>

Quantity in hours 4,582 250 4,832Total Price $421,116.00 $22,329.57 $443,445.570001AA Program Manager X XXX $ 118.06 XXXX0001AB Sr. Electrical Engineer X XXX $ 75.41 XXXX0001AC Electronic Technician X XXX $ 69.32 XXXX000lAD Systems Analyst X XXX $ 75.38 XXXX

0001AE Sr. Software Engineer X XXX $ 98.38 XXXX0001AF Software Engineer X XXX $ 62.60 XXXXTotal Amount CLIN 0001 Not-To-Exceed $443,445.57

0002 Award Fee Earned For the Period $ 36,433.000003 Travel For the Job Not-To-Exceed $ 0.00</TABLE>

(Inclusive of Burdens)NOTE: The above stated amounts reflect the following revisions:

FROM BY TO$15,000.00 ($15,000.00) $ 0.00

0004 OTHER DIRECT COSTS For the Job Not-To-Exceed $ 3,428.43

(Inclusive of Burdens)

MDA904-97-C-0424P00005Page 3 of 3

NOTE 2: TRAVEL shall be reimbursed at cost. Lodging shall be reimbursed atactual costs meals and incidental expenses shall be reimbursed at the applicableflat rate. The total of lodging, meals, and incidental expenses shall not exceedthe established rate for each location set forth in the "Federal TravelRegulations (FTR);" the "Joint Travel Regulations," Volume 2 (JTR); and theStandardized Regulation (Government Civilians Foreign Areas), Section 925," asapplicable. These costs shall be directly chargeable to this contract inaccordance with the contractor's established method of distributing such costs.First class travel shall not be reimbursed. Contractor shall be reimbursed forcoach rates only. Travel is non fee bearing. Invoices which requestreimbursement of travel expenses must be accompanied by airline ticket subs,hotel/motel receipts, and rental car receipts.

SECTION G - CONTRACT ADMINISTRATION DATAG.l ACCOUNTING AND APPROPRIATION DATA, ACR: AA only, is revised to read:

<TABLE><CAPTION>ACR: AA Obligate<S> <C>977/80400.4500 574E51 999-2590 S18119 03200106 IX 0000 X22 I20B

Previously Obligated for Section B.l CLINs 0001,, 0003 and 0004 $ 446,874.00Previously Obligated for Provisional Award Fee Payments $ 21,431.00DeObligate for Provisional Award Fee Payments This Action ($ 21,43l.00)Total Amount Obligated for Provisional Award Fee Payments $ 0.00Previously Obligated for Future Award Fee Payments $ 21,431.00Deobligate for Future Award Fee Payments $ 2l ,431.00)Total Amount Obligated for Future Award Fee Payments $ 0.00Previously Obligated for Award Fee Earned $ 0.00Obligate for Award Fee Earned This Action $ 36,433.00Total Amount Obligated for Award Fee Earned $ 36,433.00Total Amount Previously Obligated for ACR: AA $ 489,736.00DeObligate ACR: AA This Action ($ 6,429.00)Total Amount Obligated ACR: AA $ 483,307.00

</TABLE>

3. As a result of the foregoing, the total contract value is decreased asfollows:

FROM By TO

Not-To-Exceed $1,339,736.00 ($6,429.00) $1,333,307.00

4. Except as provided for herein, all terms and conditions and provisions remainunchanged and in full force and effect.

The Performance Evaluation Board discussed Litronic, Inc.'s performance duringthe base year award fee period via informal meetings. The conclusions reachedare summarized as follows.



TECHNICALStaffing:. Skilled personnel were assigned to the task, and all subcontracts appear to

have been well managed.. There were no problems with personnel equipped with inadequate skills working

on the task.Rating: EXCELLENT

PERFORMANCE:. System Engineering produced a flexible architecture that was able to respond

to numerous problems.

. Few of the many bugs in the CI Library 1.52b were the result of anydeficiency in Litronic's test engineering process. While Litronic's SoftwareEngineering Process has some way to go, it certainly was capable of respondingto this particular debugging exercise.. Litronic is very responsive in addressing support concerns.. Litronic communicates problems and concerns very well with the Program

Office.Rating: EXCELLENT

SCHEDULE:

. Contractor had some difficulty in meeting schedule for CI Library 1.52b. As aresult, library release was delayed for several months.Rating: MARGINAL

COST. Litronic effectively controlled program costs.. No problems were evident in Litronic's billing procedures.. Status reporting is deficient. It is often late, not available, or not

useful. If this problem is not corrected by the next evaluation period, costwill be further affected.Rating: GOOD

PERB Recommendations: Litronic, Inc.

Base Year Award Period

AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT

1. CONTRACT ID CODE

PAGE 1 OF 7 PAGES

2. AMENDMENT MODIFICATION NO. P00004

3. EFFECTIVE DATE: 23 OCT 1997

4. REQUISITION PURCHASE REQ. NO. 16-97-2093 A/3

5. PROJECT NO. (If applicable)

6. ISSUED BY:Maryland Procurement Office9800 Savage RoadFt. Meade, Md 20755-6000

Attn: N141 (M. Lynn Miller) (410) 859-4071

CODE H98230

7. ADMINISTERED BY (If other than Item 6)

8. NAME AND ADDRESS OF CONTRACTOR (No., street, county, State and ZIPCode)

Litronic, Inc.ATTN: James Prohaska (703-729-1700)

43088 Winter Grove DriveAshburn, VA 22011

(X)

9A. AMENDMENT OF SOLICITATION NO.

9B. DATED (See Item 11)

10A. MODIFICATION OF CONTRACT/ORDER NO.: MDA###-##-####



CODE FACILITY CODE

X10B. DATED (See Item 13): 27 June 199711. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONS

| | The above numbered solicitations is amended as set forth in Item 14. Thehour and date specified for receipt of Offers | | is extended, | | is notextended. Offer's must acknowledge receipt of this amendment prior to the hourand date specified in the solicitation or as amended, by one of the followingmethods:(a) By completing Items 8 and 15, and returning __________ copies of theamendment; (b) By acknowledging receipt of this amendment on each copy of theoffer submitted; or (c) by separate letter or telegram which includes areference to the solicitation and amendment numbers. FAILURE OF YOURACKNOWLEDGMENT TO BE RECEIVED AT THE PLACE DESIGNATED FOR THE RECEIPT OF OFFERSPRIOR TO THE HOUR AND DATE SPECIFIED MAY RESULT IN REJECTION OF YOUR OFFER. Ifby virtue of this amendment you design to change an offer already submitted,such change may be made by telegram or letter, provided each telegram or lettermakes reference to the solicitation and this amendment, and is received prior tothe opening hour and date specified.

12. ACCOUNTING AND APPROPRIATION DATA (If required) Obligate $850,000.0013. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACT/ORDERS, IT MODIFIES THECONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.

(X)

A. THIS CHANGE ORDER IS ISSUED PURSUANT TO: (Specify authority) THE CHANGESSET FORTH IN ITEM 14 ARE MADE IN THE CONTRACT ORDER NO. IN ITEM 10A.

B. THE ABOVE NUMBERED CONTRACT/ORDER IS MODIFIED TO REFLECT THEADMINISTRATIVE CHANGES (such as changes in paying office, appropriatedate, etc.) SET FORTH IN ITEM 14, PURSUANT TO THE AUTHORITY OF FAR43.103(b)

C. THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF:

(X) D. OTHER (Specify type of modification and authority)FAR 43.103 (a) Bilateral Modification.

E. IMPORTANT: Contractor | | is not, |X| is required to sign this documentand return 3 copies to the issuing office.

14. DESCRIPTION OF AMENDMENT/MODIFICATION (Organized by UCF section headings,including solicitation/contract subject matter where feasible).

A. The purpose of this modification is to:

1. Reduce the quantity of hours in section H.13 paragraph (b) OPTION I,2. Exercise a portion of the option under section H.13 paragraph (b) OPTION I,in the FPAF amount of $850,000.00.3. Add OPTION 3 for additional level of effort in Fiscal Year 1998 in the amountof $391,112.00.B. Accordingly, this contract is hereby modified as follows.(Continued on following page)

15.A NAME AND TITLE OF SIGNER (type or print)James S. ProhaskaDirector, Business Development

15B CONTRACTING OFFICER

BY /S/ JAMES S. PROHASKA---------------------

(Signature of personal authorized to sign this form)

15C. DATE SIGNED 03 Oct. 1997

16A. NAME AND TITLE OF CONTRACTING OFFICER (type or print)Gregory A. Fream

16B UNITED STATES OF AMERICA

BY /S/ GREGORY A. FREAM--------------------

16C. DATE SIGNED 03 Oct. 1997

MDA904-97-C-0424P00004



Page 2 of 7

PART I - Reduce the Level Of Effort under H.13 paragraph (b) OPTION I

OPTION I - FISCAL YEAR 1998 (1 OCTOBER 1997 - 30 SEPTEMBER 1998) is herebyrestated as follows.

CLIN ITEM DESCRIPTION UNIT QTY UNIT PRICE TOTAL

0001 The contractor shall furnish HRS 7864 XXX $738,500.00the necessary materials,facilities, equipment,supplies, and services ofskilled professional,technical and supportpersonnel to fulfill therequirements set forth in theStatement of Work for MultiLevel Information SystemSecurity Initiative Crypto


<TABLE><CAPTION>


Quantity in hours 11,400 (3,536) 7864Total Price $1,071,465.00 ($332,965.00) $738,500.00

0001AA Program Manager X XXX $ 118.06 XXXX0001AB Sr. Electrical Engineer X XXX $ 75.41 XXXX0001AC Electronic Technician X XXX $ 69.32 XXXX0001AD Systems Analyst X XXX $ 75.38 XXXX0001AE Sr. Software Engineer X XXX $ 98.38 XXXX0001AF Software Engineer X XXX $ 62.60 XXXX


MDA904-97-C-0494P00004Page 3 of 7

<TABLE><S> <C> <C>0002 Award Fee Pool, to be For the Period $ 73,850.00

determined in accordancewith the Award FeeDetermination Plan for MultiLevel Information SystemSecurity Initiative CryptoCard System Analysis andLibrary and Driver


FROM BY TO

$ 107,147.00 ($33,297.00) $ 73,850.00

0003 Travel For the Job Not-To-Exceed $ 25,150.00(Inclusive of Burdens)


FROM BY TO

$ 550,000.00 ($24,850.00) $ 25,150.00

0004 OTHER DIRECT COSTS For the Job Not-To-Exceed $ 12,500.00(Inclusive of Burdens)

NOTE: The above staled amounts reflect the following revisions:

FROM BY TO

$ 12,500.00 ($0.00) $ 25,150.00

0005 Date, in accordance with the For the Lot Not-Separately-PricedContract Data RequirementsList (CDRL), DD Form



1423, dated 13 February 1997</TABLE>

MDA904-97-C-0424P00004Page 4 of 7

PART II -Exercise the option under H.13 paragraph (b) OPTION 1.

SECTION B - SUPPLIES/SERVICES AND PRICES

B.2 SUPPLIES/SERVICES - Fiscal Year 1998 (1 October 1997 - 30 September 1998) ishereby added to this contract as follows.

<TABLE><CAPTION>CLIN ITEM DESCRIPTION UNIT QTY UNIT PRICE TOTAL<S> <C> <C> <C> <C> <C>0001 The contractor shall furnish HRS 7864 XXX $738,500.00

the necessary materials,facilities, equipment,supplies, and services ofskilled professional,technical and supportpersonnel to fulfill therequirements set forth in theStatement of Work for MultiLevel Information SystemSecurity Initiative CryptoCard System Analysis andLibrary and Driver Architectureand Development, dated 10January 1997.

0001AA Program Manager X XX $ 118.06 XXXX0001AB Sr. Electrical Engineer X XXX $ 75.41 XXXX0001AC Electronic Technician X XXX $ 69.32 XXXX0001AD Systems Analyst X XXX $ 75.38 XXXX0001AE Sr. Software Engineer X XXX $ 98.38 XXXX0001AF Software Engineer X XXX $ 62.60 XXXX

Total Amount CLIN 0001 Not-To-Exceed $738,500.00

0002 Award Fee Pool, to be determined For the Period $73,850.00in accordance with the Award FeeDetermination Plan for MultiLevel Information SystemSecurity Initiative Crypto CardSystem Analysis and Library andDriver Architecture andDevelopment, dated 10 June1997 (Rev. 2). There shall be oneevaluation for the period of 1October 1997 - 30 September1998. The contractor is authorizedto bill for up to 50% of theavailable award fee ($36,925.00),on a monthly basis in equalamounts of $3,077.08.

</TABLE>

MDA904-97-C-0424P00004Page 5 of 7

<TABLE><CAPTION>CLIN ITEM DESCRIPTION UNIT QTY PRICE TOTAL<S> <C> <C> <C> <C>0003 Travel For the Job Not-To-Exceed$25,150.00

(Inclusive Of Burdens)

0004 Other Direct Costs For the Job Not-To-Exceed$12,500.00



(Inclusive of Burdens)

0005 Data, in accordance with the Con- For the Lot Not-Separately-Pricedtract Data Requirements List(CDRL), DD Form 1423, dated13 February 1997

</TABLE>


F.3 352.211-90004 PERIOD OF PERFORMANCE (OCT 1990) - ALTERNATE III (OCT 1990)is hereby restated as follows.

The period of performance shall extend from the date of contract award to 30September 1998, unless performance is sooner terminated under the terms of thecontract. However, the Government reserves the right to exercise the option torenew the contract for up to one (1) year, as set forth elsewhere in thiscontract.


G.1 ACCOUNTING AND APPROPRIATION DATA has the following fund cite added.

ACR: AB Obligate

978/90400.4500 584E51 999-2520 S18119 04700400 IX 0000 X22 I25D

PR I69720930003

<TABLE><S> <C>Obligated for section B.2 CLINs 0001, 0003 and 0004 $776,150.00Obligated for Provisional Award Fee Payments $ 36,925.00Obligated for Future Award Fee Payments $ 36,925.00Total Amount Obligated $850,000.00

</TABLE>

SECTION H - SPECIAL CONTRACT REQUIREMENTS

H.13 OPTION TO EXTEND THE TERM OF THE CONTRACT paragraph (b) OPTION 1 only, asrestated in PART I of this modification, is hereby deleted in its entirety.

PART III - Add OPTION 3

H.13 OPTION TO EXTEND THE TERM OF THE CONTRACT paragraph (b) OPTION 3 is herebyadded to this contract as follows.

MDA904-97-C-0424P00004Page 6 of 7

OPTION 3 - FISCAL YEAR 1998 (1 OCTOBER 1997 - 30 SEPTEMBER 1998).

<TABLE><CAPTION>CLIN ITEM DESCRIPTION UNIT QTY UNIT PRICE TOTAL<S> <C> <C> <C> <C> <C>0001 The contractor shall furnish HRS 3,536 XXX $332,965.00

the necessary materials,facilities, equipment, supplies,and services or skilledprofessional, technical andsupport personnel to fulfillthe requirements set forth in theStatement of Work for MultiLevel Information SystemSecurity Initiative Crypto CardSystem Analysis and Library andDriver Architecture andDevelopment, dated 10 January 1997.

0001AA Program Manager X XXX $ 118.06 XXXX0001AB Sr. Electrical Engineer X XXX $ 75.41 XXXX0001AC Electronic Technician X XXX $ 69.320001AD Systems Analyst X XXX $ 75.38 XXXX0001AE Sr. Software Engineer X XXX $ 98.380001AF Software Engineer X XXX $ 62.60 XXXX




0002 Award Fee Pool, to be For the Period $ 33,297.00determined in accordancewith the Award FeeDetermination Plan for MultiLevel Information SystemSecurity Initiative CryptoCard System Analysis andLibrary and Driver Architecture andDevelopment, dated 10 June1997 (Rev. 2).

0003 Travel For the Job Not-To-Exceed $ 24,850.00(Inclusive of Burdens)

0004 Other Direct Costs For the Job Not-To-Exceed $ 0.00(Inclusive of Burdens)

0005 Date, in accordance with the For the Lot Not-Separately-PricedContract Data RequirementsList (CDRL), DD Form1423, dated 13 February 1997

</TABLE>

MDA904-97-C-0424P00004

Page 7 of 7

C. As a result of the foregoing, the total contract price is restated asfollows..

<TABLE><CAPTION>Section B.l FROM BY TO<S> <C> <C> <C>Cost of CLINs 0001 0003 and 0004 $338,465.00 $ 0.00 $ 338,465.00Award Fee Pool $ 31,271.00 $ 0.00 $ 31,271.00Earned Award Fee $ 0.00 $ 0.00 $ 0.00

Total CPAF Amount $369,736.00 $ 0.00 $ 369,736.00

Section B.2 FROM BY TOCost of CLINs 0001, 0003 and 0004 $ 0.00 $776.150.00 $ 776.150.00Award Fee Pool $ 0.00 $ 73,850.00 $ 73,850.00Earned Award Fee $ 0.00 $ 0.00 $ 0.00Total CPAF Amount $ 0.00 $850,000.00 $ 850.000.00

FROM BY TOTotal Contract Price $489,736.00 $850,000.00 $1,339,736.00</TABLE>


AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT1. CONTRACT ID CODEPAGE 1 OF 3 PAGES2. AMENDMENT MODIFICATION NO. P000033. EFFECTIVE DATE: 15 SEP 19974. REQUISITION PURCHASE REQ. NO. 16-97-2093-00025. PROJECT NO. (If applicable)6. ISSUED BY:

Maryland Procurement Office9800 Savage Rd., FANX IIIFt. George G. Meade, MD 20755-6000Attn: N141 (MLM)

CODE H982307. ADMINISTERED BY (If other than Item 6)8. NAME AND ADDRESS OF CONTRACTOR (No., street, county, State and ZIP Code)

LITRONIC, INC.ATTN: JAMES PROHASKA (703-729-1700)43088 WINTER GROVE DRIVEASHBURN, VA 22011

(X)9A. AMENDMENT OF SOLICITATION NO.



9B. DATED (See Item 11)10A. MODIFICATION OF CONTRACT/ORDER NO.: MDA###-##-####CODE FACILITY CODEX10B. DATED (See Item 13): 27 June 199711. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONS| | The above numbered solicitations is amended as set forth in Item 14. Thehour and date specified for receipt of Offers | | is extended, | | is notextended.Offer's must acknowledge receipt of this amendment prior to the hour and datespecified in the solicitation or as amended, by one of the following methods:

(a) By completing Items 8 and 15, and returning __________ copies of theamendment; (b) By acknowledging receipt of this amendment on each copy of theoffer submitted; or (c) by separate letter or telegram which includes areference to the solicitation and amendment numbers. FAILURE OF YOURACKNOWLEDGMENT TO BE RECEIVED AT THE PLACE DESIGNATED FOR THE RECEIPT OF OFFERSPRIOR TO THE HOUR AND DATE SPECIFIED MAY RESULT IN REJECTION OF YOUR OFFER. Ifby virtue of this amendment you design to change an offer already submitted,such change may be made by telegram or letter, provided each telegram or lettermakes reference to the solicitation and this amendment, and is received prior tothe opening hour and date specified.

12. ACCOUNTING AND APPROPRIATION DATA (If required) SEE PAGE 2 Obligate:$75,000.0013. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACT/ORDERS, IT MODIFIES THECONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.(X)


B. THE ABOVE NUMBERED CONTRACT/ORDER IS MODIFIED TO REFLECT THEADMINISTRATIVE CHANGES (such as changes in paying office, appropriate date,etc.) SET FORTH IN ITEM 14, PURSUANT TO THE AUTHORITY OF FAR 43.103(b)

(X) C. THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF:FAR 43.103(a)D. OTHER (Specify type of modification and authority)E. IMPORTANT: Contractor | | is not, |X| is required to sign this

document and return 3 copies to the issuing office.14. DESCRIPTION OF AMENDMENT/MODIFICATION (Organized by UCF section headings,

including solicitation/contract subject matter where feasible).A. The purpose of this modification is to:

1. The purpose of this modification is to provide additional funds to increasethe level of effort and to change the subcontract number of page 2 of thebasis contract from SB0920-96-602356 to SB0920-97-706672.

2. Accordingly, the following sections are hereby modified: SEE PAGE 2Except as provided herein all terms and conditions of the document referenced inItem 9A or 10A, as heretofore changed, remains unchanged and in full force andeffect.15A NAME AND TITLE OF SIGNER (type or print)

James S. ProhaskaDirector, Business Development

15B CONTRACTING OFFICERBY /S/ JAMES S. PROHASKA

---------------------(Signature of personal authorized to sign this form)

15C. DATE SIGNED 12 SEP 199716A. NAME AND TITLE OF CONTRACTING OFFICER (type or print)

GREGORY A. FREAM16B UNITED STATES OF AMERICABY /S/ GREGORY A. FREAM

--------------------16C. DATE SIGNED 15 Sept. 199_

page 2MDA904-97-C-0424/ P00003


B.l SUPPLIES/SERVICES, CLINs 0001 and 0002 only, are revised as follows:

<TABLE><CAPTION>

UNITCLIN SUPPLIES/SERVICES UNIT QTY PRICE TOTAL<S> <C> <C> <C>0001 The Contractor shall furnish the HRS From 3873 XXX From $353,616.00

necessary materials, facilities, By 709 By $ 67,500.00



equipment, supplies and services To 4582 To $421,116.00and services of skilled professional,technical and support personnel tofulfill the requirements set forth inthe Statement of Work entitled, "MultiLevel Information System SecurityInitiative Crypto Card System Analysisand Library and Driver Architectureand Development," dated 10 January1997 and the documents referenced inSection C. The contractors's managementshall provide for the effectivetimely and integrated implementationof contract requirements.



0002 Award Fee Pool, to be determined in For the Period From $ 35,362.00accordance with the Award Fee Plan By $ 7,500.00for Multi-Level Information System To $ 42,862.00Security Initiative Crypto CardSystem Analysis and Library and DriverArchitecture and Development dated 10 June1997 (Rev. 2). There shall be oneevaluation of performance at the end of theperiod of performance (Date of contract awardthrough 30 September 1997.) If theGovernment exercises the options to extendthe term of the contract, there shall be anevaluation of performance at the conclusionof each option year. The contractor isauthorized to bill for up to 50% ofthe available award fee ($21,431.00), on amonthly basis in equal amounts of $5,357.75.

</TABLE>


G1 ACCOUNTING AND APPROPRIATION DATA is revised as follows:

<TABLE><CAPTION>ACR: AA Obligate977/780400.4500 574E l 999-2520 S18119 03200106 IX 0000X22 I20BPR: I6-97-2093-0002 From By To

<S> <C> <C> <C>Obligated for CLINs 0001, 0003 and 0004 $379,374.00 $67,500.00 $446,874.00Obligated for Provisional Award Fee Payments $ 17,681.00 $ 3,750.00 $ 21,431.00Obligated for Future Award Fee Payments $ 17,681.00 $ 3,750.00 $ 21,431.00Total Amount Obligated $414,736.00 $75,000.00 $489,736.00

</TABLE>

page 3MDA904-97-C-0424/ P00003


Funds in the amount of $21.431.00 have been obligated under this contracttowards future award fee determinations but are not available for the Contractorto bill against or incur costs against. Obligated award fee funds identifiedabove will be released to the Contractor via subsequent modifications after theGovernment has rendered an award fee determination in accordance with the AwardFee Plan currently in force under this contract. Upon receipt of theaforementioned modifications, the Contractor is authorized to bill for theearned fee.

3. As a result of this modification, total contract value is increased asfollows:

FROM BY TOFFP (LOE) $414,736.00 $75,000.00 $489,736.00



4. Except as provided herein all other terms and conditions of the subjectcontract remain unchanged and in full force.

AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT1. CONTRACT ID CODEPAGE 1 OF 3 PAGES


3. EFFECTIVE DATE: 04 SEP 1997

4. REQUISITION PURCHASE REQ. NO. 16-97-2093-0001


6. ISSUED BY:Maryland Procurement Office9800 Savage Rd., FANX IIIFt. George G. Meade, Md 20755-6000Attn: N141 (MLM)

CODE H98230


8. NAME AND ADDRESS OF CONTRACTOR (No., street, county, State and ZIP Code)LITRONIC, INC.ATTN: JAMES PROHASKA (703-729-1700)43088 WINTER GROVE DRIVEASHBURN, VA 22011

(X)9A. AMENDMENT OF SOLICITATION NO.9B. DATED (See Item 11)

10A. MODIFICATION OF CONTRACT/ORDER NO.: MDA###-##-####CODE FACILITY CODE


| | The above numbered solicitations is amended as set forth in Item 14. Thehour and date specified for receipt of Offers | | is extended, | | is notextended.Offer's must acknowledge receipt of this amendment prior to the hour and datespecified in the solicitation or as amended, by one of the following methods:(a) By completing Items 8 and 15, and returning __________ copies of theamendment; (b) By acknowledging receipt of this amendment on each copy of theoffer submitted; or (c) by separate letter or telegram which includes areference to the solicitation and amendment numbers. FAILURE OF YOURACKNOWLEDGMENT TO BE RECEIVED AT THE PLACE DESIGNATED FOR THE RECEIPT OF OFFERSPRIOR TO THE HOUR AND DATE SPECIFIED MAY RESULT IN REJECTION OF YOUR OFFER. Ifby virtue of this amendment you design to change an offer already submitted,such change may be made by telegram or letter, provided each telegram or lettermakes reference to the solicitation and this amendment, and is received prior tothe opening hour and date specified.

12. ACCOUNTING AND APPROPRIATION DATA (If required)SEE PAGE 2 Obligate: $45,000.00

13. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACT/ORDERS,IT MODIFIES THE CONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.

(X)A. THIS CHANGE ORDER IS ISSUED PURSUANT TO: (Specify authority) THE CHANGES

SET FORTH IN ITEM 14 ARE MADE IN THE CONTRACT ORDER NO. IN ITEM 10A.


(X) C. THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF:FAR 43.103(a)D. OTHER (Specify type of modification and authority)

E. IMPORTANT: Contractor | | is not, |X| is required to sign thisdocument and return 3 copies to the issuing office.


1. The purpose of this modification is to provide additional funds toincrease the level of effort.



2. Accordingly, the following sections are hereby modified: SEE PAGE 2Except as provided herein all terms and conditions of the document referenced inItem 9A or 10A, as heretofore changed, remains unchanged and in full force andeffect.

15.A NAME AND TITLE OF SIGNER (type or print)James S. ProhaskaDirector, Business Development



15C. DATE SIGNED 03 SEP 1997

16A. NAME AND TITLE OF CONTRACTING OFFICER (type or print)Gregory A. Fream

16B UNITED STATES OF AMERICABY /S/ GREGORY A. FREAMA

---------------------16C. DATE SIGNED 04 SEP 1997

page 2MDA904-97-C-0424 / P00003


B.1 SUPPLIES/SERVICES, CLINs 0001 and 0002 only arc revised as follows:

<TABLE><CAPTION>

UNITCLIN SUPPLIES/SERVICES UNIT QTY PRICE TOTAL<S> <C> <C> <C> <C> <C> <C>0001 The contractor shall furnish the HRS From 3425 XXX From$312,707.00

necessary materials, Facilities By 448 By $ 40,909.00equipment, supplies and To 3873 To $353,616.00services of skilled professional,technical and support personnel tofulfill the requirements set forth inthe Statement or work entitled, "MultiLevel Information System Security InitiativeCrypto Card System Analysis andLibrary and Driver Architecture andDevelopment," dated 10 January1997 and the documents referencedin Section C. The contractor's managementshall provide for the effective timely andintegrated implementation of contract requirements

0001AA Program Manager X XX $ 118.06 XXXX0001AB Sr. Electrical Eng. X XX $ 75.41

XXXX0001AC Electronic Technician X XX $ 69.32

XXXX0001AD Systems Analyst X XX $ 75.38 XXXX0001AE Sr. Software Engineer X XX $ 98.38 XXXX

0001AF Software Engineer X XX $ 62.60XXXX


0002 Award Fee Pool, to be determined in For the Period From $ 31,271.00accordance with the Award Fee Plan By $ 4,091.00for Multi-Level Information System To $ 35,362.00Security Initiative Crypto CardSystem Analysis and Library and DriverArchitecture and Development, dated 10 June1997 (Rev. 2). There shall be one evaluation ofperformance at the end of the period of performance(Date of contract award through 30 September1997.) If the Government exercises theoptions to extend the term of the contract, thereshall be an evaluation of performance at theconclusion of each option year. The contractor



is authorized to bill for up to 50% ofthe available award fee ($17,681.00), on amonthly basis in equal amounts of $4,420.25.

</TABLE>


G.1 ACCOUNTING AND APPROPRIATION DATA is revised as follows:

ACR: AA Obligate

977/780400.4500 574E51 999-2520 S18119 03200106 IX 0000X22 120BPR: I6-97-2093-0001 From By To

Obligated for CLINs 0001, 0003 and 0004 $338,465.00 $40,909.00 $379,374.00Obligated for Provisional AwardFee Payments $ 15,635.50 $ 2,045.50 $ 17,681.00Obligated for Future Award Fee Payments $ 15,635.50 $ 2,045.50 $ 17,681.00Total Amount Obligated $369,736.00 $45,000.00 $414,736.00

page 3MDA904-97-C-0424 / P00002


Funds in the amount of $17,681.00 have been obligated under this contracttowards future award fee determinations but are not available for the Contractorto bill against or incur costs against. Obligated award fee funds identifiedabove will be released to the Contractor via subsequent modifications after theGovernment has rendered an award fee determination in accordance with the AwardFee Plan currently in force under this contract. Upon receipt of theaforementioned modifications, the Contractor is authorized to bill for theearned fee.

3. As a result of this modification, total contract value is increased asfollows:

FROM BY TOFFP (LOE) $369,736.00 $45,000.00$414,736.00


AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT1. CONTRACT ID CODEPAGE 1 OF 3 PAGES


3. EFFECTIVE DATE: 03 JULY 1997

4. REQUISITION PURCHASE REQ. NO. N/A


6. ISSUED BY:Maryland Procurement Office9800 Savage Rd., FANX IIIFt. George G. Meade, MD 20755-6000Attn: N141 (MLM)

CODE H98230


8. NAME AND ADDRESS OF CONTRACTOR (No., street, county, State and ZIP Code)LITRONIC, INC.ATTN: JAMES PROHASKA (703-729-1700)43088 WINTER GROVE DRIVEASHBURN, VA 22011

(X)9A. AMENDMENT OF SOLICITATION NO.



9B. DATED (See Item 11)

10A. MODIFICATION OF CONTRACT/ORDER NO.: MDA904-97-C-0424

CODE FACILITY CODE


| | The above numbered solicitations is amended as set forth in Item 14. Thehour and date specified for receipt of Offers | | is extended, | | is notextended.Offer's must acknowledge receipt of this amendment prior to the hour and datespecified in the solicitation or as amended, by one of the followingmethods:


12. ACCOUNTING AND APPROPRIATION DATA (If required) N/A Obligate: N/A

13. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACT/ORDERS, IT MODIFIES THECONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.

(X)A. THIS CHANGE ORDER IS ISSUED PURSUANT TO: (Specify authority) THE CHANGES

SET FORTH IN ITEM 14 ARE MADE IN THE CONTRACT ORDER NO. IN ITEM 10A.


(X) C. THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF:FAR 43.103(a)D. OTHER (Specify type of modification and authority)



1. The purpose of this modification is to incorporate the requirements of theattached Contract Security Classifications Specification DD Form 254, dated23 June 1997.2. Accordingly, the following sections are hereby modified: SEE PAGE 2

Except as provided herein all terms and conditions of the document referenced inItem 9A or 10A, as heretofore changed, remains unchanged and in full force andeffect.

15A NAME AND TITLE OF SIGNER (type or print)James S. ProhaskaDirector, Business Development



15C. DATE SIGNED 7/3/97

16A. NAME AND TITLE OF CONTRACTING OFFICER (type or print)JAMES M. RUSSELLContracting Officer

16B UNITED STATES OF AMERICABY /S/ JAMES M. RUSSELL

--------------------(Signature of Contracting Officer)

16C. DATE SIGNED 03 JUL 1997



page 2MDA904-97-C-0424 / P00001

SECTION C - DESCRIPTION/SPECIFICATION/WORK STATEMENTS is revised to add:

C.4 Contract Security Classification Specification, DD Form 254, dated 23 June1997.

SECTION D - PACKAGING AND MARKING is revised to add:

D.3 352.247-9004 PACKING AND SHIPPING (OCT 1993)

(a) Packing

(1) Material shall be packed by personnel duly cleared for the level ofclassification in question, to conceal it properly and to avoid suspicion as toits contents, and to reach destination in satisfactory condition. Internalmarkings or internal packaging will clearly indicate the classification. NONOTATION TO INDICATE THE CLASSIFICATION SHALL APPEAR ON EXTERNAL MARKINGS.

(2) Documents shall be enclosed in two sealed envelopes or covers. Typewrittenor printed matter in the contents shall be protected by a cover sheet or byfolding inward to avoid direct contact with the inner envelope or cover. Theinner cover shall be addressed, return addressed, sealed and marked with thesecurity classification on front and back so that the marking will be easilyseen when the outer cover is removed. Receipt for, if required, shall beenclosed identifying the addressor, addressee, and listing the contents by shorttitle. The outer envelope or cover shall be of sufficient opaqueness and densityas to prevent the classification marking of the inner cover from being visibleand shall be addressed, return addressed, and carefully sealed with no markingsor notations.

(b) Shipping

(1) Classified material shall be shipped in accordance with the IndustrialSecurity Manual for Safeguarding Classified Material and Security Guidelinescontained in DD Form 254.

(2) Unclassified material shall be shipped in accordance with the Contractor'sbest commercial practices to insure safe arrival at destination.

page 3MDA904-97-C-0424 / P00001

SECTION H- SPECIAL CONTRACT REQUIREMENTS is revised to add:

H.16 352.290-9001 RETENTION OF INFORMATION (OCT 1993)

After completion of the contract, the Contractor shall not retain in hispossession (unless specified by the contract document) any drawings, sketches,prints, reports, or other data developed under this contract without writtenapproval of the Contracting Officer, or his duly authorized representative.


1.5 REFERENCED CLAUSES - WHEN APPLICABLE is revised to add:

52.204-2 Security Requirements (AUG 1996)

3. As a result of this modification, total contract value is unchanged.


DEPARTMENT OF DEFENSE CONTRACT SECURITY CLASSIFICATION SPECIFICATION (Therequirements of the DoD industrial Security Manual apply to all security aspectsof this effort)

1. CLEARANCE AND SAFEGUARDINGa. FACILITY CLEARANCE REQUIRED: SECRETb. LEVEL OF SAFEGUARDING REQUIRED: SECRET

2. USERS SPECIFICATION IS FOR: (x and complete as applicable)X a. PRIME CONTRACT NUMBER: MDA904-97-C-0424



b. SUBCONTRACT NUMBERc. SOLITATION OR OTHER NUMBER

DUE DATE (YYMMDD)

3. THIS SPECIFICATION IS: (X and complete as applicable)X a. ORIGINAL (Complete date in all cases) DATE (YYMMDD): 970623

b. REVISED (Supercedes all previous specs) / Revision No. / DATE (YYMMDD)c. FINAL (Complete Item 5 in all cases) / DATE

4. IS THIS A FOLLOW-ON CONTRACT? X YES; NO. IF YES, complete the---

following:Classified material received or generated under MDA904-95-C-4074 .

---------------------------(Preceding Contract Number) is transferred to this follow-on contract.

5. IS THIS A FINAL DD FORM 254: ______ YES; X NO. If Yes,------------

complete the following:

In response to the contractor's request date _____________________, retentionof the identified classified material is authorized for the period of_______________________.

6. CONTRACTOR (Include Commercial and Government Entity (CAGE) Code)

a. NAME, ADDRESS, AND ZIP CODELitronic Industries2950 Redhill AvenueCosta Mesa, CA 92626-7900

b. CAGE CODE:4F972

c. COGNIZANT SECURITY OFFICE (Name, Address, and Zip Code)Defensive Investigative ServiceIndustrial Secuiryt Field Office, San Diego16855 W. Bernardo Drive, Suite 150San Diego, CA 92127-1619

7. SUBCONTRACTORa. NAME, ADDRESS AND ZIP CODE:b. CAGE CODE:c. COGNIZANT SECURITY OFFICE (Name, Address, and Zip Code)

8. ACTUAL PERFORMANCEa. LOCATION:b. CAGE CODE:c. COGNIZANT SECURITY OFFICE (Name, Address, and Zip Code)

9. GENERAL IDENTIFICATION OF THIS PROCUREMENTMulti Level Information System Security Initiative Crypto Card System Analysis,and Library and Driver Architecture and Development.

10.THIS CONTRACT WILL REQUIRES ACCESS TO: YES NOa. COMMUNICATIONS SECURITY (COMSEC) INFORMATION: Xb. RESTRICTED DATA Xc. CRITICAL NUCLEAR WEAPON DESIGN INFORMATION Xd. FORMERLY RESTRICTED DATA Xe. INTELLIGENCE INFORMATION:

(1) Sensitive Compartmented Information (SCI) X(2) Non-SCI X

f. SPECIAL ACCESS INFORMATION Xg. NATO INFORMATION Xh. FOREIGN GOVERNMENT INFORMATION Xi. LIMITED DISSEMINATION INFORMATION Xj. FOR OFFICIAL USE ONLY INFORMATION Xk. OTHER (Specify

11.IN PERFORMING THIS CONTRACT, THE CONTRACTOR WILL: YES NOa. HAVE ACCESS TO CLASSIFIED INFORMATION ONLY AT

ANOTHER CONTRACTOR'S FACILITY OR A GOVERNMENTACTIVITY X

b. RECEIVE CLASSIFIED DOCUMENTS ONLY Xc. RECEIVE AND GENERATE CLASSIFIED MATERIAL Xd. FABRICATE MODIFY, OR STORE CLASSIFIED HARDWARE Xe. PERFORM SERVICES ONLY Xf. HAVE ACCESS TO U.S. CLASSIFIED INFORMATION

OUTSIDE THE U.S., PUERTO RICO, U.S. POSSESSIONS ANDTRUST TERRITORIES X

g. BE AUTHORIZED TO USE THE SERVICES OF DEFENSETECHNICAL INFORMATION CENTER (DTIC) OR OTHER



SECONDARY DISTRIBUTION CENTER Xh. REQUIRE A COMSEC ACCOUNT Xi. HAVE TEMPEST REQUIREMENTS Xj. HAVE OPERATIONS SECURITY (OPSEC) REQUIREMENTS Xk. BE AUTHORIZED TO USE THE DEFENSE COURIER

SERVICE Xl. OTHER (Specify)

12. PUBLIC RELEASE. Any information (classified or unclassified) pertaining tothis contract shall not be released for public dissemination except as providedby the Industrial Security Manual or unless it has been approved for publicrelease by appropriate U.S. Government authority. Proposed public releasesshall be submitted for approval prior to release

X DIRECT ____________________ Through (Specify)

Proposed public releases shall be submitted for approval prior to releasedirect to the Contracting Officer.

to the Directorate for Freedom of Information and Security Review, Office ofthe Assistant Secretary of Defense (Public Affairs)* for review.

* In the case of non DoD User Agencies, requests for disclosure shall besubmitted to that agency.

13. SECURITY GUIDANCE. The security classification guidance needed for thisclassified effort is identified below. If any difficulty is encountered inapplying this guidance or if any other contributing factor indicates a need forchanges in this guidance, the contractor is authorized and encouraged to providerecommended changes; to challenge the guidance or the classification assigned toany information or material furnished or generated under this contract; and tosubmit any questions for interpretation of this guidance to the officialidentified below. Pending final decision, the information involved shall behandled and protected at the highest level of classification assigned orrecommended. (Fill in appropriate for the classified effort. Attach, orforward under separate correspondence, any documents/guides/extracts referencedherein. Add additional pages as needed to provide complete guidance)

Additional security requirements begin on page 3.

Classified AIS Processing Will Be Involved?X YES ________ NO

-------

Annual Review of This Form Required______ NO X YES (date) One year ADAD

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

TYPED NAME, TITLE AND SIGNATURE OFPROGRAM/PROJECT MANAGER/COR OR OTHERDESIGNATED OFFICIAL

John CentafontProgram Manager/s/ JOHN CENTAFONT

ACTIVITY NAME ADDRESS, ZIP CODE, TELEPHONENUMBER AND OFFICE SYMBOLDirector, National Security Agency9800 Savage Road, Attn: X22Fort George G. Meade, MD 20755-6733 (410) 859-4464

ONLY AUTHORIZED NSA CONTRACTING OFFICERS MAY SERVE AS CERTIFYING OFFICIALS FORNSA SCI CONTRACTS AND SUBCONTRACTS.

14.ADDITIONAL SECURITY REQUIREMENTS.Requirements, in addition to ISM requirements, are established

Attachment ASeptember 1996

SECURE TELECOMMUNICATION REQUIREMENTS

Secure telecommunications are required as this contract involves access toclassified information or sensitive unclassified, Government or Government-derived information at the contractor facility. These requirements apply to theuse of Government contractor telecommunications equipment over which classified



information or sensitive unclassified Government or Government-derivedinformation is transmitted.

The following definitions apply:

Telecommunications: Preparation, transmission, communication, or relatedprocessing of information (writing, images, sounds or other data) by electricalelectromagnetic, electromechanical, electro-optical or electronic means.

"Government Contractor" telecommunications: Voice and data telecommunicationsbetween or among Federal Government Agencies and theircontractor/subcontractors. This includes management information processingsystems and local data networks.

"Secured" means the application of communications security (COMSEC) equipments,devices or techniques to telecommunications or information processing systemsover which classified information is transmitted.

"Protected" means the application of National Security Agency (NSA) approvedprotection equipment, devices or techniques to contractor telecommunicationsover which sensitive unclassified, Government or Government-derived informationis transmitted.

"Sensitive unclassified, Government or Government derived information" isdefined as any information, the loss, misuse or unauthorized access to, ormodification of which might adversely affect the U.S. national interest, theconduct of DoD programs or the privacy of DoD personnel.

A COMSEC account is required for this contract. The NSA Central Office of Recordhas primary responsibility for auditing all COMSEC material held in thisaccount. NSA will ensure that all Government contractor securetelecommunications facilities are operated in accordance with NSA requirements.

The contractor or subcontractor shall comply with DoD 5220.22-A, COMSEC Annex tothe National Industrial Security Program Operating Manual, dated June 1995.

Equipment, devices, techniques and services required for securing or protectingcontractor telecommunications will be acquired only from

for this contract. (If Yes, identify the pertinent contractual clauses in thecontract document itself, or provide an appropriate statement which identifiesthe additional requirements. Provide a copy of the requirements to the cognizantsecurity office. Use Item 13 if additional space is needed.) X YES NO____

-

15. INSPECTIONS. Elements of this contract are outside the inspectionresponsibility of the cognizant security office. (If YES , explain andidentify specific areas or elements carved out and the activity responsible forinspections. Use item 13 if additional space is needed.) X YES ____ NO

-----

16. CERTIFICATION AND SIGNATURE. Security requirements stated herein arecomplete and adequate for safeguarding the classified information to be releasedor generated under this classified effort. All questions shall be referred tothe official named below.

a. TYPED NAME OF CERTIFYING OFFICIALJames Russell

b. TITLEContracting Officer

c. TELEPHONE (Include Area Code)(410) 684-7102

d. ADDRESS (Include Zip Code)Maryland Procurement Office9800 Savage RoadFort George G. Meade, MD 20755-6000

e. SIGNATURE/S/ JAMES M. RUSSELL

17.REQUIRED FOR DISTRIBUTIONX a. Contractor

b. SubcontractorX c. Cognizant Security Office for Prime and Subcontractor

d. U.S. Activity Responsible for Overseas Security AdministrationX e. Administrative Contracting OfficerX f. Others As Necessary S412, DCS



sources listed in the NSA Information Systems Security Products and ServicesCatalog. Contractors shall comply with the STU-III Doctrine or otherappropriate doctrine.

Keying materials required for the operation of secured and protectedtelecommunications systems will be furnished by the government. A DefenseCourier Service account may be required for shipment of this material.

The prime contractor shall include requirements that conform with this DD254 inall subcontracts that require secured or protected equipment or services.

COMSEC incidents will be reported as follows: The contractor shall make animmediate telephonic notification to NSA of any incident or violation of COMSECrequirements. Notification will be made to the Office of COMSEC Insecurities on(410) 859-6811. Violations or possible compromises of COMSEC information shouldalso be reported to S41 at (410) 859-6255 or the NSA Support Services OperationsCenter, Security Duty Officer at (301) 688-6911. A follow-up written report isrequired and shall be appropriately classified. Specific guidance as to properclassification will be provided by NSA. The report shall be submitted to theContracting Officer, ATTN: V514 and the appropriate Defense InvestigativeService (DIS) Cognizant Security Office. If accountable COMSEC material isinvolved, the Central Office of Record will also be provided a copy of thereport.

Clarification and guidance for COMSEC requirements may be directed to the NSAProcedural and Material Control Branch at (301) 688-8110.

Attachment CSeptember 1996

COLLATERAL (NON-SCI) CONTRACTS

Contractor employees may not carry any classified material on commercialaircraft unless approved by the Contracting Officer (CO) or his designatedrepresentative.

Classified material released under this contract does not become the property ofthe contractor and can be withdrawn by the National Security Agency (NSA) atanytime. Upon expiration of the contract, all classified materials released tothe contractor and all other materials of any kind incorporating data from suchclassified materials will be returned to the NSA for final disposition. Acertificate of destruction in lieu of the material will suffice when thematerial has been destroyed, either at the direction or under the supervision ofthe CO or his designee.

The contractor will not release classified material to any activity orindividual of the contractor's organization not directly engaged in providingservices under the contract, or to another contractor (including asubcontractor), government agency, private individual, or organization withoutthe written consent of the CO. In the event that consent for such release isrequested, the NSA will verify that the proposed recipient is appropriatelycleared and has need-to-know.

Contractor and subcontractor personnel, as well as individuals who areconsultants to the contractor or subcontractor, who have access to certainspecified classified cryptographic information or materials, or to spaces wheresuch classified cryptographic information or materials are produced, processedor stored are subject to requirements set forth in NSA/CSS Regulation 90-15. TheContractor Security Officer shall notify such personnel that they are subject tothis requirement and shall provide the CO written confirmation that this noticewas provided within 90 days of the effective date of this DD254.

Non-US citizens, to include immigrant aliens, are not authorized access toclassified or to unclassified portions of this contract, proposal or studywithout the express written approval of NSA, Facilities Security Services (S41).

Contractors will maintain such records as will permit them to furnish on demandthe names of individuals who have or have had access to classified material inthe custody of the contractor.

Reproduction of any material released to the contractor must be approved by theContracting Officer's Representative (COR).

The following marking applies to all classified elements of informationgenerated under this contract:

DERIVED FROM: (Insert source document)DECLASSIFY ON: (Insert date)



These documents apply to this contract:

Form G9006, "Classification Guidelines"

Director of Central Intelligence Directive 1/7, Security Controls on theDissemination of Intelligence Information, effective 15 June 1996

Executive Order 12958, Classified National Security Information, dated October1995

32 Code of Federal Regulations Part 2001, Implementation of Executive Order12958, dated October 1995

DoD 5220.22-M, National Industrial Security Program Operating Manual, datedJanuary 1995

DoD 5220.22-M-Sup 1, National Industrial Security Program Operating ManualSupplement, dated February 1995Handling, Control and Accountability Requirements for NSA SensitiveCompartmented Information Contracts, dated 8 August 1994

NSA/CSS Classification Manual 123-2, dated 3 September 1991

These additional documents and paragraphs will be included on DD254 attachmentsfor COMSEC collateral efforts:

DoD 5220.22-A, COMSEC Annex to the National Industrial Security ProgramOperating Manual, dated June 1995

NSA/CSS Regulation 90-15, Access to Classified Cryptographic Information, dated16 March 1992

NCSC-6, National Policy Governing the Disclosure or Release of COMSEC to ForeignGovernments or International Organizations, dated 16 January 1981

The contractor/subcontractor shall not divulge to any individual, company,organization, or other U.S. Government Department or Agency any information,either classified or unclassified, pertaining to the design or capabilities ofCOMSEC or communications protection systems or equipment being developed,produced, purchased, or provided as Government-furnished equipment under thisand/or previous NSA contracts without the prior approval of the NSA.

Classified and COMSEC waste paper products should be destroyed daily. Classifiedand Controlled Cryptographic Item (CCI) hardware production scrap resulting fromthis contract shall be disposed of at intervals not to exceed six months.

Any external view or photographs of the end item hardware, provided all coversare in place, shall be unclassified, but the information shall be marked FOROFFICIAL USE ONLY and released based on need-to-know. This information will notbe published in periodicals or trade publications without prior approval of theCO.

Contractor/subcontractor-generated documents, both classified and unclassified,shall not be released to the Defense Technical Information Center (DTIC). Theyshall bear the statement "Not Releasable to the Defense Technical InformationCenter per DoD Directive 3200.12."

All material created from the pattern generation tape, whether intermediate orend product, shall be afforded the same protection as the pattern generationtape. The contractor or subcontractor shall ensure that an appropriateclassification marking is affixed to each item in a manner that affords the itemsufficient protection. Reticles, masters and submasters, working plates,blowbacks, and any other material created from the pattern generation tape orits derivative shall be marked with the appropriate classification and shall becontrolled within the "in-process" accounting system as required by DoD 5220.22-A. Depending upon the process used for the fabrication or CCI products, reticlesand other materials produced from the pattern generation tape or its derivativesshall be marked to reflect either a classification or a CCI designation, asappropriate. Such material shall also be controlled within the "in-process"accounting system.

All classified COMSEC documents (drawings, reports, test date, correspondence,etc.) originated by the contractor or subcontractor shall not be disclosed toforeign nationals and must be marked "US ONLY." The release of those documentsthat need to be shared with foreign governments must be approved by Director,NSA as specified in NCSC-6. Documents approved for release to a foreigngovernment shall be marked "REL to US and (insert name of specified country)ONLY".

In addition to other applicable caveats, contractor or subcontractor-generatedclassified COMSEC documents, photographs, reports, etc., shall be marked withthe following caveat: "COMSEC MATERIAL -- Access by Contractor Personnel Is



Restricted to U.S. Citizens Holding Final Government Clearance."

Requirements for contractor handling of classified operational keying materialmarked CRYPTO are provided in DoD 5220.22-A.

DEPARTMENT OF DEFENSE CONTRACT SECURITY CLASSIFICATION SPECIFICATION (Therequirements of the DoD industrial Security Manual apply to all security aspectsof this effort)

1. CLEARANCE AND SAFEGUARDINGa. FACILITY CLEARANCE REQUIRED: SECRETb. LEVEL OF SAFEGUARDING REQUIRED: SECRET

2. USERS SPECIFICATION IS FOR: (x and complete as applicable)X a. PRIME CONTRACT NUMBER: MDA904-97-C-0424

b. SUBCONTRACT NUMBERc. SOLITATION OR OTHER NUMBER Due Date (YYMMDD)

3. THIS SPECIFICATION IS: (x and complete as applicable)X a. ORIGINAL (Complete date in all cases) DATE (YYMMDD): 970623

b. REVISED (Supercedes all previous specs) / Revision No. / DATE (YYMMDD)c. FINAL (Complete Item 5 in all cases) / DATE

4. IS THIS A FOLLOW-ON CONTRACT? X YES; NO. IF YES, complete the---

following:Classified material received or generated under MDA904-95-C-4074

-----------------------------. (Preceding Contract Number) is transferred to this follow-on contract.

5. IS THIS A FINAL DD FORM 254: ______ YES; X NO. If Yes,------------

complete the following:

In response to the contractor's request date _____________________, retentionof the identified classified material is authorized for the period of_______________________.

6. CONTRACTOR (Include Commercial and Government Entity (CAGE) Code)a. NAME, ADDRESS, AND ZIP CODE

Litronic Industries2950 Redhill AvenueCosta Mesa, CA 92626-7900

b. CAGE CODE:4F972

c. COGNIZANT SECURITY OFFICE (Name, Address, and Zip Code)Defensive Investigative ServiceIndustrial Secuiryt Field Office, San Diego16855 W. Bernardo Drive, Suite 150San Diego, CA 92127-1619

7. SUBCONTRACTORa. NAME, ADDRESS AND ZIP CODE:b. CAGE CODE:c. COGNIZANT SECURITY OFFICE (Name, Address, and Zip Code)

8. ACTUAL PERFORMANCEa. LOCATION:b. CAGE CODE:c. COGNIZANT SECURITY OFFICE (Name, Address, and Zip Code)

9. GENERAL IDENTIFICATION OF THIS PROCUREMENTMulti Level Information System Security Initiative Crypto Card System Analysis,and Library and Driver Architecture and Development.<TABLE><CAPTION>

<S> <C> <C> <C>10. THIS CONTRACT WILL REQUIRES ACCESS TO: YES NOa. COMMUNICATIONS SECURITY (COMSEC) INFORMATION: Xb. RESTRICTED DATA Xc. CRITICAL NUCLEAR WEAPON DESIGN INFORMATION Xd. FORMERLY RESTRICTED DATA Xe. INTELLIGENCE INFORMATION:</TABLE>

(1) Sensitive Compartmented Information (SCI) X<TABLE><CAPTION>

(2) Non-SCI Xf. SPECIAL ACCESS INFORMATION X



g. NATO INFORMATION Xh. FOREIGN GOVERNMENT INFORMATION Xi. LIMITED DISSEMINATION INFORMATION Xj. FOR OFFICIAL USE ONLY INFORMATION Xk. OTHER (Specify<S> <C> <C> <C>

11. IN PERFORMING THIS CONTRACT, THE CONTRACTOR WILL: YES NOa. HAVE ACCESS TO CLASSIFIED INFORMATION ONLY AT

ANOTHER CONTRACTOR'S FACILITY OR A GOVERNMENTACTIVITY X

b. RECEIVE CLASSIFIED DOCUMENTS ONLY Xc. RECEIVE AND GENERATE CLASSIFIED MATERIAL Xd. FABRICATE MODIFY, OR STORE CLASSIFIED HARDWARE Xe. PERFORM SERVICES ONLY Xf. HAVE ACCESS TO U.S. CLASSIFIED INFORMATION OUTSIDE THE U.S.,

PUERTO RICO, U.S. POSSESSIONS AND TRUST TERRITORIES Xg. BE AUTHORIZED TO USE THE SERVICES OF DEFENSE

TECHNICAL INFORMATION CENTER (DTIC) OR OTHERSECONDARY DISTRIBUTION CENTER X

h. REQUIRE A COMSEC ACCOUNT Xi. HAVE TEMPEST REQUIREMENTS Xj. HAVE OPERATIONS SECURITY (OPSEC) REQUIREMENTS Xk. BE AUTHORIZED TO USE THE DEFENSE COURIER</TABLE>

SERVICE Xl. OTHER (Specify)

12. PUBLIC RELEASE. Any information (classified or unclassified) pertaining tothis contract shall not be released for public dissemination except as providedby the Industrial Security Manual or unless it has been approved for publicrelease by appropriate U.S. Government authority. Proposed public releasesshall be submitted for approval prior to release.

X DIRECT ____________________ Through (Specify)-----

Proposed public releases shall be submitted for approval prior to releasedirect to the Contracting Officer.

to the Directorate for Freedom of Information and Security Review, Office ofthe Assistant Secretary of Defense (Public Affairs)* for review.* In the case of nonDoD User Agencies, requests for disclosure shall besubmitted to that agency.

13. SECURITY GUIDANCE. The security classification guidance needed for thisclassified effort is identified below. If any difficulty is encountered inapplying this guidance or if any other contributing factor indicates a need forchanges in this guidance, the contractor is authorized and encouraged to providerecommended changes; to challenge the guidance or the classification assigned toany information or material furnished or generated under this contract; and tosubmit any questions for interpretation of this guidance to the officialidentified below. Pending final decision, the information involved shall behandled and protected at the highest level of classification assigned orrecommended. (Fill in appropriate for the classified effort. Attach, orforward under separate correspondence, any documents/guides/extracts referencedherein. Add additional pages as needed to provide complete guidance)

Additional security requirements begin on page 3.

Classified AIS Processing Will Be Involved?X YES ________ NO

-------

Annual Review of This Form Required______ NO X YES (date) One year ADAD

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

TYPED NAME, TITLE AND SIGNATURE OF PROGRAM/PROJECT MANAGER/COR OR OTHERDESIGNATED OFFICIALJohn CentafontProgram Manager/S/ JOHN CENTAFONT

ACTIVITY NAME ADDRESS, ZIP CODE, TELEPHONENUMBER AND OFFICE SYMBOLDirector, National Security Agency9800 Savage Road, Attn: X22Fort George G. Meade, MD20755-6733(410) 859-4464



ONLY AUTHORIZED NSA CONTRACTING OFFICERS MAY SERVE AS CERTIFYING OFFICIALS FORNSA SCI CONTRACTS AND SUBCONTRACTS.

14.ADDITIONAL SECURITY REQUIREMENTS. Requirements, in addition to ISMrequirements, are established for this contract. (If Yes, identify thepertinent contractual clauses in the contract document itself, or provide anappropriate statement which identifies the additional requirements. Item 13 ifadditional space is needed.) Provide a copy of the requirements to thecognizant security office. Use YES NO X-------------------

15. INSPECTIONS. Elements of this contract are outside the inspectionresponsibility of the cognizant security office. (IF Yes, explain and identifyspecific areas or elements carved out and the activity responsible forinspections. Use item 13 if additional space is needed. YES X NO

16. CERTIFICATION AND SIGNATURE. Security requirements stated herein arecomplete and adequate for safeguarding the classified information to be releasedor generated under this classified effort. All questions shall be referred tothe official named below.

a. TYPED NAME OF CERTIFYING OFFICIALJames Russell

b. TITLEContracting Officer

c. TELEPHONE (Include Area Code)(410) 684-7102

d. ADDRESS (Include Zip Code)Maryland Procurement Office9800 Savage RoadFort George G. Meade, MD 20755-6000

e. SIGNATURE/S/ JAMES M. RUSSELL

17. REQUIRED FOR DISTRIBUTIONX a. Contractor

b. SubcontractorX c. Cognizant Security Office for Prime and Subcontractor

d. U.S. Activity Responsible for Overseas Security AdministrationX e. Administrative Contracting OfficerX f. Others As Necessary S412, DCS

AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT1. CONTRACT ID CODEPAGE OF PAGES2. AMENDMENT MODIFICATION NO. 013. EFFECTIVE DATE: 26 AUG 974. REQUISITION PURCHASE REQ. NO.5. PROJECT NO. (If applicable)6. ISSUED BY:

U.S. SMALL BUSINESS ADMINISTRATIONATTN: MED200 W. SANTA ANA BLVD., STE. #700SANTA ANA, CA 92701ATTN: JOE DWORNICZAK 714-550-7420

CODE7. ADMINISTERED BY (If other than Item 6)CODE8. NAME AND ADDRESS OF CONTRACTOR (No., street, county, State and ZIP Code)

LITRONIC INDUSTRIESATTN: JAMES PROHASKA43088 WINTER GROVE DRIVEASHBURN, VA 22011

(X)9A. AMENDMENT OF SOLICITATION NO.9B. DATED (See Item 11)10A. MODIFICATION OF CONTRACT/ORDER NO.: SB0920-96-602356CODE FACILITY CODEX10B. DATED (See Item 13): 27 JUN 9711. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONS| | The above numbered solicitations is amended as set forth in Item 14. Thehour and date specified for receipt of Offers | | is extended, | | is notextended.Offer's must acknowledge receipt of this amendment prior to the hour and datespecified in the solicitation or as amended, by one of the following methods:




12. ACCOUNTING AND APPROPRIATION DATA (If required) N/A13. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACT/ORDERS, IT MODIFIES THECONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.(X)


(X) B. THE ABOVE NUMBERED CONTRACT/ORDER IS MODIFIED TO REFLECT THEADMINISTRATIVE CHANGES (such as changes in paying office, appropriate date,etc.) SET FORTH IN ITEM 14, PURSUANT TO THE AUTHORITY OF FAR 43.103(b)C. THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF:D. OTHER (Specify type of modification and authority)E. IMPORTANT: Contractor |X| is not, |__| is required to sign this

document and return ________ copies to the issuing office.


1. Reference contract MDA904-97-C-0424, with NSA.2. Effective immediate, the subcontract #SB0920-96-602356 is changed to the

new number SBO920-97-706672.3. The SBA office which issues/administrates the subcontract is as in block

6 above.Except as provided herein all terms and conditions of the document referenced inItem 9A or 10A, as heretofore changed, remains unchanged and in full force andeffect.15A NAME AND TITLE OF SIGNER (type or print)15B CONTRACTING OFFICER

(Signature of personal authorized to sign this form)15C. DATE SIGNED16A. NAME AND TITLE OF CONTRACTING OFFICER (type or print)

Joseph DworniczakContracting Officer

16B UNITED STATES OF AMERICABY /S/ JOSEPH DWORNICZAK

---------------------(Signature of Contracting Officer)

16C. DATE SIGNED 26 Aug 97

MDA904-97-C-0424P00007Page 3 of 11

0002 Award Fee Pool, to be For the Period $10,709.00determined in accordancewith the Award FeeDetermination Plan for MultiLevel Information SystemSecurity Initiative CryptoCard System Analysis andLibrary and Driver

NOTE: The above stated amounts reflect the following revisions:<TABLE><CAPTION>

FROM BY TO<S> <C> <C> <C> <C>

$ 33,297.00 ($22,588.00) $ 10.709.00

0003 Travel For the Job Not-to-Exceed $ 2,600.00(Inclusive of Burdens)


FROM BY TO

$ 24,850.00 ($22,250.00) $ 2,600.00



0004 OTHER DIRECT COSTS For the Job Not-to-Exceed $ 84,600.00(Inclusive of Burdens)


FROM BY TO

0.00 $ 84,600.00 $ 84,600.00

0005 Data, in accordance with the For the Lot Not-Separately-PricedContract Data RequirementsList (CDRL), DD Form1423, dated 13 February 1997

FROM BY TO

TOTAL NOT-TO-EXCEED $391,112.00 (186,112.00) $205,000.00</TABLE>

AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT1. CONTRACT ID CODEPAGE 1 OF 11 PAGES2. AMENDMENT MODIFICATION NO. P000073. EFFECTIVE DATE: 28 MAY 19984. REQUISITION PURCHASE REQ. NO. 16-97-2093 A/45. PROJECT NO. (If applicable)6. ISSUED BY:

Maryland Procurement Office9800 Savage RoadFt. Meade, Md 20755-6000Attn: N141 (M. Lynn Miller) (410) 859-4071


LITRONIC, INC.ATTN: James Prohaska (703-950-9700)43088 Winter Grove DriveAshburn, VA 22011

(X)9A. AMENDMENT OF SOLICITATION NO.9B. DATED (See Item 11)10A. MODIFICATION OF CONTRACT/ORDER NO.: MDA###-##-####CODE FACILITY CODEX10B. DATED (See Item 13): 27 June 199711. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONS| | The above numbered solicitations is amended as set forth in Item 14. Thehour and date specified for receipt of Offers | | is extended, | | is notextended.Offer's must acknowledge receipt of this amendment prior to the hour and datespecified in the solicitation or as amended, by one of the following methods:


12. ACCOUNTING AND APPROPRIATION DATA (If required) Obligate $205,000.00013. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACT/ORDERS, IT MODIFIES THECONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.(X)


B. THE ABOVE NUMBERED CONTRACT/ORDER IS MODIFIED TO REFLECT THEADMINISTRATIVE CHANGES (such as changes in paying office, appropriate date,etc.) SET FORTH IN ITEM 14, PURSUANT TO THE AUTHORITY OF FAR 43.103(b)C. THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF:



14. DESCRIPTION OF AMENDMENT/MODIFICATION (Organized by UCF section headings,



including solicitation/contract subject matter where feasible).1. Part I-Revise section H.13 paragraph (b) OPTION 3;2. Part II-Exercise the revised OPTION 3 in the FPAF amount of $205,000.00,

which is hereby added to Section B.2; and3. Part II-Incorporate government furnished property.

Except as provided herein all terms and conditions of the document referenced inItem 9A or 10A, as heretofore changed, remains unchanged and in full force andeffect.15A NAME AND TITLE OF SIGNER (type or print)




15C. DATE SIGNED 5/27/9816A. NAME AND TITLE OF CONTRACTING OFFICER (type or print)

MARGARET M. QUASNYContracting Officer

16B UNITED STATES OF AMERICABY Margaret M. Quasny(Signature of Contracting Officer)16C. DATE SIGNED 5/28/98

MDA904-97-C-0424P00008

Page 2 of 4

SECTION B - SUPPLIES/SERVICES AND PRICES

B.2 SUPPLIES/SERVICES (Fiscal Year 1998 - 1 October 1997 - 30 September 1998)is restated as follows:

UNITCLIN ITEM DESCRIPTION UNIT QTY PRICE TOTAL

0001 The Contractor shall furnish the HRS 9,004 XXX $845,591.00<TABLE><CAPTION>

necessary materials, facilities,<S> <C> <C> <C> <C> <C>

equipment, supplies and servicesand services of skilled professional,technical and support personnel tofulfill the requirements set forth inthe Statement of Work for "MultiLevel Information System SecurityInitiative Crypto Card SystemAnalysis and Library and DriverArchitecture and Development,"dated 10 January 1997.

0001AA Program Manager X XXX $118.06 XXXX

0001AB Sr. Electrical Eng. X XXX $ 75.41 XXXX

0001AC Electronic Technician X XXX $ 69.32 XXXX

0001AD Systems Analyst X XXX $ 75.38 XXXX

0001AE Sr. Software Engineer X XXX $ 98.38 XXXX

0001AF Software Engineer X XXX$ $ 62.60 XXXX


0002 Award Fee Pool, to be determined For the Period $84,559.00in accordance with the Award

</TABLE>Fee Determination Plan forMulti Level Information SystemSecurity Initiative Crypto CardSystem Analysis and Library and DriverArchitecture and Development , dated 10 June1997 (Rev. 2). There shall be oneevaluation for the period of 1October 1997 - 30 September

` 1998. The contractor isauthorized to bill for up to 50% ofthe available award fee ($42,279.50), on amonthly basis in equal amounts.



ACR: AB

<TABLE><CAPTION>

MDA904-97-C-0424P00008

<S> <C> <C> <C> <C> <C>Page 3 of 4


0003 Travel For the Job Not-to-Exceed $ 27,750.00(Inclusive of Burdens)ACR: AB

0004 Other Direct Costs For the Job Not-to-Exceed From: $ 97,100.00(Inclusive of Burdens) By: $ 184,000.00ACR: AB To: $ 281,100.00

0005 Data, in accordance with For the Lot Not-Separately-Pricedthe Contract DataRequirements List(CDRL), DD Form 1423,dated 13 February 1997ACR: AB

TOTAL NOT-TO-EXCEED From: $1,055,000.00By: $ 184,000.00To: $ 1,239,000.00


G1 ACCOUNTING AND APPROPRIATION DATA is revised to include the following:

ACR: AB Obligate978/90400.4500 584E5l 999-2520 S18119 04700400 IX 0000 X22 I25D

Previously Obligated for section B.2 CLINs 0001, 0003 and 0004 $ 970,441.00Obligate this action for section B.2 CLIN 004 $ 184,000.00Total Obligated for section B.2 CLINs 0001, 0003 and 0004 $1,154,441.00

Total Previously Obligated for Provisional Award Fee Payments $ 42,279.50

Total Previously Obligated for Future Award Fee Payments $ 42,279.50

Total Amount Previously Obligated (PR: I6-97-2093-0003) $ 850,000.00Total Amount Previously Obligated (PR: I6-97-2093-0004) $ 205,000.00Total Amount Obligated This Action (PR: I6-97-2093-0005) $ 184,000.00

Total Amount Obligated ACR: AB $1,239,000.00</TABLE>

MDA904-97-C-0424P00008

Page 4 of 4

C. As a result of the foregoing, the total contract price is restated asfollows:<TABLE><CAPTION>

Section B.1 FROM BY TO<S> <C> <C> <C>

Cost of CLINs 0001, 0003 and 0004 $ 446,874.00 $ 0.00 $ 446,874.00

Award Fee Pool $ 0.00 $ 0.00 $ 0.00

Earned Award Fee $ 36,433.00 $ 0.00 $ 36,433.00

Total FPAF Amount $ 483,307.00 $ 0.00 $ 483,307.00


Cost of CLINs 0001, 0003 and 0004 $ 970,441.00 $184,000.00 $1,154,441.00

Award Fee Pool $ 84,559.00 $ 0.00 $ 84,559.00

Earned Award Fee $ 0.00 $ 0.00 $ 0.00



Total FPAF Amount $1,055,000.00 $184,000.00 $1,239,000.00

FROM BY TO

Total Contract Price $1,538,307.00 $184,000.00 $1,722,307.00</TABLE>


LITRONIC INDUSTRIESPURCHASE ORDER WORKSHEET

PO NUMBER: MDA904-97-C-0424, P00007 Customer Number:Date: May 28, 1998 Customer: NSA

Maryland Procurement OfficeAddress: 9800 Savage Road

FANX IIIFort George G. Meade, MD 20755-6000

Buyer: M. Quansy

REMARKS SECTION

1. ADDITIONAL FUNDING FOR FY98. TOTAL CONTRACT AMOUNT IS $1,055,000.00

2. PROVIDE COPY TO BOB GRAY.

Item Part Number Quantity Unit Price Due Date Total

0001 See Page 4 of Contract for 205,000.00 N/A $205,000.0-0Appropriate Labor Categories

Total Price: $ 205,000.00Taxable: NOInitiated by: ProhaskaRep: Prohaska

AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT1. CONTRACT ID CODEPAGE 1 OF 3 PAGES2. AMENDMENT MODIFICATION NO. P000063. EFFECTIVE DATE: 07 NOV 19974. REQUISITION PURCHASE REQ. NO. N/A5. PROJECT NO. (If applicable)6. ISSUED BY:



LITRONIC, INC.ATTN: JAMES PROHASKA (703-729-1700)43088 WINTER GROVE DRIVEASHBURN, VA 22011

(X)9A. AMENDMENT OF SOLICITATION NO.9B. DATED (See Item 11)10A. MODIFICATION OF CONTRACT/ORDER NO.: MDA904-97-C-0424CODE FACILITY CODEX10B. DATED (See Item 13): 27 June 199711. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONS| | The above numbered solicitations is amended as set forth in Item 14. Thehour and date specified for receipt of Offers | | is extended, | | is notextended.Offer's must acknowledge receipt of this amendment prior to the hour and datespecified in the solicitation or as amended, by one of the following methods:

(a) By completing Items 8 and 15, and returning __________ copies of theamendment; (b) By acknowledging receipt of this amendment on each copy of theoffer submitted; or (c) by separate letter or telegram which includes areference to the solicitation and amendment numbers. FAILURE OF YOURACKNOWLEDGMENT TO BE RECEIVED AT THE PLACE DESIGNATED FOR THE RECEIPT OF OFFERSPRIOR TO THE HOUR AND DATE SPECIFIED MAY RESULT IN REJECTION OF YOUR OFFER. Ifby virtue of this amendment you design to change an offer already submitted,such change may be made by telegram or letter, provided each telegram or lettermakes reference to the solicitation and this amendment, and is received prior to



the opening hour and date specified.

12. ACCOUNTING AND APPROPRIATION DATA (If required) N/A13. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACT/ORDERS, IT MODIFIES THECONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.(X)



(X) C. THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF:43.103(a) Bilateral Modification.D. OTHER (Specify type of modification and authority)E. IMPORTANT: Contractor | | is not, |X| is required to sign this

document and return 3 copies to the issuing office.14. DESCRIPTION OF AMENDMENT/MODIFICATION (Organized by UCF section headings,

including solicitation/contract subject matter where feasible).

1. The purpose of this modification is to decrease the Not-to-Exceed amountsfor CLIN 0003, Travel and CLIN 0004, Other Direct Costs, and increase the numberof labor hours for CLIN 0001 in Section B.1 of this contract.

2. Accordingly, this contract is hereby modified as follows.(Continued on following page)





15C. DATE SIGNED 07 NOV 199716A. NAME AND TITLE OF CONTRACTING OFFICER (type or print)


16B UNITED STATES OF AMERICABY /S/ Margaret M. Quasny

----------------------(Signature of Contracting Officer)16C. DATE SIGNED 11/7/97

AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT1. CONTRACT ID CODEPAGE 1 OF 4 PAGES2. AMENDMENT MODIFICATION NO. P000083. EFFECTIVE DATE: 07 JUN 19984. REQUISITION PURCHASE REQ. NO. 16-97-2093-00055. PROJECT NO. (If applicable)6. ISSUED BY:


CODE H982307. ADMINISTERED BY (If other than Item 6)CODE8. NAME AND ADDRESS OF CONTRACTOR (No., street, county, State and ZIP Code)

DUNS: 050761998Litronic, Inc.ATTN: James Prohaska (703-905-9700)2950 Redhill AvenueCosta Mesa, CA 92626

(X)9A. AMENDMENT OF SOLICITATION NO.9B. DATED (See Item 11)10A. MODIFICATION OF CONTRACT/ORDER NO.: MDA904-97-C-0424CODE FACILITY CODEX10B. DATED (See Item 13): 27 June 199711. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONS| | The above numbered solicitations is amended as set forth in Item 14. Thehour and date specified for receipt of Offers | | is extended, | | is notextended.Offer's must acknowledge receipt of this amendment prior to the hour and datespecified in the solicitation or as amended, by one of the following methods:




12. ACCOUNTING AND APPROPRIATION DATA (If required) SEE SECTION G.1Obligate: $184,000.0013. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACT/ORDERS, IT MODIFIES THECONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.(X)


B. THE ABOVE NUMBERED CONTRACT/ORDER IS MODIFIED TO REFLECT THEADMINISTRATIVE CHANGES (such as changes in paying office, appropriate date,etc.) SET FORTH IN ITEM 14, PURSUANT TO THE AUTHORITY OF FAR 43.103(b)C. THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF:




A. The purpose of this modification is to increase CLIN 0004, Other DirectCosts/Materials, in Section B.2.

B. Accordingly, this contract is hereby modified as follows. (Continued onfollowing page)





15C. DATE SIGNED 03 Oct. 199716A. NAME AND TITLE OF CONTRACTING OFFICER (type or print)


16B UNITED STATES OF AMERICABY /S/ Margaret M. Quasny

----------------------(Signature of Contracting Officer)16C. DATE SIGNED 6/8/98

MDA904-97-C-0424P00008Page 2 of 11

PART 1 - Reduce the Level Of Effort under H.13 paragraph (b) OPTION 3

OPTION 3 - FISCAL YEAR 1998 (1 OCTOBER 1997- 30 SEPTEMBER 1998) is herebyrestated as follows:


<TABLE><S> <C> <C> <C> <C> <C>0001 The contractor shall furnish the HRS 1,140 XXX $107,091.00

necessary materials, facilities,equipment, supplies and servicesand services of skilled professional,technical and support personnel tofulfill the requirements set forth inthe Statement of Work for MultiLevel Information System SecurityInitiative Crypto Card System Analysisand Library and Driver Architectureand Development, dated 10 January

1997.



</TABLE>

NOTE: The above stated amounts reflect the following revisions:<TABLE><CAPTION>


Quantity in hours 3,536 (2,396) 1,140Total Price $332,965.00 ($225,874.00) $107,091.00

0001AA Program Manager X XXX $ 118.06 XXXX0001AB Sr. Electrical Engineer X XXX $ 75.41 XXXX0001AC Electronic Technician X XXX $ 69.32 XXXX0001AD Systems Analyst X XXX $ 75.38 XXXX0001AE Sr. Software Engineer X XXX $ 98.38 XXXX0001AF Software Engineer X XXX $ 62.60 XXXX


MDA904-97-C-0424P00007Page 4 of 11

PART II - Exercise the option under H.13 paragraph (b) OPTION 3

SECTION B - SUPPLIES/SERVICES AND PRICES<TABLE><CAPTION>

B.2 SUPPLIES/SERVICES (Fiscal Year 1998 - 1 October 1997 - 30 September 1998) Option 3 is hereby added tosection as follows: this

UNITCLIN ITEM DESCRIPTION UNIT QTY PRICE TOTAL<S> <C> <C> <C> <C> <C> <C>

0001 The contractor shall furnish the HRS From: 7,864 XXX From: $738,500.00necessarymaterials,facilities, By: 1,140 By: $107,091.00

equipment,supplies andservices To: 9,004 To: $845,591.00

of skilled professional, technicaland support personnel to fulfillthe requirements set forth inthe Statement of Work for MultiLevel Information System SecurityInitiative Crypto Card SystemAnalysis and Library and DriverArchitecture and Development,dated 10 January 1997.

0001AA Program Manager X XXX $118.06 XXXX0001AB Sr. Electrical Engineer X XXX $ 75.41 XXXX0001AC Electronic Technician X XXX $ 69.32 XXXX0001AD Systems Analyst X XXX $ 75.38 XXXX0001AE Sr. Software Engineer X XXX $ 98.38 XXXX0001AF Software Engineer X XXX $ 62.60 XXXX

Total Amount CLIN 0001 Not-To-Exceed $845,591.00ACR: AB

0002 Award Fee Pool, to be determined For the Period From: $ 73,850.00in accordance with the Award Fee By: $10,709.00Determination Plan for Multi To: $84,559.00Level Information System

</TABLE>Security Initiative Crypto CardSystem Analysis and Library andDriver Architecture andDevelopment, dated 10 June1997 (Rev. 2). There shall be oneevaluation for the period of 1October 1997-30 September1998. The contractor is authorizedto bill for up to 50% of theavailable award fee ($42,279.50),on a monthly basis in equal



amounts.ACR: AB

MDA904-97-C-0424P00007Page 5 of 11

<TABLE><CAPTION>

UNIT---- ----------------------------------- ----------- --- --------------------- -----------------CLIN UNIT QTY PRICE TOTAL---- ITEM DESCRIPTION ----------- --- --------------------- -----------------

----------------------------------------------------------------------------------------------------------------------------------------<C> <S> <C> <C> <C> <C>0003 Travel For the Job Not-To-Exeed From: $25,150.00

(Inclusive of Burdens) By: $2,600.00ACR: AB To: $27,750.00

-----------------------------------------------------------------------------------------------------0004 Other direct Costs For the Job Not-To-Exeed From: $12,500.00

(Inclusive of Burdens) By: $84,600.00ACR: AB To: $97,100.00

-----------------------------------------------------------------------------------------------------0005 Data, in accordance with the Con- For the Lot Not-Separately-Priced

tract Data Requirements List(CDRL), DD Form 1423, dated13 February 1997ACR: ABTOTAL NOT-TO-EXCEED From: $850,000.00

By: $205,000.00To: $1,055,000.00

</TABLE>

<TABLE><CAPTION>SECTION G - CONTRACT ADMINISTRATION DATA<S> <C>

G.1 ACCOUNTING AND APPROPRIATION DATA is revised to include the following:

ACR: AB978/90400.4500 584E51 999-2520 S18119 04700400 IX 0000 X22 I125D

Previously obligated for section B.2 CLINs 0001, 0003 and 0004$776,150.00Obligate this action for section B.2 CLINs 0001,0003 and 0004 $ 194,291.00Total Obligated for section B.2 CLINs 0001, 0003 and 0004 $ 970,441.00

Previously Obligated for Provisional Award Fee Payments $ 36,925.00Obligate this action for Provisional Award Fee Payments $ 5,354.50Total Obligated for Provisional Award Fee Payments $ 42,279.50

Previously Obligated for Provisional Award Fee Payments $ 36,925.00Obligate this action for Future Award Fee Payments $ 5,354.50Total Obligated for Future Award Fee Payments $ 42,279.50

Total Amount Previously Obligated (PR: I6-97-2093-0003) $ 850,000.00Total Amount Obligated This Action (PR: I6-97-2093-0004) $ 205,000.00Total Amount Obligated ACR: AB $1,055,000.00</TABLE>G.2 352.216-9007 NOTICE: AWARD FEE FUNDING (JUL 1993) is restated as follows

Funds in the amount of $42,279.50 have been obligated under this contracttowards future award fee determinations but are not available for the Contractorto bill against or incur costs against. Obligated award fee funds identifiedabove will be

released to the Contractor via subsequent modifications after the Government hasrendered an award fee determination in accordance with the Award Fee Plancurrently in force under this contract. Upon receipt of the aforementionedmodifications, the Contractor is authorized to bill for the earned fee.

G.13 NOTICE - CONTRACT ADMINISTRATION FUNCTION (OCT 1993) is added:

(a) The Procuring Contracting Officer (PCO) will retain all administrativefunctions under this contract except for those assigned to the cognizantDefense Contract Management Command (DCMC) component, in accordance withPart 42 of the FAR, Part 242 of the DoD FAR Supplement and the PCO's letter



dated 27 May 1998.

(b) The Contractor's 5-position CAGE Code is 4F972.

(c) The following administration functions are hereby delegated to thecognizant DCMC component (see FAR/DFARS references below):

(1) 42.302(a)(1). Review the Contractor's compensation structure.

(2) 42.302(a)(2). Review the Contractor's insurance plans.

(3) 42.302(a)(5). Negotiate forward pricing rate agreements (see FAR 15.809).

(4) 42.302(a)(9). Establish final indirect cost rates and billing rates forthose contractors meeting the criteria for contracting officerdetermination in FAR Subpart 42.7.

(5) 42.302(a)(11). In connection with Cost Accounting Standards (see FAR Part30)

(i) Determine the accuracy of the Contractor's disclosure statements;

(ii) Determine whether disclosure statements are in compliance with CostAccounting Standards and FAR Part 31;

(iii) Determine the Contractor's compliance with Cost Accounting Standards anddisclosure statements, if applicable; and

(iv) Negotiate price adjustments and execute supplemental agreements under theCost Accounting Standards clause at FAR 52.230-3, 52.230-4, and 52.230-5.Note: the ACO will negotiate the amount of the adjustment, but the MPO COwill issue the modification to the contract.

(6) 42.302(a)(16). Monitor the Contractor's financial condition and advise thecontracting officer when it jeopardizes contract performance.

(7) 42.302(a)(19). Ensure processing and execution of duty-free certificates.

(8) 42.302(a)(25). Process and execute novation and change of name agreementsunder FAR Subpart 42.12.

(9) 42.302(a)(26). Perform property administration and and plant clearance(see FAR Part 45).

(10) 42.302(a)(33). Advise and assist contractors regarding their prioritiesand allocations responsibilities and assist contracting offices inprocessing for special assistance and for priority ratings for privatelyowned capital equipment.

(11) 42.302(a)(34). Monitor Contractor industrial relations matters under thecontract; apprise the contracting officer of actual or potential labordisputes; and coordinate the removal of urgently required material from thestrikebound contractor's plant upon instruction from, and authorization of,the contracting officer.

(12) 42.302(a)(36). Review the adequacy of the Contractor's traffic operations.

(13) 42.302(a)(37). Review and evaluate preservation, packaging, and packing.

(14) 42.302(a)(42). Review and evaluate for technical adequacy the Contractor'slogistics support, maintenance, and modification programs.

(15) 42.302(a)(48). Evaluate and monitor the Contractor's procedures forcomplying with procedures regarding restrictive markings on data.

(16) 42.302(a)(49). Monitor the Contractor's value engineering program.

(17) 42.302(a)(50). Review, approve or disapprove, and maintain surveillance ofthe Contractor's purchasing system (see FAR Part 44).

(18) 42.302(a)(52). Review, evaluate, and approve plant or division-wide smalland small disadvantaged business master subcontracting plans.

(19) 42.302(a)(53). Obtain the Contractor's currently approved company ordivision-wide plans for small business and small disadvantaged businesssubcontracting for its commercial products, or, if there is no currentlyapproved plan, assist the contracting officer in evaluating the plans forthose products.

(20) 42.302(a)(54). Assist the contracting officer, upon request, in evaluatingan offeror's proposed small business and small disadvantaged businesssubcontracting plans, including documentation of compliance with similar



plans under prior contracts.

(21) 42.302(a)(55). By periodic surveillance, ensure the Contractor'scompliance with small business and small disadvantaged businesssubcontracting plans and any labor surplus area contractual requirements;maintain documentation of the Contractor's performance under and compliancewith these plans and requirements; and provide advice and assistance to thefirms involved, as appropriate.

(22) 42.302(a)(58). Ensure timely submission of required reports.

(23) 42.302(a)(66). Determine that the Contractor has a drug-free workplaceprogram and drug-free awareness program (see FAR Subpart 23.5).

(24) 242.302(a)(4). Also, review and evaluate:

(A) Contractor estimating system (see FAR 15.811); and

(B) Contractor material management and accounting system under DFARS Subpart242.72.

(25) 242.302(a)(8). Monitor the Contractor's costs under DFARS Subpart 242.70.

(26) 242.302(a)(9). For additional contract administration functions related toIR&D/B&P projects performed by major contractors, see 242.771-3(a).

(c) The following contract administration functions (marked (X) whenapplicable) are hereby delegated to the cognizant DCMC component (seeFAR/DFARS references below):

( ) (1) 42.302(a)(3). Conduct post-award orientation conferences.

( ) (2) 42.302(a)(4). Review and evaluate contractor's proposals under FARSubpart 25.8 and, when negotiation will be accomplished by the contractingofficer, furnish comments and recommendations to that officer.

( ) (3) 42.302(a)(6). Negotiate advance agreements applicable to treatment ofcosts under contracts currently assigned for administration (see FAR Subpart31.109).

( ) (4) 42.302(a)(12). Review and approve or disapprove the Contractor'srequests for payments under the progress payments clause.

( ) (5) 42.302(a)(13). Make payments on assigned contracts when prescribed inagency acquisition regulations (see FAR Subpart 42.205).

( ) (6) 42.302(a)(15). Ensure timely notification by the Contractor of anyanticipated overrun or underrun of the estimated cost under cost-reimbursementcontracts.

( ) (7) 42.302(a)(17). Analyze quarterly limitation on payments statementsand recover overpayments from the Contractor. Note: use with 42.302(a)(12)above.

( ) (8) 42.302(a)(20). For classified contracts, administer those portions ofthe applicable industrial security program designated as ACO responsibilities(see FAR Subpart 4.4).

( ) (9) 42.302(a)(28). Perform necessary screening, redistribution, anddisposal of contractor inventory.

( ) (10) 42.302(a)(29). Issue contract modifications requiring the Contractorto provide packing, crating, and handling services on excess Governmentproperty. When the ACO determines it to be in the Government's interests, theservices may be secured from a contractor other than the contractor inpossession of the property.

( ) (11) 42.302(a)(31). Perform production support, surveillance, and statusreporting, including timely reporting of potential and actual slippages incontract delivery schedules.

( ) (12) 42.302(a)(32). Perform pre-award surveys (see FAR Subpart 9.1).

( ) (13) 42.302(a)(38). Ensure Contractor compliance with contractual qualityassurance requirements (see FAR Part 46).

( ) (14) 42.302(a)(39). Ensure Contractor compliance with contractual safetyrequirements. Note: see DFARS 223.370 for safety requirements on contracts forammunition and explosives.

( ) (15) 42.302(a)(40). Perform engineering surveillance to assess compliancewith contractual terms for schedule, cost, and technical performance in the



areas of design, development, and production.

( ) (16) 42.302(a)(41). Evaluate for adequacy and perform surveillance ofContractor efforts and management systems that relate to design, development,production, engineering changes, subcontractors, tests, management ofengineering resources, reliability and maintainability, data control systems,configuration management, and independent research and development.

( ) (17) 42.302(a)(43). Report to the contracting office any inadequaciesnoted in specifications.

( ) (18) 42.302(a)(44). Perform engineering analyses of Contractor costproposals.

( ) (19) 42.302(a)(45). Review and analyze Contractor proposed engineeringand design studies and submit comments and recommendations to the contractingoffice, as required.

( ) (20) 42.302(a)(46). Review engineering change proposals for properclassification and, when required, for need, technical adequacy of design,productibility, and impact on quality, reliability, schedule, and cost; submitcomments to the contracting office.

( ) (21) 42.302(a)(47). Assist in evaluating and make recommendations foracceptance or rejection of waivers and deviations.

( ) (22) 42.302(a)(51). Consent to the placement of subcontracts.

( ) (23) 42.302(a)(57). Assign and perform supporting contractadministration.

( ) (24) 42.302(a)(59). Issue administrative changes, correcting errors oromissions in typing, Contractor address, facility or activity code, remittanceaddress, computations which do not require additional contract funds, and othersuch changes (see FAR Subpart 43.101).

( ) (25) 42.302(a)(60). Cause release of shipments from Contractor's plantsaccording to the shipping instructions. When applicable, the order of assignedpriority shall be followed; shipments within the same priority shall bedetermined by date of the instructions.

( ) (26) 42.302(a)(61). Obtain Contractor proposals for any contract priceadjustments resulting from amended shipping instructions. ACOs shall review allamended shipping instructions on a periodic, consolidated basis to assure thatadjustments are timely made. Except when the ACO has settlement authority, theACO shall forward the proposal to the contracting officer for contractmodification. The ACO shall not delay shipments pending completion andformalization of negotiations of revised shipping instructions.

( ) (27) 42.302(a)(65). Accomplish administrative closeout procedures (seeFAR Subpart 4.804-5).

( ) (28) 242.302(a)(19). Also negotiate and issue contract modificationsreducing contract prices in connection with the provisions of paragraph (b) ofthe clause at FAR 52.225-10, Duty-Free Entry, and paragraph (c) of the clause at252.225-7009, Duty-Free Entry--Qualifying Country End Products and Supplies.

( ) (29) 242.302(a)(33). Also perform industrial readiness and mobilizationproductions planning field surveys and negotiate schedules.

( ) (30) 242.302(a)(41). In contract, with cost schedule control systemsrequirements (see DFARS Subpart 234.005-70;

(A) Perform postaward surveillance of Contractor progress in demonstrating thatits cost schedule control systems meet the cost schedule control systemscriteria;

(B) Provide assistance in the review and acceptance of the Contractor's costschedule control systems; and

(C) After acceptance of the systems, perform surveillance to monitor theircontinuing acceptable operation.

H.17 352.245-9001 GOVERNMENT FURNISHED PROPERTY (APR 1989) is added:

(a) The Government shall deliver to the Contractor, F.O.B. carrier's equipment,wharf, or freight station Ashburn, VA, where the work will be performed, thefollowing property to be used for this requirement:

Description Qty. Value To be delivered to Contractor

GTC FORTEZZA Crypto Card 2 $140.00 In Place



(b) The Contractor shall inspect the property within thirty (30) days of itsreceipt. Damaged or defective property will be promptly reported to theContracting Officer after having a confirming inspection thereof made by theGovernment Representative. The Contractor will also request a confirminginspection by the carrier's representative where he considers the damage to beattributable in some degree to the carrier.

(c) A representative of the Contracting Officer may be present to inspect thecondition of the property prior to packaging thereof for return to theGovernment. The Contractor will notify the designated property administratorprior to the packaging of the property for return so that personnel may beassigned for these examinations.

(d) In fulfillment of the requirements of the contract clause entitled"Government Property," reporting of Government Property inventory shall besubmitted in accordance with FAR 45.508.

(e) Under no circumstances shall government property be accepted by thecontractor without a contracting officer's signature on the shipping document.

(f) All inquiries with regard to the above property should be directed to thedesignated property administrator.

H.18. DESIGNATION OF PROPERTY ADMINISTRATOR - RECORDS OF GOVERNMENT PROPERTY(OCT 1993) is added:

(a) The cognizant Defense Contract Management Command (DCMC) component isdesignated to administer the maintenance by the Contractor of the officialGovernment Property Records for all Government property.

(b) The Contractor will sign one (1) copy of the shipping or inspection documentacknowledging receipt of property and forward same to the designated propertyadministrator.(End of clause)


1.1 REFERENCED CLAUSES. The following contract clause(s) pertinent to thissection are hereby incorporated by reference:

CLAUSE NO TITLEFAR CLAUSES

52.245-4 Government-Furnished Property (Short Form) (APR 1984)

C. As a result of the foregoing, the total contract price is restated asfollows.<TABLE><CAPTION>

Section B.1 FROM BY TO<S> <C> <C> <C>

Cost of CLINs 0001, 0003 and 0004 $ 446,874.00 $ 0.00 $ 446,874.00Award Fee Pool $ 0.00 $ 0.00 $ 0.00Earned Award Fee $ 36,433.00 $ 0.00 $ 36,433.00Total PFAF Amount $ 483,307.00 $ 0.00 $ 483,307.00


Cost of CLINs 0001, 0003 and 0004 $ 776,150.00 $194,291.00 $ 970,441.00Award Fee Pool $ 73,850.00 $ 10,709.00 $ 84,559.00Earned Award Fee $ 0.00 $ 0.00 $ 0.00Total PFAF Amount $ 850,000.00 $205,000.00 $1,055,000.00

FROM BY TO

Total Contract Price $1,333,307.00 $205,000.00 $1,538,307.00</TABLE>D. Except as provided herein, all terms and conditions of this contract, aspreviously modified, remain unchanged and in full force and effect.



EXHIBIT 10.14

SUBLEASE

NOTE: This Sublease document is being used as a Sub-sublease document.Therefore, the terms "sublease", "sublessor" and "sublessee" will often be usedas "sub-sublease", "sub-sublessor" and sub-sublessee", respectively.

1. PARTIES.

This Sublease, dated October 20, 1997, is made between E.I. du Pont de Nemoursand Company, a Delaware corporation (Sublessor"), and Lintronic Industries, aCalifornia corporation ("Sublessee").

2. MASTER LEASE.

Sublessor is the Sub-lessee under a written lease dated February 21, 1991,wherein Koll Tower Four Associates, a California limited partnership ("Lessor")leased to Lessee Hadson Power Systems, a Delaware corporation, the real propertylocated in the City of Irvine, County of Orange, State of California, describedas portions of that certain 16-story office building located at 2030 MainStreet, Irvine, California, as identified in the Master Lease as the "Premises"("Master Premises"). Said lease has been amended by the following amendmentsthat certain Sublease dated April 7, 1995 by and between Hadson Power Systems("Hadson")*, a Delaware corporation and E.I. du Pont de Nemours and Company (asexisting "Sublessor"); said lease and amendments are herein collectivelyreferred to as the "Master Lease" and are attached hereto as Exhibit "A".

*Hadson Systems is now LG & E Energy Systems, Inc., a Kentucky Corporation

3. PREMISES.

Sublessor hereby subleases to Sublessee on the terms and conditions set forth inthis Sublease the following portions of the Master Premises ("Premises"):approximately 11.912 rentable square feet as identified as Exhibit One to thesublease and further identified as 2030 SE Main Street, Suite 1250, Irvine,California.

4. WARRANTY BY SUBLESSOR.

Sublessor warrants and represents that the Master Lease has not been amended ormodified except as expressly set forth herein, that Sublessor is not now, and asof the commencement of the Term hereof will not be, in default or breach of anyof the provisions of the Master Lease, and that Sublessor has no knowledge ofany claim by Lessor that Sublessor is in default or breach of any of theprovisions of the Master Lease.



5. TERM.

The Term of this Sublease shall commence on November 1, 1997 ("CommencementDate"), or when Lessor consents to this Sublease (if such consent is requiredunder the Master Lease), whichever shall last occur, and end on September 17,2001 ("Termination Date"), unless otherwise sooner terminated in accordance withthe provisions of this Sublease. In the event the Term commences on a date otherthan the Commencement Date, Sublessor and Sublessee shall execute a memorandumsetting forth the actual date of the commencement of the Term.

Possession of the Premises ("Possession") shall be delivered to Sublessee on thecommencement of the Term. If for any reason Sublessor does not deliverPossession to Sublessee on the commencement of the Term, Sublessor shall not besubject to any liability for such failure, the Termination Date shall not beextended by the delay, and the validity of this Sublease shall not be impaired,but rent shall abate until delivery of Possession. Notwithstanding theforegoing, if Sublessor has not delivered Possession to Sublessee within thirty(30) days after the Commencement Date, then at any time thereafter and beforedelivery of Possession, sublessee may give written notice to Sublessor ofSublessee's intention to cancel this Sublease. Said notice shall set forth aneffective date for such cancellation which shall be at least ten (10) days afterdelivery of said notice to Sublessor. If Sublessor delivers Possession toSublessee on or before such effective date, this Sublease shall remain in fullforce and effect. If Sublessor fails to deliver Possession to Sublessee on orbefore such effective date, this Sublease shall be cancelled, in which case allconsideration previously paid by Sublessee to Sublessor on account of thisSublease shall be returned to Sublessee, this Sublease shall thereafter be of nofurther force and effect, and Sublessor shall have no further liability toSublessee on account of such delay or cancellation. If Sublessor permitsSublessee to take Possession prior to the commencement of the Term, such earlyPossession shall not advance the Termination Date and shall be subject to theprovisions of this Sublease, including without limitation the payment of rent.

6. RENT.

6.1. Minimum Rent. Sublessee shall pay to Sublessor as minimum rent, withoutdeduction, setoff, notice, or demand, at E.I. du Pont de Nemours, Attn:Corporate Real Estate, 1007 Market Street, D12048A, Wilmington, DE 19898, or atsuch other place as Sublessor shall designate from time to time by notice toSublessee, the sum of See Addendum One Dollars ($_________) per month, inadvance on the first day of each month of the Term. Sublessee shall pay toSublessor upon execution of this Sublease the sum of Twenty Thousand Two HundredFifty and 40/100ths Dollars ($20,250.40) as rent for the first month. If theTerm begins or ends on a day other than the first or last day of a month, therent for the partial months shall be prorated on a per diem basis. Additionalprovisions: See attached Addendum One

6.2. Operating Costs. If the Master Lease requires Sublessor to pay to Lessor



all or portion of the expenses of operating the building and/or project of whichthe Premises are a part ("Operating Costs"), including but not limited to taxes,utilities, or insurance, then Sublessee shall pay to Sublessor as additionalrent seventy and 24/100ths percent (70.24%) of the amounts payable by Sublessorfor Operating Costs incurred during the Term. Such [illegible text] shall bepayable as and [illegible text] Operating Costs are payable by Sublessor toLessor if the Master Lease provides for the payment by Sublessor of OperatingCosts on the basis of an estimate thereof, then as and when adjustments whenestimated and actual Operating Costs are made under the Master Lease, theobligations of Sublessor and Sublessee hereunder shall be adjusted in a likemanner, and if any such adjustment shall occur after the expiration of

2

earlier termination of the term, then the obligations of Sublessor and Sublesseeunder this Section 6.2 shall survive such expiration or termination. Sublessorshall, upon request by Sublessee, furnish Sublessee with copies of allstatements submitted by Lessor of actual or estimated Operating Costs during theTerm.

7. SECURITY DEPOSIT.

Sublessee shall deposit with Sublessor upon execution of this Sublease the sumof Twenty Thousand Two Hundred Fifty and 40/100ths Dollars ($20,250.40) assecurity for Sublessee's faithful performance of Sublessee's obligationshereunder ("Security Deposit"). If Sublessee fails to pay rent or other chargeswhen due under this Sublease, or fails to perform any of its other obligationshereunder, Sublessor may use or apply all or any portion of the Security Depositfor the payment of any rent or other amount then due hereunder and unpaid, forthe payment of any other sum for which Sublessor may become obligated by reasonof Sublessee's default or breach, or for any loss or damage sustained bySublessor as a result of Sublessee's default or breach. If Sublessor so uses anyportion of the Security Deposit, Sublessee shall, within ten (10) days afterwritten demand by Sublessor, restore the Security Deposit to the full amountoriginally deposited, and Sublessee's failure to do so shall constitute adefault under this Sublease. Sublessor shall not be required to keep theSecurity Deposit separate from its general accounts, and shall have noobligation or liability for payment of interest on the Security Deposit. In theevent Sublessor assigns its interest in this Sublease, Sublessor shall deliverto its assignee so much of the Security Deposit as is then held by Sublessor.Within ten (10) days after the Term has expired, or Sublessee has vacated thePremises, or any final adjustment pursuant to Subsection 6.2 hereof has beenmade, whichever shall last occur, and provided Sublessee is not then in defaultof any of its obligations hereunder, the Security Deposit, or so much thereof ashad not theretofore been applied by Sublessor, shall be returned to Sublessee orto the last assignee, if any, of Sublessee's interest hereunder.

8. USE OF PREMISES.



The Premises shall be used and occupied only for sales, consulting and relatedgeneral office functions, and for no other use or purpose.

9. ASSIGNMENT AND SUBLETTING.

Sublessee shall not assign this Sublease or further sublet all or any part ofthe Premises without the prior written consent of Sublessor (and the consent ofLessor, if such is required under the terms of the Master Lease).

10. OTHER PROVISIONS OF SUBLEASE.

All applicable terms and conditions of the Master Lease are incorporated intoand made a part of this Sublease as if Sublessor were the lessor thereunder,Sublessee the lessee thereunder, and the Premises the Master Premises, exceptfor the following:

See attached Addendum One to the Sublease

Sublessee assumes and agrees to perform the lessee's obligations under theMaster Lease during the Term to the extent that such obligations are applicableto the Premises, except that the

3

obligation to pay rent to Lessor under the Master Lease shall be consideredperformed by Sublessee to the extent and in the amount rent is paid to Sublessorin accordance with Section 6 of this Sublease. Sublessee shall not commit orsuffer any act or omission that will violate any of the provisions of the MasterLease. Sublessor shall exercise due diligence in attempting to cause Lessor toperform its obligations under the Master Lease for the benefit of Sublessee. Ifthe Master Lease terminates, this Sublease shall terminate and the parties shallbe relieved of any further liability or obligation under this Sublease, providedhowever, that if the Master Lease terminates as a result of a default or breachby Sublessor or Sublessee under this Sublease and/or the Master Lease, then thedefaulting party shall be liable to the nondefaulting party for the damagesuffered as a result of such termination. Notwithstanding the foregoing, if theMaster Lease gives Sublessor any right to terminate the Master Lease in theevent of the partial or total damage, destruction, or condemnation of the MasterPremises or the building or project of which the Master Premises are a part, theexercise of such right by Sublessor shall not constitute a default or breachhereunder.

11. ATTORNEYS' FEES

If Sublessor, Sublessee, or Broker shall commence an action against the otherarising out of or in connection with this Sublease, the prevailing party shallbe entitled to recover its costs of suit and reasonable attorney's fees.



12. AGENCY DISCLOSURE.

Sublessor and Sublessee each warrant that they have dealt with no other realestate broker in connection with this transaction except: CB COMMERCIAL REALESTATE GROUP, INC., who represents Sublessor and Sublessee. In the event that CBCOMMERCIAL REAL ESTATE GROUP, INC. represents both Sublessor and Sublessee,Sublessor and Sublessee hereby confirm that they were timely advised of the dualrepresentation and they consent to the same, and that they do not expect saidbroker to disclose to either of them the confidential information of the otherparty.

13. COMMISSION.

Upon execution of this Sublease, and consent thereto by Lessor (if such consentis required under the terms of the Master Lease), Sublessor shall pay Broker areal estate brokerage commission in accordance with Sublessor's contract withBroker for the subleasing of the Premises, if any, and otherwise in the amountof (Per separate agreement) Dollars ($_________) for services rendered ineffecting this Sublease. Broker is hereby made a third party beneficiary ofthis Sublease for the purpose of enforcing its right to said commission.

14. NOTICES.

All notices and demands which may or are to be required or permitted to be givenby either party on the other hereunder shall be in writing. All notices anddemands by the Sublessor shall be sent by United States Mail, postage prepaid,addressed to the Sublessee at the Premises, and to the address hereinbelow, orto such other place as Sublessee may from time to time designate in a notice tothe Sublessor. All notices and demands by the Sublessee to Sublessor shall besent by

4

United States Mail, postage prepaid, addressed to the Sublessor at the addressset forth herein, and to such other person or place as the Sublessor may fromtime to time designate in a notice to the Sublessee.

To Sublessor: E.I. du Pont de Nemours and Company, Corporate Real Estate,D12048A, 1007 Market Street, Wilmington, Delaware 19898.

To Sublessee: Lintronic Industries, 2030 SE Main Street, Suite 1250, Irvine,CA 92714.

15. CONSENT BY LESSOR.

THIS SUBLEASE SHALL BE OF NO FORCE OR EFFECT UNLESS CONSENTED TO BY LESSORWITHIN 10 DAYS AFTER EXECUTION HEREOF, IF SUCH CONSENT IS REQUIRED UNDER THE



TERMS OF THE MASTER LEASE.

16. COMPLIANCE.

The parties hereto agree to comply with all applicable federal, state and locallaws, regulations, codes, ordinances and administrative orders havingjurisdiction over the parties, property or the subject matter of this Agreement,including, but not limited to, the 1964 Civil Rights Act and all amendmentsthereto, the Foreign Investment in Real Property Tax Act, the ComprehensiveEnvironmental Response Compensation and Liability Act, and The Americans WithDisabilities Act.

Sublessor: E.I. du Pont de Nemours and Sublessee: Lintronic Industries, aCompany, a Delaware California corporationcorporation

By:___________________________________ By: /S/ KRIS SHAH---------------------------------

Title: _______________________________ Title: President-----------------------------

Date: ________________________________ Date: Oct. 24, 1997------------------------------

LESSOR'S AND LESSEE'S CONSENT TO SUBLEASE

The undersigned ("Lessor"), lessor under the Master Lease and the undersignedLessee hereby consents to the foregoing Sublease without waiver of anyrestriction in the Master Lease concerning further assignment or subletting.Lessor certifies that, as of the date of Lessor's execution hereof, Sublessor isnot in default or breach of any of the provisions of the Master Lease, and thatthe Master Lease has not been amended or modified except as expressly set forthin the foregoing Sublease.

Lessor: Koll Tower Four Associates, Lessee: LG & E Energy Systems, Inc.

5

a California limited partnership a Kentucky corporation

By: __________________________________ By: _________________________________

Title: ________________________________ Title: ______________________________



CONSULT YOUR ADVISORS -- This document has been prepared for approval by yourattorney. No representation or recommendation is made by Broker as to the legalsufficiency or tax consequences of this document or the transaction to which itrelates. These are questions for your attorney.

In any real estate transaction, it is recommended that you consult with aprofessional, such as a civil engineer, industrial hygienist or other person,with experience in evaluating the condition of the property, including thepossible presence of asbestos, hazardous materials and underground storagetanks.

6

EXHIBIT ONE

[Floorplan]

7

ADDENDUM ONE TO THAT CERTAIN SUBLEASE DATED OCTOBER 20, 1997BY AND BETWEEN E.I. DU PONT DE NEMOURS AND COMPANY ("DU PONT")AND LINTRONIC INDUSTRIES ("LINTRONIC")FOR THE PREMISES LOCATED AT2030 MAIN STREET, SUITE 1250, IRVINE, CALIFORNIA

BASE RENT: Months Rate/Rentable S.F. Monthly Total1-46 $1.70 Fully Serviced $20,250.40

TENANT IMPROVEMENTS: Landlord shall clean the premises and shampoo the carpet.Otherwise, Tenant must accept the premises in its "as is"condition. Any proposed modifications to the suite musthave the written approval of Sublessor and Lessor, andshall be at Sublessee's expense.

PARKING: Du Pont shall make available a maximum of forty-eight(48) in-common unreserved parking spaces to Lintronic ata monthly charge of $30.00 per space per month. Lintronicshall lease a minimum of thirty (30) of these parkingspaces for the sublease term. Lintronic shall pay a one-time charge of $10.00 for each parking card issued.

HAZARDOUS MATERIALS: Du Pont has no knowledge of any toxic or hazardousmaterials within the proposed sublease premises. Du Pontwill not provide any warranties or guarantees or beresponsible for any remedies as a result of the presenceof any toxic or hazardous materials.

INDEMNITY: Lintronic shall indemnify and hold Du Pont safe and



harmless from and against any and all loss, costs,damages, claims, actions or liability on account of thedeath of or injury to any person or persons, or thedamage to or destruction of any property or pollutionarising from or growing out of Lintronic's use andoccupancy of the subleased premises, unless caused inwhole or in part by the willful misconduct or solenegligence of Du Pont or Lessor.

OPERATING EXPENSES: Lintronic shall have a 1998 base year. Lintronic shallpay for increases in operating expenses in excess of the1998 base year, which shall be calculated to reflect 95%occupancy and in accordance with Section 6.2 of theSublease document.

8

EARLY OCCUPANCY: Lintronic shall not commence to pay base rent or operatingexpenses other than after-hours heating, ventilation andair conditioning until November 18, 1997 regardless ofLintronic's actual occupancy date. Lintronic will beresponsible for parking charges during its early occupancy.In the event Lintronic cannot occupy the Premises prior toNovember 17, 1997, and the delay in occupancy is through nofault of Lintronic, then rent shall commence one (1)business day after all approvals have been obtained fromall parties to this Sublease.

FURNITURE: Du Pont shall allow Tenant to utilize the private office,conference room, reception area and modular furnituresystems in place within the premises as of October 20, 1997hereinafter referred to as Furniture. By signing below,Lintronic acknowledges that it has inspected and acceptsthe Furniture with respect to quantity and quality. As acondition of utilizing said Furniture, Lintronic and DuPont shall comply with the following:

a. Lintronic shall deposit $30,000 as a non-refundabledeposit towards the purchase of the Furniture.

b. Lintronic's deposit will be retained by Du Pont untilthe expiration of the sublease term and then appliedtogether with a rental credit of $595.60 per month ($.05per rentable square foot per month) towards the purchaseprice for a total rental credit of $27,397.60.

c. Du Pont will convey title to the Furniture toLintronic for $1.00 at the end of the sublease term. Title



shall be conveyed by a bill of sale prepared by Du Pont.

d. Any default of the sublease terms or conditions willresult in Lintronic's forfeiture of both the deposit andrental credit paid by Lintronic.

RIGHT TO ASSIGNSUBLEASE: Lintronic's rights to sublease or assign all or any portion

of the Premises to any other entity or person per the termsof the Master Lease and subject to the approval of Lessor,Lessee and Sublessor.

SIGNAGE: No exterior signage is available from Lessor. All directoryand suite signage shall be obtained through the MasterLessor and shall be at Lintronic's cost.

9

Sublessor: E.I. du Pont de Nemours and Sublessee: Lintronic Industries, aCompany, a Delaware California corporationcorporation

By: /S/ AUTHORIZED SIGNATORY By: /S/ KRIS SHAH------------------------------------ --------------------------------

Title: Manager, Corporate Real Estate Title: President-------------------------------- -----------------------------

By: /S/ NANCY J. McDANIEL By:________________________________------------------------------------

Title: Properties Manager Title:_____________________________--------------------------------

Date: 10/28/97 Date: Oct. 24, 1997---------------------------------- ------------------------------

Lessor: Koll Tower Four Associates, Lessee: LG & E Energy Systems, Inc.a California limited a Kentucky corporationpartnership

By: Koll Management Services, Inc., By: a Delaware Corporation As Agent------------------------------------ --------------------------------

Title: ________________________________ Title: ____________________________

By: /S/ AUTHORIZED SIGNATORY BY:________________________________



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

Title: Portfolio Manager Title:_____________________________---------------------------------

Date: 11/7/97 Date:______________________________----------------------------------

10

1st Mo. 20,250.40/mo.Sec Dep 20,250.40Furniture Dep 30,000.00Total 70,500,80

E.I. Du Pont de Nemours & Co.

11

LITRONIC INDUSTRIES, INC.GENERAL ACCOUNT2950 RED HILL AVE PH 714-545-6649COSTA MESA, CA 92626

BANK OF YORBA LINDACOSTA MESA, CALIFORNIA 9262690-3789-1222

24667024667

PAY **SEVENTY THOUSAND FIVE HUNDRED DOLLARS & 80 CENTS**TO THE ORDER OFE.I. DUPONT DE NEMOURS & COMPANY

DATE 10/24/97

AMOUNT $70,500.80

/S/ Kris Shah/S/ Nancy R. Mckenna

LITRONIC INDUSTRIES, INC.

24667



024667

DATE10/24/97

INVOICE NO.

COMMENT

AMOUNT70,500.80

DISCOUNT

NET AMOUNT$70,500.80

12

CHECK: 024667

10/24/97

E.I. DUPONT DE NEMOURS & CO.

TOTAL: $70,500.80

13

AMENDMENT NO. 1 TO OFFICE BUILDING SUB-SUBLEASE

This Amendment No. 1 to the Office Building Sub-sublease (the "Amendment") ismade as of this 24 day of November 1997 by and between E. I. du Pont de Nemoursand Company, a Delaware corporation ("Sublessor") and Lintronic Industries, aCalifornia Corporation ("Sublessee").

Sublessor and Sublessee are parties to that certain Office Building Sub-subleasedated October 20, 1997 (the "Sub-sublease") pursuant to which Sublessor sub-subleases to Sublessee that certain space identified as 11,912 rentable squarefeet in 2030 Main Street, Suite 1250, Irvine, California.

Sublessor and Sublessee agree to amend the Sub-sublease as follows:

1. Rent Commencement Date: Rent shall start November 24, 1997 and willcontinue through September 17, 2001.



Except as herein provided, all other terms and conditions of the Sub-subleaseshall be in full force and effect.

Sublessor: Sublessee:

E.I. duPont de Nemours and Company, Lintronic Industries,a Delaware corporation a California corporation

By:________________________________ By: /s/ Kris Shah-------------------------------------

Title:_____________________________ Title: President----------------------------------

Date:______________________________ Date: Dec. 1, 97-----------------------------------

14



EXHIBIT 10.15

Table of Contents

INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT

<TABLE><S> <C>Section 1. DEFINITIONS............................................................. 3

1.1. Special Definitions.................................................. 31.2. Other Defined Terms.................................................. 111.3 Attachments.......................................................... 11

Section 2. CREDIT LINE/FINANCE CHARGES/OTHER CHARGES............................... 112.1. Credit Line.......................................................... 112.2. Product Advances..................................................... 112.3. A/R Advances......................................................... 132.4. Finance and Other Charges............................................ 142.5. Statements Regarding Customer's Account.............................. 152.6. Shortfall............................................................ 152.7. Application of Payments.............................................. 152.8. Prepayment and Reborrowing By Customer............................... 15

Section 3. CREDIT LINE/ADDITIONAL PROVISIONS....................................... 153.1. Ineligible Accounts.................................................. 153.2. Reimbursement for Charges............................................ 173.3. Lockbox and Special Account.......................................... 173.4. Collections.......................................................... 183.5. Application of Remittances and Credits............................... 183.6. Power of Attorney.................................................... 18

Section 4. SECURITY -- COLLATERAL.................................................. 204.1. Grant................................................................ 204.2. Further Assurances................................................... 20

Section 5. CONDITIONS PRECEDENT.................................................... 215.1. Conditions Precedent to the Effectiveness of This Agreement.......... 215.2. Conditions Precedent to Each Advance................................. 22

Section 6. REPRESENTATIONS AND WARRANTIES.......................................... 226.1. Organization and Qualifications...................................... 226.2. Rights in Collateral; Priority of Liens.............................. 226.3. No Conflicts......................................................... 236.4. Enforceability....................................................... 236.5. Locations of Offices, Records and Inventory.......................... 236.6. Fictitious Business Names............................................ 236.7. Organization......................................................... 246.8. No Judgments or Litigation........................................... 246.9. No Defaults.......................................................... 246.10. Labor Matters........................................................ 246.11. Compliance with Law.................................................. 246.12. ER1SA................................................................ 246.13. Compliance with Environmental Laws................................... 246.14. Intellectual Property................................................ 25

</TABLE>

<TABLE><S> <C>



6.15. Licenses and Permits................................................. 256.16. Investment Company................................................... 256.17. Taxes and Tax Returns................................................ 266.18. Status of Accounts................................................... 266.19. Affiliate/Subsidiary Transactions.................................... 266.20. Accuracy and Completeness of Information............................. 266.21. Recording Taxes...................................................... 266.22. Indebtedness......................................................... 26

Section 7. AFFIRMATIVE COVENANTS................................................... 277.1. Financial and Other Information...................................... 277.2. Location of Collateral............................................... 297.3. Changes in Customer.................................................. 297.4. Corporate Existence.................................................. 307.5. ERISA................................................................ 307.6. Environmental Matters................................................ 307.7. Collateral Books and Records/Collateral Audit........................ 317.8. Insurance; Casualty Loss............................................. 317.9. Taxes................................................................ 327.10. Compliance With Laws................................................. 327.11. Fiscal Year.......................................................... 327.12. Intellectual Property................................................ 327.13. Maintenance of Property.............................................. 327.14. Collateral........................................................... 337.15. Subsidiaries......................................................... 347.16 Financial Covenants; Additional Covenants............................ 34

Section 8. NEGATIVE COVENANTS...................................................... 348.1. Liens................................................................ 348.2. Disposition of Assets................................................ 348.3. Corporate Changes.................................................... 348.4. Guaranties........................................................... 358.5. Restricted Payments.................................................. 358.6. Investments.......................................................... 358.7. Affiliate/Subsidiary Transactions.................................... 358.8. ERISA................................................................ 368.9. Additional Negative Pledges.......................................... 368.10. Storage of Collateral with Bailees and Warehousemen.................. 368.11. Use of Proceeds...................................................... 368.12. Accounts............................................................. 368.13. Indebtedness......................................................... 378.14. Loans................................................................ 37

Section 9. DEFAULT................................................................. 379.1 Event of Default..................................................... 379.2. Acceleration......................................................... 389.3. Remedies............................................................. 399.4. Waiver............................................................... 40

</TABLE>

<TABLE><S> <C>Section 10. MISCELLANEOUS......................................................... 40

10.1 Term; Termination.................................................... 4010.2 Indemnification...................................................... 4110.3 Additional Obligations............................................... 4110.4. Limitation of Liability.............................................. 4110.5. Alteration/Waiver.................................................... 4110.6. Severability......................................................... 42



10.7 One Loan............................................................. 4210.8 Additional Collateral................................................ 4210.9. No Merger or Novations............................................... 4210.10. Paragraph Titles..................................................... 4310.11. Binding Effects; Assignment.......................................... 4310.12. Notices.............................................................. 4310.13. Counterparts......................................................... 4310.14. Attachment A modifications........................................... 4310.15. Submission and Consent to Jurisdiction and

Choice of Law..................................................... 4310.16. Jury Trail Waiver.................................................... 4410.14. Additional Provision................................................. 44

</TABLE>

INVENTORY AND WORKING CAPITALFINANCING AGREEMENT

This INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT (as amended, supplementedor otherwise modified from time to time, this "Agreement") amends and restatesthat Agreement for Wholesale Financing dated August 9, 1989 (as amended fromtime to time, the "Financing Agreement") and is hereby made this 30th day ofOctober, 1997, by and between IBM CREDIT CORPORATION with a place of business at1500 RiverEdge Parkway, Atlanta, GA 30328, a Delaware corporation, ("IBMCredit"), and PULSAR DATA SYSTEMS, incorporated, with a place of business at4500 Forbes Boulevard, Lanham, MD 20706, a Delaware corporation,("Customer").

WITNESSETH

WHEREAS, IBM Credit and Customer are parties to that certain FinancingAgreement pursuant to which IBM Credit finances Customer's acquisition ofinventory and equipment;

WHEREAS, in the course of Customer's operations, Customer intends topurchase from Persons approved in writing by IBM Credit for the purposes of thisAgreement (the "Authorized Suppliers") computer hardware and software productsmanufactured or distributed by or bearing any trademark or trade name of suchAuthorized Suppliers (the "Products") (as of the date hereof the AuthorizedSuppliers are as set forth on Attachment E hereto);

WHEREAS, Customer has requested that IBM Credit finance its purchase ofProducts from such Authorized Suppliers and its working capital requirements,and IBM Credit is willing to provide such financing to Customer subject to theterms and conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the premises and for other good andvaluable consideration, the receipt and sufficiency of which are herebyacknowledged, the parties hereby agree that the Financing Agreement is herebyamended and restated in its entirety as follows:

Section 1. DEFINITIONS; ATTACHMENTS

1.1 Special Definitions. The following terms shall have the followingrespective meaning in this Agreement:



"A/R Advance": any loan or advance of funds made by IBM Credit to or on behalfof Customer pursuant to Section 2.3 of this Agreement, including, as the contextmay require, a WCO Advance, a PRO Advance and a Takeout Advance.

"A/R Advance Date": the Business Day on which IBM Credit makes an A/R Advanceunder this Agreement.

"A/R Advance Term": shall be the collective or individual reference, as thecontext may require, to a PRO Advance Term and a WCO Advance Term.

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"A/R Finance Charges": as defined on Attachment A.

"Accounts": as defined in the U.C. C.

"Advance": any loan or other extension of credit by IBM Credit to or on behalfof Customer pursuant to this Agreement including, without limitation, (i)Product Advances and (ii) A/R Advances.

"Affiliate": with respect to the Customer, any Person meeting one of thefollowing: (i) at least 10% of such Person's equity is owned, directly orindirectly, by Customer; (ii) at least 10% of Customer's equity is owned,directly or indirectly, by such Person; or (iii) at least 10% of Customer'sequity and at least 10% of such Person's equity is owned, directly orindirectly, by the same Person or Persons. All of Customer's officers,directors, joint venturers, and partners shall also be deemed to be Affiliatesof Customer for purposes of this Agreement.

"Agreement": as defined in the caption.

"Auditors": a nationally recognized firm of independent certified publicaccountants selected by Customer and satisfactory to IBM Credit.

"Available Credit": at any time, (1) the Maximum Advance Amount less (2) theOutstanding Advances at such time.

"Average Daily Balance": the sum of the unpaid principal of Outstanding ProductAdvances or Outstanding A/R Advances, as the case may be, as of each day duringa calendar month, divided by the number of days in the calendar month.

"Borrowing Base": as defined in Attachment A.

"Business Day": any day other than a Saturday, Sunday or other day on whichcommercial banks in New York, New York are generally closed or on which IBMCredit is closed.

"Closing Date": the date on which the conditions precedent to the effectivenessof this Agreement set forth in Section 5.1 hereof are satisfied or waived inwriting by IBM Credit.

"Code": the Internal Revenue Code of 1986, as amended or any successor statute.

"Collateral": as defined in Section 4.1.

"Collateral Management Report": a report to be delivered by Customer to IBM



Credit from time to time, as provided herein, signed by the chief executiveofficer or chief financial officer of Customer, substantially in the form anddetail of Attachment F hereto, detailing and certifying, among other items: asummary of Customer's inventory on hand financed by IBM Credit and Customer'sEligible Accounts, the amounts and aging of all of Customer's Accounts,Customer's inventory on hand financed by IBM Credit by quantity, type, model,Authorized Supplier's invoice price to Customer and the total of the line itemvalues for all inventory listed on the report, the amounts and aging ofCustomer's accounts payable as

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of a specified date, all of Customer's IBM Credit borrowing activity during aspecified period and the total amount of Customer's Borrowing Base as well asCustomer's Outstanding A/R Advances, Outstanding Product Advances, AvailableCredit and any Shortfall Amount as of a specified date.

"Common Due Date": (1) the fifth day of a calendar month if the ProductFinancing Period or A/R Advance Term, whichever is applicable, expires on thefirst through tenth of such calendar month; (2) the fifteenth day of a calendarmonth if the Product Financing Period or A/R Advance Term, whichever isapplicable, expires on the eleventh through twentieth of such calendar month;and (3) the twenty-fifth day of a calendar month if the Product Financing Periodor A/R Advance Term, whichever is applicable, expires on the twenty-firstthrough the last day of such calendar month.

"Compliance Certificate": a certificate substantially in the form ofAttachment C.

"Credit Line": as defined in Section 2.1.

"Customer": as defined in the caption.

"Default": either (1) an Event of Default or (2) any event or condition which,but for the requirement that notice be given or time lapse or both, would be anEvent of Default.

"Delinquency Fee Rate": as defined on Attachment A.

"Eligible Accounts": as defined in Section 3.1.

"Environmental Laws": all statutes, laws, judicial decisions, regulations,ordinances, and other governmental restrictions relating to pollution, theprotection of the environment, occupational health and safety, or to emissions,discharges or release of pollutants, contaminants, hazardous substances orwastes into the environment.

"Environmental Liability": any claim, demand, obligation, cause of action,allegation, order, violation, injury, judgment, penalty or fine, cost orexpense, resulting from the violation or alleged violation of any EnvironmentalLaws or the imposition of any Lien pursuant to any Environmental Laws.

"ERISA": the Employee Retirement Income Security Act of 1974, as amended, or anysuccessor statutes.

"Event of Default": as defined in Section 9.1.



"Financial Statements": the consolidated and consolidating balance sheets(including, without limitation, securities such as stocks and investment bonds),statements of operations, statements of cash flows and statements of changes inshareholder's equity of Customer and its Subsidiaries for the period specified,prepared in accordance with GAAP and Consistent with prior practices.

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"Floor Plan Lender": any Person who now or hereinafter provides inventoryfinancing to Customer, provided that such Person executes an IntercreditorAgreement (as defined in Section 5.1 of this Agreement) or a subordinationagreement with IBM Credit in form and substance satisfactory to IBM Credit.

"Free Financing Period": for each Product Advance, the period, if any, in whichIBM Credit does not charge Customer a financing charge. IBM Credit shallcalculate the Customer's Free Financing Period utilizing a methodology that isconsistent with the methodologies used for similarly situated customers of IBMCredit. The Customer understands that IBM Credit may not offer or may cease tooffer a Free Financing Period for the Customer's purchases of Products. IBMCredit will use its best efforts to timely inform Customer of a change in a FreeFinancing Period made available by an Authorized Supplier, however IBM Creditassumes no liability of any kind for any delay or failure on its part to providesuch information.

"Free Financing Period Exclusion Fee": as defined in Attachment A.

"GAAP": generally accepted accounting principles in the United States as ineffect from time to time.

"Governmental Authority": any nation or government, any state or other politicalsubdivision thereof, and any entity exercising executive, legislative, judicial,regulatory or administrative functions of or pertaining to government, and anycorporation or other entity owned or controlled (through stock or capitalownership or otherwise) by any of the foregoing.

"Hazardous Substances": all substances, wastes or materials, to the extentsubject to regulation as "hazardous substances" or "hazardous waste" under anyEnvironmental Laws.

"IBM Credit": as defined in the caption.

Indebtedness": with respect to any Person, (1) all obligations of such Personfor borrowed money or for the deferred purchase price of property or services(other than trade liabilities incurred in the ordinary course of business andpayable in accordance with customary practices) or which is evidenced by a note,bond, debenture or similar instrument, (2) all obligations of such Person undercapital leases (including obligations under any leases Customer may enter into,now or in the future with IBM Credit), (3) all obligations of such Person inrespect of letters of credit, banker's acceptances or similar obligations issuedor created for the account of such Person, (4) liabilities arising under anyinterest rate protection, future, option swap, cap or hedge agreement orarrangement under which such Person is a party or beneficiary, (5) allobligations under guaranties of such Person and (6) all liabilities secured byany Lien on any property owned by such Person even though such Person has notassumed or otherwise become liable for the payment thereof.



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"Investment": with respect to any Person (the "Investor"), (1) any investment bythe Investor in any other Person, whether by means of share purchase, capitalcontribution, purchase or other acquisition of a partnership or joint ventureinterest, loan, time deposit, demand deposit or otherwise, and (2) any guarantyby the Investor of any Indebtedness or other obligation of any other Person.

"Lien(s)": any lien, claim, charge, pledge, security interest, deed of trust,mortgage, other encumbrance or other arrangement having the practical effect ofthe foregoing, including the interest of a vendor or lessor under anyconditional sale agreement, capital lease or other title retention agreement.

"Material Adverse Effect": a material adverse effect (1) on the business,operations, results of operations, assets, or financial condition of theCustomer, (2) on the aggregate value of the Collateral or the aggregate amountwhich IBM Credit would be likely to receive (after giving consideration toreasonably likely delays in payment and reasonable costs of enforcement) in theliquidation of such Collateral to recover the Obligations in full, or (3) on therights and remedies of IBM Credit under this Agreement.

"Maximum Advance Amount": at any time, the lesser of (1) the Credit Line and (2)the Borrowing Base at such time.

"Obligations": all covenants, agreements, warranties, duties, representations,loans, advances, interest (including interest accruing on or after the filing ofany petition in bankruptcy, or the commencement of any insolvency,reorganization or like proceeding, relating to Customer, whether or not a claimfor post-filing or post-petition interest is allowed in such proceeding), fees,reasonable expenses, indemnities, liabilities and Indebtedness of any kind andnature whatsoever now or hereafter arising, owing, due or payable from Customerto IBM Credit.

"Other Documents": all security agreements, mortgages, leases, instruments,documents, guarantees, schedules of assignment, contracts and similar agreementsexecuted by Customer and delivered to IBM Credit, pursuant to this Agreement orotherwise, and all amendments, supplements and other modifications to theforegoing from time to time.

"Other Charges": as set forth in Attachment A.

"Outstanding Advances": at any time of determination, the sum of (1) the unpaidprincipal amount of all Advances made by IBM Credit under this Agreement, and(2) any finance charge, fee, expense or other amount related to Advances chargedto Customer's account with IBM Credit.

"Outstanding A/R Advances": at any time of determination, the sum of (1) theunpaid principal amount of all A/R Advances made by IBM Credit under thisAgreement; and (2) any finance charge, fee, expense or other amount related toA/R Advances charged to Customer's account with IBM Credit.

Page 8 of 46



"Outstanding Product Advances": at any time of determination, the sum of (1) theunpaid principal amount of all Product Advances made by IBM Credit under thisAgreement; and (2) any finance charge, fee, expense or other amount related toProduct Advances charged to Customer's account with IBM Credit.

"Permitted Indebtedness": any of the following:

(1) Indebtedness to IBM Credit;

(2) Indebtedness described in Section VII of Attachment B;

(3) Indebtedness to any Floor Plan Lender;

(4) Purchase Money Indebtedness;

(5) guaranties in favor of IBM Credit; and

(6) other Indebtedness consented to by IBM Credit in writing prior to incurringsuch Indebtedness.

"Permitted Liens": any of the following:

(1) Liens which are the subject of an Intercreditor Agreement, in effect fromtime to time between IBM Credit and any other secured creditor;

(2) Purchase Money Security Interests;

(3) Liens described in Section I of Attachment B;

(4) Liens of warehousemen, mechanics, materialmen, workers, repairmen, commoncarriers, landlords and other similar Liens arising by operation of law orotherwise, not waived in connection herewith, for amounts that are not yet dueand payable or being contested in good faith by appropriate proceedings promptlyinstituted and diligently conducted if an adequate reserve or other appropriateprovisions shall have been made therefor as required to be in conformity withGAAP and an adverse determination in such proceedings could not reasonably beexpected to have a Material Adverse Effect;

(5) attachment or judgement Liens individually or in the aggregate not inexcess of $250,000 (exclusive of (A) any amounts that are duly bonded to thesatisfaction of IBM Credit or (B) any amount fully covered by insurance as towhich the insurance company has acknowledged its obligation to pay suchjudgement in full);

(6) easements, rights-of-way, restrictions and other similar encumbrancesincurred in the ordinary course of business which, in the aggregate, are notsubstantial in amount and which do not materially detract from the value of theproperty subject thereto or materially interfere with the ordinary conduct ofthe business of Customer;

(7) extensions of renewals of the foregoing permitted Liens; provided that (A)the aggregate amount of such extended or renewed Liens do not

Page 9 of 46



exceed the original principal amount of the Indebtedness for which it secures,(B) such Liens do not extend to any property other than property alreadypreviously subject to the Lien and (C) such extended or renewed Liens are onterms and conditions no more restrictive than the terms and conditions of theLiens being extended or renewed;

(8) Liens arising from deposits or pledges to secure bids, tenders, contracts,leases, surety and appeal bonds and other obligations of like nature arising inthe ordinary course of the Customer's business;

(9) Liens for taxes, assessments or governmental charges not delinquent orbeing contested, in good faith, by appropriate proceedings promptly institutedand diligently conducted if an adequate reserve or other appropriate provisionsshall have been made therefor as required in order to be in conformity with GAAPand an adverse determination in such proceedings could not reasonably beexpected to have a Material Adverse Effect;

(10) Liens arising out of deposits in connection with workers' compensation,unemployment insurance or other social security or similar legislation;

(11) Liens arising pursuant to this Agreement; and

(12) other Liens consented to by IBM Credit in writing prior to incurring suchLien.

"Person": any individual, association, firm, corporation, partnership, trust,unincorporated organization or other entity whatsoever.

"Policies": all policies of insurance required to be maintained by Customerunder this Agreement or any of the Other Documents.

"Prime Rate": as of the date of determination, the average of the rates ofinterest announced by Citibank, N.A., Chase Manhattan Bank and Bank of AmericaNational Trust & Savings Association (or any other bank which IBM Credit uses inits normal course of business of determining Prime Rate) as their prime or baserate, as of the last Business Day of the calendar month immediately precedingthe date of determination, whether or not such announced rates are the actualrates charged by such banking institutions to their most creditworthy borrowers.

"PRO Advance": an A/R Advance, with a PRO Advance Term, made by IBM Credit toitself on behalf of Customer to repay all or a portion of a Product Advance thatis due and payable.

"PRO Advance Term": for each PRO Advance, a period, in increments of ten days asspecified by Customer in the Request for A/R Advance with respect to such PROAdvance, but in no event in excess of thirty days, commencing on the A/R AdvanceDate for such PRO Advance.

"Product Advance": any advance of funds made or committed to be made by IBMCredit for the account of Customer to an Authorized Supplier in respect of aninvoice delivered by such Authorized Supplier to IBM Credit describing Productspurchased by Customer, including any such purchased by Customer, including anysuch

Page 10 of 46



advance made or committed to be made as of the date hereof pursuant to theFinancing Agreement.

"Product Financing Charge": as defined in Attachment A.

"Product Financing Period": for each Product Advance, a period of days equal tothat set forth in Attachment A from time to time, commencing on the invoice dateof such Product Advance.

"Purchase Money Indebtedness": any Indebtedness (including capital leases)incurred to finance the acquisition of assets (other than assets manufactured ordistributed by or bearing any trademark or trade name of any AuthorizedSupplier) to be used in the Customer's business not to exceed the lesser of (1)the purchase price or acquisition cost of such asset and (2) the fair marketvalue of such asset.

"Purchase Money Security Interest": any security interest securing PurchaseMoney Indebtedness, which security interest applies solely to the particularasset acquired with the Purchase Money Indebtedness.

"Request for A/R Advance": as defined in Section 2.3.

"Requirement of Law": as to any Person, the articles of incorporation and by-laws of such Person, and any law, treaty, rule or regulation or determination ofan arbitrator or a court or other governmental authority, in each caseapplicable to or binding upon such Person or any of its property or to whichsuch Person or any of its property is subject.

"Shortfall Amount": as defined in Section 2.6.

"Shortfall Transaction Fee": as defined in Attachment A.

"Subsidiary": with respect to any Person, any corporation or other entity ofwhich securities or other ownership interests having ordinary voting power toelect a majority of the board of directors or other Person performing similarfunctions are at the time directly or indirectly owned by such Person.

"Takeout Advance": an A/R Advance made to existing creditors of Customer onbehalf of Customer, in an amount sufficient to discharge Customer's indebtednessto such creditor.

"Termination Date": shall mean the first anniversary of the date of thisAgreement or such other date as IBM Credit and Customer may agree to from timeto time.

"Voting Stock": securities, the holders of which are ordinarily, in the absenceof contingencies, entitled to elect the corporate directors (or personsperforming similar functions). "WCO Advance": an A/R Advance, with a WCO AdvanceTerm.

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"WCO Advance Term": for each WCO Advance, a period of one hundred eighty (180)days commencing on the A/R Advance Date for such WCO Advance.



1.2. Other Defined Terms. Terms not otherwise defined in this Agreement whichare defined in the Uniform Commercial Code as in effect in the State of New York(the "U.C.C.") shall have the meanings assigned to them therein.

1.3. Attachments. All attachments, exhibits, schedules and other addendahereto, including, without limitation, Attachment A and Attachment B, arespecifically incorporated herein and made a part of this Agreement.

Section 2. CREDIT LINE/ FINANCE CHARGES/ OTHER CHARGES

2.1. Credit Line. Subject to the terms and conditions set forth in thisAgreement, on and after the Closing Date to but not including the date that isthe earlier of (x) the date on which this Agreement is terminated pursuant toSection 10. and (y) the date on which IBM Credit terminates the Credit Linepursuant to Section 9., IBM Credit agrees to extend to the Customer a creditline ("Credit Line") in the amount set forth the Attachment A pursuant to whichIBM Credit will make to the Customer, from time to time, Advances in anaggregate amount at any one time outstanding not to exceed the Maximum AdvanceAmount. Notwithstanding any other term or provision of this Agreement, IBMCredit may, at any time and from time to time, in its sole discretion (x)temporarily increase the amount of the Credit Line above the amount set forth inAttachment A and decrease the amount of the Credit Line back to the amount ofthe Credit Line set forth in Attachment A, in each case upon written notice tothe Customer and (y) make Advances pursuant to this Agreement upon the requestof Customer in an aggregate amount at any one time outstanding in excess of theCredit Line.

2.2. Product Advances. (A) Subject to the terms and conditions of thisAgreement, IBM Credit shall make Product Advances in connection with Customer'spurchase of Products from Authorized Suppliers (as defined under WITNESSETH).Customer hereby authorizes and directs IBM Credit to pay the proceeds of ProductAdvances directly to the applicable Authorized Supplier in respect of invoicesdelivered to IBM Credit for such Products by such Authorized Supplier andacknowledges that each such Product Advance constitutes a loan by IBM Credit toCustomer pursuant to this Agreement as if the Customer received the proceeds ofthe Product Advance directly from IBM Credit.

(B) No finance charge shall accrue on any Product Advance during the FreeFinancing Period, if any, applicable to such Product Advance. Customer shallrepay each Product Advance no later than the Common Due Date for such ProductAdvance. Customer may, at its option, repay each Product Advance by requestingIBM Credit to apply all or any part of the principal amount of an A/R Advance tothe Outstanding Product Advances. Customer's request for such application shallbe made in accordance with Section 2. When so requested and subject to the termsand conditions of this Agreement, IBM Credit shall apply the amount so requestedto the amounts due in respect of the Outstanding Product Advances. Nothing

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contained herein shall relieve Customer of its obligation to repay ProductAdvances when due. Each Product Advance shall accrue a finance charge on theAverage Daily Balance thereof from and including the first (1st) day followingthe end of the Free Financing Period, if any, for such Product Advance, or if nosuch Free Financing Period shall be in effect, from and including the date ofinvoice for such Product Advance, in each case, to and including the date suchProduct Advance shall become due and payable in accordance with the terms of



this Agreement, at a per annum rate equal to the lesser of (a) the financecharge set forth in Attachment A to this Agreement as the "Product FinancingCharge" and (b) the highest rate from time to time permitted by applicable law.

In addition, for any Product Advance with respect to which a Free FinancingPeriod shall not be in effect, Customer shall pay a Free Financing PeriodExclusion Fee. Such fee shall be due and payable on the Common Due Date forsuch Product Advance. If it is determined that amounts received from Customerwere in excess of the highest rate permitted by law, then the amountrepresenting such excess shall be considered reductions to principal ofAdvances.

(C) Customer acknowledges that IBM Credit does not warrant the Collateral.Customer shall be obligated to pay IBM Credit in full even if the Collateral isdefective or fails to conform to the warranties extended by the AuthorizedSupplier. The Obligations of Customer shall not be affected by any disputeCustomer may have with any manufacturer, distributor or Authorized Supplier.Customer will not assert any claim or defense which it may have against anymanufacturer, distributor or Authorized Supplier against IBM Credit.

(D) Customer hereby authorizes IBM Credit to collect directly from anyAuthorized Supplier any credits, rebates, bonuses or discounts owed by suchAuthorized Supplier to Customer ("Supplier Credits"). Any Supplier Creditsreceived by IBM Credit may be applied by IBM Credit to the Outstanding Advances.IBM Credit will use its best efforts to provide a schedule of Supplier Creditsto Customer weekly or upon Customer's reasonable demand. Any Supplier Creditscollected by IBM Credit shall in no way reduce Customer's debt to IBM Credit inrespect of the Outstanding Advances until such Supplier Credits are applied byIBM Credit.

(E) IBM Credit may apply any payments and Supplier Credits received byIBM Credit to reduce finance charges first and then to principal amounts ofAdvances owed by Customer. IBM Credit may apply principal payments to theoldest (earliest) invoices (and related Product Advances) first, but, in anycase, all principal payments will be applied in respect of the OutstandingProduct Advances made for Products which have been sold, lost, stolen,destroyed, damaged or otherwise disposed of prior to any other applicationthereof.

(F) Customer will indemnify and hold IBM Credit harmless from and againstany claims or demands asserted by any Person relating to or arising from theCollateral for any reason whatsoever, including, without limitation, thecondition of the Collateral, any misrepresentation made about the Collateral byany representative of

Page 13 of 46

Customer, or any act or failure to act by Customer except to the extent suchclaims or demands are directly attributable to IBM Credit's gross negligence orwillful misconduct. Nothing contained in the foregoing shall impair any rightsor claims which the Customer may have against any manufacturer, distributor orAuthorized Supplier.

2.3. A/R Advances. (A) Whenever Customer shall desire IBM Credit to provide anA/R Advance, Customer shall deliver to IBM Credit written notice of Customer'srequest for such an Advance ("Request for A/R Advance"). For any requested A/R



Advance pursuant to which monies will be disbursed to Customer or any Personother than IBM Credit, a Request for A/R Advance shall be delivered to IBMCredit on or prior to 1:00 p.m. (eastern time) one Business Day prior to therequested A/R Advance Date. The Request for A/R Advance shall specify (i) therequested A/R Advance Date; (ii) the amount of the requested A/R Advance; (iii)whether such A/R Advance is a WCO Advance or a PRO Advance; (iv) if applicable,the PRO Advance Term for such A/R Advance; (v) for each PRO Advance, the month,day and year of the Common Due Date, as set forth in Customer's applicablebilling statement from IBM Credit, for the Product Advance to which the PROAdvance is to be applied; and (vi) if applicable, the amount of the requestedA/R Advance that should be applied to the Outstanding Product Advances (providedthat all PRO Advances shall be applied to the Outstanding Product Advances).Customer may deliver a Request for A/R Advance via facsimile. Any Request forA/R Advance delivered to IBM Credit shall be irrevocable. Notwithstanding anyother provision of this Agreement, Customer shall not (i) request more than onePRO Advance in respect of any Product Advance; and (ii) request a PRO Advancefor any Common Due Date on which Customer will take a discount offered by IBMCredit for invoice amounts paid in full within fifteen days of the invoice dateunder IBM Credit's High Turnover Option ("HTO") Program.

(B) Subject to the terms and conditions of this Agreement, on the A/RAdvance Date specified in a Request for A/R Advance, IBM Credit shall make theprincipal amount of each A/R Advance available to the Customer in immediatelyavailable funds to an account maintained by Customer (or in the case of aTakeout Advance, as directed by Customer). If IBM Credit is making an A/RAdvance hereunder on a day on which Customer is to repay all or any part of anOutstanding Advance (or any other amount owing hereunder), IBM Credit shallapply the proceeds of the A/R Advance to such repayment and only an amount equalto the difference, if any, between the amount of the A/R Advance and the amountbeing repaid shall be made available to Customer as provided in the immediatelypreceding sentence.

(C) Each A/R Advance shall accrue a finance charge on the unpaid principalamount thereof, from and including the date of each A/R Advance to and includingthe date such A/R Advance is due and payable in accordance with the terms ofthis Agreement at a per annum rate equal to the lesser of (a) the finance chargeset forth in Attachment A to this Agreement under the caption "A/R FinanceCharge" for such type of A/R Advance, or (b) the highest rate from time to timepermitted by applicable law. If it is determined that amounts received from theCustomer were in excess of such highest rate, then the amount

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representing such excess shall be considered reductions to principal ofAdvances.

(D) Unless otherwise due and payable at an earlier date, the unpaidprincipal amount of each A/R Advance, other than a Takeout Advance, shall be dueand payable on the applicable Common Due Date. Unless otherwise notified byCustomer in writing prior to the day the principal amount of any WCO Advancebecomes due and payable, the customer shall be deemed to have provided IBMCredit with a Request for A/R Advance requesting a WCO Advance on the day suchprincipal amount is due and payable in an amount equal to the unpaid principalamount of the WCO Advance so due. Subject to the terms and conditions of thisAgreement, the principal amount of such WCO Advance shall automatically renewfor an additional WCO Advance Term. Notwithstanding any other provision of this



Agreement, a Takeout Advance may only be requested on the Closing Date and suchTakeout Advance shall be limited to an amount sufficient to discharge theindebtedness that is the subject of a Takeout Advance.

Unless otherwise agreed in writing, a Takeout Advance shall be due pursuant tothe Schedule of Repayments in Attachment D to this Agreement.

2.4. Finance and Other Charges. (A) Finance charges shall be calculated bymultiplying the applicable Delinquency Fee Rate, Product Financing Charge or A/RFinance Charge provided for in this Agreement by Customer's applicable AverageDaily Balance. The Delinquency Fee Rate, the Product Financing Charge and thevarious A/R Finance Charges provided for in this Agreement are each computed onthe basis of an actual day, 360 day year.

(B) The Customer hereby agrees to pay to IBM Credit the charges set forthas "Other Charges" in Attachment A. The Customer also agrees to pay IBM Creditadditional charges for any returned items of payment received by IBM Credit.The Customer hereby acknowledges that any such charges are not interest but thatsuch charges, if unpaid, will constitute part of the Outstanding Advances.

(C) The finance charges and Other Charges owed under this Agreement, andany charges hereafter agreed to in writing by the parties, are payable monthlyon receipt of IBM Credit's bill or statement therefor or IBM Credit may, in itssole discretion, add unpaid finance charges and Other Charges to the Customer'soutstanding Advances.

(D) If any amount owned under this Agreement, including, withoutlimitation, any Advance, is not paid when due (whether at maturity, byacceleration or otherwise), the unpaid amount thereof will bear a late chargefrom and including the day after such Advance was due and payable to andincluding the date IBM Credit receives payment thereof, at a per annum rateequal to the lesser of (a) the amount set forth in Attachment A to thisAgreement as the "Delinquency Fee Rate" and (b) the highest rate from time totime permitted by applicable law. In addition, if any Shortfall Amount shallnot be paid when due pursuant to Section 2.6 hereof, Customer shall pay IBMCredit a Shortfall Transaction Fee. If

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it is determined that amounts received from Customer were in excess of suchhighest rate, then the amount representing such excess shall be consideredreductions to principal of Advances.

2.5 Statements Regarding Customer's Account. IBM Credit will send statements ofeach transaction hereunder as well as monthly billing statements to Customerwith respect to Advances and other charges due on Customer's account with IBMCredit. Each statement of transaction and monthly billing statement shall bedeemed, absent manifest error, to be correct and shall constitute an accountstated with respect to each transaction or amount described therein unlesswithin seven (7) Business Days after such statement of transaction or billingstatement is received by Customer, Customer provides IBM Credit written noticeobjecting that such amount or transaction is incorrectly described therein andspecifying the error(s), if any, contained therein. IBM Credit may at any timeadjust such statements of transaction or billing statements to comply with



applicable law and this Agreement.

2.6. Shortfall. If, on any date, the Outstanding Advances shall exceed theMaximum Advance Amount (such excess, the "Shortfall Amount"), then the Customershall on such date prepay the Outstanding Advances in an amount equal to suchShortfall amount.

2.7. Application of Payments. The Customer hereby agrees that all checks andother instruments delivered to IBM Credit on account of Customer's Obligationsshall constitute conditional payment until such items are actually collected byIBM Credit. The Customer waives the right to direct the application of any andall payments at any time or times hereafter received by IBM Credit on account ofthe Customer's Obligations. Customer agrees that IBM Credit shall have thecontinuing exclusive right to apply and reapply any and all such payments toCustomer's Obligations in such manner as IBM Credit may deem advisablenotwithstanding any entry by IBM Credit upon any of its books and records.

2.8. Prepayment and Reborrowing By Customer. (A) Customer may at any timeprepay, without notice or penalty, in whole or in part amounts owed under thisAgreement. IBM Credit may apply payments made to it (whether by the Customer orotherwise) to pay finance charges and other amounts owing under this Agreementfirst and then to the principal amount owed by the Customer.

(B) Subject to the terms and conditions of this Agreement, any amountprepaid or repaid to IBM Credit in respect to the Outstanding Advances may bereborrowed by Customer in accordance with the provisions of this Agreement.

Section 3. CREDIT LINE ADDITIONAL PROVISIONS

3.1. Ineligible Accounts. IBM Credit and Customer agree that IBM Credit shallhave the sole right to determine eligibility of Accounts from an Account debtorfor purposes of determining the Borrowing Base; however, without limiting suchright, the following Accounts will be deemed to be ineligible for purposes ofdetermining the Borrowing Base;

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(A) Accounts created from the sale of goods and/or performance of services(i) on non-standard terms or (ii) that allow for payment to be made more thanthirty (30) days from the date of such sale or performance or services or (iii)to Nexus Unlimited, Inc.

(B) Accounts unpaid more than: (i) one hundred twenty (120) days from dateof invoice if the Account debtor is a United States government institution; or(ii) ninety (90) days from date of invoice for all other Account debtors;

(C) Accounts payable by an Account debtor if fifty percent (50%) or more ofthe aggregate outstanding balance of all such Accounts remain unpaid for morethan: (i) one hundred twenty (120) days from date of invoice if the Accountdebtor is a United States government institution; or (ii) ninety (90) days fromdate of invoice for all other Account debtors;

(D) Accounts payable by an Account debtor that is an Affiliate of Customer,or an officer, employee, agent, guarantor, stockholder of Customer or anAffiliate of Customer, or is related to or has common shareholders, officers ordirectors with Customer;



(E) Accounts arising from consignment sales;

(F) Except for state, local and United States government institutions andpublic educational institutions, Accounts with respect to which the payment bythe Account debtor is or may be conditional;

(G) Except for state, local and United States government institutions andpublic educational institutions, Accounts with respect to which : (i) theAccount debtor is not a commercial entity, or (ii) the Account debtor is not aresident of the United States;

(H) Accounts payable by any Account debtor to which Customer is or maybecome liable for goods sold or services rendered by such Account debtor toCustomer;

(I) Accounts arising from the sale or lease of goods purchased for apersonal, family or household purpose;

(J) Accounts arising from the sale or other disposition of goods that havebeen used for demonstration purposes or loaned or leased by the Customer toanother party;

(K) Accounts which are progress payment accounts or contra accounts;

(L) Accounts upon which IBM Credit does not have a valid, perfected, firstpriority security interest;

(M) Accounts payable by an Account debtor that is or Customer knows willbecome, subject to proceedings under United States Bankruptcy Law or other lawfor the relief of debtors;

(N) Accounts that are not payable in US dollars;

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(O) Accounts payable by any Account debtor that is a remarketer of computerhardware and software products and whose purchases of such products fromCustomer have been financed by another person, other than IBM Credit, whopays the proceeds of such financing directly to Customer on behalf of suchdebtor ("Third Party Financer") unless (i) such Third Party Financer does nothave a separate financing relationship with Customer or (ii) such Third PartyFinancer has a separate financing relationship with Customer and has waived itsright to set off its obligations to Customer;

(P) Accounts arising from the sale or lease of goods which are billed toany Account debtor but have not yet been shipped by Customer;

(Q) Accounts with respect to which Customer has permitted or agreed to anyextension, compromise or settlement, or made any change or modification of anykind or nature, including, but not limited to, any change or modification to theterms relating thereto;

(R) Accounts that do not arise from undisputed bona fide transactionscompleted in accordance with the terms and conditions contained in the invoices,



purchase orders and contracts relating thereto;

(S) Accounts that are discounted for the full payment term specified inCustomer's terms and conditions with its Account debtors, or for any longerperiod of time.

(T) Accounts on cash on delivery (C.O.D.) Terms;

(U) Accounts arising from maintenance or service contracts that are billedin advance of full performance of service;

(V) Accounts arising from bartered transactions;

(W) Accounts arising from incentive payments, rebates, discounts, credits,and refunds from a supplier; and

(X) Upon thirty (30) days prior notice, any and all other Accounts that IBMCredit deems, in its sole and absolute discretion, to be ineligible, providedhowever, that no direct obligation of the government of the United States ofAmerica shall be deemed ineligible pursuant to this subsection (X).

The aggregate of all Accounts that are not ineligible Accounts shall hereinafterbe referred to as "Eligible Accounts".

3.2 Reimbursement for Charges. Customer agrees to pay for all costs andexpenses of Customer's bank in respect to collection of checks and other itemsof payment, all fees relating to the use and maintenance of the Lockbox and theSpecial Account (each as defined in Section 3.3) and with respect to remittancesof proceeds of the Advances hereunder.

3.3 Lockbox and Special Account. Customer shall establish and maintain alockbox ("Lockbox") at the address set forth in Attachment A

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with the financial institution listed in Attachment A ("Bank") pursuant to anagreement between the Customer and Bank in form and substance satisfactory toIBM Credit. Customer shall also establish and maintain a deposit account whichshall contain only proceeds of Customer's Accounts ("Special Account") with suchBank. Customer shall enter into and maintain a contingent blocked accountagreement with such Bank for the benefit of IBM Credit in form and substancesatisfactory to IBM Credit pursuant to which, among other things, such Bankshall agree that, upon notice from IBM Credit, disbursements from the SpecialAccount shall be made only as IBM Credit shall direct.

3.4. Collections. Customer shall instruct all Account debtors to remitpayments directly to a Lockbox. In addition, Customer shall have suchinstruction printed in conspicuous type on all invoices. Customer shallinstruct such Bank to deposit all remittances to such Bank's Lockbox into itsSpecial Account. Customer further agrees that it shall not deposit or permitany deposits of funds other than remittances paid in respect of the Accountsinto the Special Account(s) or permit any commingling of funds with suchremittances in any Lockbox or Special Account. Without limiting the Customer'sforegoing obligations, if, at any time, Customer receives a remittance directlyfrom an Account debtor, then Customer shall make entries on its books andrecords in a manner that shall reasonably identify such remittances and shall



keep a separate account on its record books of all remittances so received anddeposit the same into a Special Account. Until so deposited into the SpecialAccount, Customer shall keep all remittances received in respect of Accountsseparate and apart from Customer's other property so that they are capable ofidentification as the proceeds of Accounts in which IBM Credit has a securityinterest.

3.5. Application of Remittances and Credits. Customer shall apply allremittances against the aggregate of Customer's outstanding Accounts no laterthan the end of the Business Day on which such remittances are deposited intothe Special Account. Customer also agrees to apply each remittance against itsrespective Account no later than three (3) Business Days from the date suchremittance is deposited into the Special Account. In addition, Customer shallpromptly apply any credits owing in respect to any Account when due.

3.6. Power of Attorney. Customer hereby irrevocably appoints IBM Credit, withfull power of substitution, as its true and lawful attorney-in-fact with fullpower, in good faith and in compliance with commercially reasonable standards,in the discretion of IBM Credit, to:

(A) sign the name of Customer on any document or instrument that IBM Creditshall deem necessary or appropriate to perfect and maintain perfected thesecurity interest in the Collateral contemplated under this Agreement and theOther Documents;

(B) endorse the name of Customer upon any of the items of payment ofproceeds and deposit the same in the account of IBM Credit for application tothe Obligation; and

upon the occurrence and during the continuance of an Event of Default, asdefined in Section 9.1 hereof, which is not waived by the IBM Credit;

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(C) demand payment, enforce payment and otherwise exercise all Customer'srights and remedies with respect to the collection of any Accounts;

(D) settle, adjust, compromise, extend or renew any Accounts;

(E) settle, adjust or compromise any legal proceedings brought to collectany Accounts;

(F) sell or assign any Accounts upon such terms, for such amounts and atsuch time or times as IBM Credit may deem advisable;

(G) discharge and release any Accounts;

(H) prepare, file and sign Customer's name on any Proof of Claim inBankruptcy or similar document against any Account debtor;

(I) prepare, file and sign Customer's name on any notice of lien, claim ofmechanic's lien, assignment or satisfaction of lien or mechanic's lien, orsimilar document in connection with any Accounts;

(J) endorse the name of Customer upon any chattel paper, document, instrument,invoice, freight bill, bill of lading or similar document or agreement relating



to any Account or goods pertaining thereto;

(K) endorse the name of Customer upon any of the items of payment of proceedsand deposit the same in the account of IBM Credit for application to theObligation;

(L) sign the name of Customer to requests for verification of Accounts andnotices thereof to Account debtors;

(M) sign the name of Customer on any document or instrument that IBM Creditshall deem necessary or appropriate to enforce any and all remedies it may haveunder this Agreement, at law or otherwise; and

(N) make, settle and adjust claims under the Policies with respect to theCollateral and endorse Customer's name on any check, draft, instrument or otheritem of payment of the proceeds of the Policies with respect to the Collateral;and

(O) take control in any manner of any term of payment or proceeds and for suchpurpose to notify the postal authorities to change the address for delivery ofmail addressed to Customer to such address as IBM Credit may designate.

The power of attorney granted by this Section is for value and coupled with aninterest and is irrevocable so long as this Agreement is in effect or anyObligations remain outstanding. Nothing done by IBM Credit pursuant to suchpower of attorney will reduce any of Customer's Obligations other thanCustomer's payment Obligations to the extent IBM Credit has received monies.

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Section 4. SECURITY -- COLLATERAL

4.1 Grant. To secure Customer's full and punctual payment and performance ofthe Obligations (including obligations under leases Customer may enter into, nowor in the future, with IBM Credit) when due (whether at the stated maturity, byacceleration or otherwise), Customer hereby grants IBM Credit a securityinterest in all of Customer's right, title and interest in and to the followingproperty, whether now owned or hereafter acquired or existing and whereverlocated:

(A) all inventory and equipment, and all parts thereof, attachments,accessories and accessions thereto, products thereof and documents therefor;

(B) all accounts, contract rights, chattel paper, instruments, depositaccounts, obligations of any kind owning to Customer, whether or not arising outof or in connection with the sale or lease of goods or the rendering of servicesan all books, invoices, documents and other records in any form evidencing orrelating to any of the foregoing;

(C) general intangibles;

(D) all rights now or hereafter existing in and to all mortgages, securityagreements, leases or other contracts securing or otherwise relating to any ofthe foregoing; and

(E) all substitutions and replacements for all of the foregoing, all



proceeds of the foregoing and, to the extent not otherwise included, allpayments under insurance or any indemnity, warranty or guaranty, payable byreason of loss or damage to or otherwise with respect to any of the foregoing.

All of the above assets shall be collectively defined herein as the"Collateral."

Customer covenants and agrees with IBM Credit that: (a) the security constitutedto by this Agreement is in addition to any other security from time to time heldby IBM Credit and (b) the security hereby created is a continuing securityinterest and will cover and secure the payment of all Obligations both presentand future of Customer to IBM Credit.

4.2 Further Assurances. Customer shall, from time to time upon the request ofIBM Credit, execute and deliver to IBM Credit, or cause to be executed anddelivered, at such time or times as IBM Credit may request such other andfurther documents, certificates and instruments that IBM Credit may deemnecessary to perfect and maintain perfected IBM Credit's security interests inthe Collateral and in order to fully consummate all of the transactionscontemplated under this Agreement and the Other Documents. Customer shall makeappropriate entries on its books and records disclosing IBM Credit's securityinterests in the Collateral.

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Section 5. CONDITIONS PRECEDENT

5.1. Conditions Precedent to the Effectiveness of this Agreement. Theeffectiveness of this Agreement is subject to the receipt by IBM Credit of, orwaiver in writing by IBM Credit of compliance with, the following conditionsprecedent:

(A) this Agreement executed and delivered by Customer and IBM Credit;

(B) (i) copies of the resolutions of the Board of Directors of Customercertified by the secretary or assistant secretary of Customer authorizing theexecution, delivery and performance of this Agreement and each Other Documentexecuted and delivered in connection herewith, (ii) a certificate of thesecretary or an assistant secretary of Customer, in form and substancesatisfactory to IBM Credit, certifying the names and true signatures of theofficers of Customer authorized to sign this Agreement and the Other Documentsand (iii) copies of the articles of incorporation and by-laws of Customercertified by the secretary or assistant secretary of Customer;

(C) certificates dated as of a recent date from the Secretary of State orother appropriate authority evidencing the good standing of Customer in thejurisdiction of its organization and in each other jurisdiction where theownership or lease of its property or the conduct of its business requires it toqualify to do business;

(D) copies of all approvals and consents from any Person, in each case inform and substance satisfactory to IBM Credit, which are required to enableCustomer to authorize, or required in connection with, (a) the execution,delivery or performance of this Agreement and each of the Other Documents, and(b) the legality, validity, binding effect or enforceability of this Agreementand each of the Other Documents;



(E) a lockbox agreement executed by Customer and each Bank, in form andsubstance satisfactory to IBM Credit;

(F) a contingent blocked account agreement executed by Customer and eachBank in form and substances satisfactory to IBM Credit;

(G) intercreditor agreements ("Intercreditor Agreement"), in form andsubstance satisfactory to IBM Credit, executed by each other secured creditor ofCustomer as set forth in Attachment A;

(H) a favorable opinion of counsel for Customer in substantially the formof Attachment H;

(I) UCC-1 financing statements for each jurisdiction reasonably requested byIBM Credit executed by Customer and each guarantor whose guaranty to IBM Creditis intended to be secured by a pledge of its assets;

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(J) the statements, certificates, documents, instruments, financingstatements, agreements and information set forth in Attachment A and AttachmentB; and

(K) all such other statements, certificates, documents, instruments, financingstatements, agreements and other information with respect to the matterscontemplated by this Agreement as IBM Credit shall have reasonably requested.

5.2. Conditions Precedent to Each Advance. No Advance will be required to bemade or renewed by IBM Credit under this Agreement unless, on and as of the dateof such Advance, the following statements shall be true to the satisfaction ofIBM Credit;

(A) The representations and warranties contained in this Agreement orin any document, instrument or agreement executed in connection herewith, aretrue and correct in all material respects on and as of the date of such Advanceas though made on and as of such date;

(B) No event has occurred and is continuing or after giving effectto such Advance or the application of the proceeds thereof would result in orwould constitute a Default;

(C) No event has occurred and is continuing which could reasonably beexpected to have a Material Adverse Effect;

(D) Both before and after giving effect to the making of such Advance,no Shortfall Amount exists.

Except as Customer has otherwise disclosed to IBM Credit in writing prior toeach request, each request (or deemed request pursuant to Section 2.3 (D)) foran Advance hereunder and the receipt (or deemed receipt) by the Customer of theproceeds of any Advance hereunder shall be deemed to be a representation andwarranty by Customer that, as of and on the date of such Advance, the statementsset forth in (A) through (D) above are true statements. No such disclosures byCustomer to IBM Credit shall in any manner be deemed to satisfy the conditionsprecedent to each Advance that are set forth in this Section 5.2.



Section 6. REPRESENTATIVES AND WARRANTIES

To induce IBM Credit to enter into this Agreement, Customer represents andwarrants to IBM Credit as follows;

6.1. Organization and Qualifications. Customer and each of its Subsidiaries(i) is a corporation duly organized, validly existing and in good standing underthe laws of the jurisdiction of its incorporation, (ii) has the power andauthority to own its properties and assets and to transact the businesses inwhich it presently is engaged and (iii) is duly qualified and is authorized todo business and is in good standing in each jurisdiction where it presently isengaged in business and is required to be so qualified. 6.2. Rights inCollateral; Priority of Liens. Customer and each of its Subsidiaries owns theproperty granted by it respectively as Collateral

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to IBM Credit, free and clear of any and all Liens in favor of third partiesexcept for the Liens otherwise permitted pursuant to Section 8.1. The Liensgranted by the Customer and each of its Subsidiaries pursuant to this Agreement,the Guaranties and the Other Documents in the Collateral constitute the validand enforceable first, prior and perfected Liens on the Collateral, except tothe extent any Liens that are prior to IBM Credit's Liens are (i) the subject ofan Intercreditor Agreement or (ii) Purchase Money Security Interests in productof a brand that is not financed by IBM Credit.

6.3. No Conflicts. The execution, delivery and performance by Customer of thisAgreement and each of the Other Documents (i) are within its corporate power;(ii) are duly authorized by all necessary corporate action; (iii) are not incontravention in any respect of any Requirement of Law or any indenture,contract, lease, agreement, instrument or other commitment to which it is aparty or by which it or any of its properties are bound; (iv) do not require theconsent, registration or approval of any Governmental Authority or any otherPerson (except such as have been duly obtained, made or given, and are in fullforce and effect); and (v) will not, except as contemplated herein, result inthe imposition of any Liens upon any of its properties.

6.4. Enforceability. This Agreement and all of the other documents executed anddelivered by the Customer in connection herewith are the legal, valid andbinding obligations of Customer, and are enforceable in accordance with theirterms, except as such enforceability may be limited by the effect of anyapplicable bankruptcy, insolvency, reorganization, fraudulent conveyance,moratorium or similar laws affecting creditors' rights generally or the generalequitable principles relating thereto.

6.5. Locations of Offices, Records and Inventory. The address of the principalplace of business and chief executive office of Customer is as set forth onAttachment B or on any notice provided by Customer to IBM Credit pursuant toSection 7.7(C) of this Agreement. The books and records of Customer, and all ofits chattel paper (other than the chattel paper delivered to IBM Credit pursuantto Section 7.14(E)) and records of Accounts, are maintained exclusively at suchlocations.

There is no jurisdiction in which Customer has any assets, equipment orinventory (except for vehicles and inventory in transit for processing) other



than those jurisdictions identified on Attachment B or on any notice provided byCustomer to IBM Credit pursuant to Section 7.7(C) of this Agreement. AttachmentB, as amended from time to time by any notice provided by Customer to IBM Creditin accordance with Section 7.7(C) of this Agreement, also contains a completelist of the legal names and addresses of each warehouse at which the Customer'sinventory is stored. None of the receipts received by Customer from anywarehouseman states that the goods covered thereby are to be delivered to beareror to the order of a named person or to a named person and such named person'sassigns. 6.6. Fictitious Business Names. Customer has not used any corporate orfictitious name during the five (5) years preceding the date of this Agreement,other than those listed on Attachment B.

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6.7. Organization. All of the outstanding capital stock of Customer has beenvalidly issued, is fully paid and nonassessable.

6.8. No Judgments or Litigation. Except as set forth on Attachment B, nojudgments, orders, writs or decrees are outstanding against Customer nor isthere now pending or, to the best of Customer's knowledge after due inquiry,threatened, any litigation, contested claim, investigation, arbitration, orgovernmental proceeding by or against Customer.

6.9. No Defaults. The Customer is not in default under any term of anyindenture, contract, lease, agreement, instrument or other commitment to whichit is a party or by which it, or any of its properties are bound. Customer hasno knowledge of any dispute regarding any such indenture, contract, lease,agreement, instrument or other commitment. No Default or Event of Default hasoccurred and is continuing.

6.10. Labor Matters. Except as set forth on any notice provided by Customer toIBM Credit pursuant to Section 7.1(G) of this Agreement, the Customer is not aparty to any labor dispute. There are no strikes or walkouts or laborcontroversies pending or threatened against the Customer which could reasonablybe expected to have a Material Adverse Effect.

6.11. Compliance with Law. Customer has not violated or failed to comply withany Requirement of Law or any requirement of any self regulatory organization.

6.12. ERISA. Each "employee benefit plan", "employee pension benefit plan","defined benefit plan", or "multi-employer benefit plan", which Customer hasestablished, maintained, or to which it is required to contribute (collectively,the "Plans") is in compliance with all applicable provisions of ERISA and theCode and the rules and regulations thereunder as well as the Plan's terms andconditions. There have been no "prohibited transactions" and no "reportableevent" has occurred within the last 60 months with respect to any Plan. Customerhas no "multi-employer benefit plan".

As used in this Agreement the terms "employee benefit plan", "employee pensionbenefit plan", "defined benefit plan", and "multi-employer benefit plan" havethe respective meanings assigned to them in Section 3 of ERISA and anyapplicable rules and regulations thereunder. The Customer has not incurred any"accumulated funding deficiency" within the meaning of ERISA or incurred anyliability to the Pension Benefit Guaranty Corporation (the "PBGC") in connectionwith a Plan (other than for premiums due in the ordinary course).



6.13. Compliance with Environmental Laws. Except as otherwise disclosed inAttachment B:

(A) The Customer has obtained all government approvals required withrespect to the operation of their businesses under any Environmental Law.

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(B) (i) the Customer has not generated, transported or disposed of anyHazardous Substances; (ii) the Customer is not currently generating,transporting or disposing of any Hazardous Substances; (iii) the Customer has noknowledge that (a) any of its real property (whether owned, leased, or otherwisedirectly or indirectly controlled) has been used for the disposal of or has beencontaminated by any Hazardous Substances, or (b) any of its business operationshave contaminated lands or waters of others with any Hazardous Substances; (iv)the Customer and its respective assets are not subject to any EnvironmentalLiability and, to the best of the Customer's knowledge, any threatenedEnvironmental Liability; (v) the Customer has not received any notice of orotherwise learned of any governmental investigation evaluating whether anyremedial action is necessary to respond to a release or threatened release ofany Hazardous Substances for which the Customer may be liable; (vi) the Customeris not in violation of any Environmental Law; (vii) there are no proceedings orinvestigations pending against Customer with respect to any violation or allegedviolation of any Environmental Law; provided however, that the partiesacknowledge that any generation, transportation, use, storage and disposal ofcertain such Hazardous Substances in Customer's or its Subsidiaries' businessshall be excluded from representations (i) and (ii) above, provided, further,that Customer is at all times generating, transporting, utilizing, storing anddisposing such Hazardous Substances in accordance with all applicableEnvironmental Laws and in a manner designed to minimize the risk of any spill,contamination, release or discharge of Hazardous Substances other than asauthorized by Environmental Laws.

6.14. Intellectual Property. Customer possesses such assets, licenses, patents,patent applications, copyrights, service marks, trademarks, trade names andtrade secrets and all rights and other property relating thereto or arisingtherefrom ("Intellectual Property") as are necessary or advisable to continue toconduct its present and proposed business activities.

6.15. Licenses and Permits. Customer has obtained and holds in full force andeffect all franchises, licenses, leases, permits, certificates, authorizations,qualifications, easements, rights of way and other rights and approvals whichare necessary for the operation of its businesses as presently conducted.Customer is not in violation of the terms of any such franchise, license, lease,permit, certificate, authorization, qualification, easement, right of way, rightor approval.

6.16. Investment Company. The Customer is not (i) an investment company or acompany controlled by an investment company within the meaning of the InvestmentCompany Act of 1940, as amended, (ii) a holding company or a subsidiary of aholding company, or an Affiliate of a holding company or of a subsidiary of aholding company, within the meaning of the Public Utility Holding Company Act of1935, as amended, or (iii) subject to any other law which purports to regulateor restrict its ability to borrow money or to consummate the transactionscontemplated by this Agreement or the Other Documents or to perform itsobligations hereunder or thereunder.



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6.17. Taxes and Tax Returns. Customer has timely filed all federal, state,and local tax returns and other reports which it is required by law to file, andhas either duly paid all taxes, fees and other governmental charges indicated tobe due on the basis of such reports and returns or pursuant to any assessmentreceived by the Customer, or made provision for the payment thereof inaccordance with GAAP. The charges and reserves on the books of the Customer inrespect of taxes or other governmental charges are in accordance with GAAP. Notax liens have been filed against Customer or any of its property.

6.18. Status of Accounts. Each Account is based on an actual and bona fidesale and delivery of goods or rendition of services to customers, made byCustomer, in the ordinary course of its business; the goods and inventory beingsold and the Accounts created are its exclusive property and are not and shallnot be subject to any Lien, consignment arrangement, encumbrance, securityinterest or financing statement whatsoever (other than Permitted Liens). TheCustomer's customers have accepted goods or services and owe and are obligatedto pay the full amounts stated in the invoices according to their terms. Thereare no proceedings or actions known to Customer which are pending or threatenedagainst any Material Account Debtor (as defined in Section 7.14(B) of thisAgreement) of any of the Accounts which could reasonably be expected to resultin a Material Adverse Effect on the debtor's ability to pay the full amounts dueto Customer.

6.19. Affiliate/Subsidiary Transactions. Customer is not a party to or boundby any agreement or arrangement (whether oral or written) to which any Affiliateor Subsidiary of the Customer is a party except (i) in the ordinary course ofand pursuant to the reasonable requirements of Customer's business and (ii) uponfair and reasonable terms no less favorable to Customer than it could obtain ina comparable arm's-length transaction with an unaffiliated Person.

6.20. Accuracy and Completeness of Information. All factual informationfurnished by or on behalf of the Customer to IBM Credit or the Auditors forpurposes of or in connection with this Agreement or any Other Document, or anytransaction contemplated hereby or thereby is or will be true and accurate inall material respects on the date as of which such information is dated orcertified and not incomplete by omitting to state any material fact necessary tomake such information not misleading at such time.

6.21. Recording Taxes. All recording taxes, recording fees, filing fees andother charges payable in connection with the filing and recording of thisAgreement have either been paid in full by Customer or arrangements for thepayment of such amounts by Customer have been made to the satisfaction of IBMCredit.

6.22. Indebtedness. Customer (i) has no Indebtedness, other than PermittedIndebtedness; and (ii) has not guaranteed the obligations of any other Person(except as permitted by Section 8.4).

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Section 7. AFFIRMATIVE COVENANTS



Until termination of this Agreement and the indefeasible payment andsatisfaction of all Obligations:

7.1. Financial and Other Information. Customer shall cause to be furnished toIBM Credit the following information within the following time periods:

(A) as soon as available and in any event within ninety (90) days after theend of each fiscal year of Customer (i) audited Financial Statements (providedthat, to the extent not otherwise audited by the Auditors, the consolidatingFinancial Statements may be unaudited) as of the close of the fiscal year andfor the fiscal year, together with a comparison to the Financial Statements forthe prior year, in each case accompanied by (a) either an opinion of theAuditors without a "going concern" or like qualification or exception, orqualification arising out of the scope of the audit or, if so qualified, anopinion which shall be in scope and substance reasonably satisfactory to IBMCredit, (b) such Auditors' "Management Letter" to Customer, if any, (c) awritten statement signed by the Auditors stating that in the course of theregular audit of the business of Customer and its consolidated Subsidiaries,which audit was conducted by the Auditors in accordance with generally acceptedauditing standards, the Auditors have not obtained any knowledge of theexistence of any Default under any provision of this Agreement, or, if suchAuditors shall have obtained from such examination any such knowledge, theyshall disclose in such written statement the existence of the Default and thenature thereof, it being understood that such Auditors shall have no liability,directly or indirectly, to anyone for failure to obtain knowledge of any suchDefault; (ii) if composed, a narrative discussion of the consolidated financialcondition and results of operations and the consolidated liquidity and capitalresources of Customer and its Subsidiaries for such fiscal year prepared by thechief executive officer or chief financial officer of Customer; and (iii) aCompliance Certificate along with a schedule, in substantially the form ofAttachment C hereto, of the calculations used in determining, as of the end ofsuch fiscal year, whether Customer is in compliance with the financial covenantsset forth in Attachment A;

(B) as soon as available and in any event within forty-five (45) days afterthe end of each fiscal quarter of Customer (i) Financial Statements as of theend of such period and for the fiscal year to date, together with a comparisonto the Financial Statements for the same periods in the prior year, all inreasonable detail and duly certified (subject to normal year-end auditadjustments and except for the absence of footnotes) by the chief executiveofficer or chief financial officer of Customer as having been prepared inaccordance dance with GAAP; (ii) if composed, a narrative discussion of theconsolidated financial condition and results of operations and the consolidatedliquidity and capital resources of Customer and its Subsidiariesfor such period and for the fiscal year to date prepared by the chief executiveofficer or chief financial officer of Customer; and (iii) a ComplianceCertificate along with a schedule, in substantially the form of Attachment Chereto, of the calculations used in determining, as of the end of such fiscal

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quarter, whether Customer is in compliance with the financial covenants setforth in Attachment A;

(C) as soon as available and in any event within thirty (30) days after theend of each fiscal month of Customer (i) Financial Statements as of the end of



such period and for the fiscal year to date, together with a comparison to theFinancial Statements for the same periods in the prior year, all in reasonabledetail and duly certified (subject to normal year-end audit adjustments andexcept for the absence of footnotes) by the chief executive officer or chieffinancial officer of Customer as having been prepared in accordance with GAAP;(ii) if composed, a narrative discussion of the consolidated financial conditionand results of operations and the consolidated liquidity and capital resourcesof Customer and its Subsidiaries for such period and for the fiscal year to dateprepared by the chief executive officer or chief financial officer of Customer;and (iii) a Compliance Certificate along with a schedule, in substantially theform of Attachment C hereto, of the calculations used in determining, as of theend of such fiscal month, whether Customer is in compliance with the financialcovenants set forth in Attachment A;

(D) as soon as available and in any event within forty-five (45) days afterthe end of each fiscal year of Customer (i) projected Financial Statements,broken down by quarter, for the current and following fiscal year; and (ii) ifcomposed, a narrative discussion relating to such projected FinancialStatements;

(E) as soon as available and in any event within thirty (30) days after theend of each fiscal quarter of Customer, revised projected Financial Statements,broken down by quarter, for (i) the current fiscal year from the beginning ofsuch fiscal quarter to the fiscal year end and (ii) the following fiscal year;

(F) promptly after Customer obtains knowledge of (i) the occurrence of aDefault or Event of Default, or (ii) the existence of any condition or eventwhich would result in the Customer's failure to satisfy the conditions precedentto Advances set forth in Section 5, a certificate of the chief executive officeror chief financial officer of Customer specifying the nature thereof and theCustomer's proposed response thereto, each in reasonable detail;

(G) promptly after Customer obtains knowledge of (i) any proceeding(s) beinginstituted or threatened to be instituted by or against Customer in any federal,state, local or foreign court or before any commission or other regulatory body(federal, state, local or foreign), or (ii) any actual or prospective change,development or event which, in any such case, has had or could reasonably beexpected to have a Material Adverse Effect, a certificate of the chief executiveofficer or chief financial officer of Customer specifying the nature thereof andthe Customer's proposed response thereto, each in reasonable detail;

(H) promptly after Customer obtains knowledge that (i) any orders, judgmentsor decrees which in the aggregate exceed Fifty Thousand Dollars ($50,000.00)shall have been entered against Customer or any of its properties or assets, or(ii) it has received any notification of a

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material violation of any Requirement of Law from any Governmental Authority, acertificate of the chief executive officer or chief financial officer ofCustomer specifying the nature thereof and the Customer's proposed responsethereto, each in reasonable detail;

(I) promptly after Customer learns of any material labor dispute to whichCustomer may become a party, any strikes or walkouts relating to any of itsplants or other facilities, and the expiration of any labor contract to which



Customer is a party or by which it is bound, a certificate of the chiefexecutive officer or chief financial officer of Customer specifying the naturethereof and the Customer's proposed response thereto, each in reasonable detail;

(J) within five (5) Business Days after request by IBM Credit, anywritten certificates, schedules and reports together with all supportingdocuments as IBM Credit may reasonably request relating to the Collateral orthe Customer's or any guarantor's business affairs and financial condition;

(K) by the fifth (5th) Business Day of each month, or as otherwise agreedin writing, a Collateral Management Report as of a date no earlier than thelast day of the immediately preceding month;

(L) along with the Financial Statements set forth in Section 7.1(A) and(B); the name, address and phone number of each of its Account debtors' primarycontacts for each Account on the Accounts aging report contained in its mostrecent Collateral Management Report; and

(M) within five (5) days after the same are sent, copies of all financialstatements and reports which Customer sends to its stockholders, and within five(5) days after the same are filed, copies of all financial statements andreports which Customer may make to, or file with, the Securities and ExchangeCommission or any successor or analogous governmental authority.

Each certificate, schedule and report provided by Customer to IBM Credit shallbe signed by an authorized officer of Customer, and which signature shall bedeemed a representation and warranty that the information contained in suchcertificate, schedule or report is true and accurate in all material respects onthe date as of which such certificate, schedule or report is made and does notomit to state a material fact necessary in order to make the statementscontained therein not misleading at such time. Each financial statementdelivered pursuant to this Section 7.1 shall be prepared in accordance with GAAPapplied consistently throughout the periods reflected therein and with priorperiods.

7.2 Location of Collateral. The inventory, equipment and other tangibleCollateral shall be kept or sold at the addresses as set forth on Attachment Bor on any notice provided by Customer to IBM Credit in accordance with Section7.7(C). Such locations shall be certified quarterly to IBM Credit substantiallyin the form of Attachment G.

7.3 Changes in Customer. Customer shall provide thirty (30) days priorwritten notice to IBM Credit of any change in Customer's name,

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chief executive office and principal place of business, organization, form ofownership or corporate structure; provided, however, that Customer's compliancewith this covenant shall not relieve it of any of its other obligations or anyother provisions under this Agreement or any Other Document limiting actions ofthe type described in this Section.

7.4. Corporate Existence. Customer shall (A) maintain its corporate existence,maintain in full force and effect all licenses, bonds, franchises, leases andqualifications to do business, and all contracts and other rights necessary tothe profitable conduct of its business, (B) continue in, and limit its



operations to, the same general lines of business as presently conducted by itunless otherwise permitted in writing by IBM Credit and (C) comply with allRequirements of Law.

7.5. ERISA. Customer shall promptly notify IBM Credit in writing after itlearns of the occurrence of any event which would constitute a "reportableevent" under ERISA or any regulations thereunder with respect to any Plan, orthat the PBGC (as defined in Section 6.12 of this Agreement) has instituted orwill institute proceedings to terminate any Plan. Notwithstanding the foregoing,the Customer shall have no obligation to notify IBM Credit as to any "reportableevent" as to which the 30-day notice requirement of Section 4043(b) has beenwaived by the PBGC, until such time as such Customer is required to notify thePBGC of such reportable event.

Such notification shall include a certificate of the chief financial officer ofCustomer setting forth details as to such "reportable event" and the actionwhich Customer proposes to take with respect thereto, together with a copy ofany notice of such "reportable event" which may be required to be filed with thePBGC, or any notice delivered by the PBGC evidencing its intent to institutesuch proceedings. Upon request of IBM Credit, Customer shall furnish, or causethe plan administrator to furnish, to IBM Credit the most recently filed annualreport for each Plan.

7.6. Environmental Matters. (A) Customer and any other Person under Customer'scontrol (including, without limitation, agents and Affiliates under suchcontrol) shall (i) comply with all Environmental Laws in all material respects,and (ii) undertake to use commercially reasonable efforts to prevent anyunlawful release of any Hazardous Substance by Customer or such Person into,upon, over or under any property now or hereinafter owned, leased or otherwisecontrolled (directly or indirectly) by Customer.

(B) Customer shall notify IBM Credit, promptly upon its obtaining knowledgeof (i) any non-routine proceeding or investigation by any Governmental Authoritywith respect to the presence of any Hazardous Substances on or in any propertynow or hereinafter owned, leased or otherwise controlled (directly orindirectly) by Customer, (ii) all claims made or threatened by any Person orGovernmental Authority against Customer or any of Customer's assets relating toany loss or injury resulting from any Hazardous Substance, (iii) Customer'sdiscovery of evidence of unlawful disposal of or environmental contamination byany Hazardous Substance on any property now or

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hereinafter owned, leased or otherwise controlled (directly or indirectly) byCustomer, and (iv) any occurrence or condition which could constitute aviolation of any Environmental Law.

7.7. Collateral Books and Records/Collateral Audit. (A) Customer agrees tomaintain books and records pertaining to the Collateral in such detail, form andscope as is consistent with good business practice, and agrees that such booksand records will reflect IBM Credit's interest in the Accounts.

(B) Customer agrees that IBM Credit or its agents may enter upon the premisesof Customer at any time and from time to time, during normal business hours andupon reasonable notice under the circumstances, and at any time at all on andafter the occurrence and during the continuance of an Event of Default for the



purposes of (i) inspecting the Collateral, (ii) inspecting and/or copying (atCustomer's expense) any and all records pertaining thereto, (iii) discussing theaffairs, finances and business of Customer with any officers, employees anddirectors of Customer or with the Auditors and (iv) verifying Eligible Accountsand other Collateral. Customer also agrees to provide IBM Credit with suchreasonable information and documentation that IBM Credit deems necessary toconduct the foregoing activities, including, without limitation, reasonablyrequested samplings of purchase orders, invoices and evidences of delivery orother performance.

Upon the occurrence and during the continuance of an Event of Default which hasnot been waived by IBM Credit in writing, IBM Credit may conduct any of theforegoing activities in any manner that IBM Credit deems reasonably necessary.

(C) Customer shall give IBM Credit thirty (30) days prior written notice ofany change in the location of any Collateral, the location of its books andrecords or in the location of its chief executive office or place of businessfrom the locations specified in Attachment B, and will execute in advance ofsuch change and cause to be filed and/or delivered to IBM Credit any financingstatements, landlord or other lien waivers, or other documents reasonablyrequired by IBM Credit, all in form and substance reasonably satisfactory to IBMCredit.

(D) Customer agrees to advise IBM Credit promptly, in reasonably sufficientdetail, of any substantial change relating to the type, quantity or quality ofthe Collateral, or any event which could reasonably be expected to have aMaterial Adverse Effect on the value of the Collateral or on the securityinterests granted to IBM Credit therein.

7.8. Insurance Casualty Loss. (A) Customer agrees to maintain with financiallysound and reputable insurance companies: (i) insurance on its properties, (ii)public liability insurance against claims for personal injury or death as aresult of the use of any products sold by it and (iii) insurance coverageagainst other business risks, in each case, in at least such amounts and againstat least such risks as are usually and prudently insured against in the samegeneral geographical area by companies of established repute engaged in the sameor a similar business. Customer will furnish to IBM Credit, upon its written

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request, the insurance certificates with respect to such insurance. In addition,all Policies so maintained are to name IBM Credit as an additional insured asits interest may appear.

(B) Without limiting the generality of the foregoing, Customer shall keep andmaintain, at its sole expense, the Collateral insured for an amount not lessthan the amount set forth on Attachment A from time to time opposite the caption"Collateral Insurance Amount" against all loss or damage under an "all risk"Policy with companies mutually acceptable to IBM Credit and Customer, with alender's loss payable endorsement or mortgagee clause in form and substancereasonably satisfactory to IBM Credit designating that any loss payablethereunder with respect to such Collateral shall be payable to IBM Credit. Uponreceipt of proceeds by IBM Credit the same shall be applied on account of theCustomer's Outstanding Product Advances first, then to the Outstanding A/RAdvances. Customer agrees to instruct each insurer to give IBM Credit, byendorsement upon the Policy issued by it or by independent instruments furnished



to IBM Credit at least ten (10) days written notice before any Policy shall bealtered or cancelled and that no act or default of Customer or any other personshall affect the right of IBM Credit to recover under the Policies. Customerhereby agrees to direct all insurers under the Policies to pay all proceeds withrespect to the Collateral directly to IBM Credit.

If Customer fails to pay any cost, charges or premiums, or if Customer failsto insure the Collateral, IBM Credit may pay such costs, charges or premiums.Any amounts paid by IBM Credit hereunder shall be considered an additional debtowed by Customer to IBM Credit and are due and payable immediately upon receiptof an invoice by IBM Credit.

7.9. Taxes. Customer agrees to pay, when due, all taxes lawfully leviedor assessed against Customer or any of the Collateral before any penalty orinterest accrues thereon unless such taxes are being contested, in good faith,by appropriate proceedings promptly instituted and diligently conducted and anadequate reserve or other appropriate provisions have been made therefore asrequired in order to be in conformity with GAAP and an adverse determination insuch proceedings could not reasonably be expected to have a Material AdverseEffect.

7.10. Compliance With Laws. Customer agrees to comply with all Requirements ofLaw applicable to the Collateral or any part thereof, or to the operation of itsbusiness.

7.11. Fiscal Year. Customer agrees to maintain its fiscal year as a yearending December 31 unless Customer provides IBM Credit at least thirty (30)days prior written notice of any change thereof.

7.12. Intellectual Property. Customer shall do and cause to be done all thingsnecessary to preserve and keep in full force and effect all registrations ofIntellectual Property which the failure to do or cause to be done couldreasonably be expected to have a Material Adverse Effect.

7.13. Maintenance of Property. Customer shall maintain all of its materialproperties (business and otherwise) in good condition and

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repair (ordinary wear and tear excepted) and pay and discharge all costs ofrepair and maintenance thereof and all rental and mortgage payments and relatedcharges pertaining thereto and not commit or permit any waste with respect toany of its material properties.

7.14. Collateral. Customer shall:

(A) from time to time upon request of IBM Credit, provide IBM Credit withaccess to copies of all invoices, delivery evidences and other such documentsrelating to each Account;

(B) promptly upon Customer's obtaining knowledge thereof, furnish to andinform IBM Credit of all material adverse information relating to the financialcondition of any Account debtor, other than the government of the United Statesof America, whose outstanding obligations to Customer constitute five percent(5%) or more of the Accounts at such time (a "Material Account Debtor");



(C) promptly upon Customer's learning thereof, notify IBM Credit in writingof any event which would cause any obligation of a Material Account Debtor tobecome an Ineligible Account;

(D) keep all goods rejected or returned by any Account debtor and all goodsrepossessed or stopped in transit by Customer from any Account debtor segregatedfrom other property of Customer, holding the same in trust for IBM Credit untilCustomer applies a credit against such Account debtor's outstanding obligationsto Customer or sells such goods in the ordinary course of business, whicheveroccurs earlier;

(E) stamp or otherwise mark chattel paper and instruments now owned orhereafter acquired by it in conspicuous type to show that the same are subjectto IBM Credit's security interest and immediately thereafter deliver or causesuch chattel paper and instruments to be delivered to IBM Credit or any agentdesignated by IBM Credit with appropriate endorsements and assignments to vesttitle and possession in IBM Credit;

(F) use commercially reasonable efforts to collect all Accounts owed;

(G) promptly notify IBM Credit of any loss, theft or destruction of ordamage to any of the Collateral. Customer shall diligently file and prosecuteits claim for any award or payment in connection with any such loss, theft,destruction of or damage to Collateral. Customer shall, upon demand of IBMCredit, make, execute and deliver any assignments and other instrumentssufficient for the purpose of assigning any such award or payment to IBM Credit,free of any encumbrances of any kind whatsoever;

(H) consistent with reasonable commercial practice, observe and perform allmatters and things necessary or expedient to be observed or performed under orby virtue of any lease, license, concession or franchise forming part of theCollateral in order to preserve, protect and maintain all the rights of IBMCredit thereunder;

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(I) consistent with reasonable commercial practice, maintain, use andoperate the Collateral and carry on and conduct its business in a proper andefficient manner so as to preserve and protect the Collateral and the earnings,incomes, rents, issues and profits thereof; and

(J) at any time and from time to time, upon the request of IBM Credit, andat the sole expense of Customer, Customer will promptly and duly execute anddeliver such further instruments and documents and take such further action asIBM Credit may reasonably request for the purpose of obtaining or preserving thefull benefits of this Agreement and of the rights and powers herein granted,including, without limitation, the filing of any financing or continuationstatements under the Uniform Commercial Code in effect in any jurisdiction withrespect to the security interests granted herein and the payment of any and allrecording taxes and filing fees in connection therewith. IBM Credit shall useits best efforts to provide prior written notice to Customer if the filing ofany such instrument, document or financing statement is expected to result inany expense to Customer.

7.15. Subsidiaries. IBM Credit may require that any Subsidiaries of Customerbecome parties to this Agreement or any other agreement executed in connection



with this Agreement as guarantors or sureties. Customer will comply, and causeall Subsidiaries of Customer to comply with Sections 7 and 8 of this Agreement,as if such sections applied directly to such Subsidiaries.

7.16. Financial Covenants; Additional Covenants. Customer acknowledges andagrees that Customer shall at all times maintain the financial covenants andother covenants set forth in the attachments, exhibits and other addendaincorporated in this Agreement.

Section 8. NEGATIVE COVENANTS

Until termination of this Agreement and the indefeasible payment andsatisfaction of all Obligations due hereunder:

8.1. Liens. The Customer will not, directly or indirectly mortgage, assign,pledge, transfer, create, incur, assume, permit to exist or otherwise permit anyLien or judgment to exist on any of its property, assets, revenues or goods,whether real, personal or mixed, whether now owned or hereafter acquired, exceptfor Permitted Liens.

8.2. Disposition of Assets. The Customer will not, directly or indirectly, sell,lease, assign, transfer or otherwise dispose of any assets other than (i) salesof inventory in the ordinary course of business and short term rental ofinventory as demonstrations in amounts not material to Customer, and (ii)voluntary dispositions of individual assets and obsolete or worn out property inthe ordinary course of business, provided, that the aggregate book value of allsuch assets and property so sold or disposed of under this section 8.2 (ii) inany fiscal year shall not exceed 5% of the consolidated assets of the Customeras of the beginning of such fiscal year.

8.3. Corporate Changes. The Customer will not, without the prior written consentof IBM Credit, directly or indirectly, merge,

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consolidate, liquidate, dissolve or enter into or engage in any operation oractivity materially different from that presently being conducted by Customer.

8.4. Guaranties. The Customer will not, without the prior written consent of IBMCredit, directly or indirectly, assume, guaranty, endorse, or otherwise becomeliable upon the obligations of any other Person, except (i) by the endorsementof negotiable instruments for deposit or collection or similar transactions inthe ordinary course of business, (ii) by the giving of indemnities in connectionwith the sale of inventory or other asset dispositions permitted hereunder, and(iii) for guaranties in favor of IBM Credit.

8.5. Restricted Payments. The Customer will not, directly or indirectly: (i)declare or pay any dividend (other than dividends payable solely in common stockof Customer) on, or make any payment on account of, or set apart assets for asinking or other analogous fund for, the purchase, redemption, defeasance,retirement or other acquisition of, any shares of any class of capital stock ofCustomer or any warrants, options or rights to purchase any such capital stock,whether now or hereafter outstanding, or make any other distribution in respectthereof, either directly or indirectly, whether in cash or property or inobligations of Customer; or (ii) make any optional payment or prepayment on or



redemption (including, without limitation, by making payments to a sinking oranalogous fund) or repurchase of any Indebtedness (other than the Obligations).

8.6. Investments. The Customer will not, directly or indirectly, make, maintainor acquire any Investment in any Person other than:

(A) interest bearing deposit accounts (including certificates of deposit)which are insured by the Federal Deposit Insurance Corporation ("FDIC") or asimilar federal insurance program;

(B) direct obligations of the government of the United States of America orany agency or instrumentality thereof or obligations guaranteed as to principaland interest by the United States of America or any agency thereof;

(C) stock or obligations issued to Customer in settlement of claims againstothers by reason of an event of bankruptcy or a composition or the readjustmentof debt or a reorganization of any debtor of Customer; and

(D) commercial paper of any corporation organized under the laws of any Stateof the United States or any bank organized or licensed to conduct a bankingbusiness under the laws of the United States or any State thereof having theshort-term highest rating then given by Moody's Investor's Services, Inc. orStandard & Poor's Corporation.

8.7. Affiliate/Subsidiary Transactions. The Customer will not, directly orindirectly, enter into any transaction with any Affiliate or Subsidiary,including, without limitation, the purchase, sale or exchange of property or therendering of any service to any Affiliate or Subsidiary of Customer except inthe ordinary course of business and

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pursuant to the reasonable requirements of Customer's business upon fair andreasonable terms no less favorable to customer than could be obtained in acomparable arm's-length transaction with an unaffiliated Person.

8.8. ERISA. The Customer will not (A) terminate any Plan so as to incur amaterial liability to the PBGC (as defined in Section 6.12 of this Agreement),(B) permit any "prohibited transaction" involving any Plan (other than a "multi-employer benefit plan") which would subject the Customer to a material tax orpenalty on "prohibited transactions" under the Code or ERISA, (C) fail to pay toany Plan any contribution which they are obligated to pay under the terms ofsuch Plan, if such failure would result in a material "accumulated fundingdeficiency", whether or not waived, (D) allow or suffer to exist any occurrenceand during the continuance of a "reportable event" or any other event orcondition, which presents a material risk of termination by the PBGC (as definedin Section 6.12 of this Agreement) of any Plan (other than a "multi-employerbenefit plan"), or (E) fail to notify IBM Credit as required in Section 7.5. Asused in this Agreement, the terms "accumulated funding deficiency" and"reportable event" shall have the respective meanings assigned to them in ERISA,and the term "prohibited transaction" shall have the meaning assigned to it inthe Code and ERISA. For purposes of this Section 8.8, the terms materialliability, tax, penalty, accumulated funding deficiency and risk of terminationshall mean a liability, tax, penalty, accumulated funding deficiency or risk oftermination which could reasonably be expected to have a Material AdverseEffect.



8.9. Additional Negative Pledges. Customer will not, directly or indirectly,create or otherwise cause or permit to exist or become effective any contractualobligation which may restrict or inhibit IBM Credit's rights or ability to sellor otherwise dispose of the Collateral or any part thereof after the occurrenceand during the continuance of an Event of Default.

8.10. Storage of Collateral with Bailees and Warehousemen. Collateral shall notbe stored with a bailee, warehouseman or similar party without the prior writtenconsent of IBM Credit unless Customer will, concurrently with the delivery ofsuch Collateral to such party, cause such party to issue and deliver to IBMCredit, warehouse receipts in the name of IBM Credit evidencing the storage ofsuch Collateral.

8.11. Use of Proceeds. The Customer shall not use any portion of the proceedsof any Advances other than to acquire Products from Authorized Suppliers and forits general working capital requirements.

8.12. Accounts. The Customer shall not permit or agree to any extension,compromise or settlement or make any change or modification of any kind ornature with respect to any Account, including any of the terms relating thereto,which would affect IBM Credit's ability to collect payment on any Account inwhole or in part, except for such extensions, compromises or settlements made byCustomer in the ordinary course of its business, provided, however, that theaggregate amount of such extensions, compromises or settlements does not exceedfive percent (5%) of the Customer's Accounts at any time.

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8.13. Indebtedness. The Customer will not create, incur, assume or permit toexist any Indebtedness, except for Permitted Indebtedness.

8.14. Loans. The Customer will not make any loans, advances, contributions orpayments of money or goods to any Subsidiary, Affiliate or parent corporation orto any officer, director or stockholder of Customer or of any such corporation(except for compensation for personal services actually rendered), except fortransactions expressly authorized in this Agreement.

Section 9. DEFAULT

9.1. Event of Default. Any one or more of the following events shallconstitute an Event of Default by the Customer under this Agreement and theOther Documents:

(A) The failure to make timely payment of the Obligations or any part thereofwhen due and payable;

(B) Customer fails to comply with or observe any term, covenant or agreementcontained in this Agreement or any Other Documents;

(C) Any representation, warranty, statement, report or certificate made ordelivered by or on behalf of Customer or any of its officers, employees oragents or by or on behalf of any guarantor to IBM Credit was false in anymaterial respect at the time when made or deemed made;

(D) The occurrence of any event or circumstance which could reasonably be



expected to have a Material Adverse Effect;

(E) Customer, any Subsidiary or any guarantor shall generally not pay itsdebts as such debts become due, become or otherwise declare itself insolvent,file a voluntary petition for bankruptcy protection, have filed against it anyinvoluntary bankruptcy petition, cease to do business as a going concern, makeany assignment for the benefit of creditors, or a custodian, receiver, trustee,liquidator, administrator or person with similar powers shall be appointed forCustomer, any Subsidiary or any guarantor or any of its respective properties orhave any of respective properties seized or attached, or take any action toauthorize, or for the purpose of effectuating, the foregoing, provided, however,that Customer, any Subsidiary or any guarantor shall have a period of forty-five(45) days within which to discharge any involuntary petition for bankruptcy orsimilar proceeding;

(F) The use of any funds borrowed from IBM Credit under this Agreement forany purpose other than as provided in this Agreement;

(G) The entry of any judgment against Customer or any guarantor in an amountin excess of $250,000 and such judgment is not satisfied, dismissed, stayed orsuperseded by bond within thirty (30) days after the day of entry thereof (andin the event of a stay or {superseded} bond, such judgment is not dischargedwithin thirty (30) days after termination of any such stay or bond) or suchjudgment is not fully

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covered by insurance as to which the insurance company has acknowledged itsobligation to pay such judgment in full;

(H) The dissolution or liquidation of Customer or any guarantor, or Customeror any guarantor or its directors or stockholders shall take any action todissolve or liquidate Customer or any guarantor;

(I) Any "going concern" or like qualification or exception, or qualificationarising out of the scope of an audit by an Auditor of his opinion relative toany Financial Statement delivered to IBM Credit under this Agreement;

(J) There issues a warrant of distress for any rent or taxes with respect toany premises occupied by Customer in or upon which the Collateral, or any partthereof, may at any time be situated and such warrant shall continue for aperiod of ten (10) Business Days from the date such warrant is issued;

(K) Customer suspends business;

(L) The occurrence of any event or condition which enables the holder of anyIndebtedness arising in one or more related or unrelated transactions toaccelerate the maturity thereof or the failure of Customer to pay when due anysuch Indebtedness;

(M) Any guaranty of any or all of the Customer's Obligations executed by anyguarantor in favor of IBM Credit, shall at any time for any reason cease to bein full force and effect or shall be declared to be null and void by a court ofcompetent jurisdiction or the validity or enforceability thereof shall becontested or denied by any such guarantor, or any such guarantor shall deny that



it has any further liability or obligation thereunder or any such guarantorshall fail to comply with or observe any of the terms, provisions or conditionscontained in any such guaranty;

(N) Customer is in default under the material terms of any of the OtherDocuments after the expiration of any applicable cure periods;

(O) There shall occur a "reportable event" with respect to any Plan, or anyPlan shall be subject to termination proceedings (whether voluntary orinvoluntary) and there shall result from such "reportable event" or terminationproceedings a liability of Customer to the PBGC which in the reasonable opinionof IBM Credit will have a Material Adverse Effect;

(P) Any "person" (as defined in Section 13(d)(3) of the SecuritiesExchange Act of {1934}, as amended) acquires a beneficial interest in 50% ormore of the Voting Stock of Customer.

9.2. Acceleration. Upon the occurrence and during the continuance of an Event ofDefault which has not been waived in writing by IBM Credit, IBM Credit may, init sole discretion, take any or all of the following actions, without prejudiceto any other rights it may have at law or under this Agreement to enforce itsclaims against the Customer: (a) declare its Obligations to be immediately dueand payable (except with

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respect to any Event of Default set forth in Section 9.1(E) hereof, in whichcase all Obligations shall automatically become immediately due and payablewithout the necessity of any notice or other demand) without presentment,demand, protest or any other action or obligation of IBM Credit; and

(b) immediately terminate the Credit Line hereunder.

9.3. Remedies. (A) Upon the occurrence and during the continuance of anyEvent of Default which has not been waived in writing by IBM Credit, IBM Creditmay exercise all rights and remedies of a secured party under the U.C.C. Withoutlimiting the generality of the foregoing, IBM Credit may: (i) remove from anypremises where same may be located any and all documents, instruments, files andrecords (including the copying of any computer records), and any receptacles orcabinets containing same, relating to the Accounts, or IBM Credit may use (atthe expense of the Customer) such of the supplies or space of the Customer atCustomer's place of business or otherwise, as may be necessary to properlyadminister and control the Accounts or the handling of collections andrealizations thereon; (ii) bring suit, in the name of the Customer or IBM Creditand generally shall have all other rights respecting said Accounts, includingwithout limitation the right to accelerate or extend the time of payment,settle, compromise, release in whole or in part any amounts owing on anyAccounts and issue credit in the name of the Customer or IBM Credit;

(iii) sell, assign and deliver the Accounts and any returned, reclaimed orrepossessed merchandise, with or without advertisement, at public or privatesale, for cash, on credit or otherwise, at IBM Credit's sole option anddiscretion, and IBM Credit may bid or become a purchaser at any such sale; and(iv) foreclose the security interests created pursuant to this Agreement by anyavailable judicial procedure, or to take possession of any or all of the



Collateral without judicial process and to enter any premises where anyCollateral may be located for the purpose of taking possession of or removingthe same.

(B) Upon the occurrence and during the continuance of any Event of Defaultwhich has not been waived in writing by IBM Credit, IBM Credit shall have theright to sell, lease, or otherwise dispose of all or any part of the Collateral,whether in its then condition or after further preparation or processing, in thename of Customer or IBM Credit, or in the name of such other party as IBM Creditmay designate, either at public or private sale or at any broker's board, inlots or in bulk, for cash or for credit, with or without warranties orrepresentations, and upon such other terms and conditions as IBM Credit in itssole discretion may deem advisable, and IBM Credit shall have the right topurchase at any such sale. If IBM Credit, in its sole discretion may deemadvisable, and IBM Credit shall have the right to purchase at any such sale. IfIBM Credit, in its sole discretion determines that any of the Collateralrequires rebuilding, repairing, maintenance or preparation, IBM Credit shallhave the right, at its option, to do such of the aforesaid as it deems necessaryfor the purpose of putting such Collateral in such salable form as IBM Creditshall deem appropriate. The Customer hereby agrees that any disposition by IBMCredit of any Collateral pursuant to and in accordance with the terms of arepurchase agreement between IBM Credit and the manufacturer or any supplier(including any Authorized Supplier) of such Collateral

Page 40 of 46

constitutes a commercially reasonable sale. The Customer agrees, at the requestof IBM Credit, to assemble the Collateral and to make it available to IBM Creditat places which IBM Credit shall select, whether at the premises of the Customeror elsewhere, and to make available to IBM Credit the premises and facilities ofthe Customer for the purpose of IBM Credit's taking possession of, removing orputting such Collateral in salable form. If notice of intended disposition ofany Collateral is required by law, it is agreed that ten (10) Business Daysnotice shall constitute reasonable notification.

(C) Unless expressly prohibited by the licensor thereof, if any, IBMCredit is hereby granted, upon the occurrence and during the continuance of anyEvent of Default which has not been waived in writing by IBM Credit, anirrevocable, non-exclusive license to use, assign, license or sublicense allcomputer software programs, data bases, processes and materials used by theCustomer in its businesses or in connection with any of the Collateral.

(D) The net cash proceeds resulting from IBM Credit's exercise of anyof the foregoing rights (after deducting all charges, costs and expenses,including reasonable attorneys' fees) shall be applied by IBM Credit to thepayment of Customer's Obligations, whether due or to become due, in such orderas IBM Credit may in it sole discretion elect. Customer shall remain liable toIBM Credit for any deficiencies, and IBM Credit in turn agrees to remit toCustomer or its successors or assigns, any surplus resulting therefrom.

(E) The enumeration of the foregoing rights is not intended to beexhaustive and the exercise of any right shall not preclude the exercise of anyother rights, all of which shall be cumulative.

9.4. Waiver. If IBM Credit seeks to take possession of any of the Collateralby any court process Customer hereby irrevocably waives to the extent permitted



by applicable law any bonds, surety and security relating thereto required byany statute, court rule or otherwise as an incident to such possession and anydemand for possession of the Collateral prior to the commencement of any suit oraction to recover possession thereof. In addition, Customer waives to theextent permitted by applicable law all rights of set-off it may have against IBMCredit. Customer further waives to the extent permitted by applicable lawpresentment, demand and protest, and notices of non-payment, non-performance,any right of contribution, dishonor, and any other demands, and notices requiredby law.

Section 10. MISCELLANEOUS

10.1. Term; Termination. (A) This Agreement shall remain in force until theearlier of (i) the Termination Date, (ii) the date specified in a written noticeby the Customer that they intend to terminate this Agreement which date shall beno less than ninety (90) days following the receipt by IBM Credit of suchwritten notice, and (iii) termination by IBM Credit after the occurrence andduring the continuance of any Event of Default. Upon the date that thisAgreement is terminated, all of Customer's Obligations shall be immediately dueand payable in their entirety, even if they are not yet due under their terms.

Page 41 of 46

(B) Until the indefeasible payment in full of all of Customer'sObligations, no termination of this Agreement or any of the Other Documentsshall in any way affect or impair (i) Customer's Obligations to IBM Creditincluding, without limitation, any transaction or event occurring prior to andafter such termination, or (ii) IBM Credit's rights hereunder, including,without limitation IBM Credit's security interest in the Collateral. On andafter a Termination Date, IBM Credit may, but shall not be obligated to, uponrequest of Customer, continue to provide Advances hereunder.

10.2. Indemnification. The Customer hereby agrees to indemnify and holdharmless IBM Credit and each of its officers, directors, agents and assigns(collectively, the "Indemnified Persons") against all losses, claims, damages,liabilities or other expenses (including reasonable attorneys' fees and courtcosts now or hereinafter arising from the enforcement of this Agreement, the"Losses") to which any of them may become subject insofar as such Losses ariseout of or are based upon any event, circumstance or condition (a) occurring orexisting on or before the date of this Agreement relating to any financingarrangements IBM Credit may from time to time have with (i) Customer, (ii) anyPerson that shall be acquired by Customer or (iii) any Person that Customer mayacquire all or substantially all of the assets of, or (b) directly orindirectly, relating to the execution, delivery or performance of this Agreementor the consummation of the transactions contemplated hereby or thereby or to anyof the Collateral or to any act or omission of the Customer in connectiontherewith. Notwithstanding the foregoing, the Customer shall not be obligated toindemnify IBM Credit for any Losses incurred by IBM Credit which are a result ofIBM Credit's gross negligence or willful misconduct. The indemnity providedherein shall survive the termination of this Agreement.

10.3. Additional Obligations. IBM Credit, without waiving or releasing anyObligation or Default of the Customer, may perform any Obligations of theCustomer that the Customer shall fail or refuse to perform and IBM Credit may,at any time or times hereafter, but shall be under no obligation so to do, pay,acquire or accept any assignment of any security interest, lien, encumbrance or



claim against the Collateral asserted by any person. All sums paid by IBMCredit in performing in satisfaction or on account of the foregoing and anyexpenses, including reasonable attorney's fees, court costs, and other chargesrelating thereto, shall be a part of the Obligations, payable on demand andsecured by the Collateral.

10.4. LIMITATION OF LIABILITY. NEITHER IBM CREDIT NOR ANY OTHER INDEMNIFIEDPERSON SHALL HAVE ANY LIABILITY WITH RESPECT TO ANY SPECIAL, INDIRECT ORCONSEQUENTIAL DAMAGES SUFFERED BY CUSTOMER IN CONNECTION WITH THIS AGREEMENT,ANY OTHER AGREEMENT OR ANY CLAIMS IN ANY MANNER RELATED THERETO. NOR SHALL IBMCREDIT OR ANY OTHER INDEMNIFIED PERSON HAVE ANY LIABILITY TO CUSTOMER OR ANYOTHER PERSON FOR ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY IT OR THEMHEREUNDER, EXCEPT FOR ITS OR THEIR OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

10.5 Alteration Waiver. This Agreement and the Other Documents may not bealtered or amended except by an agreement in writing signed by

Page 42 of 46

the Customer and by IBM Credit. No delay or omission of IBM Credit to exerciseany right or remedy hereunder, whether before or after the occurrence of anyEvent of Default, shall impair any such right or remedy or shall operate as awaiver thereof or as a waiver of any such Event of Default. In the event thatIBM Credit at any time or from time to time dispenses with any one or more ofthe requirements specified in this Agreement or any of the Other Documents, suchdispensation may be revoked by IBM Credit at any time and shall not be deemed toconstitute a waiver of any such requirement subsequent thereto. IBM Credit'sfailure at any time or times to require strict compliance and performance by theCustomer of any undertakings, agreements, covenants, warranties andrepresentations of this Agreement or any Other Document shall not waive, affector diminish any right of IBM Credit thereafter to demand strict compliance andperformance thereof. Any waiver by IBM Credit of any Default by the Customerunder this Agreement or any of the Other Documents shall not waive or affect anyother Default by the Customer under this Agreement or any of the OtherDocuments, whether such Default is prior or subsequent to such other Default andwhether of the same or a different type. None of the undertakings, agreements,warranties, covenants, and representations of the Customer contained in thisAgreement or the Other Documents and no Default by the Customer shall be deemedwaived by IBM Credit unless such waiver is in writing signed by an authorizedrepresentative of IBM Credit.

10.6. Severability. If any provision of this Agreement or the Other Documentsor the application thereof to any Person or circumstance is held invalid orunenforceable, the remainder of this Agreement and the Other Documents and theapplication of such provision to other Persons or circumstances will not beaffected thereby, the provisions of this Agreement and the Other Documents beingseverable in any such instance.

10.7. One Loan. All Advances heretofore, now or at any time or times hereaftermade by IBM Credit to the Customer under this Agreement or the Other Documentsshall constitute one loan secured by IBM Credit's security interests in theCollateral and by all other security interests, liens and encumbrancesheretofore, now or from time to time hereafter granted by the Customer to IBMCredit or any assignor of IBM Credit.



10.8. Additional Collateral. All monies, reserves and proceeds received orcollected by IBM Credit with respect to Accounts and other property of theCustomer in possession of IBM Credit at any time or times hereafter are herebypledged by Customer to IBM Credit as security for the payment of Customer'sObligations and shall be applied promptly by IBM Credit on account of theCustomer's Obligations; provided, however, IBM Credit may release to theCustomer such portions of such monies, reserves and proceeds as IBM Credit mayfrom time to time determine, in its sole discretion.

10.9. No Merger or Novations. A) Notwithstanding anything contained in anydocument to the contrary, it is understood and agreed by the Customer and IBMCredit that the claims of IBM Credit arising hereunder and existing as of thedate hereof constitute continuing claims arising out of the Obligations ofCustomer under the Financing Agreement and any Other Document. Customeracknowledges and agrees that such Obligations

Page 43 of 46

outstanding as of the date hereof have not been satisfied or discharged andthat this Agreement is not intended to effect a novation of the Customer'sObligations under the Financing Agreement or any Other Document.

(B) Neither the obtaining of any judgment nor the exercise of any powerof seizure or sale shall operate to extinguish the Obligations of the Customerto IBM Credit secured by this Agreement and shall not operate as a merger of anycovenant in this Agreement, and the acceptance of any payment or alternatesecurity shall not constitute or create a novation and the obtaining of ajudgment or judgments under a covenant herein contained shall not operate as amerger of that covenant or affect IBM Credit's rights under this Agreement.

10.10. Paragraph Titles. The Section titles used in this Agreement and theOther Documents are for convenience only and do not define or limit the contentsof any Section.

10.11. Binding Effect; Assignment. This Agreement and the Other Documents shallbe binding upon and inure to the benefit of IBM Credit and the Customer andtheir respective successors and assigns; provided, that the Customer shall haveno right to assign this Agreement or any of the Other Documents without theprior written consent of IBM Credit.

10.12. Notices. Except as otherwise expressly provided in this Agreement, anynotice required or desired to be served, given or delivered hereunder shall bein writing, and shall be deemed to have been validly served, given or delivered(A) upon receipt if deposited in the United States mails, first class mail, withproper postage prepaid, (B) upon receipt of confirmation or answerback if sentby telecopy, or other similar facsimile transmission, (C) one Business Day afterdeposit with a reputable overnight courier with all charges prepaid, or (D) whendelivered, if hand-delivered by messenger, all of which shall be properlyaddressed to the party to be notified and sent to the address or numberindicated as follows:

(i) If to IBM Credit at:IBM Credit Corporation1500 RiverEdge ParkwayAtlanta, GA 30328Attention: Remarketer Finance Center Manager



Telecopy: (770) 644-4826

(ii) If to Customer at:Pulsar Data Systems, Incorporated4500 Forbes BoulevardLanham, MD 20706Attention: Mr. John ShutzTelecopy: (301) 459-9353

or to such other address or number as each party designates to the other in themanner prescribed herein.

Page 44 of 46

10.13. Counterparts. This Agreement may be executed in any number ofcounterparts, each of which shall be an original, with the same effect as if thesignatures thereto were upon the same instrument.

10.14. ATTACHMENT A MODIFICATIONS. IBM Credit may modify the Product FinancingPeriod set forth in Attachment A from time to time if on at least two occasionsduring any three-month period a Shortfall Amount has become due and payable andmay modify the Collateral Insurance Amount set forth in Attachment A from timeto time, in each case, by providing Customer with a new Attachment A. Any suchnew Attachment A shall be effective as of the date specified in the newAttachment A.

10.15. SUBMISSION AND CONSENT TO JURISDICTION AND CHOICE OF LAW. TO INDUCE IBMCREDIT TO ACCEPT THIS AGREEMENT AND THE OTHER DOCUMENTS, THE CUSTOMER HEREBYIRREVOCABLY AND UNCONDITIONALLY:

(A) SUBMITS ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDINGRELATING TO THIS AGREEMENT AND ANY OTHER DOCUMENT, OR FOR THE RECOGNITION ANDENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERALJURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND ANY FEDERAL DISTRICTCOURT IN NEW YORK.

(B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCHCOURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREINAFTER HAVE TO THE VENUEOF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION ORPROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIMTHE SAME.

(C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BEEFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANYSUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO CUSTOMER AT ITS ADDRESSSET FORTH IN SECTION 10.12 OR AT SUCH OTHER ADDRESS OF WHICH IBM CREDIT SHALLHAVE BEEN NOTIFIED PURSUANT THERETO;

(D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OFPROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE INANY OTHER JURISDICTION.

(E) AGREES THAT THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THISAGREEMENT SHALL BE GOVERNED BY THE LAWS (WITHOUT GIVING EFFECT TO CONFLICT OFLAW PROVISIONS) OF THE STATE OF NEW YORK.



10.16. JURY TRIAL WAIVER. EACH OF IBM CREDIT AND THE CUSTOMER HEREBYIRREVOCABLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING(INCLUDING ANY COUNTERCLAIM) OF ANY TYPE IN WHICH IBM CREDIT AND THE CUSTOMERARE PARTIES AS TO ALL MATTERS ARISING DIRECTLY OR INDIRECTLY OUT OF THISAGREEMENT OR ANY DOCUMENT, INSTRUMENT OR AGREEMENT EXECUTED IN CONNECTIONHEREWITH.

10.17. Additional Provision. In the event that any conflict arises betweenthis Agreement and that certain Forbearance Agreement dated August 8, 1997 byand among Customer, IBM Credit, Lillian Davis and William W. Davis, Sr. (the"Forbearance Agreement"), the Forbearance Agreement, while it remains in effect,shall govern provided however,

45 of 46

that the occurance of any event that causes a termination of the ForbearanceAgreement shall create an Event of Default under this Agreement.

IN WITNESS WHEREOF, the Customer has read this entire Agreement, and has causedits authorized representatives to execute this Agreement and has caused itscorporate seal to be affixed hereto as of the date first written above.

PULSAR DATA SYSTEMS, INCORPORATED

By: /s/ William W. Davis, Sr.------------------------------

Print Name: William W. Davis, Sr.----------------------PRESIDENT/CEO

Title:____________________________

ACCEPTED this ______________ day of ________________, 1997:

IBM CREDIT CORPORATION

By:_______________________________

Print Name:_______________________

Title:____________________________

Page 46 of 46

ATTACHMENT A, EFFECTIVE DATE OCTOBER 15, 1997 ("IWCF ATTACHMENT A")TO INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF AGREEMENT")

DATED AUGUST 9, 1989



CUSTOMER: PULSAR DATA SYSTEMS, INCORPORATED

I. Fees, Rates and Repayment Terms:

(A) Credit Line: THIRTY FIVE MILLION DOLLARS ($35,000,000.00);

(B) Borrowing Base:

(i) 85% of the amount of the Customer's Eligible Accounts as of thedate of determination as reflected in the Customer's most recentCollateral Management Report;

(ii) 100% of the Customer's inventory in the Customer's possession asof the date of determination as reflected in the Customer's mostrecent Collateral Management Report constituting Products (otherthan service parts) financed through a Product Advance by IBMCredit, provided, however, IBM Credit has a first prioritysecurity interest in such Products and such Products are in newand in un-opened boxes. The value to be assigned to suchinventory shall be based upon the Authorized Supplier's invoiceprice to Customer for Products net of all applicable pricereduction credits.

(C) Product Financing Charge: Prime Rate Plus 1.75%

(D) Product Financing Period: 150 Days

(E) Collateral Insurance Amount: Seventeen Million five hundredThousand Dollars ($17,500,000.00)

Page 1 of 21

IWCF ATTACHMENT A TOINVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF AGREEMENT")

I. Fees, Rates and Repayment Terms (Continued):

(F) A/R Finance Charge:

(i) PRO Advance Charge: Prime Rate plus 2.00%

(ii) WCO Advance Charge: Prime Rate plus 1.75%

(G) Delinquency Fee Rate: Prime Rate plus 6.500%

(H) Shortfall Transaction Fee: Shortfall Amount multiplied by 0.30%

(I) Free Financing Period Exclusion Fee: Product Advance multiplied by0.40%

(J) Other Charges:

(i) Application Processing Fee: $ 0.00(ii) Monthly Service Fee: $1,000.00(iii) Closing Fee: $ 0.00



(iv) Commitment Fee: $ 0.00

Page 2 of 21


II. Bank Account

(A) Customer's Lockbox(es) and Special Account(s) will be maintained at thefollowing Bank(s):

Name Of Bank: Nationsbank, N.A.

Address: 8300 Greensboro Drive, Suite 550McLean, VA 22102-3604

Phone: _________________________________________________________________________

Lockbox Address: P.O. Box 630037 Baltimore, MD 21263-0037

Special Account #: 3933900355

Name of Bank: __________________________________________________________________

Address: _______________________________________________________________________

________________________________________________________________________________

Phone: _________________________________________________________________________

Lockbox Address: _______________________________________________________________

Special Account #:______________________________________________________________

Name of Bank: __________________________________________________________________

Address: _______________________________________________________________________

________________________________________________________________________________

Phone: _________________________________________________________________________

Lockbox Address: _______________________________________________________________

Special Account: _______________________________________________________________

Name of Bank: __________________________________________________________________

Address: _______________________________________________________________________

________________________________________________________________________________



Phone: _________________________________________________________________________

Lockbox Address: _______________________________________________________________

Special Account: _______________________________________________________________

Page 3 of 21


III. Financial Covenants:

Definitions: The following terms shall have the following respective meaningsin this Attachment A. All amounts shall be determined in accordance withgenerally accepted accounting principles (GAAP).

Current shall mean within the on-going twelve month period.

Current Assets shall mean assets that are cash or expected to become cashwithin the on-going twelve months.

Current Liabilities shall mean payment obligations resulting from past orcurrent transactions that require settlement within the on-going twelvemonth period. All indebtedness to IBM Credit shall be considered a CurrentLiability for purposes of determining compliance with the FinancialCovenants.

Long Term shall mean beyond the on-going twelve month period.

Long Term Assets shall mean assets that take longer than a year to beconverted to cash. They are divided into four categories: tangible assets,investments, intangibles and other.

Long Term Debt shall mean payment obligations of indebtedness which maturemore than twelve months from the date of determination, or mature withintwelve months from such date but are renewable or extendible at the optionof the debtor to a date more than twelve months from the date ofdetermination.

Net Profit after Tax shall mean Revenue plus all other income, minus allcosts, including applicable taxes.

Revenue shall mean the monetary expression of the aggregate of products orservices transferred by an enterprise to its customers for which saidcustomers have paid or are obligated to pay, plus other income as allowed.

Subordinated Debt shall mean Customer's indebtedness to third parties asevidenced by an executed Notes Payable Subordination Agreement in favor ofIBM Credit.

Page 4 of 21




III. Financial Covenants (continued):

Tangible Net Worth shall mean:

Total Net Worth minus;

(a) goodwill, organizational expenses, pre-paid expenses,deferred charges, research and development expenses,software development costs, leasehold expenses, trademarks,trade names, copyrights, patents, patent applications,privileges, franchises, licenses and rights in any thereof,and other similar intangibles (but not including contractrights) and other current and non-current assets asidentified in Customer's financial statements; and

(b) all accounts receivable from employees, officers, directors,stockholders and affiliates; and

(c) all callable/redeemable preferred stock.

Total Assets shall mean the total of Current Assets and Long Term Assets.

Total Liabilities shall mean the Current Liabilities and Long Term Debtless Subordinated Debt, resulting from past or current transactions, thatrequire settlement in the future.

Total Net Worth (the amount of owner's or stockholder's ownership in anenterprise) is equal to Total Assets minus Total Liabilities.

Working Capital shall mean Current Assets minus Current Liabilities.

Page 5 of 21


III. Financial Covenants (continued):

Customer will be required to maintain the following financial ratios,percentages and amounts as of the last day of the fiscal period under review byIBM Credit:

a) Revenue on an annual basis (i.e., the current fiscal year-to-dateRevenue annualized) to Working Capital ratio greater than zeroand equal to or less than 30.0:1.0 at 09/30/97, 28.0:1.0 at12/31/97 and 27.0 at 03/31/98.

c) Net Profit after Tax to Revenue percentage equal to or greaterthan -1.0 at 9/30/97, 0.0 percent at 12/31/97 and 0.5 percent at03/31/98.



d) Total Liabilities to Tangible Net Worth ratio greater than zeroand equal to or less than 17.0 at 9/31/97, 15.0:1.0 at 12/31/97and 14.0:1.0 at 03/31/98.

Page 6 of 21


IV. Additional Conditions Precedent Pursuant to Section 5.1 (K) of theAgreement:

. Executed Contingent Blocked Account Amendment;

. Executed guaranty of any shareholder(s) owning ten (10) percent ormore of the equity of Customer. Customer shall cause guarantor(s) tosubmit a personal financial statement upon the request of IBM Credit;

. Executed Waiver of Landlord Lien for all premises in which a landlordhas the right of levy for rent;

. Fiscal year-end financial statements of Customer as of December 31,1997 audited by an independent certified public accountant anddelivered to IBM Credit no later than March 31, 1998;

. A Certificate of Location of Collateral whereby the Customer certifieswhere Customer presently keeps or sells inventory, equipment and othertangible Collateral;

. Subordination or Intercreditor Agreements from all creditors having alien which is superior to IBM Credit in any assets that IBM Creditrelies on to satisfy Customer's obligations to IBM Credit.

Page 7 of 21


IV. Additional Conditions Precedent Pursuant to Section 5.1 (K) of theAgreement (continued):

. A Compliance Certificate as to Customer s compliance with thefinancial covenants set forth in Attachment A as of the last fiscalmonth of Customer for which financial statements have been published;

. An Opinion of Counsel substantially in the form and substance ofAttachment H whereby the Customer's counsel states his or her opinionabout the execution, delivery and performance of the Agreement andother documents by the Customer;

. Termination or release of Uniform Commercial Code filing by anothercreditor as required by IBM Credit;



. A copy of an all-risk insurance certificate pursuant to Section 7.8(B) of the Agreement;

Page 8 of 21

IWCF ATTACHMENT B TOINVENTORY AND WORKING CAPITAL FINANCING AGREEMENT

("IWCF AGREEMENT")

I. Liens. Wilmington Trust Co.

II. Locations of Offices. Records and Inventory

A) 4500 Forbes Blvd.Lanham, MD 20706CEO: William W. Davis

B)

Location of Assets, Inventory and Equipment (including warehouses)

Location Leased (Y/N)

4500 Forbes Blvd., Lanham, MD 20706 YES4611 Assembly Drive Suite N Lanham, MD 20706 YES

III. Fictitious Names.None

IV. Organization.

A) Subsidiaries

None

Name Jurisdiction Owner Percent Owned

B) Affiliates

None

Name Capacity

Page 10 of 21

IWCF ATTACHMENT CINVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF AGREEMENT")

COMPLIANCE CERTIFICATE

TO: IBM CREDIT CORPORATION(INSERT RFC ADDRESS)



The undersigned authorized officers of __________________________("__________"), hereby certify on behalf of the Customer, with respect to theInventory and Working Capital Financing Agreement executed by and between____________________ and IBM Credit Corporation ("IBM Credit") on_________________, 19__, as amended from time to time (the "Agreement"), that(A) _____________________ has been in compliance for the period from_____________, 19__ to ____________ ___, 19__ with the financial covenants setforth in Attachment A to the Agreement, as demonstrated below, and (B) noDefault has occurred and is continuing as of the date hereof, except, in eithercase, as set forth below. All capitalized terms used herein and not otherwisedefined shall have the meanings assigned to them in the Agreement.

I. Financial Covenants

FINANCIAL COVENANTS REQUIRED ACTUAL

Annualized Revenueto Working Capital

Current Assets toCurrent Liabilities

Net Profit AfterTax to Revenue

Total Liabilitiesto Tangible NetWorth

Tangible Net Worth

Page 11 of 21

IWCF ATTACHMENT CINVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF AGREEMENT")

II. Calculation of Tangible Net Worth.

Total Assets MINUS Total Liabilities ______________________

LESS:

goodwill ______________________

organizational expenses ______________________

pre-paid expenses ______________________



deferred charges, etc. ______________________

leasehold expenses ______________________

all other ______________________

callable/redeemable preferred stock ______________________

officer, employee, director, stockholder ______________________and affiliate receivables

Total Tangible Net Worth ======================

Attached hereto are Financial Statements as of and for the end of thefiscal __________ ended on the applicable date, as required by Section 7.1 ofthe Inventory and Working Capital Financing Agreement.

Submitted by:

___________________________________________(Customer Name)

By: _______________________________________

Print Name: _______________________________

Title: ____________________________________

Page 12 of 21

IWCF ATTACHMENT E TOINVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF AGREEMENT")

Pulsar Data Systems, Incorporated

AUTHORIZED SUPPLIERS

Access GraphicsAlmoAshton-Tate (AST)CannonCabletron Systems, Inc.CompaqComstorComtech Micro Systems, Inc.DigitalDell Computer SystemsDiamond Flower ElectricDolch American Instruments, Inc.Decision Support Systems, Inc.First Source International



GatesGraphic TechnologiesIngram AllianceInt'l Computer Graphics, Inc.InacomIngramLexmarkMatrix Marketing, Inc.MegahertzMeriselMicroageMemory products and MoreNCR CorporationNippon Electric Company (NEC)International Business Machines (IBM)IMB Personal Computer Company (PCC)Powerstar, Inc.Procom TechnologyPC WholesaleQMSRobecSDISouthern Electronics Corp. (SED)Simple TechnologySonySouthland Micro SystemsStorage DimensionsSun MicrosystemsTech DataToshibaViking Components, Inc.Zenith Data Systems

Page 13 of 21

IWCF ATTACHMENT G TOINVENTORY AND WORKING CAPITAL FINANCING AGREEMENT

("IWCF AGREEMENT")

CERTIFICATE OF LOCATION OF COLLATERAL

The undersigned, the Chief Executive Officer of Pulsar Data Systems, herebycertifies with reference to the Inventory and Working Capital FinancingAgreement, dated October 19. 1997, between Pulsar Data Systems and IBM CreditCorporation as follows:

a) The following are all the locations where Pulsar Data Systems presentlykeeps or sells inventory, equipment or other tangible Collateral:

LOCATION LEASE (YES/NO)

4500 Forbes Blvd, Lanham, MD 20706 YES

4611 Assembly Drive Suite N, Lanham, MD 20706 YES



IN WITNESS WHEREOF. I HAVE HEREUNTO SET MY HAND THIS DAYOF ______________________, 19____.

_______________________________(Customer Name)

By: /s/ William W. Davis, Sr.

Title: WILLIAM W. DAVIS, SR.PRESIDENT/CEO

Page 14 of 21

ATTACHMENT H

Technology Management Services

Pulsar(TM) Data Systems, Inc.

October 24, 1997

IBM Credit Corporation1500 River Edge ParkwayAtlanta, GA 30328

Re: Pulsar Data Systems, Inc.Inventory and Working Capital Financing Agreement

Ladies and Gentlemen:

We have acted as counsel for Pulsar Data Systems, Incorporated, a Delawarecorporation (the "Borrower") in connection with the exception and delivery ofthat certain Inventory and Working Capital Financing Agreement, dated as ofOctober 24, 1997 (the "Financing Agreement"), by and among the Borrower and IBMCredit Corporation ("IBM Credit"), and the other agreements, instruments, anddocuments executed and delivered by the Borrower in connection with theFinancing Agreement. Unless otherwise defined herein, capitalized terms usedherein shall have the meanings ascribed to such terms in the FinancingAgreement.

In this connection, we have examined the following document:

(i) The Certificate of Incorporation of the By-laws of the Borrower, eachas amended to date;

(i) The records of the proceedings taken by the Board of Directors of theBorrower in connection with the execution, delivery, and performance of theFinancing Documents to which they are a party (as defined below);



Corporate Headquarters4500 Forbes Blvd., Suite 400

Lanham, MD 20706301/459-2650 Voice 301/459-2654 FAX

http://www.pulsardata.com

Page 15 of 21

IBM Credit CorporationJune 27, 1997Page Two

(iii) The Financing Agreement;

(iv) The contingent Blocked Account Amendment;

(v) Acknowledgment copies of the UCC-1 Financing Statements listed onExhibit A hereto (the "Financing Statements") executed by theBorrower naming it as Debtor and IBM Credit as Secured Party andfiled in the offices set forth on Exhibit A;

The documents referred to in clauses (iii) through (vi) above arehereinafter referred to as the Financing Documents.

In our examination, we have assumed the genuineness of allsignatures, the legal capacity of natural persons, the authenticity of alldocuments submitted to us as originals, the conformity to original copies, andthe authenticity of the originals of such latter documents, and, regardingdocuments executed by parties other than the Borrower, that those parties hadthe power and the capacity to enter into, execute, delivery and perform allobligations under such documents, the due authorization of all requisite actionwith respect to such documents, and the validity and binding effect of suchdocuments upon such other parties.

As to any facts material to this opinion, we have relied upon therepresentations and warranties of the Borrower contained in each of theFinancing Documents, and in certificates delivered by the Borrower pursuant toeach of the Financing Documents, statements, and representations of officers andother representatives of the Borrower, and, as to the matters addressed therein,certificates or correspondence from public officials. For purposes of theopinion set forth in Paragraph 4, the term "Material Contracts" means theagreements and instruments to which the Borrower is subject which have beenidentified to us by officers of the Borrower and set forth on Exhibit B heretoas the agreements and instruments which are material to the business orfinancial condition of the Borrower: and the term "Material Orders" means thoseorders and decrees to which the Borrower is subject which have

Page 16 of 21

IBM Credit CorporationJune 27, 1997Page Three



been identified to us by officers of the Borrower and set forth in Exhibit Chereto as the orders and decrees, agreements, and instruments which are materialto the business or financial condition of the Borrower.

As used herein, the term "UCC" refers to the Uniform commercial Code as ineffect in the State of New York.

We are members of the bar in the State of Maryland and Pennsylvania andexpress no opinion as to the laws of any other jurisdiction except the GeneralCorporation Law of the State of Maryland and the federal laws of the UnitedStates of America.

Based on the foregoing, and subject to the assumptions and qualificationsset forth herein, we are of the opinion that:

1. Borrower by July 10, 1997 will be a corporation duly organized,validity existing and in good standing under the laws of the jurisdiction of itsincorporation and is duly qualified and authorized to do business and in goodstanding as a foreign corporation in each jurisdiction where, to our knowledge,it presently is engaged in business and is required to be qualified.

2. Borrower has all or will have all the requisite corporate power andauthority (a) to own, lease, and operate its properties and assets and to carryon its business as now being conducted; and (b) to execute, delivery, andperformance of the Financing Documents to which it is a party.

3. All corporate action on the part of the Borrower requisite for theexecution, delivery, and performance of the Financing Documents to which it isparty will be duly taken.

4. The execution, delivery, and performance by the Borrower of theFinancing Documents to which it is a party will not (a) violate, be in conflictwith, result in the breach of, or constitute (with due notice or

Page 17 of 21

IBM Credit CorporationJune 27, 1997Page Four

lapse of time, or both) a default under (I) the Certificate of Incorporation orBy-laws of Borrower or any resolution of its Board of Directors or any committeethereof, (ii) any Material Contract, or (iii) any federal or state law(including, without limitation, environmental or occupational health, and safetylaw), regulation, rule, Material Order, or legal requirement of any federal,state, or public authority or agency applicable to Borrower; or (b) result inthe creation or imposition of a lien of any nature whatsoever upon any of theBorrower's property or assets other than as represented by the FinancingDocuments.

5. Borrower has obtained any and all consents, approvals, or otherauthorizations required to be obtained pursuant to its Certificate ofIncorporation and By-laws in connection with the execution, delivery, andperformance of the Financing Documents. No consent, approval, or authorizationof or by any court, administrative agency, other governmental authority, or any



other Person is required in connection with the execution, delivery, andperformance by the Borrower of the Financing Documents that has not already beenobtained.

6. To our knowledge, there are no actions, proceedings, or investigationspending or threatened against the Borrower which question the validity of theFinancing Documents to which it is a party or relating the transactionscontemplated thereby, except for those investigations which IBM Credit hasknowledge of by full disclosure of the Borrower.

7. Each of the Financing Documents has been duly executed and deliveredby duly authorized officer of the Borrower and constitutes the legal, valid,binding obligation of the Borrower, enforceable against the Borrower inaccordance with its terms, except that, in each case, (I) enforcement may besubject to and limited by applicable bankruptcy, insolvency, reorganization,moratorium, or other laws now or hereafter in effect relating to creditors'rights generally, (ii) the remedy of specific performance and injunctive andother forms of equitable relief may be subject to equitable defenses and to thediscretion of the court before which any proceeding therefor may be brought. and(iii) certain of the

Page 18 of 21

IBM Credit CorporationJune 27, 1997Page Five

remedial provisions including waivers with respect to the exercise of remediesagainst the Collateral contained in the Financing Documents may be unenforceablein whole or in part, but the inclusion of such provisions does not affect thevalidity of the Financing Documents, each taken as a whole and, the FinancingDocuments, each taken as a whole, contain adequate remedial provisions for thepractical realization of the security purported to be afforded thereby.

8. The Financing Agreement is effective to create in favor of IBM Credita valid security interest within the meaning of the UCC in the Collateral assecurity for the obligations purported to be secured thereby; and (ii) theFinancing Statements are in appropriate form and have been duly filed resultingin a perfected security interest (as such term is defined in Section 9-303 ofthe UCC) of IBM Credit in the Collateral in which security interests to whichArticle 9 of the UCC applies.

9. Borrower is not an "investment company" or a company "controlled" byan "investment company," within the meaning of the Investment Company Act of1940, as amended.

This opinion is rendered solely to and for the benefit of IBM Credit inconnection with the execution and delivery of the Financing Documents and maynot be relied upon by any other person, firm, or corporation without our priorwritten consent, except that it may be furnished to any prospective purchaser ofa participation in the rights of IBM Credit and may be furnished to an reliedupon by any Person which hereafter acquires such a participation.

This opinion is limited to laws as currently in effect on the date hereto



and the facts as they currently exist. We assume no obligation to revise,supplement or otherwise update this opinion.

Very truly yours,

/s/ Christopher R. Locke

Christopher R. Locke

Page 19 of 21

ATTACHMENT I

CORPORATE SECRETARY'S CERTIFICATE AS TO RESOLUTIONSAUTHORIZING BORROWING BY CORPORATION

IBM CREDIT CORPORATION

_______________________________

_______________________________

_______________________________

I, Lillian Davis, certify that I am the Secretary of Pulsar Data Systems("Customer") and that I am custodian of the Customer's organizational books andrecords, including the minutes of the meetings of the Customer's Board ofDirectors. I further certify as follows:

1. Customer is a corporation organized under the laws of the State ofDelaware, and has its principal place of business at 4500 Forbes Blvd., Lanham,MD 20706.

2. Customer is registered to conduct business or as otherwise required inthe following states and localities:

______________________________________________________________________________

______________________________________________________________________________

3. True and complete copies of the Customer's Articles of Incorporationand By-laws ("Governing Documents") are delivered herewith, together with allamendments and addenda thereto as in effect on the date hereof.

4. The following is a true, accurate and compared copy of a Resolution(the "Resolution") adopted by the Customer's Board of Directors at a specialmeeting thereof held on due notice at which there was present a quorumauthorized to adopt the Resolution and the entire proceedings of which wereproper and in accordance with the Customer's Governing Documents. The Resolutionwas duly made, seconded and unanimously adopted, remains in full force andeffect and has not been revoked, annulled, amended or modified in any mannerwhatsoever, and each authorization and empowerment contained in the Resolutionis permitted and proper under the Customer's Governing Documents:



"Resolved, that:(a) Each executive or managing officer and agent of the Company (each

an "Authorized Person") is and shall be authorized and empowered, separately orcollectively, to obtain financing from IBM Credit Corporation, a Delawarecorporation ("IBM Credit") on behalf of the Company, from time to time, inamounts and upon terms and conditions as such Authorized Person deems proper,and for that purpose: (1) to execute notes, financing statements and otherevidences of the Company's indebtedness with respect thereto; (2) to enter intofinancing agreements, loan agreements, security agreements, pledge agreementsand any other agreements with IBM Credit and third parties relating to the termsand

Page 20 of 21

conditions upon which any such financing may be obtained and to the security tobe furnished by the Company thereof; (3) to enter into, as lessor or lessee, orto assign or sell any interest Company may have in, any lease or similar rentalagreement; (4) to modify, supplement or amend any such agreements, any suchterms or conditions in such agreements and any such security therefor; (5) togrant powers of attorney, (6) to pledge, assign, guarantee, mortgage, consign,grant security interest in and otherwise transfer to IBM Credit as collateralsecurity for any and all debts and obligations of the Company to IBM Credit orits affiliates, whenever and however arising, any assets of this Company; (7) toexecute and deliver any and all assignments, schedules, transfers, endorsements,contracts, guarantees, agreements, designations, consignments, deeds of trust,mortgages, instruments of pledge or other instruments in respect thereof and tomake remittances and payments in respect thereof by checks, drafts or otherwise;and (8) to do and perform all other acts and things deemed by such AuthorizedPerson to be necessary, convenient or proper to carry out any of the foregoing.

(b) The authorization contained herein shall apply whether or notproceeds of any loans or advances made at the request of any Authorized Personshall be paid or credited by IBM Credit to the Company or shall be paid orcredited to the individual order of any affiliates of the Company or other thirdparty, and IBM Credit shall be under no obligation to inquire as to theapplication or disposition of the proceeds of any such loan or advance.

(c) Hereby ratified, approved, confirmed and consented to are all thatany Authorized Person has done or may do in the premises."

5. Appearing below are the names, titles and specimen signatures of atleast two Authorized Persons, as defined in the Resolution cited in thepreceding paragraph, (list at least three such Authorized Persons):

Authorized Person(s) Title Signature(print) (print)

William W. Davis President /s/ William W. DavisLillian A. Davis Vice PresidentJohn Shutt Chief Financial Officer /s/ John Shutt

The foregoing is not intended to be a comprehensive or exclusive list of theCustomer's Authorized Persons. Upon request, Customer will promptly provide to



IBM Credit additional certificates containing the name, title and specimensignature of other Authorized Persons, and IBM Credit may now and in the futurerely on the signature of any Authorized Person whether or not listed on this orany other certificate or on the signature page(s) hereof. Nevertheless, it ishereby certified that each name, title and signature appearing above or on thesignature page(s) hereof, is consistent with the books and records of theCustomer.

Page 21 of 21

IN WITNESS WHEREOF, I have signed this certificate this __________ day of________________, 19___.

___________________________________

Name: _____________________________

ATTACHMENT J

IBM Credit and Customer agree that this Agreement shall govern the financingfacility between them, except to the extent that the Customer is in default ofparagraphs 9.1, 9.2, 9.3, 9.4 and 10.1 herein as of the date hereof (the"Specified Defaults") and that such Specified Defaults are addressed in theForbearance Agreement dated October 15, 1997, then said Forbearance Agreementshall govern the rights and remedies of both Customer and IBM Credit regardingsuch Specified Defaults.



EXHIBIT 10.16

[LOGO]ALLIANCE--------Business Centers LEASE AND SERVICE AGREEMENT----------------

This Agreement is made this 6th day of January, 1999, by and between ALLIANCE8150 Leesburg, Inc., d/b/a ALLIANCE Business Centers ("Lessor") having officesknown and numbered as Suite 600/700 (the "Facility") in the building located at8150 Leesburg Pike, Vienna, Virginia 22182 (the "Building") and Litronic, Inc.("Lessee") a Corporation with an address of 2030 Main Street Suite 1250, Irvine,CA 92614. The parties for themselves, their heirs, legal representatives,successors and assigns. agree as follows:

1. Demise and Description of Property.----------------------------------

a. Lessor leases to Lessee and Lessee leases from Lessor, the "Premises"(defined below), being a subpart of Lessor's total leased Facility space, forthe term and subject to the conditions and covenants hereinafter set forth andto all encumbrances, restrictions, zoning laws, regulations or statutesaffecting the Building, Facility or Premises.

b. The Premises consists of Facility office space number(s) 713 as shownin the floor plan annexed hereto. Lessor hereby grants Lessee the privilege touse in common with other lessees and parties that Lessor may designate certainoffice amenities located in the Facility; the use of all of which are subject tosuch reasonable rules and regulations as Lessor currently has in place and mayadopt from time to time. The amenities are more particularly described inattached Exhibit "A." The "Operating Standards" as presently in place andgoverning the use of the Premises and the Facility are attached in Exhibit "B".

2. Use.----

a. The Premises shall be used by Lessee solely for general officeactivity and such other normally incident uses and for no other purpose, instrict accordance with the Operation Standards. Additionally, Lessee shall notoffer at the Premises any services which Lessor provides to its lessees,including, but not limited to those amenities or services described in attachedExhibit "A". In the event Lessee breaches any provision of this paragraph,Lessor shall be entitled to exercise any rights or remedies available to theLessor pursuant to this Agreement together with such other rights and remedies



as the Lessor may otherwise have and choose to exercise.

b. Lessee shall not make nor permit to be made any use of the Premiseswhich would violate any of the terms of this Agreement or which, directly orindirectly, is forbidden by statute, ordinance or government regulations, whichmay be dangerous to life, limb or property, which may invalidate or increase thepremium of any policy of insurance carried on the Building or on the

1

Facility, which will suffer or permit the Premises to be used in any manner oranything to be brought into or kept there which, in the sole judgment of Lessor,shall in any way impair or tend to impair the high quality character, reputationor appearance of the Building or the Facility, or which may or tend to impair orinterfere with any services performed by Lessor for Lessee or for others.

3. Term.-----

a. The term of this Agreement shall be for a period of 6 months,commencing 9:00 a.m. on the 1st day of February 1999, and ending 5:00 p.m. onthe 31st day of July, 1999, unless renewed as provided in paragraph "3(b)"herein.

b. Upon the ending term date set forth herein or any extension thereof,the Agreement shall be extended for the same period of time as the initial termand upon the same terms and conditions as herein contained except for the amountof base rental charges, which shall each be increased by at least ten percent(10%), unless either party notifies the other in writing by certified orregistered mail, return receipt requested, or delivered by hand that theAgreement shall not be extended within the period hereinafter specified orautomatically renewed. If Lessee has less than three offices, such notice shallbe given at least 60 days prior to the expiration date of this Agreement. IfLessee has three or more offices, such notice shall be given at least 90 daysprior to the expiration date of this Agreement.

c. In the event the entire Premises or the Facility are damaged,destroyed or taken by eminent domain or acquired by private purchase in lieu ofeminent domain so as to render the Premises fully untenantable and unrestorablein Lessor's sole judgment, then within 90 days thereafter by written notice tothe other party, either party shall be able to terminate this Agreement, whichwill terminate as of the date thereof.

4. Rent.-----

a. For and during the term of this Agreement, Lessee shall pay Lessor asrent for the Premises a total rental of $ 33,738, payable in 6 equal monthlyinstallments of $ 5623 (unless otherwise indicated on Rebate Rider attached),



each payable in advance of the first day of each calendar month after thecommencement of the term, or a daily prorated amount for any partial calendarmonth during the term. If any payment of rent or other charges due under thisAgreement is not received within five (5) calendar days after its due date, theLessee will also pay, as additional rent, a late payment charge which shall bean amount equal to 10% of any amount owed to Lessor or $50 whichever is greater.

b. It is additionally specifically covenanted and agreed that thefinancial terms of this Agreement are strictly confidential and Lessee agreesnot to knowingly or willfully divulge this information to or any other Lessee orpotential Lessee of Lessor. Any such disclosure by the Lessee

2

of the financial terms of this Agreement as set forth herein above, shallconstitute a material breach of this Lease.

c. The first such payment of rental as well as the payment of the Depositas set forth in below shall be billed by Lessor simultaneously with execution ofthis Agreement. Should the Lessee fail to make such payment prior to thecommencement of the term of this Agreement, then, at Lessor's sole option, theAgreement shall be null and void and of no further effect.

d. The rental payable during the term of this Agreement shall beincreased on the first day of the month following notification of any rentalincrease (however designated) which the Lessor might receive form the Lessor'sover-landlord ("Building"). The term "direct expenses" as used herein shallrefer to the same items and costs as are used by the Building in itsdetermination of expenses and costs passed on to Lessor. Lessor shallimmediately notify Lessee in writing of any such increase, and shall bill Lesseefor its pro rata share thereof, which bill Lessee shall pay promptly upon suchnotification for each and every month thereafter for the balance of the term.

e. Rent charges are based on the value of the rental Premises andservices to be used by no more than five (5) person(s) only. If more than saidnumber of person(s) habitually use the Premises or services, the Fixed MonthlyRental Charges will be increased by a factor of $100 (not included furnishings)for each additional person who habitually uses the Premises.

f. If a Lessee check is returned for any reason, Lessee will pay anadditional charge of $100.00 per returned check and, for the purpose ofconsidering default and/or late charges, it will be as if the paymentrepresented by the returned check had never been made.

5. Security Deposit.-----------------

a. Lessee has deposited with Lessor $5623; $3300 already on hand; $2323due on February 1, 1999 or the equivalent of one month's rent, in good or



certified funds with a domestic bank, as a non-interest bearing securitydeposit. Lessor may use the security deposit to cure any default of Lessee underthis Agreement, restore the Premises including any and all furniture, fixturesand equipment provided by Lessor and vendors at the Premises to their originalcondition and configuration, reasonable wear and tear excepted, to pay forrepairs to any damage to the Premises, Executive Suite or Building, caused byLessee or Lessee's guests, to pay any rent or other charges which Lessee owesLessor at or prior to the expiration of this Agreement, and to reimburse Lessorfor costs or expenses arising from any other obligation of Lessee which Lesseehas failed to perform. If Lessor transfers control or ownership of the Premisesand Lessor transfers the security deposit to such purchaser, Lessee will looksolely to the new Lessor for the return of the security deposit, and the Lessornamed in this Agreement shall be released from all liability for the return ofthe security deposit.

b. The security deposit (less any sums used by Lessor in accordance withthe terms and conditions of this Agreement) will be returned within sixty (60)days after the termination of any services rendered or expiration of the termhereof. The security deposit shall not under any

3

circumstance be applied in lieu of be the final payment(s) of Fixed MonthlyRental charges or service charges under this Agreement.

c. In the event that, by reason of the Lessee's default in itsobligations pursuant to this Agreement or otherwise, including but not limitedto the payment of the Fixed Monthly Rental Charge, any amounts due by reason ofthe Lessee's use of additional services hereto and/or by reason of the Lessee'suse of telephone services as supplied pursuant to this Agreement, Lessor shallbe entitled to apply any of the security deposited pursuant to this Agreement toany outstanding sums due or owing to the Lessor, and Lessor shall have the rightto charge the Lessee, as additional rent, such sums as are necessary toreplenish any and all amounts applied so as to cause the security to be returnedto its entire amount. The failure to pay such amounts as are necessary toreplenish the security shall be considered a breach of this Agreement and shallentitle the Lessor to exercise any of its rights pursuant to this Agreement orotherwise.

6. Delivery of Possession.-----------------------

If, for any reason whatsoever, Lessor cannot deliver possession of thePremises to Lessee at the commencement of the term, this Agreement shall not bevoid nor voidable nor shall Lessor be liable to Lessee for any loss or damageresulting therefrom; but there shall be an abatement of rent for the periodbetween the stated term commencement and the time when Lessor does deliverpossession of the Premises.

7. Services.



---------

a. So long as Lessee is not in default hereunder, Lessor shall makeavailable certain amenities to Lessee as more particularly described in Exhibit"A". Such services shall be offered to Lessee, in conjunction with such servicesbeing offered by Lessor to its other lessees, without charge for the reasonableuse of the same.

b. In addition, provided Lessee is not in default hereunder and providedthe cost thereof does not exceed the Security Deposit, Lessor shall makeavailable to Lessee certain other services the cost of which shall be billed tothe Lessee as additional rent and the payment of which shall be subject to thesame terms and conditions as those governing the payment of the Fixed MonthlyRental Charge herein regardless of when such charges are billed to the Lessee.

c. There will be a Client Service Charge of $100/month per office.

8. Telephone Services.-------------------

a. Provided Lessee is not in default of any of the terms, covenants,conditions or provisions of this Agreement, Lessor will make available toLessee, a telecommunications package which will consist of some combination oftelephone equipment, numbers, lines, conference calling, voice mail, local, longdistance and international service, and directory listing. All components of thetelecommunications package including any telephone numbers used by Lessee willremain

4

at all times the property of Lessor and Lessee will acquire no rights in thecomponents beyond the term specified by Lessor.

b. Upon Lessee's written request, Lessee shall be entitled to appointLessor as its exclusive agent for the sole purpose of procuring and arrangingLessee's local "white pages" listings. Lessor shall have no involvement norresponsibility for any "yellow pages" listings desired by Lessee.

c. Lessor shall not be liable for any interruption or error in theperformance of its services to Lessee under this Section. Lessee waives anyrecourse as against the Lessor for any claimed liability arising from theprovision of telecommunication services including, but not limited to; injuriesto persons or property arising out of mistakes, omissions, interruptions,delays, errors or defects in transmissions occurring in the course of furnishingtelecommunications services provided same are not caused by the willful acts ofthe Lessor, as well any claim for business interruption and for consequentialdamages.

d. Lessor shall use reasonable efforts to provide Telephone Services to



Lessee in a first-class, professional manner. Telephone service charges shall beas per Lessor's then scheduled rates for the same, or as the same may be amendedby Lessor from time to time.

e. In the event that any toll fraud is traceable to telecommunicationsservices employed by Lessee, such toll fraud shall be deemed to be a materialdefault in the Lessee's obligations hereunder. Lessee further hereby agrees toindemnify, hold harmless and to reimburse Lessor for all charges associated withany such toll fraud including, but not limited to, unauthorized use of callingcards or telephone lines.

f. It is expressly acknowledged and agreed that Lessor shall be the soleand exclusive provider of telecommunication services to Lessee. Lessee herebyagrees and covenants that it will not use any other telephone service ortelephone carrier to provide it service in the Premises. In the event thatLessee uses or acquires any other telephone service at the Premises, such useand/or installation shall constitute a material default in the Lessee'sobligations hereunder.

9. Furniture and Fixtures.-----------------------

At its own cost and expense, Lessor shall furnish and install furniture,fixtures and equipment as are in Lessor's sole opinion necessary to providesuitable office accommodations for Lessee, upon such terms and conditionsroutinely applicable to the Facility. All such furniture, fixtures and equipmentshall remain Lessor's property.

10. Insurance: Waiver of Claims.----------------------------

a. Lessor has no obligation to and will not carry insurance for Lessee'sbenefit. Lessor will not be liable to Lessee or to any other person for damageson account of loss, damage or theft,

5

to any business or personal property of Lessee. Lessee hereby waives any claimsagainst Lessor from any loss, cost, liability or expense (including reasonableattorneys' fees) arising from Lessee's use of the Premises or any common areasmade available to Lessee by Lessor or from the conduct of Lessee's business, orfrom any activity, work, or thing done in the Premises or common areas by Lesseeor Lessee's agents, contractors, visitors or employees. To the extent thatLessor has any liability for any of the forgoing pursuant to any law, ordinanceor statute, Lessee shall seek recovery for such loss(es)/or damage(s) from itsown insurance company as provided for in subparagraph (c) herein prior to makingany claims against Lessor.

b. The Lessor shall not be liable or responsible to the Lessee for any



injury or damage resulting from the acts or omissions of Lessor, its employees,persons leasing office space or obtaining services from the Lessor, or otherpersons occupying any part of the Premises or Building, or for any failure ofservices provided such as water, gas or electricity, HVAC or for any injury ordamage to person or property caused by any person except for such loss or damagearising from the willful or grossly negligent misconduct of the Lessor, itsagents, servants, or employees or from the Lessor's failure to make repairswhich it is obligated to make hereunder. Neither Lessor or any of its agents,employees, officers or directors shall be responsible for damages resulting fromany error, omission or defect in any work performed or provided as part of theservices rendered, whether uncompensated services or compensated services.

c. Lessee shall provide Lessor with a certificate of insurance evidencingGeneral/Public Liability coverage with liability limits of not less than OneMillion Dollars ($1,000,000) per occurrence for Bodily Injury and/or PropertyDamage Liability and One Hundred Thousand Dollars ($100,000) per occurrence forFire/Legal Liability. Said insurance coverage shall remain in force during theterm of this Agreement and renewals thereof. The Lessor, Alliance National,Inc., and Alliance Business Centers, Inc. shall be named as an additional namedinsured on each of these policies. Lessee's failure to provide or maintain suchinsurance shall not reduce or otherwise alter Lessee's liability orresponsibility to pay any judgment rendered against Lessee for such Liabilityand Damages Failure to maintain such insurance and/or to name the Lessor and itsdesignees, as set forth above, shall constitute a material breach of thisAgreement.

d. Both parties hereby agree to defend, indemnify and hold the otherharmless from and against any and all claims, damages, injury, loss and expensesto or of any person or property resulting from the acts or negligence of theiragents, employees, invitees and/or licensees while in the Building, ExecutiveSuite and/or Premises.

e. Any fire and extended risk casualty insurance that Lessee maintainsshall include a waiver of subrogation in favor of Lessor and Building Landlord,and any fire and extended risk insurance carried on the Facility by Lessor shalllikewise contain a waiver of subrogation in favor of Lessee.

11. Waiver of Breach.-----------------

Should Lessor not insist upon the strict performance of any term orcondition of this Agreement or to exercise any right or remedy available for abreach thereof, and no acceptance of

6

full or partial payment during the continuance of any such breach shallconstitute a waiver of any such breach or any such term or condition. No term orcondition of this Agreement required to be performed by Lessee and no breachthereof, shall be waived, altered or modified, except by a written instrument



executed by Lessor. No waiver of any breach shall affect or alter any term orcondition in this Agreement, and each term or condition shall continue in fullforce and effect with respect to any other then existing or subsequent breachthereof.

12. Operating Standards.--------------------

The Operating Standards attached to this Agreement as Exhibit "B" arehereby made an integral part of this Agreement. Lessee, its employees, agents,guests, invitees, visitors and/or any other persons caused to be present in andaround the Premises by the Lessee shall perform and abide by the rules andregulations and any amendments or additions to said rules and regulations asLessor may make. In addition, Lessee, its employees and agents shall abide byall applicable governmental rules, regulations, statutes and ordinances relatingin any way to the Premises or the Facility or Lessee's use or occupancy of thePremises or the Facility; failing which Lessee shall be in default hereunder andshall pay any fines or penalties imposed for such violation(s) directly to theappropriate governmental authority or to Lessor, if Lessor has paid such amounton behalf of Lessee. Such remedy shall not be exclusive. It is hereby furtherexplicitly agreed and understood that full compliance with the OperatingStandards as set forth constitutes a material obligation of this Agreement, andthat the failure to so comply shall constitute a violation of this Agreemententitling the Lessor to exercise any of its remedies pursuant to this Agreementor otherwise.

13. Employment of Lessor's Employees.--------------------------------

a. Lessee agrees that it will not, during the term of this Agreement andany renewals thereof, or for a period of one year after the expiration or soonertermination of this Agreement, hire or issue an offer to employ any person whois an employee of Lessor or Lessor's agent without prior consent from Lessor. IfLessee either hires an employee of Lessor or Lessor's agent; or hires any personwho has been an employee of Lessor or its agent within six months prior to thetime they are hired by Lessee, Lessee will, at Lessors sole option, be liable toLessor for liquidated damages equal to six months wages of the employee, at therate last paid that employee by Lessor.

b. If Lessor assists in hiring an employee for Lessee. Lessee shall payto the Lessor a commission equal to 20% of that employee's annual salary. Theprovisions hereof shall survive the expiration or sooner termination of the termthereof.

14. Alteration.-----------

If Lessee requires any special wiring or office alterations forextraordinary business machines or other purposes not consistent with thecurrent wiring, extraordinary telephone equipment or computer equipment. Suchalteration shall be done (i) only with the express written permission of



7

the Lessor, and if said permission is granted, then (ii) by an agent designatedby Lessor at Lessee's cost. The electrical current shall be used for ordinarylighting purposes only, unless written permission to do otherwise shall firsthave been obtained from Lessor at an agreed cost to Lessee. Lessor furtherreserves the sole and exclusive right to limit the number and type of lines andtelephone equipment Lessee can install in the leased Premises.

15. Re-Entry.---------

Lessor and its agents shall have the right to enter the Premises at anytime for the purpose of making any repairs, alterations, inspections which itshall deem necessary for the preservation, safety or improvements of saidPremises, without in any way being deemed or held to have committed an eviction(constructive or otherwise) of or trespass against Lessee.

16. Relocation.-----------

a. Lessee agrees that the Lessor may, in its sole discretion, relocatethe lessee from its present Premises to a like or similar office space withinthe same facility upon ten (10) days notice to the Lessee. In the event that theLessor requires the Lessee to relocate, the Lessor hereby agrees to bear thereasonable cost of any such relocation, which cost shall be limited to the costassociated with the physical transfer of the Lessee's property to any differentoffice, which the Lessor may designate.

b. In the event that any such relocation is effected, the Lessee herebyacknowledges that, unless otherwise agreed in writing, that all of the terms andconditions of this Agreement shall remain in full force and effect.

17. Assignment and Subletting.--------------------------

No assignment or subletting of the Premises, this Agreement or any partthereof shall be made by Lessee without Lessor's prior written consent, whichconsent may be withheld for any or no reason in Lessor's sole discretion.Neither all nor any part of Lessee's interest in the Premises or this Agreementshall be encumbered, assigned or transferred, in whole or in part, either by actof the Lessee or by operation of law.

18. Surrender.----------

a. On expiration of the term, any extended term, or sooner termination ofthis Agreement, Lessee shall promptly surrender and deliver the Premises to



Lessor, without demand. and in as good condition as when let, ordinary wear andtear excepted.

b. Upon Lessee serving a notice of cancellation as provided in 3b hereinLessor shall have the right to show Lessee's Premises during the 60 day period(for one or two offices) or 90 day period (for three or more offices) as thecase may be.

8

c. Without prior written approval of Lessor, Lessee shall not remove anyof Lessors property from the Premises upon termination of this Agreement or atany other time, except during Lessor's normal business hours. In the eventLessor consents to Lessee's removing property before or after normal businesshours, any expenses incurred by Lessor as a result, including but not limited toexpenses for personnel, security, elevator, utilities and the like shall be paidby Lessee in advance, to the extent determinable by Lessor, by certified and/orbank check.

d. If Lessee vacates the Premises and leaves behind any property,whatsoever, same will be deemed abandoned by Lessee and may be disposed of byLessor at Lessee's expense. If Lessee defaults in the payment of sums due toLessor, and Lessor changes the locks, removes Lessee's property, or otherwisedenies access to Lessee, Lessor shall not be liable for conversion or partial,actual and/or constructive eviction.

19. Holding Over.-------------

a. In the event that Lessee, should not renew this Agreement inaccordance with the terms and conditions hereof, and/or fail to surrender thePremises upon the expiration of the term of the Agreement as provided herein,Lessee agrees to pay Lessor, as liquidated damages, a sum equal to twice themonthly rent and all additional charges for services provided by Lessor toLessee, for each month that Lessee retains possession of the Premises or anypart thereof; provided, however, that the acceptance of such sums, representingliquidated damages shall not be deemed to be permission to Lessee to continue inpossession of the Premises.

20. Default and Remedies.---------------------

a. If the Lessee shall default in fulfilling any of its terms,conditions, covenants or provisions of this Agreement, including but not limitedto:

1. Payment of fixed Monthly Rental Charges and/or any other chargeshereunder within ten days of the date such charges become due,



2. Becomes comes insolvent, makes an assignment for benefit of creditors,or files a voluntary petition under any bankruptcy or insolvency law, or hasfiled against it an involuntary petition under any such law;

3. Defaults in fulfilling any of the terms, conditions, covenants orprovisions of this Agreement including but not limited to the breach of any ofthe terms and conditions set forth in the exhibits attached hereto;

4. The abandonment and/or vacatur of the Premises by the Lessee; then,after five days notice of any such default(s), the Lessor may, at its solediscretion, terminate this Agreement upon five days notice to the Lessee, andupon the expiration of such notice

9

period, the Lessee shall quit and surrender the Premises to the Lessor. In theevent that the Lessee fails to quit and surrender the Premises, the Lessor mayre-enter and take possession of the Premises and remove all persons and propertytherefrom, as well as disconnect any telephone lines installed for the benefitof Lessee, without any liability whatsoever to Lessee. In addition, Lessor mayelect concurrently or alternately to accelerate all of Lessee's obligationshereunder including without limitation the rental, direct expenses, Schedule BCosts, and Telephone Services costs, and/or the re-letting of the Premises orany part thereof, for all or any part of the remainder of said term, to a partysatisfactory to Lessor, at any monthly rental rate. Lessor, in its solediscretion, may accept notwithstanding the foregoing, Lessor shall have noobligation, implied or otherwise, to mitigate its damage(s) under suchcircumstances.

b. Should Lessor be unable to re-let the Premises, or should each monthlyre-rental be less than the rental, Lessee is obligated to pay under thisAgreement or any renewal thereof, at Lessor's option Lessee shall pay the amountof such deficiency, plus the expenses of reletting, immediately in one lump sum(if allowable under law) to Lessor upon demand and/or as such obligationsaccrue.

c. If Lessee shall default in the observance or performance of any termor covenant on Lessee's part to be observed or performed under or by virtue ofany of the terms or provisions in any article of this lease, then, unlessotherwise provided elsewhere in this lease, Lessor may immediately or at anytime thereafter and with notice perform the obligation of Lessee thereunder, andif Lessor, in connection therewith or in connection with any default by Lesseein the covenant to pay rent hereunder, makes any expenditures or incurs anyobligations for the payment of money, including but not limited to attorney'sfees, in instituting, prosecuting or defending any actions or proceeding, suchsums so paid or obligations incurred with interest and costs shall be deemed tobe additional rent hereunder and shall be paid by Lessee to Lessor rendition ofany bill or statement to Lessee therefor, and if Lessee's lease term shall haveexpired at the time of making of such expenditures or incurring of such



obligations, such sums shall be recoverable by Lessor as damages.

21. Mail & Telephone Forwarding.---------------------------

a. After termination or expiration of the term of this Agreement, Lesseehereby agrees that it will take all reasonable steps to notify all parties ofLessee's new address and phone numbers. Lessor shall have no obligation, tonotify any person or entity of Lessee's new address and/or phone numbers, exceptas expressly provided herein.

b. Lessor will, unless otherwise instructed by Lessee in writing, forwardmail to Lessee at its new address and give out new telephone number via a voicemail message for a period of three (3) months at the rate of $150.00 per month,which sums shall be deducted from any amounts deposited with the Lessor assecurity hereunder and paid to the Lessor in advance. In the event that there isnot sufficient security remaining on deposit to pay for the charges set forthherein,

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unless the Lessee shall pay the charges set forth herein to the Lessor inadvance, Lessor shall have no obligation to provide the services set forthherein.

22. Notices.--------

Any notice under this Agreement shall be in writing and shall be eitherdelivered by hand or by first class mail to the party at the address set forthbelow. Lessor hereby designates its address as:

ALLIANCE Business Centers8150 Leesburg Pike, Suite 600/700Vienna, Virginia 22182Attn: Sales Management

with a copy by regular first class mail to:ALLIANCE National, Inc.122 East 42nd Street. Suite 2707New York, NY 10168Attn: Legal Department

Lessee hereby designates its address (which address must be an address withinthe United States), as

Litronic, Inc.Attn: Charlie Scruggs8150 Leesburg Pike, Suite 700



Vienna, VA 22182

Litronic, Inc.Attn: Tom Seykora2030 Main Street Suite 1250Irvine, CA 92614

If such mail is properly addressed and mailed, as above, it shall be deemednotice for all purposes, given when sent or delivered, even if returned asundelivered.

23. Landlord's Election Under This Agreement.----------------------------------------

Upon early termination of the main Building lease, this Agreement shallterminate unless the Building Landlord under the main lease elects to have thisAgreement assigned to the Building Landlord or another entity as provided in themain lease. Upon notice to Lessor of the termination of the main lease and suchelection, (i) the Agreement shall be deemed to have been assigned by

11

Lessor to the Building Landlord or to such other entity as is designated in suchnotice by the Building Landlord, (ii) the Building Landlord shall be deemed tobe the Lessor under this Agreement and shall assume all rights andresponsibilities of Lessor under this Agreement, and (iii) Lessee shall bedeemed to have attorned to the Building Landlord as Lessor under thisAgreement.

24. Time of Essence.----------------

Time is of the essence as to the performance by Lessee of all covenants,terms and provisions of this Agreement.

25. Severability.------------

The invalidity of any one or more of the sections, subsections, sentences,clauses or words contained in this Agreement or the application thereof to anyparticular set of circumstances, shall not affect the validity of the remainingportions of this Agreement or of their valid application to any other set ofcircumstances. All of said sections, subsections, sentences, clauses and wordsare inserted conditionally on being valid in law; and in the event that one ormore of the sections, subsections, sentences, clauses or words contained hereinshall be deemed invalid, this Agreement shall be construed as if such invalidsections, subsections, sentences, clauses or words had not been inserted. In theevent that any part of this Agreement shall be held to be unenforceable orinvalid, the remaining parts of this Agreement shall nevertheless continue to be



valid and enforceable as though the invalid portions had not been a part hereof.In addition, the parties acknowledge (i) that this Agreement has been fullynegotiated by and between the parties in good faith and is the result of thejoint efforts of both parties, (ii) that both parties have been provided withthe opportunity to consult with legal counsel regarding its terms, conditionsand provisions and (iii) that regardless of whether or not either party haselected to consult with legal counsel, it is the intent of the parties that inno event shall the terms, conditions or provisions of this Agreement beconstrued against either party as the drafter of this Agreement.

26. Execution by Lessee.--------------------

The party or parties executing this Agreement on behalf of the Lesseewarrant(s) and represent(s): (i) that such executing party (or parties) has (orhave) complete and full authority to execute this Agreement on behalf of Lessee;(ii) that Lessee shall fully perform its obligations hereunder.

27. Assumption Agreements and Covenants.-----------------------------------

This Agreement is subject and subordinate to the main Building leasegoverning the Facility, under which Lessor is bound as tenant; and theprovisions of the main lease, other than as to the payment of rent or othermonies, are incorporated into this Agreement as if completely herein

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rewritten. Lessee shall comply with and be bound by all provisions of the mainlease except that the payment of rent shall be governed by the provisions ofthis Agreement, and Lessee shall indemnify and hold Lessor harmless from andagainst any claim or liability under the main lease of Lessor arising fromLessee's breach of the Main Lease or this Agreement. Lessor covenants andwarrants that the use of the Premises as a business office is consistent withand does not violate the terms of the main lease.

28. Covenant and Conditions.------------------------

Each term, provision and obligation of this Agreement to be performed byLessee shall be construed as both a covenant and condition.

29. Entire Agreement.-----------------

This Agreement embodies the entire understandings between the partiesrelative to its subject matter, and shall not be modified, changed or altered inany respect except in writing signed by all parties.



30. Counterparts.-------------

This Agreement may be executed in two or more counterparts, each of whichshall be deemed to be an original, but all of which together shall constituteone and the same instrument.

IN WITNESS WHEREOF, Lessor and Lessee have executed this Agreement as ofthe date first above written.

ALLIANCE Business Centers

ALLIANCE 8150 Leesburg, Inc.

By: /s/ CHERI REID-----------------------------------------------

Cheri Reid - Area General Manager

LESSEE: Litronic, Inc.(If a corporation)

By: /s/ AUTHORIZED SIGNATORY-----------------------------------

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Title: Vice President[Corporate Seal]

LESSEE:(If an individual or partnership)

By: _____________________________________

By: _____________________________________

EXHIBIT "A"

. Furnished Private Office

. Furnished, Decorated Reception Room with Professional Receptionist

. Personalized Telephone Answering During Office Hours

. 24 hour Voicemail

. 12 hours of Conference Room or private furnished offices, subject to prior



scheduling and use by other lessees

. Corporate Identity on Lobby Directory where Available

. Complete Mail Room Facility

. Receipt of Mail and Packages

. Complete Kitchen Facilities with Coffee Machine

. Utilities and Maintenance

. HVAC During Normal Business Hours

. Janitorial Services

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. 8 hours per month courtesy use of other ALLIANCE Business Centersaffiliated facilities. Locations subject to current affiliation andavailability.

. 24 hour Access/7 days per week

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EXHIBIT "B" OPERATING STANDARDS

1. Lessees and their guests will conduct themselves in a businesslike manner;proper attire will be worn at all times; and the noise level will be keptto a level so as not to interfere with or annoy other Lessees.

2. Lessee shall not provide or offer to provide any services to Lessor'scustomers if such services are available from Lessor.

3. Lessee will not affix anything to the walls of the Premises without theprior written consent of the Lessor.

4. Lessee will not prop open any corridor doors, exit doors or doorsconnecting corridors during or after business hours.

5. Lessees using public areas may only do so with the consent of the Lessor,and those areas must be kept neat and attractive at all times.

6. Lessee will not conduct any activity within the Premises, Executive Suiteor Building, which in the sole judgment of the Landlord will createexcessive traffic or is inappropriate to the executive office suiteenvironment.



7. Lessee may not conduct business in the corridors or any other areas exceptin its designated offices or conference rooms without the written consentof Lessor.

8. All corridors, halls, elevators and stairways shall not be obstructed byLessee or used for any purpose other than normal egress and ingress.

9. No advertisement, identifying signs or other notices shall be inscribed,painted or affixed on any part of the corridors, doors, or public areas.

10. Without Lessor's specific prior written permission, Lessee is not permittedto place "mass market", direct mail or advertising (i.e. newspaper,classified advertisements, yellow pages, billboards) using Lessor'sassigned telephone number or take any such action that would generate aexcessive of incoming calls.

11. Lessee shall not solicit clients of Lessor or and their employees in theBuilding without first obtaining Lessor's prior written approval.

12. Immediately following Lessee's use of conference room space and/oraudio/visual equipment, Lessee shall clean up and return the space andequipment to the state

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and condition it was in prior to Lessee's use. If not, Lessor may chargeLessee for any other expenses required to restore the conference spaceand/or equipment to its original condition.

13. Lessor must be notified in writing if Lessee desires to utilize theconference room or other common areas of the Executive Suite during eveningor weekend hours. Lessor may deny the Lessee access if the desired usageis inappropriate and may disrupt normal operations.

14. Lessee shall not, without Lessor's written consent, store or operate anycomputer (except a desktop/laptop computer or fax machine) or any otherlarge business machines, reproduction equipment, heating equipment, stove,speaker phones, radios, stereo equipment or other mechanical amplificationequipment, refrigerator or coffee equipment, or conduct a mechanicalbusiness, do any cooking, or ally to be used on the Premises oil, burningfluids, gasoline, kerosene for heating, warming or lighting. No articledeemed extra hazardous on account of fire or any explosives shall bebrought into said Premises or Facility. No offensive gases, odors onliquids shall be permitted.

15. Lessee will bring no animals into the Premises or Facility except for thoseassisting disabled individuals.

16. Lessor shall not remove furniture fixtures or decorative material from



offices or common areas without the written consent of Lessor.

17. Lessee shall not make any additional copies of any Lessor issued keys. Allkeys and security cards are the property of Lessor and must be returnedupon request or by the close of business on the expiration or soonertermination of the Agreement term. Any lost or unreturned keys or cardsshall incur a $25.00 per item charge and the cost to re-key the office.

18. Lessee shall not smoke nor allow smoking in any area of the Facility,including the Premises, and shall comply with all governmental regulationsand ordinances concerning smoking.

19. Lessee shall not allow more than three visitors in the reception lobby ofthe Premises at any one time.

20. Lessee's parking rights (if any) are defined by Lessor's Agreement with theowner of the Building. Landlord reserves the right to modify parkingarrangements if required to do so by Building management.

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21. Lessee shall cooperate and be courteous with all other occupants of theFacility and Lessor's staff and personnel. Lessor reserves the right tomake such other reasonable rules and regulations as in its judgment mayfrom time to time be needed for the safety, care, appropriate operation andcleanliness of the Facility.

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EXHIBIT 10.17

AIRPORT BUS. CENTER

Dated: December 4, 1997----------------

1. BASIC LEASE TERMS. For purposes of this Lease, the following terms have thefollowing definitions and meanings:

(a) LANDLORD: Airport Industrial Complex, a California Limited Partnership------------------------------------------------------------

Landlord's Address (For Notices):17755 Sky Park East, Ste 100,------------------------------------Irvine, CA 92614------------------------------------or such other place as Landlord may from time to time designate by noticeto Tenant with a copy to Koll Management Services, P.O. Box 1980, NewportBeach, California 92660.

(b) Tenant: Litronic Industries, Inc., a California Corporation---------------------------------------------------

TENANT'S TRADE NAME: Litronic--------

TENANT'S ADDRESS FOR NOTICES (PREMISES):17895 Sky Park Circle, Suite A------------------------------Irvine. CA 92614 Attention: Kris Shah------------------------------ ---------

(c) PREMISES: Suite(s) A of building 2401 (the "Building") of AIRPORT BUS.- ---- ------------

CENTER (the "Project"), located in the City of Irvine ("City"), County of------ ------Orange ("County"), State of California ('State") as shown on Exhibit "A-I".------ ----------The Premises are depicted on Exhibit "A-II" and contain approximately 1,800

-----Rentable Square Feet (subject to adjustment as provided in this Lease).

(d) TENANT'S SHARE: 0.2%----

(e) TERM: 18 Lease Months and 0 Days.-- -

(f) COMMENCEMENT DATE: January 1, 1998.



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

(g) EXPIRATION DATE: June 30, 1999.-------------

(h) INITIAL MONTHLY BASE RENT: $1,476.00, subject to adjustment as provided in---------

Exhibit "B" and as otherwise provided in this Lease.

(i) MONTHLY OPERATING EXPENSE CHARGE: $54.00, subject to adjustment as------

provided in Exhibit "B" and as set forth in Paragraph 6.

(j) SECURITY DEPOSIT: $1,655.00.---------

(k) NON-REFUNDABLE CLEANING FEE PORTION OF SECURITY DEPOSIT: $125.00-------

(l) PERMITTED USE: General office for computer programming and installation of-----------------------------------------------------------

computer chips and no other use without the express written consent of--------------Landlord, which consent Landlord may withhold in its sole and absolutediscretion.

(m) BROKER(S): Dave Desner, CB Commercial.--------------------------

(n) GUARANTOR(S): None----

(o) INTEREST RATE: The greater of ten percent (10%) per annum or two percent(2%) in excess of the prime lending or reference rate of Wells Fargo BankN.A. or any successor bank in effect on the twenty-fifth (25th) day of thecalendar month immediately prior to the event giving rise to the InterestRate imposition; provided, however, the Interest Rate will in no eventexceed the maximum interest rate permitted to be charged by applicablelaw.

(p) EXHIBITS: A-l through H, inclusive, which Exhibits are attached to thisLease and incorporated herein by this reference.

This Paragraph 1 represents a summary of the basic terms and definitions of thisLease. In the event of any inconsistency between the terms contained in thisParagraph 1 and any specific provision of this Lease, the terms of the morespecific provision shall prevail.

2. PREMISES AND COMMON AREAS.



(a) PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases fromLandlord the Premises upon and subject to the terms, covenants and conditionscontained in this Lease to be performed by each party.

(b) TENANT'S USE OF COMMON AREAS. During the Term of this Lease, Tenant shallhave the nonexclusive right to use in common with all other occupants of theProject, the following common areas of the Project (collectively, the "CommonAreas"): the parking facilities of the Project which serve the Building, loadingand unloading areas, trash areas, roadways, sidewalks, walkways, parkways,driveways, landscaped areas, and similar areas and facilities situated withinthe Project and appurtenant to the Building which are not reserved for theexclusive use of any Project occupants.

(c) LANDLORD'S RESERVATION OF RIGHTS. Provided Tenant's use of and access tothe Premises is not interfered with in an unreasonable manner, Landlord reservesfor itself and for all other owner(s) and operator(s) of the Common Areas andthe balance of the Project, the right from time to time to: (i) install, use,maintain, repair, replace and relocate pipes, ducts, conduits, wires andappurtenant meters and equipment above the ceiling surfaces, below the floorsurfaces and within the walls of the Building; (ii) make changes to the designand layout of the Project, including, without limitation, changes to buildings,driveways, entrances, loading and unloading

2

areas, direction of traffic, landscaped areas and walkways, parking spaces andparking areas; and (iii) use or close temporarily the Common Areas, and/or otherportions of the Project while engaged in making improvements, repairs oralterations to the Building, the Project, or any portion thereof.

3. TERM. The term of this Lease ("Term") will be for the period designated inSubparagraph 1(e), commencing on the Commencement Date, and ending on theExpiration Date. Each consecutive twelve (12) month period of the Term of thisLease, commencing on the Commencement Date, will be referred to herein as a"Lease Year".

4. POSSESSION.

(a) DELIVERY OF POSSESSION. Landlord will deliver possession of the Premises toTenant in its current "as-is" condition with the addition of only those items ofwork described on Exhibit "C" which are to be completed by Landlord on or beforethe Commencement Date. If, for any reason not caused by Tenant, Landlord cannotdeliver possession of the Premises to Tenant on the Commencement Date, thisLease will not be void or voidable, nor will Landlord be liable to Tenant forany loss or damage resulting from such delay, but in such event, theCommencement Date and Tenant's obligation to pay rent will not commence untilLandlord delivers possession to Tenant. If the delay in possession is caused byTenant, then the Term and Tenant's obligation to pay rent will commence as ofthe Commencement Date even though Tenant does not yet have possession.



Notwithstanding the foregoing, Landlord will not be obligated to deliverpossession of the Premises to Tenant (but Tenant will be liable for rent ifLandlord can otherwise deliver the Premises to Tenant) until Landlord hasreceived from Tenant all of the following: (i) a copy of this Lease fullyexecuted by Tenant and the guaranty of Tenant's obligations under this Lease, ifany, executed by the Guarantor(s), (ii) the Security Deposit and the firstinstallment of Monthly Rase Rent; and (iii) copies of policies of insurance orcertificates thereof as required under Paragraph 19 of this Lease.

(b) CONDITION OF PREMISES. By taking possession of the Premises, Tenant will bedeemed to have accepted the Premises in its "as-is" condition on the date ofdelivery of possession and to have acknowledged that all work to be completed byLandlord as described on Exhibit "C" has been completed and there are noadditional items needing work or repair by Landlord. Tenant acknowledges thatneither Landlord nor any agent of Landlord has made any representation orwarranty with respect to the Premises, the Building, the Project or any portionsthereof or with respect to the suitability of same for the a conduct of Tenant'sbusiness and Tenant further acknowledges that Landlord will have no obligationto construct or complete any additional buildings or improvements within theProject. Landlord shall deliver the premises in a good working condition,including but not limited to the HVAC, electrical, plumbing and mechanicalsystems, etc. Tenant shall have (30) days after possession to notify Landlord.

3

5. RENT

(a) MONTHLY BASE RENT. Tenant agrees to pay Landlord the Monthly Base Rent forthe Premises (subject to adjustment as hereinafter provided) in advance on thefirst day of each calendar month during the Term without prior notice or demand,except that Tenant agrees to pay the Monthly Base Rent for the first month ofthe Term directly to Landlord concurrently with Tenant's delivery of theexecuted Lease to Landlord. All rent must be paid to Landlord, without anydeduction or offset, in lawful money of the United States of America, at theaddress designated by Landlord or to such other person or at such other place asLandlord may from time to time designate in writing. Monthly Base Rent will beadjusted during the Term of this Lease as provided in Exhibit "B".

(b) ADDITIONAL RENT. All amounts and charges to be paid by Tenant hereunder,including, without limitation, payments for Operating Expenses, insurance andrepairs, will be considered additional rent for purposes of this Lease, and theword "rent" as used in this Lease will include all such additional rent unlessthe context specifically or clearly implies that only Monthly Base Rent isintended.

(c) LATE PAYMENTS. Late payments of Monthly Base Rent and/or any item ofadditional rent will be subject to interest and a late charge as provided inSubparagraph 22(t) below.

6. OPERATING EXPENSES.



(a) OPERATING EXPENSES. Throughout the Term of this Lease, commencing on theCommencement Date, Tenant agrees to pay Landlord as additional rent inaccordance with the terms of this Paragraph 6, Tenant's Share of OperatingExpenses for the taxes and insurance for the Project and all costs and expensesof the operation, maintenance, repair, and replacement of the Project including,without limitation: (i) any form of real property tax assessment, license fee,license tax, business license fee, commercial rental tax, levy, charge,improvement bond or similar imposition of any kind or nature imposed by anyauthority having the direct power to tax, including any city, county, state orfederal government, or any school, agricultural lighting, drainage or otherimprovement or special assessment district thereof; (ii) any and all assessmentsunder any covenants, conditions and restrictions affecting the Project; (iii)water, sewer and other utility charges; (iv) costs of insurance obtained byLandlord pursuant to Paragraph 19 of the Lease; (v) waste disposal andjanitorial services; (vi) security; (vii) labor; (viii) management costsincluding, without limitation: (A) wages and salaries (and payroll taxes andsimilar charges) of property management employees, and (B) management officerental, supplies, equipment and related operating expenses and management fees;(ix) supplies, materials, equipment and tools including rental of personalproperty; (x) repair and maintenance of the structural portions of the buildingswith the Project, including the plumbing, heating, ventilating, air-conditioningand electrical systems installed or furnished by Landlord; (xi) maintenance,costs and upkeep of all parking and other Common Areas; (xii) depreciation on astraight line basis and rental of personal property used in maintenance;

4

(xiii) amortization on a straight line basis over the useful life [together withinterest at the Interest Rate on the unamortized balance] of all capitalizedexpenditures which are: (A) reasonably intended to produce a reduction inoperating charges or energy consumption; or (B) required under any governmentallaw or regulation that was not applicable to the Project at the time it wasoriginally constructed; or (C) for replacement of any Project equipment neededto operate the Project at the same quality levels as prior to the replacement;(xiv) gardening and landscaping; (xv) maintenance of signs (other than signs oftenants of the Project); (xvi) personal property taxes levied on or attributablelo personal property used in connection with the Common Areas; (xvii) reasonableaccounting, audit, verification, legal and other consulting fees; and (xviii)costs and expenses of repairs, resurfacing, repairing, maintenance, painting,lighting, cleaning, refuse removal, security and similar items, includingappropriate reserves

(b) DETERMINATION OF TENANT'S MONTHLY OPERATING EXPENSE CHARGE. Tenant'sMonthly Operating Expense Charge shall be determined as provided in Subparagraph1(i) of this Lease. If Tenant's Monthly Operating Expense Charge is scheduledfor each year of the Lease Term as shown on Exhibit "B", then Subparagraphs (c)and (d) below will not apply.



(c) ESTIMATE STATEMENT. Prior to the Commencement Date and on or about March1st of each subsequent calendar year during the Term of this Lease, Landlordwill endeavor to deliver to Tenant a statement ("Estimate Statement") whereinLandlord will estimate both the Operating Expenses and Tenant's MonthlyOperating Expense Charge for the then current calendar year. Tenant agrees topay Landlord, as additional rent, Tenant's estimated Monthly Operating ExpenseCharge each month thereafter, beginning with the next installment of rent due,until such time as Landlord issues a revised Estimate Statement or the EstimateStatement for the succeeding calendar year; except that, concurrently with theregular monthly rent payment next due following the receipt of each suchEstimate Statement, Tenant agrees to pay Landlord an amount equal to one monthlyinstallment of Tenant's estimated Monthly Operating Expense Charge (less anyapplicable Operating Expenses already paid) multiplied by the number of monthsfrom January, in the current calendar year, to the month of such rent paymentnext due, all months inclusive. If at any time during the Term of this Lease,but not more often than quarterly, Landlord reasonably determines thatTenant's's share of Operating Expenses for the current calendar year will begreater than the amount set forth in the then current Estimate Statement,Landlord may issue a revised Estimate Statement and Tenant agrees to payLandlord, within ten (10) days of receipt of the revised Estimate Statement, thedifference between the amount owed by Tenant under such revised EstimateStatement and the amount owed by Tenant under the original Estimate Statementfor the portion of the then current calendar year which has expired. ThereafterTenant agrees to pay Tenant's Monthly Operating Expense Charge based on suchrevised Estimate Statement until Tenant receives the next calendar year'sEstimate Statement or a new revised Estimate Statement for the current calendaryear.

(d) ACTUAL STATEMENT. By March 1st of each calendar year during the Term ofthis Lease, Landlord will also endeavor to deliver to Tenant a statement("Actual Statement") which states Tenant's Share of the actual OperatingExpenses for the preceding calendar year. If the

5

Actual Statement reveals that Tenant's Share of the actual Operating Expenses ismore than the total Additional Rent paid by Tenant for Operating Expenses onaccount of the preceding calendar year, Tenant agrees to pay Landlord thedifference in a lump sum within ten (10) days of receipt of the ActualStatement. If the Actual Statement reveals that Tenant's Share of the actualOperating Expenses is less than the Additional Rent paid by Tenant for OperatingExpenses on account of the preceding calendar year, Landlord will credit anyoverpayment toward the next monthly installment(s) of Tenant's Share of theOperating Expenses due under this Lease.

(e) MISCELLANEOUS. Any delay or failure by Landlord in delivering any EstimateStatement or Actual Statement pursuant to this Paragraph 6 will not constitute awaiver of its right to require an increase in rent nor will it relieve Tenant ofits obligations pursuant to this Paragraph 6, except that Tenant will not be



obligated to make any payments based on such Estimate Statement or ActualStatement unless ten (10) days after receipt of such Estimate Statement orActual Statement. If Tenant does not object to any Estimate Statement or ActualStatement within thirty (30) days after Tenant receives any such statement, suchstatement will be deemed final and binding on Tenant. Even though the Term hasexpired and Tenant has vacated the Premises, when the final determination ismade of Tenant's Share of the actual Operating Expenses for the year in whichthis Lease terminates, Tenant agrees to promptly pay any increase due over theestimated expenses paid and, conversely, any overpayment made in the event saidexpenses decrease shall promptly be rebated by Landlord to Tenant. Suchobligation will be a continuing one which will survive the expiration ortermination of this Lease. Prior to the expiration or sooner termination of theLease Term and Landlord's acceptance of Tenant's surrender of the Premises,Landlord will have the right to estimate the actual Operating Expenses for thethen current Lease Year and to collect from Tenant prior to Tenant's surrenderof the Premises, Tenant's Share of any excess of such actual Operating Expensesover the estimated Operating Expenses paid by Tenant in such Lease Year.

7. SECURITY DEPOSIT AND CLEANING FEE. Upon Tenant's execution of this Lease,Tenant will deposit with Landlord the Security Deposit designated inSubparagraph 1(j). The Security Deposit will be held by Landlord as security forthe full and faithful performance by Tenant of all of the terms, covenants, andconditions of this Lease to be kept and performed by Tenant during the Termhereof. The Security Deposit is not, and may not be construed by Tenant toconstitute, rent for the last month or any portion thereof. If Tenant defaultswith respect to any provisions of this Lease including, but not limited to, theprovisions relating to the payment of rent or additional rent, Landlord may (butwill not be required to) use, apply or retain all or any part of the SecurityDeposit for the payment of any rent or any other sum in default, or for thepayment of any other amount which Landlord may spend by reason of Tenant'sdefault or to compensate Landlord for any loss or damage which Landlord maysuffer by reason of Tenant's default. If any portion to the Security Deposit isso used or applied, Tenant agrees, within ten (10) days after Landlord's writtendemand therefor, to deposit cash with Landlord in an amount sufficient torestore the Security Deposit to its original amount and Tenant's failure to doso shall constitute a default under this Lease. Landlord is not required to keepTenant's Security Deposit separate from its general funds, and Tenant isnot

6

entitled to interest on such Security Deposit. If Tenant is not in default atthe expiration or termination of this Lease, Landlord will return the SecurityDeposit to Tenant, less the non-refundable Cleaning Fee portion designated inSubparagraph 1(k). Landlord's obligations with respect to the Security Depositare those of a debtor and not of a trustee.

8. USE.



(a) TENANT'S USE OF THE PREMISES. The Premises may be used for the use or usesset forth in Subparagraph 1(1) only, and Tenant will not use or permit thePremises to be used for any other purpose without the prior written consent ofLandlord, which consent Landlord may not unreasonably withhold. Nothing in thisLease will be deemed to give Tenant any exclusive right to such use in theProject.

(b) COMPLIANCE. At Tenant's sole cost and expense, Tenant agrees to procure,maintain and hold available for Landlord's inspection, all governmental licensesand permits required for the proper and lawful conduct of Tenant's business fromthe Premises, it any. Tenant agrees not to use, alter or occupy the Premises orallow the Premises to be used, altered and occupied in violation of, and Tenant,at its sole cost and expense, agrees to use and occupy the Premises, and causethe Premises to be used and occupied, in compliance with: (i) any and all laws,statutes, zoning restrictions, ordinances, rules, regulations, orders andrulings now or hereafter in force and any requirements of any insurer, insuranceauthority or duly constituted public authority having jurisdiction over thePremises, the Building or the Project now or hereafter in force, (ii) therequirements of the Board of Fire Underwriters and any other similar body, (iii)the Certificate of Occupancy issued for the Building, and (iv) any recordedcovenants, conditions and restrictions and similar regulatory agreements, ifany, which affect the use, occupation or alteration of the Premises, theBuilding and/or the Project. Tenant agrees to comply with the Rules andRegulations referenced in Paragraph 28 below. Tenant agrees not to do or permitanything to be done in or about the Premises which will in any manner obstructor interfere with the rights of other tenants or occupants of the Project, orinjure or unreasonably annoy them, or use or allow the Premises to be used forany unlawful or unreasonably objectionable purpose. Tenant agrees not to placeor store any articles or materials outside of the Premises or to cause, maintainor permit any nuisance or waste in, on, under or about the Premises or elsewherewithin the Project. Tenant shall not use or allow the Premises to be used forlodging, bathing or the washing of clothes.

(c) HAZARDOUS MATERIALS. Except for ordinary and general office supplies, suchas copier toner, liquid paper, glue, ink and common household cleaning materials(some or all of which may constitute "Hazardous Materials" as defined in thisLease), Tenant agrees not to cause or permit any Hazardous Materials to bebrought upon, stored, used, handled, generated, released or disposed of on, in,under or about the Premises, the Building, the Common Areas or any other portionof the Project by Tenant, its agents, employees, subtenants, assignees,licensees, contractors or invitees (collectively, "Tenant's Parties"), withoutthe prior written consent of Landlord, which consent Landlord may withhold inits sole and absolute discretion. Concurrently

7

with the execution of this Lease, Tenant agrees to complete and deliver toLandlord an Environmental Questionnaire in the form of Exhibit "G" attachedhereto. Upon the expiration or earlier termination of this Lease, Tenant agrees



to promptly remove from the Premises, the Building and the Project, at its solecost and expense, any and all Hazardous Materials, including any equipment orsystems containing Hazardous Materials which are installed, brought upon,stored, used, generated or released upon, in, under or about the Premises, theBuilding and/or the Project or any portion thereof by Tenant or any of Tenant'sParties. To the fullest extent permitted by law, Tenant agrees to promptlyindemnity, protect, defend and hold harmless Landlord and Landlord's partners,officers, directors, employees, agents, successors and assigns (collectively,"Landlord indemnified Parties") from and against any and all claims, damages,judgments, suits, causes of action, losses, liabilities, penalties, fines,expenses and costs (including, without limitation, clean-up, removal,remediation and restoration costs, sums paid in settlement of claims, attorneys'fees, consultant fees and expert fees and court costs) which arise or resultfrom the presence of Hazardous Materials on, in, under or about the Premises,the Building or any other portion of the Project and which are caused orpermitted by Tenant or any of Tenant's Parties. Tenant agrees to promptly notifyLandlord of any release of Hazardous Materials in the Premises, the Building orany other portion of the Project which Tenant becomes aware of during the Termof this Lease, whether caused by Tenant or any other persons or entities. In theevent of any release of Hazardous Materials caused or permitted by Tenant or anyof Tenant's Parties, Landlord shall have the right, but not the obligation, tocause Tenant to immediately take all steps Landlord deems necessary orappropriate to remediate such release and prevent any similar future release tothe satisfaction of Landlord and Landlord's mortgagee(s). At all times duringthe Term of this Lease, Landlord will have the right, but not the obligation, toenter upon the Premises to inspect, investigate, sample and/or monitor thePremises to determine if Tenant is in compliance with the terms of this Leaseregarding Hazardous Materials. As used in this Lease, the term "HazardousMaterials" shall mean and include any hazardous or toxic materials, substancesor wastes as now or hereafter designated under any law, statute, ordinance,rule, regulation, order or ruling of any agency of the State, the United StatesGovernment or any local governmental authority, including, without limitation,asbestos, petroleum, petroleum hydrocarbons and petroleum based products, ureaformaldehyde foam insulation, polychlorinated biphenyls ("PCBs"), and freon andother chlorofluorocarbons. The provisions of this Subparagraph 8(c) will survivethe expiration or earlier termination of this Lease.

(d) REFUSE AND SEWAGE. Tenant agrees not to keep any trash, garbage, waste orother refuse on the Premises except in sanitary containers and agrees toregularly and frequently remove same from the Premises. Tenant shall keep allcontainers or other equipment used for storage of such materials in a clean andsanitary condition. Tenant shall properly dispose of all sanitary sewage andshall not use the sewage disposal system for the disposal of anything exceptsanitary sewage. Tenant shall keep the sewage disposal system free of allobstructions and in good operating condition. If the volume of Tenant's trashbecomes excessive in Landlord's judgment, Landlord shall have the right tocharge Tenant for additional trash disposal services and/or to

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require that Tenant contract directly for additional trash disposal services atTenant's sole cost and expense.

9. NOTICES. Any notice required or permitted to be given hereunder must be inwriting and may be given by personal delivery (including delivery by overnightcourier or an express mailing service) or by mail, if sent by registered orcertified mail. Notices to Tenant shall be sufficient if delivered to Tenant atthe Premises and notices to Landlord shall be sufficient if delivered toLandlord at the address designated in Subparagraph 1(a). Either party mayspecify a different address for notice purposes by written notice to the other,except that the Landlord may in any event use the Premises as Tenant's addressfor notice purposes.

10. BROKERS. The parties acknowledge that the broker(s) who negotiated thisLease are stated in Subparagraph 1(m) Landlord and Tenant each agree to promptlyindemnify, protect, defend and hold harmless the other from and against any andall claims, damages, judgments, suits, causes of action, losses, liabilities,penalties, fines, expenses and costs (including attorneys" fees and courtcosts) resulting from any breach by the indemnifying party of the foregoingrepresentation, including, without limitation, any claims that may be assertedby any broker, agent or finder undisclosed by the indemnifying party. Theforegoing mutual indemnity shall survive the expiration or earlier terminationof this Lease. Tenant agrees that Landlord will not recognize or compensate anythird party broker with regards to any renewals and/or expansions unless suchrenewal or expansion rights are included within this Lease at the time ofexecution by the parties and in Landlord's commission agreement with thebroker(s) specified in Subparagraph 1(m).

11. SURRENDER; HOLDING OVER.

(a) SURRENDER. The voluntary or other surrender of this Lease by Tenant, or amutual cancellation thereof, shall not constitute a merger, and shall, at theoption of Landlord, operate as an assignment to Landlord of any or all subleasesor subtenancies. Upon The expiration or earlier termination of this Lease,Tenant agrees to peaceably surrender the Premises to Landlord broom clean and ina state of good order, repair and condition, ordinary wear and tear and casuallydamage excepted, with all of Tenant's personal property and alterations removedfrom the Premises to the extent required under Paragraph 13 and all damagecaused by such removal repaired as required by Paragraph 13. The delivery ofkeys to any employee of Landlord or to Landlord's agent or any employee thereofalone will not be sufficient to constitute a termination of this Lease or asurrender of the Premises.

(b) HOLDING OVER. If Tenant holds over after the expiration or earliertermination of the Term, Landlord may, at its option, treat Tenant as a tenantat sufferance only, and evict Tenant immediately, or consent in writing to thecontinued occupancy by Tenant which shall be subject to all of the terms,covenants and conditions of this Lease, so far as applicable, including thepayment of Operating Expenses, except that the Monthly Base Rent for any month



or partial month during which Tenant holds over shall be equal to one hundredfifty percent

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(150%) of the Monthly Base Rent in effect under this Lease immediately prior tosuch holdover. Acceptance by Landlord of rent alter such expiration or earliertermination will not result in a renewal of this Lease. If Tenant fails tosurrender the Premises upon the expiration of this Lease in accordance with theterms of this Paragraph 11 despite demand to do so by Landlord, Tenant agrees topromptly indemnify, protect, defend and hold Landlord harmless from all claims,damages, judgments, suits, causes of action, losses, liabilities, penalties,fines, expenses and costs (including attorneys" fees and costs), including,without limitation, costs and expenses incurred by Landlord in returning thePremises to the condition in which Tenant was to surrender it and claims made byany succeeding tenant founded on or resulting from Tenant's failure to surrenderthe Premises. The provisions of this Subparagraph 11(b) will survive theexpiration or earlier termination of this Lease.

12. TAXES ON TENANT'S PROPERTY. Tenant agrees to pay before delinquency, alltaxes and assessments (real and personal) levied against Tenant's businessoperations or any personal property, improvements, alterations, trade fixturesor merchandise placed by Tenant in or about the Premises

13. ALTERATIONS. Tenant shall not make any alterations to the Premises or anyother aspect of the Project, without Landlord's prior written consent, whichconsent Landlord may withhold in its reasonable but subjective discretion. Allpermitted alterations must be performed in compliance with Landlord's standardrules and regulations regarding alterations. All alterations will become theproperty of Landlord and will remain upon and be surrendered with the Premisesat the end of the Term of this Lease; provided, however, Landlord may requireTenant to remove any or all alterations at the end of the Term of this Lease. IfTenant fails to remove by the expiration or earlier termination of this Leaseall of its personal property, or any alterations identified by Landlord forremoval, Landlord may, at its option, treat such failure as a hold-over pursuantto Subparagraph 11(b) above, and/or Landlord may (without liability to Tenantfor loss thereof) treat such personal property and/or alterations as abandonedand, at Tenant's sole cost and expense and in addition to Landlord's otherrights and remedies under this Lease, at law or in equity: (a) remove and storesuch items; and/or (b) upon ten (10) days" prior notice to Tenant, sell, discardor otherwise dispose of all or any such items at private or public sale for suchprice as Landlord may obtain or by other commercially reasonable means. Tenantshall be liable for all costs of disposition of Tenant's abandoned property andLandlord shall have no liability to Tenant with respect to any such abandonedproperty. Landlord agrees to apply the proceeds of any sale of any such propertyto any amounts due to Landlord under this Lease from Tenant (includingLandlord's attorneys" fees and other costs incurred in the removal, storageand/or sale of such items), with any remainder to be paid to Tenant.



14. REPAIRS.

(a) LANDLORD'S OBLIGATIONS. Landlord agrees to repair and maintain thestructural portions of the Building, including the foundations, bearing andexterior walls (excluding glass),

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subflooring and roof (excluding skylights), and the unexposed electrical,plumbing and sewer systems, including those portions of such systems which areoutside the Premises, gutters and downspouts on the Building and the heating,ventilating and air conditioning systems which serve the Premises, unless suchmaintenance and repairs are caused in part or in whole by the act, neglect oromission of any duty by Tenant, its agents, servants, employees or invitees, inwhich case Tenant will pay to Landlord, as additional rent, the reasonable costof such maintenance and repairs. The costs of maintenance and repairs performedby Landlord will be included in Operating Expenses. Except as provided in thisSubparagraph 14(a), Landlord has no obligation to alter, remodel, improve,repair, decorate or paint the Premises or any part thereof. Landlord will not beliable for any failure to make any such repairs or to perform any maintenanceunless such failure shall persist for an unreasonable time after written noticeof the need of such repairs or maintenance is given to Landlord by Tenant.Tenant will not be entitled to any abatement of rent and Landlord will not haveany liability by reason of any injury to or interference with Tenant's businessarising from the making of any repairs, alterations or improvements in or to anyportion of the Building or the Premises or in or to fixtures, appurtenances andequipment therein. Tenant waives the right to make repairs at Landlord's expenseunder any law, statute, ordinance, rule, regulation, order or ruling (including,without limitation, to the extent the Premises are located in California, theprovisions of California Civil Code Sections 1941 and 1942 and any successorstatutes or laws of a similar nature).

(b) TENANT'S OBLIGATIONS. Tenant agrees to keep, maintain and preserve thePremises in a state of condition and repair consistent with the Building and,when and if needed, at Tenant's sole cost and expense, to make all repairs tothe Premises and every part thereof including, without limitation, all walls,storefronts, floors, ceilings, interior and exterior doors and windows andfixtures and interior plumbing. Any such maintenance and repairs will beperformed by Landlord's contractor, or at Landlord's option, by such contractoror contractors as Tenant may choose from an approved list to be submitted byLandlord. Tenant agrees to pay all costs and expenses incurred in suchmaintenance and repair within seven (7) days after billing by such contractor orcontractors. If Tenant refuses or neglects to repair and maintain the Premisesproperty as required hereunder to the reasonable satisfaction of Landlord,Landlord, at any time following ten (10) days from the date on which Landlordmakes a written demand on Tenant to effect such repair and maintenance, mayenter upon the Premises and make such repairs and/or maintenance, and uponcompletion thereof, Tenant agrees to pay to Landlord as additional rent,Landlord's costs for making such repairs plus an amount not to exceed ten



percent (10%) of such costs for overhead, within ten (10) days of receipt fromLandlord of a written itemized bill therefor. Any amounts not reimbursed byTenant within such ten (10) day period will bear interest at the interest Rateuntil paid by Tenant.

15. LIENS. Tenant agrees not to permit any mechanic's, materialmen's or otherliens to be filed against all or any part of the Project, the Building or thePremises, nor against Tenant's leasehold interest in the Premises, by reason ofor in connection with any repairs, alterations, improvements or other workcontracted for or undertaken by Tenant or any other act or omission

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of Tenant or Tenant's agents, employees, contractors, licensees or invitees. AtLandlord's request, Tenant agrees to provide Landlord with enforceable,conditional and final lien releases (or other evidence reasonably requested byLandlord to demonstrate protection from liens) from all persons furnishing laborand/or materials at the Premises. Landlord will have the right at all reasonabletimes to post on the Premises and record any notices o/ non-responsibility whichit deems necessary for protection from such liens. If any such liens are filed,Tenant will, at its sole cost and expense, promptly cause such liens to bereleased of record or bonded so that it no longer affects title to the Project,the Building or the Premises. If Tenant fails to cause any such liens to be soreleased or bonded within ten (10) days after filing thereof, such failure willbe deemed a material breach by Tenant under this Lease without the benefit ofany additional notice or cure period described in Paragraph 22 below, andLandlord may, without waiving its rights and remedies based on such breach, andwithout releasing Tenant from any of its obligations, cause such liens to bereleased by any means it shall deem proper, including payment in satisfaction ofthe claims giving rise to such liens. Tenant agrees to pay to Landlord withinten (10) days after receipt of invoice from Landlord, any sum paid by Landlordto remove such liens, together with interest at the Interest Rate from the dateof such payment by Landlord.

16. ENTRY BY LANDLORD. Landlord and its employees and agents will at allreasonable times have the right to enter the Premises to inspect the same, toshow the Premises to prospective purchasers or tenants, to post notices ofnonresponsibility, and/or to repair the Premises as permitted or required bythis Lease. In exercising such entry rights, Landlord will endeavor to minimizeas reasonably practicable, the interference with Tenant's business, and willprovide Tenant with reasonable advance notice of any such entry (except inemergency situations). Landlord will at all times have and retain a key withwhich to unlock all doors in the Premises, excluding Tenant's vaults and safes.Tenant shall not alter any lock or install any new or additional locks or boltson any door of the Premises without Landlord's prior written consent and withoutproviding Landlord with a key to all such locks. Except in the case of the grossnegligence or willful misconduct of Landlord, any entry to the Premises obtainedby Landlord will not be construed or deemed to be a forcible or unlawful entryinto the Premises, or an eviction of Tenant from the Premises and Landlord will



not be unable to Tenant for any damages or losses resulting from any such entry.

17. UTILITIES AND SERVICES. Throughout the Term of this Lease, Tenant shall paydirectly to the utility company providing such service all costs for water, gas,heat, light, power, sewer, electricity, telephone and other services metered,chargeable or provided to the Premises. Landlord will not be liable to Tenantfor any failure to furnish any of the foregoing utilities and services if suchfailure is caused by all or any of the following: (i) accident, breakage orrepairs" (ii) strikes, lockouts or other labor disturbance or labor dispute ofany character; (iii) governmental regulation, moratorium or other governmentalaction or inaction; (iv) inability despite the exercise of reasonable diligenceto obtain electricity, water or fuel, or (v) any other cause beyond Landlord'sreasonable control. In addition, in the event of any stoppage or interruption ofservices or utilities, Tenant shall not be entitled to any abatement orreduction of

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rent (except as expressly provided in Subparagraphs 20(f) or 21(b) if suchfailure results from a damage or taking described therein), no eviction ofTenant will result from such failure and Tenant will not be relieved from theperformance of any covenant or agreement in this Lease because of such failure.In the event of any failure, stoppage or interruption thereof, Landlord agreesto diligently attempt to resume service promptly.

18. ASSUMPTION OF RISK AND INDEMNIFICATION.

(a) ASSUMPTION OF RISK. Tenant, as a material part other consideration toLandlord, agrees that neither Landlord nor any Landlord indemnified Parties (asdefined in Subparagraph 8(c) above) will be liable to Tenant for, and Tenantexpressly assumes the risk of and waives any and all claims it may have againstLandlord or any Landlord Indemnified Parties with respect to, (i) any and alldamage to property or injury to persons in, upon or about the Premises, theBuilding or the Project resulting from the act or omission (except for thegrossly negligent or intentionally wrongful act or omission) of Landlord, (ii)any such damage caused by other tenants or persons in or about the Building orthe Project, or caused by quasi-public work, (iii) any damage to propertyentrusted to employees of the Building, (iv) any loss of or damage to propertyby them or otherwise, or (v) any injury or damage to persons or propertyresulting from any casualty, explosion, falling plaster or other masonry orglass, steam, gas, electricity, water or rain which may leak from any part ofthe Building or any other portion of the Project or from the pipes, appliancesor plumbing works therein or from the root, street or subsurface or from anyother place, or resulting from dampness. Neither Landlord nor any LandlordIndemnified Parties will be liable for consequential damages arising out of anyloss of the use of the Premises or any equipment or facilities therein by Tenantor any Tenant Parties (as defined in Subparagraph 8(c) above) or forinterference with light. Tenant agrees to give prompt notice to Landlord in caseof fire or accidents in the Premises or the Building, or of detects therein or



in the fixtures or equipment.

(b) INDEMNIFICATION. Tenant will be liable for, and agrees, to the maximumextent permissible under applicable law, to promptly indemnify, protect, defendand hold harmless Landlord and all Landlord Indemnified Parties, from andagainst, any and all claims, damages, judgments, suits, causes of action,losses, liabilities, penalties, fines, expenses and costs, including attorneys"fees and court costs (collectively, "Indemnified Claims"), arising or resultingfrom (i) any act or omission of Tenant or any Tenant Parties; (ii) the use ofthe Premises and Common Areas and conduct of Tenant's business by Tenant or anyTenant Parties, or any other activity, work or thing done, permitted or sufferedby Tenant or any Tenant Parties, in or about the Premises, the Building orelsewhere within the Project and/or (iii) any default by Tenant of anyobligations on Tenant's part to be performed under the terms of this Lease. Incase any action or proceeding is brought against Landlord or any Landlordindemnified Parties by reason of any such indemnified Claims, Tenant, uponnotice from Landlord, agrees to promptly defend the same at Tenant's sole costand expense by counsel approved in writing by Landlord, which approval Landlordwill not unreasonably withhold.

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(c) SURVIVAL; NO RELEASE OF INSURERS. Tenant's indemnification obligationsunder Subparagraph 18(b) will survive the expiration or earlier termination ofthis Lease Tenant's covenants, agreements and indemnification obligation inSubparagraphs 18(a) and 18(b) above, are not intended to and will not relieveany insurance carrier of its obligations under policies required to be carriedby Tenant pursuant to the provisions of This Lease.

19. INSURANCE.

(a) TENANT'S INSURANCE. On or before the earlier to occur of (i) theCommencement Date, or (ii) the date Tenant commences any work of any type in thePremises pursuant to this Lease (which may be prior to the Commencement Date),and continuing throughout the entire Term hereof and any other period ofoccupancy, Tenant agrees to keep in full force and effect, at its sole cost andexpense, the insurance specified on Exhibit "F" attached hereto. Landlordreserves the right to require any other form or forms of insurance as Tenant orLandlord or any mortgagees of Landlord may reasonably require from time to timein form, in amounts, and for insurance risks against which, a prudent tenantwould protect itself, but only to the extent coverage for such risks and amountsare available in the insurance market at commercially acceptable rates Landlordmakes no representation that the limits of liability required to be carried byTenant under the terms of this Lease are adequate to protect Tenant's interestsand Tenant should obtain such additional insurance or increased liability limitsas Tenant deems appropriate.

(b) SUPPLEMENTAL TENANT INSURANCE REQUIREMENTS. All policies must be in a formreasonably satisfactory to Landlord and issued by an insurer admitted to dobusiness in the State. All policies must be issued by insurers with a



policyholder rating of "A" and a financial rating of "X" in the most recentversion of Best's Key Rating Guide. All policies must contain a requirement tonotify Landlord (and Landlord's property manager and any mortgagees or groundlessors of Landlord who are named as additional insureds, if any) in writing notless than thirty (30) days prior to any material change, reduction in coverage,cancellation or other termination thereof. Tenant agrees to deliver to Landlord,as soon as practicable after placing the required insurance, but in any eventwithin the time frame specified in Subparagraph 19(a) above, certificate(s) ofinsurance and/or if required by Landlord, certified copies of each policyevidencing the existence of such insurance and Tenant's compliance with theprovisions of this Paragraph 19. Tenant agrees to cause replacement policies orcertificates to be delivered to Landlord not less than thirty (30) days prior tothe expiration of any such policy or policies. If any such initial orreplacement policies or certificates are not furnished within the time(s)specified herein, Landlord will have the right, but not the obligation, toobtain such insurance as Landlord deems necessary to protect Landlord'sinterests at Tenant's expense. Tenant's insurance under Subparagraphs 19(a)(iii)and (iv) must name Landlord and Landlord's property manager (and at Landlord'srequest, Landlord's mortgagees and ground lessors of which Tenant has beeninformed in writing) as additional insureds and must also contain a provisionthat the insurance afforded by such policy is primary insurance and any

14

insurance carried by Landlord and Landlord's property manager or Landlord'smortgagees or ground lessors, if any, will be excess over and non-contributingwith Tenant's insurance.

(c) WAIVER OF SUBROGATION. Tenant's property insurance shall contain a clausewhereby the insurer waives all rights of recovery by way of subrogation againstLandlord. Tenant shall also obtain and furnish evidence to Landlord of thewaiver by Tenant's worker's compensation insurance carrier of all rights ofrecovery by way of subrogation against Landlord.

20. DAMAGE OR DESTRUCTION.

(a) PARTIAL DESTRUCTION. If the Premises or the Building are damaged by fire orother casualty to an extent not exceeding twenty-five percent (25%) of the fullreplacement cost thereof and Landlord's contractor reasonably estimates in awriting delivered to Landlord and Tenant that the damage thereto may berepaired, reconstructed or restored to substantially its condition immediatelyprior to such damage within one hundred eighty (180) days from the date of suchcasualty, and Landlord will receive insurance proceeds sufficient to cover thecosts of such repairs reconstruction and restoration (including proceeds fromTenant and/or Tenants insurance which Tenant is required to deliver to Landlordpursuant to Subparagraph 20(d) below to cover Tenant s obligation for the costsof repair, reconstruction and restoration of any portion of the tenantimprovements and any alterations for which Tenant is responsible under thisLease) then Landlord agrees to commence and proceed diligently with the work of



repair, reconstruction and restoration and this Lease will continue in fullforce and effect.

(b) SUBSTANTIAL DESTRUCTION. Any damage or destruction to the Premises or theBuilding which Landlord is not obligated to repair pursuant to Subparagraph20(a) above will be deemed a substantial destruction. In the event of asubstantial destruction, Landlord may elect to either: (i) repair reconstructand restore the portion of the Building or the Premises damaged by such casualtyin which case this Lease will continue in full force and effect, subject toTenant's termination right contained in Subparagraph 20(c) below; or (ii)terminate this Lease effective as of the date of Tenant's receipt of Landlord selection to so terminate.

(c) TERMINATION RIGHTS. It Landlord elects to repair, reconstruct and restorepursuant to Subparagraph 20(b)(i) hereinabove, and if Landlord's contractorestimates that as a result of such damage, Tenant cannot be given reasonable useof and access to the Premises within two hundred forty (240) days after the dateof such damage then either Landlord or Tenant may terminate this Lease effectiveupon delivery of written notice to the other within ten (10) days after Landlorddelivers notice to Tenant of its election to so repair reconstruct or restore;provided, however, Tenant shall have no right to terminate this Lease ifLandlord can relocate Tenant to other comparable Premises in the Building or theProject within one hundred eighty (180) days after the date of such damage.

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(d) TENANTS COSTS AND INSURANCE PROCEEDS. In the event of any damage ordestruction of all or any part of the Premises, Tenant agrees to immediately (i)notify Landlord thereof, and (ii) deliver to Landlord all property insuranceproceeds received by Tenant with respect to any tenant improvements installed byor at the cost of Tenant and any alterations , but excluding proceeds for Tenants furniture, fixtures, equipment and other personal property whether or not thisLease is terminated as permitted in this Paragraph 20 and Tenant hereby assignsto Landlord all rights to receive such insurance proceeds. If for any reason(including Tenants failure to obtain required insurance) Tenant fails to receiveinsurance proceeds covering the full replacement cost of any tenant improvementsand any alterations which are damaged, Tenant will be deemed to have self-insured the replacement cost of such items, and upon any damage or destructionthereto Tenant agrees to immediately pay to Landlord the full replacement costof such items less any insurance proceeds actually received by Landlord fromLandlord's or Tenant's insurance with respect to such items.

(e) ABATEMENT OF RENT. In the event of any damage, repair reconstruction and/orrestoration described in this Paragraph 20, rent will be abated or reduced, asthe case may be, from the date of such casualty in proportion to the degree towhich Tenant s use of the Premises is impaired during such period of repairuntil such use is restored. Except for abatement of rent as providedhereinabove, Tenant will not be entitled to any compensation or damages for lossof, or interference with, Tenant's business or use or access of all or any part



of the Premises or for lost profits or any other consequential damages of anykind or nature, which result from any such damage, repair, reconstruction orrestoration.

(f) DAMAGE NEAR END OF TERM. Landlord and Tenant shall each have the right toterminate this Lease if any damage to the Premises or the Building occurs duringthe last twelve (12) months of the Term of this Lease where Landlord scontractor estimates in a writing delivered to Landlord and Tenant that therepair, reconstruction or restoration of such damage cannot be completed withinsixty (60) days after the date of such casualty. If either party desires toterminate this Lease under this Subparagraph (f), it shall provide writtennotice to the other party of such election within ten (10) days after receipt ofLandlord's contractor's repair estimates.

(g) WAIVER OF TERMINATION RIGHT. Landlord and Tenant agree that the foregoingprovisions of this Paragraph 20 are to govern their respective rights andobligations in the event of any damage or destruction and supersede and are inlieu of the provisions of any applicable law, statute, ordinance, rule,regulation, order or ruling now or hereafter in force which provide remedies fordamage or destruction of leased premises (including, without limitation, to theextent the Premises are located in California, the provisions of CaliforniaCivil Code Section 1932, Subsection 2, and Section 1933, Subsection 4 and anysuccessor statute or laws of a similar nature).

21. EMINENT DOMAIN.

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(a) SUBSTANTIAL TAKING. If the whole of the Premises or such part hereof asshall substantially interfere with Tenant s use and occupancy of the Premises,as contemplated by this Lease, is taken for any public or quasi-public purposeby any lawful power or authority by exercise of the right of appropriation,condemnation or eminent domain, or sold to prevent such taking, either partywill have the right to terminate this Lease effective as of the date possessionis required to be surrendered to such authority.

(b) PARTIAL TAKING; ABATEMENT OF RENT. In the event of a taking of a portion ofthe Premises which does not substantially interfere with Tenant s use andoccupancy of the Premises including any temporary taking of ninety (90) days orless, then, neither party will have the right to terminate this Lease andLandlord will thereafter proceed to make a functional unit of the remainingportion of the Premises (but only to the extent Landlord receives proceedstherefor from the condemning authority), and rent will be abated with respect tothe part of the Premises which Tenant is deprived of on account of such taking.Notwithstanding the immediately preceding sentence to the contrary , if any partof the Building or the Project is taken (whether or not such takingsubstantially interferes with Tenant's use of the Premises), Landlord mayterminate this Lease upon thirty (30) days' prior written notice to Tenant ifLandlord also terminates the leases of the other tenants of the Building which



are leasing comparably sized space for comparable lease terms.

(c) CONDEMNATION AWARD. In connection with any taking of the Premises or theBuilding Landlord will be entitled to receive the entire amount of any awardwhich may be made or given in such taking or condemnation, without deduction orapportionment for any estate or interest of Tenant, it being expresslyunderstood and agreed by Tenant that no portion of any such award will beallowed or paid to Tenant for any so-called bonus or excess value of this Lease,and such bonus or excess value will be the sole property of Landlord. Tenantagrees not to assert any claim against Landlord or the taking authority for anycompensation because of such taking (including any claim for bonus or excessvalue of this Lease); provided, however, if any portion of the Premises istaken, Tenant will have the right to recover from the condemning authority (butnot from Landlord) any compensation as may be separately awarded or recoverableby Tenant for the taking of Tenant's furniture, fixtures, equipment and otherpersonal property within the Premises, for Tenant's relocation expenses, and forany loss of goodwill or other damage to Tenant's business by reason of suchtaking.

22. DEFAULTS AND REMEDIES.

(a) DEFAULTS. The occurrence of any one or more of the following events will bedeemed a default by Tenant:

(i) The abandonment or vacation of the Premises by Tenant

(ii) The failure by Tenant to make any payment of rent or additional rent or anyother payment required to be made by Tenant hereunder, as and when due, wheresuch failure

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continues for a period of three (3) days after written notice thereof fromLandlord to Tenant; provided, however that any such notice will be in lieu of,and not in addition to, any notice required under applicable law (including,without limitation, to the extent the Premises are located in California, theprovisions of California Code of Civil Procedure Section 1161 regarding unlawfuldetainer actions or any successor statute or law of a similar nature).

(iii) The failure by Tenant to observe or perform any of the express orimplied covenants or provisions of this Lease to be observed or performed byTenant, other than as specified in Subparagraph 22(a)(i) or (ii) above, wheresuch failure continues for a period of five (5) days after written noticethereof from Landlord to Tenant the provisions of any such notice will be inlieu of, and not in addition to, any notice required under applicable law(including, without limitation, to the extent the Premises are located inCalifornia, California Code of Civil Procedure Section 1161 regarding unlawfuldetainer actions and any successor statute or similar law). If the nature ofTenants default is such that more than five (5) days are reasonably required for



its cure, then Tenant will not be deemed to be in default if Tenant, withLandlord's concurrence, commences such cure within such five (5) day period andthereafter diligently prosecutes such cure to completion.

(iv) (A) The making by Tenant of any general assignment for the benefit ofcreditors; (B) the filing by or against Tenant of a petition to have Tenantadjudged a bankrupt or a petition for reorganization or arrangement under anylaw relating to bankruptcy (unless, in the case of a petition filed againstTenant, the same is dismissed within sixty (60) days); (C) the appointment of atrustee or receiver to take possession of substantially all of Tenant's assetslocated at the Premises or of Tenant's interest in this Lease, where possessionis not restored to Tenant within thirty (30) days; or (D) the attachment,execution or other judicial seizure of substantially all of Tenant s assetslocated at the Premises or of Tenant s interest in this Lease where such seizureis not discharged within thirty (30) days.

(b) LANDLORD'S REMEDIES; TERMINATION. In the event of any default by Tenant, inaddition to any other remedies available to Landlord at law or in equity underapplicable law (including without limitation to the extent the Premises arelocated in California, the remedies of Civil Code Section 1951.4 and anysuccessor statute or similar law), Landlord will have the immediate right andoption to terminate this Lease and all rights of Tenant hereunder. If Landlordelects to terminate this Lease then, to the extent permitted under applicablelaw Landlord may recover from Tenant: (i) the worth at the time of award of anyunpaid rent which had been earned at the time of such termination; plus (ii) theworth at the time of award of the amount by which the unpaid rent which wouldhave been earned after termination until the time of award exceeds the amount ofsuch rent loss that Tenant proves could have been reasonably avoided; plus (iii)the worth at the time of award of the amount by which the unpaid rent for thebalance of the Term after the time of award exceeds the amount of such rent lossthat Tenant proves could be reasonably avoided; plus (iv) any other amountnecessary to compensate Landlord for all the detriment proximately caused byTenant's failure to perform its

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obligations under this Lease or which, in the ordinary course of things, resultstherefrom including, but not limited to: attorneys" fees and costs; brokerscommissions; the costs of refurbishment, alterations, renovation and repair ofthe Premises, and removal (including the repair of any damage caused by suchremoval) and storage (or disposal) of Tenant's personal property, equipment,fixtures, alterations, the tenant improvements and any other items which Tenantis required under this Lease to remove, but does not remove, as well as theunamortized value of any free rent, reduced rent, free parking, reduced rateparking and any tenant improvement allowance or other costs or economicconcessions provided, paid, granted, or incurred by Landlord pursuant to thisLease. As used in Subparagraphs 22(b)(i) and (ii) above the "worth at the timeof award" is computed by allowing interest at the interest Rate. As used inSubparagraph 22(b)(iii) above, the "worth at the time of award" is computed by



discounting such amount at the discount rate of the Federal Reserve Bank of SanFrancisco at the time of award plus one percent (1%).

(c) LANDLORD S REMEDIES; RE-ENTRY RIGHTS. In the event of any default byTenant, in addition to any other remedies available to Landlord under thisLease, at law or in equity, Landlord will also have the right, with or withoutterminating this Lease, to re-enter the Premises and remove all persons andproperty from the Premises; such property may be removed and stored in a publicwarehouse or elsewhere and/or disposed of at the sole cost and expense of andfor the account of Tenant in accordance with the provisions of Paragraph 13 ofthis Lease or any other procedures permitted by applicable law. No re-entry ortaking possession of the Premises by Landlord pursuant to this Subparagraph22(c) will be construed as an election to terminate this Lease unless a writtennotice of such intention is given to Tenant or unless the termination thereof isdecreed by a court of competent jurisdiction.

(d) LANDLORD S REMEDIES; RE-LETTING. If Landlord does not elect to terminatethis Lease, Landlord may from time to time, without terminating this Lease,either recover all rent as it becomes due or relate the Premises or any partthereof on terms and conditions as Landlord in its sole and absolute discretionmay deem advisable with the right to make alterations and repairs to thePremises in connection with such reletting. If Landlord elects to relet thePremises then rents received by Landlord from such reletting will be applied:first, to the payment of any indebtedness other than rent due hereunder fromTenant to Landlord; second, to the payment of any cost of such reletting; third,to the payment of the cost of any alterations and repairs to the Premisesincurred in connection with such reletting; fourth, to the payment of rent dueand unpaid hereunder and the residue, if any will be held by Landlord andapplied to payment of future rent as the same may become due and payablehereunder. Should that portion of such rents received from such reletting duringany month, which is applied to the payment of rent hereunder, be less than therent payable during that month by Tenant hereunder, then Tenant agrees to paysuch deficiency to Landlord immediately upon demand therefor by Landlord. Suchdeficiency will be calculated and paid monthly.

(e) LANDLORD'S REMEDIES; PERFORMANCE FOR TENANT. All covenants and agreementsto be performed by Tenant under any of the terms of this Lease are to beperformed by Tenant

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at Tenant's sole cost and expense and without any abatement of rent. If Tenantfails to pay any sum of money owed to any party other than Landlord, for whichit is liable under this Lease, or if Tenant fails to perform any other act onits part to be performed hereunder, and such failure continues for ten (10) daysafter notice thereof by Landlord, Landlord may, without waiving or releasingTenant from its obligations, but shall not be obligated to, make any suchpayment or perform any such other act to be made or performed by Tenant. Tenantagrees to reimburse Landlord upon demand for all sums so paid by Landlord and



all necessary incidental costs, together with interest thereon at the InterestRate, from the date of such payment by Landlord until reimbursement by Tenant.This remedy shall be in addition to any other right or remedy of Landlord setforth in this Paragraph 22.

(f) LATE PAYMENT. If Tenant fails to pay any installment of rent within seven(7) days when due or if Tenant fails to make any other payment for which Tenantis obligated under this Lease when due, such late amount will accrue interest atthe Interest Rate until such amount is paid by Tenant to Landlord. In additionTenant agrees to pay to Landlord concurrently with such late payment amount, asadditional rent, a late charge equal to ten percent (10%) of the amount due tocompensate Landlord for the extra costs Landlord will incur as a result of suchlate payment. Landlord and Tenant agree that such late charge represents a fairand reasonable estimate of the costs that Landlord will incur by reason of anysuch late payment. Acceptance of any such interest and late charge will notconstitute a waiver of the Tenant's default with respect to the overdue amount,or prevent Landlord from exercising any of the other rights and remediesavailable to Landlord. If Tenant incurs a late charge more than three (3) timesin any period of twelve (12) months during the Lease Term, then, notwithstandingthat Tenant cures the late payments for which such late charges are imposedLandlord will have the right to require Tenant thereafter to pay allinstallments of Monthly Base Rent quarterly in advance in the form of acashier's check throughout the remainder of the Lease Term. Any payments of anykind returned for insufficient funds will be subject to an additional handlingcharge of $25.00 and thereafter, Landlord may require Tenant to pay all futurepayments of rent or other sums due by money order or cashier's check.

(g) RIGHTS AND REMEDIES CUMULATIVE. All rights, options and remedies ofLandlord contained in this Lease will be construed and held to be cumulative,and no one of them will be exclusive of the other, and Landlord shall have theright to pursue any one or all of such remedies or any other remedy or reliefwhich may be provided by law or in equity whether or not stated in this Lease.Nothing in this Paragraph 22 will be deemed to limit or otherwise affectTenant's indemnification of Landlord pursuant to any provision of ThisLease.

23. LANDLORD'S DEFAULT. Landlord will not be in default in the performance ofany obligation required to be performed by Landlord under this Lease unlessLandlord fails to perform such obligation within thirty (30) days after thereceipt of written notice from Tenant specifying in detail Landlord's failure toperform; provided, however, that if the nature of Landlord's obligation is suchthat more than thirty (30) days are required for performance, then Landlord willnot be deemed in default if it commences such performance within suchthirty

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(30) day period and thereafter diligently pursues the same to completion. Uponany default by Landlord, Tenant may exercise any of its rights provided at law



or in equity subject to the limitations on liability set forth in Paragraph 35of This Lease.

24. ASSIGNMENT AND SUBLETTING.

(a) RESTRICTION ON TRANSFER. Except as expressly provided in this Paragraph 24,Tenant will not, either voluntarily or by operation of law, assign or encumberthis Lease or any interest herein or sublet the Premises or any part thereof, orpermit the use or occupancy of the Premises by any party other than Tenant (anysuch assignment encumbrance sublease, or the like will sometimes be referred toas a "Transfer"), without the prior written consent of Landlord, which consentLandlord will not unreasonably withhold. For purposes of this Paragraph 24 , ifTenant is a corporation, partnership or other entity, any transfer, assignment,encumbrance or hypothecation of fifty percent (50%) or more (individually or inthe aggregate) of any stock or other ownership interest in such entity, and/orany transfer, assignment, hypothecation or encumbrance of any controllingownership or voting interest in such entity, will be deemed a Transfer and willbe subject to all of the restrictions and provisions contained in this Paragraph24; provided, however, this provision will not apply to public corporations, thestock of which is traded through a public stock exchange or over the countersystem.

(b) TRANSFER NOTICE. If Tenant desires to elect a Transfer, then at leastthirty (30) days prior to the date when Tenant desires the Transfer to beeffective (the "Transfer Date") Tenant agrees to give Landlord a notice (the"Transfer Notice") stating the name, address and business of the proposedassignee, sublessee or other transferee (sometimes referred to hereinafter as"Transferee") reasonable information (including references) concerning thecharacter, ownership, and financial condition of the proposed Transferee, theTransfer Date, any ownership or commercial relationship between Tenant and theproposed Transferee, and the consideration and all other material terms andconditions of the proposed Transfer, all in such detail as Landlord mayreasonably require.

(c) LANDLORDS OPTIONS. Within fifteen (15) days of Landlord's receipt of anyTransfer Notice and any additional information requested by Landlord concerningthe proposed Transferee's financial responsibility, Landlord will notify Tenantof its election to do one of the following: (i) consent to the proposed Transfersubject to such reasonable conditions as Landlord may impose in providing suchconsent; (ii) refuse such consent, which refusal shall be on reasonable grounds;or (iii) terminate this Lease as to all or such portion of the Premises which isproposed to be sublet or assigned and recapture all or such portion of thePremises for reletting by Landlord.

(d) ADDITIONAL CONDITIONS. A condition to Landlord's consent to any transfer ofthis Lease will be the delivery to Landlord of a true copy of the fully executedinstrument of assignment, sublease, transfer or hypothecation, in form andsubstance reasonably satisfactory to Landlord.

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Tenant agrees to pay to Landlord, as additional rent, all sums and otherconsideration payable to and for the benefit of Tenant by the assignee orsublessee in excess of the rent payable under this Lease for the same period andportion of the Premises. In calculating excess rent or other consideration whichmay be payable to Landlord under this paragraph, Tenant will be entitled todeduct commercially reasonable third party brokerage commissions and attorney'sfees and other amounts reasonably and actually expended by Tenant in connectionwith such assignment or subletting if acceptable written evidence of suchexpenditures is provided to Landlord. No Transfer will release Tenant ofTenant's obligations under This Lease or alter the primary liability of Tenantto pay the rent and to perform all other obligations to be performed by Tenanthereunder. Landlord may require that any Transferee remit directly to Landlordon a monthly basis, all monies due Tenant by said Transferee. Consent byLandlord to one Transfer will not be deemed consent to any subsequent Transfer.In the event of default by any Transferee of Tenant or any successor of Tenantin the performance of any of the terms hereof, Landlord may proceed directlyagainst Tenant without the necessity of exhausting remedies against suchTransferee or successor. If Tenant effects a Transfer or requests the consent ofLandlord to any Transfer (whether or not such Transfer is consummated), then,upon demand, Tenant agrees to pay Landlord a non-refundable administrative feeof not less than One Hundred Dollars ($100.00) and actual expenses incurred,plus Landlord's reasonable attorneys" fees.

25. SUBORDINATION. Without the necessity of any additional document beingexecuted by Tenant for the purpose of effecting a subordination, and at theelection of Landlord or any mortgagee or beneficiary with a deed of trustencumbering the Building and/or the Project, or any lessor of a ground orunderlying lease with respect to the Building, this Lease will be subject andsubordinate at all times to: (i) all ground leases or underlying leases whichmay now exist or hereafter be executed affecting the Building; and (ii) the lienof any mortgage or deed of trust which may now exist or hereafter be executedfor which the Building, the Project or any leases thereof, or Landlord'sinterest and estate in any of said items, is specified as Security.Notwithstanding the foregoing, Landlord reserves the right to subordinate anysuch ground leases or underlying leases or any such liens to This Lease. If anysuch ground lease or underlying lease terminates for any reason or any suchmortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosureis made for any reason, at the election of Landlord's successor in interest,Tenant agrees to attorn to and become the tenant of such successor in whichevent Tenant's right to possession of the Premises will not be disturbed as longas Tenant is not in default under this Lease. Tenant hereby waives its rightsunder any law which gives or purports to give Tenant any right to terminate orotherwise adversely affect this Lease and the obligations of Tenant hereunder inthe event of any such foreclosure proceeding or sale. Tenant covenants andagrees to execute and deliver, upon demand by Landlord and in the formreasonably required by Landlord, any additional documents evidencing thepriority or subordination of this Lease and Tenant's attornment agreement withrespect to any such ground lease or underlying leases or the lien of any suchmortgage or deed of trust. If Tenant fails to sign and return any such documents



within ten (10) days of receipt, Tenant will be in default hereunder.

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26. ESTOPPEL CERTIFICATE. Within ten (10) days following any written requestwhich Landlord may make from time to time, Tenant agrees to execute and deliverto Landlord an estoppel certificate, in Landlord's standard form or as mayreasonably be required by Landlord's lender. Landlord and Tenant intend that anyStatement delivered pursuant to this Paragraph 26 may be relied upon by anymortgagee, beneficiary, purchaser or prospective purchaser of the Building orany interest therein. Tenant's failure to deliver such statement within suchtime will be conclusive upon Tenant (i) that this Lease is in full force andeffect without modification except as may be represented by Landlord, (ii) thatthere are no uncured defaults in Landlord's performance, and (iii) that not morethan one (1) month's rent has been paid in advance. Without limiting theforegoing, if Tenant fails to deliver any such statement within such ten (10)day period, Landlord may deliver to Tenant an additional request for suchStatement and Tenant's failure to deliver such Statement to Landlord within ten(10) days after delivery of such additional request will constitute a defaultunder this Lease. Tenant agrees to indemnify and protect Landlord from andagainst any and all claims, damages, losses, liabilities and expenses (includingattorneys fees and costs) attributable to any failure by Tenant to timelydeliver any such estoppel certificate to Landlord as required by this Paragraph26.

27. BUILDING PLANNING. If Landlord requires the Premises for use in conjunctionwith another suite or for other reasons connected with the planning program forthe Building or the Project, Landlord will have the right upon sixty (60) days'prior written notice to Tenant, to move Tenant to other space in the Building ofsubstantially similar size as the Premises, and with tenant improvements ofsubstantially similar age, quality and layout as then existing in the Premises.Any such relocation will be at Landlord's cost and expense, including the costof providing such substantially similar tenant improvements (but not anyfurniture or personal property) and Tenant's reasonable moving, telephoneinstallation and stationary reprinting costs. If Landlord so relocates Tenant,the terms and conditions of this Lease will remain in full force and effect andapply to the new space, except that (a) a revised Exhibit "A" will become partof this Lease and will reflect the location of the new space, (b) Paragraph 1 ofThis Lease will be amended to include and state all correct data as to the newspace, (c) the new space will thereafter be deemed to be the "Premises," and (d)all economic terms and conditions (e.g. rent, total Operating Expense Allowance,etc.) will be adjusted on a per square foot basis based on the total number ofrentable square feel of area contained in the new space. Landlord and Tenantagree to cooperate fully with one another in order to minimize the inconvenienceto Tenant resulting from any such relocation.

28. RULES AND REGULATIONS. Tenant agrees to faithfully observe and comply withthe "Rules and Regulations," a copy of which is attached hereto and incorporatedherein by this reference as Exhibit "E," and all reasonable and



nondiscriminatory modifications thereof and additions thereto from time to timeput into effect by Landlord. Landlord will not be responsible to Tenant for theviolation or non-performance by any other tenant or occupant of the Building ofany of the Rules and Regulations.

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29. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS. Tenant,within ten (10) days after request therefor, agrees to execute any reasonableamendments to this Lease which may be requested by any lender or ground lessorof the Project, provided any such amendments do not increase the obligations ofTenant under this Lease or adversely affect the leasehold estate created by thisLease. In the event of any default on the part of Landlord, Tenant will givenotice by registered or certified mail to any beneficiary of a deed of trust ormortgage covering the Premises or ground lessor of Landlord whose address hasbeen furnished to Tenant, and Tenant agrees to offer such beneficiary, mortgageeor ground lessor a reasonable opportunity to cure the default (including withrespect to any such beneficiary or mortgagee, time to obtain possession of thePremises, subject to this Lease and Tenant's rights hereunder, by power of saleor a judicial foreclosure, if such should prove necessary to effect acure).

30. DEFINITION OF LANDLORD. The term "Landlord" as used in this Lease, so faras covenants or obligations on the part of Landlord are concerned, means andincludes only the owner or owners, at the time in question, of the fee title ofthe Premises or the lessees under any ground lease, if any. In the event of anytransfer, assignment or other conveyance or transfers of any such title (otherthan a transfer for security purposes only), Landlord herein named (and in caseof any subsequent transfers or conveyances, the then grantor) will beautomatically relieved from and after the date of such transfer, assignment orconveyance of all liability as respects, the performance of any covenants orobligations on the part of Landlord contained in this Lease thereafter to beperformed, so long as the transferee assumes in writing all such covenants andobligations of Landlord arising after the date of such transfer. Landlord andLandlord's transferees and assignees have the absolute right to transfer all orany portion of their respective title and interest in the Project, the Building,the Premises and/or this Lease without the consent of Tenant, and such transferor subsequent transfer will not be deemed a violation on Landlord's part of anyof the terms and conditions of This Lease.

31. WAIVER. The waiver by either party of any breach or any term, covenant orcondition herein contained will not be deemed to be a waiver of any subsequentbreach of the same or any other term, covenant or condition herein contained,nor will any custom or practice which may develop between the parties in theadministration of the terms hereof be deemed a waiver of or in any way affectthe right of either party to insist upon performance in strict accordance withsaid terms. The subsequent acceptance of rent or any other payment hereunder byLandlord will not be deemed to be a waiver of any preceding breach by Tenant ofany term, covenant or condition of this Lease, other than the failure of Tenant



to pay the particular rent so accepted, regardless of Landlord's knowledge ofsuch preceding breach at the time of acceptance of such rent. No acceptance byLandlord of a lesser sum than the basic rent and additional rent or other sumthen due will be deemed to be other than on account of the earliest installmentof such rent or other amount due, nor will any endorsement or statement on anycheck or any letter accompanying any check be deemed an accord and satisfaction,and Landlord may accept such check or payment without prejudice to Landlord'sright to recover the balance of such installment or other amount or pursue anyother remedy provided in this Lease. The consent or

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approval of Landlord to or of any act by Tenant requiring Landlord's consent orapproval will not be deemed to waive or render unnecessary Landlord's consent orapproval to or of any subsequent similar acts by Tenant.

32. PARKING. So long as this Lease is in effect and provided Tenant is not indefault hereunder, Landlord grants to Tenant, Tenant's visitors and guests anon-exclusive license to use the parking areas which serve the Building subjectto the terms and conditions of this Paragraph 32 and the Rules and Regulationsregarding parking contained in Exhibit "E" attached hereto. Tenant will not useor allow any of Tenant's employees or guests to use any parking spaces whichhave been specifically assigned by Landlord to other tenants or occupants or forother uses such as visitor parking or which have been designated by anygovernmental entity as being restricted to certain uses. Landlord may assign anyunreserved and unassigned parking spaces and/or make all or any portion of suchspaces reserved, if Landlord reasonably determines that it is necessary fororderly and efficient parking or for any other reasonable reason. Tenant agreesto cause its employees, subtenants, assignees, contractors, suppliers, customersand invitees to comply with the Rules and Regulations. Landlord reserves theright from time to lime to modify and/or adopt such other reasonable and non-discriminatory rules and regulations for the parking facilities as it deemsreasonably necessary for the operation of the parking facilities.

33. FORCE MAJEURE. If either Landlord or Tenant is delayed, hindered in orprevented from the performance of any act required under this Lease by reason ofstrikes, lock-outs, labor troubles, inability to procure standard materials,failure of power, restrictive governmental laws, regulations or orders orgovernmental action or inaction (including failure, refusal or delay in issuingpermits, approvals and/or authorizations which is not the result of the actionor inaction of the party claiming such delay), riots, civil unrest orinsurrection, war, fire, earthquake, flood or other natural disaster, unusualand unforeseeable delay which results from an interruption of any publicutilities (e.g., electricity, gas, water, telephone) or other unusual andunforeseeable delay not within the reasonable control of the party delayed inperforming work or doing acts required under the provisions of this Lease, thenperformance of such act will be excused for the period of the delay and theperiod for the performance of any such act will be extended for a periodequivalent to the period of such delay. The provisions of this Paragraph 33 will



not operate to excuse Tenant from prompt payment of rent or any other paymentsrequired under the provisions of this Lease.

34. SIGNS. Landlord will designate the location on the Premises, if any, anyfor one or more Tenant identification sign(s). Tenant has no right to installTenant identification signs in any other location in on or about the Premises orthe Project and will not display or erect any other signs, displays or otheradvertising materials that are visible from the exterior of the Building or fromwithin the Building in any interior or exterior common areas. The size, design,color and other physical aspects of any and all permitted sign(s) will besubject to (i) Landlord's written approval prior to installation, which approvalmay be withheld in Landlord s discretion (ii) any covenants, conditions orrestrictions and sign criteria governing the

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Project, and (iii) any applicable municipal or governmental permits andapprovals. Tenant will be solely responsible for all costs for installation,maintenance, repair and removal of any Tenant identification sign(s). If Tenantfails to remove Tenant's sign(s) upon termination of this Lease and repair anydamage caused by such removal, Landlord may do so at Tenant's sole cost andexpense. Tenant agrees to reimburse Landlord for all costs incurred by Landlordto effect any installation, maintenance or removal on Tenant's account, whichamount will be deemed additional rent, and may include, without limitation, allsums disbursed, incurred or deposited by Landlord including Landlord's costs,expenses and actual attorneys" fees with interest thereon at the Interest Ratefrom the date of Landlord's demand until paid by Tenant. Any sign rights grantedto Tenant under this Lease are personal to Tenant and may not be assigned,transferred or otherwise conveyed to any assignee or subtenant of Tenant withoutLandlord's prior written consent, which consent Landlord may withhold in itssole and absolute discretion.

35. LIMITATION ON LIABILITY. In consideration of the benefits accruinghereunder, Tenant on behalf of itself and all successors and assigns of Tenantcovenants and agrees that, in the event of any actual or alleged failure, breachor default hereunder by Landlord: (a) Tenant's recourse against Landlord formonetary damages will be limited to Landlord's interest in the Buildingincluding, subject to the prior rights of any Mortgagee, Landlord's interest inthe rents of the Building and any insurance proceeds payable to Landlord; (b)except as may be necessary to secure jurisdiction of the partnership, no partnerof Landlord shall be sued or named as a party in any suit or action and noservice of process shall be made against any partner of Landlord; (c) no partnerof Landlord shall be required to answer or otherwise plead to any service ofprocess; (d) no judgment will be taken against any partner of Landlord and anyjudgment taken against any partner of Landlord may be vacated and set aside atany time after the fact; (e) no writ of execution will be levied against theassets of any partner of Landlord; (f) the obligations under this Lease do notconstitute personal obligations of the individual partners, directors, officersor shareholders of Landlord, and Tenant shall not seek recourse against the



individual partners, directors, officers or shareholders of Landlord or any oftheir personal assets for satisfaction of any liability in respect to thisLease; and (g) these covenants and agreements are enforceable both by Landlordand also by any partner of Landlord.

36. FINANCIAL STATEMENTS. Prior to the execution of this Lease by Landlord andat any time during the Term of this Lease upon ten (10) days prior writtennotice from Landlord, Tenant agrees to provide Landlord with a current financialstatement for Tenant and any guarantors of Tenant and financial statements forthe two (2) years prior to the current financial statement year for Tenant andany guarantors of Tenant. Such statements are to be prepared in accordance withgenerally accepted accounting principles and, if such is the normal practice ofTenant, audited by an independent certified public accountant.

37. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that upon Tenantpaying the rent required under this Lease and paying all other charges andperforming all of the covenants and provisions on Tenant's part to be observedand performed under this Lease Tenant

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may peaceably and quietly have hold and enjoy the Premises in accordance withthis Lease

38. MISCELLANEOUS.

(a) CONFLICT OF LAWS. This Lease shall be governed by and construed solelypursuant to the laws of the State without giving effect to choice of lawprinciples thereunder.

(b) SUCCESSORS AND ASSIGNS. Except as otherwise provided in this Lease all ofthe covenants conditions and provisions of this Lease shall be binding upon andshall inure to the benefit of the parties hereto and their respective heirs,personal representatives, successors and assigns.

(c) PROFESSIONAL FEES AND COSTS. If either Landlord or Tenant should bring suitagainst the other with respect to this Lease, then all costs and expenses,including without limitation, actual professional fees and costs such asappraisers, " accountants" and attorneys" fees and costs, incurred by the partywhich prevails in such action, whether by final judgment or out of courtsettlement, shall be paid by the other party, which obligation on the part ofthe other party shall be deemed to have accrued on the date of the commencementof such action and shall be enforceable whether or not the action is prosecutedto judgment. As used herein , attorneys" fees and costs shall include, withoutlimitation , attorneys" fees, costs and expenses incurred in connection with any(i) post-judgment motions; (ii) contempt proceedings; (iii) garnishment, levyand debtor and third party examination; (iv) discovery; and (v) bankruptcylitigation. Tenant agrees to pay all collection agency fees and attorneys " feescharged to Landlord in connection with any late payment or non-payment of rent



or any other amounts due under this Lease including, without limitation, a feeof $75.00 for the preparation of any demand for delinquent rent or any notice topay rent or quit.

(d) TERMS AND HEADINGS. The words "Landlord" and "Tenant" as used herein shallinclude the plural as well as the singular. Words used in any gender includeother genders. The paragraph headings of this Lease are not a part of this Leaseand shall have no effect upon the construction or interpretation of any parthereof.

(e) TIME. Time is of the essence with respect to the performance of everyprovision of this Lease in which time of performance is a factor.

(f) PRIOR AGREEMENT; AMENDMENTS. This Lease constitutes and is intended by theparties to be a final, complete and exclusive statement of their entireagreement with respect to the subject matter of this Lease. This Leasesupersedes any and all prior and contemporaneous agreements and understandingsof any kind relating to the subject matter of this Lease. There are no otheragreements, understandings, representations, warranties or statements, eitheroral or in written form, concerning the subject matter of this Lease. Noalteration, modification, amendment or

27

interpretation of this Lease shall be binding on the parties unless contained ina writing which is signed by both parties.

(g) SEPARABILITY. The provisions of this Lease shall be considered separablesuch that it any provision or part of this Lease is ever held to be invalid,void or illegal under any law or ruling all remaining provisions of this Leaseshall remain in full force and effect to the maximum extent permitted by law.

(h) RECORDING. Neither Landlord nor Tenant shall record this Lease nor a shortform memorandum thereof without the consent of the other.

(i) COUNTERPARTS. This Lease may be executed in one or more counterparts, eachof which shall constitute an original and all of which shall be one and the sameagreement.

(j) NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees that the termsof this Lease are confidential and constitute proprietary information ofLandlord. Disclosure of the terms could adversely affect the ability of Landlordto negotiate other leases and impair Landlords relationship with other tenants.Accordingly, Tenant agrees that it, and its partners, officers, directors,employees, agents and attorneys, shall not intentionally and voluntarilydisclose the terms and conditions of this Lease to any newspaper or otherpublication or any other Tenant or apparent prospective tenant of the Buildingor other portion of the Project, or real estate agent, either directly orindirectly, without the prior written consent of Landlord, provided, however,



that Tenant may disclose the terms to prospective subtenants or assignees underthis Lease.

(k) NON-DISCRIMINATION. Tenant acknowledges and agrees that there shall be nodiscrimination against, or segregation of, any person, group of persons, orentity on the basis of race, color, creed, religion, age, sex, marital status,national origin, or ancestry in the leasing, subleasing, transferring,assignment, occupancy, tenure, use, or enjoyment of the Premises, or any portionthereof.

39. EXECUTION OF LEASE.

(a) Joint and Several Obligations. If more than one person executes this Leaseas Tenant, their execution of this Lease will constitute their covenant andagreement that (i) each of them is jointly and severally liable for the keeping,observing and performing of all of the terms, covenants, conditions, provisionsand agreements of this Lease to be kept, observed and performed by Tenant, and(ii) the term "Tenant" as used in this Lease means and includes each of themjointly and severally.

The act of or notice from, or notice or refund to, or the signature of any oneor more of them, with respect to the tenancy of this Lease, including, but notlimited to, any renewal, extension, expiration, termination or modification ofthis Lease, will be binding upon each and all of the persons executing thisLease as Tenant with the same force and effect as if each and all of

28

them had so acted or so given or received such notice or refund or sosigned.

(b) TENANT AS CORPORATION OR PARTNERSHIP. If Tenant executes this Lease as acorporation or partnership, then Tenant and the persons executing this Lease onbehalf of Tenant represent and warrant that such entity is duly qualified and ingood standing to do business in California and that the individuals executingthis Lease on Tenant's behalf are duly authorized to execute and deliver thisLease on its behalf, and in the case of a corporation, in accordance with a dulyadopted resolution of the board of directors of Tenant, a copy of which is to bedelivered to Landlord on execution hereof, if requested by Landlord, and inaccordance with the by-laws of Tenant, and, in the case of a partnership, inaccordance with the partnership agreement and the most current amendmentsthereto, if any, copies of which are to be delivered to Landlord on executionhereof, if requested by Landlord, and that this Lease is binding upon Tenant inaccordance with its terms.

(c) EXAMINATION OF LEASE. Submission of this instrument by Landlord to Tenantfor examination or signature by Tenant does not constitute a reservation of oroption for lease, and it is not effective as a lease or otherwise until



execution by and delivery to both Landlord and Tenant.

IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed bytheir duly authorized representatives as of the date first above written.

TENANT: LANDLORD:

Litronic Industries, Inc., Airport Industrial Complex,a California Corporation a California Limited Partnership

By: /S/ KRIS SHAH By: /S/ JULIE GROOT--------------------------- -------------------------

Name: Kris Shah Name: Julie A. GrootTitle: Chief Executive Officer Title: Senior Manager

29

ADDITIONAL LEASE PROVISIONS

17.(a) UTILITIES AND SERVICES: The electricity for the Premises is currentlyin Landlord's name. Tenant agrees to contact Southern California Edison at(800) 990-7788 within ten (10) days from the date Tenant takes possession of thePremises and have the bill for electricity put into Tenant's name.

Tenant shall reimburse Landlord for any interim charges actually billed toLandlord for electricity from the date Tenant takes possession of the Premisesuntil the date the bill is put into Tenant's name.

In the event Tenant fails to put the bill for electricity in Tenant's namewithin ten (10) days from the date Tenant takes possession of the Premises,Landlord shall have the right to contact Southern California Edison on theeleventh (11th) day after Tenant takes possession of the Premises and have theelectricity for the Premises turned off.

Tenant hereby acknowledges that Tenant has the absolute responsibility tocontact Southern California Edison and have electrical service put into Tenant'sname. In the event Tenant fails to put the bill for electrical service intoTenant's name as required hereinabove and Landlord has electrical service turnedoff, Tenant understands that there will be no electrical service to thePremises. In such event, Tenant releases and holds Landlord harmless from anyclaims, demands, liabilities, damages, expenses, actions and causes of actionbased on, arising out of, or related thereto.

Tenant waives the right to additional notice of any kind from Landlord and/orSouthern California Edison and specifically waives any rights or remediesprovided by Civil Code Section 789.3.

Landlord (initials)



Tenant ________Tenant ________

30

ADDITIONAL SECTIONS

40. OPTION TO EXTEND: Provided Tenant has complied with all of the terms andconditions of the Lease and is still in occupancy of the Premises, Tenant shallhave an option to extend the Least Term for one (1) additional eighteen (18)month period on the same general terms and conditions then in existence underthe Lease, except that all economic terms of the Lease for the option periodshall be adjusted to the prevailing market terms and conditions for like orsimilar space in the project, but in any event, no less than the then-applicableMonthly Base Rent under the Lease. Tenant shall notify Landlord at least three(3) months, but no earlier than six (6) months, prior to the end of the LeaseTerm if Tenant desires to exercise its option. Tenant's option to extend shallbe personal to Tenant and shall not be assignable.

Landlord (initials)Tenant (initialsTenant ________

31

Exhibit A-1 - THE PROJECT

[P L A T M A P]

AIRPORT INDUSTRIAL COMPLEX

INITIALLandlord (initials)

Tenant _______

KOLL

32



EARLY POSSESSION AGREEMENT

Reference is made to that lease dated December 4, 1997 ("Lease") Between AirportIndustrial Complex, a California Limited Partnership , Landlord, and LitronicIndustries, Inc., a California Corporation , Tenant, at 17895 Sky Park Circle,Suite A, Irvine, CA 92614 Building/Unit 2401/A

Tenant is to be allowed to occupy the premises on December 05, 1997 and rent isto begin on January 01, 1998 (the "Early Possession Period"). Landlord andTenant agree that all the terms and conditions of the Lease are to be in fullforce and effect as of the date of Tenant's possession of the premises.

Tenant accepts premises in their present condition. Landlord agrees to completeall tenant improvements as set forth in the Lease. Tenant understands that hisearly occupancy may cause some delay in the construction of the tenantimprovements and that such delay will not be a cause for forgiveness of any rentdue. It is further understood that any improvement of the leased premises bythe Tenant which may result in the delay in construction of tenant improvementsor in the obtaining of a building permit without prior written consent ofLandlord is hereby prohibited.

(initials)

In the event Tenant takes possession of the premises prior to completion of anyconstruction, Tenant agrees to hold Landlord harmless from any and all claimsfor damages to goods, equipment or inconvenience.

Tenant hereby agrees that if Tenant breaches the Lease and/or abandons thepremises before the end of the Lease term, if Tenant's right to possession isterminated by Landlord because of Tenant's breach of the Lease, Landlord shall,at its option, (i) void this Early Possession Agreement; and (ii) recover fromTenant, in addition to any damages due Landlord under the terms and conditionsof the Lease, rent prorated for the duration of the Early Possession Period at arental rate equivalent to one and a half (1 1/2) times the monthly rental ratein effect at the commencement of the Lease.

DATE: December 4, 1997

LANDLORD: Airport Industrial Complex, a California Limited Partnership

By: /S/ JULIE GROOT

33

Julie A. Groot, Senior Manager

TENANT: Litronic Industries, Inc., a California Corporation

By: /S/ KRIS SHAH



Kris Shah, Chief Executive Officer

34



Exhibit 10.26

General Services AdministrationFederal Supply ServiceWashington, DC 20406

February 3. 1999

Pulsar Data Systems4390 Parliament PlaceSuite RLanham, MD 20706

Subject: Transmittal of Contract Extension ModificationContract Number GS-35F-4232DExtended Contract Period

Dear Mr. Morris:

This is to advise you that a modification (copy enclosed) to extend the subjectcontract has been executed. The period of performance will now continue throughApril 30, 2002.

You are requested to send two complete copies of the approved pricelist,including updated terms and conditions and pricing, to the undersigned and twocopies to the following address:

GSA/FSS/FMLCrystal Mall #4, Room L-1041941 Jefferson Davis HighwayArlington, VA 22202

We look forward to continuing working with your firm to make the FSS ITSchedules Program am mutually successful endeavor. Should you have anyquestions regarding your contract award, please feel free to contact theundersigned at 703/305/5492.

Sincerely,

/Deboray Lague/Deborah LagueContracting OfficerIT Acquisition Center

AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT

1. CONTRACT ID CODE



2. AMENDMENT/MODIFICATION NO. PAGE OF PAGESMODIFICATION # 86 1 53

3. EFFECTIVE DATE

4. REQUISITION/PURCHASE REQ NO.

5. PROJECT NO.

6. GSA/FSS/FCICRYSTAL MALL #4, ROOM 10171941 JEFFERSON DAVIS HIGHWAYARLINGTON, VA 22202

7. ADMINISTERED BY (if other than Item 5) CODE ___________

8. NAME AND ADDRESS OF CONTRACTOR (No., street, country, state and ZIP Code)Pulsar Data Systems, Inc.4390 Parliament Place, Suite RLanham, MD 20706

() 9A. AMENDMENT OF SOLICITATION NO.9B. DATED (SEE ITEM 11)10A. MODIFICATION OF CONTRACT/ORDER NO.GS-35F-4232D

10B DATED (SEE ITEM 13)96122FACILITY CODE11. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONSThe above numbered solicitation is amended as set forth in Item 14. The hourand date specified for receipt of Offers ____ is extended ______ isnot extended.

Offers must acknowledge receipt of this amendment prior to the hour and datespecified in the solicitation or as amended, by one of the following methods:

(a) By completing items 8 and 15. and returning ___ copies of the amendment;(b) By acknowledging receipt of this amendment on each copy of the of offersubmitted; or (c) By separate letter or telegram which includes a reference tothe solicitation and amendment numbers. FAILURE OF YOUR ACKNOWLEDGMENT TO BERECEIVED AT THE PLACE DESIGNATED FOR THE RECEIPT OF OFFERS PRIOR TO THE HOUR ANDDATE SPECIFIED MAY RESULT IN REJECTION OF YOUR OFFER. If by this amendment youdesire to change an offer already submitted, such change may be made by telegramor letter, provided each telegram or letter makes reference to the solicitationand this amendment, and is received prior to the opening hour and datespecified.

12. ACCOUNTING AND APPROPRIATION DATA (if required))



13. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACTS/ORDERS, IT MODIFIESTHE CONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.

() A.THIS CHANGE ORDER IS ISSUED PURSUANT TO: (Specify authority) THE CHANGESSET FORTH IN ITEM 14 ARE MADE IN THE CONTRACT ORDER NO. IN ITEM 10A.

B. THE ABOVE NUMBERED CONTRACT/ORDER IS MODIFIED TO REFLECT THE ADMINISTRATIVECHANGES (such as changes in paying office, appropriation, date, etc.) SET FORTHIN ITEM 14, PURSUANT TO THE AUTHORITY OF FAR 43.103(b).

C. THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF:

D. OTHER (Specify type of modification and authority) PER SECTION G.1

X IMPORTANT: Contractor __ is not, X is required to sign and return 2-----

copies of the issuing office.

14. DESCRIPTION OF AMENDMENT/MODIFICATION (Organized by UCF section headings,including solicitation/contract subject matter where feasible.)

The above referenced contract under FSC Group 70, Information TechnologyMultiple Award Schedule, is hereby modified as follows:

Pulsar letter dated 1/11/99Except as provided herein, all terms and conditions of the document referencedin Item 9A or 10A, as heretofore changed, remains unchanged and in full force

15A. NAME AND TITLE OF SIGNER (Type of print)Roderick K. MorrisContracts Manager

15B. CONTRACTOR/OFFICER/S/

------------------------(Signature of person authorized to sign)

15C. DATE SIGNED1/11/9916A. NAME AND TITLE OF CONTRACTING OFFICER (Type or print)

16B. UNITED STATES OF AMERICABY: /DEBORAH LAGUE/

----------------------------(signature of Contracting Officer)

16C. DATE SIGNED2/3/99



STANDARD FORM 30 (REV. 10-83)Prescribed by GSA

Modification Page 2 of 53 pages

1. Change in Contract Period.

The original contract period was April 1, 1996 or Date of Award, whichever islater, through March 31, 1999.

The new contract period is April 1, 1996 or Date of Award, whichever is later,through five (5) years from the contract begin date, with a minimum period ofthree years from April 1, 1999. For example.<TABLE><CAPTION>

Contract New ContractBegin Date End Data<S> <C>

April 1, 1996 March 31, 2002July 4, 1997 July 3, 2002February 24, 1998 February 23, 2003</TABLE>

2. ADD/REPLACE the following FSC/FPDS Classes to list of products and/orservices being solicited in Section B.2.

SIN 132-8 PURCHASE OF EQUIPMENT

FSC CLASS 7042 - MINI AND MICRO COMPUTER CONTROL DEVICES

___ Microcomputer Control Devices

___ Telephone Answering and Voice Messaging Systems

FSC CLASS 6020 - FIBER OPTIC CABLE ASSEMBLIES AND HARNESSES

___ Fiber Optic Cable Assemblies and Harnesses

FSC CLASS 5805 - TELEPHONE AND TELEGRAPH EQUIPMENT

___ Telephone Equipment

___ Audio and Video Teleconferencing Equipment

FSC CLASS 5820 - RADIO AND TELEVISION COMMUNICATION EQUIPMENT, EXCEPT AIRBORNE

___ Two-Way Radio Transmission/Receivers/Antennas



___ Broadcast Band Radio Transmitters/Receivers/Antennas

Modification Page 3 of 53 Pages

___ Microwave Radio Equipment/Antennas and waveguides

___ Satellite Communications Equipment

FSC CLASS 5826 - RADIO NAVIGATION EQUIPMENT, AIRBORNE

Airborne Radio Navigation Equipment

FSC CLASS 5830 - INTERCOMMUNICATION AND PUBLIC ADDRESSSYSTEMS, EXCEPT AIRBORNE

Pagers and Public Address Systems (wired and wirelesstransmission, including background music systems)(NOTE: Pager, Transmissions Services are excluded from thissolicitation.)

FSC CLASS 5841 - RADAR EQUIPMENT, AIRBORNE

___ Airborne Radar Equipment

FSC CLASS 5895 - MISCELLANEOUS COMMUNICATION EQUIPMENT

___ Miscellaneous Communications Equipment

Indicate if the following is being offered in support of SIN132-8 PURCHASE OF EQUIPMENT

___ Installation for equipment offered under SIN 132-8(FPDS Code N070)

___ Deinstallation for equipment offered under SIN 132-8(FPDS Code N070):

___ Reinstallation for equipment offered under SIN 132-8 FPDS Code N070)

NOTE: Installation must be incidental to, in conjunction with and in directsupport of, the products sold under SIN 132-8 on this contract and cannot bepurchased separately.


SPECIAL ITEM NO. 132-51 INFORMATION TECHNOLOGY PROFESSIONAL SERVICES

___ IT Facility Operation and Maintenance (FPDS CODE D301)



X IT Systems Development Services (PDS CODE D302)---

X IT Systems Analysis Services (FPDS Code D306)---

X Automated Information Systems Design and Integration---

Services (FPDS Code D307)

___ Programming Services (FPDS Code D308)___ Millennium Conversion Services (Y2K)

___ IT Backup and Security Services (FPDS Code D310)

___ IT Data Conversion Services (FPDS Code D311)

___ Computer Aided Design/Computer Aided Manufacturing (CAD/CAM) Services (FPDSCode D313)

X IT Network Management Services (FPDS Code D316))---

___ Automated News Services, Data Services, or Other InformationServices (FPDS Code D317)

___ Other Information Technology Services, Not Elsewhere Classified (FPDS CodeD399)

Note: All non-professional labor categories must be incidental to and usedsolely to support hardware, software and/or professional services, and cannot bepurchased separately.

SIN 132-52 ELECTRONIC COMMERCE SERVICES

___ Navigation Services

3. DELETE from Section C.1 the list of EXCLUDED ITEMS and REPLACE with thefollowing:

NOTE: The following ARE EXCLUDED from the Information TechnologySchedule:- )


i. Radar Equipment (except airborne radar equipment).

Offers for radar equipment (other than airborne radar equipment) must be made to



the GSA Federal Supply Service under FSC Group 58, Part IX. Contact Mr. WilliamGlacken on (215) 656-3835.

ii. Electrical Equipment - e.g., Uninterruptible Power Supplies, Computer Back-Up Power Systems, Surge Suppressers, Power Line Conditioners, Surge Absorbers,etc. may be offered under this solicitation only in conjunction with the ITequipment these devices support. Offers which are limited to the electricalequipment cited above should be made to the GSA Federal Supply Service under FSCGroup 61, Part V, Section B. Contact Mr. Dwight Young on (817) 978-8372.

iii. Training Courses for products which are outside the scope of this Schedule.

iv. Diskettes, Disk Cartridges, Disk Packs, Tape Cartridges, Tapes, and OpticalDisks, may be offered only in conjunction with the hardware devices whichutilize these supply items. Offers which do not include the hardware devicesmay be made under Federal Supply Schedule FSC Group 58, Part V. Contact (212)264-2692.

v. Carrying cases, except one per portable CPU purchase.

vi. Financial Management Software that specifically covers complete primary-accounting systems that meet-Joint Financial Management Improvement Program(JFMIP) Core Financial System Requirements. Contact Ms. Kathy Wood, GSA, FederalTechnology Service, on (703) 756-4214.

vii. Subscription services for databases on magnetic media and/or on opticaldisk. Contact Ms. Mary Ann DeFeo on (212) 264-2306.

viii. Any products which are not U.S. Made End Products, Designated Country EndProducts, Caribbean Basin Country End Products, Canadian End Products, orMexican End Products in accordance with FAR 25.402(c) and General ServicesAdministration Acquisition Regulation (GSAR) 525.402(a).

ix. Any products or services that are not "commercial" as defined in accordancewith FAR 52.202-l(c).


4. ADD the following new paragraph to the end of Section F:

F.5 DELIVERY PRICES (F-FCI-202-G) (DEC 1997)

(a) Prices offered must cover delivery as provided below to destinations locatedwithin the 48 contiguous States and the District of Columbia.

(b) The Offeror is requested to indicate below whether or not prices submittedcover delivery f.o.b. destination in Alaska, Hawaii, the Commonwealth of PuertoRico, and such overseas locations as specified:



(Yes) (No)Alaska XHawaii | XPuerto Rico XOverseas Locations X

Specify: ______________________________________________________________________________________________________________________________________________________

(c) When deliveries are made to destinations outside the 48 contiguous States;i.e., Alaska, Hawaii, the Commonwealth of Puerto Rico, and such overseaslocations as specified, and are not covered by paragraph (b), above, thefollowing conditions will apply:

(1) Delivery will be f.o.b. inland carrier, point of exportation (FAR 52.247-38), with the transportation charges to be paid by the Government from point ofexportation to destination in Alaska, Hawaii, the Commonwealth of Puerto Rico,and such overseas locations specified, as designated by the ordering office.The Contractor shall add the actual cost of transportation to destination fromthe point of exportation in the 48 contiguous States nearest to the designateddestination. Such costs will, in all cases, be based upon the lowest regularlyestablished rates on file with the Interstate Commerce Commission, the U.S.Maritime Commission (if shipped by water), or any State regulatory body, orthose published by the U.S. Postal Service; and must be supported by paidfreight or express receipt or by a statement of parcel post charges includingweight of shipment.

(2) The right is reserved to ordering agencies to furnish Government bills oflading.

(d) Ordering offices will be required to pay differential) between freightcharges and express charges where express deliveries are desired by theGovernment.


5. DELETE Section G.1 MODIFICATIONS in its entirety and REPLACE with thefollowing:

G.1.A MODIFICATIONS (MULTIPLE AWARD SCHEDULE)(GSAR 552.243-72) (AUG 1997) (FCIDEVIATION-DEC 1997)

(a) General. The Contractor may request a contract modification by submitting arequest to the Contracting Officer for approval, except as noted in paragraph(d) of this clause. At a minimum, every request shall describe the proposedchange(s) and provide the rationale for the requested change(s).



(b) Types of Modifications.

(1) Additional items/additional SINs. When requesting additions, the followinginformation must be submitted:

(i) Information requested in paragraphs (1) and (2) of the Commercial SalesPractice Format to add SINs.

(ii) Discount information for the new items(s) or new SIN(s). Specifically,submit the information requested in paragraphs 3 through 5 of the CommercialSales Practice Format. If this information is the same as the initial award, astatement to that effect may be submitted instead.

NOTE: Tho format for the Commercial Sales Practices is found in item G.1.B.

(iii) Information about the new item(s) or new SIN(s) as described in 552.212-70, Preparation of Offer (Multiple Award Schedule) is required.

NOTE: Preparations of Offer (Multiple Award Schedules) paragraph is item G.1.C.

(iv) Delivery time(s) for the new item(s) or the item(s) under the new SIN(s)must be submitted in accordance with 552.211-78, Commercial Delivery Schedule(Multiple Award Schedules).

NOTE: The Commercial Delivery Schedule (Multiple Award Schedules) reference isF-FSS-265, April 1995 for this contract.


(v) Production point(s) for the new item(s) or the item(s) under the new SIN(s)must be submitted if required by 52.215-6, Place of Performance.

NOTE: The Place of Performance reference is 52.215-20 for thiscontract.

(vi) Any information requested by 52.212-3(f), Offerors Representations andCertifications - Commercial Items, that may be necessary to assure compliancewith 552.225-9, Trade Agreements Act (I.2).

(2) Deletions. The Contractors shall provide an explanation for the deletion.The Government reserves the right to reject any subsequent offer of the sameitem or a substantially equal item at a higher price during the same contractperiod, if the Contracting Officer finds the higher price to be unreasonablewhen compared with the deleted item.

(3) Price Reduction. The Contractor shall indicate whether the price reductionfalls under the item (i), (ii), or (iii) of subparagraph (c)(l) of the PriceReductions clause at 552.238-76 (I.14). If the price reduction falls under item(i), the Contractor shall submit a copy of the dated commercial pricelist(s). If



the price reduction falls under item (ii) or (iii), the Contractor shall submita copy of the applicable pricelist(s), bulletins or letters or customeragreements which outline the effective date, duration, terms and conditions ofthe price reduction.

(c) Effective dates. The effective date of any modification is the datespecified in the modification, except as otherwise provided ln the PriceReductions clause at 552.238-76 (I.14).

(d) Electronic file updates. The Contractor shall update electronic filesubmissions to reflect all modifications. Except for price reductions andcorrections, the Contractor shall obtain the Contracting Officer's approvalbefore transmitting changes. Price reductions and correction may be transmittedwithout prior approval. However, the Contracting Officer shall be notified asset forth in the Price Reductions clause at 552.238-76 (I.14).

(e) Amendments to paper Federal Supply Schedule Price lists. The Contractorshall distribute a supplemental paper Federal Supply Schedule Pricelistreflecting accepted changes within 15 days after the effective date of themodification. At a minimum, distribution shall be made to these orderingactivities that previously received the basic document. In addition, two copiesof the supplemental pricelist shall be submitted to the contracting officer, andtwo copies shall be submitted to the FSS Schedule Information Center.


G.1.B COMMERCIAL SALES PRACTICES FORMAT (CSP-1)

Name of Offeror: Pulsar Data Systems, Inc.SIN(s): 132-8, 132-51, 132-33d, 132-12

NOTE: Please refer to clause 552.212-70, PREPARATION OF OFFER (MULTIPLE AWARDSCHEDULE), for additional information concerning your offer. Provide thefollowing information for each SIN (or group of SINs or SubSIN) for whichinformation is the same.

(1) Provide the dollar value of sales to the general public at or based on anestablished catalog or market price during the previous 12 month period or theOfferor's last fiscal year. $150M. State beginning and ending of the 12 monthperiod. Beginning $70M Ending $80M. In the event that a dollar value is not anappropriate measure of the sales, provide and describe your own measure of thesales of the item(s).

(2) Show your total projected annual sales to the Government under this contractfor the contract term, excluding options, for each SIN offered. If youcurrently hold a Federal Supply Schedule contract for the SIN the totalprojected annual sales should be based on your most recent 12 months of salesunder that contract. SIN 132-8 $ 89M; SIN 132-51 $12M; SIN 132-33 $7M

(3) Based on your written discounting policies (standard commercial sales-



practices in the event you do not have written discounting policies), are thediscounts and any concessions which you offer the Government equal-to or betterthan your best price (discount and concessions in any combination) offered toany customer acquiring the same items regardless of quantity or terms andconditions? YES X NO . (See definition of "concession" and "discount" in

--- ---552.212-70.)

(4) (a) Based on your written discounting policies (standard commercial salespractices in the event you do not have written discounting policies), provideinformation as requested for each SIN (or group of SINs for which theinformation is the same) in accordance with the instructions at Table 515-1which is provided in this solicitation for your convenience. The informationshould be provided in the chart below or in an equivalent format developed bythe Offeror. Rows should be added to accommodate as many customers as required.See definition of "concession" and "discount" in 552.212-70.


Column 1 Column 2 Column 3 Column 4 Column 5Customer Discount Quantity/Volume FOB Term Concessions

(b) Do any deviations from your written policies or standard commercial salespractices disclosed in the above chart ever result in better discounts (lowerprices) or concessions than indicated? YES NO X . If YES, explain

------ ------deviations in accordance with the instructions at Table 515-1 which is providedin this solicitation for your convenience.

(5) If you are a dealer/reseller without significant sales to the generalpublic, you should provide manufacturers information required by paragraphs (1)through (4) above for each item/SIN offered, if the manufacturer's sales underany resulting contract are expected to exceed $500,000. You must also obtainwritten authorization from the manufacturer(s) for Government access, at anytime before award or before agreeing to a modification, to the manufacturer'ssales records for the purpose of verifying the information submitted by themanufacturer. The information is required in order to enable the Government tomake a determination that the offered price is fair and reasonable. To expeditethe review and processing of offers, you should advise the manufacturer(s) ofthis requirement. The Contracting Officer may require the information besubmitted on electronic media with commercially available spreadsheet(s). Theinformation may be provided by the manufacturer directly to the Government. Ifthe manufacturer's item(s) is being offered by multiple dealers/resellers, onlyone copy of the requested information should be submitted to the Government. Inaddition, you must submit the following information along with a listing ofcontact

information regarding each of the manufacturers whose products



and/or services are included in the offer (include themanufacturers name, address, the manufacturers contact point,telephone number, and FAX number) for each model offered by SIN:

(a) Manufacturer's Name(b) Manufacturer's Part Number(c) Dealer's/Reseller's Part Number(d) Product Description,(e) Manufacturer's List Price.(f) Dealer's/Resellers percentage discount from List Price or net prices


TABLE 515-1INSTRUCTIONS FOR COMMERCIAL SALES PRACTICES FORMAT

If you responded "YES" to question (3), on the COMMERCIAL SALES PRACTICESFORMAT, complete the chart in question (4)(a) for the customer(s) who receiveyour best discount. If you responded "NO" complete the chart in question (4)(a)showing your written policies or standard sales practices for all customers orcustomer categories to whom you sell at a price (discounts and concessions incombination) that is equal to or better than the price(s) offered to theGovernment under this solicitation or with which the Offeror has a currentagreement to sell at a discount which equals or exceeds the discount(s) offeredunder this solicitation. Such agreement shall be in effect on the date the offeris submitted or contain an effective date during the proposed multiple awardschedule contract period. If your offer is lower than your price to othercustomers or customer categories you will be aligned with the customer orcategory of customer that receives your best price for purposes of the PriceReductions clause at 552.238-76. The Government expects you to provideinformation required by the format in accordance with these instructions thatis, to the best of your knowledge and belief, current, accurate, and complete asof 14 calendar days prior to its submission. You must also disclose any changesin your pricelist(s), discounts and/or discounting policies which occur afterthe offer is submitted, but before the close of negotiations. If your discountpractices vary by model or product line, the discount information should be bymodel or product line as appropriate. You may limit the number of models orproduct lines reported to those which exceed 75% of actual historical Governmentsales (commercial sales may be substituted if Government sales are unavailable)value of the special item number (SIN).

Column 1-Identify the applicable customer or category of customer. A "customer"is any entity, except the Federal Government, which acquires supplies orservices from the Offeror. The term customer includes, but is not limited tooriginal equipment manufacturers, value added resellers, state and localgovernments, distributors, educational institutions (an elementary, junior high,or degree granting school which maintains a regular facility and establishedcurriculum and an organized body of students), dealers, national accounts, andend users. In any instance where the Offeror is asked to disclose information



for a customer, the Offeror may disclose information by category of customer ifthe Offeror's discount policies or practices are the same for all customers inthe category. (Use a separate line for each customer or category of customer.)


Column 2-Identify the discount. The term "discount" is as defined insolicitation clause 552.212-70 Preparation of Offer (Multiple Award Schedule).Indicate the best discount (based on your written discounting policies orstandard commercial discounting practices if you do not have written discountingpolicies) at which you sell to the customer or category of customer identifiedin column 1, without regard to quantity; terms and conditions of the agreementsunder which the discounts are given; and whether the agreements are written ororal. Net prices or discounts off of other pricelists should be expressed aspercentage discounts from the pricelist which is the basis for your offer. Ifthe discount disclosed is a combination of various discounts (prompt payment,quantity, etc.), the percentage should be broken out for each type of discount.If the pricelists which are the basis of the discounts given to the customersidentified in the chart are different than the pricelist submitted upon whichyour offer is based, identify the type or title and date of each pricelist. TheContracting Officer may require submission of these pricelists. To expediteevaluation, Offerors may provide these pricelists at the time of submission.

Column 3-Identify tho quantity or volume of sales. Insert the minimum quantityor sales volume which the identified customer or category of customer musteither purchase/order, per order or within a specified period, to earn thediscount. When purchases/orders must be placed within a specified period to earna discount indicate the time period.

Column 4-Indicate tho FOB delivery term for each identified customer. (See FAR47.3 for an explanation of FOB delivery terms.)

Column 5-Indicate concession regardless of quantity granted to the identifiedcustomer or category of customer. Concessions are defined in solicitation clause552.212-70 Preparation of Offers (Multiple Award Schedule). If the spaceprovided is inadequate, the disclosure should be made on a separate sheet byreference. If you respond "YES" to question 4(b) in the Commercial SalesPractices Format, provide an explanation of the circumstances under which youdeviate from your written policies or standard commercial sales practicesdisclosed in the chart on the Commercial Sales Practices Format and explain howoften they occur. Your explanation should include a discussion of situationsthat lead to deviations from standard practice, an explanation of how often theyoccur, and the controls you employ to assure the integrity of your pricing.Examples of typical

Modification Page 13 of 53 Pages,



deviations may include, but are not limited to, one time goodwill discounts tocharity organizations or to compensate an otherwise disgruntled customer; alimited sale of obsolete or damaged goods; the sale of sample goods to a newcustomer; or the sales of prototype goods for testing purposes.

If deviations from your written policies or standard commercial sales practicesdisclosed in the chart on the Commercial Sales Practices Format are sosignificant and/or frequent that the Contracting Officer cannot establishwhether the price(s) offered is fair and reasonable, then you may be asked toprovide additional information. The Contracting Officer may ask for informationto demonstrate that you have made substantial sales of the item(s) in thecommercial market consistent with the information reflected on the chart on theCommercial Sales Practices Format, a description of the conditions surroundingthose sales deviations, or other information that may be necessary in order forthe Contracting Officer to determine whether your offered price(s) is fair andreasonable. In cases where additional information is-requested, the ContractingOfficer will target the request in order to limit the submission of data to thatneeded to establish the reasonableness of the offered price.

G.1.C PREPARATION OF OFFER (MULTIPLE AWARD SCHEDULE)(GSAR 552.212-70) (AVG 1997)

(a) Definitions. Concession, as used in this solicitation, means a benefit,enhancement or privilege (other than a discount), which either reduces theoverall cost of a customer's acquisition or encourages a customer to consummatea purchase. Concessions include, but are not limited to, freight allowance,extended warranty, extended price guarantees, free installation and bonus goods.

Discount, as used in this solicitation, means a reduction to catalog prices(published or unpublished). Discounts include, but are not limited to, rebates,quantity discounts, purchase option credits, and any other terms or conditionsother than concessions which reduce the amount of money .a customer ultimatelypays for goods or services ordered or received. Any net price lower than thelist price is considered a "discount" by the percentage difference from the listprice to the net price.

(b) For each Special Item Number (SIN) included in an offer, the Offeror shallprovide the information outlined in paragraph (c). Offerors may provide a singleresponse covering more than one SIN, if the information disclosed is the samefor all products


under each SIN. If discounts and concessions vary by model or product line,Offerors shall ensure that information is clearly annotated as to item or itemsreferenced.

(c) Provide information described below for each SIN:



(l) Two copies of the Offeror's current published (dated or otherwiseidentified) commercial descriptive catalogs and/or pricelists from whichdiscounts are offered. If special catalogs or pricelists are printed for thepurpose of this offer, such descriptive catalogs or pricelists shall include astatement indicating the special catalogs or pricelists represent a verbatimextract from the Offeror's commercial catalogs and/or pricelists and identifythe descriptive catalogs and/or pricelists from which the information has beenextracted.

(2) Next to each offered item in the commercial catalog and/or pricelist, theOfferor shall write the special item number (SIN) under which the item is beingoffered. Unless a special catalog or pricelist is submitted, all other itemsshall be marked "excluded," lined out, and initialed by the Offeror.

(3) The discount(s) offered under this solicitation. The description ofdiscounts offered shall include all discounts, such as prompt payment discounts,quantity/dollar volume discounts (indicate whether models/products can becombined within the SIN or whether SINs can be combined to earn discounts),blanket purchase agreement discounts, or purchase option credits. If the termsof sale appearing in the commercial catalogs or pricelist on which an offer isbased are in conflict with the terms of this solicitation, the latter shallgovern.

(4) A description of concessions offered under this solicitation which are notgranted to other customers. Such concessions may include,-but are not limitedto, an extended warranty, a return/exchange goods policy, or enhanced oradditional services.

(5) If the Offeror is a dealer/reseller or the Offeror will use dealers toperform any aspect of contract awarded under this solicitation, describe thefunctions, if any, that the dealer/reseller will perform.


G.1.D REQUIREMENTS FOR COST OR PRICING DATA OR INFORMATION OTHER THAN COST ORPRICING DATA-MODIFICATIONS (FAR 52.215-21) (OCT 1997) (ALTERNATE IV-OCT 1997)(VARIATION I-AUG 1997)

(a) Submission of cost or pricing data is not required.

(b) Provide information described below.

(1) Information required by the clause at 552.243-72, Modifications (MultipleAward Schedule);

(2) Any additional supporting information requested by the Contracting Officer.The Contracting Officer may require additional supporting information, but onlyto the extent necessary to determine whether the price(s) offered is fair and



reasonable.

(3) By submitting a request for modification, the Contractor grants theContracting Officer or an authorized representative the right to examine, at anytime before agreeing to a modification, books, records, documents, papers, andother directly pertinent records to verify the pricing, sales and other datarelated to the supplies or services proposed in order to determine thereasonableness of price(s). Access does not extend to Contractor's cost orprofit information or other data relevant solely to the Contractor'sdetermination of the prices to be offered in the catalog or marketplace.

6. DELETE Section G.3 CONTRACTOR'S REPORT OF SALES in its entirety and REPLACEwith the following:

G.3 CONTRACTOR'S REPORT OF SALES (GSAR 552.238-72) (FEB 1998)(FCI DEVIATION--DEC 1997)

(a) The Contractor must report the quarterly dollar value (in U.S. dollars androunded to the nearest whole dollar) of sales under the contract by calendarquarter (i.e., January-March, April-June, July-September, and October-December).The dollar value of a sale is the price paid by the schedule user for productsand services on a schedule contract delivery order, as recorded by theContractor. The reported contract sales value must include the IndustrialFunding Fee (see Clause 552.238-77).


(b) The Contractor must report the quarterly dollar value of sales on electronicGSA Form 72A, Contractor's Report of Sales, to the FSS Vendor Support Center(VSC) Website at Internet, http://VSC.gsa.gov. Sales shall be reportedseparately for each National Stock Number (NSN), Special Item Number (SIN), orsubitem. If no sales occur, the Contractor shall show zero on the report foreach separate National Stock Number (NSN), Special Item Number (SIN), orsubitem.

(c) The Contractor must register with the FSS Vendor Support Center (VSC) beforeusing the automated reporting system. To register, the Contractor (or hisauthorized representative) must call the VSC at (703) 305-6235 and provide thenecessary information regarding the company, contact name(s), and telephonenumber(s). The VSC will then issue a 72A specific password and provide otherinformation needed to access the reporting system. Instructions for electronicreporting are available at the VSC Website or by calling the above phone number.

(d) The Contractor must convert the total value of any sales made in foreigncurrency to U.S. dollars using the "Treasury Reporting Rates of Exchange,"issued by the U.S. Department of Treasury, Financial Management Service. Thecontractor must use the issue of the Treasury report in effect on the last dayof the reporting quarter. The report is available from:



Department of the TreasuryFinancial Management ServiceInternational Funds Branch3700 East-West HighwayPGCII, Room 5Al9Hyattsville, MD 20782Telephone: (202) 874-7994Internet:http://www.ustreas.gov/treasury/bureaus/finman/intn.html

(e) The report is due 30 days following the completion cf the reporting period.The Contractor must provide a close-out report within 120 days after theexpiration date of the contract. This close-out report must cover all sales notshown in the final quarterly report and reconcile all errors and credits. If allcontract sales are reported and all errors and credits on the final quarterlyreport are reconciled, then the Contractor shall show zero sales in the close-out report.

(f) The Government reserves the right to inspect without further notice, suchrecords of the Contractor as pertain to sales under this contract. Willfulfailure or refusal to submit the required


reports, or falsification thereof, constitutes sufficient cause for terminatingthe contract for cause under the termination provisions of this contract.

7. DELETE Section H.1 OPTION TO EXTEND in its entirety and REPLACE with thefollowing:

F.1.A OPTION TO EXTEND THE TERM OF THE CONTRACT(I-FSS-164-A) (AUG 1995)

The Government may require continued performance of this contract for anadditional 5 year period. The option clause may not be exercised more than onetime. When the option to extend the term of this contract is exercised thefollowing conditions are applicable:

(a) The Contracting Officer may exercise the option by providing a writtennotice to the Contractor ten (10) months before expiration of the contract.

(b) When the Government exercises its option to extend the term of thiscontract, prices in effect at the time the option is exercised will remain ineffect during the option period, unless an adjustment is made in accordance withanother contract clause (e.g., Economic Price Adjustment Clause or PriceReductions Clause).

H.1.B NOTICE REGARDING OPTION(S) (GSAR 552.217-71) (NOV 1992)



The General Services Administration (GSA) has included an option to extend theterm of the contract in order to demonstrate the value it places on qualityperformance by providing a mechanism for continuing a contractual relationshipwith a successful Offeror that performs at a level which meets or exceeds GSA'squality performance expectations as communicated to the Contractor, in writing,by the Contracting Officer or designated representative. When deciding whetherto exercise the option, the Contracting Officer will consider the quality of theContractor's past performance under this contract in accordance with 48 CFR517.207.


8. DELETE Section H.9 YEAR 2000 WARRANTY COMMERCIAL SUPPLY ITEMS in its entiretyand REPLACE with the following:

H.9 YEAR 2000 WARRANTY COMMERCIAL SUPPLY ITEMS (I-FSS-550-A)(AUG 1997)

As used in this clause, "Year 2000 compliant" means information technology thataccurately processes date/time data (including, but not limited to, calculating,comparing, and sequencing) from, into, and between the twentieth and twenty-first centuries, and the years 1999 and 2000 and leap year calculations.Furthermore, Year 2000 compliant information technology, when used incombination with other information technology, shall accurately processdate/time if the other information technology properly exchanges date/time datawith it.

(a) All currently awarded products that are not Year 2000 compliant must bedeleted from this contract no later than December 31, 1999.

(b) Any contract modifications, adding new items under clause 552.243-72,Modifications (Multiple Award Schedule), must meet the warranty requirement inparagraph c, below.

(c) The Contractor warrants that each hardware, software, and firmware productdelivered under this contract shall be able to accurately process date data(including, but not limited to, calculating, comparing, and sequencing) from,into, and between the twentieth and twenty-first centuries, including leap yearcalculations, when used in accordance with the product documentation provided bythe Contractor, provided that all listed or unlisted products (e.g. hardware,software, firmware) used in combination with such listed product properlyexchange date data with it. If the contract requires that specific listedproducts must perform as a system in accordance with the foregoing warranty,then that warranty shall apply to those listed products as a system. Theduration of this warranty and the remedies-available to the Government forbreach of this warranty shall be as defined in, and subject to, the terms andlimitations of the Contractor's standard commercial warranty or warrantiescontained in this contract, provided that notwithstanding any provision to thecontrary in such commercial warranty or warranties, the remedies available tothe Government under this warranty shall include repair or replacement of any



listed product whose non-compliance is discovered and made known to theContractor in writing within ninety (90) days after acceptance. Nothing in thiswarranty shall be construed to limit


any rights or remedies the Government may otherwise have under this contractwith respect to defects other than Year 2000 performance.

9. DELETE Section 1.4 EXAMINATION OF RECORDS BY GSA in its entirety and REPLACEwith the following:

I.4 EXAMINATION OF RECORDS BY GSA (MULTIPLE AWARD SCHEDULE) (GSAR 552.215-71)(AUG 1997)

The Contractor agrees that the Administrator of General Services or any dulyauthorized representative shall have access to and the right to examine anybooks, documents, papers and records of the Contractor involving transactionsrelated to this contract for overbillings, billing errors, compliance with thePrice Reductions clause and--compliance with the Industrial Funding Fee clauseof this contract. This authority shall expire 3 years after final payment. Thebasic contract and each option shall be treated as separate contracts forpurposes of applying this clause.

10. DELETE Section 1.6 PAYMENTS BY ELECTRONIC FUNDS TRANSFER in its entirety andREPLACE with the following:

I.6 INVOICE PAYMENTS (GSAR 552.232-70).(MAR 1998)

(a) The due date for making invoice payments by the designated payment officeis:

(1) For orders placed electronically by the General Services Administration(GSA) Federal Supply Service(FSS), and to be paid by GSA through electronicfunds transfer (EFT), the later of the following two events:

(i) The 10th day after the designated billing office receives a proper invoicefrom the contractor. If the designated billing office fails to annotate theinvoice with the date of receipt at the time of receipt, the invoice payment duedate shall be the 10th day after the date of the Contractor's invoice; providedthe Contractor submitted a proper invoice and no disagreements exists overquantity, quality, or Contractor compliance with contract requirements.

(ii) The 10th day after Government acceptance of supplies delivered or servicesperformed by the Contractor.




(2) For all other orders, the later of the following two events:

(i) The 30th day after the designated billing office receives a proper invoicefrom the Contractor. If the designated billing office fails to annotate theinvoice with the date of receipt at the time of receipt, the invoice payment duedate shall be the 30th day after the date of the Contractor's invoice; providedthe Contractor submitted a proper invoice and no disagreement exists overquantity, quality, or Contractor compliance with contract requirements.

(ii) The 30th day after Government acceptance of supplies delivered or servicesperformed by the Contractor.

(3) On a final invoice, if the payment amount is subject to contract settlementactions, acceptance occurs on the effective date of the contract settlement.

(b) The General Services Administration will issue payment on the due date in(a)(1) above if the Contractor complies with full cycle electronic commerce.Full cycle electronic commerce includes all the following elements:

(1) The Contractor must receive and fulfill electronic data interchange (EDI)purchase orders (transaction set 850).

(2) The Contractor must generate and submit to the Government valid EDI invoices(transaction set 810).

(3) The Contractor's financial institution must receive and process, on behalfof the Contractor, EFT payments through the Automated Clearing House (ACH)system.

(4) The EDI transaction sets in (b)(1) through (b)(3) above must adhere toimplementation conventions provided by GSA.

(c) If any of the conditions in (b) above do not occur, the 10 day payment duedates in (a)(1) become 30 day payment due dates.

(d) All other provisions of the Prompt Payment Act (31 U.S.C. 3901 et seq.) andOffice of Management and Budget (OMB) Circular A-125, Prompt Payment, apply.


11. DELETE Section 1.7 PAYMENT BY CREDIT CARD in its entirety and REPLACE withthe following:

I.7 PAYMENT BY PURCHASE CARD (GSAR 552.232-80) (DEC 1989) (VARIATION I) (MAR1998)

(a) Definitions: "Government purchase card" means the uniquely numbered credit



card issued to named individual Government employees or entities to pay forofficial Government purchases. "Oral delivery order" means an order placedorally either in person or by telephone, which is paid for by Governmentpurchase card.

(b) Contractors are required to accept the Government purchase card for paymentsequal to or less than the micro-purchase threshold for oral or written deliveryorders. This is not intended to limit the acceptance of the Government purchasecard under this contract for dollar amounts that exceed this threshold ifotherwise agreeable between the Contractor and the customer; therefore,Contractors are encouraged to accept payment by the Government purchase card forall orders. If the Contractor is unwilling to accept payment by the Governmentpurchase card for a delivery order, the Contractor must so advise the orderingagency within 24 hours of receipt of order.

(c) The Contractor shall not process a transaction for payment through thecredit card clearinghouse until the purchased supplies have been shipped orservices performed. Unless the cardholder requests correction or replacement ofa defective or faulty item in accordance with other contract requirements, theContractor shall immediately credit a cardholder's account for items returned asdefective or faulty.

12. DELETE Section 1.13 INVOICE REQUIREMENTS in its entirety and REPLACE withthe following:

I.13 INVOICE

The Contractor shall submit an original invoice and three copies (or electronicinvoice, if authorized,) to the address designated 141 the delivery or taskorder to receive invoices. An invoice must include-

(1) Name and address of the Contractor;(2) Invoice date;(3) Contract number, contract line item number and, if applicable, the ordernumber;


(4) Description, quantity, unit of measure, unit price and extended price of theitems delivered;(5) Shipping number and date of shipment including the bill of lading number andweight of shipment if shipped on Government bill of lading;

(6) Terms of any prompt payment discount offered;(7) Name and address of official to whom payment is to be sent; and(8) Name, title, and phone number of person to be notified in event of defectiveinvoice.

Invoices will be handled in accordance with the Prompt Payment Act (31 U.S.C.



3903) and Office of Management and Budget (OMB) Circular A-125, Prompt Payment.Contractors are encouraged to assign an identification number to each invoice.

13. DELETE Section 1.25 INDUSTRIAL FUNDING FEE in its entirety and REPLACE withthe following:

I.25 INDUSTRIAL FUNDING FEE (G5AR 552.238-77) {FEB 1998)(FC: DEVIATION--DEC 1997))

(a) The Contractor must pay the Federal Supply Service, GSA, an IndustrialFunding Fee (IFF). The Contractor must remit the IFF in U.S. dollars within 30days after the end of each quarterly reporting period as established in clause552.238-72, Contractor's Report of Sales. The IFF equals one percent (1%) ofthe total quarterly sales reported. The IFF reimburses the GSA Federal SupplyService for the costs of operating the Federal Supply Schedules Program.Offerors should include the IFF in the prices submitted with their offer. Thefee is included in the award price(s) and reflected in the total amount chargedto ordering activities; consequently, GSA's costs are recouped from theseordering activities.

(b) The Contractor must remit any monies due as a result of the close out reportrequired by Clause 552.238-72 at the time the close out report is submitted toGSA.

(c) The IFF amount due must be paid by check, or electronic funds transferthrough the Automated Clearing House (ACH), to the "General ServicesAdministration." If the payment involves multiple special item numbers orcontracts, the Contractor may consolidate the IFFs into one payment. To ensurethat the payment is credited properly, the Contractor shall identify the checkor electronic transmission as an "Industrial Funding Fee" and include thefollowing information: contract number(s);


report amount(s); and report period(s). If the Contractor makes payment bycheck, provide this information on either the check, check stub, or otherremittance material.

(1) If the payment is made by check, it shall be forwarded to the followingaddress:

General Services AdministrationAccounts Receivable Branch (6BCR)P.O. Box 70500Chicago, IL 60673-0500

(2) If the IFF payment is made by electronic funds transfer through ACH, theContractor must call GSA, Financial Information Control Branch, Receivables,Collections and Sales Section (6BCDR) at (contracting officer to insert phonenumber) to make arrangements.



(d) If the full amount of the IFF is not paid within 30 calendar days after theend of the applicable reporting period, it shall constitute a contract debt tothe United States Government under the terms of FAR 32.6. The Government mayexercise all rights under the Debt Collection Act of 1982, including withholdingor setting off payments and interest on the debt (see FAR 52.232-17, Interest).

(e) Failure to submit sales reports, falsification of sales reports, and/orfailure to pay the IFF in a timely manner may result in termination orcancellation of this contract. Willful failure or refusal to furnish therequired reports, falsification of sales reports, or failure to make timelypayment of the IFF constitutes sufficient cause for terminating the contract forcause under the termination provisions of this contract.

14. ADD to the end of Section I - CONTRACT CLAUSES the following clauses:

I.28 PLACEMENT OF ORDERS (GSAR 552.216-73) (JUN 1994) (ALTERNATE II-JUN 1994)(DEVIATION)

(a) Delivery orders under this contract may be placed by entities authorized todo so by the Scope of Contract clause (see C.2).

(b) Orders may be placed through Electronic Data Interchange (EDI) or mailed inpaper form. EDI orders shall be placed using the American National StandardsInstitute (ANSI) X12 Standard for Electronic Data Interchange (EDI) format.


(c) If the Contractor agrees, GSA's Federal Supply Service (FSS) will place allorders by EDI using computer-to-computer EDI. If computer-to-computer EDI is notpossible, FSS will use an alternative EDI method allowing the Contractor toreceive orders by facsimile transmission. Subject to the Contractor's agreement,other agencies may place orders by EDI.

(d) When computer-to-computer EDI procedures will be used to place orders, theContractor shall enter into one or more Trading Partner Agreements (TPA) witheach Federal agency placing orders electronically in order to ensure mutualunderstanding by the parties of certain electronic transaction conventions andto recognize the rights and responsibilities of the parties as they apply tothis method of placing orders. The TPA must identify, among other things, thethird party provider(s) through which electronic orders are placed, thetransaction sets used, security procedures, and guidelines for implementation.Federal agencies may obtain a sample format to customize as needed from theoffice specified in (g) below.

(e) The Contractor shall be responsible for providing its own hardware andsoftware necessary to transmit and receive data electronically. Additionally,each party to the TPA shall be responsible for the costs associated with its use



of third party provider services.

(f) Nothing in the TPA will invalidate any part of this contract between theContractor and the General Services Administration. All terms and conditions ofthis contract that otherwise would be applicable to a mailed order shall applyto the electronic order.

(g) The basic content and format of the TPA will be provided by:

General Services AdministrationSystems Inventory and Operations Management Center (FCS)Washington, DC 20406

Telephone: (703) 305-7741FAX: (703) 305-7720

I.29 CONTRACT SALES CRITERIA (I-FSS-639) (MAR 1998)

A contract will not be awarded unless anticipated sales are expected to exceed$25,000 for a 1-year period. Resultant contracts will be canceled in accordancewith the cancellation clause unless reported sales are $25,000 for each 12 monthperiod from date of award and every 12 month period thereafter.


15. DELETE Section K.16 COST ACCOUNTING STANDARDS NOTICES AND CERTIFICATION andREPLACE with the following:

R.16 RESERVED

16. DELETE Section L.10 SIC CODES AND SMALL BUSINESS SIZE STANDARD in itsentirety and REPLACE with the following:

L.10 STANDARD INDUSTRIAL CLASSIFICATION (SIC) CODE AND SMALL BUSINESS SIZESTANDARD (BLOCK 10, STANDARD FORM 1449)

(a) The standard industrial classification (SIC) codes for this acquisition andthe small business size standards per FAR 19.102, are as follows:

SIC DESCRIPTION SIZE

DIVISION D - MANUFACTURING

MAJOR GROUP 27 - PRINTING, PUBLISHING, AND ALLIED INDUSTRIES2741 MISCELLANEOUS PUBLISHING 500

MAJOR GROUP 35 - INDUSTRIAL AND COMMERCIAL MACHINERY AND COMPUTER EQUIPMENT3571 ELECTRONIC COMPUTERS 1,0003572 COMPUTER STORAGE DEVICES 1,000



3575 COMPUTER TERMINALS 1,0003577 COMPUTER PERIPHERAL EQUIPMENT, N.E.C. 1,000

MAJOR GROUP 36 - ELECTRONIC AND OTHER ELECTRICAL EQUIPMENT AND COMPONENTS

3643 CURRENT-CARRYING WIRING DEVICES 5003644 NONCURRENT-CARRYING WIRING DEVICES 5003651 HOUSEHOLD AUDIO AND VIDEO EQUIPMENT 7503661 TELEPHONE AND TELEGRAPH APPARATUS 1,0003663 RADIO AND TELEVISION BROADCASTING AND

COMMUNICATIONS EQUIPMENT - 7503669 OTHER COMMUNICATIONS EQUIPMENT, N.E.C. 750


DIVISION E - TRANSPORTATION, COMMUNICATIONS, ELECTRIC, GAS, AND SANITARYSERVICES

MAJOR GROUP 48 - COMMUNICATIONS4812RADIOTELEPHONE COMMUNICATIONS 1,5004813TELEPHONE COMMUNICATIONS, EXCEPTRADIOTELEPHONE 1,5004822TELEGRAPH AND OTHER MESSAGE COMMUNICATIONS $ 5.04899COMMUNICATIONS SERVICES, N.E.C. $11.0

DIVISION F - WHOLESALE TRADEMAJOR GROUP 50 - DURABLE GOODS5045 COMPUTERS AND COMPUTER PERIPHERAL

EQUIPMENT AND SOFTWARE $ 500

DIVISION I - SERVICESMAJOR GROUP 73 - BUSINESS SERVICES

7359 EQUIPMENT RENTAL AND LEASING, N.E.C. $ 5.07371 COMPUTER PROGRAMS $ 18.07372 PREPACKAGED SOFTWARE $ 18.07373 COMPUTER INTEGRATED SYSTEMS DESIGN $ 18.07374 COMPUTER PROCESSING AND DATA PREPARATION

AND PROCESSING SERVICES $ 18.07375 INFORMATION RETRIEVAL SERVICES $ 18.07376 COMPUTER FACILITIES MANAGEMENT SERVICES 18.07377 COMPUTER RENTAL AND LEASING $ 18.07378 COMPUTER MAINTENANCE AND REPAIR $ 18.07379 COMPUTER RELATED SERVICES, N.E.C. $ 18.07389 BUSINESS SERVICES, N.E.C. $ 5.0

NOTES: SIZE STANDARDS PRECEDED BY A DOLLAR SIGN ($) ARE IN MILLIONS OF DOLLARS.ALL OTHERS ARE IN NUMBER OF EMPLOYEES UNLESS SPECIFIED OTHERWISE. N.E.C.: NOT



ELSEWHERE CLASSIFIED.

(b) The small business size standard for a concern which submits an offer in itsown name, other than on a construction or service contract, but which proposesto furnish a product which it did not itself manufacture, is 500 employees.

(c) If the Offeror represents different business sizes than indicated inparagraph G.l(c) for any proposed SIN, indicatebelow the SIC code and the business size.

Modification Page 27 of 53 Pages->

Special Item Number Standard Industry Business(SIN) Classification (SIC) Size

132-3 Leasing ofEquipment132-8 Purchase ofEquipment132-12 Maintenance ofEquipment, RepairService and/orRepair/Spare Parts132-32 Term SoftwareLicense132-33 PerpetualSoftware License132-34 Maintenance ofSoftware132-50 Training Courses132-51 ProfessionalInformation TechnologyServices.132-52 ElectronicCommerce Services

17. DELETE from ATTACHMENT I the section entitled INFORMATION FOR ORDERINGOFFICES and REPLACE with the following:

INFORMATION FOR ORDERING OFFICES

SPECIAL NOTICE TO AGENCIES:

Small Business Participation

SBA strongly supports the participation of small business concerns in the



Federal Supply Schedules Program. To enhance Small Business Participation SBApolicy allows agencies to include in their procurement base and goals, thedollar value of orders expected to be placed against the Federal Supplyschedules, and to report accomplishments against these goals.

For orders exceeding the micropurchase threshold, FAR 8.404 requires agencies toconsider the catalogs/pricelists of at least three schedule contractors orconsider reasonably available


information by using the GSA Advantage!TM on-line shopping service(www.fss.gsa.gov). The catalogs/pricelists, GSA Advantage!TM and the FederalSupply Service Home Page (www.fss.gsa.gov) contain information on a broad arrayof products and services offered by small business concerns.

This information should be used as a tool to assist ordering activities inmeeting or exceeding established small business goals. It should also be used asa tool to assist in including small, small disadvantaged, and women-owned smallbusinesses among those considered when selecting pricelists for a best valuedetermination.

For orders exceeding the micropurchase threshold, customers are to givepreference to small business concerns when two or more items at the samedelivered price will satisfy their requirement.

1. Geographic Scope of Contract:

**The minimum acceptable geographic scope of contract is the 48 contiguousstates and the District of Columbia. If the scope includes Alaska, Hawaii, orthe Commonwealth of Puerto Rico, identify these locations. Any overseaslocations must also be specifically identified.**

2. Contractor's Ordering Address and Payment Information:

**The Contractor should insert the complete address(es) for ordering (seeparagraph G.8) and payment (see paragraph G.10.**

Contractors are required to accept the Government purchase card for paymentsequal to or less than the micro-purchase threshold for oral or written deliveryorders. Government purchase cards will/will not be acceptable for payment above

----the micro-purchase threshold. In addition, bank account information for wiretransfer payments will be shown on the invoice.

**Choose the appropriate language "will" or "will not" in the second sentence.Copy the first and third sentence.**

The following telephone number(s) can be used by ordering agencies to obtain



technical and/or ordering assistance:

**Insert the telephone numbers.**(301) 459-2650


3. LIABILITY FOR INJURY OR DAMAGE

The Contractor shall not be liable for any injury to Government personnel ordamage to Government property arising from the use of equipment maintained bythe Contractor, unless such injury or damage is due to the fault or negligenceof the Contractor.

4. Statistical Data for Government Ordering Office Completion of Standard Form279:

Block 9: G. Order/Modification Under Federal ScheduleBlock 16: Data Universal Numbering System (DUNS)Number: 11-807-6561Block 30: Type of Contractor - A

**Copy the applicable letter and corresponding language from the followinglist**

A. Small Disadvantaged Business8. Other Small BusinessC. Large BusinessG. Other Nonprofit OrganizationL. Foreign Contractor

Block 31: Woman-Owned Small Business - NO**Yes or No**

Block 36: Contractors Taxpayer Identification Number (TIN)51-275037

4a. CAGE Code: OMOC7

**CAGE Codes are assigned by the Defense Logistics Agency. If you do notcurrently have a CAGE Code, GSA will supply you with the form necessary toobtain a CAGE Code at a later date.**

5. FOB Destination

6. DELIVERY SCHEDULE

a. TIME OF DELIVERY: The Contractor shall deliver to destination within thenumber of calendar days after receipt of order (ARO), as set forth below:



SPECIAL ITEM NUMBER DELIVERY TIME (Days ARO)132-8 90 or as negotiated132-33 90 or as negotiated


**NOTE: The Time of Delivery stated should be identical to that shown underparagraph B.2, PRODUCTS AND SERVICES OFFERED/SCHEDULE OF ITEMS. If ExpeditedDelivery and/or Overnight and 2-Day Delivery are offered under paragraph C.12,COMMERCIAL DELIVERY SCHEDULE (MULTIPLE AWARD SCHEDULE), provide information inthis section of the pricelist.**

N/A

b. URGENT REQUIREMENTS: When the Federal Supply Schedule contract deliveryperiod does not meet the bona fide urgent delivery requirements of an orderingagency, agencies are encouraged, if time permits, to contact the Contractor forthe purpose of obtaining accelerated delivery. The Contractor shall replay tothe inquiry within 3 workdays after receipt. (Telephonic replies shall beconfirmed by the Contractor in writing.) If the Contractor offers an accelerateddelivery time acceptable to the ordering agency, any order(s) placed pursuant tothe agreed upon accelerated delivery time frame shall be delivered within thisshorter delivery time and in accordance with all other terms and conditions ofthe contract .

7. Discounts: Prices shown are NET Prices; Basic Discounts have been deducted.

a. Prompt Payment: 0% - n/a Net 30 days from receipt of invoice or date ofacceptance, whichever is later.b. Quantityc. Dollar Volumed. Government Educational Institutions

**If Government Educational Institutions as offered special discounts, which aregreater than the discounts offered to other Government customers, specify suchdiscounts. Otherwise, state that Government Educational Institutions areoffered the same discounts as all other Government customers.**

e. Other

**Provide complete information to explain all of the discounts offered. Copythe language in paragraphs "a" through "f" as applicable to your proposal.**


8. Trade Agreements Act of 1979, as amended:



All items are U.S. made end products, designated country end products, CaribbeanBasin country end products, Canadian end products, or Mexican end products asdefined in the Trade Agreements Act of 1979, as amended.

9. Statement Concerning Availability of Export Packing:

NONE

10. Sma11 Requirements: The minimum dollar value of orders to be issued is$100.

**See C.9, ORDER LIMITATIONS, paragraph (a) Minimum Order.**

11. Maximum Order: (All dollar amounts are exclusive of any discount for promptpayment.)

a. Special Item-Number 132-3 - Leasing of Equipment

The maximum dollar value per order for all leased equipment will be $500,000.

b. Special Item Number 132-8 - Purchase of Equipment

The maximum dollar value per order for all purchased equipment will be $500,000.

c. Special Item Number 132-12 - Repair Parts/Spare Parts

The maximum dollar value per order for all repair parts/spare parts will be$10,000.

d. Special Item Number 132-32 - Term Software Licenses

The maximum dollar value per order for all term software licenses will be$50,000 or $500,000.

e. Special Item Number 132-33 - Perpetual Software Licenses

The maximum dollar value per order for all perpetual software licenses will be$50,000 or $500,000.

f. Special Item Number 132-50 - Training Courses

The maximum dollar value per order for all training courses will be S25,000.


g. Special Item Number 132-51 - Information Technology (IT) ProfessionalServices

The maximum dollar value per order for all IT Professional services will be



$500,000.

h. Special Item Number 132-52 - Electronic Commerce (EC) Services

The maximum dollar value per order for all EC services will be $500,000.

Note: Maximum Orders do not apply to Special Item Numbers 132-12 Maintenanceand Repair Service (except for Repair Parts/Spare Parts) or 132-34 Maintenanceof Software.

12. USE OF FEDERAL SUPPLY SERVICE INFORMATION TECHNOLOGY SCHEDULE CONTRACTS. Inaccordance with FAR 8.404:

[NOTE: Special ordering procedures have been established for Special ItemNumbers (SINs) 132-51 IT Professional Services and 132-52 EC Services; refer tothe terms and conditions for those SINs.]

Orders placed pursuant to a Multiple Award Schedule (MAS), using the proceduresin FAR 8.404, are considered to be issued pursuant to full and open competition.Therefore, when placing orders under Federal Supply Schedules, ordering officesneed not seek further competition, synopsize the requirement, make a separatedetermination of fair and reasonable pricing, or consider small business set-asides in accordance with subpart 19.5. GSA has already determined the pricesof items under schedule contracts to be fair and reasonable. By placing anorder against a schedule using the procedures outlined below, the orderingoffice has concluded that the order represents the best value and results in thelowest overall cost alternative (considering price, special features,administrative costs, etc.) to meet the Government's needs.

a. Orders placed at or below the micro-purchase threshold. Ordering offices canplace orders at or below the micro-purchase threshold with any Federal SupplySchedule Contractor.

b. Orders excluding the micro-purchase threshold but not exceeding the maximumorder threshold. Orders should be placed with the Schedule Contractor that canprovide the supply or service that represents the best value. Before placing anorder, ordering offices should consider reasonably available information


about the supply or service offered under MAS contracts by using the "GSAAdvantage!" on-line shopping service, or by reviewing the catalogs/pricelists ofat least three Schedule Contractors and selecting the delivery and other optionsavailable under the schedule that meets the agency's needs. In selecting thesupply or service representing the best value, the ordering office mayconsider--

(1) Special features of the supply or service that are required in effectiveprogram performance and that are not provided by a comparable supply or service;



(2) Trade-in considerations;

(3) Probable life of the item selected as compared with that of a comparableitem;

(4) Warranty considerations;

(5) Maintenance availability;

(6) Past performance; and

(7) Environmental and energy efficiency considerations.

c. Orders exceeding the maximum order threshold. Each schedule contract has anestablished maximum order threshold. This threshold represents the point whereit is advantageous for the ordering office to seek a price reduction. Inaddition to following the procedures in paragraph b, above, and before placingan order that exceeds the maximum order threshold, ordering offices shall--

(1) Review additional Schedule Contractors' catalog pricelists or use the "GSAAdvantage!" on-line shopping service;

(2) Based upon the initial evaluation, generally seek price reductions from theSchedule Contractor(s) appearing to provide the best value (considering priceand other factors); and

(3) After price reductions have been sought, place the order with the ScheduleContractor that provides the best value and results in the lowest overall costalternative. If further price reductions are not offered, an order may still beplaced, 8 if the ordering office determines that it is appropriate.


NOTE: For orders exceeding the maximum order threshold, the Contractor may:

(1) Offer a new lower price for this requirement (the Price Reductions clause isnot applicable to orders placed over the maximum order in FAR 52.216-19 OrderLimitations);

(2) Offer the lowest price available under the contract; or

(3) Decline the order (orders must be returned in accordance withFAR 52.216-19).

d. Blanket purchase agreements (BPAs). The establishment of Federal SupplySchedule BPAs is permitted when following the ordering procedures in FAR 8.404.All schedule contracts contain BPA provisions. Ordering offices may use BPAs toestablish accounts with Contractors to fill recurring requirements. BPAs shouldaddress the frequency of ordering and invoicing, discounts, and delivery



locations and times.

e. Price reductions. In addition to the circumstances outlined in paragraph c,above, there may be instances when ordering offices will find it advantageous torequest a price reduction. For example, when the ordering office finds aschedule supply or service elsewhere at a lower price or when a BPA is beingestablished to fill recurring requirements, requesting a price reduction couldbe advantageous. The potential volume of orders under these agreements,regardless of the size of the individual order, may offer the ordering officethe opportunity to secure greater discounts. Schedule Contractors are notrequired to pass on to all schedule users a price reduction extended only to anindividual agency for a specific order.

f. Small business. For orders exceeding the micro-purchase threshold, orderingoffices should give preference to the items of small business concerns when twoor more items at the same delivered price will satisfy the requirement.

g. Documentation. Orders should be documented, at a minimum, by identifying theContractor the item was purchased from, the item purchased, and the amount paid.If an agency requirement in excess of the micro-purchase threshold is defined soas to require a particular brand name, product, or feature of a product peculiarto one manufacturer, thereby precluding consideration of a product manufacturedby another company, the


ordering office shall include an explanation in the file as to why theparticular brand name, product, or feature is essential to satisfy the agency'sneeds.

13. FEDERAL INFORMATION TECHNOLOGY/TELECOMMUNICATIONS STANDARDS REQUIREMENTS:Federal departments and agencies acquiring products from this Schedule mustcomply with the provisions of the Federal Standards Program, as appropriate(reference: NIST Federal Standards Index). Inquiries to determine whether ornot specific products listed herein comply with Federal Information ProcessingStandards (FIPS) or Federal telecommunication Standards (FED-STDS), which arecited by ordering offices, shall be responded to promptly by the Contractor.

13.1 FEDERAL INFORMATION PROCESSING STANDARDS PUBLICATIONS (FIPS PUBS):Information Technology products under this Schedule that do not conform toFederal Information Processing Standards (FIPS) should not be acquired unless awaiver has been granted in accordance with the applicable "FIPS Publication."Federal Information Processing Standards Publications (FIPS PUBS) are issued bythe U.S. Department of Commerce, National Institute of Standards and Technology(NIST), pursuant to National Security Act. Information concerning theiravailability and applicability should be obtained from the NationalTechnical Information Service (NTIS), 5285 Port Royal Road, Springfield,Virginia 22161. FIPS PUBS include voluntary standards when these are adopted forFederal use. Individual orders for FIPS PUBS should be referred to the NTIS



Sales Office, and orders for subscription service should be referred to theNTIS Subscription Officer, both at the above address, or telephone number (703)487-4650.

13.2 FEDERAL TELECOMMUNICATION STANDARDS (FED STDS): Telecommunication productsunder this Schedule that do not conform to Federal Telecommunication Standards(FED-STDS) should not be acquired unless a waiver has been granted in accordancewith the applicable "FED-STD." Federal telecommunication Standards are issued bythe U.S. Department of Commerce, National Institute of Standards and Technology(NIST), pursuant to National Security Act. Ordering information and informationconcerning the availability of FED-STDS should be obtained from the GSA, FederalSupply Service, Specification Section, 470 East L'Enfant-Plaza, Suite 8100,SW, Washington, DC 20407, telephone number (202)619-8925. Please include aself-addressed mailing label when requesting information by mail. Informationconcerning their applicability can be obtained by writing or calling the U.S.Department of Commerce, National Institute of Standards and Technology,Gaithersburg, MD 20899, telephone number (301) 975-2833.


14. SECURITY REQUIREMENTS. In the event security requirements are necessary,the ordering activities may incorporate, in their delivery orders, a securityclause in accordance with current laws, regulations, and individual agencypolicy; however, the burden of administering the security requirements shall bewith the ordering agency. If any costs are incurred as a result of theinclusion of security requirements, such costs will not exceed ten percent (10%)or $100,000, of the total dollar value of the order, whichever is lessor.

15. CONTRACT ADMINISTRATION FOR ORDERING OFFICES: Any ordering office, withrespect to any one or more delivery orders placed by it under this contract, mayexercise the same rights of termination as might the GSA Contracting Officerunder provisions of FAR 52.212-4, paragraphs (1) Termination for theGovernment's convenience, and (m) Termination for Cause (See C.1.)

16. GSA Advantage!

GSA Advantage! is an on-line, interactive electronic information and orderingsystem that provides on-line access to vendors' schedule prices with orderinginformation. GSA Advantage! will allow the user to perform various searchesacross all contracts including, but not limited to:

(1) Manufacturer;(2) Manufacturer's Part Number; and(3) Product categories.

Agencies can browse GSA Advantage! by accessing the Internet Worldwide Webutilizing a browser (ex.: NetScape). The Internet address ishttp://www.fss.gsa.gov/.



17. PURCHASE OF INCIDENTAL, NON-SCHEDULE ITEMS

For administrative convenience, open market (non-contract) items may be added toa Federal Supply Schedule Blanket Purchase Agreement (BPA) or an individualorder, provided that the items are clearly labeled as such on the order, allapplicable regulations have been followed, and price reasonableness has beendetermined by the ordering activity for the open market (non-contract) items.

18. CONTRACTOR COMMITMENTS, WARRANTIES AND REPRESENTATIONS

a. For the purpose of this contract, commitments, warranties and representationsinclude, in addition to those agreed to for the entire schedule contract:


(1) Time of delivery/installation quotations for individual orders;

(2) Technical representations and/or warranties of products concerningperformance, total system performance and/or configuration, physical, designand/or functional characteristics and capabilities of aproduct/equipment/service/software package submitted in response to requirementswhich result in orders under this schedule contract.

(3) Any representations and/or warranties concerning the products made in anyliterature, description, drawings and/or specifications furnished by theContractor.

b. The above is not intended to encompass items not currently covered by the GSASchedule contract.

19. OVERSEAS ACTIVITIES

The terms and conditions of this contract shall apply to all orders forinstallation, maintenance and repair of equipment in areas listed in thepricelist outside the 48 contiguous states and the District of Columbia, exceptas indicated below:

_____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Upon request of the Contractor, the Government may provide the Contractor withlogistics support, as available, in accordance with all applicable Governmentregulations. Such Government support will be provided on a reimbursable basis,and will only be provided to the Contractor's technical personnel whose servicesare exclusively required for the fulfillment of the terms and conditions of thiscontract.



20. YEAR 2000 WARRANTY - COMMERCIAL SUPPLY ITEMS (I-FSS-550-A)(AUG 1997)

As used in this clause, "Year 2000 compliant" means information technologythat accurately processes date/time data (including, but not limited to,calculating, comparing, and sequencing) from, into, and between the twentiethand twenty-first centuries, and the years 1999 and 2000 and leap yearcalculations. Furthermore, Year 2000 compliant information technology, when usedin combination with other information technology, shall accurately process datetime if the other information technology properly exchanges date/time data withit.

Modification Page 38 of 53 Pages.

(a) All currently awarded products that are not Year 2000 compliant mustbe deleted from this contract no later than December 31, 1999.

(b) Any contract modifications, adding new items under clause 552.243-72,Modifications (Multiple Award Schedule), must meet the warranty requirement inparagraph c, below.

(c) The Contractor warrants that each hardware, software, and firmware productdelivered under this contract shall be able to accurately process date data(including, but not limited to, calculating, comparing, and sequencing) from,into, and between the twentieth and twenty-first centuries, including leap yearcalculations, when used in accordance with the product documentation provided bythe Contractor, provided that all listed or unlisted products (e.g. hardware,software, firmware) used in combination with such listed product properlyexchange date data with it. If the contract requires that specific listedproducts must perform as a system in accordance with the foregoing warranty,then that warranty shall apply to those listed products as a system. Theduration of this warranty and the remedies available to the Government forbreach of this warranty shall be as defined in, and subject to, the terms andlimitations of the Contractor's standard commercial warranty or warrantiescontained in this contract, provided that notwithstanding any provision to thecontrary in such commercial warranty or warranties, the remedies available tothe Government under this warranty shall include repair or replacement of anylisted product whose non-compliance is discovered and made known to theContractor in writing within ninety (90) days after acceptance. Nothing in thiswarranty shall be construed to limit any rights or remedies the Government mayotherwise have under this contract with respect to defects other than Year 2000performance.

21. BLANKET PURCHASE AGREEMENTS (BPAs)

Federal Acquisition Regulation (FAR) 13.201(a) defines Blanket PurchaseAgreements (BPAs) as "...a simplified method of filling anticipated repetitiveneeds for supplies or services by establishing 'charge accounts' with qualifiedsources of supply." The use of Blanket Purchase Agreements under the Federal



Supply Schedule Program is authorized in accordance with FAR 13.202(c)(3), whichreads, in part, as follows:

"BPAs may be established with Federal Supply Schedule Contractors, ( if notinconsistent with the terms of the applicable schedule contract."


Federal Supply Schedule contracts contain BPA provisions to enable scheduleusers to maximize their administrative and purchasing savings. This featurepermits schedule users to set up "accounts" with Schedule Contractors to fillrecurring requirements. These accounts establish a period for the BPA, andgenerally address issues such as the frequency of ordering and invoicing,authorized callers, discounts, delivery locations and times. Agencies mayqualify for the best quantity/volume discounts available under the contract,based on the potential volume of business that may be generated through such anagreement, regardless of the size of the individual orders. In addition,agencies may be able to secure a discount higher than that available in thecontract based on the aggregate volume of business possible under a BPA.Finally, Contractors may be open to a progressive type of discounting where thediscount would increase once the sales accumulated under the BPA reach certainprescribed levels. Use of a BPA may be particularly useful with the new MaximumOrder feature. See the Suggested Format, contained in this Schedule Pricelist,for customers to consider when using this purchasing tool.

22. CONTRACTOR TEAM ARRANGEMENTS

Federal Supply Schedule Contractors may use "Contractor Team Arrangements"(see FAR 9.6) to provide solutions when responding to a customer agencyrequirements. The policy and procedures outlined in this part will providemore flexibility and allow innovative acquisition methods when using theFederal Supply Schedules. See the additional information regardingContractor Team Arrangements in this Schedule Pricelist.


18. DELETE from ATTACHMENT I the section entitled TERMS AND CONDITIONSAPPLICABLE TO INFORMATION TECHNOLOGY PROFESSIONAL SERVICES (SPECIAL ITEM 132-51)AND ELECTRONIC COMMERCE SERVICES (SPECIAL ITEM 132-52) FOR GENERAL PURPOSEINFORMATION TECHNOLOGY SERVICES and REPLACE with the following:

TERMS AND CONDITIONS APPLICABLE TO INFORMATION TECHNOLOGY (IT) PROFESSIONALSERVICES (SPECIAL ITEM NUMBER 132-51) AND ELECTRONIC COMMERCE (EC) SERVICES(SPECIAL ITEM NUMBER 132-52)

**The phrase, "Information Technology (IT) Professional Services/ElectronicCommerce (EC) Services" in the following; paragraphs may need to be revised in



order to be consistent with the Offeror's proposal; e.g., if only ITProfessional Services are offered, all references to EC Services should bedeleted.**

1. SCOPE

a. The prices, terms and conditions stated under Special Item Number 132-51Information Technology Professional Services and Special Item Number 132-52Electronic Commerce Services apply exclusively to IT/EC Services within thescope of this Information Technology Schedule.

b. The Contractor shall provide services at the Contractor's facility and/or atthe Government location, as agreed to by the Contractor and the ordering office.

**NOTE: Include paragraph 2, only if hourly rates for IT Professional Servicesare offered.**

2. ORDERING PROCEDURES

a. Procedures for IT professional services priced on GSA schedule at hourlyrates.

(1) FAR 8.402 contemplates that GSA may occasionally find it necessary toestablish special ordering procedures for individual Federal Supply Schedules orfor some Special Item Numbers (SINs) within a Schedule. GSA has establishedspecial ordering procedures for IT professional services (SIN 132-51)


that are priced on schedule at hourly rates. These special ordering procedureswhich are outlined herein take precedence over the procedures in FAR 8.404.

(2) The GSA has determined that the rates for IT professional services containedin this pricelist are fair and reasonable. However, the ordering office usingthis contract is responsible for considering the level of effort and mix oflabor proposed to perform a specific task being ordered and for making adetermination that the total firm-fixed price or ceiling price is fair andreasonable.

(3) When ordering IT professional services ordering offices shall

(i) Prepare a Request for quotation:

(A) A performance-based statement of work that outlines, at a minimum, the workto be performed, location of work, period of performance, deliverable schedule,applicable standards, acceptance criteria, and any special requirements (i.e.,security clearances, travel, special knowledge, etc.) should be prepared.

(B) A request for quotation should be prepared which includes the performance-



based statement of work and requests the contractors submit either a firm-fixedprice or a ceiling price to provide the services outlined in the statement ofwork. A firm-fixed price order shall be requested, unless the ordering officemakes a determination that it is not possible at the time of placing the orderto estimate accurately the extent or duration of the work or to anticipate costwith any reasonable degree of confidence. When such a determination is made, alabor hour or time-and-materials-proposal may be requested. The firm fixedprice shall be based on the hourly rates in the schedule contract and shallconsider the mix of labor categories and level of effort required to perform theservices described in the statement of work. The firm-fixed price of the ordershould also include any travel costs or other incidental costs related toperformance of the services ordered, unless the order provides for reimbursementof travel costs at the rates provided in the Federal Travel or Joint TravelRegulations. A ceiling price must be established for labor; hour and time andmaterial orders.

(C) The request for quotation may request the contractors, if necessary orappropriate, submit a project plan for performing the task and information onthe contractor's experience and/or past performance performing similar tasks.


(D) The request for quotation shall notify the contractors what basis will beused for selecting the contractor to receive the order. The notice shallinclude the basis for determining whether the contractors are technicallyqualified and provide an explanation regarding the intended use of anyexperience and/or past performance information in determining technicalacceptability of responses. If consideration will be limited to schedulecontractors who are small business concerns as permitted by paragraph (ii)(A)below, the request for quotations shall notify the contractors that will be thecase.

(ii) Transmit the Request for quotation to Contractors:

(A) Based upon an initial evaluation of catalogs and pricelists, the orderingoffice should identify the contractors that appear to offer the best value(considering the scope of services offered, hourly rates and other factors suchas contractors' locations, as appropriate). When buying IT professional servicesunder SIN 132-51 ONLY, the ordering office, at its discretion, may limitconsideration to those schedule contractors that are small business concerns.This limitation is not applicable when buying supplies and/or services underother SINs as well as SIN 132-51. The limitations may only be used when at leastthree (3) small businesses that appear to offer services that will meet theagency's needs are available, if the order is estimated to exceed the micro-purchase threshold.

(B)- The request for quotation-should be to three (3) contractors if theproposed order is estimated to exceed the micro-purchase threshold, but not toexceed the maximum order threshold. For proposed orders exceeding the maximum



order threshold, the request for quotation should be provided to additionalcontractors that offer services that will meet the agency's needs. Orderingoffices should strive to minimize the contractors' costs associated withresponding to requests for proposals for specific orders. Requests should betailored to the minimum level necessary for adequate evaluation and selectionfor order placement.

(iii) Evaluate Proposals and select the contractor to receive the order:

After responses have been evaluated against the factors identified in therequest for quotation, the order should be placed with the schedule contractorthat represents the best value and results in the lowest overall costalternative (considering price, special qualifications, administrative costs,etc.) to meet the Government's needs.


(4) The establishment of Federal Supply Schedule Blanket Purchase Agreements(BPAs) for recurring services is permitted when the procedures outlined hereinare followed. All BPAs for services must define the services that may beordered under the BPA, along with delivery or performance time frames, billingprocedures, etc. The potential volume of orders under BPAs, regardless of thesize of individual orders, may offer the ordering office the opportunity tosecure volume discounts. When establishing BPAs ordering offices shall

(i) Inform contractors in the request for quotation (based on the agency'srequirement) if a single BPA or multiple BPAs will be established, and indicatethe basis that will be used for selecting the contractors to be awarded theBPAs.

(A) SINGLE BPA: Generally, a single BPA should be established when the orderingoffice can define the tasks to be ordered under the BPA and establish afirm-fixed price or ceiling price for individual tasks or services to beordered. When this occurs, authorized users may place the order directly underthe established BPA when the need for service arises. The schedule contractorthat represents the best value and results in the lowest overall costalternative to meet the agency's needs should be awarded the BPA.

(B) MULTIPLE BPAs: When the ordering office determines multiple BPAs are neededto meet its requirements, the ordering office should determine which contractorscan meet any technical qualifications before establishing the BPAs. Whenmultiple BPAs are established, the authorized users must follow the procedure in(3)(ii)(B) above, and then place the order with the schedule contractor thatrepresents the best value and results in the lowest overall cost alternative tomeet the agency's needs.

(ii) Review BPAs periodically. Such reviews shall be conducted at leastannually. The purpose of the review is to determine whether the BPA stillrepresents the best value (considering price, special qualifications, etc.) and



results in the lowest overall cost alternative to meet the agency's needs.

(5) The ordering office should give preference to small business concerns whentwo or more contractors can provide the services at the same firm-fixed price orceiling price.


(6) When the ordering office's requirement involves both products as well as ITprofessional services, the ordering office should total the prices for theproducts and the firm-fixed price for the services and select the contractorthat represents the greatest value in terms of meeting the agency's total needs.

(7) The ordering office, at a minimum, should document orders by identifying thecontractor the services were purchased from, the services purchased, and theamount paid. If other than a firm-fixed price order is placed, suchdocumentation should include the basis for the determination to use a labor-houror time-and-materials order. For agency requirements in excess of themicro-purchase threshold, the order file should document the evaluation ofschedule contractors' proposals that formed the basis for the selection of thecontractor that received the order and the rationale for any trade-offs made inmaking the selection.

b. Ordering Procedures for other services available on schedule at fixed pricesfor specifically defined services or tasks.

Orders placed pursuant to a Multiple Award Schedule (MAS), using the proceduresin FAR 8.404, are considered to be issued pursuant to full and open competition.Therefore, when placing orders under Federal Supply Schedules, ordering officesneed not seek further competition, synopsize the requirement, make a separatedetermination of fair and reasonable pricing, or consider small business set-asides in accordance with subpart 19.5. GSA has already determined the prices ofitems under schedule contracts to be fair and reasonable. By placing an orderagainst a schedule using the procedures outlined below, the ordering office hasconcluded that the order represents the best value and results in the lowestoverall cost alternative (considering price, special features, administrativecosts, etc.) to meet the Government's needs.

(1) Orders placed at or below the micro-purchase threshold. Ordering offices canplace orders at or below the micro-purchase threshold with any Federal SupplySchedule Contractor.

(2) Orders excluding the micro-purchase threshold but not exceeding the maximumorder threshold. Orders should be placed with the Schedule Contractor that canprovide the supply or service that represents the best value. Before placing anorder, ordering offices should consider reasonably available informationabout the service offered under MAS contracts by using the "GSA Advantage!"on-line shopping service, or by reviewing the, catalogs/pricelists of at



least three Schedule Contractors and selecting the delivery and other optionsavailable under the


schedule that meets the agency's needs. In selecting the service representingthe best value, the ordering office may consider--(i) special features of theservice that are required in effective program performance and that are notprovided by a comparable service; and (ii) past performance.

(3) Orders exceeding the maximum order threshold. Each schedule contract has anestablished maximum order threshold. This threshold represents the point whereit is advantageous for the ordering office to seek a price reduction. Inaddition to following the procedures in paragraph b, above, and before placingan order that exceeds the maximum order threshold, ordering offices shall

(i) Review additional Schedule Contractors' catalogs/pricelists or use the "GSAAdvantage!" on-line shopping service;

(ii) Based upon the initial evaluation, generally seek price reductions from theSchedule Contractor(s) appearing to provide the best value (considering priceand other factors); and

(iii) After price reductions have been sought, place

the order with the Schedule Contractor that provides the best value and resultsin the lowest overall cost alternative. If further price reductions are notoffered, an order may still be placed, if the ordering office determines that itis appropriate.

NOTE: For orders exceeding the maximum order threshold, the Contractor may:

(A) Offer a new lower price for this requirement (the Price Reductions clause isnot applicable to orders placed over the maximum order in FAR 52.216-19 OrderLimitations);

(B) Offer the lowest price available under the contract; or

(C) Decline the order (orders must be returned in accordance withFAR 52.216-19).

(4) Blanket purchase agreements (BPAs). The establishment of Federal SupplySchedule BPAs is permitted when following the ordering procedures in FAR 8.404.All schedule contracts contain BPA provisions. Ordering offices may use BPAs toestablish accounts with Contractors to fill recurring requirements. BPAs shouldaddress the frequency of ordering and invoicing, discounts, and deliverylocations and times.




(5) Price reductions. In addition to the circumstances outlined in paragraph(3), above, there may be instances when ordering offices will find itadvantageous to request a price reduction. For example, when the ordering officefinds a schedule service elsewhere at a lower price or when a BPA is beingestablished to fill recurring requirements, requesting a price reduction couldbe advantageous. The potential volume of orders under these agreements,regardless of the size of the individual order, may offer the ordering officethe opportunity to secure greater discounts. Schedule Contractors are notrequired to pass on to all schedule users a price reduction extended only to anindividual agency for a specific order.

(6) Small business. For orders exceeding the micro purchase threshold, orderingoffices should give preference to the items of small business concerns when twoor more items at the same delivered price will satisfy the requirement.

(7) Documentation. Orders should be documented, at all, minimum, by identifyingthe Contractor the item was purchased from, the item purchased, and the amountpaid. If an agency requirement in excess of the micro-purchase threshold isdefined so as to require a particular brand name, product, or feature of aproduct peculiar to one manufacturer, thereby precluding consideration of aproduct manufactured by another company, the ordering office shall include anexplanation in the file as to why the particular brand name, product, or featureis essential to satisfy the agency's needs.

3. ORDER

a. Agencies may use written orders, EDI orders, blanket purchase agreements,individual purchase orders, or task orders for ordering services under thiscontract. Blanket Purchase Agreements shall not extend beyond the end of thecontract period; all services and delivery shall be made and the contract termsand conditions shall continue in effect until the completion of the order.Orders for tasks which extend beyond the fiscal year for which funds areavailable shall include FAR 52.232-19 Availability of Funds for the Next FiscalYear. The purchase order shall specify the availability of funds and the periodfor which funds are available.

b. All task orders are subject to the terms and conditions of the contract. Inthe event of conflict between a task order and the contract, the contract willtake precedence.


4. PERFORMANCE OF SERVICES

a. The Contractor shall commence performance of services on the date agreed toby the Contractor and the ordering office.



b. The Contractor agrees to render services only during normal working hours,unless otherwise agreed to by the Contractor and the ordering office.

c. The Contractor guarantees the satisfactory completion of the IT/EC Servicesperformed under the task order and that all contract personnel utilized in theperformance of IT/EC services under the task order shall have the education,experience, and expertise as stated in the task order.

d. Any Contractor travel required in the performance of IT/EC Services mustcomply with the Federal Travel Regulation or Joint Travel Regulations, asapplicable, in effect on the date(s) the travel is performed. EstablishedFederal Government per diem rates will apply to all Contractor travel.Contractors cannot use GSA city pair contracts.

5. INSPECTION OF SERVICE

The Inspection of Services-Fixed Price (AUG 1996) clause at FAR 52.246-4applies to firm-fixed price orders placed under this contract. TheInspection-Time-and-Materials and Labor-Hour (JAN 1986) clause at FAR 52.246-6applies to time and materials and labor-hour orders placed under this contract.

6. RESPONSIBILITIES OF THE CONTRACTOR

The Contractor shall comply with all laws, ordinances, and regulations (Federal,State, City, or otherwise) covering work of this character.

7. RESPONSIBILITIES OF THE GOVERNMENT

Subject to security regulations, the ordering office shall permit Contractoraccess to all facilities necessary to perform the requisite IT/EC Services.

8. INDEPENDENT CONTRACTOR

All IT/EC Services performed by the Contractor under the terms of this contractshall be as an independent Contractor, and not as an agent or employee of theGovernment.


9. ORGANIZATIONAL CONFLICTS OF INTEREST

a. Definitions.

"Contractor" means the person, firm, unincorporated association, joint venture,partnership, or corporation that is a party to this contract.

"Contractor and its affiliates" and "Contractor or its affiliates" refers to theContractor, its chief executives, directors, officers, subsidiaries, affiliates,subcontractors at any tier, and consultants and any joint venture involving the



Contractor, any entity into or with which the Contractor subsequently merges oraffiliates, or any other successor or assignee of the Contractor.

An "Organizational conflict of interest" exists when the nature of the work tobe performed under a proposed Government contract, without some restriction onactivities by the Contractor and its affiliates, may either (i) result in anunfair competitive advantage to the Contractor or its affiliates or (ii) impairthe Contractor's or its affiliates' objectivity in performing contract work.

b. To avoid an organizational or financial conflict of interest and to avoidprejudicing the best interests of the Government, ordering offices may placerestrictions on the Contractors, its affiliates, chief executives, directors,subsidiaries and subcontractors at any tier when placing orders against schedulecontracts. Such restrictions shall be consistent with FAR 9.505 and shall bedesigned to avoid, neutralize, or mitigate organizational conflicts of interestthat might otherwise exist in situations related to individual orders placedagainst the schedule contract. Examples of situations, which may requirerestrictions, are provided at FAR 9.508.

10. INVOICES

The Contractor, upon completion of the work ordered, shall submit invoices forIT/EC services. Progress payments may be authorized by the ordering office onindividual orders if appropriate. Progress payments shall be based uponcompletion of defined milestones or interim products. Invoices shall besubmitted monthly for recurring services performed during the preceding month.


11. PAYMENTS

For firm-fixed price orders the Government shall pay the Contractor, uponsubmission of proper invoices or vouchers, the prices stipulated in thiscontract for service rendered and accepted. Progress payments shall be madeonly when authorized by the order. For time-and-materials orders, the Paymentsunder Time-and-Materials and Labor-Hour Contracts (Alternate I (APR 1984)) atFAR 52.232-7 applies to time-and-materials orders placed under this contract.For labor-hour orders, the Payment under Time-and-Materials and Labor-HourContracts (FEB 1997) (Alternate II (JAN 1986)) at FAR 52.232-7 applies tolabor-hour orders placed under this contract.

12. RESUMES

Resumes shall be provided to the GSA Contracting Officer or the user agency uponrequest.

13. INCIDENTAL SUPPORT COSTS

Incidental support costs are available outside the scope of this contract. The



costs will be negotiated separately with the ordering agency in accordance withthe guidelines set forth in the FAR.

14. APPROVAL OF SUBCONTRACTS

The ordering activity may require that the Contractor receive, from the orderingactivity's Contracting Officer, written consent before placing any subcontractfor furnishing any of the work called for in a task order.

15. DESCRIPTION OF IT/EC SERVICES AND PRICING

**NOTE TO CONTRACTORS: The information provided below is designed to assistContractors in providing complete descriptions and pricing information for theIT/EC Services offered. This language should NOT be printed as part of theInformation Technology Schedule Pricelist; instead, Contractors shouldprovide the same type of information as it relates to the IT/EC Services offeredunder the contract.**

a. The Contractor shall provide a description of each type of IT/EC Serviceoffered under Special Item Numbers 132-51 and 132-52. IT/EC Services should bepresented in the same manner as the Contractor sells to its commercial and otherGovernment


customers. If the Contractor is proposing hourly rates, a description of allcorresponding commercial job titles (labor categories) for those individuals whowill perform the service should be provided.

b. Pricing for all IT/EC Services shall be in accordance with the Contractor'scustomary commercial practices; e.g., hourly rates, monthly rates, term rates,and/or fixed prices. The following is an Example of the manner in which thedescription of a commercial job title should be presented:

EXAMPLE:

Commercial Job Title: System Engineer

Minimum General Experience: Three (3) years of technical experience whichapplies to systems analysis and design techniques for complex computer systems.Requires competence in all phases of systems analysis techniques, concepts andmethods; also requires knowledge of available hardware, system software,input/output devices, structure and management practices.

Functional Responsibility: Guides users in formulating requirements, advisesalternative approaches, conducts feasibility studies.

Minimum Education: Bachelor's Degree in Computer Science



19. ADD the following to the end of the Terms and Conditions and prior to theprices of the FEDERAL SUPPLY SERVICE AUTHORIZED INFORMATION TECHNOLOGY SCHEDULEPRICELIST (formerly known as Attachment I of the solicitation).

**Include the following in the proposed FSS IT Schedule Price-list.**

USA COMMITMENT TO PROMOTESMALL BUSINESS PARTICIPATIONPROCUREMENT PROGRAMS

PREAMBLE

(Name of Company) provides commercial products and services to the FederalGovernment. We are committed to promoting participation of small, smalldisadvantaged and women-owned small businesses in our contracts. We pledge toprovide opportunities to the small business community through resellingopportunities, mentor-protege programs, joint ventures, teaming arrangements,and subcontracting.


COMMITMENT

To actively seek and partner with small businesses.

To identify, qualify, mentor and develop small, small disadvantaged and women-owned small businesses by purchasing from these businesses whenever practical.

To develop and promote company policy initiatives that demonstrate our supportfor awarding contracts and subcontracts to small business concerns.

To undertake significant efforts to determine the potential of small, smalldisadvantaged and women-owned small business to supply products and services toour company.

To insure procurement opportunities are designed to permit the maximum possibleparticipation of small, small disadvantaged, and women-owned small businesses.

To attend business opportunity workshops, minority business enterprise seminars,trade fairs, procurement conferences, etc., to identify and increase smallbusinesses with whom to partner.

To publicize in our marketing publications our interest in meeting smallbusinesses that may be interested in subcontracting opportunities.

We signify our commitment to work in partnership with small, small disadvantagedand women-owned small businesses to promote and increase their participation inFederal Government contracts. To accelerate potential opportunities please



contact (Insert Company Point of contact, phone number, e-mail address, faxnumber).


20. In order to assist GSA/FSS in updating our database, please,PROVIDE/UP DATE the following information:

(a) Offerors are to insert the ordering information below:

ORDERING ADDRESS: 4390 Parliament Place, Suite RLanham, MD ZIP CODE: 20706ORDERING FACSIMILE: 301-459-9210

(b) Offerors are required to designate a person to be contacted for promptcontract administration.

NAME: Roderick K. MorrisTITLE: GSA Contracts ManagerADDRESS: 4390 Parliament Place, Suite RLanham, MD ZIP CODE: 20706TELEPHONE NO.: ( 301 ) 459-2650 x4509 FAX NO.:( 301 ) 459-9210E-MAIL ADDRESS [email protected]

(c) Contractor compliance with the GSA Form 72A reporting requirements and theIndustrial Funding Fee will be delegated to a GSA Administrative ContractingOfficer. The Contract Management Zone will be determined based upon the locationof the individual designated by the Contractor for administration of thecontract's GSA Form 72A reporting. The name of this individual, along with theperson responsible for questions concerning the Industrial Funding Fee, must beprovided by the Contractor prior to the award of a contract.

GSA FORM 72A:

NAME: Roderick K. MorrisADDRESS: 4390 Parliament Place, Suite RLanham, MD ZIP CODE: 20706TELEPHONE NO.: (301)459-2560 x4509 FAX NO.: (301 )459-9210E-MAIL ADDRESS: [email protected]


INDUSTRIAL FUNDING FEE:NAME: Roderick K. MorrisADDRESS: 4390 Parliament Place, Suite RLanham, MD ZIP CODE: 20706



TELEPHONE NO.: ( 301) 459-2650 Ext. 4509 FAX NO.: ( 301) 459-9210E-MAIL ADDRESS: [email protected]

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EXHIBIT 10.27

DEED OF LEASE AGREEMENT

THIS DEED OF LEASE AGREEMENT (hereinafter referred to as "Lease"), madethis 11th day of August 1998, by and between Massachusetts Mutual Life InsuranceCompany, a corporation organized and existing under the laws of Maryland(hereinafter referred to as the "Landlord") and Pulsar Data Systems, Inc., aCorporation organized and existing under the laws of Maryland, (hereinafterreferred to as the "Tenant").

WITNESSETH, THAT FOR AND IN CONSIDERATION of the mutual entry into thisLease by the parties hereto, and for other good and valuable consideration, thereceipt and adequacy of which are hereby acknowledged by each party hereto, theLandlord hereby leases to the Tenant and the Tenant hereby leases from theLandlord all of that real property, situated and lying in Prince George'sCounty, Maryland, which consists of the space (containing 12,790 rentable squarefeet of floor area) outlined in Exhibit A attached hereto and made a part hereof(hereinafter referred to as the "Premises") and located in a building(hereinafter referred to as the "Building") at 4390 Parliament Place, Lanham,Maryland (the Premises, the remainder of the Building, such tract of land, otherbuildings thereon, and any other buildings or improvements to be constructedthereon being hereinafter referred to collectively as the "Property").

SUBJECT TO THE OPERATION AND EFFECT of any and all instruments and mattersof record or in fact.

UPON THE TERMS AND SUBJECT TO THE CONDITIONS which are hereinafter setforth:

SECTION 1. TERM.

1.1. LENGTH. This Lease shall be for a term (hereinafter referred to asthe "Term") (a) commencing on the first day after the date on which the Landlordsubstantially completes the improvements to be made to the Premises under theprovisions of Section 5 and tenders possession thereof to the Tenant (herein-after referred to as the "Commencement Date", except that if the date of suchcommencement is hereafter advanced or postponed by written agreement of theparties hereto, the date to which it is advanced or postponed shall thereafterbe the "Commencement Date"), and (b) terminating at 12:01 A.M., local time, onthe fifth (5th) anniversary of the first (1st) day of the first (1st) fullcalendar month during the Term (hereinafter referred to as the "TerminationDate", except that if the date of such termination is hereafter advanced orpostponed pursuant to any provision of this Lease, or by written agreement ofthe parties hereto, the date to which it is advanced or postponed shallthereafter be the Termination Date).

1.2. Taking of possession by Tenant shall be deemed conclusively to



establish that said

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buildings and other improvements have been completed in accordance with theplans and specifications and that the Premises are in good and satisfactorycondition, as of when possession was so taken. Tenant acknowledges that norepresentations as to the repair of the Premises have been made by Landlord,unless such are expressly set forth in this Lease. After such "CommencementDate" Tenant shall, upon demand, execute and deliver to Landlord a letter ofacceptance of delivery of the Premises. In the event of any dispute as tosubstantial completion or work performed or required to be performed byLandlord, the certificate of Landlord's architect or general contractor shall beconclusive.

1.3. SURRENDER. The Tenant shall at its expense, at the expiration of theTerm/1// or upon any earlier termination of this Lease, (a) promptly surrenderto the Landlord possession of the Premises (including any fixtures or otherimprovements which, under the provisions of Section 5, are owned by theLandlord) in good order and repair (ordinary wear and tear excepted) and broomclean, (b) remove therefrom the Tenant's signs, goods and effects and anymachinery, trade fixtures and equipment used in conducting the Tenant's trade orbusiness and not owned by the Landlord, and (c) repair any damage to thePremises or the Building caused by such removal.

1.4 HOLDING OVER.

1.4.1. If the Tenant continues to occupy the Premises after theexpiration of the Term or any earlier termination of this Lease after obtainingthe Landlord's express, written consent thereto,

(a) such occupancy shall (unless the parties hereto otherwiseagree in writing) be deemed to be under a month-to-month tenancy, which shallcontinue until either party hereto notifies the other in writing, by at leastthirty (30) days before the end of any calendar month, that the notifying partyelects to terminate such tenancy at the end of such calendar month, in whichevent such tenancy shall so terminate;

(b) anything contained in the foregoing provisions of thisSection to the contrary notwithstanding, the rental payable for each suchmonthly period shall equal one-twelfth (1/12) of the Base Rent and theAdditional Rent payable under the provisions of subsection 2.2 (calculated inaccordance with such provisions of subsection 2.2 as if this Lease had beenrenewed for a period of twelve (12) full calendar months after such expirationor earlier termination of the Term or such renewal); and

(c) such month-to-month tenancy shall be upon the same terms andsubject to the same conditions as those set forth in the provisions of thisLease; provided, that if the Landlord gives the Tenant, by at least thirty (30)days before the end of any calendar month during such month-to-month tenancy,



written notice that such terms and conditions (including any thereof relating tothe amount or payment of Rent) shall, after such month, be modified in

___________________

/1// or any extension thereof

-2-

any manner specified in such notice, then such tenancy shall, after such month,be upon the said terms and subject to the said conditions, as so modified.

1.4.2. If the Tenant continues to occupy the Premises after theexpiration of the Term or any earlier termination of this Lease withoutobtaining the Landlord's express, written consent thereto, such occupancy shallbe on the same terms and subject to the same conditions as those set forth inthe provisions of paragraph 1.4.1, except that, anything contained in theprovisions of this Lease to the contrary notwithstanding, (a) the rental payableduring the period of such occupancy shall equal/2// of the rental which would bepayable during such period under the provisions of subparagraph 1.4.1.(b), hadthe Tenant obtained the Landlord's express, written consent to such occupancy,as aforesaid, and (b) nothing in the provisions of paragraph 1.4.1. or any otherprovision of this Lease shall be deemed in any way to alter or impair theLandlord's right immediately to evict the Tenant or exercise its other rightsand remedies under the provisions of this Lease or applicable law on account ofthe Tenant's occupancy of the Premises without having obtained suchconsent.

SECTION 2. RENT

2.1. AMOUNT. As rent for the Premises (all of which is hereinafter referredto collectively as "Rent"), the Tenant shall pay to the Landlord in advance,without demand, deduction or set off, for the entire Term hereof, all of thefollowing:

2.1.1. Base Rent. An annual rent in the amounts specified in ExhibitD.

2. 1.2. Additional Rent. Additional rent (hereinafter referred to as"Additional Rent") in the amount of any payment referred to as such in anyprovision of this Lease which accrues while this Lease is in effect.

2. 1.3. Lease Year. As used in the provisions of this Lease, the term"Lease Year" means (a) the period commencing on the Commencement Date and



terminating on the first (1st) anniversary of the last day of the calendar monthcontaining the Commencement Date, and (b) each successive period of twelve ( 12)calendar months thereafter during the Term.

____________________

/2// one hundred fifty percent (150%) for the first three (3) months and twohundred percent (200%) thereafter

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2.2. ANNUAL OPERATING COSTS/3//

2.2.1. Taxes.

(a) Tenant agrees to pay before they become delinquent all taxes,assessments and governmental charges of any kind and nature whatsoever(hereinafter referred to as "Taxes") lawfully levied or assessed against theBuilding and the grounds, parking areas, driveways and alleys around theBuilding. Tenant shall furnish to Landlord, not later than twenty (20) daysbefore the date any such Taxes become delinquent, official receipts of theappropriate taxing authority or other evidence satisfactory to Landlordevidencing payment thereof. If Tenant should fail to pay any Taxes, assessmentsor governmental charges required to be paid by Tenant hereunder, in addition toany other remedies provided herein, Landlord may, if it so elects, pay suchTaxes, assessments and governmental charges. Any sums so paid by Landlord shallbe deemed to be Additional Rent owing by Tenant to Landlord and due and payableon demand by Landlord, together with interest thereon at the rate of twelvepercent (12%) per annum from the date paid by Landlord to the date of repaymentby Tenant.

(b) In the event the Premises constitute a portion of a multipleoccupancy building, in lieu of Tenant paying the Taxes as provided above,Landlord agrees to pay, before they become delinquent, all Taxes lawfully leviedor assessed against such Building and the grounds, parking areas, driveways andalleys around the Building, and Tenant agrees to pay to Landlord, as AdditionalRent, upon demand, the amount of Tenant's proportionate share of such Taxes paidby Landlord. Tenant's proportionate share means the percentage assigned to thePremises for purposes of allocating Taxes as set forth herein and other AnnualOperating Costs as set forth in Subsection 2.2.2 below and represents theapproximate and (for purposes of this Lease) hereby agreed upon proportion whichthe floor area of the Premises bears to the aggregate net rentable space withinthe Building and the Property and shall be twenty two and 40/100 percent (22.40%) of the Building and twenty two and 40/00 percent (22.40 % ) of the Property.

2.2.2. Maintenance.

(a) Maintenance by Tenant. Tenant shall, at its own cost andexpense, keep and maintain all parts of the Premises in good condition, promptly



making all necessary repairs and replacements, interior and non-structural,ordinary and extraordinary, including but not limited to, glass and plate glass,doors and office entry(s), walls and finish work, floors and floor covering,heating and air conditioning systems, electrical systems, plumbing work andfixtures, termite and pest extermination, regular removal of trash and debris.The cost of maintenance and repair of any common party wall (any wall, divider,partition or any other structure separating the premises from any adjacentpremises occupied by other tenants) shall be shared equally by

___________________

/3// In no event shall Tenant's annual increase in controllable AnnualOperating Costs (not including, real estate taxes, insurance, utilities and snowremoval) exceed six percent (6%) of the Tenant's previous years costs.

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Tenant and the tenant occupying adjacent premises. Tenant shall not damage anyparty wall or disturb the integrity and support provided by any party wall andshall, at its sole cost and expense, promptly repair any damage or injury to anyparty wall caused by Tenant or its employees, agents or invitees.

(b) Maintenance by Landlord. Tenant and its employees, customers andlicensees shall have the non-exclusive right to use the parking areas, if any,as may be designated by Landlord in writing, subject to such reasonable rulesand regulations as Landlord may from time to time prescribe. Further, inmultiple occupancy buildings, Landlord shall perform the roof, paving, andlandscape maintenance, exterior painting and common sewage line plumbing whichare otherwise Tenant's obligations under Subsection 2.2.2(a) above, and Tenantshall, in lieu of the obligations set forth under Subsection 2.2.2(a) above withrespect to such items, be liable for its proportionate share (as defined inSubsection 2.2.1(b) above) of the cost and expense of Building maintenance andthe care for the grounds around the Building, including but not limited to, themowing of grass, care of shrubs, general landscaping, maintenance of parkingareas, driveways and alleys, roof maintenance, exterior repainting and commonsewage line plumbing; provided, however, that Landlord shall have the right torequire Tenant to pay such other reasonable proportion of said mowing, shrubcare and general landscaping costs as may be determined by Landlord in its solediscretion; and further provided that if Tenant or any other particular tenantof the Building can be clearly identified as being responsible for obstructionor stoppage of the common sanitary sewage line then Tenant, if Tenant isresponsible, or such other responsible tenant, shall pay the entire costthereof, upon demand, as additional rent. Tenant shall pay/4// when due itsshare, determined as aforesaid, of such costs and expenses along with the othertenants of the Building to Landlord upon demand, as Additional Rent, for theamount of its share of such costs and expenses in the event Landlord elects toperform or cause to be performed such work. Such share shall include amanagement fee equal to five percent (5%) of the Rent for each Lease Year,administrative and accounting costs, and a/5// reserve for asphalt, roof repairsand repainting.



(c) Maintenance Contract. Tenant shall, at its own cost and expense,enter into a regularly scheduled preventative maintenance/service contract witha maintenance contractor for servicing all heating and air conditioning systemsand equipment within the Premises and shall provide Landlord with copies of allservice reports. The maintenance contractor and contract

________________

/4// within thirty (30) days

/5// reasonable

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must be approved by Landlord./6// The service contract must include all servicessuggested by the equipment manufacturer within the operation/maintenance manualand must become effective (and a copy thereof delivered to Landlord) withinthirty (30) days of the date Tenant takes possession of the Premises. Each Leaseyear Landlord will inspect the HVAC system to determine that the aforementionedmaintenance is being performed. If the HVAC system is not being maintainedpursuant to this Section Landlord will send notice of such lack of maintenanceto Tenant and Tenant shall thereafter have thirty (30) days to perform thenecessary maintenance. Failure by Tenant to complete the necessary maintenancein such thirty (30) day period shall be a material Event of Default and Landlordshall have the right to cure such Event of Default pursuant to Section 13.Should the inspection demonstrate a lack of maintenance of the HVAC system,Tenant shall pay for the cost of such inspection. Thirty days before Tenantvacates the Premises, Landlord will have the HVAC equipment inspected by aqualified HVAC mechanic at Landlord's expense. If in the opinion of the HVACmechanic, the equipment has not been properly maintained,/7// then Landlord mayauthorize necessary repairs to be made to the system. Such repairs will bededucted from the Tenant's security deposit. Tenant shall reimburse Landlord forany and all costs associated with such repairs which exceed the amount of anysecurity deposit. The remainder of the security deposit, if any, shall berefunded to Tenant in accordance with the terms of the Lease.

2.2.3. Computation. After the end of each calendar year during theTerm, the Landlord shall compute the total of the Annual Operating Costsincurred for all of the Property during such calendar year, and shall allocatethem to the net rentable space within the Property in proportion to therespective operating costs percentages assigned to such spaces; provided, thatanything contained in the foregoing provisions of this subsection 2.2 to thecontrary notwithstanding, wherever the Tenant and/or any other tenant of spacewithin the Property has agreed in its lease or otherwise to provide any item ofsuch services partially or entirely at its own expense, or wherever in theLandlord's judgment any such significant item of expense is not incurred withrespect to or for the benefit of all of the net rentable space within theProperty, in allocating the Annual Operating Costs pursuant to the foregoing



provisions of this subsection the Landlord shall make an appropriate adjustment,using generally accepted accounting principles, as aforesaid, so as to avoidallocating to the Tenant or to such other tenant (as the case may be) thoseAnnual Operating Costs covering such services already being provided by theTenant or by such other tenant at its own expense, or to avoid allocating to allof the net rentable space within the Property those Annual Operating Costsincurred only with respect to a portion thereof, as aforesaid.

2.2.4. Payment as Additional Rent. The Tenant shall, within fifteen(15) days after demand therefor by the Landlord (with respect to each calendaryear during the Term), accompanied by a statement setting forth in reasonabledetail the Annual Operating Costs for

____________________

/6// , which approval shall not be unreasonably withheld, conditioned ordelayed

/7// , reasonable wear and tear excepted

-6-

such calendar year, pay to the Landlord as Additional Rent the amount of theTenant's operating costs percentage of the Annual Operating Costs for suchcalendar year (as derived and allocated under the provisions of paragraph2.2.3).

2.2.5. Proration. If only part of any calendar year falls within theTerm, the amount computed as Additional Rent for such calendar year under theforegoing provisions of this subsection shall be prorated in proportion to theportion of such calendar year falling within the Term (but the expiration of theTerm before the end of a calendar year shall not impair the Tenant's obligationhereunder to pay such prorated portion of such Additional Rent for that portionof such calendar year falling within the Term, which shall be paid on demand, asaforesaid).

2.2.6. Landlord's right to estimate. Anything contained in theforegoing provisions of this subsection to the contrary notwithstanding, theLandlord may, at its discretion, (a) make from time to time during the Term areasonable estimate of the Additional Rent which may become due under suchprovisions for any calendar year, (b) require the Tenant to pay to the Landlordfor each calendar month during such year one twelfth (1/12) of such AdditionalRent, at the time and in the manner that the Tenant is required hereunder to paythe monthly installment of the Base Rent for such month, and (c) at theLandlord's reasonable discretion, increase or decrease from time to time duringsuch calendar year the amount initially so estimated for such calendar year, allby giving the Tenant written notice thereof, accompanied by a schedule settingforth in reasonable detail the expenses comprising the Annual Operating Costs,as so estimated. In such event, the Landlord shall cause the actual amount of



such Additional Rent to be computed and certified to the Tenant within 120 daysafter the end of such calendar year, and the Tenant or the Landlord, as the casemay be, shall promptly thereafter pay to the other the amount of any deficiencyor overpayment therein, as the case may be./8//

____________________________

/8// Right to Audit:

(a) Selection of Accountants: If Tenant disputes the amount of anadjustment or the proposed estimated increase or decrease in Taxes orAnnual Operating Costs, Tenant shall give Landlord written notice ofsuch dispute within thirty (30) days after Landlord advises Tenant ofsuch adjustment or proposed increase or decrease. Tenant's failure togive such notice shall waive its right to dispute the amounts sodetermined. Tenant shall also not be entitled to dispute theforegoing amounts if Tenant is then in default hereunder. If Tenantis entitled to and timely objects, Tenant shall have the right toengage its own accountants ("Tenants Accountants") for the purposesof verifying the accuracy of the statement in dispute, or thereasonableness of the adjustment or estimated increase or decrease.If Tenant's Accountants determine that an error has been made,Landlord and Tenant's Accountants shall endeavor to agree upon thematter. If they cannot agree within twenty (20) days from the dateTenant's Accountants commence reviewing Landlord's records, Landlordand Tenant's Accountants shall jointly

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2.3. WHEN DUE AND PAYABLE.

2.3.1. The Base Rent for any Lease Year shall be due and payable intwelve (12) consecutive, equal monthly installments, in advance, on the first(lst) day of each calendar month during such Lease Year; provided, that thefirst monthly installment of the Base Rent will be due and payable upon leaseexecution.

2.3.2. Any Additional Rent, other than Annual Operating Costs whichare due and payable with each payment of Base Rent, accruing to the Landlordunder any provision

______________________

select an independent certified public accounting firm (the"Independent Accountant") which firm shall conclusively determinewhether the adjustment or estimated increase or decreases isreasonable, and if not, what amount is reasonable. Both parties shallbe bound by such determination. If Tenant's Accountants do notparticipate in choosing the Independent Accountant within 20 daysfrom the date Landlord and Tenant's Accountant's determine that they



cannot agree as to whether or not an error has been made, thenLandlord's determination of the adjustment or estimated increase ordecrease shall be conclusively determined to be reasonable and Tenantshall be bound hereby.

(b) Payment of Costs: All costs incurred by Tenant in obtaining Tenant'sAccountants and the cost of the Independent Accountant shall be paidby Tenant unless Tenant's Accountants disclose an error, acknowledgeby Landlord (or found to have conclusively occurred by theIndependent Accountant), of more than ten percent (10%) in thecomputation of the total amount of Taxes or Annual Operating Costs asset forth in the statement submitted by Landlord with respect to thematter in dispute; in which event Landlord shall pay the reasonablecosts incurred by Tenant in obtaining such audits. No subtenant shallhave the right to conduct an audit and no assignee shall conduct anaudit for any period during which such assignee was not in possessionof the Premises.

(c) Continuation of Payments Pending Determination: Tenant shall continueto timely pay Landlord the amount of the prior year's adjustment andadjusted Additional Rent determined to be incorrect as aforesaiduntil the parties have concurred as to the appropriate adjustment orhave deemed to be bound by the determination of the IndependentAccountant in accordance with the preceding terms. Landlord's delayin submitting any statement contemplated herein for any Lease Yearshall not affect the provisions of this Paragraph, nor constitute awaiver of Landlord's rights as set forth herein for said Lease Yearor any subsequent Lease Years during the Lease Term or any extensionsthereof.

-8-

of this Lease shall, except as is otherwise set forth herein, be dueand/9//

2.3.3. Each such payment shall be made promptly when due, withoutany deduction or setoff whatsoever, and without demand, failing which the Tenantshall pay to the Landlord as Additional Rent, a late charge equaling/10// ofthe sum of the Base Rent and Additional Rent outstanding.

2.4. WHERE PAYABLE. The Tenant shall pay the Rent, in lawful currency ofthe United States of America, to the Landlord by delivering or mailing it(postage prepaid) to the Landlord's address which is set forth in Section 16, orto such other address or in such other manner as the Landlord from time to timespecifies by written notice to the Tenant. Any payment made by the Tenant to theLandlord on account of Rent may be credited by the Landlord to the payment ofany Rent then past due, including late fees, interest and penalties, beforebeing credited to Rent currently falling due. Any such payment which is lessthan the amount of Rent then due shall constitute a payment made on account



thereof, the parties hereto hereby agreeing that the Landlord's acceptance ofsuch payment (whether or not with or accompanied by an endorsement or statementthat such lesser amount or the Landlord's acceptance thereof constitutes paymentin full of the amount of Rent then due) shall not alter or impair the Landlord'srights hereunder to be paid all of such amount then due, or in any otherrespect.

2.5. TAX ON LEASE. If federal, state or local law now or hereafter imposesany tax, assessment, levy or other charge (other than any income, inheritance orestate tax) directly or indirectly upon (a) the Landlord with respect to thisLease or the value thereof, (b) the Tenant's use or occupancy of the Premises,(c) the Base Rent, Additional Rent or any other sum payable under this Lease, or(d) this transaction, then (except if and to the extent that such tax,assessment, levy or other charge is included in the Annual Operating Costs) theTenant shall pay the amount thereof as Additional Rent to the Landlord upondemand, unless the Tenant is prohibited by law from doing so, in which event theLandlord may, at its election, terminate this Lease by giving written noticethereof to the Tenant.

2.6. SECURITY DEPOSIT.

2.6.1. Simultaneously with the entry into this Lease by the partieshereto, the Tenant shall deposit with the Landlord the sum of twenty-sixthousand two hundred nineteen and 50/100 Dollars ($26,219.50), which shall beretained by the Landlord as security for the Tenant's payment of the Rent andperformance of all of its other obligations under the provisions of this

___________________

/9// within thirty (30) days after Tenant's receipt of invoice.

/10// twelve percent (12%)

-9-

Lease./11//

2.6.2. On the occurrence of an Event of Default, the Landlord shallbe entitled, at its sole discretion,

(a) to apply any or all of such sum in payment of (i) anyRent then due and unpaid, (ii) any expense incurred by the Landlord in curingany such event of default, and/or (iii) any damages incurred by the Landlord byreason of such event of default (including, by way of example rather than oflimitation, that of reasonable attorneys' fees); and/or

(b) to retain any or all of such sum to reimburse for any orall damages suffered by the Landlord by reason of event of such default. If atany time Landlord draws upon the security deposit in accordance with this



section Tenant upon demand agrees to immediately pay to Landlord an amountsufficient to return the security deposit to the amount stated above.

2.6.3. On the termination of this Lease, any of such sum which isnot so applied or retained shall be returned to the Tenant within/12// of theLease termination date.

2.6.4. Such sum shall not bear interest while being held by theLandlord hereunder.

2.6.5. No Mortgagee (as that term is defined by the provisions ofSection 12) or purchaser of any or all of the Property at any foreclosureproceeding brought under the provisions of any Mortgage (as that term is definedby the provisions of Section 12) shall (regardless of whether the Lease is atthe time in question subordinate to the lien of any Mortgage under theprovisions of Section 12 or otherwise) be liable to the Tenant or any otherperson for any or all of such sum (or any other or additional security depositor other payment made by the Tenant under the provisions of this Lease), unlessboth (a) the Landlord has actually delivered it in cash to such Mortgagee orpurchaser, as the case may be, and (b) it has been specifically identified, andaccepted by the Lender or such purchaser, as the case may be, as such and forsuch purpose, then Landlord will have no further liability for return of thesecurity deposit.

SECTION 3. USE OF PREMISES.

3.1 The Tenant shall, continuously throughout the Term occupy and use thePremises for and only for general office and warehouse purposes.

____________________

/11// Notwithstanding anything contained herein to the contrary provided Tenanthasn't been in default, Landlord will refund one month of the security depositin the amount of eight thousand seven hundred thirty-nine and 83/100 ($8,739.83)at the end of the first (1st) Lease Year.

/12// thirty (30) days

-10-

3.2 In its use of the Premises and the remainder of the Property, theTenant shall not violate any applicable law, ordinance or regulation.

3.3 License.

3.3.1 The Landlord hereby grants to the Tenant a non-exclusivelicense to use (and to permit its officers, directors, agents, employees andinvitees to use in the course of conducting business at the Premises),

(a) any and all portions of the said tract of land on which the



Building is located (excluding that portion thereof which is improved by anyother building) which, by their nature, are manifestly designed and intended forcommon use by the occupants of the Building and of any other improvements onsuch tract, for pedestrian ingress and egress to and from the Premises and forany other such manifest purposes; and

(b) any and all portions of such tract of land as from time to timeare designated (by striping or otherwise) by the Landlord for such purpose, forthe parking of automobiles.

3.3.2. Such license shall be exercised in common with the exercisethereof by the Landlord, any tenant or owner of the building or any otherbuilding located on such tract, and their respective officers, directors,agents, employees and invitees, and in accordance with the Rules and Regulationspromulgated from time to time pursuant to the provisions of Section 11.

3.4 SIGNS. The Tenant shall have the right to erect from time to timewithin the Premises such signs as it desires, in accordance with applicable law,except that the Tenant shall not erect any sign within the Premises in any placewhere such sign is visible from the exterior of the Premises, unless theLandlord has given its express, written consent thereto.

3.5 [DELETED]

SECTION 4. INSURANCE AND INDEMNIFICATION.

4.1 INCREASE IN RISK. The Tenant

4.1.1. shall not do or permit to be done any act or thing as aresult of which either (a) any policy of insurance of any kind covering (i) anyor all of the Property or (ii) any liability of the Landlord in connectiontherewith may become void or suspended, or (b) the insurance risk under any suchpolicy would (in the opinion of the insurer thereunder) be made greater; and

4.1.2. shall pay as Additional Rent the amount of any increase inany premium for such insurance resulting from any breach of such covenant.

4.2 INSURANCE TO BE MAINTAINED BY TENANT.

-11-

4.2.1. The Tenant shall maintain at its expense, throughout theTerm, insurance against loss or liability in connection with bodily injury,death, property damage or destruction, occurring within the Premises or arisingout of the use thereof by the Tenant or its agents, employees, officers orinvitees, visitors and guests, under one or more policies of general publicliability insurance having such limits as to each as are reasonably required bythe Landlord from time to time, but in any event of not less than a total of TwoMillion Dollars ($2,000,000.00) for bodily injury to or death of all persons orproperty damage or destruction in any one occurrence, and (b) Fifty Thousand



Dollars ($50,000.00) Fire Legal Liability. Each such policy shall (a) name asthe insured thereunder the Tenant and the Landlord (and, at the Landlord'srequest, any Mortgagee) as additional insureds, (b) by its terms, not becancellable without at least thirty (30) days' prior written notice to theLandlord (and, at the Landlord's request, any such Mortgagee), and (c) be issuedby any insurer of recognized responsibility licensed to issue such policy in theState of Maryland.

4.2.2. (a) At least five (5) days before the Commencement Date, theTenant shall deliver to the Landlord a certificate of each such policy, and (b)at least thirty (30) days before any such policy expires, the Tenant shalldeliver to the Landlord an original or a signed duplicate copy of a replacementpolicy therefor; provided, that so long as such insurance is otherwise inaccordance with the provisions of this Section, the Tenant may carry any suchinsurance under a blanket policy covering the Premises for the risks and in theminimum amounts specified in paragraph 4.2.1, in which event the Tenant shalldeliver to the Landlord two (2) insurer's certificates therefor in lieu of anoriginal or a copy thereof, as aforesaid.

4.3 INSURANCE TO BE MAINTAINED BY LANDLORD. The Landlord shall maintainthroughout the Term all-risk insurance upon the Building, including as neededbut not limited to Personal Property, Loss of Rents, Glass, Boiler andMachinery, General Liability and Umbrella Liability in at least such amounts andhaving at least such forms of coverage as are required from time to time by theLandlord's lender. The cost of the premiums for such insurance and of eachendorsement thereto and of any applicable deductibles therefor shall be deemed,for purposes of the provisions of Section 2, to be a cost of operating andmaintaining the Property.

4.4 WAIVER OF SUBROGATION. If either party hereto is paid any proceedsunder any policy of insurance naming such party as an insured, on account of anyloss, damage or liability, then such party hereby releases the other pattyhereto, to and only to the extent of the amount of such proceeds, from any andall liability for such loss, damage or liability, notwithstanding that suchloss, damage or liability may arise out of the negligent or intentionallytortious act or omission of the other party, its agents or employees; provided,that such release shall be effective only as to a loss, damage or liabilityoccurring while the appropriate policy of insurance of the releasing partyprovides that such release shall not impair the effectiveness of such policy orthe insured's ability to recover thereunder. Each party hereto shall usereasonable efforts to have a clause to such effect included in its saidpolicies, and shall promptly notify the other in writing if such clause cannotbe included in any such policy.

-12-

4.5 LIABILITY OF PARTIES. Except if and to the extent that such party isreleased from liability to the other party hereto pursuant to the provision ofsubsection 4.4.



4.5.1. the Landlord (a) shall be responsible for, and shallindemnify and hold harmless the Tenant against and from any and all liabilityarising out of, any injury to or death of any person or damage to any property,occurring anywhere upon the Property, if, only if and to the extent that suchinjury, death or damage is proximately caused by the grossly negligent orintentionally tortious act or omission of the Landlord or its agents, officersor employees, but (b) shall not be responsible for or be obligated to indemnifyor hold harmless the Tenant against or from any liability for any such injury,death or damage occurring anywhere upon the Property (including the Premises),(i) by reason of the Tenant's occupancy or use of the Premises or any otherportion of the Property, or (ii) because of fire, windstorm, act of God or othercause unless solely caused by such gross negligence or intentionally tortiousact or omission of the Landlord, as aforesaid; and

4.5.2. subject to the operation and effect of the foregoingprovisions of this subsection, the Tenant shall be responsible for, and shalldefend, indemnify and hold harmless the Landlord against and from, any and allliability or claim of liability (including without limitation reasonableattorney's fees) arising out of any injury to or death of any person or damageto any property, occurring within the Premises, or, if caused by Tenant, itsemployees, agents or invitees, on the Property.

SECTION 5. IMPROVEMENTS TO PREMISES.

5.1 BY LANDLORD./13//

5.1.1. The Landlord/14// shall make the improvements to thePremises which are set forth in the plans and specifications attached hereto asExhibit B-1.

_____________________

/13// Landlord shall provide a turn key buildout based upon the final approvedspace plan dated July 24,1998 and attached hereto in Exhibit B-1. The cost ofany additional improvements or services incurred due to Tenant's modification ofthe final approved space plan shall be promptly paid directly by Tenant toLandlord upon written request by Landlord (to include invoice with back-up), andfailure to pay such sum in accordance with the schedule below shall constitutean Event of Default under the Lease. Landlord's contractor shall perform allwork to be done within the Premises, with the exception of Tenant's telephoneand data cabling.

In the event the cost of the improvement exceeds the Allowance, Tenant shallrepay such costs in accordance with the following schedule; (a) seventy fivepercent (75%) upon requisition of the improvements and (b) twenty five percent(25%) upon the substantial completion of the improvements.

/14// at its sole cost and expense

-13-



5.1.2. [Deleted]

5.1.3. the Landlord shall use reasonable efforts to complete suchimprovements by the date on which the Tenant is entitled to occupy the Premisespursuant to this Lease, but shall have no liability to the Tenant hereunder ifprevented from doing so by reason of any (a) strike, lock-out or other labortroubles, (b) governmental restrictions or limitations, (c) failure or shortageof electrical power, gas, water, fuel oil, or other utility or service, (d)riot, war, insurrection or other national or local emergency (e) accident,flood, fire or other casualty, (f) adverse weather condition, (g) other act ofGod, (h) inability to obtain a certificate of occupancy, or (i) shortage ofmaterials or labor, or (j) other cause similar or dissimilar to any of theforegoing and beyond the Landlord's reasonable control. In such event, (a) theCommencement Date shall be postponed for a period equalling the length of suchdelay, (b) the Termination Date shall be determined pursuant to the provisionsof subsection 1.1 by reference to the Commencement Date as so postponed, and (c)the Tenant shall accept possession of the Premises within three (3) days aftersuch completion. If Tenant does not submit drawings or approvals in a timelymanner and, as a result, the Landlord cannot deliver the Premises timely, theLease Commencement Date shall not be postponed.

5.2 BY TENANT. The Tenant shall not make any alteration, addition orimprovement to the Premises without first obtaining the Landlord's writtenconsent thereto.

If the Landlord consents to any such proposed alteration, addition orimprovement, it shall be made at the Tenant's sole expense (and the Tenant shallhold the Landlord harmless from any cost incurred on account thereof), and atsuch time and in such manner as not unreasonably to interfere with the use andenjoyment of the remainder of the Property by any tenant thereof or otherperson.

5.3 MECHANICS' LIEN. The Tenant shall (a) immediately after it is filed orclaimed, bond or have released any mechanics', materialman's or other lien filedor claimed against any or all of the Premises, the Property, or any otherproperty owned or leased by the Landlord, by reason of labor or materialsprovided for the Tenant or any of its contractors or subcontractors (other thanlabor or materials provided by the Landlord pursuant to the provisions ofsubsection 5.1), or otherwise arising out of the Tenant's use or occupancy ofthe Premises or any other portion of the Property, and (b) defend, indemnify andhold harmless the Landlord against and from any and all liability, claim ofliability or expense (including, by way of example rather than of limitation,that of reasonable attorneys' fees) incurred by the Landlord on account of anysuch lien or claim.

5.4 FIXTURES. Any and all improvements, repairs, alterations and all otherproperty attached to, used in connection with or otherwise installed within thePremises by the Landlord or the Tenant shall, immediately on the completion oftheir installation, become the Landlord's property without payment therefor bythe Landlord, except that any machinery, equipment or fixtures installed by the



Tenant and used in the conduct of the Tenant's trade or business (rather than toservice the Premises or any of the remainder of the Building or the Propertygenerally)

-14-

shall remain the Tenant's property.

SECTION 6. UTILITIES AND SERVICES.

6.1 UTILITIES. Landlord agrees to provide at its cost water and electricityservice connections into the Premises and telephone service connections to theBuilding, but Tenant shall pay for all water, gas, heat, light, power,telephone, sewer, sprinkler charges, meter installation charges, and otherutilities and services used on or from the Premises, together with any taxes,penalties, surcharges or the like pertaining thereto and any maintenance chargesfor utilities and shall furnish all electric light bulbs and tubes. If any suchservices are not separately metered to Tenant, Tenant shall pay itsproportionate share as determined by Landlord of all charges jointly meteredwithin the Building.

6.2 INTERRUPTION. The Landlord shall have no liability to the Tenant forany compensation or reduction of rent on account of any failure, modification orinterruption of any such service which either (a) arises out of any of thecauses enumerated in the provisions of subsection 5.1.3, or (b) is required byapplicable law (including, by way of example rather than of limitation, anyfederal law or regulation relating to the furnishing or consumption of energy orthe temperature of buildings).

SECTION 7. LANDLORD'S RIGHT OF ENTRY.

The Landlord and its agents shall be entitled to enter the Premises at anyreasonable time (a) to inspect the Premises, (b) to exhibit the Premises to anyexisting or prospective purchaser, tenant/15// or Mortgagee thereof, (c) to makeany alteration, improvement or repair to the Building or the Premises, or (d)for any other purpose relating to the operation or maintenance of the Property;provided that the Landlord shall (a) (unless doing so is impractical orunreasonable because of emergency) give the Tenant at least twenty-four (24)hours' prior notice of its intention to enter the Premises, and (b) usereasonable efforts to avoid thereby interfering more than is reasonablynecessary with the Tenant's use and enjoyment thereof.

SECTION 8. FIRE AND OTHER CASUALTIES.

8.1 GENERAL. If the Premises are damaged by fire or other casualty duringthe term,

8.1.1. the Landlord shall, with reasonable promptness (taking intoaccount the time required by the Landlord to effect a settlement with, and toprocure any insurance proceeds from, any insurer against such casualty, but in



any event within/16// days after the date of such casualty), substantiallyrestore the premises to their condition immediately before such casualty,

_________________________

/15// (if during the last six (6) months of the Term)

/16// one hundred eighty (180)

-15-

and may temporarily enter and possess any or all of the Premises for suchpurpose (provided, that the Landlord shall not be obligated to repair, restoreor replace any fixture, improvement, alteration, furniture, or other propertyowned, installed or made by the Tenant), but

8.1.2. the times for commencement and completion of any suchrestoration shall be extended for the period of any delay occasioned by theLandlord in doing so arising out of any of the causes enumerated in theprovisions of subsection 5.1. If the Landlord undertakes to restore the Premisesand such restoration is not accomplished within the said period of/17// daysplus the period of any extension thereof, as aforesaid, the Tenant may terminatethis Lease by giving written notice thereof to the Landlord within thirty (30)days after the expiration of such period, as so extended; and

8.1.3. so long as the Tenant is deprived of the use of any or all ofthe Premises on account of such casualty, the Base Rent and any Additional Rentpayable under the provisions of subsection 2.2 shall be abated in proportion tothe number of square feet of the Premises rendered substantially unfit foroccupancy by such casualty, unless, because of any such damage, the undamagedportion of the Premises is made materially unsuitable for use by the Tenant forthe purposes set forth in the provisions of Section 3, in which event the BaseRent and any such Additional Rent shall be abated entirely during such period ofdeprivation.

8.2 SUBSTANTIAL DESTRUCTION. Anything contained in the foregoing provisionsof this Section to the contrary notwithstanding,

8.2.1. if during the Term the Building is so damaged by fire orother casualty that (a) either the Premises or (whether or not the Premises aredamaged) the Building is rendered substantially unfit for occupancy, asreasonably determined by the Landlord, or (b) the Building is damaged to theextent that the Landlord reasonably elects to demolish the Building, or if anyMortgagee requires that any or all of such insurance proceeds be used to retireany or all of the debt secured by its Mortgage, then in any such case theLandlord may elect to terminate this Lease, as of the date of such casualty bygiving written notice thereof to the Tenant within thirty (30) days after thedate of such casualty; and

8.2.2. in such event, (a) the Tenant shall pay to the Landlord the



Base Rent and any Additional Rent payable by the Tenant hereunder and accruedthrough the date of such termination, (b) the Landlord shall repay to the Tenantany and all prepaid Rent for periods beyond such termination, and (c) theLandlord may enter upon and repossess the Premises without further notice.

8.3 TENANT'S NEGLIGENCE. Anything contained in any provision of this Leaseto the contrary notwithstanding, if any such damage to the Premises, theBuilding or both are caused by or result from the negligent or intentionallytortious act or omission of the Tenant, those claiming

_________________________

/17// one hundred eighty (180)

-16-

under the Tenant or any of their respective officers, employees, agents orinvitees,

8.3.1. the Rent shall not be suspended or apportioned as aforesaid,and

8.3.2. except if and to the extent that the Tenant is released fromliability therefor pursuant to the provisions of subsection 4.4, the Tenantshall pay to the Landlord upon demand, as Additional Rent, the cost of (a) anyrepairs and restoration made or to be made as a result of such damage, or (b)(if the Landlord elects not to restore the Building) any damage or loss whichthe Landlord incurs as a result of such damage.

SECTION 9. CONDEMNATION.

9.1 RIGHT TO AWARD.

9.1.1. If any or all of the Premises are taken by the exercise ofany power of eminent domain or are conveyed to or at the direction of anygovernmental entity under a threat of any such taking (each of which ishereinafter referred to as a "Condemnation"), the Landlord shall be entitled tocollect from the condemning authority thereunder the entire amount of any awardmade in any such proceeding or as consideration for such conveyance, withoutdeduction therefrom for any leasehold or other estate held by the Tenant underthis Lease.

9.1.2. The Tenant hereby (a) assigns to the Landlord all of theTenant's right, title and interest, if any, in and to any such award; (b) waivesany right which it may otherwise have in connection with such Condemnation,against the Landlord or such condemning authority, to any payment for (i) thevalue of the then-unexpired portion of the Term, (ii) leasehold damages, and(iii) any damage to or diminution of the value of the Tenant's leaseholdinterest hereunder or any portion of the Premises not covered by suchCondemnation; and (c) agrees to execute any and all further documents which may



be required to facilitate the Landlord's collection of any and all suchawards.

9.1.3. Subject to the operation and effect of the foregoingprovisions of this Section, the Tenant may seek, in a separate proceeding, aseparate award on account of any damages or costs incurred by the Tenant as aresult of such Condemnation, so long as such separate award in no way diminishesany award or payment which the Landlord would otherwise receive as a result ofsuch Condemnation and Tenants right of recovery is limited to moving expensesand the cost of trade fixtures.

9.2 EFFECT OF CONDEMNATION.

9.2.1. If (a) all of the Premises are covered by a Condemnation, or(b) any part of the Premises is covered by a Condemnation and the remainderthereof is insufficient for the reasonable operation therein of the Tenant'sbusiness, or (c) any of the Building is covered by a Condemnation and, in theLandlord's reasonable opinion, it would be impractical to restore the

-17-

remainder thereof, or (d) any of the rest of the Property is covered by aCondemnation and, in the Landlord's reasonable opinion, it would be impracticalto continue to operate the remainder of the Property thereafter, then, in anysuch event, the Term shall terminate on the date on which possession of so muchof the Premises, the Building or the rest of the Property, as the case may be,as is covered by such Condemnation is taken by the condemning authoritythereunder, and all Rent (including, by way of example rather than oflimitation, any Additional Rent payable under the provision of subsection 2.2),taxes and other charges payable hereunder shall be apportioned and paid to suchdate.

9.2.2. If there is a Condemnation and the Term does not terminatepursuant to the foregoing provision of this subsection, the operation and effectof this Lease shall be unaffected by such Condemnation, except that the BaseRent shall be reduced in proportion to the square footage of floor area, if any,of the Premises covered by such Condemnation.

9.3 If there is a Condemnation, the Landlord shall have no liability to theTenant on account of any (a) interruption of the Tenant's business upon thePremises, (b) diminution in the Tenant's ability to use the Premises, or (c)other injury or damage sustained by the Tenant as a result of such Condemnation.

9.4 Except for any separate proceeding brought by the Tenant under theprovisions of paragraph 9.1.3., the Landlord shall be entitled to conduct anysuch condemnation proceeding and any settlement thereof free of interferencefrom the Tenant, and the Tenant hereby waives any right which it otherwise hasto participate therein.

SECTION 10. ASSIGNMENT AND SUBLETTING.



10.1 The Tenant hereby acknowledges that the Landlord has entered into thisLease because of the Tenant's financial strength, goodwill, ability andexpertise and that, accordingly, this Lease is one which is personal to theTenant, and agrees for itself and its successors and assigns in interesthereunder that it will not (a) assign any of its rights under this Lease, or (b)make or permit any total or partial sale, lease, sublease, assignment,conveyance, license, mortgage, pledge, encumbrance, or a transfer of acontrolling interest in Tenant, or other transfer of any or all of the Premisesor the occupancy or use thereof (each of which is hereinafter referred to as a"Transfer"), without first obtaining the Landlord's written consent thereto(which consent/18// and, if given, shall not constitute a consent to anysubsequent such Transfer, whether

____________________

/18// shall not be unreasonably withheld, conditioned or delayed, so long assuch transferee meets Landlord's reasonable criteria, which criteria are asfollows:

a. The financial strength of the proposed assignee or subtenant, both interms of net worth and in terms of reasonably anticipated cash flowover the Lease term, is not materially less than Tenant's financialstrength at the time this Lease was signed or at the time of suchassignment or sublease, whichever is greater.

-18-

by the person hereinabove named as the "Tenant" or by any such transferee). TheLandlord shall be entitled, at its sole discretion, to condition any suchconsent upon the entry by such person into an agreement with (and in form andsubstance satisfactory to) the Landlord, by which it assumes all of the Tenant'sobligations hereunder. Any person to whom any Transfer is attempted without suchconsent shall have no claim, right or remedy whatsoever hereunder against theLandlord, and the Landlord shall have no duty to recognize any person claimingunder or through the same. No such action taken with or without the Landlord'sconsent shall in any way relieve or release the Tenant from liability for thetimely performance of all of the Tenant's obligations hereunder. The Tenanthereby acknowledges that any merger, consolidation or other restructuring ofownership interests in Tenant constitutes a Transfer hereunder. As additionalrent, Tenant shall reimburse Landlord promptly for reasonable legal and otherexpenses incurred by Landlord in connection with any request by Tenant forconsent to assignment or subletting; no assignment or subletting shall affectthe continuing primary liability of Tenant (which, following assignment, shallbe joint and several with the assignee); no consent to any of the foregoing in aspecific instance shall operate as a waiver in any subsequent instance. In theevent that any assignee or subtenant pays to Tenant any amounts in excess of theAnnual Rent and additional rent then payable hereunder, or pro rata portionthereof on a square footage basis for any portion of the Premises, Tenant shall



promptly pay/19// said excess to Landlord as and when received by Tenant.

10.2 Anything contained in the foregoing provisions of this Section to thecontrary

________________________

b. The proposed assignee or subtenant will not burden the Premisesand/or Common Areas to an extent substantially disproportionate totypical tenants of the Building, whether through disproportionatedemand for landlord services or utilities, disproportionate bearingweights on floor areas, disproportionate parking requirements,deterioration of floors or other elements of the Building, orotherwise.

c. The proposed assignee or subtenant does not intend to makesubstantial alterations to the Premises which would, in Landlord'sreasonable judgement, result in a material net decrease in the valueof the Premises as improved.

d. The proposed assignee's or subtenant's use of the Premises will, inLandlord's sole judgment, be compatible with the uses of the othertenants in the Building or will be appropriate for a Class A officebuilding.

e. Any other basis on which Landlord can reasonably refuse to withholdits consent to the proposed assignment or sublease, including anyfailure of the proposed assignee or subtenant to meet any of thereasonable criteria of Landlord that Tenant was required to meetprior to the execution of this Lease.

/19// fifty percent (50%) of

-19-

notwithstanding, neither the Tenant nor any other person having an interest inthe possession, use or occupancy of the Premises or any other portion of theProperty shall enter into any lease, sublease, license, concession or otheragreement for the possession, use or occupancy of space in the Premises or anyother portion of the Property which provides for any rental or other payment forsuch use, occupancy or utilization based in whole or in part upon the net incomeor profits derived by any person from the space in the Premises or other portionof the Property so leased, used or occupied (other than any amount based on afixed percentages of receipts or sales).

10.3. /20//In the event of any/21// transfer without Landlord's consent,Landlord may, at its sole option, have the right at any time or from time totime or from time after such Transfer to terminate this Lease as to all or anyportion of the Premises and enter into a direct lease agreement with the



proposed sublessee. Neither Tenant nor any party claiming an interest under orthrough Tenant shall interfere with Landlord's exercise of its rights hereunder.Tenant hereby indemnifies and holds Landlord harmless from and against any andall liabilities, costs, losses or damages, including reasonable attorneys feesand court costs, arising from any breach of the provisions of this section byTenant.

SECTION 11. RULES AND REGULATIONS.

The Landlord shall have the right to prescribe, at its sole discretion,reasonable rules and regulations (hereinafter referred to as the "Rules andRegulations") having uniform applicability to all tenants of the Building(subject to the provisions of their respective leases) and governing their useand enjoyment of the Building and the remainder of the Property; provided, thatthe Rules and Regulations shall not materially interfere with the Tenant's useand enjoyment of the Premises, in accordance with the provisions of this Lease,for the purposes enumerated in the provisions of Section 3. The Tenant shalladhere to the Rules and Regulations and shall cause its agents, employees,invitees, visitors and guests to do so. A copy of the Rules and Regulations ineffect on the date hereof is attached hereto as Exhibit C.

SECTION 12. SUBORDINATION; ATTORNMENT AND NON-DISTURBANCE.

12.1. SUBORDINATION. This Lease shall be subject and subordinate to thelien, operation and effect of each mortgage, deed of trust, ground lease and/orother, similar instrument of encumbrance heretofore or hereafter covering any orall of the Premises or the remainder of the Property (and each renewal,modification, consolidation, replacement or extension thereof), (each of whichis herein referred to as a "Mortgage"), all automatically and without thenecessity of any action by either party hereto.

12.2. ATTORNMENT AND NON-DISTURBANCE. The Tenant shall, promptly at therequest of the

______________________

/20// Except for the Transfers to subsidiaries or other affiliates ofTenant,

/21// other

-20-

Landlord or the holder of any Mortgage (herein referred to as a "Mortgagee"),execute, enseal, acknowledge and deliver such further instrument or instruments

12.2.1. evidencing such subordination as the Landlord or suchMortgagee deems necessary or desirable, and

12.2.2. (at such Mortgagee's request) attorning to such Mortgagee.



Landlord will use reasonable efforts to obtain an agreement from the Mortgagee(in such Mortgagee's usual form) that such Mortgagee will, in the event of aforeclosure of any such mortgage or deed of trust (or termination of any suchground lease) take no action to interfere with the Tenant's rights hereunder,except on the occurrence of an Event of Default.

12.3. Anything contained in the provisions of this Section to the contrarynotwithstanding, any Mortgagee may at any time subordinate the lien of itsMortgage to the operation and effect of this Lease without obtaining theTenant's consent thereto, by giving the Tenant written notice thereof, in whichevent this Lease shall be deemed to be senior to such Mortgage without regard totheir respective dates of execution, delivery and/or recordation among the LandRecords of the said County, and thereafter such Mortgagee shall have the samerights as to this Lease as it would have had, were this Lease executed anddelivered before the execution of such Mortgage.

SECTION 13. DEFAULT.

13.1. DEFINITION: As used in the provisions of this Lease, each of thefollowing events shall constitute, and is hereinafter referred to as, an "Eventof Default":

13.1.1. If the Tenant fails to (a) pay any Rent or any other sumwhich it is obligated to pay by any provision of this Lease, when and as due andpayable hereunder and without demand therefor, or (b) perform any of its otherobligations under the provisions of this Lease; or

13.1.2. if the Tenant (a) applies for or consents to theappointment of a receiver, trustee or liquidator of the Tenant or of all or asubstantial part of its assets, (b) files a voluntary petition in bankruptcy oradmits in writing its inability to pay its debts as they come due, (c) makes anassignment for the benefit of its creditors, (d) files a petition or an answerseeking a reorganization or an arrangement with creditors, or seeks to takeadvantage of any insolvency law, (e) performs any other act of bankruptcy, or(f) files an answer admitting the material allegations of a petition filedagainst the Tenant in any bankruptcy, reorganization or insolvency proceeding;or

13.1.3. if (a) an order, judgment or decree is entered by any courtof competent jurisdiction adjudicating the Tenant a bankrupt or insolvent,approving a petition seeking such a reorganization, or appointing a receiver,trustee or liquidator of the Tenant or of all or a substantial part of itsassets, or (b) there otherwise commences as to the Tenant or any of its assetsany proceeding under any bankruptcy, reorganization, arrangement, insolvency,readjustment, receivership or similar law, and if such order, judgment, decreeor proceeding continues unstayed for more than sixty (60) consecutive days;

-21-



13.1.4. if the Tenant fails to occupy and assume possession of thePremises within/22// days after the Commencement Date;

13.1.5. [deleted]

13.1.6./23// [deleted]

13.2. NOTICE TO TENANT; GRACE PERIOD. Anything contained in the provisionsof this Section to the contrary notwithstanding, on the occurrence of an Eventof Default the Landlord shall not exercise any right or remedy which it holdsunder any provision of this Lease or applicable law unless and until

13.2.1. the Landlord has given written notice thereof to the Tenant,if written notice is required by this Section for the Event of Default which hasoccurred, and

13.2.2. the Tenant has failed, (a) if such Event of Default consistsof a failure to pay money, within five (5) days/24//, or (b) if such Event ofDefault consists of something other than a failure to pay money, within thirty(30) days thereafter actively, diligently and in good faith to begin to curesuch Event of Default and to continue thereafter to do so until it is fullycured; provided, that

13.2.3. no such notice shall be required, and the Tenant shall beentitled to no such grace period, (a) in an emergency situation in which theLandlord acts to cure such Event of Default pursuant to the provisions ofparagraph 13.3.5; or (b) more than twice during any twelve (12) month period, or(c) if the Tenant has substantially terminated or is in the process ofsubstantially terminating its continuous occupancy and use of the Premises forthe purpose set forth in the provisions of Section 3, or (d) in the case of anyEvent of Default enumerated in the provisions of paragraphs 13.1.2, 13.1.3,13.1.4 and 13.1.6.

13.3. LANDLORD'S RIGHTS ON EVENT OF DEFAULT. On the occurrence of any Eventof Default, the Landlord may (subject to the operation and effect of theprovisions of subsection 13.2) take any

_______________________

/22// thirty (30)

/23// In the event Tenant should cease to continue to operate its business atthe Premises for a period of forty-five (45) consecutive days for any reasonother than Tenant's alterations, casualty or other reason beyond Tenant'sreasonable control, Landlord shall have the right at any time thereafter toterminate the Lease and recapture the Premises upon thirty (30) days priorwritten notice to Tenant. Landlord shall also have the option to recapture thePremises upon thirty (30) days prior written notice to Tenant withoutterminating the Lease. In such event, Tenant shall remain liable for the Rentuntil such time as Landlord leases the Premises to another party.



/24// after written notice is received; however, Landlord shall only beobligated to provide written notice to Tenant twice in each Lease Year;thereafter, no notice shall be due from Landlord to Tenant and Tenant shall bein default if it fails to pay such amounts when due.

-22-

or all of the following actions:

13.3.1. re-enter and repossess the Premises and any and allimprovements thereon and additions thereto;

13.3.2. declare the entire balance of the Rent for the remainder ofthe Term to be due and payable, and collect such balance in any manner notinconsistent with applicable law;

13.3.3. terminate this Lease;

13.3.4. relet any or all of the Premises for the Tenant's accountfor any or all of the remainder of the Term as hereinabove defined, or for aperiod exceeding such remainder, in which event the Tenant shall pay to theLandlord, at the times and in the manner specified by the provisions of Section2, the Base Rent and any Additional Rent accruing during such remainder, lessany monies received by the Landlord, with respect to such remainder, from suchreletting, as well as the cost to the Landlord of any/25// attorneys' fees or ofany repairs or other action (including those taken in exercising the Landlord'srights under any provision of this Lease) taken by the Landlord on account ofsuch Event of Default;

13.3.5. cure such Event of Default in any other manner (after givingthe Tenant written notice of the Landlord's intention to do so except asprovided in paragraph 13.2.3), in which event the Tenant shall reimburse theLandlord for all expenses incurred by the Landlord in doing so, plus interestthereon at the lesser of the rate of/26// per annum or the highest rate thenpermitted on account thereof by applicable law, which expenses and interestshall be Additional Rent and shall be payable by the Tenant immediately ondemand therefor by the Landlord; and/or

13.3.6. pursue any combination of such remedies and/or any otherremedy available to the Landlord on account of such Event of Default underapplicable law.

13.4. NO WAIVER. No action taken by the Landlord under the provisions ofthis Section shall operate as a waiver of any right which the Landlord wouldotherwise have against the Tenant for the Rent hereby reserved or otherwise, andthe Tenant shall remain responsible to the Landlord for any loss and/or damagesuffered by the Landlord by reason of any Event of Default.

13.5. DEFAULT BY LANDLORD. In the event of any default by Landlord,



Tenant's exclusive remedy shall be an action for actual direct damages (Tenanthereby waiving the benefit of any laws granting it a lien upon the property ofLandlord and/or upon rent due Landlord), but prior to any such action Tenantwill give Landlord written notice specifying such default with particularity,and Landlord shall thereupon have thirty (30) days in which to cure any suchdefault. Unless and until Landlord fails to so cure any default after suchnotice, Tenant shall not have any remedy or cause of

______________________

/25// reasonable

/26// twelve percent (12%)

-23-

action by reason thereof. All obligations of Landlord hereunder will beconstrued as covenants, not conditions, and all such obligations will be bindingupon Landlord only during the period of its possession of the Premises and notthereafter. The term "Landlord" shall mean only the owner, for the time being ofthe Premises, and in the event of the transfer by such owner of its interest inthe Premises, such owner shall thereupon be released and discharged from allcovenants and obligations of the Landlord thereafter accruing, but suchcovenants and obligations shall be binding during the lease term upon each newowner for the duration of such owner's ownership. Notwithstanding any otherprovision hereof, Landlord shall not have any personal liability hereunder. Inthe event of any breach or default by Landlord in any term or provision of thisLease, Tenant agrees to look solely to the equity or interest then owned byLandlord in the Property, however, in no event, shall any deficiency judgment orany money judgment of any kind be sought or obtained against any Landlord.

SECTION 14. ESTOPPEL CERTIFICATE.

The Tenant shall from time to time, within five (5) days after beingrequested to do so by the Landlord or any Mortgagee, execute, enseal,acknowledge and deliver to the Landlord (or, at the Landlord's request, to anyexisting or prospective purchaser, transferee, assignee or Mortgagee of any orall of the Premises, the Property, any interest therein or any of the Landlord'srights under this Lease) an instrument in recordable form,

14.1. certifying (a) that this Lease is unmodified and in full force andeffect (or, if there has been any modification thereof, that it is in full forceand effect as so modified, stating therein the nature of such modification); (b)as to the dates to which the Base Rent and any Additional Rent and other chargesarising hereunder have been paid; (c) as to the amount of any prepaid Rent orany credit due to the Tenant hereunder; (d) that the Tenant has acceptedpossession of the Premises, and the date on which the Term commenced; (e) as towhether, to the best knowledge, information and belief of the signer of suchcertificate, the Landlord or the Tenant is then in default in performing any of



its obligations hereunder (and, if so, specifying the nature of each suchdefault); and (f) as to any other fact or condition reasonably requested by theLandlord or such other addressee; and

14.2. acknowledging and agreeing that any statement contained in suchcertificate may be relied upon by the Landlord and any such other addressee.

14.3 In the event that Tenant fails to deliver in a timely manner theestoppel certificate described in Section 14, Landlord may complete such acertificate on behalf of Tenant, which certificate shall be binding againstTenant as if Tenant itself signed such certificate. For such purpose, Tenanthereby irrevocably constitutes and appoints Landlord as Tenant's attorney-in-fact (which appointment shall be deemed coupled with an interest) for and in itsname to prepare and sign on Tenant's behalf such an estoppel certificate, Tenanthereby ratifying and confirming all the said attorney shall lawfully do orchoose to do or be done by virture hereof, it being understood and agreed thatthe aforesaid provisions impose no burden or obligation on the Landlord to do orperform any act whatsoever. After said estoppel certificate has been prepared byLandlord, Landlord shall provide Tenant a copy thereof. Unless Tenant modifiessuch certificate as may be appropriate to make the certificate fully accurate,and signs and returns to Landlord the certificate within three

-24-

(3) days after receipt from Landlord, Landlord shall be entitled and authorizedto sign such estoppel certificate and deliver to any Mortgagee or other personsuch estoppel certificate in the name and on behalf of Tenant.

SECTION 15. QUIET ENJOYMENT.

The Landlord hereby covenants that the Tenant, on paying the Rent andperforming the covenants set forth herein, shall peaceably and quietly hold andenjoy, throughout the Term, (a) the Premises, and (b) such rights as the Tenantmay hold hereunder with respect to the remainder of the Property.

SECTION 16. NOTICES.

Any notice, demand, consent, approval, request or other communication ordocument to be provided hereunder to a party hereto shall be (a) given inwriting, and (b) deemed to have been given (i) forty-eight (48) hours afterbeing sent as certified or registered mail in the United States mails, postageprepaid, return receipt requested, upon its hand delivery to such party,addressed as follows:

IF TO LANDLORD: Cornerstone Real Estate Advisers, Inc.c/o Cambridge Asset Advisors Limited Partnership560 Herndon Parkway, Suite 210Herndon, Virginia 20170

IF TO TENANT: Pulsar Data Systems, Inc.



4390 Parliament Place, Suite RLanham, Maryland 20720

Each party may change its notice address by giving written notice of suchchange to the other party in accordance with the terms of this Section 16.

SECTION 17. LANDLORD'S LIEN./27//

[Deleted]

SECTION 18. GENERAL.

18.1. EFFECTIVENESS. This Lease shall become effective upon and only uponits execution by

_______________________

/27// Notwithstanding anything contained herein to the contrary, Landlordagrees to forgive its lien on any furniture, fixture or equipment located in thePremises, but does not waive any of its rights and or remedies granted under theUniform Commercial Code or any statutory lien for Rent in Landlord's favor.

-25-

each party hereto./28//

18.2. COMPLETE UNDERSTANDING. This Lease represents the completeunderstanding between the parties hereto as to the subject matter hereof, andsupersedes all prior written or oral negotiations, representations, warranties,statements or agreements between the parties hereto as to the same.

18.3. AMENDMENT. This Lease may be amended by and only by an instrumentexecuted and delivered by each party hereto.

18.4. APPLICABLE LAW. This Lease shall be given effect and construed byapplication of the laws of Maryland, and any action or proceeding arisinghereunder shall be brought in the Circuit Court for Prince Georges County,Maryland, provided, that if such action or proceeding arises under theConstitution, laws or treaties of the United States of America, or if there is adiversity of citizenship between the parties thereto so that it is to be broughtin a United States District Court, it shall be brought in the United StatesDistrict Court for the appropriate District in Maryland.

18.5. WAIVER. The Landlord shall not be deemed to have waived the exerciseof any right which it holds hereunder unless such waiver is made expressly andin writing (and no delay or omission by the Landlord in exercising any suchright shall be deemed to be a waiver of its future exercise). No such waiver asto any instance involving the exercise of any such right shall be deemed awaiver as to any other such instance, or any other such right.



18.6. TIME OF ESSENCE. Time shall be of the essence of this Lease.

18.7. HEADINGS. The headings of the Sections, subsections, paragraphs andsubparagraphs hereof are provided herein for and only for convenience ofreference, and shall not be considered in construing their contents.

18.8. CONSTRUCTION. As used herein,

18.8.1. the term "person" means a natural person, a trustee, acorporation, a partnership and any other form of legal entity; and

18.8.2. all references made (a) in the neuter, masculine orfeminine gender shall be deemed to have been made in all such genders, (b) inthe singular or plural number shall be deemed to have been made, respectively,in the plural or singular number as well, and (c) to any Section, subsection,paragraph or subparagraph shall, unless therein expressly indicated to thecontrary, be deemed to have been made to such Section, subsection, paragraph orsubparagraph of this Lease.

18.9. EXHIBITS. Each writing referred to herein as being attached hereto asan exhibit or otherwise designated herein as an exhibit hereto is hereby made apart hereof.

_______________________

/28// and delivery by Landlord to Tenant

-26-

18.10. SEVERABILITY. No determination by any court, governmental body orotherwise that any provision of this Lease or any amendment hereof is invalid orunenforceable in any instance shall affect the validity or enforceability of (a)any other such provision, or (b) such provision in any circumstance notcontrolled by such determination. Each such provision shall be valid andenforceable to the fullest extent allowed by, and shall be construed whereverpossible as being consistent with, applicable law.

18.11. DEFINITION OF THE "LANDLORD".

18.11.1. As used herein, the term the "Landlord" means the personhereinabove named as such, and its heirs, personal representatives, successorsand assigns (each of whom shall have the same rights, remedies, powers,authorities and privileges as it would have had, had it originally signed thislease as the Landlord).

18.11.2. No person holding the Landlord's interest hereunder(whether or not such person is named as the "Landlord" herein) shall have anyliability hereunder after such person ceases to hold such interest, except forany such liability accruing while such person holds such interest.



18.11.3. Neither the Landlord nor any principal of the Landlord,whether disclosed or undisclosed, shall have any personal liability under anyprovision of this Lease.

18.12. DEFINITION OF THE "TENANT". As used herein, the term the "Tenant"means each person hereinabove named as such and such person's heirs, personalrepresentatives, successors and assigns, each of whom shall have the sameobligations, liabilities, rights and privileges as it would have possessed hadit originally executed this Lease as the Tenant; provided, that no such right orprivilege shall inure to the benefit of any assignee of the Tenant, immediate orremote, unless the assignment to such assignee is made in accordance with theprovisions of Section 10. Whenever two or more persons constitute the Tenant,all such persons shall be jointly and severally liable for performing theTenant's obligations hereunder.

18.13. COMMISSIONS. Each party hereto hereby represents and warrants to theother that, in connection with the leasing of the Premises hereunder, the partyso representing and warranting has not dealt with any real estate broker, agentor finder, other than Scheer Partners as Tenant's Agent and Cambridge PropertyGroup Limited Partnership as Landlords Agent and there is no other commission,charge or other compensation due on account thereof Each party hereto shallindemnify and hold harmless the other against and from any inaccuracy in suchparty's representation.

18.14. RECORDATION. This Lease may not be recorded among the Land Recordsof the said County or among any other public records, without the Landlord'sprior express, written consent thereto, and any attempt by the Tenant to do sowithout having obtained the Landlord's consent thereto shall constitute an Eventof Default hereunder. If this Lease is recorded by either party hereto, suchparty shall bear the full expense of any transfer, documentary stamp or othertax, and any recording fee, assessed in connection with such recordation;provided, that if under applicable law the recordation of this Lease hereafterbecomes necessary in order for this Lease to be or remain

-27-

effective, the Tenant shall bear the full expense of any and all such taxes andfees incurred in connection therewith.

18.15. APPROVAL BY MORTGAGEES. Anything contained in the provisions of thisLease to the contrary notwithstanding, the Landlord shall be entitled at anytime hereafter but before the Landlord delivers possession of the Premises tothe Tenant hereunder, to terminate this Lease by giving written notice thereofto the Tenant, if any Mortgagee fails to approve this Lease for purposes of theprovisions of its Mortgage, and in the manner set forth therein.

18.16 WAIVER OF TRIAL BY JURY. The Tenant hereby waives trial by jury inany action or proceeding to which the Tenant and the Landlord may be parties,arising out of or in any way pertaining to (a) this Lease, or (b) the Property.



It is agreed and understood that this waiver constitutes a waiver of trial byjury of all claims against all parties to such actions or proceedings, includingclaims against parties who are not parties to this Lease.

This waiver is knowingly, willingly and voluntarily made by the Tenant, andthe Tenant hereby represents that no representations of fact or opinion havebeen made by any individual to induce this waiver of trial by jury or to in anyway modify or nullify its effect. The Tenant further represents that it has beenrepresented in the signing of this Lease and in the making of this waiver byindependent legal counsel, selected of its own free will, and that it has hadthe opportunity to discuss this waiver with counsel.

18.17. FINANCIAL INFORMATION.

18.18. AUTHORITY.

By signing below, the undersigned individuals represent and warrant thatthey have all requisite authority to sign this Lease Agreement and to bind theentity on behalf of which they sign this Lease.

IN WITNESS WHEREOF, each party hereto has executed and ensealed this Leaseor caused it to be executed and ensealed on its behalf by its duly authorizedrepresentatives, the day and year first above written.

WITNESS: LANDLORD: MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY

/s/ By: /S/ ROBERT R. VILLENEUVE---------------------- ------------------------------------

Mr. Robert R. VilleneuveVice President

Date: 8/11/98----------------------------------

-28-

WITNESS: TENANT: PULSAR DATA SYSTEMS, INC.

/s/ By: /S/ DARYL B. DAVIS----------------------- ------------------------------------

Name: Daryl B. Davis----------------------------------

Title: V. P. Ops.---------------------------------



Date: 8/10/98----------------------------------

-29-

AGREEMENT OF LEASEby and between

MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANYand


EXHIBIT A

PREMISES

The Premises consists of approximately 12,790 rentable square feet in 4390Parliament Place, a 57,089 square foot, office/flex project located at 4390Parliament Place, Lanham, Prince George's County, Maryland; to be located in theapproximate location shown on the plan attached hereto as Exhibit A-1.

-30-


MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY

and


EXHIBIT A-1

SITE PLAN

[SITE PLAN]

-31-


Massachusetts Mutual Life Insurance Company

and



Pulsar Data Systems, Inc.

EXHIBIT B

TENANT IMPROVEMENTS

[DELETED]

-32-



and


EXHIBIT B-1

SPACE PLAN

-33-



and


EXHIBIT C

CURRENT RULES AND REGULATIONS

1. The sidewalks, lobbies, passages, elevators and stairways shall not beobstructed by the Tenant and used by the Tenant for any purposes other thaningress and egress from and to the Tenant's offices. The Landlord shall inall cases retain the right to control or prevent access thereto by anyperson whose presence, in the Landlord's judgment, would be prejudicial tothe safety, peace, character or reputation of the Building or of any tenantof the Property.

2. The toilet rooms, water closets, sinks, faucets, plumbing and other service



apparatus of any kind shall not be used by the Tenant for any purpose otherthan those for which they were installed, and no sweepings, rubbish, rags,ashes, chemicals or other refuse or injurious substances shall be placedtherein or used in connection therewith by the Tenant, or left by theTenant in the lobbies, passages, elevators or stairways of the Building.

3. No skylight, window, door or transom of the Building shall be covered orobstructed by the Tenant, and no window shade, blind, curtain, screen,storm window, awning or other material shall be installed or placed on anywindow or in any window space, except as approved in writing by theLandlord. If the Landlord has installed or hereafter installs any shade,blind or curtain in the Premises, the Tenant shall not remove it withoutfirst obtaining the Landlord's written consent thereto.

4. No sign, lettering, insignia, advertisement, notice or other thing shall beinscribed, painted, installed, erected or placed in any portion of thePremises which may be seen from outside the Building, or on any window,window space or other part of the exterior or interior of the Building,unless first approved in writing by the Landlord. Names on suite entrancesshall be provided by and only by the Landlord and at the Tenant's expense,using in each instance lettering of a design and in a form consistent withthe other lettering in the Building, and first approved in writing by theLandlord. The Tenant shall/will not erect any stand, booth or showcase orother article or matter in or upon the Premises and/or the Building withoutfirst obtaining the Landlord's written consent thereto.

5. The Tenant shall not place any additional lock or security devices upon anydoor within the

-34-

EXHIBIT CCURRENT RULES AND REGULATIONS (CONTINUED)

Premises or elsewhere upon the Property without Landlord's consent, andshall surrender all keys for all such locks at the end of the Term. TheLandlord shall provide the Tenant with one set of keys to the Premises whenthe Tenant assumes possession thereof

6. The delivery of towels, ice, water, food, beverages, newspaper and othersupplies, equipment and furniture will be permitted only under theLandlord's direction and control.

7. The Tenant shall not do or permit to be done anything which obstructs orinterferes with the rights of any other tenant of the Property. The Tenantshall not keep anywhere within the Property any matter having an offensiveodor, or any kerosene, gasoline, benzine, camphene, fuel or other explosiveor highly flammable material. No bird, fish or other animal shall bebrought into or kept in or about the Premises.



8. The Tenant shall keep the Premises in a good state of preservation andcleanliness while in possession of the Premises.

9. If the Tenant desires to install signalling, telegraphic, telephonic,protective alarm or other wires, apparatus or devices within the Premises,the Landlord shall direct where and how they are to be installed and,except as so directed, no installation, boring or cutting shall bepermitted. The Landlord shall have the right (a) to prevent or interruptthe transmission of excessive, dangerous or annoying current of electricityor otherwise into or through the Building or the Premises, (b) to requirethe changing of wiring connections or layout at the Tenant's expense, tothe extent that the Landlord may deem necessary, (c) to require compliancewith such reasonable rules as the Landlord may establish relating thereto,and (d) in the event of noncompliance with such requirements or rules,immediately to cut wiring or do whatever else it considers necessary toremove the danger, annoyance or electrical interference with apparatus inany part of the Building. Each wire installed by the Tenant must beclearly tagged at each distributing board and junction box and elsewherewhere required by Landlord, with the number of the office to which suchwire leads and the purpose for which it is used, together with the name ofthe tenant or other concern, if any, operating or using it.

10. No furniture, package, equipment, supplies or merchandise may be receivedin the Building, or carried up or down in the elevators or stairways,except during such hours as are designated for such purpose by theLandlord, and only after Tenant gives notice thereof to the Landlord. TheLandlord shall have the exclusive right to prescribe the method and mannerin which any of the same is brought into or taken out of the Building, andthe right to exclude from the Building any heavy furniture, safe or otherarticle which may create a hazard and to require it to be located at adesignated place in the Premises. The Tenant shall not place any weightanywhere beyond the safe carrying capacity of the Building. The cost ofrepairing any damage to the Building or any other part of the Propertycaused by taking any of the same in or out of the Premises, or any damagecaused while it is in the Premises or the

-35-


rest of the Building, shall be borne by the Tenant.

11. Without the Landlord's prior written consent, (a) nothing shall be fastenedto (and no hole shall be drilled, or nail or screw driven into) any wall orpartition, (b) no wall, or partition shall be painted, papered or otherwisecovered or moved in any way or marked or broken, (c) no connection shall bemade to any electrical wire for running any fan, motor or other apparatus,device or equipment, (d) no machinery of any kind other than customarysmall business machinery shall be allowed in the Premises, (e) no



switchboard or telephone wiring or equipment shall be placed anywhere otherthan where designated by the Landlord, and (f) no mechanic shall be allowedto work in or about the Building other than one employed by the Landlord,unless approved in writing by Landlord.

12. The Tenant shall have access to the Premises at all reasonable times. TheLandlord shall in no event be responsible for admitting or excluding anyperson from the Premises. In case of invasion, hostile attack,insurrection, mob violence, riot, public excitement or other commotion,explosion, fire or any casualty, the Landlord shall have the right to baror limit access to the Building to protect the safety of occupants of theProperty, or any property within the Property.

13. The Landlord shall have the right to rescind, suspend or modify the Rulesand Regulations and to promulgate such other Rules or Regulations as, inthe Landlord's reasonable judgment, are from time to time needed for thesafety, care, maintenance, operation and cleanliness of the Building, orfor the preservation of good order therein. Upon the Tenant's having beengiven notice of the taking of any such action, the Rules and Regulations asso rescinded, suspended, modified or promulgated shall have the same forceand effect as if in effect at the time at which the Tenant's lease wasentered into (except that nothing in the Rules and Regulations shall bedeemed in any way to alter or impair any provision of such lease).

14. The use of any room within the Building as sleeping quarters is strictlyprohibited at all times.

15. The Tenant shall keep the windows and doors of the Premises (includingthose opening on corridors and all doors between rooms entitled to receiveheating or air conditioning service and rooms not entitled to receive suchservice), closed while the heating or air conditioning system is operating,in order to minimize the energy used by, and to conserve the effectivenessof, such systems. The Tenant shall comply with all reasonable Rules andRegulations from time to time promulgated by the Landlord with respect tosuch systems or their use.

16. Nothing in these Rules and Regulations shall give any Tenant any right orclaim against the Landlord or any other person if the Landlord does notenforce any of them against any other

-36-


tenant or person (whether or not the Landlord has the right to enforce themagainst such tenant or person), and no such nonenforcement with respect toany tenant shall constitute a waiver of the right to enforce them as to theTenant or any other tenant or person.



-37-



and


EXHIBIT D

BASE RENT

<TABLE><CAPTION>--------------------------------------------------------------------------------

RENTAL SQUARE ANNUAL MONTHLYLEASE YEAR RATE FEET BASE RENT BASE RENT

--------------------------------------------------------------------------------<S> <C> <C> <C> <C>

1 $8.20 12,790 $104,878.00 $8,739.83--------------------------------------------------------------------------------

2 $8.45 12,790 $108,024.34 $9,002.03--------------------------------------------------------------------------------

3 $8.70 12,790 $111,265.07 $9,272.09--------------------------------------------------------------------------------

4 $8.96 12,790 $114,603.02 $9,550.25--------------------------------------------------------------------------------

5 $9.23 12,790 $118,041.11 $9,836.76--------------------------------------------------------------------------------</TABLE>

-38-



and


EXHIBIT E

LEASE ADDENDUMS



1. Option to Terminate: Provided Tenant is not then in default under the termsof this Lease, Tenant shall have the one-time right to terminate this Lease asof the end of the thirty-sixth (36th) month of the Lease Term. Tenant mustprovide Landlord at least one hundred eighty (180) days prior written notice(i.e. 180 days prior to the end of the 36th month of the Lease Term) of itselection to exercise this option to terminate. If Tenant fails to provideLandlord with such written notice on or before such one hundred eighty (180) dayperiod, Tenant's option to terminate shall become null and void and Tenant shallhave no further option(s) to terminate. In connection with said termination andas liquidated damages to compensate Landlord for the damage it will incur inconnection with an early termination, Tenant shall pay a fee to Landlord equalto all unamortized tenant improvement costs and leasing commissions amortizedover sixty (60) months at a per annum rate of ten percent (10%) per annum plusthree (3) months Base Rent at the then current rates. The parties acknowledgethat it would be difficult to calculate Landlord's damages in the event of anearly termination and that the above sum is a reasonable estimate of suchdamages. Tenant shall pay such sum at the time of its giving the foregoingnotice or such notice shall be null and void and Tenant's option to terminateshall thereupon be null and void. In addition, the parties shall execute atermination agreement in connection with such early termination.

2. Right of First Offer: As long as Tenant has not been in default during theTerm of the Lease and is not in default under the Lease at the time of itsexercise of this right, and so long as this right is exercised in connectionwith an expansion of Tenant's Premises and for no other purpose, and subject tothe prior rights of any other tenant in the Building, Landlord hereby grants toTenant a one-time right of first offer on the terms and conditions contained inthis paragraph to lease the 6,717 square feet in Suite P when it becomesavailable and is not subject to the rights of any other tenant (the "OfferSpace"). The rent for such Space shall be the same rate Tenant is then payingfor the Premises, as escalated. Such lease shall be coterminous with the leasefor the existing Premises and if such Term is then less than three (3) LeaseYears, the Term for the existing Premises and the Offer Space shall be extendedso that it will expire at least three (3) Lease Years from the commencement dateof Tenant's lease of the Offer Space. Landlord shall also provide Tenant with atenant improvement allowance in the amount equal to the proportionate amountwith respect to the Lease Term remaining for improvements to the Offer Space. Inthe event the Offer Space becomes available for lease during the Term, Landlordshall give notice thereof to Tenant which notice shall

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contain the foregoing terms to lease the Offer Space. Within five (5) businessdays of such notice, time being of the essence, Tenant shall give Landlordnotice that it either does or does not wish to lease the Offer Space or ifTenant fails to give Landlord notice of its desires respecting the Offer Spacewithin the foregoing required five (5) business day period, then Landlord shallbe entitled to proceed to market and/or lease the Offer Space to a third partyfree and clear of Tenant's right to first offer and such right shall be deemed



terminated in all respects and Tenant shall have no further rights of firstoffer.

In the event Tenant gives Landlord a notice as required in the precedingparagraph that it wishes to lease the Offer Space, then Landlord and Tenantshall have twenty (20) days from the date of the notice within which to amendthis Lease by adding the Offer Space on the terms and conditions contained inLandlord's notice. In the event Landlord and Tenant fail to sign such amendmentto this Lease, using good faith efforts, within said twenty (20) day period,time being of the essence, then Landlord shall be entitled to proceed to marketand/or lease the Offer Space to a third party free

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----------------COMPARISON OF FOOTNOTES--------------

-FOOTNOTE 1-any extension thereof

-FOOTNOTE 2-hundred fifty percent (150%) for the first three (3) months and two hundredpercent (200%)

-FOOTNOTE 3-no event shall Tenant's annual increase in controllable Annual Operating Costs(not including, real estate taxes, insurance, utilities and snow removal) exceedsix percent (6%) of the Tenant's previous years costs.

-FOOTNOTE 4-thirty (30) days

-FOOTNOTE 5-Blank Footnote

-FOOTNOTE 6-which approval shall not be unreasonably withheld, conditioned or delayed

-FOOTNOTE 7-to Audit:

(a) Selection of Accountants: If Tenant disputes the amount of an adjustmentor the proposed estimated increase or decrease in Taxes or Annual OperatingCosts, Tenant shall give Landlord written notice of such dispute within thirty(30) days after Landlord advises Tenant of such adjustment or proposed increaseor decrease. Tenant's failure to give such notice shall waive its right todispute the amounts so determined. Tenant shall also not be entitled to disputethe foregoing amounts if Tenant is then in default hereunder. If Tenant isentitled to and timely objects, Tenant shall have the right to engage its ownaccountants ("Tenants Accountants") for the purposes of verifying the accuracy



of the statement in dispute, or the reasonableness of the adjustment orestimated increase or decrease. If Tenant's Accountants determine that an errorhas been made, Landlord and Tenant's Accountants shall endeavor to agree uponthe matter. If they cannot agree within twenty (20) days from the date Tenant'sAccountants commence reviewing Landlord's records, Landlord and Tenant'sAccountants shall jointly select an independent certified public accounting firm(the "Independent Accountant") which firm shall conclusively determine whetherthe adjustment or estimated increase or decreases is reasonable, and if not,what amount is reasonable. Both parties shall be bound by such determination. IfTenant's Accountants do not

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participate in choosing the Independent Accountant within 20 days from the dateLandlord and Tenant's Accountant's determine that they cannot agree as towhether or not an error has been made, then Landlord's determination of theadjustment or estimated increase or decrease shall be conclusively determined tobe reasonable and Tenant shall be bound hereby.

(b) Payment of Costs: All costs incurred by Tenant in obtaining Tenant'sAccountants and the cost of the Independent Accountant shall be paid by Tenantunless Tenant's Accountants disclose an error, acknowledge by Landlord (or foundto have conclusively occurred by the Independent Accountant), of more than tenpercent (10%) in the computation of the total amount of Taxes or AnnualOperating Costs as set forth in the statement submitted by Landlord with respectto the matter in dispute; in which event Landlord shall pay the reasonable costsincurred by Tenant in obtaining such audits. No subtenant shall have the rightto conduct an audit and no assignee shall conduct an audit for any period duringwhich such assignee was not in possession of the Premises.

(c) Continuation of Payments Pending Determination: Tenant shall continueto timely pay Landlord the amount of the prior year's adjustment and adjustedAdditional Rent determined to be incorrect as aforesaid until the parties haveconcurred as to the appropriate adjustment or have deemed to be bound by thedetermination of the Independent Accountant in accordance with the precedingterms. Landlord's delay in submitting any statement contemplated herein for anyLease Year shall not affect the provisions of this Paragraph, nor constitute awaiver of Landlord's rights as set forth herein for said Lease Year or anysubsequent Lease Years during the Lease Term or any extensions thereof.

-FOOTNOTE 9-within thirty (30) days after Tenant's receipt of invoice.

-FOOTNOTE 10-percent (12%)

-FOOTNOTE 11-anything contained herein to the contrary provided Tenant hasn't been indefault, Landlord will refund one month of the security deposit in the amount ofeight thousand seven hundred thirty-nine and 83/100 ($8,739.83) at the end of



the first (1st) Lease Year.

-FOOTNOTE 12-(30) days

-FOOTNOTE 13-shall provide a turn key buildout based upon the final approvedspace plan dated July 24,1998 and attached hereto in Exhibit B-1. The cost ofany additional improvements or services incurred due to Tenant's modification ofthe final approved space plan shall be promptly paid directly by Tenant toLandlord upon written request by Landlord (to include invoice with back-up), andfailure to pay such sum in accordance with the schedule below shall constitutean Event of Default under the Lease. Landlord's contractor shall perform allwork to be done within the Premises, with the exception of Tenant's telephoneand data cabling.

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In the event the cost of the improvement exceeds the Allowance, Tenant shallrepay such costs in accordance with the following schedule; (a) seventy fivepercent (75%) upon requisition of the improvements and (b) twenty five percent(25%) upon the substantial completion of the improvements.

-FOOTNOTE 14-its sole cost and expense

-FOOTNOTE 15-during the last six (6) months of the Term)

-FOOTNOTE 16-hundred eighty (180)

-FOOTNOTE 17-hundred eighty (180)

-FOOTNOTE 18-not be unreasonably withheld, conditioned or delayed, so long as such transfereemeets Landlord's reasonable criteria, which criteria are as follows:

a. The financial strength of the proposed assignee or subtenant, both in termsof net worth and in terms of reasonably anticipated cash flow over the Leaseterm, is not materially less than Tenant's financial strength at the time thisLease was signed or at the time of such assignment or sublease, whichever isgreater.

b. The proposed assignee or subtenant will not burden the Premises and/orCommon Areas to an extent substantially disproportionate to typical tenants ofthe Building, whether through disproportionate demand for landlord services orutilities, disproportionate bearing weights on floor areas, disproportionateparking requirements, deterioration of floors or other elements of the Building,



or otherwise.

c. The proposed assignee or subtenant does not intend to make substantialalterations to the Premises which would, in Landlord's reasonable judgement,result in a material net decrease in the value of the Premises as improved.

d. The proposed assignee's or subtenant's use of the Premises will, inLandlord's sole judgment, be compatible with the uses of the other tenants inthe Building or will be appropriate for a Class A office building.

e. Any other basis on which Landlord can reasonably refuse to withhold itsconsent to the proposed assignment or sublease, including any failure of theproposed assignee or subtenant to meet any of the reasonable criteria ofLandlord that Tenant was required to meet prior to the execution of this Lease.

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-FOOTNOTE 19-percent (50%) of

-FOOTNOTE 20-for the Transfers to subsidiaries or other affiliates of Tenant,


-FOOTNOTE 22-(30)

-FOOTNOTE 23-the event Tenant should cease to continue to operate its business at thePremises for a period of forty-five (45) consecutive days for any reason otherthan Tenant's alterations, casualty or other reason beyond Tenant's reasonablecontrol, Landlord shall have the right at any time thereafter to terminate theLease and recapture the Premises upon thirty (30) days prior written notice toTenant. Landlord shall also have the option to recapture the Premises uponthirty (30) days prior written notice to Tenant without terminating the Lease.In such event, Tenant shall remain liable for the Rent until such time asLandlord leases the Premises to another party.

-FOOTNOTE 24-written notice is received; however, Landlord shall only be obligated to providewritten notice to Tenant twice in each Lease Year; thereafter, no notice shallbe due from Landlord to Tenant and Tenant shall be in default if it fails to paysuch amounts when due.


-FOOTNOTE 26-



percent (12%)

-FOOTNOTE 27-anything contained herein to the contrary, Landlord agrees to forgive its lienon any furniture, fixture or equipment located in the Premises, but does notwaive any of its rights and or remedies granted under the Uniform CommercialCode or any statutory lien for Rent in Landlord's favor.

-FOOTNOTE 28-delivery by Landlord to Tenant

----------------COMPARISON OF FOOTNOTES--------------

-HEADER 1-----------EXHIBIT C----------

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CURRENT RULES AND REGULATIONS (CONTINUED)-----------------------------------------

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EXHIBIT 10.29

BUSINESS LOAN AGREEMENT

<TABLE><S> <C> <C> <C> <C> <C> <C> <C> <C>------------------------------------------------------------------------------------------------------------------------------------

Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials$3,800,000.00 09-29-1998 02-28-2000 0221440309 RCC4a CBL31 SG------------------------------------------------------------------------------------------------------------------------------------

References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loanor item.

------------------------------------------------------------------------------------------------------------------------------------</TABLE>

Borrower: Litronic Industries, Inc. Lender: BYL BANK GROUP2030 Main Street #1250 Costa Mesa OfficeIrvine, CA 92614 1700 Adams Ave. Ste. 100

Costa Mesa, CA 92626

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THIS BUSINESS LOAN AGREEMENT between Litronic Industries, Inc. ("Borrower") andBYL BANK GROUP ("Lender") is made and executed on the following terms andconditions. Borrower has received prior commercial loans from Lender or hasapplied to Lender for a commercial loan or loans and other financialaccommodations, including those which may be described on any exhibit orschedule attached to this Agreement. All such loans and financialaccommodations, together with all future loans and financial accommodations fromLender to Borrower, are referred to in this Agreement individually as the "Loan"and collectively as the "Loans." Borrower understands and agrees that: (a) ingranting, renewing, or extending any Loan, Lender is relying upon Borrower'srepresentations, warranties and agreements, as set forth in this Agreement; (b)the granting, renewing, or extending of any Loan by Lender at all times shall besubject to Lender's sole judgment and discretion; and (c) all such Loans shallbe and shall remain subject to the following terms and conditions of thisAgreement.

TERM. This Agreement shall be effective as of September 29, 1998, and shallcontinue thereafter until all Indebtedness of Borrower to Lender has beenperformed in full and the parties terminate this Agreement in writing.

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

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

BORROWER. The word "Borrower" means Litronic Industries, Inc.. The word"Borrower" also includes, as applicable, all subsidiaries and affiliates of

BUSINESS LOAN AGREEMENT Page 2(Continued)

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Borrower as provided below in the paragraph titled "Subsidiaries andAffiliates."

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

COLLATERAL. The word "Collateral" means and includes without limitationall property and assets granted as collateral security for a Loan, whetherreal or personal property, whether granted directly or indirectly, whethergranted now or in the future, and whether granted in the form of a securityinterest, mortgage, deed of trust, assignment, pledge, chattel mortgage,chattel trust, factor's lien, equipment trust, conditional sale, trustreceipt, lien, charge, lien or title retention contract, lease orconsignment intended as a security device, or any other security or lieninterest whatsoever, whether created by law, contract, or otherwise.



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

EVENT OF DEFAULT. The words "Event of Default" mean and include withoutlimitation any of the Events of Default set forth below in the sectiontitled "EVENTS OF DEFAULT."

GRANTOR. The word "Grantor"means and includes without limitation each andall of the persons or entities granting a Security Interest in anyCollateral for the Indebtedness, including without limitation all Borrowersgranting such a Security Interest.

GUARANTOR. The word "Guarantor" means and includes without limitation eachand all of the guarantors, sureties, and accommodation parties inconnection with any Indebtedness.

INDEBTEDNESS. The word "Indebtedness" means and includes withoutlimitation all Loans, together with all other obligations, debts andliabilities of Borrower to Lender, or any one or more of them, as well asall claims by Lender against Borrower, or any one or more of them; whethernow or hereafter existing, voluntary or involuntary, due or not due,absolute or contingent, liquidated or unliquidated; whether Borrower may beliable individually or jointly with others; whether Borrower may beobligated as a guarantor, surety, or otherwise; whether recovery upon suchIndebtedness may be or hereafter may become barred by any statute oflimitations; and whether such Indebtedness may be or hereafter may becomeotherwise unenforceable.

LENDER. The word "Lender" means BYL BANK GROUP, its successors andassigns.


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

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

PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and securityinterests securing indebtedness owned by Borrower to Lender; (b) liens fortaxes, assessments, or similar charges either not yet due or beingcontested in good faith; (c) liens of materialmen, mechanics, warehousemen,or carriers, or other like liens arising in the ordinary course of businessand security obligations which are not yet delinquent; (d) purchase moneyliens or purchase money security interests upon or in any property acquiredor held by Borrower in the ordinary course of business to secureindebtedness outstanding on the date of this Agreement or permitted to beincurred under the paragraph of this Agreement titled "Indebtedness andLiens"; (e) liens and security interests which, as of the date of thisAgreement, have been disclosed to and approved by the Lender in writing;and (f) those liens and security interests which in the aggregateconstitute an immaterial and insignificant monetary amount with respect tothe net value of Borrower's assets.

RELATED DOCUMENTS. The words "Related Documents" mean and include withoutlimitation all promissory notes, credit agreements, loan agreements,environmental agreements, guaranties, security agreements, mortgages, deedsof trust, and all other instruments, agreements and documents, whether nowor hereafter existing, executed in connection with the indebtedness.

SECURITY AGREEMENT. The words "Security Agreement" mean and includewithout limitation any agreements, promises, covenants, arrangements,understandings or other agreements, whether created by law, contract, orotherwise, evidencing, governing, representing, or creating a SecurityInterest.

SECURITY INTEREST. The words "Security Interest" mean and include withoutlimitation any type of collateral security, whether in the form of a lien,charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,chattel trust, factor's lien, equipment trust, conditional sale, trustreceipt, lien or title retention contract, lease or consignment intended asa security device, or any other security or lien interest whatsoever,whether created by law, contract, or otherwise.




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SARA. The word "SARA" means the Superfund Amendments and ReauthorizationAct of 1996 as now or hereafter amended.

CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initialLoan Advance and each subsequent Loan Advance under this Agreement shall besubject to the fulfillment to Lender's satisfaction of all of the conditions setforth in this Agreement and in the Related Documents.

LOAN DOCUMENTS. Borrower shall provide to Lender in form satisfactory toLender the following documents for the Loan: (a) the Note; (b) SecurityAgreements granting to Lender security interests in the Collateral; (c)Financing Statements perfecting Lender's Security Interests; (d) evidenceof insurance as required below; and (e) any other documents required underthis Agreement or by Lender or its counsel.

BORROWER'S AUTHORIZATION. Borrower shall have provided in form andsubstance satisfactory to Lender properly certified resolutions, dulyauthorizing the execution and delivery of this Agreement, the Note and theRelated Documents, and such other authorizations and other documents andinstruments as Lender or its counsel, in their sole discretion, mayrequire.

PAYMENT OF FEES AND EXPENSES. Borrower shall have paid to Lender all fees,charges, and other expenses which are then due and payable as specified inthis Agreement or any Related Document.

REPRESENTATIONS AND WARRANTIES. The representations and warranties setforth in this Agreement, in the Related Documents, and in any document orcertificate delivered to Lender under this Agreement are true and correct.

NO EVENT OF DEFAULT. There shall not exist at the time of any advance acondition which would constitute an Event of Default under this Agreement.

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

ORGANIZATION. Borrower is a corporation which is duly organized, validlyexisting, and in good standing under the laws of the state of Borrower'sincorporation and is validly existing and in good standing in all states inwhich Borrower is doing business. Borrower has the full power andauthority to own its properties and to transact the businesses in which itis presently engaged or presently proposes to engage. Borrower also isduly qualified as a foreign corporation and is in good standing in allstates


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in which the failure to so qualify would have a material adverse effect onits businesses or financial condition.

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

FINANCIAL INFORMATION. Each financial statement of Borrower supplied toLender truly and completely disclosed Borrower's financial condition as ofthe date of the statement, and there has been no material adverse change inBorrower's financial condition subsequent to the date of the most recentfinancial statement supplied to Lender. Borrower has no materialcontingent obligations except as disclosed in such financial statements.

LEGAL EFFECT. This Agreement constitutes, and any instrument or agreementrequired hereunder to be given by Borrower when delivered will constitute,legal, valid and binding obligations of Borrower enforceable againstBorrower in accordance with their respective terms.

PROPERTIES. Except as contemplated by this Agreement or as previouslydisclosed in Borrower's financial statements or in writing to Lender and as



accepted by Lender, and except for property tax liens for taxes notpresently due and payable, Borrower owns and has good title to all ofBorrower's properties free and clear of all Security Interests, and has notexecuted any security documents or financing statements relating to suchproperties. All of Borrower's properties are titled tin Borrower's legalname, and Borrower has not used, or filed a financing statement under, anyother name for at least the last five (5) years.

HAZARDOUS SUBSTANCES. The term "hazardous waste," "hazardous substance,""disposal," "release," and "threatened release," as used in this Agreement,shall have the same meanings as set forth in the "CERCLA," "SARA," theHazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.,the Resource Conservation and Recovery Act, 49 U.S.C. Section 6901, etseq., Chapters 6.5 through 7.7 of Division 20 of the California Health andSafety Code, Section 25100, et. seq., or other applicable state or Federallaws, rules or regulations adopted pursuant to any of the foregoing.Except as disclosed to and acknowledged by Lender in writing, Borrowerrepresents and warrants that: (a) During the period of Borrower'sownership of the properties, there has been no use, generation,manufacture, storage, treatment, disposal,


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release, or threatened release of any hazardous waste or substance by oron, under, about or from any of the properties. (b) Borrower has noknowledge of, or reason to believe that there has been (i) any use,generation, manufacture storage, treatment, disposal, release, orthreatened release of any hazardous waste or substance on, under, about orfrom the properties by any prior owners or occupants of any of theproperties, or (ii) any actual or threatened litigation or claims of anykind by any person relating to such matters. (c) Neither Borrower nor anytenant, contractor, agent or other authorized user of any of the propertiesshall use, generate, manufacture, store, treat, dispose of, or release anyhazardous waste or substance on, under, about or from any of theproperties; and any such activity shall be conducted in compliance with allapplicable federal, state, and local laws, regulations, and ordinances,including without limitation those laws, regulations and ordinancesdescribed above. Borrower authorizes Lender and its agents to enter uponthe properties to make such inspections and tests as Lender may deemappropriate to determine compliance of the properties with this section ofthe Agreement. Any inspections or tests made by Lender shall be atBorrower's expense and for Lender's purposes only and shall not beconstrued to create any responsibility or liability on the part of Lenderto Borrower or to any other person. The representations and warrantiescontained herein are based on Borrower's due diligence in investigating theproperties for hazardous waste and hazardous substances. Borrower hereby(a) releases and waives any future claims against Lender for indemnity orcontribution in the event Borrower becomes liable for cleanup or othercosts under any such laws, and (b) agrees to indemnify and hold harmlessLender against any and all claims, losses, liabilities, damages, penalties,and expenses which Lender may directly or indirectly sustain or sufferresulting from a breach of this section of the Agreement or as aconsequence of any use, generation, manufacture, storage, disposal, releaseor threatened release of a hazardous waste or substance on the properties.The provisions of this section of the Agreement, including the obligationto indemnify, shall survive the payment of the indebtedness and thetermination or expiration of this Agreement and shall not be affected byLender's acquisition of any interest in any of the properties, whether byforeclosure or otherwise.

LITIGATION AND CLAIMS. No litigation, claim, investigation, administrativeproceeding or similar action (including those for unpaid taxes) againstBorrower is pending or threatened, and no other event has occurred whichmay materially adversely affect Borrower's financial condition orproperties, other than litigation, claims, or other events, if any, thathave been disclosed to and acknowledged by Lender in writing.

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


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LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,Borrower has not entered into or granted any Security Agreements, or



permitted the filing or attachment of any Security Interests on oraffecting any of the Collateral directly or indirectly securing repaymentof Borrower's Loan and Note, that would be prior or that may in any way besuperior to Lender's Security Interests and rights in and to suchCollateral.

BINDING EFFECT. This Agreement, the Note, all Security Agreements directlyor indirectly securing repayment of Borrower's Loan and Note and all of theRelated Documents are binding upon Borrower as well as upon Borrower'ssuccessors, representatives and assigns, and are legally enforceable inaccordance with their respective terms.

COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely forbusiness or commercial related purposes.

EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrowermay have any liability complies in all material respects with allapplicable requirements of law and regulations, and (i) no Reportable Eventnor Prohibited Transaction (as defined in ERISA) has occurred with respectto any such plan, (ii) Borrower has not withdrawn from any such plan orinitiated plan or initiated steps to do so, (iii) no steps have bene takento terminate any such plan, and (iv) there are not unfunded liabilitiesother than those previously disclosed to Lender in writing.

LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business,or Borrower's Chief executive office, if Borrower has more than one placeof business, is located at 2030 Main Street #1250, Irvine, CA 92614.Unless Borrower has designated otherwise in writing this location is alsothe office or offices where Borrower keeps its records concerning theCollateral.

YEAR 2000. Borrower warrants and represents that all software utilized inthe conduct of Borrower's business will have appropriate capabilities andcompatibility for operation to handle calendar dates falling on or afterJanuary 1, 2000, and all information pertaining to such calendar dates, inthe same manner and with the same functionality as the software doesrespecting calendar dates falling on or before December 31, 1999. Further,Borrower warrants and represents that the data-related user interfacefunctions, data-fields, and data-related program instructions and functionsof the software include the indication of the century.

INFORMATION. All information heretofore or contemporaneously herewithfurnished by Borrower to Lender for the purposes of or in connection withthis Agreement or any transaction contemplated hereby is, and allinformation hereafter furnished by or on behalf of Borrower to Lender willbe, true and accurate in every material respect on the date as of whichsuch information is dated or certified; and none of such information is orwill be


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incomplete by omitting to state any material fact necessary to make suchinformation not misleading.

SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands andagrees that Lender, without independent investigation, is relying upon theabove representations and warranties in extending Loan Advances toBorrower. Borrower further agrees that the foregoing representations andwarranties shall be continuing in nature and shall remain in full force andeffect until such time as Borrower's Indebtedness shall be paid in full, oruntil this Agreement shall be terminated in the manner provided above,whichever is the last to occur.

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

LITIGATION. Promptly inform Lender in writing of (a) all material adversechanges in Borrower's financial condition, and (b) all existing and allthreatened litigation, claims, investigations, administrative proceedingsor similar actions affecting Borrower or any Guarantor which couldmaterially affect the financial condition of Borrower or the financialcondition of any Guarantor.

FINANCIAL RECORDS. Maintain its books and records in accordance withgenerally accepted accounting principles, applied on a consistent basis,and permit Lender to examine and audit Borrower's books and records at allreasonable times.

ADDITIONAL INFORMATION. Furnish such additional information andstatements, lists of assets and liabilities, agings of receivables andpayables, inventory schedules, budgets, forecasts, tax returns, and otherreports with respect to Borrower's financial condition and business



operations as Lender may request from time to time.

INSURANCE. Maintain fire and other risk insurance, public liabilityinsurance, and such other insurance as Lender may require with respect toBorrower's properties and operations, in form, amounts, coverages and withinsurance companies reasonably acceptable to Lender. Borrower, upon requestof Lender, will deliver to Lender from time to time the policies orcertificates of insurance in form satisfactory to Lender, includingstipulations that coverages will not be cancelled or diminished without atleast ten (10) days' prior written notice to Lender. Each insurance policyalso shall include an endorsement providing that coverage in favor ofLender will not be impaired in any way by any act, omission or default ofBorrower or any other person. In connection with all policies coveringassets in which Lender holds or is offered a security interest for theLoans, Borrower will provide lender with such loss payable or otherendorsements as Lender may require.

INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports oneach existing insurance policy showing such information as Lender mayreasonably request, including


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without limitation the following: (a) the name of the insurer; (b) therisks insured; (c) the amount of the policy; (d) the properties insured;(e) the then current property values on the basis of which insurance hasbeen obtained, and the manner of determining those values; and (f) theexpiration date of the policy. In addition, upon request of Lender (howevernot more often than annually), Borrower will have an independent appraisersatisfactory to Lender determine, as applicable, the actual cash value orreplacement cost of any Collateral. The cost of such appraisal shall bepaid by Borrower.

OTHER AGREEMENTS. Comply with all terms and conditions of all otheragreements, whether now or hereafter existing, between Borrower and anyother party and notify Lender immediately in writing of any default inconnection with any other such agreements.

LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's businessoperations, unless specifically consented to the contrary by Lender inwriting.

TAXES, CHARGES AND LIENS. Pay and discharge when due all of itsindebtedness and obligations, including without limitation all assessments,taxes, governmental charges, levies and liens, of every kind and nature,imposed upon Borrower or its properties, income, or profits, prior to thedate on which penalties would attach, and all lawful claims that, ifunpaid, might become a lien or charge upon any of Borrower's properties,income, or profits. Provided however, Borrower will not be required to payand discharge any such assessment, tax, charge, levy, lien or claim so longas (a) the legality of the same shall be contested in good faith byappropriate proceedings, and (b) Borrower shall have established on itsbooks adequate reserves with respect to such contested assessment, tax,charge, levy, lien, or claim in accordance with generally acceptedaccounting practices. Borrower, upon demand of Lender, will furnish toLender evidence of payment of the assessments, taxes, charges, levies,liens and claims and will authorize the appropriate governmental officialto deliver to Lender at any time a written statement of any assessments,taxes, charges, levies, liens and claims against Borrower's properties,income or profits.

PERFORMANCE. Perform and comply with all terms, conditions, and provisionsset forth in this Agreement and in the Related Documents in a timelymanner, and promptly notify Lender if Borrower learns of the occurrence ofany event which constitutes an Event of Default under this Agreement orunder any of the Related Documents.

OPERATIONS. Maintain executive and management personnel with substantiallythe same qualifications and experience as the present executive andmanagement personnel; provide written notice to Lender of any change inexecutive and management personnel; conduct its business affairs in areasonable and prudent manner and in compliance with all applicablefederal, state and municipal laws, ordinances, rules and regulationsrespecting its properties, charters, businesses and operations, includingwithout limitation, compliance with the


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American With Disabilities Act and will all minimum funding standards and



other requirements of ERISA and other laws applicable to Borrower'semployee benefit plans.

INSPECTION. Permit employees or agents of Lender at any reasonable time toinspect any and all Collateral for the Loan or Loans and Borrower's otherproperties and to examine or audit Borrower's books, accounts, and recordsand to make copies and memoranda of Borrower's books, accounts, andrecords. If Borrower now or at any time hereafter maintains any records(including without limitation computer generated records and computersoftware programs for the generation of such records) in the possession ofa third party, Borrower, upon request of Lender, shall notify such party topermit Lender free access to such records at all reasonable times and toprovide Lender with copies of any records it may request, all at Borrower'sexpense.

COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lenderat least annually and at the time of each disbursement of Loan proceedswith a certificate executed by Borrower's chief financial officer, or otherofficer or person acceptable to Lender, certifying that the representationsand warranties set forth in this Agreement are true and correct as of thedate of the certificate and further certifying that, as of the date of thecertificate, no Event of Default exists under this Agreement.

ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in allrespects with all environmental protection federal, state and local laws,statutes, regulations and ordinances; not cause or permit to exist, as aresult of an intentional or unintentional action or omission on its part oron the part of any third party, on property owned and/or occupied byBorrower, any environmental activity where damage may result to theenvironment, unless such environmental activity is pursuant to and incompliance with the conditions of a permit issued by the appropriatefederal, state or local governmental authorities; shall furnish to Lenderpromptly and in any event within thirty (30) days after receipt thereof acopy of any notice, summons, lien, citation, directive, letter or othercommunication from any governmental agency or instrumentality concerningany intentional or unintentional action or omission on Borrower's part inconnection with any environmental activity whether or not there is damageto the environment and/or other natural resources.

ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissorynotes, mortgages, deeds of trust, security agreements, financingstatements, instruments, documents and other agreements as Lender or itsattorneys may reasonably request to evidence and secure the Loans and toperfect all Security Interests.

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


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INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normalcourse of business and indebtedness to Lender contemplated by thisAgreement, create, incur or assume indebtedness for borrowed money,including capital leases, (b) except as allowed as a Permitted Lien, sell,transfer, mortgage, assign, pledge, lease, grant a security interest in, orencumber any of Borrower's assets, or (c) sell with recourse any ofBorrower's accounts, except to Lender.

CONTINUITY OF OPERATIONS. (a) Engage in any business activitiessubstantially different than those in which Borrower is presently engaged,(b) cease operations, liquidate, merge, transfer, acquire or consolidatewith any other entity, change ownership, change its name, dissolve ortransfer or sell Collateral out of the ordinary course of business, (c) payany dividends on Borrower's stock (other than dividends payable in itsstock), provided, however that notwithstanding the foregoing, but only solong as no Event of Default has occurred and is continuing or would resultfrom the payment of dividends, if Borrower is a "Subchapter S Corporation"(as defined in the Internal Revenue Code of 1966, as amended), Borrower maypay cash dividends on its stock to its shareholders from time to time inamounts necessary to enable the shareholders to pay income taxes and makeestimated income tax payments to satisfy their liabilities under federaland state law which arise solely from their status as Shareholders of aSubchapter S Corporation because of their ownership of shares of stock ofBorrower, or (d) purchase or retire any of Borrower's outstanding shares oralter or amend Borrower's capital structure.

LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance moneyor assets, (b) purchase, create or acquire any interest in any otherenterprise or entity, or (c) incur any obligation as surety or guarantorother than int he ordinary course of business.



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

RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,and hereby assigns, conveys, delivers, pledges, and transfers to Lender allBorrower's right, title and interest in and to, Borrower's accounts with Lender(whether checking, savings, or some other account), including without limitationall accounts held jointly with someone else and all accounts Borrower


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may open in the future, excluding however all IRA and Keogh accounts, and alltrust accounts, and all trust accounts for which the grant of a securityinterest would be prohibited by law. Borrower authorizes Lender, to the extentpermitted by applicable law, to charge or setoff all sums owing on theIndebtedness against any and all such accounts.

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

DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when dueon the Loans.

OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or toperform when due any other term, obligation, covenant or conditioncontained in this Agreement or in any of the Related Documents, or failureof Borrower to comply with or to perform any other term, obligation,covenant or condition contained in any other agreement between Lender andBorrower.

DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor defaultunder any loan, extension of credit, security agreement, purchase or salesagreement, or any other agreement, in favor of any other creditor or personthat may materially affect any of Borrower's property or Borrower's or anyGrantor's ability to repay the Loans or perform their respectiveobligations under this Agreement or any of the Related Documents.

FALSE STATEMENTS. Any warranty, representation or statement made orfurnished to Lender by or on behalf of Borrower or any Grantor under thisAgreement or the Related Documents is false or misleading in any materialrespect at the time made or furnished, or becomes false or misleading atany time thereafter.

DEFECTIVE COLLATERALIZATION. This Agreement or any of the RelatedDocuments ceases to be in full force and effect (including failure of anySecurity Agreement to create a valid and perfected Security Interest) atany time and for any reason.

INSOLVENCY. The dissolution or termination of Borrower's existence as agoing business, the insolvency of Borrower, the appointment of a receiverfor any part of Borrower's property, any assignment for the benefit ofcreditors, any type of creditor workout, or the commencement of anyproceeding under any bankruptcy or insolvency laws by or againstBorrower.

CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure orforfeiture proceedings, whether by judicial proceeding, self-help,repossession or any other method, by any creditor of Borrower, any creditorof any Grantor against any collateral securing the indebtedness, or by anygovernmental agency. This includes a garnishment, attachment, or


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levy on or of any of Borrower's deposit accounts with Lender. However, thisEvent of Default shall not apply if there is a good faith dispute byBorrower or Grantor, as the case may be, as to the validity orreasonableness of the claim which is the basis of the creditor or



forfeiture proceeding, and if Borrower or Grantor gives Lender writtennotice of the creditor or forfeiture proceeding and furnishes reserves or asurety bond for the creditor or forfeiture proceeding satisfactory toLender.

EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs withrespect to any Guarantor of any of the indebtedness or any Guarantor diesor becomes incompetent, or revokes or disputes the validity of, orliability under, any Guaranty of the indebtedness. Lender, at its option,may, but shall not be required to, permit the Guarantor's estate to assumeunconditionally the obligations arising under the guaranty in a mannersatisfactory to Lender, and, in so doing, cure the Event of Default.

CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%)or more of the common stock of Borrower.

ADVERSE CHANGE. A material adverse change occurs in Borrower's financialcondition, or Lender believes the prospect of payment or performance of theindebtedness is impaired.

EVENTS AFFECTING GUARANTOR. Any of the proceeding events occurs withrespect to any Guarantor of any of the indebtedness or any Guarantordies or becomes incompetent, or revokes or disputes the validity of,or liability under, any Guaranty of the indebtedness.

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

RIGHT TO CURE. If any default, other than a Default on Indebtedness, iscurable and if Borrower or Grantor, as the case may be, has not been givena notice of a similar default within the preceding twelve (12) months, itmay be cured (and no Event of Default will have occurred) if Borrower orGrantor, as the case may be, after receiving written notice from Lenderdemanding cure of such default: (a) cures the default within fifteen (15)days; or (b) if the cure requires more than fifteen (15) days, immediatelyinitiates steps which Lender deems in Lender's sole discretion to besufficient to cure the default and thereafter continues and completes allreasonable and necessary steps sufficient to produce compliance as soon asreasonably practical.


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EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, exceptwhere otherwise provided in this Agreement or the Related Documents, allcommitments and obligations of Lender under this Agreement or the RelatedDocuments or any other agreement immediately will terminate, and, at Lender'soption, all indebtedness immediately will become due and payable, all withoutnotice of any kind to Borrower, except that in the case of an Event of Defaultof the type described in the "Insolvency" subsection above, such accelerationshall be automatic and not optional. In addition, Lender shall have all therights and remedies provided in the Related Documents or available at law, inequity, or otherwise. Except as may be prohibited by applicable law, all ofLender's rights and remedies shall be cumulative and may be exercised singularlyor concurrently. Election by Lender to pursue any remedy shall not excludepursuit of any other remedy, and an election to make expenditures or to takeaction to perform an obligation of Borrower or of any Grantor shall not affectLender's right to declare a default and to exercise its rights andremedies.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part ofthis Agreement.

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

APPLICABLE LAW. This Agreement has been delivered to Lender and acceptedby Lender in the State of California. If there is a lawsuit, Borroweragrees upon Lender's request to submit to the jurisdiction of the courts ofOrange County, the State of California. This Agreement shall be governedby and construed in accordance with the laws of the State of California.

CAPTION HEADINGS. Caption headings in this Agreement are for convenience



purposes only and are not to be used to interpret or define the provisionsof this Agreement.

MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower underthis Agreement shall be joint and several, and all references to Borrowershall mean each and every Borrower. This means that each of the Borrowerssigning below is responsible for all obligations of this Agreement.

CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender'ssale or transfer, whether now or later, of one or more participationinterests in the Loans to one or more purchasers, whether related orunrelated to Lender. Lender may provide, without any limitationwhatsoever, to any one or more purchasers, or potential purchasers, anyinformation or knowledge Lender may have about Borrower or about any othermatter relating to the Loan, and Borrower hereby waives any rights toprivacy it may have with


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respect to such matters. Borrower additionally waives any and all noticesof sale of participation interests, as well as all notices of anyrepurchase of such participation interests. Borrower also agrees that thepurchasers of any such participation interests will be considered as theabsolute owners of such interests in the Loans and will have all the rightsgranted under the participation agreement or agreements governing the saleof such participation interests. Borrower further waives all rights ofoffset or counterclaim that it may have now or later against Lender oragainst any purchaser of such participation interest and unconditionallyagrees that either Lender or such purchaser may enforce Borrower'sobligation under the Loans irrespective of the failure or insolvency of anyholder of any interest in the Loans. Borrower further agrees that thepurchaser of any such participation interests may enforce its interestsirrespective of any personal claims or defenses that Borrower may haveagainst Lender.

COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender'sexpenses, including without limitation reasonable attorneys' fees, incurredin connection with the preparation, execution, enforcement, modificationand collection of this Agreement or in connection with the Loans madepursuant to this Agreement. Lender may pay someone else to help collectthe Loans and to enforce this Agreement, and Borrower will pay that amount.This includes, subject to any limits under applicable law, Lender'sreasonable attorneys' fees and Lender's legal expenses, whether or notthere is a lawsuit, including reasonable attorneys' fees for bankruptcyproceedings (including efforts to modify or vacate any automatic stay orinjunction), appeals, and any anticipated post-judgment collectionservices. Borrower also will pay any court costs, in addition to all othersums provided by law.

NOTICES. All notices required to be given under this Agreement shall begiven in writing, may be sent by telefacsimille (unless otherwise requiredby law), and shall be effective when actually delivered or when depositedwith a nationally recognized overnight courier or deposited in the UnitedStates mail, first class, postage prepaid, addressed to the party to whomthe notice is to be given at the address shown above. Any party may changeits address for notices under this Agreement by giving formal writtennotice to the other parties, specifying that the purpose of the notice isto change the party's address. To the extent permitted by applicable law,if there is more than one Borrower, notice to any Borrower will constitutenotice to all Borrowers. For notice purposes, Borrower agrees to keepLender informed at all times of Borrower's current address(es).

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


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SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of anyprovisions of this Agreement makes it appropriate, including withoutlimitation any representation, warranty or covenant, the word "Borrower" asused herein shall include all subsidiaries and affiliates of Borrower.Notwithstanding the foregoing however, under no circumstances shall this



Agreement be construed to require Lender to make any Loan or otherfinancial accommodation to any subsidiary or affiliate of Borrower.

SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or onbehalf of Borrower shall bind its successors and assigns and shall inure tothe benefit of Lender, its successors and assigns. Borrower shall not,however, have the right to assign its rights under this Agreement or anyinterest therein, without the prior written consent of Lender.

SURVIVAL. All warranties, representations, and covenants made by Borrowerin this Agreement or in any certificate or other instrument delivered byBorrower to Lender under this Agreement shall be considered to have beenrelied upon by Lender and will survive the making of the Loan and deliveryto Lender of the Related Documents, regardless of any investigation made byLender or on Lender's behalf.

TIME IS OF THE ESSENCE. Time is of the essence in the performance of thisAgreement.

WAIVER. Lender shall not be deemed to have waived any rights under thisAgreement unless such waiver is given in writing and signed by Lender. Nodelay or omission on the part of Lender in exercising any right shalloperate as a waiver of such right or any other right. A waiver by Lenderof a provision of this Agreement shall not prejudice or constitute a waiverof Lender's right otherwise to demand strict compliance with that provisionor any other provisions of this Agreement. No prior waiver by Lender, norany course of dealing between Lender and Borrower, or between Lender andany Grantor, shall constitute a waiver of any of Lender's rights or of anyobligations of Borrower or of any Grantor as to any future transactions.Whenever the consent of Lender is required under this Agreement, thegranting of such consent by Lender in any instance shall not constitutecontinuing consent in subsequent instances where such consent is required,and in all cases such consent may be granted or withheld in the solediscretion of Lender.


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BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOANAGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OFSEPTEMBER 29, 1998.

BORROWER:

Litronic Industries, Inc.

By: /S/ KRIS SHAH-----------------------

Kris Shah, President

LENDER:

BYL BANK GROUP

By: [AUTHORIZED SIGNATORY]-----------------------Authorized Officer

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EXHIBIT 10.32

AMENDMENT TO FORBEARANCE AGREEMENT

This AMENDMENT ("Amendment") TO FORBEARANCE AGREEMENT is made as of October8, 1998 by and between PULSAR DATA SYSTEMS, INCORPORATED ("Pulsar") and IBMCREDIT CORPORATION ("IBM Credit").

RECITALS:

WHEREAS, Pulsar and IBM Credit have entered into that certain ForbearanceAgreement dated as of August 31, 1998 (as amended, supplemented or otherwisemodified from time to time, the "Agreement") and that certain Inventory AndWorking Capital Financing Agreement dated as of October 30, 1997 ("IWCF");and;

WHEREAS, Pulsar has requested that IBM Credit make certain changes itsCredit Line and Borrowing Base as more fully set forth on Attachment A as ofthis date to the IWCF; and

WHEREAS, IBM Credit is willing to consent to the requested changes subjectto the conditions set forth below.

AGREEMENT

NOW THEREFORE, in consideration of the premises set forth herein, and forother good and valuable consideration, the value and sufficiency of which ishereby acknowledged, the parties hereto agree that the Agreement is amended asfollows:

SECTION 1. DEFINITIONS. All capitalized terms not otherwise defined hereinshall have the respective meanings set forth in the Agreement.

SECTION 2. AMENDMENTS.

A. The Attachment A to the IWCF is hereby amended as follows:

For the period October 8, 1998 through and including January 6, 1999 theCredit Line shall be $18,000,000.00 and thereafter the Credit Line shall be$15,000,000.00.

B. Section 10(b) of the Agreement is hereby amended by adding to theconclusion thereof the following:

"provided, however that Pulsar demonstrate compliance to the foregoing FinancialCovenant on a monthly basis for each calendar month from September 1998 throughDecember 1998 for Pulsar's fiscal year ending December 31, 1998 and for each andevery reporting period thereafter."



Page 1 of 1

SECTION 3. ADDITIONAL REQUIREMENTS.

A. The Agreement is hereby amended by inserting therein the following newsection:

"IBM Credit has earned stock representing a four percent (4%) ownership interestin Pulsar (the "IBM Credit Interest") on a fully diluted basis. At the optionWilliam W. Davis Sr. in lieu of a distribution of such Pulsar stock to IBMCredit, Pulsar shall pay to IBM Credit the lesser of (i) four percent (4%) ofthe sale price upon the sale of all or substantially all of Pulsar's asset; or(ii) $650,000.00 or (iii) a pro-rata share of $650,000.00 upon sale of less thanall or substantially all of Pulsar's assets. For the purpose of example onlyshould Pulsar sell twenty-five percent (25%) of its assets, pursuant toprovision (iii) above, Pulsar would pay IBM Credit $162,500.00, it being anamount equal to twenty-five percent of $650,000.00."

B. IBM Credit's consent to the amendment set forth in Section 2 A of thisAmendment shall immediately cease upon the occurrence of an Event of Default andall obligations of Pulsar to IBM Credit under the IWCF, the Agreement andotherwise shall, without notice or demand, become immediately due and payable.

SECTION 4. CONDITIONS PRECEDENT. The effectiveness of this Amendment issubject to the receipt by IBM Credit, on or before the close of business onOctober 15, 1998, of the following conditions precedent:

A. Copies of all Merrill Lynch Stock Account Statements for those stockaccounts assigned to IBM Credit through and including statements for the monthof August 1998; and

B. Copies of all payment workout agreement letters with unsecured creditors;and

C. A list of all suppliers currently providing open account terms to Pulsar;and

D. This Amendment, executed and delivered by Pulsar.

SECTION 5. REPRESENTATIONS AND WARRANTIES. Pulsar makes to IBM Credit thefollowing representations and warranties all of which are material and are madeto induce IBM Credit to enter into this Amendment.

SECTION 5.1 ACCURACY AND COMPLETENESS OF WARRANTIES AND REPRESENTATIONS. Allrepresentations made by Pulsar in the Agreement were true and accurate andcomplete in every respect as of the date made, and, as amended by thisAmendment, all representations made by Pulsar in the Agreement are true,accurate and complete in every material respect as of the date hereof, and donot fail to disclose any material fact necessary to make such warranties and



representations not misleading.

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SECTION 5.2 VIOLATION OF OTHER AGREEMENTS. The execution and delivery ofthis Amendment and the performance and observance of the covenants to beperformed and observed hereunder do not violate or cause Pulsar not to be incompliance with the terms of any agreement to which Pulsar is a party.

SECTION 5.3 LITIGATION. Except as has been disclosed by Pulsar to IBM Creditin writing, there is no litigation, proceeding, investigation or labor disputepending or threatened against Pulsar, which if adversely determined, wouldmaterially adversely affect Pulsar's ability to perform Pulsar's obligationsunder the Agreement and the other documents, instruments and agreements executedin connection therewith or pursuant hereto.

SECTION 5.4 ENFORCEABILITY OF AMENDMENT. This Amendment has been dulyauthorized, executed and delivered by Pulsar and is enforceable against Pulsarin accordance with its terms.

SECTION 6. RAMIFICATION OF AGREEMENT. Except as specifically amendedhereby, all of the provisions of the Agreement shall remain unamended and infull force and effect. Pulsar hereby ratifies, confirms and agrees that theAgreement, as amended hereby, represents a valid and enforceable obligation ofPulsar's and is not subject to any claims, offsets or defense.

SECTION 7. GOVERNING LAW. This Amendment shall be governed by andinterpreted in accordance with the laws of the State of New York.

SECTION 7. COUNTERPARTS. This Amendment may be executed in any number ofcounterparts, each of which shall be an original and all of which shallconstitute one agreement.

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IN WITNESS WHEREOF, this Amendment has been duly executed by the authorizedofficers of the undersigned as of the day and year first above written.

IBM CREDIT CORPORATION PULSAR DATA SYSTEMS, INCORPORATED

By: /S/ JOHN L. ANDERSON By: /S/ WILLIAM W. DAVIS, SR.-------------------------------- ----------------------------------

Print Name: John L. Anderson Print Name: William W. Davis, Sr.------------------------

Title: Remarketer Loan Manager Title: President/CEO-----------------------------



Date: 10/15/98 Date: 10/14/98------------------------------



EXHIBIT 10.33

PROMISSORY NOTE

$804,342.08 LANHAM, MARYLAND January 1, 1999

FOR VALUE RECEIVED, DAVIS HOLDING COMPANY, a Delaware corporation,------------------

(hereinafter referred to as "Borrower") hereby promise to pay to the order ofPULSAR DATA SYSTEM, INC., a Delaware corporation, (hereinafter referred to as"Lender") the principal sum of $804,342.08, to be paid monthly on the first dayof each month, beginning with April 1, 1999, with interest only at the rate ofseven and one-half percent (7 1/2%) per annum, principal due on the sale of theproperty known as 3039 Peachtree Road, Atlanta, GA. Prepayment may be made inwhole or in part without penalty.

If the installments payable monthly are not received by the 15/th/ day ofthe month in which same are due, the maker shall be liable to the holder for thelate payment penalty of 5% of the installment then due, which amount shall bedeemed part of the principal balance due.

This Note shall be deemed in default if the installment due under the termsherein is more than THIRTY (30) days past due. The undersigned does herebyauthorize and empower any Justice of the Peace, any Clerk, Prothonotary, orAttorney of any Court of Record in the State of Maryland, or elsewhere, withoutprocess, to enter judgment on the above Obligation, with legal interest,together with 5% of the amount of the debt and interest as counsel fees, withoutprocess against him, his successors or assigns, at the suit of the holder ofthis Note, its successors or assigns, at any time, with stay of execution untilthe date of payment; and he does waive the benefit of any and all exemption lawsof the State of Maryland, or elsewhere. AND the maker hereby waives demand,protest and notice of nonpayment hereof.

This Agreement supersedes all other agreements or representations and allprior agreements or representations and all prior agreements made by Borrowerand Lender. This Agreement constitutes the entire agreement between the partieshereto and the parties are not bound by any agreements, understandings, orconditions otherwise than are expressly set forth and stipulated herein.

These presents shall be binding, both jointly and severally, upon theheirs, executors, administrators, successors and assigns of the undersigned.

WITNESS the execution of this Note effective the day and year aforesaid.

SIGNED, SEALED AND DELIVEREDIN THE PRESENCE OF: DAVIS HOLDING COMPANY



[AUTHORIZED SIGNATORY] BY: [AUTHORIZED SIGNATORY]---------------------- ----------------------WITNESS President

ATTEST: /S/ LORNA MARIE MITCHELL------------------------

Secretary



EXHIBIT 10.36

THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT----------------------------------------------

This Third Amendment to Loan and Security Agreement (this "Amendment") ismade and entered into effective as of March 31, 1999, by and among LitronicIndustries, Inc., a California corporation (the "Company"), and FidelityFunding, Inc., a Texas corporation ("Fidelity").

The Company and Fidelity Funding of California, Inc. ("FFOC") have enteredinto that certain Loan and Security Agreement (as previously amended ormodified, the "Original Agreement"), dated as of June 27, 1996, and FFOC hasassigned all of its right, title and interest in, to and under the Agreement toFidelity. The Original Agreement as amended by this Amendment is referred toherein as the "Agreement." Capitalized terms used but not defined in thisAmendment shall have the meanings given to them in the Original Agreement. TheCompany and Fidelity desire to amend the Original Agreement and, in connectiontherewith, hereby agree as follows:

1. The definition of "TANGIBLE NET WORTH REQUIREMENT" in Section 8.8 ofthe Original Agreement hereby is amended to read in its entirety as follows:

"TANGIBLE NET WORTH REQUIREMENT" means negative $6,200,000 plus thenet proceeds received by the Company from any such sale of its equity securitiesafter the date hereof.

2. The definition of "WORKING CAPITAL REQUIREMENT" in Section 8.10 of theOriginal agreement hereby is amended to read in its entirety as follows:

"WORKING CAPITAL REQUIREMENT" means negative $1,000,000 plus the netproceeds received by the Company from any sale of its equity securities afterthe date hereof.

3. Section 8.9 of the Original Agreement hereby is deleted in itsentirety and shall be of no further force or effect:

4. A new clause (o) reading in its entirety as follows hereby is added toSection 12 of the Original Agreement.

(o) The Company shall fail to consummate and complete the offeringand sale of its equity securities on or prior to May 31, 1999 resulting in netproceeds to the Company of at least $20,000,000.

5. In order to induce Fidelity to enter into this Amendment, the Companyrepresents and warrants to Fidelity that:

(a) The representations and warranties contained in Section 7 of the



Original Agreement are true and correct at and as of the time of theeffectiveness hereof.

(b) The Company is duly authorized to execute, deliver and performits obligations under this Amendment and is and will continue to be dulyauthorized to perform its obligations under the Original Agreement as amendedhereby. The Company has duly taken all corporate action necessary to authorizethe execution and delivery of this Amemdment and to authorize the performance ofthe obligations of the Company hereunder.

(c) The execution and delivery by the Company of this Amemdment, theperformance by the Company of its obligations hereunder and the consummation ofthe transactions contemplated hereby do not and will not conflict with anyprovision of law, statute, rule or regulation or of the articles ofincorporation and bylaws of the Company, or of any material agreement, judgment,license, order or permit applicable to or binding upon the Company, or result inthe creation of any lien, charge or encumbrance upon any assets or properties ofthe Company. Except for those which have been duly obtained, no consent,approval, authorization or order of any court or governmental authority or thirdparty is required in connection with the execution and delivery by the Companyof this Amendment or to consummate the transactions contemplated hereby.

(d) The Agreement (including this Amendment) has been duly executedand delivered by the Company and is a legal and binding instrument and agreementof the Company, enforceable against the Company in accordance with its terms,except as limited by bankruptcy, insolvency and similar laws and by generalprinciples of equity.

(e) No Event of Default or any event that, with the giving of notice,the passage of time or both, would constitute an Event of Default has occurredor is continuing.

6. (a) The Agreement is hereby ratified and confirmed in all respects.The execution, delivery and effectiveness of this Amendment shall not, except asexpressly provided herein, operate as a waiver of any right, power or remedy ofFidelity under the Agreement nor constitute a waiver of any provision thereof.

(b) All representations, warranties, covenants and agreements of theCompany herein shall survive the execution and delivery of this Amendment andthe performance hereof and shall further survive until the Agreement isterminated.

(c) This Amendment may be separately executed in counterparts and bythe different parties hereto in separate counterparts, each of which when soexecuted shall be deemed to constitute one and same Amendment.

(d) The Company shall pay to Fidelity a documentation fee of $1,000in connection with the execution and delivery thereof.



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(e) Fidelity has proposed a $20 million line of credit for theCompany, Litronic Industries, Inc. and Pulsar Data Systems, Inc. (collectively,the "Prospects"), pursuant to a proposal letter (the "Letter"), dated March 31,1999, from Fidelity to the Prospects, a copy of which is attached hereto. IfFidelity finally approves a line of credit for the Prospects on substantiallythe same terms and conditions outlined in the Letter and the Prospects do notaccept and close such line of credit within 60 days after Fidelity's approvalthereof, the Company shall pay to Fidelity a fee of $100,000 on such 60/th/day. The Company may not terminate this Agreement prior to such 60/th/ daywithout paying such fee unless this Agreement is terminated in connection withthe closing with Fidelity of the line of credit outlined in the Letter.

IN WITNESS WHEREOF, the Company and Fidelity have executed this Amendmentas of the date first written above.

FIDELITY: THE COMPANY:

FIDELITY FUNDING, INC., LITRONIC INDUSTRIES, INC.,a Texas corporation a California corporation

By: /s/ Michael D. Haddad By: /s/ Kris Shah------------------------- ------------------------------Michael D. Haddad Name: KRIS SHAH

-------------------------President Title: President

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

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CONSENT AND AGREEMENT---------------------

The undersigned hereby consents to the provisions of this Amendment and thetransactions contemplated therein and hereby ratifies and confirms the generalcontinuing guaranty and the subordination agreement, each dated as of June 27,1996, made by him for the benefit of Fidelity relating to the Company, andagrees that his obligations and covenants thereunder are unimpaired hereby andshall remain in full force and effect.

/s/ Kris Shah-----------------------------Kris Shah



CONSENTED TO BY:

/s/ Geraldine M. Shah-----------------------------Geraldine ShahSpouse of Kris Shah

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EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

(When the Reorganization as described in note 1 of the consolidated financialstatements referenced below has been consummated, we will be in a position toprovide the following consent)

/s/ KPMG LLP

The Board of DirectorsLitronic Inc.:

We consent to the use of our report February 26, 1999, related to theconsolidated balance sheets of Litronic Inc. and subsidiary as of December 31,1997 and 1998 and the consolidated statements of operations, shareholders'deficiency and cash flows for each of the years in the three year period endedDecember 31, 1998 and to the reference to our firm under the headings "SelectedFinancial Data Litronic" and "Experts" in the prospectus.

Orange County, CaliforniaApril 7, 1999



EXHIBIT 23.2

The Board of DirectorsPulsar Data Systems, Inc.

Our report dated March 31, 1999, contains an explanatory paragraph that statesthat the Company has suffered losses from operations and has a net workingcapital deficit, which raise substantial doubt about its ability to continue asa going concern. The financial statements do not include any adjustments thatmight result from the outcome of that uncertainty.

We consent to the use of our report included herein and to the reference to ourfirm under the headings "Selected Financial Data Pulsar" and "Experts" in theprospectus.

/s/ KPMG LLP

McLean, VirginiaApril 7, 1999



EXHIBIT 23.3

To The Board of DirectorsPulsar Data Systems, Inc.Lanham, Maryland

The audits referred to in our report dated April 27, 1998, which contains anexplanatory paragraph that states that the Company incurred a loss, has a netcapital deficiency and was in violation of certain debt convenants, amongother factors, raise substantial doubt about the Company's ability to continueas a going concern.

Our audits were made for the purpose of forming an opinion on the basicfinancial statements taken as a whole. The supplemental Schedule II, Valuationand Qualifying Accounts and Reserves is presented for purposes of complying withthe Securities and Exchange Commission's rules and is not a part of the basicfinancial statements. This schedule has been subjected to the auditingprocedures applied in our audits of the basic financial statements and, in ouropinion, is fairly stated in all material respects in relation to the basicfinancial statements taken as a whole.

We consent to the use of our reports included herein and to the reference to ourfirm under the heading "Experts" in the prospectus.

/s/ Keller Brunner & Company, L.L.C.

Bethesda, MarylandApril 7, 1999



EXHIBIT 99.1

CONSENT OF ANTHONY GIRAUDO

I consent to the reference to me as a person to be appointed a Director ofLitronic Inc. under the captions "Prospectus Summary," "Management" and"Principal Stockholders" in the Prospectus included in the RegistrationStatement on Form S-1 of Litronic Inc.

/s/ Anthony Giraudo------------------------------Anthony Giraudo

April 6, 1999Colorado Springs, Colorado

