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<SEC-DOCUMENT>0001036050-00-002147.txt : 20001222
<SEC-HEADER>0001036050-00-002147.hdr.sgml : 20001222
ACCESSION NUMBER:		0001036050-00-002147
CONFORMED SUBMISSION TYPE:	10-K405
PUBLIC DOCUMENT COUNT:		7
CONFORMED PERIOD OF REPORT:	20000930
FILED AS OF DATE:		20001221

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			INNOVATIVE SOLUTIONS & SUPPORT INC
		CENTRAL INDEX KEY:			0000836690
		STANDARD INDUSTRIAL CLASSIFICATION:	SERVICES-COMPUTER PROGRAMMING SERVICES [7371]
		IRS NUMBER:				232507402
		STATE OF INCORPORATION:			PA
		FISCAL YEAR END:			0930

	FILING VALUES:
		FORM TYPE:		10-K405
		SEC ACT:		
		SEC FILE NUMBER:	000-31157
		FILM NUMBER:		793433

	BUSINESS ADDRESS:	
		STREET 1:		420 LAPP RD
		CITY:			MALVERN
		STATE:			PA
		ZIP:			19355
		BUSINESS PHONE:		6108899898

	MAIL ADDRESS:	
		STREET 1:		420 LAPP ROAD
		CITY:			MALVERN
		STATE:			PA
		ZIP:			19355
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>0001.txt
<DESCRIPTION>INNOVATIVE SOLUTIONS AND SUPPORT, INC FORM 10-K405
<TEXT>

<PAGE>

================================================================================
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                   FORM 10-K
                                   ---------
           [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                 For the fiscal year ended September 30, 2000
                                      OR
         [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
             For the transition period from ________ to ________.

                          Commission File No. 0-31157

                    INNOVATIVE SOLUTIONS AND SUPPORT, INC.
                    --------------------------------------
            (Exact name of registrant as specified in its charter)

              PENNSYLVANIA                               23-2507402
              ------------                               ----------
      (State or other jurisdiction            (IRS Employer Identification No.)
           of incorporation)

  420 LAPP ROAD, MALVERN, PENNSYLVANIA                      19355
  ------------------------------------                      -----
(Address of principal executive offices)                 (Zip Code)

                                 (610) 889-9898
                                 --------------
              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK, PAR
VALUE $.001

Indicate by check mark whether registrant (1) has filed all reports required to
be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X  No__
                                       -

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ X ]

The aggregate market value of the Registrant's common stock held by non-
affiliates of the Registrant as of December 15, 2000 was approximately
$70,706,188. Shares of common stock held by each executive officer and director
and by each person who owns 10% or more of our outstanding common stock have
been excluded since such persons may be deemed affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes

As of December 15, 2000, there were 12,615,427 outstanding shares of the
Registrant's Common Stock.

                      Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for the 2001 Annual Meeting of
Shareholders to be filed prior to January 29, 2001 are incorporated by reference
into Part III of this Report.  Such Proxy Statement, except for the parts
therein which have been specifically incorporated by reference, shall not be
deemed "filed" for the purposes of this Report on Form 10-K.
<PAGE>

                     INNOVATIVE SOLUTIONS AND SUPPORT, INC
                        2000 Annual Report on Form 10-K

                               Table of Contents


<TABLE>
<CAPTION>
                                                    Part I                                             Page

<S>                                                                                                    <C>
Item 1.    Business                                                                                         3

Item 2.    Properties                                                                                      12

Item 3.    Legal Proceedings                                                                               12

Item 4.    Submission of Matters to a Vote of Security Holders                                             12

Item A.    Executive Officers of the Registrant.                                                        12-13

                                                   Part II

Item 5.    Market for the Registrant's Common Equity and Related Stockholder Matters                       13

Item 6.    Selected Financial Data                                                                         14

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations        14-18

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk                                      23

Item 8.    Financial Statements and Supplementary Data                                                  23-39

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure            39

                                                   Part III

Item 10.   Directors and Executive Officers of the Registrant                                              39

Item 11.   Executive Compensation                                                                          40

Item 12.   Security Ownership of Certain Beneficial Owners and Management                                  40

Item 13.   Certain Relationships and Related Transactions                                                  40

                                                   Part IV

Item 14    Exhibits, Financial Statement Schedules and Reports on Form 8-K                              41-42
</TABLE>


                                       2
<PAGE>

PART I

Item 1.  Business

Overview

     Innovative Solutions and Support, Inc. (the "Company", or "IS&S") was
founded in 1988. We design, manufacture and sell flight information computers,
electronic displays and advanced monitoring systems to the military and
government, commercial air transport and corporate aviation markets. Our
strategy is to leverage the latest technologies developed for the personal
computer and telecommunications industries into advanced, cost-effective
solutions for the aviation industry. We believe that this approach, combined
with our industry experience, enables us to develop high-quality avionics
products, substantially reduce product times to market and achieve cost
advantages over the products offered by our competitors.

     Historically, we have focused our efforts on developing and marketing air
data systems that measure, calculate and display critical flight information,
such as airspeed and altitude, and instruments that measure engine and fuel
data, primarily for use in the aircraft retrofit market and also for the OEM
market. Since fiscal year 1997, a substantial portion of our revenues has been
from the sale of air data systems that bring aircraft into compliance with
government regulations, including the reduced vertical separation minimum, or
RVSM, requirements that are being phased in by regulatory authorities on certain
heavily traveled flight routes. We believe that we are currently one of three
primary suppliers of RVSM products to the U.S. retrofit market. As a result of
our expertise, we were selected as the sole supplier of RVSM systems and
components in connection with the United States Air Force's KC-135 retrofit
program, which we believe to be one of the largest U.S. military RVSM retrofit
programs to date.

     Advances in technology are making available to pilots increasing amounts of
information that enhance both the safety and efficiency of flying. However, the
limited amount of space in the cockpit coupled with inefficiencies associated
with currently used displays inhibits the display and integration of this
information in a user friendly manner.

     During fiscal year 2000, we introduced our flat panel display system, or
Cockpit Information Portal (CIP), which is the first in a series of new products
we intend to develop to enhance the management and integration of cockpit
information. Our CIP has a large, 15 inch diagonal high-resolution screen which
can integrate and replace virtually all of the space-consuming conventional
displays currently used in cockpits. Our CIP is the centerpiece of our cockpit
information management system that organizes and displays a multitude of flight
information that may be mandated by regulation or that is or will become
available to pilots in the future. This information may be generated from a
variety of sources, including our RVSM air data system, our engine and fuel
instrumentation or from third-party data and information products, such as a
predictive weather information system. In addition, we are in the process of
developing technologies relating to other products to be incorporated with our
CIP, such as a heads up display system designed to project critical flight data
onto cockpit windshields for easy reference by pilots.

     In June 2000, we entered into an agreement with Pilatus Business Aircraft,
Ltd. pursuant to which Pilatus will offer our CIP as an option on the Pilatus PC
12, initially for use on the co-pilot side of the cockpit. Pilatus will offer
our CIP as an option on the PC 12 for use on the pilot's side of the cockpit
after our display receives the requisite FAA certification for such use, which
we expect to receive during the first half of fiscal year 2001.

Our Industry

     A wide range of information, including airspeed, altitude and fuel levels,
is critical for the proper and safe operation of aircraft. With advances in
technology, new types of information to assist pilots, such as weather radar and
ground terrain maps, are becoming available for display in cockpits. We believe
that aircraft cockpits will increasingly become information centers, capable of
delivering additional information that is either mandated by regulation or
demanded by pilots to assist them in the safe and efficient operation of
aircraft.

                                       3
<PAGE>

     There are three general types of flight data: air data, which includes
aircraft speed, altitude and rates of ascent and descent; equipment data, such
as fuel and oil quantity and other engine measurements; and alternative source
information, which is information not originating on the aircraft, including
weather radar and surface terrain maps. Air data calculations are based
primarily on air pressure measurements derived from sensors on the aircraft.
Equipment data are determined by measuring various indices such as temperature,
volume and pressure within an aircraft's engines and other mechanical equipment.
Alternative source information is typically derived from satellites or equipment
located on land and fed by satellite or radio signals to the aircraft. All types
of information are then displayed in the cockpit for reference by pilots.

     Traditionally, flight data and other cockpit information were displayed on
a series of separate analog dials. In the early 1980s, digital displays using
cathode ray tubes began to replace some of the individual analog displays.
Recently, the industry has begun to develop color flat panel displays using
liquid crystal displays (LCD) to replace some of the traditional analog or
digital displays. We expect that the ability to display more information in a
space-efficient and customizable platform will become increasingly important as
additional information, such as weather radar and surface terrain maps, becomes
mandated by regulation or demanded by pilots. Accordingly, we believe that flat
panel displays, which can integrate and display a ``suite'' of information, will
increasingly replace individual displays as the method for delivering and
ordering the information displayed in the cockpit.

Air Data and Reduced Vertical Separation Minimum (RVSM)

     Pilots use air data for a number of important purposes, including
maintaining safe separation from other aircraft. Until recently, aircraft on a
similar flight path at altitudes exceeding 29,000 feet have been required to
maintain a vertical separation of at least 2,000 feet. As air travel has
increased over the past decade, U.S. and international aviation organizations
have sought ways to increase traffic flow on high traffic routes. These
organizations have developed reduced vertical separation minimums, or RVSM, for
adoption on certain highly traveled routes to reduce vertical separation between
aircraft from 2,000 feet to 1,000 feet. RVSM increases available flight routes
within a vertical airspace, thereby increasing the number of aircraft that can
fly on high traffic routes.

     Safe travel on RVSM routes requires that an aircraft's altimeter be
extremely accurate, and aircraft flying RVSM routes must have RVSM-certified
equipment. RVSM-certified altimeters must be able to measure altitude to within
25 feet at an altitude of 30,000 feet. In contrast, non-RVSM systems need only
be accurate within 180 feet at 30,000 feet.

     RVSM has been in effect for certain North Atlantic routes since March 1997
and is currently mandated between the altitudes of 31,000 and 39,000 feet on
these routes. RVSM is scheduled to be mandated between 29,000 and 41,000 feet on
these North Atlantic routes by January 2002. RVSM was phased in on certain
Trans-Pacific air routes beginning in February 2000 and is being phased in on
Western Atlantic air routes beginning in October 2000. Eurocontrol, the
organization that oversees air traffic control throughout Europe, plans to begin
mandating RVSM on certain European routes in January 2002.

Flat Panel Displays

     Air data and other flight information have traditionally been displayed on
analog instrumentation and, more recently, individual digital displays. Within
the last five years, color flat panel displays have begun to be used in aircraft
cockpits. Flat panel displays are liquid crystal display (LCD) screens that can
replicate the display of one or a suite of analog or digital displays on one
screen. Like other instrumentation, flat panel displays can be installed in new
aircraft or used to replace existing displays in aircraft already in use.

Engine and Fuel Displays

     Equipment data, such as engine and fuel related data, traditionally have
been displayed on conventional solid state displays. Equipment data displays
convey fuel and oil levels and provide information on engine activity, including
oil and hydraulic pressures, temperature and liquid oxygen levels. This
instrumentation includes individual

                                       4
<PAGE>

and multiple displays clustered throughout an aircraft's cockpit. Engine and
fuel displays tend to be replaced more frequently than other displays due to
normal wear-and-tear. As the information displayed by this instrumentation is
vital for safe and efficient flight, aircraft operators continue to purchase
individual conventional engine and fuel displays to replace older or non-
functioning displays.

Strategy

     Our objective is to become a leading supplier and integrator of cockpit
information. We believe that our industry experience and reputation, our
technology and products and our business strategy provide a basis to achieve
this objective. Key elements of our strategy include:

          .  Maintaining our leadership in the air data and RVSM markets. We
             believe that we are one of the largest suppliers of air data and
             RVSM-compliant products to the U.S. retrofit market. As RVSM routes
             continue to be phased in over the next several years, we anticipate
             many aircraft will be retrofitted with RVSM-compliant air data
             systems. The RVSM retrofit market has a limited number of
             competitors, and we intend to capitalize on our position as a
             leading provider of reliable, cost competitive RVSM air data
             products.

          .  Establishing leadership in the flat panel display market. We expect
             that over the next several years, many aircraft will either be
             retrofitted or newly manufactured with flat panel displays. Given
             the versatility, visual appeal and lower cost of displaying a
             series of instruments and other flight-relevant information on a
             single flat panel, we believe that flat panel displays will
             increasingly replace individual analog and digital instruments. We
             also believe that our CIP has significant benefits over the flat
             panel displays currently offered by our competitors, including its
             lower cost, larger size and enhanced viewability. Accordingly, we
             believe that these advantages will allow us to generate significant
             revenues from our CIP and gain significant market share within this
             market.

          .  Continuing our engineering and product development successes. We
             have developed innovative products by combining our avionics,
             engineering and design expertise with commercially available
             technologies, components and products from non-aviation
             applications, including the personal computer and
             telecommunications industries. We believe our processes allow us to
             bring products to market quickly and to control our development
             costs. Our CIP, which we expect will be larger, display more
             information and cost less than the flat panel displays offered by
             our competitors, is an example of our ability to engineer a
             superior product through the selective application of non-avionics
             technology. We currently are developing technologies relating to
             other products intended to be incorporated with our CIP, such as a
             heads up display system designed to project critical flight data
             onto cockpit windshields for easy reference by pilots.

          .  Increasing our sales to the commercial air transport and corporate
             aviation markets. While we currently sell our products to
             commercial and corporate aircraft operators and other retrofitters,
             our products have been predominantly used in the government and
             military end user markets. We intend to strengthen and diversify
             our marketing efforts to include all end user markets of the
             aviation industry, particularly the commercial air transport
             market, including national and regional carriers and other fleet
             operators, the corporate aviation market, primarily through
             aircraft modification centers, as well as the OEM market. We have
             begun building a sales and marketing force dedicated to expanding
             our sales efforts to these markets while at the same time
             maintaining our position as a provider of avionics products in
             connection with government and military contracts.

          .  Expanding our international presence. We plan to increase our
             international sales through expanding sales and marketing personnel
             and adding foreign offices. As RVSM and flat panel displays become
             more prevalent throughout the world, we believe that European and
             other international aircraft operators and aircraft modification
             centers will accelerate their retrofitting activities, thereby
             increasing the demand for RVSM products and flat panel displays. We
             have

                                       5
<PAGE>

             recently expanded our international presence by establishing a
             sales office in London. We intend to further expand our
             international sales presence in conjunction with the anticipated
             introduction of RVSM on other air routes throughout the world.

          .  Growth through acquisitions. We intend to pursue acquisitions as a
             means of growing our business with respect to both information
             management products and content, and we have identified profiles of
             the types of companies we would like to acquire. We may seek to
             acquire developers or suppliers of complementary products,
             technology or information, or we may acquire suppliers of similar
             products as a means of increasing our product offerings and market
             share.

Our Products

     Our current line of products includes:

Air Data and RVSM Systems and Components

     Our air data and RVSM products calculate and display various measures of
air data, such as aircraft speed, altitude and rate of ascent and descent. These
systems consist of a number of components, including internally-mounted
precision pressure sensors, a computer system and a cockpit display. The sensors
collect air pressure data from calibrated openings in the skin of an aircraft.
The computers process the raw data and convert it, using advanced proprietary
algorithms developed by us, into useful information. Displays in the cockpit
then convey the information to pilots.

     Our air data systems are highly accurate with respect to the collection and
interpretation of raw air pressure data from specifically selected locations on
the aircraft. We utilize state-of-the-art, highly sensitive digital sensors
capable of gathering the requisite air pressure data. The software in our
computer systems incorporates proprietary mathematical algorithms that interpret
the air data to measure altitude, air speed and vertical speed. Our algorithms
account for time, speed and temperature variations as well as the variations
inherent in the diverse profiles of different types of aircraft so that our
products continuously provide accurate data over the requisite range of
altitudes and atmospheric conditions for the type of aircraft in which the
product is installed.

     The functionality of our traditional non-RVSM air data systems and our RVSM
systems is similar. However, our RVSM systems use advanced sensors to gather air
pressure data and customized algorithms to interpret the data, thus allowing the
system to more accurately calculate altitude and to qualify for RVSM
certification.

     We sell individual components as well as partial and complete air data
systems. Our components and systems include:

     .  digital air data computers, which calculate various air data parameters
        such as altitude, airspeed, vertical speed, angle of attack and other
        information derived from the measure of air pressure;

     .  integrated air data computers and display units, which calculate and
        convey air data information;

     .  altitude displays, which convey aircraft altitude measurements;

     .  airspeed displays, which convey various types of airspeed measurements
        including vertical airspeed and rates of ascent and descent; and

     .  altitude alerters, which allow the pilot to select a desired cruising
        altitude that the aircraft will reach and maintain.

                                       6
<PAGE>

Flat Panel Display

     We have developed a large, high-resolution flat panel display that can
replace virtually all of the conventional analog and digital displays currently
used in a cockpit and can also display additional information that is not now
commonly displayed in the cockpit. Our CIP is capable of displaying nearly all
types of air data, engine and fuel data and alternative source information. As
technology and information delivery systems further develop, we expect
additional information, such as surface terrain maps, to be commonly displayed
in the cockpit. We have designed our CIP to be capable of displaying information
generated from a variety of sources, including our RVSM air data system, our
engine and fuel instrumentation and third-party data and information products.

     Our CIP can interpret, configure and display air data and equipment data
from our own products and other manufacturers' data products. The "open
architecture" characteristics of the cockpit instrumentation market enables our
CIP products to be adapted to work in most cockpit instrumentation systems. In
addition, we have designed our CIP to be able to host and integrate a heads up
display that we are developing to project important flight information onto an
aircraft's cockpit windshield for easy reference by pilots.

     Flat panel displays, like other cockpit instrumentation, require FAA
approval before installation in non-military aircraft. We are in the process of
seeking "non-hazardous" approval of the display pursuant to which we will be
permitted to install our CIP on certain aircraft for non-essential use,
including, for example, on the co-pilot side of aircraft requiring operation by
just one pilot. In addition, we are in the process of seeking FAA-approval of
our CIP for essential use by pilots, initially for the Pilatus PC 12. We expect
to receive non-hazardous approval and approval for essential use during the
first half of fiscal 2001. After we obtain FAA approval for essential use in the
Pilatus PC 12, we will still need approval to place our CIP in other types of
aircraft. See "Business--Government Regulation."

     In June 2000, we entered into an agreement with Pilatus Business Aircraft,
Ltd. pursuant to which Pilatus will offer our CIP as an option on the Pilatus PC
12, initially for use on the co-pilot side of the cockpit. Pilatus will offer
the CIP as an option on the PC 12 for pilot-side use upon our receiving the
requisite certification from the FAA for such use.

Engine and Fuel Displays

     We develop, manufacture and market engine and fuel displays. Our solid
state multifunction displays convey information with respect to fuel and oil
levels as well as engine activity, such as oil and hydraulic pressures,
temperature and liquid oxygen levels. This instrumentation includes individual
and multiple displays clustered throughout an aircraft's cockpit. Our displays
can be used in conjunction with our own engine and fuel data equipment or that
of other manufacturers.

     Engine and fuel displays are vital to the safe and proper flight of
aircraft and are found in all aircraft. In addition, the accurate conveyance of
engine and fuel information is critical for the monitoring of engine stress and
the maintenance of engine parts. Engine and fuel displays tend to be replaced
more frequently than other displays and have remained largely unchanged since
their introduction due to their low cost, standard design and universal use.

     We believe that our engine and fuel displays are extremely reliable, and we
have designed them to be programmable to adapt easily without major modification
to most modern aircraft. Our products have been installed on Lockheed Martin C-
130H aircraft, Boeing DC-9 and DC-10 aircraft and U.S. Air Force A-10 aircraft.

Customers

     Our customers include, among others, the United States government, DME
Inc., Northwest Airlines Corporation, Air Canada, Inc., DHL Airways, Inc., Emery
Worldwide Airlines, Federal Express Corporation, The Boeing Company, Lockheed
Martin Corporation, Rockwell International Corporation, Bombardier Aerospace
(the

                                       7
<PAGE>

manufacturer of Learjet), Pilatus Aircraft Ltd. and Gulfstream Aerospace
Corporation.

Retrofit Market

     Historically, the majority of our sales have come from the retrofit market.
Among other reasons, we have pursued the retrofit market because of its
continued rapid growth in response to the increasing need to support the world's
aging fleet of aircraft.

     Updating an individual aircraft's existing electronics equipment has become
increasingly common as new technology makes existing instrumentation outdated
while an aircraft is still structurally and mechanically sound. Retrofitting an
aircraft is generally a substantially less expensive alternative to purchasing a
new aircraft. We expect our main customers in the retrofit market to be:

     .  government and military contractors;

     .  aircraft operators; and

     .  aircraft modification centers.

     Government and Military Contractors. Since 1988, we have sold products to
both commercial contractors and military end users in connection with government
aircraft retrofit programs. To date, a majority of our annual sales have been in
connection with these programs. For example, we sell various products to Boeing
and Rockwell International relating to contracts with government entities,
including the United States Air Force, to retrofit aircraft. In addition, we
sell our products directly to government entities. Government-related projects
are generally under either a subcontract with the prime contractor, such as
Boeing, or a direct contract with the appropriate government agency. The
majority of our government project sales are to commercial contractors pursuant
to commercial off-the-shelf equipment contracts. As defense spending has
decreased over the past decade, the government's desire for cost-effective
retrofitting of aircraft has led it to increasingly purchase commercial off-the-
shelf equipment rather than requiring the development of specially designed
products, which are usually more costly and take a longer time to develop. These
contracts tend to be on commercial terms, although some of the termination and
other provisions of government contracts described below are typically
applicable to these contracts.

     Each government-related contract includes various federal regulations that
impose certain requirements on us, including the ability of the government
agency or general contractor to alter the price, quantity or delivery schedule
of our products. In addition, the government agency or general contractor
retains the right to terminate the contract at any time at its convenience. Upon
such alteration or termination, we would normally be entitled to an equitable
adjustment to the contract price so that we may receive the purchase price for
already delivered items and reimbursement for allowable costs incurred.

     Aircraft Operators.   We also sell our products to aircraft operators,
including commercial airlines, overnight delivery services and corporate
carriers. Our products are used mostly in the retrofitting of aircraft owned or
operated by these customers, which generally retrofit and maintain their
aircraft themselves. Our commercial fleet customers include Northwest Airlines,
Air Canada, DHL, Emery and Federal Express. We sell these customers a range of
products from fuel quantity indicators to RVSM air data systems.

     Aircraft Modification Centers. Based on industry data, we believe there are
approximately 12,800 private and corporate aircraft in service in North America.
The primary retrofit market for private and corporate jets is through aircraft
modification centers, which repair and retrofit private aircraft in a manner
similar to the way auto mechanics service a person's car. We are beginning to
market our products to a number of aircraft modification centers throughout the
United States. We believe that our RVSM and non-RVSM air data systems and
related components will be used by aircraft modification centers to update older
or outdated air data systems.

     We anticipate that retrofitting of air data systems by aircraft
modification centers, and thus the demand for our RVSM products, will increase
significantly as RVSM is increasingly phased-in on many of the world's most
popular

                                       8
<PAGE>

flight routes. Furthermore, we anticipate that as flat panel displays gain
popularity, aircraft modification centers will become significant customers of
our flat panel product for aircraft owners seeking to upgrade their display
systems.

OEM Market

     We also market our products to original equipment manufacturers,
particularly manufacturers of corporate and private jets as well as contractors
of military jets. Customers of our products include Bombardier (the manufacturer
of Learjet), Pilatus, Gulfstream, Boeing and Lockheed.

     Certain jet manufacturers currently equip their aircraft with traditional
non-RVSM air data systems. However, we believe that most aircraft manufacturers
will begin equipping their aircraft with RVSM-compliant air data systems in
anticipation of the expected increasing use of RVSM throughout the world. In
addition, we expect that as flat panel displays become increasingly popular,
OEMs will begin manufacturing an increasing percentage of their aircraft with
flat panel displays, either as standard or optional equipment.

Backlog

     As of September 30, 2000, our backlog was $13.4 million, $12.2 million of
which we expect will be sold in fiscal year 2001. Our backlog consists solely of
orders believed to be firm. In the case of contracts with government entities,
orders are only included in backlog to the extent funding has been obtained for
such orders.

Sales and Marketing

     We have generally focused our sales efforts on government and military
entities and contractors, aircraft operators and OEMs, and more recently on
aircraft modification centers. We intend to increase our sales efforts with
respect to the commercial and corporate aviation markets in the future. To date,
we have made substantial use of third-party sales representatives for our sales
efforts. We compensate these third-party sales representatives through
commissions.

     In fiscal year 2000, we hired a Vice President of Marketing and Business
Development and additional full-time marketing and sales personnel to undertake
sales efforts to our domestic customers and to direct our European sales
programs and operations. In February 2000, we opened a sales office in London
responsible for marketing our products throughout Europe, Africa and the Middle
East. In addition, we intend to add sales representatives to begin marketing
efforts in South America, Korea and Japan. Such additions will allow us to
expand our marketing efforts to a more global focus. We expect to compensate our
direct sales force through a combination of base salary and commissions.

     We believe that our ability to provide prompt and effective repair and
upgrade service is critical to our marketing efforts. As part of our customer
service program, we have implemented a 24-hour hotline that customers can call
with respect to product repair or upgrade concerns. We employ five field service
engineers to service our equipment and, depending on the service required, we
may either dispatch a service crew to make necessary repairs or request that the
customer return the product to us for repairs or upgrades at our main facility.
In the event repairs or upgrades are required to be made at our facility, we
provide spare products for use by our customers during the repair time. Our in-
house turnaround repair times average 15 days and turnaround upgrade times
average 30 days. Before returning our products to customers, all repaired or
upgraded products are retested for airworthiness.

     In connection with our customer service program, we typically provide our
customers with a two-year warranty on new products. We also offer our customers
extended warranties of varying terms for additional fees.

Government Regulation

     The manufacture and installation of our products in aircraft owned and
operated in the United States is governed by U.S. Federal Aviation
Administration (FAA) regulations. The most significant of these regulations

                                       9
<PAGE>

focus on Technical Standard Order (TSO) and Type Certificate (TC) or
Supplemental Type Certificate (STC) certifications. The FAA recommends that
avionics products be TSO-certified. A TSO sets forth the minimum general
standards that a certain type of equipment should meet. TSO certification is a
declaration by the FAA that a product meets such consensus standards and
guidelines and that it is certified to be used in aircraft. For example, all
altimeters, including RVSM and non-RVSM versions, have the same TSO, which sets
forth the various general requirements that an altimeter must meet to be TSO-
certified, such as life cycle, software, environmental and other standards. TSO-
certified avionics products are preferred by retrofitters and OEMs because they
act as an industry-wide stamp of approval and streamline the TC/STC approval
process, described below. The TSO certification process typically takes
approximately two to three months and consists of product testing, including
environmental simulation, as well as software and overall system testing.

     The FAA requires that all avionics products receive TC or STC certification
upon their installation in aircraft. Without such certification, avionics
products may not be installed in an aircraft. TC certification is required for
installation by an OEM, and STC certification is required for retrofitting
installation. When an avionics product is installed in a certain type of
aircraft, the FAA conducts an inspection and systems tests on a test aircraft
containing such newly installed product. The TC and STC process includes ground
analyses and test flights to determine whether the product is functioning
properly in the aircraft. Upon satisfactory completion of these tests, a product
is TC- or STC-certified, meaning the type of aircraft tested can be flown with
the installed instrumentation. The TC and STC approval procedures typically last
one to four months, depending on the complexity of the equipment being
certified.

     With respect to our RVSM air data products, the FAA also requires that
these products be RVSM-certified before they are used in flight. This
certification process may be undertaken in conjunction with the TC/STC
certification process. RVSM certification requires ground and flight tests and
an analysis of flight data to ensure the accuracy, reliability, system safety
and mean time between failure rates of the product. The RVSM certification
process typically lasts one to three months.

     Sales of our products to European or other non-U.S. owners of aircraft also
typically require approval of the Joint Aviation Authorities (JAA), the European
counterpart of the FAA, or another appropriate governmental agency. Currently,
18 European countries are members of the JAA. JAA certification requirements for
the manufacturing and installation of our products in European-owned aircraft
mirror the FAA regulations. Much like the FAA certification process, the JAA has
established a process for granting TSOs, TCs and STCs. Certification by the JAA
or other appropriate governmental agencies is generally granted upon
demonstration that the equipment is accurate and able to maintain certain levels
of repeatability over time.

     In addition to product-related regulations, we are also subject to the
government's procurement regulations with respect to sales of our products to
government entities or government contractors. These regulations dictate the
manner in which products may be sold to the government and set forth other
requirements which must be met in order to do business with or on behalf of
government entities. For example, pursuant to such regulations, the government
agency or general contractor may alter the price, quantity or delivery schedule
of our products. In addition, the government agency or general contractor
retains the right to terminate the contract at any time at its convenience. Upon
such alteration or termination, we would normally be entitled to an equitable
adjustment to the contract price so that we may receive the purchase price for
already delivered items and reimbursement for allowable costs incurred.

Manufacturing, Assembly and Materials Acquisition

     Our manufacturing activities consist primarily of assembling and testing
components and subassemblies and integrating them into a finished system. We
believe that this method allows us to achieve relatively flexible manufacturing
capacity while lowering overhead expenses. We generally purchase the components
for our products from third-party vendors and assemble them in a clean room
environment to reduce impurities and improve the performance of our products.
Many of the components we purchase are standard products, although certain parts
are made to our specifications.

                                       10
<PAGE>

     When appropriate, we enter into long-term supply agreements and use our
relationships with long-term suppliers to improve product quality and
availability and to reduce delivery times and product costs. In addition, we are
continually identifying alternative component suppliers for important component
parts. Using component parts from new suppliers in our products generally
requires FAA certification of the entire finished product if the newly sourced
component varies significantly from our original drawings and specifications. To
date, we have not experienced delay in the delivery of our products caused by
the inability to obtain either component parts or FAA approval of products
incorporating new component parts.

Quality Assurance

     Product quality is of vital importance to our customers, and we have taken
steps to enhance the overall quality of our products. We utilize the Six Sigma
program, which is a process evaluation program based on the premise that
efficient companies can reduce to a very low level the number of defects and
inefficient processes. Under this program, we are continuously seeking to
improve our operational efficiencies, including our design and manufacturing
processes and, thus, the general quality of our products. In particular, our Six
Sigma program allows us to analyze our development processes and reduce the
risks inherent in shortening our development cycle times. In effect, Six Sigma
has allowed us to improve our product quality and cycle times. Our employees are
required to attend an in-house training session that teaches them the principles
and application of our Six Sigma program.

     In addition, we are ISO 9001 certified. ISO 9001 standards are an
international consensus on effective management practices with the goal of
ensuring that a company can consistently deliver its products and related
services in a manner that meets or exceeds customer quality requirements. ISO
9001 standards set forth the requirements a company's quality systems must meet
to achieve a high standard of quality. As an ISO 9001-certified manufacturer, we
can represent to our customers that we maintain high quality industry standards
in the education of our employees and the design and manufacture of our
products. In addition, our products undergo extensive quality control testing
prior to being delivered to customers. As part of our quality assurance
procedures, we maintain detailed records of test results and our quality control
processes.

Our Competition

     The market for our products is highly competitive and characterized by
several industry niches in which a number of manufacturers specialize. Our
competitors vary in size and resources, and substantially all of our competitors
are much larger and have substantially greater resources than we do. With
respect to air data systems and related products, our principal competitors
include Kollsman Inc., Honeywell International Inc., Rockwell International
Corporation, Meggitt Avionics Inc. and Smiths Industries plc. Of these
competitors, only Honeywell, Rockwell and Smiths currently manufacture products
which compete with our RVSM products. With respect to flat panel displays, our
principal competitors currently include Honeywell, Rockwell, Meggitt and Smiths.
However, because the flat panel display industry is a new and evolving market,
as the demand for flat panel displays increases, we may face competition in this
area from additional companies in the future.

     We believe that the principal competitive factors in the markets we serve
are cost, development cycle time, responsiveness to customer preferences,
product quality, technology, reliability and breadth of product line. We believe
that our significant and long-standing customer relationships reflect our
ability to compete favorably with respect to these factors.

Intellectual Property and Proprietary Rights

     We rely on patents to protect our proprietary technology. We currently hold
three U.S. patents and have one U.S. patent application pending relating to our
technology. In addition, we have five international patent applications pending.
Certain of these patents and patent applications cover technology relating to
air data measurement systems and RVSM calibration techniques while others cover
technology relating to flat panel display systems and other aspects of our CIP
solution. While we believe that these patents have significant value in
protecting our technology, we also believe that the innovative skill, technical
expertise and the know-how of our personnel in applying the technology reflected
in our patents would be difficult, costly and time consuming to reproduce.

                                       11
<PAGE>

     While there are no pending lawsuits against us regarding the infringement
of any patents or other intellectual property rights, we cannot be certain that
such infringement claims will not be asserted against us in the future.

Our Employees

     As of September 30, 2000, we had 123 employees, 68 of whom were in our
manufacturing and assembly operations, 24 in research and development, 13 in
quality, customer service and field support, 7 in sales and 11 in general
administrative and corporate positions.

     Our future success also depends on our ability to attract, train and retain
highly qualified personnel. We plan to hire additional personnel, including in
particular sales and marketing personnel, during the next twelve months.
Competition for such qualified personnel is intense and we may not be able to
attract, train and retain highly qualified personnel in the future.

     None of our employees is represented by a labor union, and we consider our
relationship with our employees to be good.

Item 2. Properties.

     We lease approximately 27,000 square feet in an office complex located in
suburban Philadelphia. This space is used for administrative purposes, product
development and the assembly of our products. To accommodate for our future
growth, we have initiated plans to build a new facility in suburban Philadelphia
that would increase our space to approximately 43,800 square feet. We expect the
cost of this new facility, including land acquisition, to be between $5 million
and $6 million.

Item 3. Legal Proceedings.

     In the ordinary course of our business, we are at times subject to various
legal proceedings.  We do not believe that any current legal proceedings will
have a material adverse effect on our results of operations or financial
position.

Item 4. Submission of Matters to a Vote of Security Holders.

     Not applicable.

Item A. Executive Officers of the Registrant

  The following is a list of our executive officers, their ages and their
positions:

<TABLE>
<CAPTION>
Name                                  Age                              Position
- ----                                  ---                              --------
<S>                                   <C>     <C>
Geoffrey S. M. Hedrick...............  58     Chairman of the Board and Chief Executive Officer
Robert J. Ewy........................  55     President
James J. Reilly......................  60     Chief Financial Officer
David J. Marvin......................  47     Vice President of Marketing and Business Development
Roger E. Mitchell....................  46     Vice President of Operations
</TABLE>

     Geoffrey S. M. Hedrick has been our Chief Executive Officer since he
founded IS&S in February 1988 and our Chairman of the Board since 1997. Prior to
founding IS&S, Mr. Hedrick served as President and Chief Executive Officer of
Smiths Industries North American Aerospace Companies. He also founded Harowe
Systems, Inc. in 1971, which was subsequently acquired by Smiths Industries. Mr.
Hedrick has 35 years of experience in the avionics industry, and he holds a
number of patents in the electronics, optoelectric, electromagnetic, aerospace
and contamination-control fields.

                                       12
<PAGE>

     Robert J. Ewy has been our President since May 1999. From 1971 until
joining us, Mr. Ewy was employed by AlliedSignal, Inc., Electronics and Avionics
Systems, where he held various positions. From 1998 to 1999, Mr. Ewy was General
Manager of Business Aviation. From 1997 to 1998, he was Vice President of Flight
Information Systems, and from 1996 to 1997, he was Vice President of
Communications and Cabin Systems. Prior thereto, from 1993 to 1996, Mr. Ewy was
Director of Strategic Business Enterprises. Mr. Ewy holds a Bachelor of Science
degree in Engineering from the University of Missouri.

     James J. Reilly has been our Chief Financial Officer since February 2000.
From 1996 to 1999, Mr. Reilly was employed by B/E Aerospace, Inc., Seating
Products Group, where he served as Vice President and Chief Financial Officer.
From 1989 to 1996, Mr. Reilly was employed by E-Systems, Inc. as Vice President
and Principal Accounting Officer. Mr. Reilly holds a Bachelor of Science degree
and a Masters of Business Administration degree from the University of Hartford.

     David J. Marvin has been our Vice President of Marketing and Business
Development since August 2000. Until joining us, Mr. Marvin was employed by
Smiths Industries from 1992 as the Director of Marketing. Mr. Marvin has 23
years experience in the Aerospace Industry including nine years in Systems
Engineering with Boeing, and the last twelve years in Director and Vice
President of Marketing roles. Mr. Marvin holds a Bachelor of Science degree from
Kent State University and a Masters of Science degree in Engineering from Drexel
University.

     Roger E. Mitchell has been our Vice President of Operations since September
1999. From July 1998 until September 1999, Mr. Mitchell served as our Director
of Operations. Prior to joining us, Mr. Mitchell was employed by AlliedSignal,
where he held various positions, including Operations Manager from 1994 to 1998.
Mr. Mitchell received a Bachelor of Arts degree from Lewis University.

Part II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters

Our common stock has been traded on the Nasdaq National Market under the symbol
"ISSC" since our initial public offering on August 4, 2000. The following table
lists the high and low per share sale prices for our common stock for the
periods indicated:

Fiscal 2000:                                        High       Low
                                                    ----       ---

August 4, 2000 - September 30, 2000                 $18.50     $10.625

On December 6, 2000, there were 37 holders of record of the shares of
outstanding common stock.

We have not paid cash dividends on our common stock, and we do not expect to
declare cash dividends on our common stock in the near future.  We intend to
retain any earnings to finance the growth of our business.

Recent Sales of Unregisterd Securities

     During fiscal 2000, we sold and issued the following securities: from
September 1999 to December 1999, we issued an aggregate of 10,962 shares of
common stock to an employee of ours upon the exercise of stock options granted
to him at an exercise price of $1.09 per share.  The issuances were exempt from
the registration requirements of the Securities Act of 1933 by virtue of Section
701 of the Securities Act.

                                       13
<PAGE>

Item 6.  Selected Financial Data.

     You should read the data set forth below together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and related notes appearing elsewhere herein.

<TABLE>
<CAPTION>
                                                                           Year Ended September 30,
                                                     ---------------------------------------------------------------------
                                                        1996           1997          1998          1999           2000
                                                     -----------    -----------   -----------   -----------    -----------
<S>                                                  <C>            <C>           <C>           <C>            <C>
Statement of Operations Data:
Revenues.........................................    $ 6,685,682    $10,594,204   $14,682,313   $22,487,882    $33,273,890
Cost of sales....................................      5,322,424      7,007,523     8,480,549    10,570,009     14,819,043
                                                     -----------    -----------   -----------   -----------    -----------
  Gross profit...................................      1,363,258      3,586,681     6,201,764    11,917,873     18,454,847
Research and development.........................        963,921      1,114,351     1,554,564     1,915,634      3,274,708
Selling, general and
 administrative..................................      1,634,199      1,567,896     2,492,509     3,333,977      4,951,732
                                                     -----------    -----------   -----------   -----------    -----------
  Total operating expenses.......................      2,598,120      2,682,247     4,047,073     5,249,611      8,226,440
Operating income (loss)..........................     (1,234,862)       904,434     2,154,691     6,668,262     10,228,407
Interest (income) expense, net...................        (27,287)        63,813       224,121       (30,137)      (564,555)
                                                     -----------    -----------   -----------   -----------    -----------
Income (loss) before income
 taxes...........................................     (1,207,575)       840,621     1,930,570     6,698,399     10,792,962
Income tax (expense) benefit,
 net.............................................             --             --     2,013,802    (2,517,764)    (4,043,405)
                                                     -----------    -----------   -----------   -----------    -----------
Net income (loss)................................    $(1,207,575)   $   840,621   $ 3,944,372   $ 4,180,635    $ 6,749,557
                                                     ===========    ===========   ===========   ===========    ===========
Net income (loss) per common
 share:
 Basic...........................................    $     (0.18)   $      0.13   $      0.59   $      0.62    $      0.86
 Diluted.........................................          (0.18)          0.10          0.46          0.45           0.66
Weighted average shares outstanding:
 Basic...........................................      6,612,739      6,612,739     6,670,134     6,746,976      7,893,630
 Diluted.........................................      6,612,739      8,554,092     8,611,487     9,204,344     10,231,931
</TABLE>

<TABLE>
<CAPTION>
                                                                                        September 30,
                                                                     -------------------------------------------------
                                                              1996           1997          1998          1999           2000
                                                           -----------    -----------   -----------   -----------    -----------
<S>                                                        <C>            <C>           <C>           <C>            <C>
Balance Sheet Data:
Cash and cash equivalents...............................   $   328,451    $   484,281   $   102,150   $ 4,638,607    $38,657,433
Working capital (deficit)...............................      (846,370)       140,212     3,387,163     8,557,052     50,944,599
Total assets............................................     3,732,425      4,839,520     9,029,168    12,612,189     60,746,527
Debt and capital lease obligations, less current
 portion................................................       115,286         27,845        46,379        45,764      4,265,447
Total shareholders' equity (deficit)....................      (597,356)       368,265     4,564,637     8,935,272     50,822,496
</TABLE>


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

     This Annual Report on Form 10-K contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act, subject to the safe
harbor of such Act. Those statements involve known and unknown risks,
uncertainties and other factors that may cause actual results and the course of
events of IS&S to differ materially from those forward-looking statements
discussed here. Additional information concerning factors that could cause such
a difference can be found herein under "Risk Factors".

Overview

     Innovative Solutions and Support was founded in 1988. We design, develop,
manufacture and market flight information computers, electronic displays and
advanced monitoring systems that measure and display critical flight
information, including data relative to aircraft separation (RVSM, Reduced
Vertical Separation Minimum), airspeed and altitude as well as engine and fuel
data measurements.

                                       14
<PAGE>

     Our revenues are derived from the sale of our products to the retrofit
market and, to a lesser extent, original equipment manufacturers (OEMs). Our
customers include government and military entities and their commercial
contractors, aircraft operators, aircraft modification centers and various OEMs.
Although we occasionally sell our products directly to government entities, we
primarily have sold our products to commercial customers for end use in
government and military programs. These sales to commercial contractors are on
commercial terms, although some of the termination and other provisions of
government contracts are applicable to these contracts.

     We record revenues when our products are shipped. Since fiscal year 1998,
the majority of our revenues have come from the sale of RVSM-compliant air data
systems, including sales to commercial contractors in connection with the United
States Air Force KC-135 retrofit program. We are the sole supplier of these
systems and components under subcontracts with various commercial contractors
for the retrofit program, which covers the approximately 600 KC-135 aircraft
currently in use. As of September 30, 2000, we have delivered 280 KC-135 ship
sets for retrofit installation. Subsequent to September 30, 2000, the government
exercised its options for the remaining aircraft, which continues the program
through March 2002.

     We have recently begun marketing our flat panel display system, or Cockpit
Information Portal (CIP), and are in the process of obtaining the required
certifications. We have entered into an agreement with Pilatus Business
Aircraft, Ltd. to offer our CIP in their PC 12 business aircraft. We expect to
receive revenues from our flat panel display during the second half of fiscal
2001.

     Our cost of sales are comprised of material components purchased through
our supplier base and direct in-house assembly labor and overhead costs. Many of
the components we use in assembling our products are standard, although certain
parts are manufactured to meet our specifications. The overhead portion of cost
of sales is primarily comprised of salaries and benefits, building occupancy,
supplies, business travel, and outside service costs related to our production,
purchasing, material control and quality departments as well as warranty costs.

     We intend to continue investing in the development of new products that
complement our current product offering and will expense associated research and
development costs as they are incurred.

     Our selling, general and administrative expenses consist of marketing and
business development expenses, professional expenses, salaries and benefits for
executive and administrative personnel, facility costs, and recruiting, legal,
accounting and other general corporate expenses.

Results of Operations

Fiscal Year Ended September 30, 2000 Compared to Fiscal Year Ended September 30,
1999

     Revenues.  Revenues increased $10.8 million, or 48.0%, to $33.3 million for
the fiscal year ended September 30, 2000 (fiscal 2000) from $22.5 million for
the prior fiscal year ending September 30, 1999 (fiscal 1999). The increase was
primarily attributable to RVSM product shipments for the KC-135 program. We
recognized $21.6 million in revenues related to this program in fiscal 2000 and
$14.5 million in fiscal 1999.

     Cost of Sales.  Cost of sales increased $4.2 million, or 40.2%, to $14.8
million, or 44.5% of revenues, for fiscal 2000 from $10.6 million, or 47.0% of
revenues, for fiscal 1999. The increase in dollar amount was related to the
increase in revenues, and the decrease as a percentage of revenues was primarily
related to cost containment resulting from our Six Sigma program, a process
evaluation program designed to increase efficiency.

     Research and development.  Research and development expenses increased $1.4
million, or 70.9%, to $3.3 million, or 9.8% of revenues, for fiscal 2000 from
$1.9 million, or 8.5% of revenues, for fiscal 1999. The increase in both dollar
amount and as a percentage of revenues was primarily due to engineering efforts
related to the introduction of new products, including our flat panel display,
an engine pressure ratio transmitter, a low-cost altimeter and ongoing
enhancements and improvements to existing products. The increase in research and
development spending reflects our continued commitment to product development
and new product introductions.

                                       15
<PAGE>

     Selling, general and administrative. Selling, general and administrative
expenses increased $1.6 million, or 48.5%, to $5.0 million, or 14.9% of
revenues, for fiscal 2000 from $3.3 million, or 14.8% of revenues, for fiscal
1999. The increased spending reflects our investment in personnel and
infrastructure to support our continued growth.

     Interest (income) expense, net. Net interest income increased $535,000 to
$565,000 in fiscal 2000 as compared to net interest income of $30,000 in fiscal
1999. Net interest income for fiscal 2000 was due to substantially higher cash
balances during the period resulting primarily from our initial public offering
of common stock in August 2000.

     Income tax (expense) benefit, net. Income tax expense was $4.0 million for
fiscal 2000 compared to $2.5 million for fiscal 1999. The increased amount was
the direct result of higher income before tax. Effective tax rates were
essentially unchanged at 37.5% in fiscal year 2000 and 37.6% in fiscal year
1999.

     Net income. As a result of the factors described above, our net income
increased $2.6 million, or 60.6%, to $6.7 million, or 20.3% of revenues, for
fiscal year 2000 from $4.2 million, or 18.6% of revenues, for fiscal 1999. On a
fully diluted basis, earnings per share (EPS) increased $0.21, or 46.7%, to
$0.66 for fiscal 2000 from $0.45 in fiscal 1999. The percentage increase in net
income was greater than the percentage increase in EPS because of the dilutive
impact of the Company's initial public offering (IPO). The Company sold
3,450,000 shares of stock in their IPO in August 2000.

Fiscal Year Ended September 30, 1999 Compared to Fiscal Year Ended September 30,
1998

     Revenues. Revenues increased $7.8 million, or 53.2%, to $22.5 million in
fiscal 1999 from $14.7 million in the fiscal year ended September 30, 1998
(fiscal 1998). The increase was principally due to shipments of RVSM air data
systems for the KC-135 aircraft, which contributed $14.7 million of revenues
during fiscal 1999 compared to $4.2 million of revenues in fiscal 1998. This
increase was partially offset by a decrease in sales of air data equipment and
engine instruments.

     Cost of Sales. Cost of sales increased $2.1 million, or 24.6%, to $10.6
million, or 47.0% of revenues, in fiscal 1999 from $8.5 million, or 57.8% of
revenues, in fiscal 1998. The increase in dollar amount of cost of sales was
related to our increase in revenues, and the decrease as a percentage of
revenues was primarily related to cost containment resulting from our Six Sigma
program.

     Research and development. Research and development expense increased
$361,000, or 23.2%, to $1.9 million, or 8.5% of revenues, in fiscal 1999 from
$1.6 million, or 10.5% of revenues, in fiscal 1998. The dollar increase in
research and development expense was primarily due to engineering efforts
related to the introduction of new products, including our flat panel display,
an engine pressure ratio transmitter, a low-cost altimeter and ongoing
enhancements and improvements to existing products in fiscal 1999.

     Selling, general and administrative. Selling, general and administrative
expenses increased $841,000, or 33.8%, to $3.3 million, or 14.8% of revenues, in
fiscal 1999 from $2.5 million, or 17.0% of revenues, in fiscal 1998. The dollar
increase was primarily related to the hiring of executive personnel in general
management and sales and marketing. The decrease as a percent of revenues
reflects economies associated with increased revenues.

     Interest (income) expense, net. Net interest income was $30,000 in fiscal
1999 as compared to net interest expense of $224,000 in fiscal 1998. The
interest income in fiscal 1999 was the result of higher average cash balances in
the period. Net interest expense in fiscal 1998 was the result of borrowings
under our then existing credit facility and lower cash balances.

     Income tax (expense) benefit, net. We recognized an income tax expense of
$2.5 million for an effective rate of 37.6% in fiscal 1999. In fiscal 1998 we
recorded a tax benefit in the amount of $2.0 million as a result of the reversal
of the valuation allowance to reflect prior net operating loss carry-forwards.
During fiscal 1999 we utilized all of our net operating loss carry-forwards from
previous periods. We expect that going forward we will generally

                                       16
<PAGE>

be subject to normal tax rates without the benefit of net operating loss carry-
forwards.

     Net income. As a result of the factors described above, our net income
increased $237,000, or 6.0%, to $4.2 million, or 18.6% of revenues, with a $2.5
million tax expense, for fiscal 1999 from net income of $3.9 million for fiscal
1998, or 26.9% of revenues, with a $2.0 million tax benefit. On a fully diluted
basis, earnings per share declined $0.01, or 2.2%, to $0.45 for fiscal 1999 from
$0.46 in fiscal 1998. Fiscal year 1998 restated without the benefit of a $ 2.0
million tax benefit and with tax rates similar to fiscal 1999 would reflect net
income of $1.2 million and fully diluted earnings per share of $0.14. A
comparison between fiscal 1999 and these restated fiscal 1998 values would
reflect an increase in net income of $3.0 million, or 247%, to $4.2 million and
earnings per share would have increased $0.31, or 221%, to $0.45 in the same
period.

Liquidity and Capital Resources

     Prior to our initial public offering in August 2000, our primary sources of
liquidity have been cash flows from operations and borrowings. We require cash
principally to finance inventory, accounts receivable and payroll.

     Our cash flow provided from operating activities was $2.5 million for
fiscal 2000 as compared to $6.0 million for fiscal 1999. The decrease was
primarily a result of higher accounts receivable and inventory that more than
offset increases in net income. The increase in accounts receivable was
primarily due to higher revenues in August and September of fiscal 2000 compared
to August and September of fiscal 1999.

     Cash flow provided by operating activities for fiscal 1999 was $6.0 million
as compared to cash used of $39,000 for fiscal 1998. The increase in fiscal 1999
was primarily due to higher net income, adjusted for the deferred portion of the
income tax expense, and a decrease in accounts receivable balances. This
increase was partially offset by a decrease in accounts payable.

     Our cash used in investing activities was $7.9 million for fiscal 2000 as
compared to $0.6 million for fiscal 1999. Of the $7.3 million increase, $3.0
million was due to the purchase of our Pilatus airplane. This aircraft will
serve as a test bed for the Company's new air data and flat panel products and
also as a sales/marketing tool for demonstrating its products to its aviation
customers .

     Our cash used in investing activities for fiscal 1999 was $592,000 as
compared to cash used of $238,000 for fiscal 1998. The increase in fiscal 1999
was due to the purchase of property and equipment.

     Cash flow provided by financing activities was $39.5 million for the fiscal
2000 as compared to cash used of $0.8 million for the fiscal 1999. This increase
was a direct result of the following: the Company received a net amount of $34.1
million in proceeds as a result of our IPO in August 2000; the Company borrowed
$4.3 million of Industrial Development Bonds (IDB) to fund our new building;
and, $1.0 million worth of warrants were exercised in the fiscal 2000. In
contrast, the use of funds in the fiscal 1999 was attributable to repayment of
loans and capital lease obligations.

     Our cash used in financing activities for fiscal 1999 was $832,000 as
compared to cash used of $105,000 for fiscal 1998. The increase in cash used was
primarily due to the repayment of borrowings during fiscal 1999.

     We allowed our credit facility to lapse in August 2000 as a result of the
strong cash balance we have from the net proceeds of our IPO. We are in
discussions with a number of financial institutions regarding the establishment
of a new credit facility.

     To accommodate our future growth, we have initiated plans to build a new
facility that increases our space from 27,000 square feet to approximately
43,800 square feet. We expect the cost of this new facility, including land
acquisition, to be between $5.0 million and $6.0 million. We have financed
approximately $4.3 million of this project with industrial development bonds and
the remainder will be funded with our cash.



                                       17
<PAGE>

     Our future capital requirements depend on numerous factors, including
market acceptance of our products, the timing and rate of expansion of our
business and other factors. We have experienced increases in our expenditures
since our inception consistent with growth in our operations, personnel and
product line, and we anticipate that our expenditures will continue to increase
in the foreseeable future. We believe that our cash and cash equivalents,
together with the net proceeds from our IPO and any new credit facility we may
enter into, will provide sufficient capital to fund our operations for at least
the next twelve months. However, we may need to raise additional funds through
public or private financings or other arrangements in order to support more
rapid expansion of our business than we currently anticipate. Further, we may
develop and introduce new or enhanced products, respond to competitive
pressures, invest in or acquire businesses or technologies or respond to
unanticipated requirements or developments.

Inflation

     We do not believe that inflation has had a material effect on our financial
position or results of operations during the past three years. However, we
cannot predict the future effects of inflation.

Recent Accounting Pronouncements

     In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB
101), "Revenue Recognition," which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosures related to revenue recognition policies.
Management believes that SAB 101 has no material effect on its current revenue
recognition policies.

Risk Factors
- ------------

Risks Related to Our Business

Most of our sales are of air data systems products, and we cannot be certain
that the market will continue to accept these or our other products.

     During fiscal 1999 and 2000, we derived 81% and 99% of our revenues from
the sale of air data systems and related products. We expect that revenues from
our air data products will continue to account for a significant portion of our
revenues in the future. Accordingly, our revenues will decrease if such products
do not continue to receive market acceptance or if our existing customers do not
continue to incorporate our products in their retrofitting or manufacturing of
aircraft. In seeking new customers, it may be difficult for our products to
displace competing air data products. Accordingly, we cannot assure you that
potential customers will accept our products or that existing customers will not
abandon them.

We currently have a limited number of customers that use our products, primarily
for government-related contracts, making us reliant on these customers and
government needs.

     A substantial portion of our sales have been, and we expect will continue
to be, to general contractors or government agencies in connection with
government aircraft retrofit or original manufacturing contracts. Sales to
government contractors and government agencies accounted for approximately 75%
and 82% of our revenues during fiscal 1999 and 2000. Accordingly, our revenues
could decline as a result of government spending cuts, general budgetary
constraints and the complex and competitive government procurement processes.

     Additionally, a substantial portion of our revenues have been from a
relatively limited number of government contractors, fleet operators and
aircraft manufacturers. We derived 76% of our revenues during fiscal year 1999
from three customers, The Boeing Company, Rockwell International Corporation and
Northwest Airlines Corporation, and 62% of our revenues during fiscal 2000 from
DME, Inc., Rockwell International Corporation and Lockheed Martin. We expect a
relatively small number of customers to account for a majority of our revenues
for the foreseeable future. As a result of our concentrated customer base, a
loss of one or more of these customers could

                                       18
<PAGE>

adversely affect our revenues and results of operations.

Our business currently derives a large portion of its revenues from one military
retrofit program, the loss of which could reduce our revenues.

     During fiscal 1999 and 2000, 63% and 65% of our revenues resulted from
sales in connection with the United States Air Force KC-135 retrofit program in
which we are a supplier of certain avionics products. Governmental spending cuts
with respect to this program or our loss of business under this program would
reduce our revenues and harm our financial condition.

The growth of our customer base could be limited by delays or difficulties in
completing the development and introduction of our planned products or product
enhancements.

     Recent advances in technology have led to increased demands for new
avionics products. Our product development efforts may not be successful, and we
may encounter significant delays in bringing our products to market. If our
product development efforts are not successful or are significantly delayed and
our customers decide to purchase competing products, our business may be harmed
as a result of decreased sales and lost market share.

If we fail to enhance existing products or to develop and achieve market
acceptance for flat panel displays and other new products that meet customer
requirements, our business may not grow.

     Although a substantial majority of our revenues has come from sales of air
data systems and related products, we expect to spend a large portion of our
research and development efforts in developing and marketing our CIP and
complementary products. Our ability to grow and diversify our operations through
the introduction and sale of new products, such as flat panel displays, is
dependent upon our success in continuing product development and engineering
activities as well as our sales and marketing efforts and our ability to obtain
requisite approvals to sell such products. Our sales growth will also depend in
part on the market acceptance of and demand for our CIP and future products. We
cannot be certain that we will be able to develop, introduce or market our CIP
or other new products or product enhancements in a timely or cost-effective
manner or that any new products will receive market acceptance or necessary
regulatory approval.

We rely on third party suppliers for the components of our air data systems
products, and any interruption in the supply of these components could hinder
our ability to deliver our products.

     Our manufacturing process consists primarily of assembling components from
third party manufacturers. For fiscal year 2000, our principal suppliers were
Sechan Electronics, Weston, UK, and Polytronix, Inc. These third party
components may not continue to be available to us on commercially reasonable
terms or in a timely fashion. If we are unable to maintain relationships with
key third party suppliers, the development and distribution of our products
could be delayed until equivalent components can be obtained and integrated into
our products. In addition, substitution of certain components from other
manufacturers may require FAA or other approval, which could delay our ability
to ship products.

Our government retrofit projects allow the government agency or government
contractor to terminate or modify their contracts with us.

     Our government retrofit projects are generally pursuant to either a direct
contract with a government agency or a subcontract with the general contractor
to a government agency. Each contract includes various federal regulations that
impose certain requirements on us, including the ability of the government
agency or general contractor to alter the price, quantity or delivery schedule
of our products. In addition, the government agency or general contractor
retains the right to terminate the contract at any time at its convenience. Upon
alteration or termination of these contracts, we would normally be entitled to
an equitable adjustment to the contract price so that we may receive the
purchase price for items we have delivered and reimbursement for allowable costs
we have incurred. Most of our backlog is from government-related contracts.
Accordingly, because these contracts can be terminated, we cannot assure you
that our backlog will result in sales.

                                       19
<PAGE>

We depend on our key personnel to manage our business effectively, and if we are
unable to retain our key employees, our ability to compete could be harmed.

     Our success depends on the efforts, abilities and expertise of our senior
management and other key personnel, including in particular our Chairman and
Chief Executive Officer, Geoffrey Hedrick. We generally do not have employment
agreements with our employees. There can be no assurance that we will be able to
retain such employees, the loss of some of whom could hurt our ability to
execute our business strategy. We intend to continue hiring key management and
sales and marketing personnel. Competition for such personnel is intense, and we
may not be able to attract or retain additional qualified personnel.

If we do not manage our rapid growth, improve existing processes and implement
new systems, procedures and controls, we may use resources inefficiently and our
ability to serve our customers and capitalize on market opportunities may
suffer.

     We expect our rapid growth to continue, causing significant strain on our
operational and administrative resources. We have grown from 72 employees in
1997 to approximately 123 employees as of September 30, 2000, and we expect to
continue hiring additional employees. Our future success will depend in part on
our ability to implement and improve our operational, administrative and
financial systems and controls and to manage, train and expand our employee
base. We cannot assure you that our current and planned personnel levels,
systems, procedures and controls will be adequate to support our future
operations. If inadequate, we may not be able to exploit existing and potential
market opportunities. Any delays or difficulties we encounter could impair our
ability to attract new customers or enhance our relationships with existing
customers.

Our revenue and operating results may vary significantly from quarter to
quarter, which may cause our stock price to decline.

     Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, including:

     . variations in demand for our products;

     . the timing of the introduction of RVSM requirements on various flight
       routes;

     . the capital expenditure budgets of aircraft owners and operators and the
       appropriation cycles of the U.S. government;

     . changes in the use of our products, including non-RVSM air data systems,
       RVSM systems and flat panel displays;

     . delays in introducing or obtaining government approval for new products;

     . new product introductions by competitors;

     . changes in our pricing policies or the pricing policies of our
       competitors; and

     . costs related to possible acquisitions of technologies or businesses.

     We plan to increase our operating expenses to expand our sales and
marketing operations and fund greater levels of product development. As a
result, a delay in generating revenues could cause significant variations in our
operating results from quarter to quarter.

Our competition includes other manufacturers of air data systems and flight
information displays against whom we may not be able to compete successfully.

                                       20
<PAGE>

     The markets for our products are intensely competitive and subject to rapid
technological change. Our competitors include Kollsman, Inc., Honeywell
International Inc., Rockwell International Corporation, Smiths Industries plc
and Meggitt Avionics Inc. Substantially all of our competitors have
significantly greater financial, technical and human resources than we do. In
addition, our competitors have much greater experience in and resources for
marketing their products. As a result, our competitors may be able to respond
more quickly to new or emerging technologies and customer preferences or devote
greater resources to the development, promotion and sale of their products than
we can. Our competitors may also have greater name recognition and more
extensive customer bases that they can use to their benefit. This competition
could result in price reductions, fewer customer orders, reduced gross margins
and loss of market share.

We may not be able to identify or complete acquisitions or we may consummate an
acquisition that adversely affects our operating results.

     One of our strategies is to acquire businesses or technologies that will
complement our existing operations. We have limited experience in acquiring
businesses or technologies. There can be no assurance that we will be able to
acquire or profitably manage acquisitions or successfully integrate them into
our operations. Furthermore, certain risks are inherent in our acquisition
strategy, such as the diversion of management's time and attention and combining
disparate company cultures and facilities. Acquisitions may have an adverse
effect on our operating results, particularly in quarters immediately following
the consummation of such transactions, as we integrate the operations of the
acquired businesses into our operations. Once integrated, acquisitions may not
achieve levels of net sales or profitability comparable to those achieved by our
existing operations or otherwise perform as expected.

Our success depends on our ability to protect our proprietary rights, and there
is a risk of infringement. If we are unable to protect and enforce our
intellectual property rights, we may be unable to compete effectively.

     Our success and ability to compete will depend in part on our ability to
obtain and maintain patent or other protection for our technology and products,
both in the United States and abroad. In addition, we must operate without
infringing the proprietary rights of others.

     We currently hold three U.S. patents and have one U.S. patent application
pending. In addition, we have five international patent applications pending. We
cannot be certain that patents will issue on any of our present or future
applications. In addition, our existing patents or any future patents may not
adequately protect our technology if they are not broad enough, are successfully
challenged or other entities are able to develop competing methods without
violating our patents. If we are not successful in protecting our intellectual
property, competitors could begin to offer products which incorporate our
technology. Patent protection involves complex legal and factual questions and,
therefore, is highly uncertain, and litigation relating to intellectual property
is often very time consuming and expensive. If a successful claim of patent
infringement were made against us or we are unable to develop non-infringing
technology or license the infringed or similar technology on a timely and cost-
effective basis, we might not be able to make some of our products.

Risks Related to Our Industry

If we are unable to respond to rapid technological change, our products could
become obsolete and our reputation could suffer.

     Future generations of air data systems, engine and fuel displays and flat
panel displays embodying new technologies or new industry standards could render
our products obsolete. The market for aviation products is subject to rapid
technological change, new product introductions, changes in customer preferences
and evolving industry standards. Our future success will depend on our ability
to:

     . adapt to rapidly changing technologies;

     . adapt our products to evolving industry standards; and

                                       21
<PAGE>

     . develop and introduce a variety of new products and product enhancements
       to address the increasingly sophisticated needs of our customers.

     Our future success will also depend on our developing high quality, cost-
effective products and enhancements to our products that satisfy the needs of
our customers and on our introducing these new technologies to the marketplace
in a timely manner. If we fail to modify or improve our products in response to
evolving industry standards, our products could rapidly become obsolete.

Our products must obtain government approval before we can sell them.

     Our products are currently subject to direct regulation by the U.S. Federal
Aviation Authority (FAA), its European counterpart, the Joint Aviation
Authorities (JAA), and other comparable organizations. Our products and many of
their components must be approved by either the FAA, the JAA or other comparable
organizations before they can be used in an aircraft. To be certified, we must
demonstrate that our products are accurate and able to maintain certain levels
of repeatability over time. Although the certification requirements of the FAA
and the JAA are substantially similar, there is no formal reciprocity between
the two systems. Accordingly, even though some of our products are FAA-approved,
we may need to obtain approval from the JAA or other appropriate organizations
to have them certified for installation outside the United States.

     Significant delay in receiving certification for newly developed products
or enhancements to our products or losing certification for our existing
products could result in lost sales or delays in sales. Furthermore, the
adoption of additional regulations or product standards, as well as changes to
the existing product standards, could require us to change our products and
underlying technology. Some products from which we expect to generate
significant future revenues, including our CIP, have not received regulatory
approval. We cannot assure you that we will receive regulatory approval on a
timely basis or at all. For a more detailed description, see "Business--
Government Regulation."

Because our products utilize sophisticated technology and are deployed in
complex aircraft cockpit environments, problems with these products may arise
that could seriously harm our reputation for quality assurance and our business.

     Our products use complex system designs and components that may contain
errors, omissions or defects, particularly when we incorporate new technologies
into our products or we release new versions or enhancements of our products.
Despite our quality assurance process, errors, omissions or defects could occur
in our current products, in new products or in new versions or enhancements of
existing products after commercial shipment has begun. We may be required to
redesign or recall those products or pay damages. Such an event could result in
the following:

     . the delay or loss of revenues;

     . the cancellation of customer contracts;

     . the diversion of development resources;

     . damage to our reputation;

     . increased service and warranty costs; or

     . litigation costs.

     Although we currently carry product liability insurance, this insurance may
not be adequate to cover our losses in the event of a product liability claim.
Moreover, we may not be able to maintain such insurance in the future.

We face risks associated with international operations that could cause our
financial results to suffer or make

                                       22
<PAGE>

it difficult to market our products outside of the United States.

     We expect to derive an increasing amount of our revenues from sales outside
the United States, particularly in Europe. We have limited experience in
marketing and distributing our products internationally. In addition, there are
certain risks inherent in doing business on an international basis, such as:

     . differing regulatory requirements for products being installed in
       aircraft;

     . legal uncertainty regarding liability;

     . tariffs, trade barriers and other regulatory barriers;

     . political and economic instability;

     . changes in diplomatic and trade relationships;

     . potentially adverse tax consequences;

     . the impact of recessions in economies outside the United States; and

     . variance and unexpected changes in local laws and regulations.

     Currently, all of our international sales are denominated in U.S. dollars.
An increase in the value of the dollar compared to other currencies could make
our products less competitive in foreign markets. In the future, we may conduct
sales in local currencies, exposing us to changes in exchange rates that could
adversely affect our results of operations.

     Item 7A. Quantitative and qualitative disclosures about market risk.

     Most of our cash equivalents and capital lease obligations are at fixed
interest rates and therefore the fair market value of these instruments is
affected by changes in market interest rates. As of September 30, 2000, all of
our cash equivalents matured within 1 day and we had the ability to immediately
liquidate our investments. Therefore, we believe that we are exposed to
immaterial levels of market risk.

     Item 8. Financial statements and supplementary data.

     The financial statements of Innovative Solutions and Support, Inc. listed
in the index appearing under Item 14 herein are filed as part of this Report.

                                       23
<PAGE>

                    Innovative Solutions and Support, Inc.

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                     Page
                                                                     ----
<S>                                                                  <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                               25

CONSOLIDATED BALANCE SHEETS                                            26

CONSOLIDATED STATEMENTS OF OPERATIONS                                  27

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY                        28

CONSOLIDATED STATEMENTS OF CASH FLOWS                                  29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                             30
</TABLE>

                                       24
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Innovative Solutions and Support, Inc.:

     We have audited the accompanying consolidated balance sheets of Innovative
Solutions and Support, Inc. (a Pennsylvania corporation) and subsidiaries
as of September 30, 1999 and 2000, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 2000. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, 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,
in all material respects, the financial position of Innovative Solutions and
Support, Inc. and subsidiaries as of September 30, 1999 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2000 in conformity with accounting principles
generally accepted in the United States.

     Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The information included in Schedule II
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

                                             /s/ ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
October 27, 2000


                                       25
<PAGE>

                    INNOVATIVE SOLUTIONS AND SUPPORT, INC.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                   September 30,      September 30,
                                                                   -------------      -------------
                                                                        1999               2000
                                                                        ----               ----
                                     ASSETS
<S>                                                                <C>               <C>
Current Assets:
  Cash and cash equivalents.......................................  $ 4,638,607      $38,657,433
  Cash restricted for capital expenditures (Note 5)...............         ----        4,141,689
  Accounts receivable, less allowance for doubtful accounts:
  1999-$0; 2000 - $75,000.........................................    3,413,771        8,394,304
  Inventories, net................................................    3,496,773        4,265,144
  Deferred taxes..................................................       23,530          464,346
  Prepaid expenses................................................       66,104          136,447
                                                                    -----------      -----------
     Total current assets.........................................   11,638,785       56,059,363
                                                                    -----------      -----------
Property and Equipment:
  Computers and test equipment....................................    1,646,659        2,027,987
  Corporate airplane..............................................         ----        2,989,591
  Furniture and office equipment..................................      341,042          735,262
  Leasehold improvements..........................................       50,205           54,299
                                                                    -----------      -----------
                                                                      2,037,906        5,807,139
  Less--Accumulated depreciation..................................   (1,292,716)      (1,683,973)
                                                                    -----------      -----------
     Net property and equipment...................................      745,190        4,123,166
                                                                    -----------      -----------
Deposits and Other Assets.........................................       24,202          359,986
                                                                    -----------      -----------
Deferred Taxes....................................................      204,012          204,012
                                                                    -----------      -----------
                                                                    $12,612,189      $60,746,527
                                                                    ===========      ===========
                     LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
  Current portion of note payable.................................  $      ----      $   100,000
  Current portion of capitalized lease obligations................       23,831           19,794
  Accounts payable................................................      888,052        1,856,048
  Accrued expenses................................................    1,385,143        2,964,947
  Deferred revenue................................................      784,707          173,975
                                                                    -----------      -----------
     Total current liabilities....................................    3,081,733        5,114,764
                                                                    -----------      -----------
Capitalized Lease Obligations (Note 8)............................       45,764           30,447
                                                                    -----------      -----------
Deferred Revenue..................................................      549,420          543,820
                                                                    -----------      -----------
Long-Term Note Payable (Note 5)...................................         ----        4,235,000
                                                                    -----------      -----------
Commitments and Contingencies (Note 8)
Shareholders' Equity:
  Preferred stock, 10,000,000 shares authorized--
    Class A Convertible stock, $.001 par value;
    200,000 shares authorized, 177,092 and 0 shares issued
    and outstanding at September 30, 1999 and 2000................          177             ----
  Common stock, $.001 par value; 75,000,000 shares authorized,
    6,766,213 and 12,593,503 shares issued and outstanding at
    September 30, 1999 and 2000, respectively.....................        6,766           12,594
  Additional paid-in capital......................................    8,749,376       43,881,392
  Retained earnings...............................................      178,953        6,928,510
                                                                    -----------      -----------
     Total shareholders' equity...................................    8,935,272       50,822,496
                                                                    -----------      -----------
                                                                    $12,612,189      $60,746,527
                                                                    ===========      ===========
</TABLE>

The accompanying notes are an integral part of these statements.

                                       26
<PAGE>

                    INNOVATIVE SOLUTIONS AND SUPPORT, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                  For the Fiscal Year Ended September 30,
                                               --------------------------------------------
                                                   1998             1999             2000
                                               -----------      -----------      -----------
<S>                                            <C>              <C>              <C>
Revenues (includes related party
  amounts of $2,952,584, $1,226,210 and
  $88,566, respectively)                       $14,682,313      $22,487,882      $33,273,890
Cost of Sales (includes related party
  amounts of $2,744,825, $616,751 and
  $39,444, respectively)....................     8,480,549       10,570,009       14,819,043
                                               -----------      -----------      -----------
     Gross profit...........................     6,201,764       11,917,873       18,454,847
                                               -----------      -----------      -----------
Operating Expenses:
     Research and development...............     1,554,564        1,915,634        3,274,708
     Selling, general and administrative....     2,492,509        3,333,977        4,951,732
                                               -----------      -----------      -----------
                                                 4,047,073        5,249,611        8,226,440
                                               -----------      -----------      -----------
         Operating income...................     2,154,691        6,668,262       10,228,407
Interest Income.............................       (14,092)         (80,376)        (599,277)
Interest Expense............................       238,213           50,239           34,722
                                               -----------      -----------      -----------
     Income before income taxes.............     1,930,570        6,698,399       10,792,962
     Income tax (expense) benefit, net
       (Note 4).............................     2,013,802       (2,517,764)      (4,043,405)
                                               -----------      -----------      -----------
Net Income..................................   $ 3,944,372      $ 4,180,635      $ 6,749,557
                                               ===========      ===========      ===========
Net Income Per Common Share:
     Basic..................................   $      0.59      $      0.62      $      0.86
     Diluted................................   $      0.46      $      0.45      $      0.66
Weighted Average Shares Outstanding:
     Basic..................................     6,670,134        6,746,976        7,893,630
     Diluted................................     8,611,487        9,204,344       10,231,931
</TABLE>




The accompanying notes are an integral part of these statements.

                                       27
<PAGE>

                     INNOVATIVE SOLUTIONS AND SUPPORT, INC.
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                    Retained
                                                                                   Additional       Earnings
                                                            Preferred    Common      Paid-in      (Accumulated
                                                              Stock      Stock       Capital        Deficit)           Total
                                                            ----------  --------  -------------  ---------------  ---------------
<S>                                                         <C>         <C>       <C>            <C>              <C>
BALANCE, SEPTEMBER 30, 1997  ...........................          177      6,613     8,307,529       (7,946,054)          368,265
  Issuance of stock to directors  ......................           --        115       251,885               --           252,000
  Net income  ..........................................           --         --            --        3,944,372         3,944,372
                                                                -----    -------   -----------      -----------       -----------
BALANCE, SEPTEMBER 30, 1998  ...........................          177      6,728     8,559,414       (4,001,682)        4,564,637
  Issuance of stock to directors  ......................           --         38       104,962               --           105,000
  Compensation in connection with issuance
    of Common stock options  ...........................           --         --        85,000               --            85,000
  Net income  ..........................................           --         --            --        4,180,635         4,180,635
                                                                -----    -------   -----------      -----------       -----------
BALANCE, SEPTEMBER 30, 1999  ...........................          177      6,766     8,749,376          178,953         8,935,272
  Exercise of warrants to purchase Common
    stock   ............................................           --        425     1,034,008               --         1,034,433
  Exercise of options to purchase Common
    stock   ............................................           --         11        11,989               --            12,000
  Initial public offering of Common stock, net..........           --      3,450    34,087,784               --        34,091,234
  Conversion of preferred stock to Common
   stock in connection with initial public offering.....         (177)     1,942        (1,765)              --                --
  Net income   .........................................           --         --            --        6,749,557         6,749,557
                                                                -----    -------   -----------      -----------       -----------
BALANCE, SEPTEMBER 30, 2000   ..........................        $  --    $12,594   $43,881,392      $ 6,928,510       $50,822,496
                                                                =====    =======   ===========      ===========       ===========
</TABLE>




The accompanying notes are an integral part of these statements.

                                       28
<PAGE>

                     INNOVATIVE SOLUTIONS AND SUPPORT, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                    For the Fiscal Year Ended
                                                                    -------------------------
                                                                          September 30,
                                                                          -------------
                                                             1998                1999            2000
                                                          -----------         -----------     -----------
<S>                                                       <C>                 <C>             <C>
Cash Flows From Operating Activities:
  Net income..........................................    $ 3,944,372         $ 4,180,635     $ 6,749,557
  Adjustment to reconcile net income to net cash
  provided by (used in) operating activities--
    Imputed interest..................................         91,440                  --              --
    Depreciation and amortization.....................        126,877             264,785         391,257
    Excess and obsolete inventory expense.............        338,221             100,446         318,421
    Bad debt expense..................................             --                  --          75,000
    Deferred taxes....................................     (2,013,802)          1,786,260        (440,816)
    Compensation expense for stock issued to directors        252,000             105,000              --
    Compensation expense for common stock options.....             --              85,000              --
    (Increase) decrease in--
    Accounts receivable...............................     (1,079,782)            161,562      (5,055,533)
    Inventories.......................................     (1,547,719)           (789,134)     (1,086,792)
    Prepaid expenses and other........................        (82,607)             21,706        (406,127)
    Increase (decrease) in--
    Accounts payable..................................        237,048          (1,363,639)        967,996
    Accrued expenses..................................        (17,058)            954,136       1,579,804
    Deferred revenue..................................       (287,502)            454,154        (616,332)
                                                          -----------         -----------     -----------
        Net cash provided by (used in) in operating
        activities....................................        (38,512)          5,960,911       2,476,435
                                                          -----------         -----------     -----------
Cash Flows From Investing Activities:
    Purchases of property and equipment...............       (238,152)           (592,189)     (3,769,233)
    Restricted cash...................................             --                  --      (4,141,689)
                                                          -----------         -----------     -----------
        Net cash provided by (used in) financing
        activities....................................       (238,152)           (592,189)     (7,910,922)
                                                          -----------         -----------     -----------
Cash Flows From Financing Activities:
    Proceeds from issuance of notes...................             --                  --       4,335,000
    Repayments of notes...............................       (587,600)           (250,000)             --
    Borrowings on credit facility.....................      2,270,000                  --              --
    Repayments on credit facility.....................     (1,720,000)           (550,000)             --
    Repayments of capitalized lease obligations.......        (67,867)            (32,265)        (19,354)
    Proceeds from the sale of stock...................             --                  --      34,091,234
    Proceeds from exercise of stock options  .........             --                  --          12,000
    Proceeds from exercise of warrants................             --                  --       1,034,433
                                                          -----------         -----------     -----------
        Net cash provided by (used in) financing
        activities....................................       (105,467)           (832,265)     39,453,313
                                                          -----------         -----------     -----------
Net Increase (Decrease) In Cash And Cash Equivalents..       (382,131)          4,536,457      34,018,826
Cash And Cash Equivalents, Beginning Of Year..........        484,281             102,150       4,638,607
                                                          -----------         -----------     -----------
Cash And Cash Equivalents, End Of Year................    $   102,150         $ 4,638,607     $38,657,433
                                                          ===========         ===========     ===========
</TABLE>




The accompanying notes are an integral part of these statements.

                                       29
<PAGE>

                     INNOVATIVE SOLUTIONS AND SUPPORT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.   Background:

     Innovative Solutions and Support, Inc., (the "Company"), was incorporated
in Pennsylvania on February 12, 1988. The Company's primary business is the
design, manufacture and sale of flight information computers, electronic
displays and advanced monitoring systems to the military and government,
commercial air transport and corporate aviation markets.

     On July 7, 2000, the Company's Board of Directors approved a split of the
Company's common stock on a 1.09624-to-1 basis. All references in the financial
statements to the number of shares of Common stock and to per share amounts have
been retroactively stated to reflect the split. The Company completed an initial
public offering of its common stock in August 2000. Upon the closing of the
offering, the outstanding shares of Series A Preferred stock were converted into
1,941,353 shares of Common stock.

     Future results of operations involve a number of risks and uncertainties.
Factors that could affect future operating results and cause actual results to
vary materially from expectations include, but are not limited to, dependence on
key personnel, dependence on technological developments, dependence on key
customers and product liability.

2.   Summary Of Significant Accounting Policies:

  Use of Estimates

     Preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities, at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

  Cash and Cash Equivalents

     Highly liquid investments purchased with an original maturity of three
months or less are classified as cash equivalents.

  Inventories

     Inventories are stated at the lower of cost (first-in, first-out) or market
as follows:

<TABLE>
<CAPTION>
                                                                             September 30,
                                                                     ------------------------------
                                                                           1999            2000
                                                                        ----------      ----------
<S>                                                                  <C>             <C>
     Raw materials and finished components....................          $2,368,432      $4,142,021
     Work-in-process..........................................           1,806,287       1,119,490
                                                                        ----------      ----------
     Gross inventory..........................................           4,174,719       5,261,511
     Reserve for excess and obsolete..........................            (677,946)       (996,367)
                                                                        ----------      ----------
                                                                        $3,496,773      $4,265,144
                                                                        ==========      ==========
</TABLE>

                                       30
<PAGE>

                    INNOVATIVE SOLUTIONS AND SUPPORT, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 Property and Equipment

     Property and equipment is stated at cost. Depreciation is provided using an
accelerated method over the estimated useful lives of the assets (the lesser of
5 to 7 years or over the lease term). This method is not materially different
from straight-line. Major additions and improvements are capitalized, while
maintenance and repairs that do not improve or extend the life of assets are
charged to expense as incurred.  During the year ended September 30, 2000, the
Company purchased an aircraft for approximately $3.0 million.  This aircraft
will serve as a test bed for the Company's new air data and flat panel products
and also as a sales/marketing tool for demonstrating products to its aviation
customers.

 Revenue Recognition

     Revenues are recognized upon shipment of product, and include $2,952,584,
$1,226,210 and $88,566 from a related-party in 1998, 1999 and 2000, respectively
(see Note 9).

 Deferred Revenue

     The Company has a contract which provided for the customer to make advance
payments of 90% of anticipated deliverables. These amounts are recorded as
deferred revenue when received and recognized as revenue when the related
products are shipped. Additionally, in fiscal 1999, a customer purchased a 10
year warranty. This amount has been recorded as deferred revenue and is being
recognized ratably over the 10 year term of the warranty.

 Warranty

     Estimated cost to repair or replace products under warranty is provided
when revenues from product sales are recorded. In fiscal 1999, the Company began
to offer its customers extended warranties for additional fees. These warranty
sales are recorded as deferred revenue and recorded as revenues over the
warranty period.

 Income Taxes

     Income taxes are recorded in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" (see
Note 4).

 Research and Development

     Research and development expenses incurred for product enhancements and
future product development are charged to expense as incurred.

 Long-Lived Assets

     The Company evaluates the realizability of long-lived assets pursuant to
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of." SFAS No.121 requires that long-lived assets be
reviewed for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If changes
in circumstances indicate that the carrying amount of an asset that an entity
expects to hold and use may not be recoverable, future cash flows expected to
result from the use of the asset and its disposition must be estimated. If the
undiscounted value of the future cash flows is less than the carrying amount of
the asset, impairment is recognized. No material adjustments have been recorded
for the periods presented.

                                       31
<PAGE>

                    INNOVATIVE SOLUTIONS AND SUPPORT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Comprehensive Income

     Pursuant to SFAS No. 130, "Reporting Comprehensive Income," the Company
would be required to classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. There were
no items of other comprehensive income for any of the periods presented.

 Fair Value of Financial Instruments

     The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities and debt
instruments. The carrying values of these assets and liabilities are considered
to be representative of the respective fair values.

 Major Customers and Products

     The Company derived 49%, 76% and 62% of its revenue from three, three and
two customers for the fiscal years ended September 30, 1998, 1999 and 2000,
respectively. Accounts receivable related to these customers total $2,096,468
and $5,082,366 at September 30, 1999 and 2000, respectively.

     In addition, revenues from sales of air data and RVSM systems and
components were 70%, 81% and 99% of revenues for the years ended September 30,
1998, 1999 and 2000, respectively. Revenues from sales of engine and fuel
displays were 30%, 19% and 1% for the years ended September 30, 1998, 1999 and
2000, respectively.

 Major Suppliers

     The Company currently buys several of its components from sole source
suppliers. Although there are a limited number of manufacturers of the
particular components, management believes that other suppliers could provide
similar components on comparable terms. A change in suppliers, however, could
cause a delay in manufacturing and shipments, a possible loss of sales, and
could cause the Company to fail to fulfill certain performance obligations under
current customer contracts, which would adversely affect operating results.

 Concentration of Credit Risk

     Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash balances and accounts receivables.
The Company invests its excess cash with large banks where preservation of
principal is the major consideration. The Company's customer base principally
consists of companies within the aviation industry. The Company does not
currently require collateral from its customers.

 Supplemental Cash Flow Information

     For the years ended September 30, 1998, 1999 and 2000, the Company paid
$146,875, $75,206 and $34,722, respectively, for interest, and $10,028, $155,278
and $3,910,000, respectively, for income taxes.

                                       32
<PAGE>

                    INNOVATIVE SOLUTIONS AND SUPPORT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

3. Net Income Per Share:

     Net income per share is calculated pursuant to SFAS No. 128, "Earnings per
Share" ("EPS"). Basic EPS excludes potentially dilutive securities and is
computed by dividing net income by the weighted-average number of common shares
outstanding for the period. Diluted EPS is computed assuming the conversion or
exercise of all dilutive securities such as preferred stock, options and
warrants.

     Under SFAS No. 128, the Company's granting of certain stock options,
warrants and convertible preferred stock resulted in potential dilution of basic
EPS. The following table summarizes the differences between basic weighted
average shares outstanding and diluted weighted average shares outstanding used
to compute diluted EPS.

<TABLE>
<CAPTION>
                                                              For the Year Ended
                                                              ------------------
                                                                 September 30,
                                                                 -------------
                                                            1998         1999         2000
                                                       ---------    ---------   ----------
<S>                                                   <C>           <C>         <C>
Basic weighted average number of shares
 outstanding.......................................    6,670,134    6,746,976    7,893,630
 Incremental shares from assumed exercise or
  conversion of:
  Stock options....................................           --      168,671      333,196
  Warrants.........................................           --      347,344      371,398
  Preferred stock..................................    1,941,353    1,941,353    1,633,707
                                                       ---------    ---------   ----------
  Diluted weighted average number of shares
    Outstanding....................................    8,611,487    9,204,344   10,231,931
                                                       =========    =========   ==========
</TABLE>

  The number of incremental shares from the assumed exercise of stock options
and warrants is calculated by using the treasury stock method.

4. Income Taxes:

  The Company incurred operating losses and generated a significant accumulated
deficit from inception through the fiscal year ended September 30, 1996. As of
September 30, 1998 the Company had federal net operating loss carryforwards of
approximately $5.8 million. At September 30, 1996 and 1997, a valuation
allowance was recorded for 100% of the associated deferred tax asset as
realization of the tax benefit was not considered more likely than not. At
September 30, 1998, management determined, based upon historical and projected
operating results, that it was more likely than not that the tax benefit would
be realized. Therefore, as of September 30, 1998 the Company eliminated the
valuation reserve and recorded an income tax benefit and a corresponding
deferred tax asset of $2.0 million, relating to the remaining cumulative net
operating loss of $5.8 million. The Company utilized the entire remaining
cumulative net operating loss in fiscal 1999.

                                       33
<PAGE>

                    INNOVATIVE SOLUTIONS AND SUPPORT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     The deferred tax effect of temporary differences giving rise to the
Company's deferred tax assets consists of the following components:

                                                 September 30, September 30,
                                                 -----------   -----------
                                                     1999          2000
                                                     ----          ----

     Deferred tax assets--
          Deferred revenue...................       $227,542      $227,542
          Reserves and accruals..............             --       440,816
                                                    --------      --------
     Deferred tax asset......................       $227,542      $668,358
                                                    ========      ========

     Payments received for warranties are recorded as taxable income in the year
received and, therefore, generate deferred tax assets.

     The components of income taxes were as follows:

<TABLE>
<CAPTION>
                                                  For the Year Ended September 30,
                                             -------------------------------------------
                                                  1998             1999          2000
                                                  ----             ----          ----
     <S>                                    <C>                 <C>             <C>
     Current Provision:
          Federal......................      $   656,394       $  534,497    $4,064,517
          State........................          115,834          197,007       419,704
                                             -----------       ----------    ----------
                                                 772,228          731,504     4,484,221
                                             -----------       ----------    ----------
  Deferred Provision (Benefit):
          Federal......................       (2,529,362)       1,780,359      (399,041)
          State........................         (256,668)           5,901       (41,775)
                                             -----------       ----------    ----------
                                              (2,786,030)       1,786,260      (440,816)
                                             -----------       ----------    ----------
                                             $(2,013,802)      $2,517,764    $4,043,405
                                             ===========       ==========    ==========
</TABLE>

     The reconciliation of the statutory federal rate to the Company's effective
income tax expense (benefit) rate is as follows:

<TABLE>
<CAPTION>
                                                                 For the Year Ended
                                                          --------------------------------
                                                                      September 30,
                                                                      -------------
                                                              1998        1999       2000
                                                              ----        ----       ----
<S>                                                       <C>             <C>        <C>
Federal statutory tax rate............................        34.0%       34.0%      34.0%
State income taxes, net of federal benefit............         6.0         3.6        2.6
Other.................................................          --          --        0.9
Benefit of net operating loss carryforward............       (40.0)         --         --
Reversal of deferred tax asset valuation reserve......      (104.3)         --         --
                                                           -------        ----       ----
                                                           (104.3)%       37.6%      37.5%
                                                           =======        ====       ====
</TABLE>

5. Notes Payable:

     The Company had $837,600 of subordinated notes bearing annual interest at
10% collateralized by all of the Company's tangible and intangible assets. In
fiscal 1998, $587,600 of these notes was repaid and the remaining $250,000 was
repaid during fiscal 1999.

  Warrants to purchase 734,570 shares of Common stock at $2.19 per share
expiring in June 2004 were issued to the noteholders in conjunction with the
issuance of the notes. The subordinated notes were recorded net of $125,000 of

                                       34
<PAGE>

                    INNOVATIVE SOLUTIONS AND SUPPORT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

fair value assigned to the warrants. The warrants were valued using the Black-
Scholes pricing model with the following assumptions: risk-free interest rate of
6.50%; an expected life of seven years; dividend yield of zero; and a volatility
of 30%. The notes were amortized to their face value over one year, with $91,440
and $33,560 of amortization included in interest expense for the years ended
September 30, 1998 and 1997, respectively (see Note 7).

     The Company entered into a $4,335,000 loan agreement dated August 1, 2000
with the Chester County, PA Industrial Development Authority.  The purpose of
the loan is to fund the construction of the Company's new office and
manufacturing facility.  The loan matures in 2015 and carries an interest rate
set by the remarketing agent  that is consistent with 30-day tax-exempt
commercial paper.  The future maturities of this note payable are as follows as
of September 30, 2000:  2001-$100,000; 2002 - $150,000; 2003 - $200,000; 2004 -
$250,000; 2005 - $250,000; thereafter - $3,385,000.  The loan agreement requires
the Company to maintain certain financial covenants including a ratio of
liabilities to (EBITDA) earnings before interest, taxes and depreciation and
amortization, fixed charge ratio and a minimum tangible net worth.  The Company
was in compliance with the covenants of the loan agreement as of September 30,
2000.  The proceeds from this loan are considered restricted cash.

6. Credit Facility:

     The Company had a revolving credit and equipment line with a bank ("Credit
Facility") which allowed the Company to borrow up to $1,000,000, increasing to
$2,000,000 under certain circumstances, with interest at the higher of the prime
rate plus 1.5% or the bank's cost of funds, as defined, plus 2.5%. All
borrowings under the Credit Facility were repaid in April 1999. The original
expiration date was July 1999, and was temporarily extended to August 2000. The
Company allowed this credit facility to expire in August 2000.

7. Shareholders' Equity:

 Preferred Stock

     Holders of Class A Convertible Preferred stock are entitled to certain
rights shared with Common stock holders, as defined, including equal voting
rights and an equal share of dividends, if any. In addition, Class A Convertible
Preferred stock carries a liquidation right of $24 per share in the event of any
liquidation, as defined. The Class A Convertible Preferred stock is convertible
into Common stock at the option of the holder, at the rate of 10.9624 shares of
Common stock for each share of Class A Convertible Preferred stock, subject to
adjustment, as defined. The Preferred stock was automatically converted into
Common stock upon the closing of the Company's initial public offering on August
4, 2000.

 Common Stock

     The Company issued 115,105 and 38,368 shares of Common stock to non-
employee directors, with fair values of $252,000 and $105,000, for the years
ended September 30, 1998 and 1999, respectively. The fair value of the Common
stock was charged to selling, general and administrative expense on the
accompanying statements of operations on the date of issue.

 Stock Options

     The Company's 1988 Stock Incentive Plan provides for the grant of incentive
stock options to employees. The Company's 1998 Stock Option Plan provides for
the grant of incentive and nonqualified stock options to employees, officers,
directors and independent contractors and consultants.  Through September 30,
2000, no stock options have been granted to independent contractors or
consultants under this plan.

                                       35
<PAGE>

                    INNOVATIVE SOLUTIONS AND SUPPORT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Incentive stock options granted under the 1988 Stock Incentive Plan and the 1998
Stock Option Plan (the "Plans") must be at least 100% of the fair value of the
Common stock on the date of grant. Nonqualified stock options granted under the
1998 Plan may be less than, equal to or greater than the fair value of the
Common stock on the date of grant. Required disclosure information regarding the
Plans has been combined due to the similarities in the Plans. The Company has
reserved 1,360,228 shares of its Common stock for awards under the Plans.

     The Company applies Accounting Principal Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and the related interpretations in
accounting for options issued to employees under the Plans. Under APB No. 25,
compensation cost related to stock options granted to employees is computed
based on the intrinsic value of the stock option at the date of grant, which
represents the difference between the exercise price and the fair value of the
Common stock. During the year ended September 30, 1999, the Company granted
performance based stock options to an employee. The Company recorded $85,000 in
compensation expense related to these options as the applicable performance
measures that determined vesting had been achieved.

     Under SFAS No. 123, "Accounting for Stock-Based Compensation,"
compensation cost related to stock options granted to employees is computed
based on the value of the stock option at the date of grant using an option
valuation methodology, typically the Black-Scholes pricing model. SFAS No. 123
can be applied either by recording the fair value of the options or by
continuing to record the APB No. 25 value and disclosing the SFAS No. 123 impact
on a pro-forma basis. The Company has elected the disclosure method of SFAS No.
123. Had the Company recognized compensation cost for its stock option plans
consistent with the provisions of SFAS 123, the Company's pro forma net income
for fiscal 1998, 1999 and 2000 would have been as follows:

                                             Year Ended September 30,
                                        -------------------------------------
                                           1998         1999          2000
                                        ----------   ----------    ----------
          Net income:
             As reported........        $3,944,372   $4,180,635    $6,749,557
             Pro forma..........         3,923,963    4,114,312     6,338,894
          Basic EPS:
             As reported........        $     0.59   $     0.62    $     0.86
             Pro forma..........              0.59         0.61          0.80
          Diluted EPS:
             As reported........        $     0.46   $     0.45    $     0.66
             Pro forma..........              0.46         0.45          0.62


     The weighted average fair value of the stock options granted during the
years ended September 30, 1998, 1999 and 2000 were $1.28, $2.21 and $10.09,
respectively. The fair value of each option grant is estimated on the grant date
using the Black-Scholes option pricing model with the following assumptions:

<TABLE>
<CAPTION>
                                                                 Year Ended
                                                                 ----------
                                                               September 30,
                                                               -------------
                                                           1998      1999      2000
                                                           ----      ----      ----
          <S>                                              <C>       <C>       <C>
          Expected dividend rate.......................      --        --        --
          Expected volatility..........................      70%       70%      126%
          Weighted average risk-free interest rate.....     5.7%      5.7%      5.9%
          Expected lives (years).......................       5         5         5
</TABLE>

                                       36
<PAGE>

               INNOVATIVE SOLUTIONS AND SUPPORT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  Information relative to the Plans is as follows:

<TABLE>
<CAPTION>
                                                                   Range of         Weighted
                                                                  ---------         --------
                                                                   Exercise          Average
                                                                  ---------         --------
                                                     Options       Prices       Exercise Price
                                                   ------------   -------       --------------
<S>                                                <C>           <C>            <C>
  Outstanding September 30, 1997..............         282,281      0.91- 2.74           2.12
     Granted..................................         135,386      2.19- 3.28           2.70
     Terminated...............................        (109,624)     2.19- 2.74           2.24
                                                      --------    ------------         ------
  Outstanding September 30, 1998..............         308,043      0.91- 3.28           2.33
     Granted..................................         356,278      3.28- 6.39           3.52
     Terminated...............................         (54,812)           2.19           2.19
                                                      --------    ------------         ------
  Outstanding September 30, 1999..............         609,509      0.91- 6.39           3.28
     Granted..................................         359,323     10.03-17.13          11.28
     Exercised................................         (10,962)           1.09           1.09
     Terminated...............................         (82,218)     0.91-10.03           6.20
                                                      --------    ------------         ------
  Outstanding September 30, 2000..............         875,652    $ 2.19-17.13         $ 6.17
                                                      ========    ============         ======

  Options exerciseable at September 30, 2000.          251,034    $ 2.19-11.86         $ 3.19
                                                      ========    ============         ======
</TABLE>

     Options may no longer be granted under the 1988 Stock Incentive Plan. At
September 30, 2000, 167,763 shares were available for grant under the 1998 stock
option plan.

     The following table summarizes information concerning outstanding and
exerciseable options at September 30, 2000:

<TABLE>
<CAPTION>
  /--------------------------- OPTIONS OUTSTANDING--------------------------/      /------OPTIONS EXERCISEABLE------/
  Range of         Outstanding         Weighted Average
  Exercise            As of               Remaining         Weighted Average           As of           Weighted Average
   Prices       September 30, 2000     Contractual Life      Exercise Price      September 30, 2000     Exercise Price
   ------       ------------------     ----------------      --------------      ------------------     --------------
<S>            <C>                   <C>                   <C>                  <C>                  <C>
$0.0-5.00                532,773                   8.0               $ 3.03              240,072                $ 2.93
$5.01-7.50                27,406                   8.7               $ 6.39                5,481                $ 6.39
$7.51-10.00                    0                     0               $  0.0                    0                $  0.0
$10.01-12.50             314,473                   9.6               $11.44                5,481                $11.86
$12.51-15.00                   0                   0.0               $  0.0                    0                $  0.0
$15.01-17.50               1,000                  10.0               $17.13                    0                $  0.0
                         -------                  ----               ------              -------                ------
                         875,652                   8.6               $ 6.17              251,034                $ 3.20
                         -------                  ----               ------              -------                ------
</TABLE>


 Warrants

     In connection with the issuance of subordinated notes, the Company issued
warrants to purchase 734,570 shares of Common stock at an exercise price of
$2.19 per share (see Note 5). During the year ended September 30, 2000, warrants
to purchase 381,141 shares of Common stock were exercised for an aggregate
purchase price of $834,433. The remaining warrants are fully vested and
exercisable through June 2004.

     In addition, during the year ended September 30, 2000, warrants to purchase
43,850 shares of Common stock were exercised for an aggregate purchase price of
$200,000, or approximately $4.56 per share.

                                       37
<PAGE>

                     INNOVATIVE SOLUTIONS AND SUPPORT, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (Continued)


     In addition, there are outstanding warrants to purchase 11,006 shares of
Common stock at an exercise price of $4.56 per share. The warrants are fully
vested and are exercisable through August 2, 2004.

8. Commitments and Contingencies:

 Capital Leases

     The Company leases certain equipment under capital leases, with terms
ranging from three to five years. Implicit interest rates under these leases
range from 2% to 13%. The capitalized cost of $94,291 and $94,291 and the
related accumulated amortization of $36,771 and $68,768 has been included in
property and equipment at September 30, 1999 and 2000, respectively.

Future minimum payments of capital leases at September 30, 2000 are as follows:


      Fiscal 2001..............................................    $ 20,325
      Fiscal 2002..............................................      19,328
      Fiscal 2003..............................................      16,906
      Fiscal 2004..............................................           0
                                                                   --------
      Total minimum lease payments.............................      56,559
      Less--amount representing interest.......................      (6,318)
                                                                   --------
      Present value of future minimum lease payments...........      50,241
      Less--Current portion....................................     (19,794)
                                                                   --------
                                                                   $ 30,447
                                                                   ========
 Operating Lease

     Rent expense under operating leases totaled $226,014, $427,410 and $429,355
for the years ended September 30, 1998, 1999 and 2000, respectively. Future
minimum payments related to all noncancelable leases are $433,124 in fiscal
2001.

 Product Liability

     The Company currently has product liability insurance to $20,000,000, which
management believes is adequate to cover potential liabilities that may arise.

 Land Purchase

     During the year ended September 30, 2000, the Company committed to purchase
a tract of land for $1.0 million. The Company intends to construct a new
manufacturing and office facility on the land. Included in the accompanying
balance sheet as of September 30, 2000, is a deposit of $100,000 toward the
purchase of the land. The Company expects to spend a total of $5.0 million to
$6.0 million on the construction through fiscal 2001.

                                       38
<PAGE>

                    INNOVATIVE SOLUTIONS AND SUPPORT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Employment Agreement

  In May 1999, the Company entered into an employment agreement with an employee
for an annual salary of $225,000 expiring in May 2002.

 Legal Proceedings

  From time to time, the Company is subject to various legal proceedings in the
ordinary course of business. Management does not believe that any of the current
legal proceedings will have a material adverse effect on the Company's
operations or financial condition.

  9.   Related-party Transactions:

  The Company incurred legal fees of $82,231, $76,924 and $42,364 with a law
firm which is a shareholder of the Company for the years ended September 30,
1998, 1999 and 2000, respectively. Management believes the fees paid were on an
arm's length basis and were consistent with the fees paid prior to the law
firm's investment in the Company.

  The Company derived revenues of approximately $2,952,584, $1,226,210 and
$88,566 for the years ended September 30, 1998, 1999 and 2000, respectively,
from a company which is a shareholder and purchased $2,744,825, $616,751 and
$39,444 of component parts used in the manufacturing process from this related
party for the years ended September 30, 1998, 1999 and 2000, respectively.


  10. Initial Public Offering

      In August 2000, the Company completed its initial public offering of
  3,450,000 shares of Common Stock at a price of $11.00 per share. The Company
  received net proceeds of approximately $34 million from the offering. Upon the
  closing of the offering, the outstanding shares of Preferred stock were
  converted into 1,941,353 shares of common stock.

Item 9.  Changes in and disagreements with accountants on accounting and
financial disclosure.

     None


Part III

Item 10. Directors and executive officers of the registrant.

     This information (other than the information relating to executive officers
included in Part I Item A.) will be included in our Proxy Statement relating to
our Annual Meeting of Shareholders, which will be filed within 120 days after
the close of our fiscal year covered by this Report, and is hereby incorporated
by reference to such Proxy Statement.

                                       39
<PAGE>

Item 11.  Executive compensation.

     This information will be included in our Proxy Statement relating to our
Annual Meeting of Shareholders, which will be filed within 120 days after the
close of our fiscal year covered by this Report, and is hereby incorporated by
reference to such Proxy Statement.

Item 12.  Security Ownership of Certain Beneficial owners and management.

     This information will be included in our Proxy Statement relating to our
Annual Meeting of Shareholders, which will be filed within 120 days after the
close of our fiscal year covered by this Report, and is hereby incorporated by
reference to such Proxy Statement.

Item 13.  Certain relationships and related transactions.

     This information will be included in our Proxy Statement relating to our
Annual Meeting of Shareholders, which will be filed within 120 days after the
close of our fiscal year covered by this Report, and is hereby incorporated by
reference to such Proxy Statement.



Part IV

Item 14.  Exhibits, financial statement schedules and reports on Form 8-K.

    (a)  The following documents are filed as part of this report:

         (1)  Financial Statements
                    See index to Financial Statements at Item 8 on page 24 of
              this report.
         (2)  Financial Statement Schedules.

                    The following financial statement schedules of IS&S are
                    filed as part of this report and should be read in
                    conjunction with the financial statements.

                       Schedule

                       II - Valuation and qualifying accounts

                            Schedules not listed above have been omitted because
                       they are not applicable or are not required or the
                       information required to be set forth therein is included
                       in the financial statements or notes thereto.

                                       40
<PAGE>

(2)  The following exhibits are filed as part of, or incorporated by reference
     into this report:

<TABLE>
<CAPTION>
     Exhibit
     Number  Exhibit Title
     <S>     <C>
     3.1#    Articles of Incorporation of IS&S.
     3.2#    Bylaws of IS&S.
     10.1*#  IS&S 1988 Incentive Stock Option Plan
     10.2*#  IS&S 1998 Stock Option Plan
     10.3*#  Employment Agreement by and between Robert J. Ewy and IS&S dated May 3, 1999.
     10.4*#  Employment Agreement by and between Roger E. Mitchell and IS&S dated July 7, 1998.
     10.5#   Stock Purchase Agreement by and between IS&S and Parker Hannifin Corporation dated July 11, 1991.
     10.6#   Securities Purchase Agreement by and among IS&S , Geoffrey S. M. Hedrick, The P/A Fund and Parker Hannifin Corporation
             dated May 8, 1995.
     10.7#   Form of Warrant Agreement
     10.8    Bond purchase Agreement
     10.9    Reimbursement, credit and Security Agreement
     10.10   Loan Agreement
     10.11   Trust Indenture
     21      Subsidiaries of IS&S.
     27      Financial Data Schedule

     *       Constitutes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form.
     #       Incorporated by reference from the Registrant's Registration Statement on Form S-1 (File No. 333-36584) filed with the
             Commission on May 9, 2000, as amended.
</TABLE>





(b)  Reports on Form 8-K.

          The Company filed a Form 8-K on August 10, 2000 making an Item 5
          disclosure announcing its revenue and net income for the third quarter
          of fiscal 2000, which ended June 30, 2000.

                                       41
<PAGE>

                     Innovative Solutions and Support, Inc.
                Schedule II - Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
                                                             Balance        Charged to                     Balance
                                                           At Beginning      Costs and                      At End
Description                                                 Of Period        Expenses      Deductions     Of Period
- -----------                                                -----------      ----------    ------------   -----------
<S>                                                       <C>               <C>           <C>            <C>
Year ended September 30, 1998
- -------------------------------
Allowance for doubtful accounts                                $      0       $      0             $0      $      0

Inventory reserve                                              $239,279       $338,221             $0      $577,500

Year ended September 30, 1999
- -------------------------------
Allowance for doubtful accounts                                $      0       $      0             $0      $      0

Inventory reserve                                              $577,500       $100,446             $0      $677,946

Year ended September 30, 2000
- -------------------------------
Allowance for doubtful accounts                                $      0       $ 75,000             $0      $ 75,000

Inventory reserve                                              $677,946       $318,421             $0      $996,367
</TABLE>

                                       42
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                        Innovative Solutions and Support, Inc.


                                        By: /s/  Geoffrey S. M. Hedrick
                                            ---------------------------
                                                 Geoffrey S. M. Hedrick
                                                 Chairman of the Board and
                                                 Chief Executive Officer

                                        Dated:  December 18, 2000

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
          Signature                                         Title                        Date
          ---------                                         -----                        ----
<S>                                                <C>                             <C>
/s/ Geoffrey S. M. Hedrick
- --------------------------
Geoffrey  S. M. Hedrick                            Chairman of the Board and       December 18, 2000
(Principal Executive Officer)                      Chief Executive Officer

/s/ James J. Reilly
- -------------------
James J. Reilly                                    Chief Financial Officer         December 18, 2000
(Principal Financial and Accounting  Officer)

/s/ Joel P. Adams
- -----------------
Joel P. Adams                                      Director                        December 18, 2000

/s/ Glen R. Bressner
- --------------------
Glen R. Bressner                                   Director                        December 18, 2000

/s/ Winston J. Churchill
- ------------------------
Winston J. Churchill                               Director                        December 18, 2000

/s/ Benjamin A. Cosgrove
- ------------------------
Benjamin A. Cosgrove                               Director                        December 18, 2000

/s/ Ivan M. Marks
- -----------------
Ivan M. Marks                                      Director                        December 18, 2000

/s/ Robert E. Mittelstaedt, Jr
- ------------------------------
Robert E. Mittelstaedt                             Director                        December 18, 2000
</TABLE>

                                       43
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.8
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>BOND PURCHASE AGREEMENT
<TEXT>

<PAGE>

                                                                    EXHIBIT 10.8

                            BOND PURCHASE AGREEMENT

          BOND PURCHASE AGREEMENT dated August 8, 2000 among CHESTER COUNTY
INDUSTRIAL DEVELOPMENT AUTHORITY (the "Issuer"), INNOVATIVE SOLUTIONS AND
SUPPORT, LLC (the "Borrower") and PNC CAPITAL MARKETS, INC., as Underwriter (the
"Underwriter").

          A.   The Issuer is issuing its Industrial Development Revenue Bonds,
2000 Series A (Innovative Solutions and Support, LLC Project) in the aggregate
principal amount of $4,335,000 (the "Bonds") pursuant to a Trust Indenture dated
as of August 1, 2000 (the "Indenture") between the Issuer and Chase Manhattan
Trust Company, National Association, as Trustee (the "Trustee").

          B.   Pursuant to a Loan Agreement dated as of August 1, 2000 between
the Issuer and the Borrower (the "Loan Agreement"), the proceeds of the Bonds
are being applied to finance the costs of the acquisition, construction and
equipping of an approximately 45,000 square foot manufacturing facility located
at 710 Pennsylvania Drive, Exton, Pennsylvania (the "Project") to be owned by
the Borrower. Under the Loan Agreement, the Borrower is obligated to make loan
payments to the Trustee in amounts and at the times sufficient to pay, when due,
the principal of, premium, if any, on and interest on the Bonds.

          C.   The Bonds will initially be issued in the Weekly Mode and bear
interest at a Weekly Rate as provided in the Indenture (such terms being used
herein as defined in the Indenture). Subject to and upon compliance with the
terms of the Bonds and the Indenture, Bonds may be tendered for purchase upon
demand of the owners thereof. The Bonds will also be subject to mandatory tender
for purchase under certain circumstances as provided in the Indenture. The
Issuer has appointed PNC Capital Markets, Inc. as Remarketing Agent (including
any successor in such capacity, the "Remarketing Agent") under the Indenture for
the purpose of remarketing Bonds which have been optionally tendered for
purchase pursuant to the terms and conditions set forth in the Indenture. In
connection with such appointment, the Borrower and the Remarketing Agent have
entered into a Remarketing Agreement dated as of August 1, 2000 (the
"Remarketing Agreement").

          D.   The Bonds are being issued pursuant to one or more resolutions
adopted by the Issuer on April 19, 2000 (the "Resolution") and are secured by an
assignment by the Issuer under the Indenture of (i) the Issuer's rights under
the Loan Agreement to receive loan payments corresponding in time and amounts to
the payments of principal of, premium, if any, on and interest on the Bonds and
(ii) the Issuer's rights to all moneys and investments held from time to time in
the Project Fund and the Bond Fund created under the Indenture.

          E.   In order to facilitate the sale of the Bonds, the Borrower will
cause to be delivered to the Trustee an Irrevocable Letter of Credit (the
"Letter of Credit") issued by PNC
<PAGE>

Bank, National Association (as issuer of the Letter of Credit, the "Bank") under
which the Trustee will be authorized to draw up to (1) an amount equal to the
principal of the Bonds outstanding (i) to pay the principal of the Bonds when
due at maturity or upon redemption or acceleration or (ii) to pay the portion of
the purchase price of Bonds tendered for purchase pursuant to the Indenture
corresponding to the principal of such Bonds to the extent remarketing proceeds
are not available for such purpose, plus (2) an amount equal to 50 days accrued
interest on the Bonds at a maximum rate of 12% per annum (i) to pay interest on
the Bonds when due or (ii) to pay the portion of the purchase price of Bonds
tendered for purchase pursuant to the Indenture corresponding to the accrued
interest, if any, on such Bonds to the extent remarketing proceeds are not
available for such purpose.

          F.   To provide for the execution of the Letter of Credit, the
Borrower will enter into a Reimbursement, Credit and Security Agreement dated as
of August 1, 2000 (the "Reimbursement Agreement") with the Bank pursuant to
which the Borrower will be obligated to reimburse the Bank, with interest for
all draws under the Letter of Credit. The Borrower's obligations to the Bank
under the Reimbursement Agreement will be secured by (i) a mortgage and security
agreement delivered by the Borrower to the Bank covering the Project, (ii) an
assignment of construction and development documents by the Borrower to the Bank
with respect to the Project, (iii) a security agreement among the Borrower,
certain affiliates of the Borrower and the Bank creating a first lien security
interest in the equipment included in the Project and other personal property of
the Borrower and such affiliates, and (iv) guaranties delivered by certain
affiliates of the Borrower to the Bank.

          G.   The Bonds are limited obligations of the Issuer and are payable
solely from payments made by the Borrower under the Loan Agreement, from
drawings under the Letter of Credit and from other moneys available for such
purpose under and in accordance with the Indenture. Neither the general credit
nor the taxing power of the Issuer, the Commonwealth of Pennsylvania, the County
of Chester or any other political subdivision thereof is pledged to the payment
of the Bonds, and the Bonds shall not be or be deemed to be a general obligation
of the Issuer or an obligation of the Commonwealth of Pennsylvania, the County
of Chester or any other political subdivision thereof. The Issuer has no taxing
power.

          H.   It is intended that the Bonds will constitute a qualified small
issue within the meaning of Section 144(a) of the Internal Revenue Code of 1986,
as amended, and the rules and regulations thereunder (the "Code") so that
interest on the Bonds will be excludable from gross income for purposes of
federal income tax, and that in reliance thereon and on the support of the Bonds
by the Letter of Credit issued by the Bank, the Underwriter may arrange for the
sale of the Bonds without registration under the Securities Act of 1933, as
amended (the "Securities Act").

          I.   The Borrower acknowledges that the Issuer is selling the Bonds
and the Underwriter is purchasing the Bonds in reliance on the representations,
covenants and

                                       2
<PAGE>

indemnities set forth herein. A Preliminary Official Statement dated July 31,
2000 (including the Appendices thereto, the "Preliminary Official Statement")
has been prepared for use in connection with the offer and sale of the Bonds and
has been delivered to the parties to this Bond Purchase Agreement. The
Preliminary Official Statement as it may be amended or supplemented as of the
Closing Date (hereinafter defined) is herein referred to as the "Final Official
Statement", and the Preliminary Official Statement and the Final Official
Statement are herein referred to collectively as the "Official Statement".

          J.   The professional advisors referred to in this Bond Purchase
Agreement are:

          Bond Counsel: Stevens & Lee, a Professional Corporation
                              Reading, Pennsylvania

          Issuer Counsel:     Conrad O'Brien Gellman & Rohn, P.C.
                              West Chester, Pennsylvania

          Borrower Counsel:   Stevens & Lee, a Professional Corporation
                              Reading, Pennsylvania

          Bank Counsel: Ballard Spahr Andrews & Ingersoll, LLP
                              Philadelphia, Pennsylvania

          Underwriter's       Ballard Spahr Andrews & Ingersoll, LLP
          Counsel:            Philadelphia, Pennsylvania

          K.   The Issuer and the Borrower desire the Underwriter to arrange for
the sale of the Bonds to the Purchasers or other initial purchasers, according
to the terms and subject to the conditions set forth or described herein.

          NOW, THEREFORE, in consideration of the covenants herein contained and
intending to be legally bound, the Issuer, the Borrower and the Underwriter
hereby agree as follows:

          Section 1. Definitions. Capitalized terms used and defined herein
                     -----------
shall have the meanings set forth herein. Capitalized terms used and not defined
herein shall have the respective meanings ascribed to such terms in the
Indenture, unless different meanings clearly appear from the context.

          Section 2. Offer to Purchase; Purchase Price; Closing. The Underwriter
                     ------------------------------------------
hereby offers to enter into this Bond Purchase Agreement with the Issuer and the
Borrower, for the purchase by the Underwriter and the sale by the Issuer of the
Bonds. This offer is made subject

                                       3
<PAGE>

to acceptance hereof by the Issuer and the Borrower on the date hereof. Upon
such acceptance, as evidenced by the signatures of the Chairman or Vice Chairman
of the Issuer and the duly authorized representative of the Borrower in the
spaces provided below, this Bond Purchase Agreement shall be in full force and
effect in accordance with its terms and shall be binding upon the Issuer, the
Borrower and the Underwriter.

          Upon the terms and conditions and upon the basis of the
representations and warranties herein set forth, the Underwriter hereby agrees
to purchase from the Issuer, and the Issuer hereby agrees to sell to the
Underwriter all (but not less than all) of the Bonds at a purchase price equal
to 98.75% of the principal amount thereof. In addition, the Borrower shall pay
to the Underwriter on the date of Closing (as defined below) an amount equal to
any and all expenses (including without limitation fees and expenses of counsel)
of the Underwriter. The Bonds shall be dated the date of Closing (hereinafter
defined), shall mature on such date (subject to prior redemption as described in
the Indenture), shall bear interest at such rate, and shall be payable at the
times and in the manner, and shall otherwise have the terms and provisions, set
forth in the Official Statement.

          The Underwriter intends to offer the Bonds at a price not in excess of
the initial offering price or prices set forth in the Official Statement;
provided, however, that the Underwriter may change such initial offering price
or prices as it deems necessary in connection with the offering of the Bonds
without any requirement of prior notice, and may offer and sell the Bonds to
certain institutions at prices lower than those stated in the Official
Statement.

          Section 3.  Delivery of and Payment for the Bonds.
                      -------------------------------------

               (a)  At or prior to 11:00 a.m., prevailing time in Philadelphia,
Pennsylvania, on August 8, 2000, or at such other time or date as shall have
been mutually agreed upon by the Issuer, the Borrower and the Underwriter, the
Issuer will deliver or cause to be delivered to the Underwriter the Bonds, in
definitive form, duly executed and authenticated by the Trustee, together with
the other documents hereinafter mentioned; and, subject to the conditions
contained herein, the Underwriter will accept such delivery and pay the purchase
price of the Bonds, plus accrued interest, if any, in immediately available
funds, by wire transfer, payable to the order of the Trustee.

               (b)  Delivery of the definitive Bonds as aforesaid shall be made
at the offices of The Depository Trust Company in New York, New York or at such
other location as may be designated by the Underwriter at least two business
days prior to Closing. Payment for the Bonds shall be made at the offices of the
Trustee in Philadelphia, Pennsylvania, and delivery of the other documents shall
be made at the offices of Stevens & Lee, Wayne, Pennsylvania, or at such other
locations as may be agreed upon by the parties. Such payment and the related
delivery is herein called the "Closing." The Bonds will be delivered as fully-
registered bonds, bearing proper CUSIP numbers and registered in the name of
Cede & Co., as nominee of The

                                       4
<PAGE>

Depository Trust Company, New York, New York, which will act as securities
depository for the Bonds.

               (c)  After execution by the Issuer and authentication by the
Trustee, the Bonds shall be held in safe custody by the Trustee or any
authorized agent for the Trustee. The Trustee shall release or authorize the
release of the Bonds from safe custody at the Closing upon receipt of payment
for the Bonds as aforesaid.

          Section 4. Representations  of Issuer. In consideration of the
                     -------------------------
foregoing and to induce the Underwriter to purchase the Bonds, the Issuer hereby
represents to the Underwriter and for the benefit of the Purchasers that:

               (a)  The Issuer is a public instrumentality and body corporate
     and politic of the Commonwealth of Pennsylvania. Under the Pennsylvania
     Economic Development Financing Law, as amended (the "Act") and by the
     Resolution, the Issuer has full power and authority to undertake the
     financing of the Project, to execute, deliver and perform its obligations
     under the Indenture, the Loan Agreement and this Bond Purchase Agreement,
     and to issue and deliver the Bonds.

               (b)  The Issuer has duly adopted the Resolution and authorized
     the Indenture, the Loan Agreement and this Bond Purchase Agreement, the
     issuance and sale of the Bonds, and all actions necessary or appropriate to
     carry out the same, and each such document, when executed and delivered by
     the Issuer, will constitute the legal, valid and binding obligation of the
     Issuer, enforceable against the Issuer in accordance with its terms, except
     to the extent that the enforceability thereof may be limited by bankruptcy,
     insolvency or other similar laws or equitable principles affecting the
     enforcement of creditors' rights generally.

               (c)  The execution, delivery and performance by the Issuer of the
     Indenture, the Loan Agreement and this Bond Purchase Agreement, and the
     issuance and delivery of the Bonds, do not and will not violate or conflict
     with any provision of the Constitution of the Commonwealth of Pennsylvania
     or any applicable statute (including the Act), or any rule, order,
     regulation, judgment or decree of any court, agency or other governmental
     or administrative board or body to which the Issuer is subject, or conflict
     with or constitute a breach of or a default under any indenture, mortgage,
     deed of trust, agreement or other instrument to which the Issuer is a party
     or by which it is bound.

               (d)  No additional or further approval, consent or authorization
     of any governmental or public body or agency not already obtained prior to
     the issuance of the Bonds is required to be obtained by the Issuer in
     connection with the entering into and performing of its obligations under
     the Indenture, the Loan Agreement and this Bond Purchase Agreement and the
     issuance and delivery of the Bonds.

                                       5
<PAGE>

               (e)  There is no action, suit, proceeding, investigation or
     inquiry by or before any court, agency or other governmental or
     administrative board or body pending or, to the knowledge of the Issuer,
     threatened challenging or contesting the powers of the Issuer, the
     authorization of any members, directors, commissioners or officers of the
     Issuer to act in their respective capacities, the issuance of the Bonds,
     the validity or enforceability of the Indenture, the Loan Agreement or this
     Bond Purchase Agreement, or the performance by the Issuer of any of its
     obligations thereunder.

               (f)  The information under the caption "The Issuer" in the
     Official Statement is correct and complete, and the Issuer has approved and
     authorized the use of the Official Statement by the Underwriter.

The foregoing representations shall survive Closing.

          Section 5. Representations of Borrower. In consideration of the
                     ---------------------------
foregoing, to induce the Issuer to issue the Bonds and to induce the Underwriter
to purchase the Bonds, the Borrower hereby represents and warrants to the Issuer
and the Underwriter that:

               (a)  The Borrower is a limited liability company duly organized
     and validly existing under the laws of the Commonwealth of Pennsylvania,
     with full power and authority to undertake the financing of the Project as
     contemplated by this Bond Purchase Agreement and the Official Statement, to
     execute and deliver the Loan Agreement, the Reimbursement Agreement, the
     Remarketing Agreement, this Bond Purchase Agreement and all other documents
     delivered by the Borrower in connection with the financing of the Project
     and to perform its obligations thereunder.

               (b)  The execution and delivery by the Borrower of the Loan
     Agreement, the Reimbursement Agreement, the Remarketing Agreement, this
     Bond Purchase Agreement and all other documents delivered by the Borrower
     in connection with the financing of the Project, have been duly authorized
     by the Borrower, and each such document, when executed and delivered by the
     Borrower, will constitute the legal, valid and binding obligation of the
     Borrower, enforceable against the Borrower in accordance with its terms,
     except to the extent that the enforceability thereof may be limited by
     bankruptcy, insolvency or other similar laws or equitable principles
     affecting the enforcement of creditors' rights generally and rights to
     indemnity may be limited by applicable law. No approval or other action by
     any governmental or administrative board or body is required in connection
     with the execution, delivery or performance by the Borrower of the same,
     except such as have been obtained.

               (c)  The execution, delivery and performance by the Borrower of
     the Loan Agreement, the Reimbursement Agreement, the Remarketing Agreement,
     this Bond Purchase Agreement and any other document delivered by the
     Borrower in connection

                                       6
<PAGE>

     with the financing of the Project do not and will not violate or conflict
     with any provision of any statute or any rule, order, regulation, judgment
     or decree of any court, agency or other governmental or administrative
     board or body to which the Borrower is subject, or violate, conflict with
     or constitute a breach of or default under any provision of any indenture,
     mortgage, deed of trust, agreement or other instrument to which the
     Borrower is a party or by which the Borrower or any of its properties is
     bound.

               (d)  All licenses, consents, approvals or authorizations of any
     federal, state or local governmental agency required on the part of the
     Borrower to be obtained in connection with the execution and delivery of
     the Loan Agreement, the Reimbursement Agreement, the Remarketing Agreement
     and this Bond Purchase Agreement, the performance by the Borrower of its
     obligations thereunder and the Borrower's consummation of the transactions
     contemplated thereby and by the Official Statement, have been duly
     obtained, and the Borrower has complied with all applicable provisions of
     law requiring any designation, declaration, filing, registration or
     qualification with any governmental authority in connection therewith; it
     being understood that the Borrower has obtained, or prior to the
     commencement of acquisition, construction and/or equipping of each
     component of the Project will obtain, all licenses, consents, approvals and
     authorizations of any and all federal, state or local governmental
     authorities required on the part of the Borrower to be obtained in
     connection with the acquisition, construction and/or equipping of such
     component of the Project, and that the Borrower has no reason to believe
     that it will not be able to obtain, when required, all further governmental
     licenses, consents, approvals and authorizations necessary for the
     acquisition, construction, equipping and/or operation of the Project as
     contemplated by the Loan Agreement and any and all other documents
     delivered by the Borrower in connection with the financing of the Project.

               (e)  There is no action, suit, proceeding, inquiry or
     investigation, at law or in equity, before or by any court, public board or
     body, pending or, to the knowledge of the Borrower, threatened against the
     Borrower wherein an unfavorable decision, ruling or finding would have a
     material adverse effect on the financial condition of the Borrower, the
     acquisition, construction, equipping and/or operation of the Project, the
     transactions contemplated by this Bond Purchase Agreement and the Official
     Statement, the validity or enforceability of the Loan Agreement, the
     Reimbursement Agreement, the Remarketing Agreement, this Bond Purchase
     Agreement or any other document delivered by the Borrower in connection
     with the financing of the Project or the existence or powers of the
     Borrower. There is no existing violation by the Borrower of any applicable
     statute, rule, order or regulation of any governmental body which could
     materially and adversely affect the financial condition or operations of
     the Borrower or the Project.

               (f)  The Official Statement (other than the information contained
     therein under the caption "The Issuer" and in Appendix B thereto, with
     respect to which

                                       7
<PAGE>

     no representation is made) does not contain an untrue statement of a
     material fact or omit to state a material fact necessary to make the
     statements therein, in light of the circumstances under which they were
     made, not misleading, and the Borrower hereby approves and authorizes the
     use thereof by the Underwriter.

The foregoing representations and warranties shall survive Closing.

          Section 6.  Covenants of Issuer.  The Issuer covenants that:
                      -------------------

               (a)  The Issuer will cooperate with the Underwriter in the
     qualification of the Bonds (and, if necessary, any other security
     contemplated by this Bond Purchase Agreement and the Official Statement)
     for offering and sale in, and the determination of their eligibility for
     investment under the laws of, such jurisdictions as the Underwriter shall
     designate, provided that the Issuer shall not be required to qualify to do
     business or consent to service of process in any state or jurisdiction
     other than the Commonwealth of Pennsylvania and the Issuer's out-of-pocket
     costs shall be paid out of the Bond proceeds or otherwise provided for.

               (b)  The Issuer will refrain from taking any action, with regard
     to which it may exercise control, that would result in the loss of the
     exclusion of the interest on the Bonds from gross income for federal income
     tax purposes.

          Section 7.  Covenants of Borrower.  The Borrower covenants that:
                      ---------------------

               (a)  The Borrower will provide to the Underwriter not later than
     the Closing Date the Final Official Statement in such quantity as the
     Underwriter may reasonably request, and will use its best efforts to amend
     the Final Official Statement if and as necessary so that it will not
     contain any untrue statement of a material fact or omit to state a material
     fact necessary to make the statements therein, in light of the
     circumstances under which they were made, not misleading.

               (b)  The Borrower will promptly notify the Underwriter of any
     material adverse change with respect to the financing of the Project as
     contemplated by this Bond Purchase Agreement and the Official Statement or
     with respect to its business, properties or financial condition, occurring
     before Closing which would require a change in the Official Statement in
     order to make the information contained therein not misleading in
     connection with the sale of the Bonds.

               (c)  The Borrower will cooperate with the Underwriter in the
     qualification of the Bonds (and, if necessary, any other security
     contemplated by this Bond Purchase Agreement or the Official Statement) for
     offering and sale in, and the determination of their eligibility for
     investment under the laws of, such jurisdictions as

                                       8
<PAGE>

     the Underwriter shall designate; provided that the Borrower shall not be
     required to qualify to do business under the laws of any jurisdiction where
     it is not now so qualified or to file any general consent to service of
     process where it is not now so subject.

               (d)  The Borrower will refrain from taking any action, or
     voluntarily permitting any action to be taken, that results in the loss of
     the exclusion of the interest on the Bonds from gross income for federal
     income tax purposes.

               (e)  To the extent permitted by applicable law, the Borrower will
     indemnify, hold harmless, protect and defend the Issuer and its members,
     directors, commissioners, officers and employees, past, present and future,
     and the Underwriter and its directors, officers and employees, past,
     present and future, and each person, if any, who controls the Underwriter
     within the meaning of Section 15 of the Securities Act (hereinafter
     collectively called the "Indemnified Parties"), against any and all losses,
     claims, damages, liabilities or expenses whatsoever arising out of or based
     upon (i) any untrue statement or alleged untrue statement of a material
     fact contained in the Official Statement (other than the information
     contained therein under the caption "The Issuer"), or any omission or
     alleged omission to state therein a material fact necessary to make the
     statements made therein, in light of the circumstances under which they
     were made, not misleading or (ii) an allegation or determination that
     registration under the Securities Act was required in connection with the
     issuance or sale of the Bonds or that the Indenture should have been
     qualified under the Trust Indenture Act of 1939, as amended. In case any
     action or claim shall be brought or asserted against one or more of the
     Indemnified Parties with respect to the matters subject to the indemnity
     provided by this Section, the Indemnified Party or Parties shall promptly
     notify the Borrower in writing, and the Borrower shall promptly assume the
     defense thereof, including the employment of counsel satisfactory to such
     Indemnified Party or Parties and the payment of all expenses. Any one or
     more of the Indemnified Parties shall have the right to employ separate
     counsel in any such action and to participate in the defense thereof, but
     the fees and expenses of such counsel shall be at the expense of such
     Indemnified Party or Parties unless (i) the employment thereof has been
     specifically authorized by the Borrower, (ii) the Borrower has failed to
     assume promptly the defense and employ counsel satisfactory to such
     Indemnified Party or Parties or (iii) the named parties to any such action
     (including any impleaded parties) include both such Indemnified Party or
     Parties and the Borrower, and such Indemnified Party or Parties shall have
     been advised by counsel that there may be one or more legal defenses
     available to it which are different from or additional to those available
     to the Borrower (in which case the Borrower shall not have the right to
     assume the defense of such action on behalf of such Indemnified Party or
     Parties), in any of which events such fees and expenses shall be borne by
     the Borrower. The Borrower shall not be liable for any settlement of such
     action effected without its consent (such consent not to be unreasonably
     withheld), but if settled with the consent of the Borrower, or if there is
     final judgement for the plaintiff in any such action

                                       9
<PAGE>

     with or without consent, the Borrower agrees to indemnify and hold harmless
     the Indemnified Party or Parties from and against any loss or liability by
     reason of settlement or judgement. The indemnity provided in this Section
     includes reimbursement for expenses incurred by the Indemnified Parties in
     investigating the claim and in defending it in accordance with the terms of
     this Section. The indemnity provided in this Section shall survive Closing.

               (f)  In order to provide for just and equitable contribution in
     circumstances in which the indemnification provided for in paragraph (e) of
     this Section is due in accordance with its terms but is for any reason
     unavailable or insufficient, the Borrower shall contribute to the aggregate
     losses, claims, damages and liabilities (including legal or other expenses
     reasonably incurred in connection with investigating or defending the same)
     to which the Underwriter may be subject in such proportion so that the
     Borrower bears them in a portion that considers the benefits received by
     the Borrower from the issuance of the Bonds, the Borrower's knowledge and
     access to information concerning the matter with respect to which the claim
     was asserted, the opportunity to correct or prevent any statement or
     omission and any other equitable considerations appropriate under the
     circumstances; and no person (including the Underwriter) guilty of
     fraudulent misrepresentation within the meaning of Section 11(f) of the
     Securities Act shall be entitled to contribution from any person who was
     not guilty of such fraudulent misrepresentation. For purposes of this
     Section, each person who controls the Underwriter within the meaning of
     Section 15 of the Securities Act shall have the same rights as the
     Underwriter. Any party entitled to contribution shall, promptly after
     receipt of notice of commencement of any action, suit or proceeding against
     such party in respect of which a claim for contribution may be made against
     the Borrower under this paragraph, notify the Borrower, but the omission so
     to notify the Borrower shall not relieve the Borrower from any other
     obligation it may have hereunder or otherwise under this paragraph.

          Section 8. Conditions of Closing. The Underwriter's obligation to
                     ---------------------
   purchase the Bonds is subject to fulfillment of the following conditions at
   or before Closing:

               (a)  The Issuer's and the Borrower's representations hereunder
     shall be true on and as of the Closing Date and shall be confirmed by
     certificates at Closing.

               (b)  Neither the Issuer nor the Borrower shall have defaulted in
     any of their covenants hereunder.

               (c)  The Underwriter shall have received:

                    (i) original executed copies (or photocopies
          thereof) of the Indenture, the Loan Agreement, the Letter of
          Credit, the Reimbursement

                                       10
<PAGE>

          Agreement, the Remarketing Agreement and all other documents executed
          in connection therewith or delivered at Closing;

                    (ii)      opinions of Bond Counsel dated the Closing Date
          with respect to the matters set forth in Exhibits A, B and C attached
          hereto;

                    (iii)     an opinion of Issuer Counsel dated the Closing
          Date with respect to the matters set forth in Exhibit D attached
          hereto;

                    (iv)      an opinion or opinions of Borrower Counsel dated
          the Closing Date with respect to the matters set forth in Exhibit E
          attached hereto;

                    (v)       an opinion of Bank Counsel dated the Closing Date
          with respect to the matters set forth in Exhibit F attached hereto;

                    (vi)      an opinion of Underwriter Counsel dated the
          Closing Date with respect to the matters set forth in Exhibit G
          attached hereto; and

                    (vii)     a certificate and agreement of the Bank dated the
          Closing Date in the form set forth in Exhibit H attached hereto.

               (d)  At Closing there shall not have been any adverse change with
     respect to the Project or the financing thereof as contemplated by the
     Official Statement and this Bond Purchase Agreement or in the business,
     property or financial condition of the Borrower, except as set forth in or
     contemplated by the Official Statement, which, in the judgment of the
     Underwriter, is material and makes it inadvisable to proceed with the sale
     of the Bonds; and the Underwriter shall have received certificates that no
     material adverse change has occurred or, if such a change has occurred,
     full information with respect thereto.

               (e)  The Underwriter shall receive such documentation as it may
     reasonably request to evidence that the Borrower has received all necessary
     state and local licenses and approvals from applicable state and local
     governmental authorities required on the part of the Borrower to be
     obtained in connection with the execution and delivery of the Loan
     Agreement and this Bond Purchase Agreement and the Borrower's consummation
     of the transactions contemplated thereby and by the Official Statement.

               (f)  The Underwriter shall receive such additional documentation
     as it may reasonably request to evidence compliance with applicable law,
     the validity of the Resolutions, the Bonds, the Indenture, the Loan
     Agreement, the Letter of Credit, the Reimbursement Agreement, the
     Remarketing Agreement, this Bond Purchase Agreement and all other documents
     delivered by the Borrower in connection with the financing of

                                       11
<PAGE>

     the Project and to demonstrate the status of the offering of the Bonds
     under the Securities Act and the exclusion of the interest on the Bonds
     from gross income for federal income tax purposes.

          Section 9. Events Permitting Underwriter to Terminate. The Underwriter
                     ------------------------------------------
may terminate its obligation to purchase the Bonds at any time before Closing if
any of the following occur:

               (a)  Legislative, executive or regulatory action or a court
     decision which, in the judgment of the Underwriter, casts sufficient doubt
     on the legality of obligations such as the Bonds, or the exclusion of
     interest on obligations such as the Bonds from gross income for federal
     income tax purposes, so as to impair materially the marketability thereof;

               (b)  Any action by the Securities and Exchange Commission or a
     court which would require any registration under the Securities Act, in
     connection with the issuance or sale of the Bonds, or qualification of the
     Indenture under the Trust Indenture Act of 1939, as amended;

               (c)  Any general suspension of trading in securities on the New
     York Stock Exchange or the establishment by the New York Stock Exchange, by
     the Securities and Exchange Commission, by any federal or state agency or
     by the decision of any court, of any limitation on prices for such trading,
     or any outbreak of hostilities or occurrence of any other national or
     international calamity or crisis, the effect of which on the financial
     markets of the United States shall be such as to make it impracticable for
     the Underwriter to enforce contracts for the sale of the Bonds; or

               (d)  Any event or condition which, in the judgment of the
     Underwriter, renders untrue or incorrect, in any material respect as of the
     time to which the same purports to relate, the information contained in the
     Official Statement, or which requires that information not reflected in the
     Official Statement should be reflected therein in order to make the
     statements and information contained therein not misleading in any material
     respect as of such time.

If the Underwriter terminates its obligations to purchase the Bonds because any
of the conditions specified in Section 8 or 9 shall not have been fulfilled or
shall have occurred at or before the Closing, such termination shall not result
in any liability on the part of the Issuer or the Underwriter.

          Section 10. Notices and Other Actions. All notices, demands and formal
                      -------------------------
actions hereunder shall be in writing mailed, telegraphed or delivered to:

                                       12
<PAGE>

          The Issuer:
          ----------

               Chester County Industrial Development Authority
               750 N. Pottstown Pike
               Exton, PA 19341
               Attention:  Executive Director

          The Borrower:
          ------------

               Innovative Solutions and Support, LLC
               420 Lapp Road
               Malvern, PA 19355
               Attention:  Roger Mitchell

          The Underwriter:
          ---------------

               PNC Capital Markets, Inc.
               One PNC Plaza, 25/th/ Floor
               249 Fifth Avenue
               Pittsburgh, PA 15222-2707
               Attention:  Paul Feldman

          Section 11. Governing Law. This Bond Purchase Agreement shall be
                      -------------
governed by and construed in accordance with the laws of the Commonwealth of
Pennsylvania.


          Section 12. Assignment; Successors and Assigns. The rights and
                      ----------------------------------
obligations of the Borrower and the Issuer hereunder shall not be assignable
without the prior written consent of the Underwriter. This Bond Purchase
Agreement will inure to the benefit of and be binding upon the parties hereto
and their successors and assigns, and will not confer any rights upon any other
persons except that the Purchasers shall be beneficiaries of the representations
in Sections 4 and 5 hereof.

          Section 13. Counterparts. This Bond Purchase Agreement may be executed
                      ------------
in any number of counterparts, all of which taken together shall be one and the
same instrument, and any parties hereto may execute this Bond Purchase Agreement
by signing any such counterpart.

          Section 14. Expenses. Whether or not the Bonds are sold by the Issuer,
                      --------
the Underwriter shall be under no obligation to pay any fees or expenses
incident to the performance of the obligations of the Issuer. All fees, expenses
and costs to effect the authorization, preparation, issuance, delivery and sale
of the Bonds (including without limitation the Issuer's fees and legal and other
expenses), the fees and disbursements of Bond Counsel, the

                                       13
<PAGE>

underwriting fee and expenses (including legal, travel and newspaper "tombstone"
advertisement expenses) of the Underwriter and the expenses and costs for the
preparation, printing, photocopying, execution and delivery of the Official
Statement, the Bonds, the Indenture, the Loan Agreement, the Letter of Credit,
the Reimbursement Agreement, the Remarketing Agreement, this Bond Purchase
Agreement and all other documents contemplated hereby and/or delivered at
Closing, shall be paid by the Borrower or by the Trustee from moneys deposited
in the Project Fund established under the Indenture pursuant to appropriate
closing statements and/or requisitions signed and delivered by the Borrower.

                                       14
<PAGE>

          IN WITNESS WHEREOF, the Issuer, the Borrower and the Underwriter have
caused their duly authorized representatives to execute and deliver this Bond
Purchase Agreement as of the date first written above.

[SEAL]                                CHESTER COUNTY INDUSTRIAL
                                      DEVELOPMENT AUTHORITY



Attest: _________________________     By ______________________________
Title:                                Title:



                                      INNOVATIVE SOLUTIONS AND
                                      SUPPORT, LLC, by its sole Member and
                                      Manager, Innovative Solutions and Support,
                                      Incorporated



                                      By ______________________________
                                      Title:  Chief Financial Officer



                                      PNC CAPITAL MARKETS, INC.



                                      By ______________________________
                                      Title:  Director

This execution page is part of the Bond Purchase Agreement dated August 8, 2000
among Chester County Industrial Development Authority, Innovative Solutions and
Support, LLC and PNC Capital Markets, Inc.

                                       15
<PAGE>

                                   EXHIBIT A
                                   ---------

                            Points to Be Covered in
                            Opinion of Bond Counsel

                 (Terms defined in the Bond Purchase Agreement
                    are used herein with the same meanings)


          1.   The Issuer is a body corporate and politic and a public
instrumentality of the Commonwealth of Pennsylvania, duly organized and validly
existing under the Pennsylvania Act, with full power and authority to undertake
the financing of the Project, to execute and deliver the Loan Agreement and the
Indenture and to issue the Bonds.

          2.   The Indenture and the Loan Agreement have each been duly
authorized, executed and delivered by the Issuer and each constitutes the legal,
valid and binding obligation of the Issuer enforceable in accordance with its
respective terms.

          3.   The issuance and sale of the Bonds have been duly authorized by
the Issuer. The Bonds have been duly executed and delivered by the Issuer and,
assuming due authentication by the Trustee, the Bonds are entitled to the
benefit and security of the Indenture and constitute the legal, valid and
binding special limited obligations of the Issuer enforceable in accordance with
their terms.

          4.   Under the laws of the Commonwealth of Pennsylvania, the Bonds and
interest on the Bonds shall be free from taxation for State and local purposes
within the Commonwealth of Pennsylvania, but this exemption does not extend to
gift, estate, succession or inheritance taxes or any other taxes not levied
directly on the Bonds or the interest thereon. Under the laws of the
Commonwealth of Pennsylvania, profits, gains or income derived from the sale,
exchange or other disposition of the Bonds are subject to State and local
taxation within the Commonwealth of Pennsylvania.

          5.   Interest on the Bonds is not includable in gross income for
federal income tax purposes under Section 103(a) of the Code.

          6.   Under the Code, interest on the Bonds constitutes an item of tax
preference under Section 57 of the Code and thus is subject to alternative
minimum tax for federal income tax purposes.

                                      A-1
<PAGE>

                                   EXHIBIT B
                                   ---------

                            Points to be Covered in
                     Supplemental Opinion of Bond Counsel

                 (Terms defined in the Bond Purchase Agreement
                    are used herein with the same meanings)


          1.   The Bonds are exempt from registration under the Securities Act
of 1933, as amended. The Indenture is not required to be qualified under the
provisions of the Trust Indenture Act of 1939, as amended.

          2.   The descriptions and summaries of the Bonds, the Loan Agreement
and the Indenture purported to be summarized in the sections of the Official
Statement entitled "The Bonds" (except for the information contained under the
caption entitled "Book Entry Only System" therein), "The Loan Agreement" and
"The Trust Indenture" fairly summarize the applicable provisions of the Bonds,
the Loan Agreement and the Indenture.

          3.   The Bond Purchase Agreement has been duly authorized, executed
and delivered by the Issuer.

                                      B-1
<PAGE>

                                   EXHIBIT C
                                   ---------

                            Points to be Covered in
                      Preference Opinion of Bond Counsel
                      ----------------------------------

                 (Terms defined in the Bond Purchase Agreement
                    are used herein with the same meanings)


          1.   Payments made by the Trustee to the owners of the Bonds
representing payments of principal of and interest at the Weekly Rate on such
Bonds as provided in Section 5.04 of the Indenture from the proceeds of draws on
the Letter of Credit, and payments made by the Trustee to pay the purchase price
of Bonds as provided in Section 4.01 or 4.02 of the Indenture from the proceeds
of draws on the Letter of Credit, will not constitute transfers of property of
the Issuer or the Borrower or any Affiliate avoidable under Section 547(b) and
recoverable from the owners of such Bonds under Section 550(a) of the United
States Bankruptcy Code (the "Bankruptcy Code"), in the event of a bankruptcy
case under the Bankruptcy Code by the Issuer or by or against the Borrower or
any Affiliate, as debtor.

          2.   Payments made by the Trustee to pay the purchase price of Bonds
as provided in Section 4.01 or 4.02 of the Indenture from the proceeds of
remarketing such Bonds by the Remarketing Agent to persons other than the Issuer
or the Borrower or any Affiliate will not constitute transfers of property of
the Issuer or the Borrower or any Affiliate avoidable under Section 547(b) and
recoverable from the owners of such Bonds under Section 550(a) of the Bankruptcy
Code, in the event of a bankruptcy case under the Bankruptcy Code by the Issuer
or by or against the Borrower or any Affiliate, as debtor.

                                      C-1
<PAGE>

                                   EXHIBIT D
                                   ---------

                            Points to be Covered in
                           Opinion of Issuer Counsel
                           -------------------------

                 (Terms defined in the Bond Purchase Agreement
                      are used herein with same meanings)


          1.   The Issuer is a public instrumentality and body corporate and
politic of the Commonwealth of Pennsylvania organized and existing under the
Act. Under the Act, and by the Resolution, the Issuer has full power and
authority to undertake the financing of the Project, to execute, deliver and
perform its obligations under the Indenture, the Loan Agreement and the Bond
Purchase Agreement and to issue and deliver the Bonds.

          2.   The Resolution has been duly adopted by the Issuer, complies in
all respects with the procedural rules of the Issuer and the requirements of
Commonwealth of Pennsylvania law (including the Act) and remains in full force
and effect on the date hereof.

          3.   The members and officers of the Issuer identified in the Issuer's
General Certificate delivered at the closing for the issuance of the Bonds have
been duly elected or appointed, and are qualified to serve as such. To the best
of such counsel's knowledge, no member or officer of the Issuer has any
financial interest, direct or indirect, in the Borrower or the Project or the
financing thereof.

          4.   The Indenture, the Loan Agreement, the Bond Purchase Agreement
and the Bonds have been duly authorized, executed and delivered by the Issuer
and, assuming due authorization, execution and delivery by the other parties
thereto, constitute legal, valid and binding obligations of the Issuer
enforceable in accordance with their respective terms, except as enforcement may
be limited by general principles of equity, regardless of whether applied in a
proceeding in equity or at law, or by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or other similar laws affecting the
enforcement of creditors' rights generally.

          5.   The execution, delivery and performance by the Issuer of the
Indenture, the Loan Agreement and the Bond Purchase Agreement and the issuance
and delivery of the Bonds do not and will not violate or conflict with any
provision of the Constitution of the Commonwealth of Pennsylvania or any
applicable statute (including the Act), or any rule, order, regulation, judgment
or decree of any court, agency or other governmental or administrative board or
body to which the Issuer is subject, or conflict with or constitute a breach of
or a default

                                      D-1
<PAGE>

under any indenture, mortgage, deed of trust, agreement or other instrument to
which the Issuer is a party or by which it is bound.

          6.   Except for any approval, consent or authorization required under
the securities or blue sky laws of any jurisdiction in connection with the
purchase and distribution of the Bonds, as to which no opinion is expressed, no
additional or further approval, consent or authorization of any governmental or
public agency or authority not already obtained is required by the Issuer in
connection with the issuance or delivery of the Bonds or the entering into and
performance of its obligations under the Indenture, the Loan Agreement or the
Bond Purchase Agreement.

          7.   There is no action, suit, proceeding or investigation by or
before any court, agency or other governmental or administrative board or body,
pending or, to the best of such counsel's knowledge, threatened against the
Issuer, challenging or contesting the powers of the Issuer, the authorization of
any members or officers of the Issuer to act in their respective capacities, or
the issuance of the Bonds, or in which an unfavorable decision, ruling or
finding would adversely affect the validity or enforceability of the Indenture,
the Loan Agreement or the Bond Purchase Agreement, the performance by the Issuer
of any of its obligations thereunder, or the issuance or delivery of the Bonds.

          8.   The information contained in the Official Statement under the
caption "The Issuer" does not contain any untrue statement of a material fact or
omit to state any material fact necessary to make the statements made therein,
in light of the circumstance under which they are made, not misleading. Except
as set forth in this paragraph, no opinion is expressed with respect to the
adequacy or accuracy of the Official Statement or other information pertaining
to the offering for sale of the Bonds.

                                      D-2
<PAGE>

                                   EXHIBIT E
                                   ---------

                            Points to be Covered in
                          Opinion of Borrower Counsel
                          ---------------------------

                 (Terms defined in the Bond Purchase Agreement
                    are used herein with the same meanings)


               1.   The Borrower is a limited liability company duly organized
and validly existing under the laws of the Commonwealth of Pennsylvania, and has
full power and authority to execute and deliver the Loan Agreement, the
Reimbursement Agreement, the Remarketing Agreement and the Bond Purchase
Agreement and the other documents executed and delivered by the Borrower in
connection therewith and to undertake and perform its obligations thereunder.

               2.   The Loan Agreement, the Reimbursement Agreement, the
Remarketing Agreement and the Bond Purchase Agreement have been duly executed
and delivered by the Borrower and constitute legal, valid and binding
obligations of the Borrower enforceable in accordance with their respective
terms, except to the extent the enforceability thereof may be limited by
bankruptcy, insolvency or other similar laws or equitable principles affecting
the enforcement of creditors' rights generally and as rights to indemnity may be
limited by applicable law.

               3.   The execution, delivery and performance of the Loan
Agreement, the Reimbursement Agreement, the Remarketing Agreement and the Bond
Purchase Agreement by the Borrower do not and will not violate or conflict with
any provision of any statute or any rule, order, regulation, judgment or decree
of any court, agency or other governmental or administrative board or body to
which the Borrower is subject, or conflict with or constitute a breach of or a
default under any provision of any indenture, mortgage, deed of trust, agreement
or other instrument to which the Borrower is a party or by which the Borrower or
any of its properties is bound.

               4.   All licenses, consents, approvals or authorizations of any
federal, state or local governmental authority required on the part of the
Borrower to be obtained in connection with the execution and delivery of the
Loan Agreement, the Reimbursement Agreement, the Remarketing Agreement and the
Bond Purchase Agreement, the performance by the Borrower of its obligations
thereunder and the Borrower's consummation of the transactions contemplated
thereby and by the Official Statement, have been duly obtained, and the Borrower
has complied with all applicable provisions of law requiring any designation,
declaration, filing, registration or qualification with any governmental
authority in connection therewith, except that no opinion is

                                      E-1
<PAGE>

express in this paragraph with respect to zoning or other local approvals
relating to the use of the land included in the Project, the construction of
improvements included in the Project or the operation of the Project.

               5.   There is no action, suit, proceeding, investigation or
inquiry pending or, to the best of such counsel's knowledge, threatened against
the Borrower which might materially adversely affect the Project or the business
or properties or financial condition of the Borrower, or in which an unfavorable
decision, ruling or finding would adversely affect the validity or
enforceability of the Loan Agreement, the Reimbursement Agreement, the
Remarketing Agreement or the Bond Purchase Agreement or any other document
executed and delivered by the Borrower in connection therewith, the performance
by the Borrower of any of its obligations thereunder, or the consummation of any
of the transactions contemplated thereby or by the Official Statement. To the
best of such counsel's knowledge, there is no existing material violation by the
Borrower of any applicable statute, rule, order or regulation of any
governmental body which could materially and adversely affect the financial
condition or operations of the Borrower or the Project.

               6.   Nothing has come to such counsel's attention which leads it
to believe that the information contained in the Official Statement, excluding
the information under the heading "The Issuer" and Appendix B thereto (about
which no opinion is expressed), contains any untrue statement of a material fact
or omits to state a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.

                                      E-2
<PAGE>

                                   EXHIBIT F
                                   ---------

                            Points to be Covered in
                            Opinion of Bank Counsel
                            -----------------------

                 (Terms defined in the Bond Purchase Agreement
                    are used herein with the same meanings)

               The Letter of Credit constitutes a valid and binding obligation
of the Bank, enforceable against the Bank in accordance with its terms, except
as limited by applicable bankruptcy, insolvency, reorganization, liquidation,
readjustment of debt, receivership, moratorium or other laws affecting the
enforcement of creditors' rights as such laws may be applied in the event of a
bankruptcy, insolvency, reorganization, liquidation, readjustment of debt,
receivership or other similar proceeding with respect to the Bank or in the
event of any moratorium or similar occurrence affecting the Bank and by
equitable principles (regardless of whether such enforceability is considered in
a proceeding at law or in equity). Such equitable principles include the
equitable power of a court in a bankruptcy or similar proceeding by or against
the Borrower to restrain or enjoin the payment by the Bank of a drawing under
the Letter of Credit; however, in such counsel's opinion, any such proceeding
would not, in and of itself and absent special circumstances, be the proper
basis for a court to enjoin permanently such payment.

                                      F-1
<PAGE>

                                   EXHIBIT G
                                   ---------

                            Points to be Covered in
                       Opinion of Underwriter's Counsel
                       --------------------------------

                 (Terms defined in the Bond Purchase Agreement
                    are used herein with the same meanings)


               1.   The conditions in the Bond Purchase Agreement to the
Underwriter's obligation to purchase the Bonds have been satisfied or waived.

               2.   No registration with the Securities and Exchange Commission
under the Securities Act need be made in connection with the issuance or sale of
the Bonds, and the Indenture is not required to be qualified under the Trust
Indenture Act of 1939, as amended.

               3.   The descriptions and summaries in the Final Official
Statement under the captions "The Bonds", "The Letter of Credit", "The Loan
Agreement" and "The Trust Indenture", insofar as the statements contained under
such captions purport to summarize certain provisions of the Bonds, the Letter
of Credit, the Loan Agreement and the Indenture, are accurate and fairly present
the information purported to be shown with respect thereto.

                                      G-1
<PAGE>

                                   EXHIBIT H
                                   ---------

                       CERTIFICATE AND AGREEMENT OF BANK


               Pursuant to Section 8(c)(vii) of the Bond Purchase Agreement
dated August __, 2000 among Chester County Industrial Development Authority (the
"Issuer"), Innovative Solutions and Support, LLC (the "Borrower"), and PNC
Capital Markets, Inc., as Underwriter, relating to the issuance by the Issuer of
$4,335,000 Industrial Development Revenue Bonds, 2000 Series A (Innovative
Solutions and Support, LLC Project) (the "Bonds"), the undersigned, PNC Bank,
National Association (the "Bank"), hereby certifies that the information
concerning the Bank set forth in Appendix B to the Final Official Statement
dated August __, 2000 relating to the Bonds (the "Official Statement") is
accurate in all material respects. Since March 31, 2000, there has been no
material adverse change in financial condition of the Bank taken as a whole
except as disclosed in or otherwise contemplated by the Private Official
Statement or the documents incorporated therein by reference. The Bank hereby
agrees that it will, upon request of any registered or beneficial owners of the
Bonds pursuant to the last paragraph of Appendix B to the Final Official
Statement, cause to be provided to such owners copies of the documents
incorporated by reference in such Appendix B.

               The Bank represents that it does not control, either directly or
indirectly through one or more intermediaries, the Borrower and that the
Borrower does not control it. "Control" for this purpose has the meaning given
to such term in Section 2(a)(9) of the Investment Company Act of 1940, as
amended and as interpreted by the Securities and Exchange Commission.

               IN WITNESS WHEREOF, the Bank has caused this Certificate to be
executed and delivered this ___ day of August, 2000.

                                        PNC BANK, NATIONAL ASSOCIATION


                                        By _________________________________
                                        Name:
                                        Title:

                                      H-1
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.9
<SEQUENCE>3
<FILENAME>0003.txt
<DESCRIPTION>REIMBURSEMENT, CREDIT AND SECURITY AGREEMENT
<TEXT>

<PAGE>

                                                                    EXHIBIT 10.9

                 REIMBURSEMENT, CREDIT AND SECURITY AGREEMENT
                 --------------------------------------------

          THIS AGREEMENT, made as of August 1, 2000 between INNOVATIVE SOLUTIONS
AND SUPPORT, LLC, a Pennsylvania limited liability company (the "Borrower"), and
PNC BANK, NATIONAL ASSOCIATION (the "Bank"), a national banking association.

                             W I T N E S S E T H :

          A.   The Chester County Industrial Development Authority (the
"Issuer") has issued its Industrial Development Revenue Bonds, 2000 Series A
(Innovative Solutions and Support, LLC Project), in the aggregate principal
amount of $4,335,000 (the "Bonds") under a Trust Indenture dated as of August 1,
2000 (the "Indenture") between the Issuer and Chase Manhattan Trust Company,
National Association, as Trustee (including any successor trustee, the
"Trustee").

          B.   Pursuant to a Loan Agreement dated as of August 1, 2000 between
the Issuer and the Borrower (the "Loan Agreement"), the proceeds of the Bonds
are being applied to finance the costs of a project (the "Project") consisting
of (i) financing the costs associated with the issuance of the Bonds; (ii)
financing the acquisition of certain real property located in the Eagleview
Corporate Center in Upper Uwchlan Township, Chester County, Pennsylvania (the
"Property") and the construction thereon of a new manufacturing, warehouse and
office facility (collectively with the Property and as more fully described on
Exhibit B hereto, the "Project Facilities"). Under the Loan Agreement, the
Borrower is obligated to make loan payments to the Trustee in amounts and at the
times corresponding to the debt service and other payments required in respect
of the Bonds.

          C.   In order to facilitate the issuance and sale of the Bonds and to
enhance the marketability of the Bonds and thereby achieve interest cost savings
and other savings to the Borrower, the Borrower has asked the Bank to issue its
Irrevocable Letter of Credit (together with any substitute letter of credit
issued pursuant to the terms hereof, the "Letter of Credit") to the Trustee, for
the account of the Borrower authorizing the Trustee to make one or more draws on
the Bank up to an aggregate of $4,406,261 as reduced and reinstated from time to
time in accordance with the provisions of the Letter of Credit, the "Letter of
Credit Amount"), of which originally (i) $4,335,000 shall be in respect of
principal of the Bonds and (ii) $71,261 shall be in respect of accrued interest
on the Bonds. The purpose of the Letter of Credit is to provide funds for the
payment of principal of and interest on the Bonds and purchase price of Bonds
which have been tendered pursuant to the tender option provisions thereof and of
the Indenture to the extent remarketing proceeds or other funds are not
available therefor in accordance with the provisions of the Indenture.

          D.   The obligations of the Borrower under this Agreement are secured
by, among other things, a Guaranty and Surety Agreement of even date herewith of
Innovative Solutions and Support, Incorporated ("IS&S, Inc.") and IS&S Delaware,
Inc. (together with IS&S, Inc., the "Guarantors"").
<PAGE>

          E.   The Bank is willing to issue the Letter of Credit upon the terms
and conditions hereinafter set forth.

          NOW, THEREFORE, in consideration of the foregoing and the undertakings
herein set forth and intending to be legally bound, the Borrower and the Bank
hereby agree as follows:

                                  ARTICLE I.

                                  DEFINITIONS

          Section 1.01  Definitions. In this Agreement (except as otherwise
                        -----------
expressly provided for or unless the context otherwise requires), the following
terms have the meanings specified in the foregoing recitals:

          Bank                          Letter of Credit
          Bonds                         Letter of Credit Amount
          Borrower                      Loan Agreement
          Guarantors                    Project
          Indenture                     Project Facilities
          IS&S, Inc.                    Trustee
          Issuer

In addition, the following terms shall have the meanings specified in this
Article, unless the context otherwise requires:

          "Affiliate" means a Person who directly, or indirectly through one or
more intermediaries, controls, or is controlled by, or is under common control
with, the Borrower or the board of directors of the Borrower. The term "control"
(including the terms "controlling", "controlled by" and "under common control
with") means the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of the Borrower or the board
of directors of the Borrower, or of the Person or the board of directors of the
Person, whether through stock ownership, partnership interests, membership,
voting rights, governing boards, committees, divisions or other bodies with one
or more common members, directors, trustees or other managers, or otherwise.

          "Architect" means the architect engaged for the design and
construction supervision of the Improvements, as may be approved by the Bank.

          "Architect Agreement" means that certain agreement, to be entered into
between the Borrower and the Architect, and all exhibits and attachments
thereto, as the same may be amended with the consent of the Bank.

          "Assignment of Construction Documents" shall have the meaning ascribed
to such term in Section 3.04.

                                       2
<PAGE>

          "Bond Documents" means the Bonds, the Indenture, the Loan Agreement,
the Remarketing Agreement and any other agreements or instruments relating
thereto.

          "Business Day" means any day other than (i) a Saturday or Sunday, (ii)
a day on which banking institutions in New York, New York, Philadelphia,
Pennsylvania, Pittsburgh, Pennsylvania or in any other city where the principal
corporate trust office of the Trustee or the office of the Bank at which drafts
are to be presented under the Letter of Credit is located are required or
authorized by law (including executive order) to close or on which either such
office is closed for a reason not related to financial condition, or (iii) a day
on which the New York Stock Exchange is closed.

          "Code" means the Internal Revenue Code of 1986, as amended, and the
rules and regulations thereunder, including any amendments and successor
provisions thereto.

          "Collateral Documents" means the Mortgage, the Security Agreement, the
Environmental Indemnity Agreement, the Assignment of Construction Documents, the
Guaranty, and all other documents delivered by the Borrower or the Guarantors to
the Bank as collateral to secure the Obligations.

          "Completion Date" means September 30, 2001.

          "Construction and Development Documents" means the Construction
Contract, the Architect Agreement, the Plans and Specifications, all consents,
licenses, permits, authorizations and approvals relating to the construction,
completion, use and occupancy of the Improvements and all other instruments,
documents and rights relating to the design, construction and development of the
Improvements.

          "Construction Contract" means the construction contract to be entered
into, and all exhibits and attachments thereto, between the Borrower and the
Contractor for the construction of the Improvements.

          "Contamination" means the uncontained presence of Hazardous Substances
at the Project Facilities, or arising from the Project Facilities, which may
require remediation under any applicable law.

          "Contractor" means the general contractor hired by the Borrower for
the construction of the Improvements.

          "Date of Issuance" shall have the meaning ascribed to such term in
Section 2.01.

          "EBITDA" means on the date of determination the sum of (i) net income
(or loss) plus (ii) all interest expense plus (iii) all charges against income
          ----                           ----
for federal, state and local taxes actually paid plus depreciation expenses plus
                                                 ----
amortization expenses, in each case determined on a consolidated basis for IS&S,
Inc. and its subsidiaries for the previous four consecutive fiscal quarters.

                                       3
<PAGE>

          "Environmental Indemnity Agreement" shall have the meaning ascribed to
such term in Section 3.04.

          "Environmental Laws" means all applicable environmental statutes,
ordinances, regulations, orders and requirements of common law concerning (i)
activities at the Project Facilities, (ii) repairs or construction of any
improvements at the Project Facilities, (iii) handling of any materials at the
Project Facilities, (iv) discharges to the air, soil, surface water or ground
water from the Project Facilities, and (v) storage, treatment or disposal of any
waste at or connected with any activity at the Project Facilities.

          "Environmentally Sensitive Area" means (i) a wetland or other "water
of the United States" for purposes of Section 404 of the federal Clean Water Act
or any similar area regulated under any state law, (ii) a floodplain or other
flood hazard area as defined pursuant to applicable state law, (iii) a portion
of the coastal zone for purposes of the federal Coastal Zone Management Act, or
(iv) any other area development of which is specifically restricted under
applicable law by reason of its physical characteristics or prior use.

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

          "ERISA Affiliate" means (i) any corporation included with the Borrower
in a controlled group of corporations within the meaning of Section 414(b) of
the Code, (ii) any trade or business (whether or not incorporated or for-profit)
which is under common control with the Borrower within the meaning of Section
414(c) of the Code, (iii) any member of an affiliated service group of which the
Borrower is a member within the meaning of Section 414(m) of the Code, and (iv)
any other entity treated as being under common control with the Borrower under
Section 414(o) of the Code.

          "Event of Default" shall have the meaning ascribed to such term in
Section 8.01.

          "Fiscal Year" means the annual accounting year of IS&S, Inc., which
currently begins on October 1 in each calendar year.

          "Fixed Charge Ratio" means on the date of determination the ratio of
(i) EBITDA to (ii) the sum of interest expense plus prior year current
                                               ----
maturities of long term debt plus unfunded capital expenditures plus dividends
                             ----                               ----

plus cash taxes, in each case determined for IS&S, Inc. on a consolidated basis
- ----
for the previous four consecutive fiscal quarters.

          "GAAP" means generally accepted accounting principles consistently
applied.

          "Guaranty" shall have the meaning ascribed to such term in Section
3.06.

          "Hazardous Substances" means "hazardous substances" or "contaminants"
as defined pursuant to the Clean Air Act, 42 U.S.C. (S) 7401 et seq.; The
                                                             -- ---
Comprehensive Environmental Response, Compensation and Liability Act of
1980, 42 U.S.C. (S) 9601 et seq. ("CERCLA"); The Federal Water Pollution Control
                         -- ---
Act, 33 U.S.C. (S) 1251 et seq.; The
                        -- ---

                                       4
<PAGE>

Hazardous Material Transportation Act, 49 U.S.C. (S) 1801 et seq.; The Federal
                                                          -- ---
Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. (S) 136; The Resource
Conservation and Recovery Act of 1976, 42 U.S.C. (S) 6901 et seq. (including the
                                                          -- ---
Hazardous and Solid Waste Amendments of 1984); The Toxic Substances Control Act,
15 U.S.C. (S) 2601 et seq.; The Federal Occupational Safety & Health Act of
                   -- ----
1970, 29 U.S.C. (S) 651 et seq. (including (S).3101 of the Omnibus
                        -- ---
Reconciliation Act of 1990); The Oil Pollution Act of 1990, Pub. L. No. 101-380,
104 Stat. 484 (1990); and the state analogues to any of the foregoing, all as
amended from time to time and the regulations promulgated pursuant thereto; and
any requirements of the common law which may impose obligations or liabilities
as a result of the presence of or exposure to hazardous substances.

          "Improvements" means the manufacturing, warehouse and office facility
to be constructed on the Property and included in the Project Facilities.

          "Inspecting Architect" means such person or entity as the Bank may
designate, from time to time, to inspect the construction of the Improvements
and to perform other services with respect thereto on behalf of the Bank.

          "Interest Component" shall have the meaning ascribed to such term in
the Letter of Credit.

          "Interest Draft" shall have the meaning ascribed to such term in the
Letter of Credit.

          "Lien" means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or otherwise), or preference, priority
or other security agreement or preferential arrangement of any kind or nature
whatsoever (including, without limitation, any conditional sale or other title
retention agreement, any capitalized lease having substantially the same
economic effect as any of the foregoing, and the filing of any financing
statement under the Uniform Commercial Code or comparable law of any
jurisdiction.

          "Liquidity Period" means the period beginning on the date hereof and
terminating on the first to occur of (i) the date the Letter of Credit
terminates, (ii) the first date on which there are no longer any Bonds
Outstanding other than Bonds bearing interest at a Term Rate or Bonds secured by
a Replacement Credit Facility, and (iii) the date the Liquidity Period is
terminated pursuant to Section 8.02.

          "Material Contract" means each indenture, mortgage, agreement or other
instrument or contract (written or oral) to which the Borrower or either
Guarantor is a party or by which any of its assets are bound (including, without
limitation, any employment or executive compensation agreement, collective
bargaining agreement, agreement relating to an Obligation, agreement for the
construction, acquisition or disposition of real or personal property, agreement
for the purchasing or furnishing of services, operating lease, joint venture
agreement, agreement relating to the acquisition or disposition of an Affiliate
or agreement of merger or consolidation) which (i) evidences, secures or governs
any outstanding Obligation of either of $100,000 or more, (ii) is an operating
lease (not evidencing the acquisition of a capital asset under GAAP)

                                       5
<PAGE>

under which the Borrower or either Guarantor is a lessee providing for aggregate
annual rentals or similar payments of $100,000 or more, or (iii) if canceled,
breached or not renewed by any party thereto, would have a material adverse
effect on the assets or condition (financial or otherwise) of the Borrower or
either Guarantor.

          "Mortgage" shall have the meaning ascribed to such term in Section
3.04.

          "Multiemployer Plan" shall have the meaning ascribed to such term in
Section 3(37) of ERISA.

          "Obligations" means any and all obligations for the payment of money,
including without limitation any and all (i) obligations for money borrowed,
(ii) obligations evidenced by bonds, debentures, notes, guaranties or other
similar instruments, (iii) construction contracts, installment sale agreements
and other purchase money obligations in connection with the performance of work,
sale of property or rendering of services, (iv) leases evidencing the
acquisition of capital assets, (v) reimbursement obligations in connection with
letters of credit and other credit enhancement facilities, (vi) obligations for
unfunded pension liabilities, (vii) guaranties of any such obligation of a third
party, (viii) obligations under any interest or currency swaps future, option or
other similar agreement and (ix) any such obligations of third parties secured
by assets of the Borrower or either Guarantor.

          "Outstanding" when applied to the Bonds shall have the meaning
ascribed to such term in the Indenture.

          "PBGC" means the Pension Benefit Guaranty Corporation.

          "Permitted Liens" means (i) Liens for taxes or assessments which are
not yet due, Liens for taxes or assessments or Liens of judgments which are
being contested, appealed or reviewed in good faith by appropriate proceedings
which prevent foreclosure of any such Lien or levy of execution thereunder and
against which Liens, if any, adequate insurance or reserves have been provided;
(ii) pledges or deposits to secure payment of workers' compensation obligations,
unemployment insurance, deposits or indemnities to secure public or statutory
obligations or for similar purposes; (iii) those minor defects which in the
opinion of the Bank's counsel do not materially affect title to the collateral
for the Borrower's obligations hereunder; (vi) Liens in favor of the Bank; (v)
the lessor's retained title to personal property which is the subject matter of
a true operating lease to the Borrower; and (vi) those further encumbrances, if
any, shown on Exhibit F attached hereto.
              ---------

          "Person" means any individual, for-profit or not-for-profit
corporation, limited liability company, partnership, joint venture, association,
joint-stock company, trust, unincorporated organization or government or any
agency or political subdivision thereof.

          "Phase One Report" shall have the meaning ascribed to such term in
Section 4.01(k).

                                       6
<PAGE>

          "Plans" means all employee pension plans maintained by the Borrower or
any ERISA Affiliate which are subject to Part 3 of Title I of ERISA.

          "Plans and Specifications" means the final plans and specifications
for the construction and equipping of the Improvements, including all schematic
and working drawings, and designations of all manufacturers and model numbers of
all equipment, if any, as the same may be amended from time to time in
accordance with the terms hereof.

          "Pledged Bonds" shall have the meaning ascribed to such term in
Section 3.03(a).

          "Prime Rate" means the rate of interest publicly announced by the Bank
from time to time as the prime rate of the Bank effective in Philadelphia,
Pennsylvania, adjusted as of the date of an announcement of any change in such
prime rate. The prime rate is determined from time to time by the Bank as a
means of pricing some loans to its borrowers and neither is tied to any external
rate of interest or index, nor necessarily reflects the lowest rate of interest
actually charged by the Bank to any particular class or category of customers.

          "Principal Component" shall have the meaning ascribed to such term in
the Letter of Credit.

          "Prohibited Transaction" shall have the meaning ascribed to such term
in Section 4975 of the Code or in Section 406 of ERISA.

          "Project Cost Schedule" shall have the meaning assigned to such term
in Section 7.01.

          "Project Fund" shall have the meaning assigned to such term in the
Indenture.

          "Redemption Draft" shall have the meaning ascribed to such term in the
Letter of Credit.

          "Remarketing Agreement" means the Remarketing Agent's agreement with
the Borrower to perform its duties as Remarketing Agent under the Indenture.

          "Remarketing Agent" means PNC Capital Markets, Inc., and its successor
for the time being in such capacity pursuant to the Indenture.

          "Replacement Credit Facility" shall mean any Alternate Letter of
Credit, as defined in the Indenture, delivered to the Trustee in replacement for
the Letter of Credit as security for the Bonds pursuant to Section 5.09 of the
Indenture.

          "Reportable Event" shall have the meaning ascribed to such term in
Title IV of ERISA.

          "Security Agreement" shall have the meaning ascribed to such term in
Section 3.04.

                                       7
<PAGE>

          "State" means the Commonwealth of Pennsylvania.

          "Subcontract" means any contract for labor or material entered into
between the Contractor and any Subcontractor, and all exhibits and attachments
thereto.

          "Subcontractor" means any person or entity entering into a Subcontract
with the Contractor.

          "Tangible Net Worth" means stockholder's equity in IS&S, Inc. less any
advances to third parties, except those advances which the Bank deems have been
satisfactorily subordinated and all items properly classified as intangibles, as
all determined on a consolidated basis for IS&S, Inc. and its subsidiaries, in
accordance with GAAP.

          "Tender Draft" shall have the meaning ascribed to such term in the
Letter of Credit.

          "Term Rate" shall have the meaning ascribed to such term in the
Indenture.

          "Unfunded Benefit Liability" shall have the meaning given in and be
determined in accordance with Section 4001(a)(18) of ERISA.

          "Unremarketed Tendered Bonds" means Bonds which (a) have been tendered
for purchase pursuant to tender option provisions of the Bonds and the Indenture
and (b) have not been successfully remarketed by the Remarketing Agent prior to
10:00 a.m. on the date of purchase thereof pursuant to such tender.

          Section 1.02  Rules of Construction; Time of Day. In this Agreement,
                        ----------------------------------
unless otherwise indicated, (i) defined terms may be used in the singular or the
plural and the use of any gender includes all genders, (ii) the words "hereof",
"herein", "hereto", "hereby" and "hereunder" refer to this entire Agreement, and
(iii) all references to particular Articles, Sections or Exhibits are references
to the Articles, Sections or Exhibits of this Agreement. References to any time
of the day in this Agreement shall refer to Eastern standard time or Eastern
daylight saving time, as in effect in Philadelphia, Pennsylvania on such day.

                                  ARTICLE II.

                      LETTER OF CREDIT AND REIMBURSEMENT

          Section 2.01  Issuance of Letter of Credit. The Borrower hereby
                        ----------------------------
requests the Bank to issue the Letter of Credit to the Trustee. Subject to the
conditions precedent hereinafter set forth, the Bank will issue to the Trustee
pursuant to the request of the Borrower, on the date of issuance of the Bonds
(the "Date of Issuance"), the Letter of Credit in the Letter of Credit Amount
and substantially in the form of Exhibit A. The Interest Component of the Letter
of Credit Amount has been established on the basis of 50 days interest on the
Bonds and a 365-day

                                       8
<PAGE>

year, at an assumed maximum interest rate of 12% per annum and will initially
equal Seventy One Thousand Two Hundred Sixty One Dollars ($71,261) (as from time
to time reduced and reinstated as provided in the Letter of Credit). The Letter
of Credit shall expire at 5:00 p.m. on August 7, 2003 or, if such day is not a
Business Day, on the next succeeding Business Day, except that such expiration
date shall automatically be extended for one additional year effective on each
anniversary of the date of issuance of the Letter of Credit, unless the Bank, at
its option, gives the Borrower and the Trustee notice at least ninety (90) days
prior to such anniversary that such expiration date will not be so extended. The
Letter of Credit is subject to prior automatic termination as provided in
paragraph 8 thereof. All drawings under the Letter of Credit will be paid with
the Bank's own funds.

          Section 2.02  Reimbursement and Other Payments.
                        --------------------------------

                (a)     Reimbursement Payments and Interest. The Borrower hereby
                        -----------------------------------
agrees to pay or cause to be paid to the Bank:

                        (1)   a sum equal to each amount drawn under the Letter
     of Credit by an Interest Draft, on the same Business Day that such drawing
     is honored (but not before such drawing is honored);

                        (2)   a sum equal to each amount drawn against the
     Interest Component of the Letter of Credit Amount by a Tender Draft (A) in
     the case of any such amount drawn on an Interest Payment Date (as defined
     in the Indenture) of the Bonds being purchased with the proceeds of such
     Tender Draft, the same Business Day that such drawing is honored (but not
     before such drawing is honored), and (B) in all other cases, on the first
     to occur of (i) the first Business Day of the first calendar month
     following the calendar month in which such drawing is honored, (ii) the
     date on which the Bonds purchased with the proceeds of such Tender Draft
     are remarketed by the Remarketing Agent and the proceeds thereof delivered
     to the Trustee, (iii) the date on which the Bonds purchased with the
     proceeds of such Tender Draft are redeemed or otherwise paid in full, or
     (iv) the date the Liquidity Period terminates;

                        (3)   a sum equal to each amount drawn against the
     Principal Component of the Letter of Credit Amount by a Tender Draft, on
     the first to occur of (i) the date on which the Bonds purchased with the
     proceeds of such Tender Draft are remarketed by the Remarketing Agent and
     the proceeds thereof are delivered to the Trustee, (ii) the date on which
     the Bonds purchased with the proceeds of such Tender Draft are redeemed or
     otherwise paid in full, or (iii) the date the Liquidity Period terminates;
     and

                        (4)   a sum equal to each amount drawn under the Letter
     of Credit by a Redemption Draft, on the same Business Day that such drawing
     is honored (but not before such drawing is honored).

All sums payable to the Bank under this Section 2.02(a) shall bear interest,
from the date the Borrower receives notice from the Trustee that the
corresponding drawing was honored under

                                       9
<PAGE>

the Letter of Credit until such sums are paid in full (it being understood and
agreed that any sum paid after 3:00 p.m. on a Business Day shall bear interest
as if it was paid at 9:00 a.m. on the next following Business Day), at a
fluctuating rate per annum (computed for the actual number of days elapsed,
based on a 360-day year) equal to the Prime Rate; provided that any amount that
is not paid within 10 days of the date such amount is due and payable to the
Bank under this Agreement shall thereafter bear interest at a fluctuating rate
per annum (computed for the actual number of days elapsed, based on a 360-day
year) equal to two percent (2%) per annum above the Prime Rate. Interest
accruing pursuant to this Section 2.02(a) shall be due and payable on the first
Business Day of each calendar month after the date the corresponding drawing is
honored under the Letter of Credit and on the date the respective sum is paid.
All payments under this Section 2.02(a) shall be applied first to the payment of
interest due and payable under this Section 2.02(a) and then to the reduction of
the principal balance of sums due and payable under this Section 2.02(a).

               (b)  Fees. On the Date of Issuance, the Borrower shall pay to the
                    ----
Bank a commitment fee for the period from the Date of Issuance to September 30,
2000, computed at the rate of one and one-half percent (1.5%) per annum on the
Letter of Credit Amount. On October 1, 2000, and quarterly on each January 1,
April 1, July 1 and October 1 thereafter so long as any credit remains available
to the Trustee under the Letter of Credit, the Borrower shall pay to the Bank a
commitment fee computed in advance for the succeeding quarter at the rate of one
and one-half percent (1.5%) per annum on the Letter of Credit Amount as of the
date such commitment fee is due and payable. Computations of the commitment fees
under this Section shall be for the actual number of days in the applicable
period, based on a 360-day year. There shall be no reduction or refund of any
portion of any such commitment fee in the event the Letter of Credit expires or
is drawn upon, reduced (automatically or otherwise), terminated or otherwise
modified after the date such commitment fee is due and payable. In the event any
commitment fee payable under the terms hereof is not paid on or before the date
it is due and payable, the payment of such commitment fee shall be accompanied
by interest thereon, from the date such payment becomes due until it is paid in
full, at a fluctuating rate per annum (computed for the actual number of days
elapsed, based on a 360-day year) equal to two percent (2%) per annum above the
Prime Rate.

               (c)  Transaction and Transfer Charges and Expenses. The Borrower
                    ---------------------------------------------
shall pay to the Bank all reasonable transaction charges that the Bank may make
for drawings under the Letter of Credit. Such transaction charges shall be
payable upon submission to the Borrower by the Bank of the Bank's bill therefor.
In addition, the Borrower shall pay to the Bank on demand any and all reasonable
charges and expenses which the Bank may pay or incur relative to the Letter of
Credit. The Borrower shall pay to the Bank upon each transfer of the Letter of
Credit in accordance with its terms a transfer fee equal to $1,000.00, together
with any and all costs and expenses of the Bank incurred in connection with such
transfer.

               (d)  Increased Costs.
                    ---------------

                    (1)  If after the date of this Agreement any enactment,
promulgation or adoption of or change in any applicable law, treaty, regulation
or rule or in the interpretation or administration thereof by any court,
administrative or governmental authority, central bank or comparable agency
charged with the interpretation or administration thereof, or

                                       10
<PAGE>

compliance by the Bank with any guideline, request or directive issued after the
date hereof (whether or not having the force of law compliance with which is not
optional on the part of the Bank) of any such authority, central bank or
comparable agency, shall either (i) impose, modify or deem applicable any
reserve, special deposit, capital, insurance assessment or similar requirement
(including without limitation a guideline, request or directive which affects
the manner in which the Bank allocates capital resources to its commitments,
including its obligations under this Agreement and the Letter of Credit), (ii)
subject the Bank to any tax, deduction or withholding or change the basis of
taxation of the Bank (other than a change in a rate of tax based on overall net
income of the Bank), (iii) cause or deem letters of credit to be assets held by
the Bank and/or deposits on its books, or (iv) impose on the Bank any other
condition regarding this Agreement or the Letter of Credit, and the result of
any event referred to in clause (i), (ii), (iii) or (iv) of this sentence shall
be to increase the direct or indirect cost to the Bank of issuing or maintaining
the Letter of Credit or the Bank's obligations under this Agreement or to reduce
the amounts receivable by the Bank hereunder or to reduce the rate of return on
the capital of the Bank in connection with this Agreement (which increase in
cost, reduction in amounts receivable or reduction in rate of return shall be
determined by the Bank's reasonable allocation of such cost increase or
reduction in amounts receivable resulting from such event), then within 30
Business Days after demand by the Bank, the Borrower shall pay to the Bank, from
time to time as specified by the Bank, additional amounts that in the aggregate
shall be sufficient to compensate the Bank for such increased cost, reduction in
amounts receivable or reduction in rate of return or take such other action that
shall be acceptable to the Trustee as shall cause the Bank's Letter of Credit
obligations hereunder to be terminated. A certificate as to such increased cost,
reduction in amounts receivable or reduction in rate of return by the Bank
together with evidence of the same showing calculations therefor, submitted by
the Bank to the Borrower shall, in absence of manifest error, be conclusive and
binding for all purposes.

               (2)  If after the date of this Agreement the Bank shall have
determined that any enactment, promulgation or adoption of or change in any
applicable law, treaty, regulation, rule or guideline regarding capital
adequacy, or in the interpretation or administration thereof, by any
administrative or governmental authority, central bank or comparable agency
charged with the interpretation or administration thereof, or compliance by the
Bank (or any controlling affiliate) with any guideline, request or directive
regarding capital adequacy (whether or not having the force of law and whether
or not failure to comply thereunder would be unlawful) of any such authority,
central bank or comparable agency, affects or would affect the amount of capital
required or expected to be maintained by the Bank (or any controlling affiliate)
and the Bank determines, on the basis of reasonable allocations, that the amount
of such capital is increased by or is based on its issuance or maintenance of
the Letter of Credit or the Bank's obligations under this Agreement, then,
within 30 Business Days after demand by the Bank, the Borrower shall pay to the
Bank, from time to time as specified by the Bank, additional amounts sufficient
to compensate the Bank therefor or take such other action that shall be
acceptable to the Trustee or shall cause the Bank's Letter of Credit obligations
hereunder to be terminated. A certificate as to such additional amounts,
together with evidence of the same showing calculations therefor, submitted to
the Borrower by the Bank shall, in the absence of manifest error, be conclusive
and binding for all purposes.

                                       11
<PAGE>

          (e)  General Interest Accrual; Place of Payment. Except as otherwise
               ------------------------------------------
provided in Section 2.02(a), all payments to the Bank under this Agreement
(including without limitation all payments becoming due under Sections 2.02(b)
and 2.02(c)) shall be accompanied by interest thereon, from the date such
payments become due until they are paid in full, at a fluctuating rate per annum
(computed for the actual number of days elapsed, based on a 360-day year) equal
to the Prime Rate; provided that any amount that is not paid within 10 days of
the date such amount is due and payable to the Bank under this Agreement shall
thereafter bear interest at a fluctuating rate per annum (computed for the
actual number of days elapsed, based on a 360-day year) equal to two percent
(2%) per annum above the Prime Rate. All payments by the Borrower to the Bank
under this Agreement shall be made in lawful currency of the United States at
the Bank's office at 1600 Market Street, Philadelphia, Pennsylvania 19103,
Attention: Corporate Banking, or at such other address and to the attention of
such other person as the Bank may stipulate by written notice to the Borrower,
upon at least 30 days prior written notice, or by a wire transfer in immediately
available funds from the Borrower to the Bank in accordance with written wire
instructions given to the Borrower by the Bank; provided that (i) all
reimbursement and transaction charge payments under Sections 2.02(a) and 2.02(c)
shall be made at the Bank's letter of credit office at 237 Fifth Avenue, 3rd
Floor - Annex Building, Pittsburgh, PA 15222, Attention: Letter of Credit
Department, or such other address as the Bank may stipulate by written notice to
the Borrower, and (ii) all reimbursement payments under Section 2.02(a) shall be
made in immediately available funds.

  Section 2.03 Transfer; Reduction; Reinstatement.
               ----------------------------------

          (a)  Transfer. The Letter of Credit may be transferred in accordance
               --------
with paragraph 9 of the Letter of Credit.

          (b)  Reduction. The Letter of Credit Amount and the respective
               ---------
Principal Component and Interest Component thereof shall be automatically
reduced as specified in paragraph 5 of the Letter of Credit. With respect to any
reductions of the Letter of Credit Amount pursuant to the terms of the Letter of
Credit as a result of Bonds ceasing to be Outstanding, the Bank shall have the
right, at its option, to require the Trustee to promptly surrender the
outstanding Letter of Credit to the Bank and to accept in substitution therefor
a letter of credit in the form of Exhibit A attached hereto, dated the date of
such substitution, for an amount equal to the Letter of Credit Amount as so
reduced, but otherwise having terms identical to the then outstanding Letter of
Credit.

          (c)  Reinstatement. In the event of a drawing under the Letter of
               -------------
Credit with an Interest Draft, the Interest Component of the Letter of Credit
Amount shall, as provided in paragraph 6 of the Letter of Credit and subject to
the conditions therein set forth, be automatically reinstated by an amount equal
to the amount of such drawing. In the event of a drawing under the Letter of
Credit with a Tender Draft, the Principal Component and Interest Component of
the Letter of Credit Amount shall, as provided in paragraph 7 of the Letter of
Credit, be reinstated with respect to such drawing (1) when and to the extent
that (i) the Bank has received reimbursement for such drawing in immediately
available funds (or the Trustee has received immediately available funds which,
pursuant to the Indenture, the Trustee will immediately remit to the Bank as
reimbursement for such drawing) and (ii) the Trustee has delivered a certificate
to the Bank in respect of such reinstatement in the form required by

                                       12
<PAGE>

paragraph 7 of the Letter of Credit, or (2) when and to the extent the Bank, at
its option, upon the Borrower's request, advises the Trustee in writing that
such reinstatement shall occur, it being understood that the Bank shall have no
obligation to grant any such reinstatement except as set forth in clause (1) of
this sentence.

     Section 2.04 Obligations Absolute. The obligations of the Borrower under
                  --------------------
this Article shall be absolute, unconditional and irrevocable and shall be
performed strictly in accordance with the terms of this Agreement, under all
circumstances whatsoever, including without limitation the following
circumstances: (i) any lack of validity or enforceability of the Letter of
Credit, the Bond Documents or any other agreement or document relating thereto;
(ii) any amendment or waiver of or any consent to or departure from the Letter
of Credit, the Bond Documents or any document relating thereto; (iii) the
existence of any claim, set-off, defense or other right which the Borrower may
have at any time against the Trustee (or any persons or entities for whom the
Trustee may be acting), the Remarketing Agent, the Bank or any other person or
entity, whether in connection with this Agreement, the transactions described
herein or any unrelated transaction; or (iv) any of the circumstances
contemplated in clauses (1) through (7), inclusive, of Section 2.06(a), except
to the extent provided for therein. The Borrower understands and agrees that no
payment by it under any other agreement (whether voluntary or otherwise) shall
constitute a defense to its obligations hereunder, except to the extent that the
Bank has been indefeasibly paid in full.

     Section 2.05 Indemnification. To the extent permitted by applicable law,
                  ---------------
the Borrower hereby indemnifies and holds harmless the Bank (and its directors,
officers, employees and agents) from and against any and all claims, damages,
losses, liabilities, costs or expenses (including reasonable attorneys' fees for
counsel of the Bank's choice) whatsoever which the Bank may incur (or which may
be claimed against the Bank by any person or entity whatsoever) by reason of or
in connection with (a) the issuance or a transfer of, or payment or failure to
pay under, the Letter of Credit, (b) any material breach by the Borrower of any
representation, warranty, covenant, term or condition in, or the occurrence of
any default under, this Agreement, the Collateral Documents or the Bond
Documents, including all fees or expenses resulting from the settlement or
defense of any claims or liabilities arising as a result of any such breach or
default, and (c) involvement of the Bank in any legal suit, investigation,
proceeding, inquiry or action as a consequence, direct or indirect, of the
Bank's issuance of the Letter of Credit, its entering into this Agreement or any
other event or transaction contemplated by any of the foregoing; provided the
Borrower shall not be required to indemnify the Bank for any claims, damages,
losses, liabilities, costs or expenses to the extent, but only to the extent,
caused by (i) Bank's failure to observe general banking practices, (ii) the
gross negligence or willful misconduct of the Bank or (iii) the Bank's failure
to pay under the Letter of Credit after the presentation to it by the Trustee of
a draft and certificate strictly complying with the terms and conditions of the
Letter of Credit, unless the Bank in good faith believes that it is prohibited
by law or other legal authority from making such payment. Nothing in this
Section is intended to limit the Borrower's reimbursement obligations contained
in Section 2.02(a). The obligations of the Borrower under this Section shall
survive the termination of this Agreement.

                                       13
<PAGE>

     Section 2.06 Liability of Bank.
                  -----------------

          (a)     As between the Borrower and the Bank, the Borrower assumes all
risks of the acts or omissions of the Trustee with respect to the Trustee's use
of the Letter of Credit. Neither the Bank nor any of its officers or directors
shall be liable or responsible for: (1) the use which may be made of the Letter
of Credit or for any acts or omissions of the Trustee in connection therewith;
(2) except as set forth in subsection 2.06(a)(3) hereof, the form, validity,
sufficiency, accuracy or genuineness of any documents (including without
limitation any documents presented under the Letter of Credit), or of any
statement therein or endorsement thereon, even if any such documents, statements
or endorsements should in fact prove to be in any or all respects invalid,
insufficient, fraudulent, forged, inaccurate or untrue; (3) the payment by the
Bank against presentation of documents which do not comply with the terms of the
Letter of Credit unless the documents on their face appear not to comply with
the terms of the Letter of Credit, including failure of any documents to bear
any reference or adequate reference to the Letter of Credit, or any other
failure by the Trustee to comply fully with conditions required in order to
effect a drawing under the Letter of Credit; (4) the validity or sufficiency of
any instrument transferring or assigning or purporting to transfer or assign the
Letter of Credit or the rights or benefit thereunder or proceeds thereof, in
whole or in part, which may prove to be invalid or ineffective for any reason
unless the documents on their face appear not to comply with the terms of the
Letter of Credit; (5) errors, omissions, interruptions, losses or delays in
transmission or delivery of any messages by mail, cable, telegraph, telex,
telephone or otherwise; (6) any loss or delay in the transmission or otherwise
of any document or draft required in order to make a drawing under the Letter of
Credit; or (7) any other circumstances whatsoever in making or failing to make
payment under the Letter of Credit; except only that the Borrower shall have a
claim against the Bank, and the Bank shall be liable to the Borrower, to the
extent, but only to the extent, of any direct, as opposed to consequential,
damages suffered by the Borrower which the Borrower proves were caused solely by
(i) the Bank's gross negligence or willful misconduct, (ii) or Bank's failure to
observe general banking practices or (iii) the Bank's willful failure to pay
under the Letter of Credit after the presentation to it by the Trustee of a
draft and certificate strictly complying with the terms and conditions of the
Letter of Credit, unless the Bank in good faith believes that it is prohibited
by law or other legal authority from making such payment. In furtherance and not
in limitation of the foregoing, the Bank may accept documents that appear on
their face to be in order, without responsibility for further investigation,
regardless of any notice or information to the contrary; provided that if the
Bank shall receive written notification from both the Trustee and the Borrower
that documents conforming to the terms of the Letter of Credit to be presented
to the Bank are not to be honored, the Bank agrees that it will not honor such
documents.

          (b)     Except for the Bank's obligations under the Letter of Credit,
the Bank shall have no liability to the Borrower or any other person as a result
of any reduction of the credit rating of the Bank or any deterioration in the
Bank's financial condition, and the Borrower hereby indemnifies and holds
harmless the Bank from any and all claims, damages, losses, liabilities, costs
or expenses relating to the Letter of Credit asserted by or on behalf of the
Borrower, the Guarantors, or any affiliate or agent thereof, which the Bank may
incur in connection therewith. No reduction of the credit rating of the Bank or
deterioration in the Bank's financial condition shall reduce or in any way
diminish the obligations of the Borrower to the

                                       14
<PAGE>

Bank under this Agreement, including without limitation the Borrower's
obligation to pay Letter of Credit commitment fees to the Bank and to reimburse
the Bank for any drawing under the Letter of Credit.

                                 ARTICLE III.

                                   SECURITY

     Section 3.01 Security and Subrogation under Indenture. The Borrower and the
                  ----------------------------------------
Bank intend that (i) the Bank will have the security and benefit of the Bond
Documents as provided in the Indenture and (ii) in the event of one or more
draws under the Letter of Credit and the application thereof to the payment of
Bonds, the Bank will be subrogated pro tanto to the rights of the Trustee and
the holders of such Bonds under the Bond Documents and in and to all funds and
security held by the Trustee under the Indenture for the payment of the
principal of and interest on such Bonds, including without limitation all loan
funds, construction funds, escrow funds, revenue funds, operation funds, debt
service funds, reserve funds, redemption funds and other funds and securities
and other instruments comprising investments thereof. In addition, the Bank
shall have any and all other subrogation rights available to the Bank at law or
in equity.

     Section 3.02 Pledge of Rights to Certain Funds and Investments. To secure
                  -------------------------------------------------
the Borrower's obligations to the Bank under this Agreement, the Borrower hereby
pledges to the Bank, and grants to the Bank a security interest in, all of the
Borrower's right, title and interest in and to all funds and investments thereof
now or hereafter held by the Trustee under the Indenture as security for the
payment of the Bonds, including without limitation any and all loan funds,
escrow funds, revenue funds, operations funds, debt service funds, reserve
funds, redemption funds and other funds and securities and other instruments
comprising investments thereof and interest and other income derived therefrom
held as security for the payment of the Bonds, such pledge, assignment and grant
being under and subject only to the rights of the Trustee under the Indenture.
The Borrower covenants and agrees that it will defend the Bank's rights and
security interests created by this Section against the claims and demands of all
persons except the Trustee. In addition to its other rights and remedies under
this Agreement and the Bond Documents, the Bank shall have all the rights and
remedies of a secured party under the Uniform Commercial Code of the State or
other applicable law with respect to the security interests created by this
Section. The Bank's rights under this Section are in addition to, and not in
lieu of, its rights described in Section 3.01.

     Section 3.03 Pledged Bonds.
                  -------------

          (a)     Pledge. To secure the Borrower's obligations to the Bank under
                  ------
this Agreement, the Borrower hereby pledges and assigns to the Bank, and grants
to the Bank a security interest in, all of the Borrower's right, title and
interest, now owned or hereafter acquired, in and to any and all Unremarketed
Tendered Bonds (together with all income therefrom and proceeds thereof)
purchased pursuant to the Indenture with the proceeds of a Tender Draft
presented under the Letter of Credit for which neither (i) full reimbursement
has

                                       15
<PAGE>

been made to the Bank nor (ii) the Trustee holds sufficient funds which,
pursuant to the Indenture, the Trustee is required to apply on behalf of the
Borrower to reimburse the Bank in full for such Tender Draft on the date such
Tender Draft is paid by the Bank. Such Unremarketed Tendered Bonds shall be
pledged to the Bank, registered in its name as pledgee of the Borrower and
delivered to and held by the Trustee as agent for the Bank under this Section
3.03 or, at the option of the Bank by written notice to the Borrower and the
Trustee, the pledged Unremarketed Tendered Bonds specified in such notice shall
be delivered to and held by the Bank. Unremarketed Tendered Bonds which are so
pledged and held by the Trustee as agent for the Bank or by the Bank are herein
referred to as "Pledged Bonds".

          (b)  Pledged Bond Payments. Any principal of, premium on and interest
               ---------------------
on Pledged Bonds which becomes due and payable (including any due-bills received
upon purchase thereof pursuant to the record date provisions of the Indenture or
the Bonds) shall be paid to the Bank. All sums of money so paid to the Bank in
respect of Pledged Bonds shall be credited against the obligation of the
Borrower to reimburse the Bank, with interest, under Section 2.02(a) for the
amount drawn with a Tender Draft to fund the purchase of such Pledged Bonds
pursuant to the Indenture.

          (c)  Release of Pledged Bonds. If the Borrower pays or causes to be
               ------------------------
paid in full its obligation under Section 2.02(a) for the reimbursement of the
amount (or allocable portion thereof) drawn with a Tender Draft to fund the
purchase of Pledged Bonds pursuant to Article IV of the Indenture (or if the
Trustee has received immediately available funds which, pursuant to Section 4.05
of the Indenture, the Trustee is required to pay over promptly to the Bank in an
amount sufficient to pay the Borrower's reimbursement obligation under Section
2.02(a) with respect to the amount drawn with such Tender Draft to fund the
purchase of such Pledged Bonds), and provided no Event of Default has occurred
and is continuing, the Bank will release from the pledge of this Agreement and
will deliver, or cause its agent to deliver, such Pledged Bonds to such person
or persons as the Trustee or the Borrower may direct. An amount equal to the
principal of, plus accrued interest on, such Pledged Bonds shall be presumed
(absent notice to the contrary) to be an "amount sufficient" for purposes of
this Section 3.03(c) and, upon receipt of such amount by the Trustee for payment
to the Bank as aforesaid, the Trustee shall be automatically authorized to
deliver such Pledged Bonds as aforesaid free from the pledge of this Agreement,
unless the Trustee has received from the Bank written notice or telephonic
notice (which shall thereafter be confirmed in writing) that such release shall
not occur.

          (d)  Liability of Bank. The Bank shall not be liable for failure to
               -----------------
collect or realize upon the obligations secured by the Pledged Bonds or any
collateral security or guarantee therefor, or any part thereof, or for any delay
in so doing, and the Bank shall not be under any obligation to take any action
whatsoever with regard thereto.

          (e)  Representations; Rights and Remedies. The Borrower represents and
               ------------------------------------
warrants to the Bank that the pledge, assignment and delivery of Pledged Bonds
pursuant to this Section 3.03 will create a valid first lien on and a first
perfected security interest in, all right, title and interest of the Borrower in
and to the Pledged Bonds, and the proceeds thereof. The Borrower covenants and
agrees that it will defend the Bank's right, title and security interest in and
to the Pledged Bonds and the proceeds thereof against the claims and demands of
all persons. In addition to its other rights and remedies under this Agreement
and the Bond

                                       16
<PAGE>

Documents, the Bank shall have all the rights and remedies of a secured party
under the Uniform Commercial Code of the State or other applicable law with
respect to the security interests created by this Section.

     Section 3.04 Mortgage; Additional Security. To further secure the
                  -----------------------------
Borrower's obligations to the Bank under this Agreement, the Borrower shall
execute (and with respect to subsection (iv) below, shall cause each Guarantor
to execute) (i) a mortgage and security agreement granting the Bank a first
priority mortgage on the Project Facilities (the "Mortgage"); (ii) an
Environmental Indemnity Agreement relating to the Project Facilities (the
"Environmental Indemnity Agreement"); (iii) an Assignment of Construction and
Development Documents collaterally assigning the Borrower's interest in all
Construction Documents (the "Assignment of Construction Documents") and (iv) a
Security Agreement granting the Bank a security interest in all of the
Borrower's and each Guarantors's accounts, general intangibles, instruments,
chattel paper, inventory, machinery and equipment (the "Security Agreement").

     Section 3.05 Financing Statements. The Borrower will execute and deliver,
                  --------------------
and cause to be executed and delivered, such financing statements and
continuation statements under the Uniform Commercial Code of the State or other
applicable law as the Bank may specify in order to perfect and maintain
perfection of the Bank's security interests under this Agreement, and the
Collateral Documents, and will pay the costs of filing the same in such public
offices as the Bank may designate.

     Section 3.06 Guaranty. The Borrower shall cause the Guarantors to execute
                  --------
and deliver to the Bank a Guaranty and Surety Agreement dated as of the date
hereof (the "Guaranty") under which the Guarantors shall guarantee and become a
surety for the Borrower's obligations under this Agreement.

                                  ARTICLE IV.

                             CONDITIONS PRECEDENT

     Section 4.01 Documentation. As conditions precedent to the Bank's issuance
                  -------------
of the Letter of Credit, the Bank shall have received each of the following in
form and substance satisfactory to the Bank:

          (a)     Executed copies of this Agreement and the Collateral Documents
(other than the Mortgage, the Environmental Indemnity Agreement and the
Assignment of Construction Documents), and true and correct copies of executed
copies of the Bond Documents and all documentation delivered in connection
therewith;

          (b)     Such financing statements as the Bank may require pursuant to
Section 3.05;

          (c)     Certified copies of the certificate or articles of formation
or incorporation, operating agreement or bylaws and authorizing resolutions of
the Borrower and each of the Guarantors, as applicable, and a good standing
certificate for the Borrower and each

                                       17
<PAGE>

of the Guarantors issued by the state of formation or incorporation of the
Borrower and each of the Guarantors;

          (d)     A certificate of the Borrower as of the date of execution and
delivery hereof stating that (i) the representations and warranties contained in
Article V are true and correct and (ii) no Event of Default has occurred and is
continuing, and no event has occurred and is continuing which, with the giving
of notice or lapse of time or both, would constitute an Event of Default;

          (e)     An opinion of counsel to the Borrower and the Guarantors
(which opinions may be issued, where indicated, in reasonable reliance upon
certifications, opinions and other documentation derived from governmental
agencies and others having particular access to materials and information
necessary to reach the conclusions expressed in such opinions) in form and
substance acceptable to the Bank and its counsel;

          (f)     A certificate or certificates of the officers of the Issuer
covering such matters as to the Issuer and the Bond Documents as the Bank may
reasonably request;

          (g)     Opinions of Stevens & Lee, bond counsel, and Conrad O'Brien
Gellman & Rohm, P.C., counsel to the Issuer, covering such matters as to the
Issuer and the Bond Documents as the Bank may reasonably request;

          (h)     A certificate or certificates of the Guarantors as of the date
of execution and delivery hereof (i) stating that the representations and
warranties contained in the Guaranty are true and correct and (ii) no Event of
Default as defined in the Guaranty has occurred and is continuing, and no event
has occurred and is continuing, which with the giving of notice or lapse of time
or both, would constitute such an Event of Default;

          (i)     Consolidated financial statements of IS&S, Inc. and its
subsidiaries as of March 31, 2000 for the six-month period then ending;

          (j)     Evidence of the insurance required under Section 6.05 and that
the Project Facilities are not located in a Special Flood Hazard area as defined
by the United States Department of Housing and Urban Development;

          (k)     The "Phase One" environmental reports concerning the Project
Facilities dated October 4, 1999 prepared by Tri State Environmental Management
Services (the "Phase One Report") and satisfactory to the Bank; and

          (l)     Such other documents, certificates, approvals, assurances and
opinions as are listed in the closing memorandum filed with the Trustee in
connection with the issuance of the Bonds or as the Bank may reasonably request.

     Section 4.02 Issuance of Bonds. On the date of execution and delivery
                  -----------------
hereof, all conditions precedent to the issuance and original placement of the
Bonds shall have been satisfied, and the Bonds shall have been duly issued and
delivered.

                                       18
<PAGE>

                                  ARTICLE V.

                        REPRESENTATIONS AND WARRANTIES

               Each Borrower represents and warrants as follows:

     Section 5.01 Existence. The Borrower is a limited liability company, duly
                  ---------
formed, validly existing and in good standing under the laws of Pennsylvania.
The Borrower has furnished to the Bank true and complete copies of its articles
of formation and operating agreement. The Borrower has all necessary permits,
licenses, certifications and qualifications to conduct its business as it is
presently being conducted, and has complied in all material respects with all
applicable requirements of the United States and the State, and their respective
agencies and instrumentalities, to own and operate the Project Facilities as it
is intended to be owned and operated pursuant to this Agreement.

     Section 5.02 Power, Authorization and No Conflicts. The Borrower has all
                  -------------------------------------
requisite power to own and operate its properties and to conduct its business
and operations as it is currently being conducted. The execution, delivery and
performance by the Borrower of this Agreement, the Collateral Documents and the
Bond Documents to which the Borrower is a party (i) are within the Borrower's
powers, and (ii) do not contravene the certificate of incorporation or the
bylaws of the Borrower or any law, rule, regulation, decree, order or judgment
applicable to the Borrower or any indenture, mortgage, instrument, contract,
agreement or restriction binding on or affecting the Borrower or any of its
assets, or result in the creation of any mortgage, pledge, lien or encumbrance
upon any of its assets other than as provided by the terms thereof.

     Section 5.03 Governmental Authorizations and Other Approvals. The Borrower
                  -----------------------------------------------
has all necessary governmental and other authorizations, approvals, consents,
permits, licenses, certifications and qualifications, and has complied in all
material respects with all applicable requirements of the United States and the
State and other jurisdictions where the Borrower conducts business or owns
property and of their respective agencies and instrumentalities, to conduct its
business as it is presently conducted and to own and operate the Project
Facilities as it is presently intended to be owned and operated pursuant to this
Agreement. No authorization, approval or other action by, and no notice to or
filing with, any governmental authority, regulatory body or court is required
for the due execution, delivery and performance by the Borrower of this
Agreement, the Collateral Documents and the Bond Documents to which the Borrower
is a party, except such as have been obtained or are not issuable on or before
the Date of Issuance.

     Section 5.04 Validity and Binding Effect. This Agreement, the Collateral
                  ---------------------------
Documents and the Bond Documents to which the Borrower is a party are, or in the
case of the Mortgage, the Environmental Indemnity Agreement and the Assignment
of Construction Documents, upon their due execution will be, the legal, valid
and binding obligations of the Borrower, enforceable against the Borrower in
accordance with their terms, subject to the application by a court of general
principles of equity and to the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar law affecting creditors' rights generally.

                                       19
<PAGE>

     Section 5.05 No Litigation. There is no pending action or proceeding before
                  -------------
any court, governmental agency or arbitrator against or involving the Borrower
and, to the best of the Borrower's knowledge, there is no threatened action or
proceeding affecting the Borrower before any court, governmental agency or
arbitrator which, in any case, might materially and adversely affect the
business, operations, assets, condition (financial or otherwise) or prospects of
the Borrower, or the validity or enforceability of this Agreement, the
Collateral Documents or the Bond Documents to which the Borrower is a party, or
the acquisition, construction, renovation and operation of the Project
Facilities.

     Section 5.06 No Violations. The Borrower is not, and no event has occurred
                  -------------
which with the passage of time or the giving of notice or both would result, in
noncompliance with, breach of or in default under (a) any applicable law or
administrative regulation of the United States, the State or any other
governmental body or agency or instrumentality thereof or any applicable
judgment, order or decree or (b) the Bond Documents or any other credit
agreement, indenture, mortgage, agreement or other instrument to which it is a
party or otherwise subject, where the result of such noncompliance, breach or
default would have a material adverse effect on the Borrower. The Borrower has
no knowledge of any violation, nor is there any notice or other record of any
violation, of any zoning, subdivision, environmental, building or other statute,
ordinance, regulation, restrictive covenant or other restriction applicable to
the Project Facilities.

     Section 5.07 Compliance. To the best of the Borrower's knowledge, the
                  ----------
acquisition and renovation of the Project Facilities as contemplated by this
Agreement and the use and operation of the Project Facilities do and shall, in
all material respects, comply with, and are lawful, permitted and conforming
uses under, all applicable building, fire, safety, zoning, subdivision, sewer,
environmental, health, insurance and other laws, ordinances, rules, regulations
and plan approval conditions of any governmental or public body or authority,
and the Borrower has obtained, or will obtain prior to commencement of the
renovation of the Project Facilities, all permits, licenses or approvals from
such governmental or public bodies or authorities which are a necessary
precondition to the acquisition, construction and renovation of the Project
Facilities.

     Section 5.08 Title to Properties; Liens and Encumbrances. The Borrower has
                  -------------------------------------------
good and marketable title in fee simple to all of its real property and valid
and indefeasible ownership of all of its fixtures, equipment and other assets.
All such real property, fixtures and equipment necessary to the conduct of the
business of the Borrower are in reasonable working order and free of any
material defects, and are suitable for the purposes for which they are presently
being used, and repair or replacement thereof has not knowingly been deferred.
There exist no Liens against any of the real or personal, tangible or
intangible, assets of the Borrower (including without limitation statutory and
other liens of mechanics, workers, contractors, subcontractors, suppliers,
taxing authorities and others), except Permitted Liens; and the Borrower has not
made a contract or arrangement of any kind, the performance of which by the
other party thereto could give rise to a Lien on the Project Facilities by
operation of law or otherwise except such as are adequately and fully covered by
the Bank's title insurance insuring the lien of the Mortgage.

                                       20
<PAGE>

          Section 5.09  Utilities and Access. All utility services necessary for
                        --------------------
operation of the Project Facilities, including water supply, storm and sanitary
sewer facilities, gas, electricity and telephone facilities are available within
the boundaries of the Project Facilities; and all roads necessary for the full
utilization of the Project Facilities for their intended purposes have been
completed and the necessary rights-of-way therefor have been acquired by the
appropriate governmental authority or others or have been dedicated to public
use and accepted by such governmental authority.

          Section 5.10  Financial Information. The audited consolidated balance
                        ---------------------
sheets of IS&S, Inc. and its subsidiaries as of September 30, 1999, and the
related consolidated statements of income and of cash flows for the fiscal year
ended on September 30, 1999, present fairly the consolidated financial condition
of IS&S, Inc. and its subsidiaries as at such date, and the consolidated results
of their operations and their consolidated cash flows for the Fiscal Year then
ended. All such financial statements, including the related schedules and notes
thereto, have been prepared in accordance with GAAP applied consistently
throughout the periods involved. Neither the Borrower nor any of the Guarantors
had, at the date of the balance sheet referred to above, any material contingent
obligation, liability for taxes, or any long-term lease or unusual forward or
long-term commitment, including, without limitation, any interest rate or
foreign currency swap or exchange transaction, which is required by GAAP to be
but is not reflected in the foregoing statements or in the notes thereto. Since
the date of the balance sheet referred to above there has been no material
adverse change in the financial condition of IS&S, Inc. on a consolidated basis.

          Section 5.11  ERISA. The Borrower, the ERISA Affiliates and the Plans
                        -----
are in compliance in all material respects with those provisions of ERISA and of
the Code which are applicable with respect to any Plan. No Prohibited
Transaction and no Reportable Event has occurred with respect to any Plan.
Neither the Borrower nor any of the ERISA Affiliates is an employer with respect
to any Multiemployer Plan. The Borrower and the ERISA Affiliates have met the
minimum funding requirements under ERISA and the Code with respect to each of
their respective Plans, if any, and have not incurred any liability to the PBGC
or any Plan. The execution, delivery and performance of this Agreement does not
constitute a Prohibited Transaction. There is no material Unfunded Benefit
Liability with respect to any Plan.

          Section 5.12  Environmental Representations. The Borrower has obtained
                        -----------------------------
the Phase One Report and, except as set forth in Exhibit C attached hereto, (a)
the Borrower does not know nor has reason to know of any activity at the Project
Facilities or any storage, treatment or disposal of any waste connected with any
activity at the Project Facilities, which has been conducted, or is being
conducted, in violation of any Environmental Law; (b) the Borrower does not know
nor has any reason to know of any of the following which could give rise to
material liabilities, material costs for remediation or a material adverse
change in the business, operations, assets, condition (financial or otherwise)
or prospects of the Borrower: (i) Contamination present at the Project
Facilities; (ii) polychlorinated biphenyls present at the Project Facilities,
(iii) asbestos or materials containing asbestos present at the Project
Facilities, or (iv) urea formaldehyde foam insulation present at the Project
Facilities; (c) no portion of the Project Facilities constitutes an
Environmentally Sensitive Area; (d) the Borrower does not know nor has

                                       21
<PAGE>

reason to know of any investigation of the Project Facilities for the presence
of radon gas or radioactive decay products of radon; and (e) no tanks presently
or formerly used for the storage of any liquid or gas above or below ground are
present at the Project Facilities or any property owned, leased or otherwise
used by the Borrower. No lien has been imposed upon the Borrower's or the
Guarantors' revenues or real or personal property pursuant to 42 U.S.C. (S)
9607(e) as that section may be amended from time to time, or pursuant to any
other applicable legal authority relating to contamination arising on or from
such entities' operations or property, and there exist no circumstances which
might lead to the imposition of such lien.

          Section 5.13  Outstanding Obligations. Attached hereto as Exhibit D is
                        -----------------------
a complete list of all Obligations of the Borrower as of the date of execution
and delivery hereof having an outstanding principal balance of $100,000 or more,
together with a description of the instruments evidencing, governing or securing
such Obligations. There exists no material default under any such instrument.

          Section 5.14  Other Material Contracts. Attached hereto as Exhibit E
                        ------------------------
is a complete list of all Material Contracts currently in effect which are not
described in Exhibit D. The Borrower has complied with all material provisions
of such Material Contracts and there exists no material default under any such
Material Contract by the Borrower or by any other party thereto.

          Section 5.15  Solvency. Each of the Borrower and the Guarantors is
                        --------
and, after giving effect to this Agreement and all other agreements of the
Borrower and the Guarantors being entered into on the date of execution and
delivery of this Agreement, will be solvent (which for this purpose shall mean
that the fair market value of its property is in excess of the total amounts of
its debts and that it is able to pay its debts as they mature).

          Section 5.16  Disclosure. This Agreement, the exhibits hereto and the
                        ----------
other documents, certificates, schedules and statements furnished to the Bank by
or on behalf of the Borrower or the Guarantors in connection with the
transactions contemplated hereby, do not contain any untrue statement of a
material fact and do not omit to state a material fact necessary in order to
make the statements contained therein not misleading in light of the
circumstances under which they were made. There is no fact known to the Borrower
which materially adversely affects or in the future may (so far as the Borrower
can now foresee) materially adversely affect the business, operations,
properties, assets or financial condition of the Borrower or the Guarantors
which has not been set forth in this Agreement or in the other documents,
certificates and statements furnished to the Bank by or on behalf of the
Borrower or the Guarantors prior to the date of execution and delivery of this
Agreement in connection with the transactions contemplated hereby.

          Section 5.17  Representations in Other Documents. The Borrower hereby
                        ----------------------------------
makes to and for the benefit of the Bank each of the representations and
warranties of the Borrower contained in the Bond Documents and the other
documents delivered by the Borrower in connection therewith.

                                       22
<PAGE>

                                  ARTICLE VI.

                               GENERAL COVENANTS

          So long as any amount is available under the Letter of Credit,
the Liquidity Period has not been terminated or any amount is due and owing to
the Bank hereunder, the Borrower covenants that, except to the extent the Bank
shall otherwise consent in writing, each of the following covenants shall be
performed and complied with by the Borrower, or the Guarantors, as indicated:

          Section 6.01  Maintenance of Existence. The Borrower will maintain its
                        ------------------------
existence, rights and privileges and its qualification to do business in the
State, will not dissolve or otherwise dispose of all or substantially all of its
assets.

          Section 6.02  Disposition of Assets. The Borrower shall not sell,
                        ---------------------
convey, assign, lease, abandon or otherwise transfer or dispose of, voluntarily
or involuntarily, any of its tangible properties or assets, except: (i)
transactions involving the sale of inventory in the ordinary course of business;
(ii) any sale, transfer or lease of assets in the ordinary course of business
which are no longer necessary or required in the conduct of the Borrower's
business; (iii) any sale, transfer or lease of assets in the ordinary course of
business which are replaced by substitute assets acquired or leased provided
such substitute assets are subject to the Bank's security interest; or (iv) any
sale, transfer or lease of assets, other than those specifically excepted
pursuant to clauses (i) through (iii) above, which is approved by the Bank.

          Section 6.03  Compliance with Laws. The Borrower will comply in all
                        --------------------
material respects with all applicable laws, rules, regulations and orders of any
governmental authority the noncompliance with which could materially and
adversely affect its business, operations, assets, condition (financial or
otherwise) or prospects or the Project Facilities, except for any such laws,
rules, regulations and orders which the Borrower is contesting in good faith by
appropriate proceedings and the noncompliance with which during such contest
would not materially and adversely affect the Borrower's business, operations,
assets, condition (financial or otherwise) or prospects or the Project
Facilities if the result of such contest were adverse to the Borrower.

          Section 6.04  Maintenance of Governmental Authorizations. The Borrower
                        ------------------------------------------
will maintain in full force and effect all of its governmental and other
authorizations, approvals, consents, permits, licenses, certifications and
qualifications necessary for the conduct of its business as it is presently
being conducted and the ownership and operation of its facilities as they are
presently being operated. The Borrower will promptly furnish copies of all
reports and correspondence relating to a loss or proposed revocation of any such
qualification to the Bank.

          Section 6.05  Maintenance of Insurance. The Borrower will maintain or
                        ------------------------
cause to be maintained (i) hazard insurance (including builder's risk insurance
with respect to any construction), with fire and extended coverage, vandalism
and malicious mischief coverage and boiler, pressure vessel, auxiliary piping,
pumps and compressors, refrigeration system, transformer and electrical
apparatus coverage, on all properties of the Borrower and the Guarantors, (ii)
business interruption (or, if appropriate, rental curtailment) insurance, (iii)

                                       23
<PAGE>

comprehensive general liability insurance and motor vehicle and rolling stock
insurance for bodily injury and property damage, and (iv) worker's compensation
insurance. Each of the policies in the preceding sentence shall be in form,
amounts and substance and with insurance companies reasonably satisfactory to
the Bank, containing 30-day notification of cancellation or change in coverage
clauses in favor of the Trustee and the Bank; and maintain such other insurance
with responsible and reputable insurance companies in such amounts and covering
such risks as are customarily maintained by persons similar to the Borrower and
the Guarantors or as the Bank may reasonably require by written notice to the
Borrower. All policies of insurance of the types described in clauses (i) and
(ii) of the first sentence of this Section with respect to the Project
Facilities shall name the Bank as a mortgagee/lender loss payee as its interests
may appear. The Borrower shall furnish to the Bank, upon written request, full
information as to all insurance carried by them.

          Section 6.06  Compliance with Bond Documents and Other Contracts. The
                        --------------------------------------------------
Borrower will comply in all material respects with all of its covenants and
agreements under the Bond Documents, as the same may hereafter be amended or
supplemented from time to time, and comply with, or cause to be complied with,
all material requirements and conditions of all contracts and insurance policies
which relate to the Project Facilities.

          Section 6.07  Maintenance of Properties. The Borrower will maintain
                        -------------------------
and preserve all of its properties in good working order and condition, ordinary
wear and tear and damage by insured casualty excepted; not permit, commit or
suffer any waste of any of its properties; not use or permit the use of any of
its properties for any unlawful purpose or permit any nuisance to exist thereon;
and make such repairs or replacements as are required or convenient for the
proper operation, repair and maintenance of the Borrower's properties in an
economical and efficient manner and consistent with customary standards
applicable to properties of like size and type.

          Section 6.08  Visitation Rights. The Borrower will permit the Bank or
                        -----------------
its agents or representatives following prior written notice to the Borrower to
examine and make copies of and abstracts from the records and books of account
of, and visit the properties of, the Borrower, and to discuss the affairs,
finances and accounts of the Borrower with the officers and accounts of the
Borrower.

          Section 6.09  Keeping of Books. The Borrower will keep proper books of
                        ----------------
record and account, in which full and correct entries shall be made of financial
transactions and the assets and operations of the Borrower in accordance with
GAAP, and have, a review of such books of record and account made by certified
public accountants reasonably acceptable to the Bank for each Fiscal Year.

          Section 6.10  Reporting Requirements. The Borrower will furnish or
                        ----------------------
cause to be furnished to the Bank the following in form satisfactory to the
Bank:

               (a)   Within 120 days after the close of each Fiscal Year of
IS&S, Inc.;

                                       24
<PAGE>

                    (1)  consolidated and consolidating financial statements for
     IS&S, Inc. and its subsidiaries, including a consolidated balance sheet and
     related consolidated statements of income, retained earnings, cash flows,
     and changes in financial position as of the end of such Fiscal Year and for
     such Fiscal Year, reviewed by independent certified public accountants
     acceptable to the Bank and prepared in accordance with GAAP, which shall
     fairly present the consolidated financial condition of IS&S, Inc. and its
     subsidiaries as at the end of such Fiscal Year; and

                    (2)  certificate signed by an officer of the Borrower
stating that (i) during such Fiscal Year the Borrower has observed and performed
in all material respects all of its covenants and agreements set forth in this
Agreement, except as disclosed in such certificate, and (ii) neither any Event
of Default nor any event which, with the giving of notice or lapse of time or
both, would constitute an Event of Default has occurred or is continuing, except
as disclosed in such certificate;

               (b)  Within 45 days after the end of each quarter of each Fiscal
Year of IS&S, Inc.;

                    (1)  unaudited consolidated and consolidating financial
     statements for IS&S, Inc. and its subsidiaries, including a consolidated
     balance sheet of IS&S, Inc. and its subsidiaries and related consolidated
     statement of income, retained earnings and cash flows as of the end of such
     fiscal quarter and for such fiscal quarter and the current fiscal year to
     the end of such fiscal quarter, which shall be internally prepared and
     presented on a consistent basis; and

                    (2)  certificate signed by an officer of the Borrower
     stating that (i) during such fiscal quarter the Borrower has observed and
     performed in all material respects all of its covenants and agreements set
     forth in this Agreement, except as disclosed in such certificate, and (ii)
     neither any Event of Default nor any event which, with the giving of notice
     or lapse of time or both, would constitute an Event of Default has occurred
     or is continuing, except as disclosed in such certificate;

               (c)  Promptly following the filing thereof, and in any event no
later than April 30 of each year, the annual Federal tax returns of IS&S, Inc.;

               (d)  Upon receipt thereof, copies of any letter or report with
respect to the management, operations or properties of the Borrower or either
Guarantor submitted to the Borrower or such Guarantor by its accountants in
connection with any annual or interim audit of the Borrower or either
Guarantor's accounts, and a copy of any written response of the Borrower or
either Guarantor to any such letter or report;

               (e)  As soon as possible and in any event within 3 days after
receipt of notice thereof, notice of any pending or threatened litigation,
investigation or other proceeding involving the Borrower or either Guarantor (i)
which could have a material adverse effect on the operations or financial
condition of the Borrower or such Guarantor or (ii) wherein the potential
damages, in the reasonable judgment of the Borrower or such Guarantor based upon
the advice of counsel experienced in such matters, are not fully covered by the
insurance policies

                                       25
<PAGE>

maintained by the Borrower or such Guarantor (except for the deductible amounts
applicable to such policies) or (iii) any material change in the condition of
the Project Facilities;

               (f)  As soon as possible, notice of any material adverse change
in the operations, financial condition or prospects of the Borrower or either
Guarantor;

               (g)  As soon as possible and in any event within 3 days after the
occurrence of each Event of Default or each event which, with the giving of
notice or lapse of time or both, would constitute an Event of Default, a
statement of an officer of the Borrower or either Guarantor setting forth the
details of such Event of Default or event and the action which the Borrower or
such Guarantor proposes to take with respect thereto;

               (h)  As soon as possible, notice of any proposed or agreed-upon
amendment or wavier of any provisions in any other credit documents to which the
Borrower or either Guarantor is a party; and

               (i)  Such other information respecting the operations and
properties, financial or otherwise, of the Borrower or either Guarantor as the
Bank may from time to time reasonably request.

          Section 6.11  Consents Under Bond Documents. The Borrower will obtain
                        -----------------------------
the consent of the Bank whenever the Borrower must obtain the consent of the
Trustee under the Bond Documents.

          Section 6.12  Amendments to Bond Documents. The Borrower will not
                        ----------------------------
consent to or enter into any amendment of or supplement to the Bond Documents.

          Section 6.13  Limitation on Optional Calls and Conversions. Except
                        --------------------------------------------
pursuant to Section 6.20, the Borrower will not exercise its rights under the
Bond Documents to direct the Issuer to call the Bonds for any optional
redemption thereof, unless the Borrower first demonstrates to the reasonable
satisfaction of the Bank that at the time of such redemption the Bank will be
fully reimbursed for all drawings on the Letter of Credit in connection with
such redemption. The Borrower will not direct or permit the conversion or
establishment of the interest rate on the Bonds to an interest rate other than
the Weekly Rate (as defined in the Indenture), unless either (i) the Letter of
Credit is being terminated in connection therewith and the Borrower demonstrates
to the reasonable satisfaction of the Bank that at the time of such conversion
the Bank will be fully reimbursed for all drawings on the Letter of Credit at or
before such conversion or (ii) the Bank consents in writing to such conversion
or establishment.

          Section 6.14  Liens; Negative Pledge. The Borrower will not enter into
                        ----------------------
any agreement with any Person other than the Bank which prohibits or limits the
ability of the Borrower to create, incur, assume or suffer to exist any
mortgage, pledge, security interest, encumbrance or other lien upon the Project
Facilities, except for the Credit Agreement. The Borrower will not create,
incur, assume or suffer to exist any mortgage, pledge, security interest,
encumbrance or other Lien upon the Project Facilities, other than:

                                       26
<PAGE>

               (i)   Permitted Liens existing on the date of this Agreement,
provided that the amounts secured by such liens are not greater than the amounts
secured thereby on the date of this Agreement;

               (ii)  liens for taxes, assessments or governmental charges or
levies not yet due and payable or being contested in good faith and by
appropriate proceedings promptly initiated and diligently conducted, provided
that a reserve or other appropriate provision, if any, as shall be required by
GAAP, shall have been made therefor and no foreclosure, distraint, sale or other
similar proceedings shall have been commenced and not stayed;

               (iii) statutory liens of landlords and liens of carriers,
warehouseman, mechanics and materialmen incurred in the ordinary course of
business for sums not yet due or being contested by appropriate proceedings
promptly initiated and diligently conducted, provided that such liens shall have
been bonded and a reserve or other appropriate provision, if any, as shall be
required by GAAP, shall have been made therefor;

               (iv)  liens incurred or deposits made in the ordinary course of
business in connection with worker's compensation, unemployment insurance and
other types of social security; and

               (v)   purchase money liens securing Obligations, provided that
each such lien is limited exclusively to the property purchased with the
proceeds of the Obligation secured by such lien.

          Section 6.15  Payment of Debt. The Borrower will make full and timely
                        ---------------
payment of the principal of and interest on all Obligations of the Borrower
whether now existing or hereafter arising, and comply in all material respects
with all covenants and agreements set forth in agreements evidencing Obligations
of the Borrower, except to the extent any such payment is being contested in
good faith, in appropriate proceedings which are being diligently pursued by the
Borrower and where adequate and appropriate reserves therefor have been set
aside by the Borrower and such non-payment has not given rise to any Lien on the
assets of the Borrower.

          Section 6.16  Environmental Covenants.
                        -----------------------

               (a)  The Borrower will cause all activities at the Project
Facilities during the term of this Agreement to be conducted in material
compliance with all Environmental Laws. The Borrower will cause all applicable
permits, licenses or approvals to be obtained and will cause all notifications
to be made, as required by Environmental Laws, and will, at all times, cause
compliance with the terms and conditions of any such approvals or notifications.
During the term of this Agreement, if reasonably requested by the Bank, the
Borrower will provide to the Bank copies of (i) applications or other materials
submitted to any governmental agency in compliance with Environmental Laws, (ii)
any notifications submitted to any person pursuant to Environmental Laws, (iii)
any permit, license, approval, amendment or modification thereto granted
pursuant to Environmental Laws, (iv) any record or manifest required to be
maintained pursuant to Environmental Laws, and (v) any correspondence, notice

                                       27
<PAGE>

of violation, summons, order, complaint or other document received by the
Borrower, its lessees, sublessees or assigns, pertaining to compliance with any
Environmental Laws.

               (b)  The Borrower will not cause or permit any Contamination
during the term of this Agreement. The Borrower will, at all times during the
term of this Agreement, cause Hazardous Substances created or used at the
Project Facilities to be handled in a manner which will not cause an undue risk
of Contamination.

               (c)  The Borrower will cause all construction of new structures
at the Project Facilities during the term of this Agreement to use design
features which safeguard against or mitigate the accumulation of radon or radon
products in concentrations exceeding an acceptable level in any such new
structure.

               (d)  Upon the occurrence and during the continuation of an Event
of Default, the Bank may, if it in good faith believes there is a violation of
or failure by the Borrower in compliance with the following, but no more
frequently than annually at its discretion, commission an investigation at the
Borrower's expense of (i) compliance at the Project Facilities with
Environmental Laws, (ii) the presence of Hazardous Substances or Contamination
at the Project Facilities, (iii) the presence at the Project Facilities of
materials which are described in clause (b) of Section 5.12, (iv) the presence
at the Project Facilities of Environmentally Sensitive Areas, (v) the presence
at the Project Facilities of radon products, or (vi) the presence at the Project
Facilities of tanks of the type described in paragraph (e) of Section 5.12. In
connection with any investigation pursuant to this paragraph, the Borrower, the
Guarantors and their lessees, sublessees and assigns, will comply with any
reasonable request for information made by the Bank or its agents in connection
with any such investigation. Any response to any such request for information
will be full and complete. The Borrower will assist the Bank and its agents to
obtain any records pertaining to the Project Facilities or to the Borrower and
the lessees, sublessees or assigns of the Borrower in connection with an
investigation pursuant to this paragraph. The Borrower will accord the Bank and
its agents access to all areas of the Project Facilities during regular business
hours and in reasonable manners in connection with any investigation pursuant to
this paragraph without unreasonable interference with the operation of business
at the Project Facilities. No investigation commissioned pursuant to this
paragraph shall relieve the Borrower from any responsibility for their
representations and warranties under Section 5.12.

               (e)  The Borrower hereby agrees to indemnify and to hold harmless
the Bank of, from and against any and all expense, loss or liability suffered by
the Bank by reason of the Borrower's breach of any of the provisions of Section
5.12 or this Section including, but not limited to, and whether or not
constituting such a breach (i) any and all expense that the Bank may reasonably
incur in complying with any Environmental Laws related to the Project
Facilities; (ii) any and all costs that the Bank may reasonably incur in
investigating or remedying any Contamination to the extent required by
Environmental Laws; (iii) any and all fines, penalties or other sanctions
(including a voiding of any transfer of the Project Facilities) assessed upon
the Bank by reason of a failure of the Borrower to have complied with
Environmental Laws; and (iv) any and all reasonable legal and professional fees
and costs incurred by the Bank in connection with the foregoing, provided that
the Borrower shall not be

                                       28
<PAGE>

responsible for any such expense, loss or liability resulting from the gross
negligence or willful misconduct of the Bank.

          Section 6.17  ERISA. The Borrower will comply in all material respects
                        -----
with all applicable provisions of ERISA and the Code as they relate to any Plan.
Promptly and in any event within 10 Business Days after receiving or becoming
aware thereof, the Borrower shall furnish to the Bank (i) a copy of any notice
of intent to terminate any Plan filed with the PBGC, (ii) a statement of the
chief financial officer of the Borrower setting forth the details of the
occurrence of any Reportable Event with respect to any Plan, (iii) a copy of any
notice that the Borrower or any ERISA Affiliate may receive from the PBGC
relating to the intention of the PBGC to terminate any Plan or to appoint a
trustee to administer any Plan, or (iv) a copy of any notice of failure to make
a required installment or other payment within the meaning of Section 412(n) of
the Code or Section 302(f) of ERISA with respect to a Plan.

          Section 6.18  Tax Returns. The Borrower will file all required tax
                        -----------
returns, pay when due all taxes imposed on their operations, assets, income or
properties, and, upon request, provide to the Bank copies of such returns and
receipts for payment of such taxes provided the Borrower may contest and in
certain cases refuse to pay any taxes that in the reasonable judgment of its
accountants and/or legal counsel the Borrower is not required to pay.

          Section 6.19  Leases. The Borrower hereby represents that there are no
                        ------
leases or agreements to lease all or any part of the Project Facilities now in
effect. The Borrower agrees not to enter into any lease or agreement to lease
all or any part of the Project Facilities without the prior written approval
thereof and of the respective tenant by the Bank

          Section 6.20  Optional Redemptions of Bonds.
                        -----------------------------

               (a)  The Borrower and the Bank intend to obtain shortly after the
Date of Issuance an appraisal of the Project Facilities on a completed value
basis from an MAI appraiser selected by the Bank and in form and substance
satisfactory to the Bank (the "Appraisal"). If the Appraisal establishes a value
of the Project Facilities (the "Project Appraised Value") such that the Letter
of Credit Amount is greater than 85% of the Project Appraised Value, then, upon
written request of the Bank, the Borrower agrees to direct the Trustee in
accordance with the terms and provisions of the Indenture to call the Bonds for
optional redemption as soon as practicable in an amount (rounded upwards to the
minimum increment permitted for such redemption) such that, after giving effect
to such redemption and the corresponding reduction in the Letter of Credit
Amount after such redemption, the Letter of Credit Amount is no greater than 85%
of the Project Appraised Value.

               (b)  In the event the Property is not acquired by the Borrower
within 180 days following the Date of Issuance, then, upon written request of
the Bank, the Borrower agrees to direct the Trustee in accordance with the terms
and provisions of the Indenture to call all of the Bonds for optional redemption
as soon as practicable.

               (c)  The Borrower agrees to direct the Trustee, in accordance
with the terms and provisions of the Indenture to call the Bonds for optional
redemption beginning on the Interest Payment Date occurring in August of 2001
and the Interest Payment Date occurring in

                                       29
<PAGE>

August of each year thereafter, in the amount as determined in accordance with
Exhibit H (with the amount of any optional redemption made pursuant to
subsection (a) above subtracted from the amount of the final redemption set
forth on Exhibit H). On the first day of [September, 2000] and the first day of
each calendar month thereafter so long as any Bonds are outstanding under the
Indenture, the Borrower shall pay to the Bank, for deposit by the Bank into the
"Bond Prepayment Fund" (which is hereby created) an amount equal to 1/12 of the
amount of the Bonds to be optionally redeemed on the following August 1. Funds
held in the Bond Prepayment Fund shall be immediately and automatically
transferred to the Bank to reimburse the Bank for draws made by the Trustee in
accordance with the Letter of Credit to optionally redeem the principal of the
Bonds on such dates.

               (d)  The Borrower agrees to take all steps necessary and required
by the Indenture to direct the Trustee to make the optional redemptions of the
Bonds at the times and on the dates required by subsections (a), (b) and (c)
above, in accordance with the terms and provisions of the Indenture.

          Section 6.21  Financial Covenants. The Borrower shall cause IS&S, Inc.
                        -------------------
to observe the following covenants:

               (a)  IS&S, Inc., on a consolidated basis, shall maintain at all
times, a ratio of total liabilities to EBITDA of not greater than 2.50:1.00
during the period from the Date of Issuance through September 29, 2000, and not
greater than 2.25:1.00 thereafter, calculated at the end of each fiscal quarter
of IS & S, Inc.

               (b)  IS&S, Inc., on a consolidated basis, shall maintain at all
times a Fixed Charge Ratio equal to or greater than 2.00:1.00, calculated at
the end of each fiscal quarter of IS&S, Inc.

               (c)  IS&S, Inc., on a consolidated basis, shall maintain at all
times a minimum Tangible Net Worth of $9,054,000, to be increased on each
September 30, commencing on September 30, 2000, by an amount equal to the sum of
(i) 75% of IS&S, Inc.'s net income (if a positive number) for the fiscal year
then ending, and (ii) 90% of the proceeds (net of customary and reasonable costs
of issuance) from the issuance of capital stock of IS&S, Inc.

          Section 6.22  Further Assurances. The Borrower will execute and
                        ------------------
deliver from time to time such further instruments and take such further actions
as may be reasonably required to carry out the purposes and provisions of this
Agreement and to assure the Bank of the subrogation and security rights in favor
of the Bank contemplated by Article IV and by the Indenture.

                                       30
<PAGE>

                                 ARTICLE VII.

                            CONSTRUCTION COVENANTS

          Section 7.01  Application of Project Fund. The Borrower shall not
                        ---------------------------
submit any requisition to the Trustee for disbursement of funds from the Project
Fund for Project costs which are inconsistent with the description of the
Project or the schedule of Project costs (the "Project Cost Schedule") to be
delivered to and approved by the Bank prior to the submission of the initial
requisition referred to in Section 7.01(b), and the Borrower shall not apply any
Bond proceeds in a manner inconsistent with the requisition therefor submitted
to the Trustee. Any costs of the Project incurred in excess of the budgeted
amounts set forth in the Project Cost Schedule will be paid for by the Borrower
upon demand of the Bank. Should it appear at any time that the balance of the
Project Fund is insufficient, in the Bank's reasonable judgment, to complete the
Improvements, the Bank may require that the Borrower pay, and the Borrower will
pay to the Trustee within 30 days of receipt of notice from the Bank, for
deposit in the Project Fund and disbursement pursuant to the Indenture, an
amount equal to the deficiency, as determined by the Bank, and the Bank shall
not be obligated to approve any further requisitions for disbursement from the
Project Fund until such amount is paid to the Trustee. Notwithstanding the
foregoing provisions, if the whole amount allocated to any component of Project
cost as set forth in the Project Cost Schedule is not, or in the Bank's
judgment, will not be expended to complete the work covered by such component,
then, with the Bank's approval, the Borrower may cause such excess to be
reallocated and used for any other component of Project cost as set forth on the
Project Cost Schedule prior to making any deposit required by the previous
sentence.

               (a)  Requisitions Regarding the Acquisition of the Property. The
                    ------------------------------------------------------
Borrower shall not submit to the Trustee under the Indenture a requisition for
the acquisition costs with respect to the Property, if any, unless and until all
of the conditions precedent set forth in Article IV shall have been satisfied
and the Bank shall have first received each of the following, in form and
substance satisfactory to the Bank:

                    (i)  Transaction Documents. The Mortgage and the
                         ---------------------
Environmental Indemnity Agreement.

                    (ii) Title Insurance Commitment. A prepaid title insurance
                         --------------------------
commitment or commitments issued by a reputable carrier reasonably satisfactory
to the Bank, committing to insure the Mortgage in the original Letter of Credit
Amount, subject only to such liens and encumbrances as the Bank may approve,
under a title insurance policy on the most current American Land Title
Association Standard Loan Policy - Revised Coverage, Form, without a pending
disbursements clause, containing (i) no exception for unrecorded easements,
discrepancies or conflicts in boundary lines, shortage in area and encroachments
which an accurate and complete survey would disclose or for loss or damage by
reason of encroachment other than by party walls, (ii) copies of any
restrictions or easements affecting the Project Facilities and, with respect to
any restrictions, affirmative coverage that they have not been violated and that
future violation would not work a forfeiture or reversion of title to the
Project Facilities, (iii) an endorsement against the invalidity or
unenforceability and loss of priority of the lien of the Mortgage resulting from
changes in the rates of interest payable on the obligations

                                       31
<PAGE>

secured by the Mortgage and (iv) such other endorsements and affirmative
insurance as may be reasonably required by the Bank, including but not limited
to, a contiguity endorsement, survey endorsement, zoning endorsement, revolving
credit endorsement, future advance endorsement and endorsement as to
nonviolation of any restrictions or easements, and the Borrower shall supply the
title company with such affidavits as may be necessary in connection therewith
and such policy or policies shall also obligate the title company to
affirmatively issue all advances pursuant to this Agreement, without exception
for mechanics' or materialmen's liens, and that access to the Property is by a
dedicated and accepted public right-of-way.

               (b)  Requisitions Regarding the Improvements on the Property. The
                    -------------------------------------------------------
Borrower shall not submit to the Trustee under the Indenture the first
requisition for hard construction costs with respect to the Improvements unless
the conditions of subsection (a) have been satisfied in full and the Bank shall
have first received each of the following in form and substance satisfactory to
the Bank:

                    (i)    Transaction Documents. The Construction and
                           ---------------------
Development Documents and the Assignment of Construction Documents.

                    (ii)   No-Lien Agreements. Duly filed and effective no-lien
                           ------------------
agreements from the Contractor and all general contractors performing any work
on the Project Facilities or Improvements effectively waiving all present and
future lien rights with respect to the Construction Contract and other contracts
thereunder.

                    (iii)  Inspection Report. A favorable report from the
                           -----------------
Inspecting Architect as to the detail set forth in the Plans and Specifications,
the quality of construction called for by the Plans and Specifications and the
adequacy of the Construction Contract to provide for completion of the
Improvements in accordance with the Plans and Specifications and as to such
other matters as the Bank may request. The Bank's obligation to authorize any
advances after the Date of Issuance for direct costs of construction may be
conditioned upon its continued receipt of similar reports from the Inspecting
Architect.

                    (iv)   Payment of Charges. Evidence satisfactory to the Bank
                           ------------------
that all installments of general or special taxes or assessments, service
charges, water and sewer charges, private maintenance charges, and other charges
by whatever name, to the extent due on or before the Date of Issuance and
relating to the Project Facilities have been paid on or before said date.

                    (v)    Compliance with Laws. Evidence satisfactory to the
                           --------------------
Bank that the Improvements, when constructed, and the Project Facilities, and
the proposed and actual use thereof, comply with all applicable laws, statutes,
codes, ordinances, rules and regulations, including but not limited to zoning
and environmental laws, of all governmental authorities having jurisdiction over
the same, and that there is no action or proceeding pending (or any time for an
appeal of any decision rendered) before any court, quasi-judicial body or
administrative agency at the time of any authorized disbursement by the Bank of
all or any part from the Project Fund relating to the validity of the
transactions contemplated hereby or the proposed or actual use or operation of
the Project Facilities or which would adversely affect the status of the zoning
with respect thereto.

                                       32
<PAGE>

                    (vi)    Permits and Approvals. Building, zoning and other
                            ---------------------
required permits covering construction of Improvements, together with evidence
satisfactory to the Bank that all approvals required with respect to the Project
Facilities from third parties or any governmental or quasi-governmental
authorities have been obtained or, in the case of approvals relating to the
operation of the Improvements which cannot be obtained until completion of
construction, evidence satisfactory to the Bank that such approvals are
obtainable. Such evidence shall include copies of all letters of grant or
approval of all zoning changes and other site plan approvals and subdivision
approvals, all variances of zoning regulations affecting the height, bulk,
location or configuration of the Project Facilities (or a satisfactory opinion
or counsel that the same are not required), and all approvals or variances
relating to parking or loading areas (both on-street and off-street) and all
appurtenant easements required by governmental authorities with respect to the
Project Facilities. Upon completion of the construction of the Improvements, the
Borrower shall furnish the Bank evidence satisfactory to the Bank that the
Project Facilities complies with the foregoing requirements.

                    (vii)   Utilities. Evidence satisfactory to the Bank that
                            ---------
(A) the Project Facilities have available to them adequate water, gas and
electric supply, storm and sanitary sewerage facilities, telephone facilities
and other required public utilities, and means of access between the Project
Facilities and public highways; and (B) all such facilities comply with all
applicable laws, rules and regulations, and all necessary easements to provide
such utility service to the Project Facilities have been obtained.

                    (viii)  Project Cost Schedule. The Project Cost Schedule in
                            ---------------------
form and substance satisfactory to the Bank approved by the Bank and the
Inspecting Architect, and certified by the Borrower as of the Date of Issuance
to be true, correct and complete.

                    (ix)    Plans and Specifications. The Plans and
                            ------------------------
Specifications in form and substance satisfactory to the Bank, approved and
signed for identification purposes by the Borrower, the Contractor, the
Architect and the Inspecting Architect.

                    (x)     No Damage or Taking. No portion of the Improvements
                            -------------------
shall have been damaged by fire or other casualty and no condemnation or taking
of the Project Facilities or the Improvements or any portion thereof shall be
pending or threatened.

                    (xi)    Subcontractor List. A list of all Subcontractors
                            ------------------
employed in connection with the construction of the Improvements and true and
correct copies of all executed Subcontracts.

                    (xii)   Lien Waivers. To the extent and at the time or times
                            ------------
permitted by applicable law, general waivers or stipulations against mechanic's
and materialman's liens by the Contractor and its Subcontractors and materialmen
for the Project.

                    (xiii)  Miscellaneous Documents, Etc. Such other documents,
                            ----------------------------
certificates, approvals and assurances that the Bank or its counsel may
reasonably request.

          Section 7.02  Requisitions Approval. The Borrower shall submit to the
                        ---------------------
Bank, no more than once per month and no later than 10 Business Days prior to
the date of the requested

                                       33
<PAGE>

disbursement, for its approval prior to disbursement thereon, each requisition
and related supporting materials required by the Indenture, together with: (a)
an itemization of the funds requisitioned against the Project Cost Schedule; (b)
in the case of hard construction costs, an Application and Certificate for
Payment (AIA Document G702) from the appropriate entity and approved by the
Inspecting Architect, together with all necessary Continuation Sheets (AIA
Document G703); (c) a certification of Borrower and the Contractor (or
construction manager, as appropriate) identifying all contractors,
subcontractors and suppliers who have performed work or furnished materials; (d)
satisfactory lien waivers from such contractors, subcontractors, and suppliers
current through the period covered by such request for funds (or through the
period covered by the previous request if permitted by the Bank); (e) a
certification of the Borrower that the Borrower has paid or actually incurred
the soft costs included in the AIA Document G702; (f) supporting invoices; (g)
if requested by the Bank, a title bring down search showing no additional liens;
(h) request to the Bank for approval of such requisition certifying, among other
things, that (i) the amounts requisitioned are due and unpaid and have not been
included in any previous requisition, (ii) the funds to be advanced against the
requisition will be fully applied in accordance with the Project Cost Schedule,
(iii) the construction of the Improvements to date has been performed in a good
and workmanlike manner, (iv) no Event of Default or event which, with the giving
of notice or lapse of time or both, would constitute an Event of Default has
occurred and is continuing, (v) the undisbursed balance of the Bond proceeds is
sufficient to complete the Project, and (vi) reaffirming the representations and
warranties of the Borrower in Article V. The Borrower will withdraw any
requisition which the Bank declines to approve. The Bank's review and approval
of the requisitions and the construction and equipping of the Project is solely
for the protection of the Bank's interests under this Agreement, and the Bank
shall not be deemed, by virtue of its inspection of the Project or approval of
any requisition, to have made any representation to any person with respect to
the construction and equipping of the Project, the validity of any costs
thereof, or the satisfaction of any conditions under the Indenture with respect
to the funding of requisitions (other than the Bank's consent thereto). All
conditions to the obligation of the Bank to approve requisitions hereunder are
imposed solely and exclusively for the benefit of the Bank and its assigns, and
no other person shall have standing to require satisfaction of such conditions
in accordance with their terms or be entitled to assume that the Bank will
approve or not approve advances in the absence of strict compliance with any or
all thereof, and no other person shall, under any circumstances, be deemed to be
a beneficiary of such conditions, any or all of which may be freely waived in
whole or in part by the Bank at any time if, in its sole discretion, it deems it
advisable to do so. The Bank shall not in any way or for any purpose be deemed
to be or to become a partner of or a joint venturer or a member of a joint
enterprise with the Borrower in connection with the construction, acquisition,
installation, ownership, development or operation of the Project.

          Section 7.03  Construction; Completion Date. The Borrower will proceed
                        -----------------------------
diligently to construct and equip the Project, in accordance with the Project
Cost Schedule and the Plans and Specifications, without delay. The Project shall
be completed on or before the Completion Date and at completion the Project
shall be free of any and all private or governmental charges or claims (filed or
not) of any nature, except for the Permitted Liens. The Borrower will deliver to
the Bank certified copies of all use, occupancy or completion certificates in
connection with the Project, immediately upon issuance. As used in this
Agreement the terms "complete", "completed", and "completion" mean, with respect
to the

                                       34
<PAGE>

Project, that (a) the Improvements are substantially physically complete in
accordance with the Plans and Specifications and equipped; (b) the Borrower has
received all permits, approvals and certificates required by law prior to the
use and occupancy thereof and has furnished true copies of such permits,
approvals and certificates to the Bank; (c) the Project is free of any and all
private or governmental charges, claims or liens (filed or not) of any nature
except the Permitted Liens; and (d) the Borrower has obtained all general
releases of mechanic's and materialman's liens required by Section 7.06 and
delivered true copies thereof to the Bank, and "Completion Date" means the date
upon which the requirements of (a), (b), (c) and (d) have been satisfied.

          Section 7.04  Certain Contracts Prohibited. The Borrower will not,
                        ----------------------------
without first obtaining written approval of the Bank, (a) execute any contract
or purchase order or permit any Subcontract or purchase order to be executed by
any person or persons with whom it has contracted in connection with the
Improvements (except for such contracts, Subcontracts or purchase orders that
have been executed prior to the date hereof and that have been approved by the
Bank), unless the amounts thereof are within the amounts budgeted therefor in
the Project Cost Schedule and are Costs of the Project (as defined in the
Indenture); (b) execute any amendment or modification to any of the Plans and
Specifications, the Contract or any other contract the effect of which would be
either to increase or decrease the amount to be paid by or on behalf of the
Borrower under any contract except as permitted by Section 7.07; or (c) contract
for any services, work or materials for the Project if such are not required by
the Plans and Specifications or if payment therefor is required to be made
regardless of the nondelivery or nonfurnishing of such materials, services or
work.

          Section 7.05  Certain Notices. The Borrower will forward to the Bank
                        ---------------
promptly after receipt, copies of all notices, permits or other documents
(excepting only notices for nondelinquent taxes due) received by the Borrower
from any governmental authority relating to the Improvements or from any person
claiming a mechanic's or materialman's lien against the Improvements or any
other property of the Borrower.

          Section 7.06  Releases. Prior to making final payment under any
                        --------
contract relating to construction of the Improvements, the Borrower will require
the contractor thereon to deliver to the Borrower, from such contractor and all
of such contractor's subcontractors or materialmen, a general release of
mechanic's and materialman's liens, and the Borrower will promptly deliver or
cause to be delivered to the Bank true and correct copies of all such releases
so obtained.

          Section 7.07  Change Orders. The Borrower will not permit, without the
                        -------------
prior written consent of the Bank, the performance of any work pursuant to any
amendment or modification of any of the Plans and Specifications, the Contract
or any Subcontract or purchase order (any such amendment or modification being
herein called a "Change Order") which would result in an increase or decrease in
excess of $20,000 of the contract prices for the construction of the
Improvements as shown in the Project Cost Schedule.

          Section 7.08  Subcontracts. (a) The Subcontracts shall be in form and
                        ------------
substance satisfactory to the Bank in all respects, and shall contain, among
other conditions, the following provisions: (i) all labor, supervision,
materials, supplies and equipment necessary to complete

                                       35
<PAGE>

the Improvements in accordance with the Plans and Specifications shall be
furnished by the Completion Date; (ii) no change in the Improvements or in the
Plans and Specifications shall be effective unless approved in writing by the
Bank; and (iii) a release and wavier to the extent permitted by law, by all
Subcontractors of the right to file mechanic's liens.

               (b)  The Borrower will furnish to the Bank from time to time on
request by the Bank, in a form acceptable to the Bank, correct lists of all
Subcontractors employed in connection with construction of the Improvements and
true and correct copies of all executed Subcontracts. The Bank may contact any
Subcontractor to verify any facts disclosed in the lists, and all Subcontracts
relating to construction of the Improvements must require the disclosure of
their contents to the Bank.

                                 ARTICLE VIII.

                             DEFAULTS AND REMEDIES

          Section 8.01  Defaults. Each of the following shall constitute an
                        --------
event of default hereunder ("Event of Default"):

               (a)  Failure by the Borrower to make or cause to be made within
two (2) days of the date when due any payment under this Agreement as (i)
reimbursement for a drawing under the Letter of Credit, (ii) a Letter of Credit
commitment fee, or (iii) interest on any such drawing or commitment or early
cancellation fee;

               (b)  Failure by the Borrower to make any other payment within 10
days of the date when it is due under this Agreement or the Mortgage;

               (c)  Failure by the Borrower to perform or comply within ten (10)
days after receipt of written notice of such failure with any of the terms or
conditions contained in Section 6.01, 6.12 or 6.13, or the Borrower shall grant
or otherwise create a lien in violation of Section 6.14;

               (d)  Failure by the Borrower or either Guarantor to perform or
comply with any of the other terms or conditions contained in this Agreement,
any Collateral Document or any other document delivered by them to the Bank
pursuant to this Agreement as the case may be and continuance of such failure
for thirty (30) days after the earlier of receipt of written notice from the
Bank to the Borrower or such Guarantor or the Borrower or such Guarantor has
knowledge that such failure has occurred, or such longer period to which Bank
may agree in the case of a default not curable by the exercise of due diligence
within such 30 day period, provided that the Borrower or such Guarantor shall
have commenced to cure, or cause the cure of, such default within such 30 day
period and shall complete such cure as quickly as reasonably possible with the
exercise of due diligence;

               (e)  Any of the representations or warranties of the Borrower or
either Guarantor set forth in this Agreement, any of the Collateral Documents,
any of the Bond Documents or any other document furnished to the Bank by or on
behalf of the Borrower or

                                       36
<PAGE>

either Guarantor pursuant to the terms hereof proves to have been false or
misleading in any material respect;

               (f)  Any material provision of this Agreement or any of the
Collateral Documents, for any reason ceases to be valid and binding on the
Borrower or any material provision of the Guaranty ceases to be valid or binding
on the Guarantors, or is declared to be null and void, or is violative of any
applicable law relating to a maximum amount of interest permitted to be
contracted for, charged or received, or the validity or enforceability thereof
is contested by the Borrower, either Guarantor or any governmental agency, court
or authority, or the Borrower denies that it has any or further liability or
obligation under this Agreement or any of the Collateral Documents, or either
Guarantor denies that it has any or further liability under the Guaranty;

               (g)  The occurrence of an Event of Default as defined in the
Indenture or the Loan Agreement;

               (h)  The Borrower or either Guarantor (i) applies for or consents
to the appointment of a receiver, trustee, liquidator or custodian or the like
of either of the Borrower or such Guarantor or of property of the Borrower or
either Guarantor or (ii) admits in writing the inability of the Borrower or
either Guarantor to pay its debts generally as they become due, or (iii) makes a
general assignment for the benefit of creditors, or (iv) is adjudicated a
bankrupt or insolvent, or (v) commences a voluntary case under the United States
Bankruptcy Code or files a voluntary petition or answer seeking reorganization,
an arrangement with creditors or an order for relief or seeking to take
advantage of any insolvency law or files an answer admitting the material
allegations of a petition filed against the Borrower or either Guarantor in any
bankruptcy, reorganization or insolvency proceeding, or action of the Borrower
or either Guarantor is taken for the purpose of effecting any of the foregoing,
or (vi) has instituted against it, without the application, approval or consent
of the Borrower or of either Guarantor, a proceeding in any court of competent
jurisdiction, under any law relating to bankruptcy, insolvency, reorganization
or relief of debtors, seeking in respect of the Borrower or either Guarantor an
order for relief or an adjudication in bankruptcy, reorganization, dissolution,
winding up or liquidation, a composition or arrangement with creditors, a
readjustment of debts, the appointment of a trustee, receiver, liquidator or
custodian or the like of the Borrower or either Guarantor or of all or any
substantial part of the assets of the Borrower or either Guarantor or other like
relief in respect thereof under any bankruptcy or insolvency law, and, if such
proceeding is being contested by the Borrower or either Guarantor in good faith,
the same (A) results in the entry of an order for relief or any such
adjudication or appointment or (B) remains undismissed and undischarged for a
period of 90 days;

               (i)  The Borrower fails to maintain in full force and effect the
hazard or other insurance required pursuant to this Agreement;

               (j)  The Project Facilities suffer a loss by fire or other
casualty and such loss is not fully insured and any deficiency in the amount of
insurance proceeds paid with respect to such loss is not posted with the Trustee
or the Bank within 10 days of the determination of such deficiency;

                                       37
<PAGE>

               (k)  The Project Facilities or any material portion thereof are
subjected to a material condemnation proceeding which if adjudicated adversely
to the Borrower or either Guarantor would render the Project Facilities unusable
for their intended use or materially reduce the collateral value thereof;

               (l)  Any litigation or administrative proceeding ensues, and is
not dismissed within 30 days, involving the Borrower or either Guarantor or any
instrument, contract or document delivered to the Bank in compliance with this
Agreement, and in the Bank's reasonable judgment (a) such litigation or
proceeding is likely to be formally adjudicated adversely to the Borrower or
such Guarantor and (b) the adverse result of such litigation or proceeding would
have in the Bank's reasonable opinion, a materially adverse effect on the
Borrower of either Guarantor's ability to pay its obligations and comply with
the covenants under this Agreement, the Collateral Documents or the Bond
Documents or on either Guarantor's ability to pay its obligations and comply
with the covenants under the Guaranty.

               (m)  Any one or more judgments or orders are entered against the
Borrower or either Guarantor, where such judgments or orders aggregate $100,000
or more and either (1) continue unsatisfied and unstayed for 30 days or (2) a
judgment lien on any property of either of the Borrower or either Guarantor is
recorded in respect thereof and is not stayed pending appeal by a bond or other
arrangement given or obtained by the Borrower or such Guarantor on terms which
do not violate the Borrower's or such Guarantor's covenants under the Guaranty;

               (n)  Failure by the Borrower or either Guarantor to make any
payment or payments in respect of any Obligation or Obligations, in an aggregate
principal amount of $100,000 or more, when such payment or payments are due and
payable (after the lapse of any applicable grace period) that results in the
acceleration of such Obligation or Obligations or enables the holder or holders
of such Obligation or Obligations or any person acting on behalf of such holder
or holders to accelerate the maturity of such Obligation or Obligations;

               (o)  The occurrence of any default or event of default with
respect to any other credit arrangement under which the Borrower or either
Guarantor is indebted to the Bank which is not cured within any applicable
notice or cure period;

               (p)  The occurrence of any payment default or any other default
or event of default with respect to any loan or other credit arrangement under
which either of the Borrower or either Guarantor is currently or hereafter
indebted in a principal amount aggregating $100,000 or more, whether to the Bank
or any other lender, which is not cured within any applicable notice or cure
period and the effect of such default or event of default is to cause or permit
the holder of such indebtedness to cause such indebtedness to become due and
payable prior to its stated maturity; or

               (q)  The occurrence of a Reportable Event that results in or
could result in any material liability of the Borrower or any ERISA Affiliate to
the PBGC or to any Plan and such Reportable Event is not corrected within thirty
(30) days after the occurrence thereof; or the occurrence of any Reportable
Event which could constitute grounds for termination of any Plan by the PBGC or
for the appointment by the appropriate United States District Court of a trustee

                                       38
<PAGE>

to administer any Plan and such Reportable Event is not corrected within thirty
(30) days after the occurrence thereof; or the filing by the Borrower or any
ERISA Affiliate of a notice of intent to terminate a Plan or the institution of
other proceedings to terminate a Plan which could result in any material
liability of the Borrower or any ERISA Affiliate to the PBGC or to any Plan; or
the Borrower or any ERISA Affiliate shall fail to pay when due any liability to
the PBGC or to a Plan; or the PBGC shall have instituted proceedings to
terminate, or to cause a trustee to be appointed to administer any Plan; or any
person engages in a Prohibited Transaction with respect to any Plan which
results in or could result in material liability of the Borrower, any ERISA
Affiliate, any Plan of the Borrower or any ERISA Affiliate or any fiduciary of
any such Plan; or failure by the Borrower or any ERISA Affiliate to make a
required installment or other payment to any Plan within the meaning of Section
302(f) of ERISA or Section 412(n) of the Code that results in or could result in
material liability of the Borrower or any ERISA Affiliate to the PBGC or any
Plan; or the withdrawal of the Borrower or any ERISA Affiliate from a Plan
during a plan year in which it was a "substantial employer" as defined in
Section 4001(9a)(2) of ERISA; or the Borrower or any ERISA Affiliate becomes an
employer with respect to any Multiemployer Plan without the prior written
consent of the Bank.

          Section 8.02  Remedies.  If an Event of Default has occurred and is
                        --------
continuing uncured, the Bank may:

               (a)  Notify the Trustee of such Event of Default, direct the
Trustee to declare an Event of Default, as defined in the Indenture, to
accelerate the Bonds and to direct the Trustee to draw on the Letter of Credit,
and direct the Trustee to exercise remedies under the Bond Documents;

               (b)  By written notice to the Borrower, the Trustee and the
Remarketing Agent terminate the Liquidity Period;

               (c)  Declare the Borrower's obligations hereunder to be,
whereupon the same shall become, immediately due and payable;

               (d)  Commission the investigation described in Section 6.16(d)
hereof.

               (e)  Exercise, or cause to be exercised, any and all such
remedies as it may have under this Agreement, any of the Collateral Documents or
any other document or at law or in equity.

          Section 8.03  Waivers; Consents. No waiver of, or consent with respect
                        -----------------
to, any provision of this Agreement shall in any event be effective unless the
same shall be in writing and signed by the Bank, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which it was given.

          Section 8.04  No Waiver; Remedies Cumulative. No failure on the part
                        ------------------------------
of the Bank to exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof; and no single or partial exercise of any right
hereunder shall preclude any other or further exercise thereof or the exercise
of any other right. The remedies herein provided are

                                       39
<PAGE>

cumulative and not exclusive of any remedies available under any other document
or at law or in equity.

          Section 8.05  Set-Off. Upon the occurrence and during the continuance
                        -------
of any Event of Default, the Bank is hereby authorized at any time and from time
to time without notice to the Borrower (any such notice being expressly waived
by the Borrower) and, to the fullest extent permitted by law, to set off and to
apply any and all balances, credits, deposits (general or special, time or
demand, provisional or final), accounts or moneys at any time held and other
indebtedness at any time owing by the Bank to or for the account of the Borrower
against any and all of the obligations of the Borrower now or hereafter existing
under this Agreement or any other agreement or instrument delivered by the
Borrower to the Bank in connection therewith, whether or not the Bank shall have
made any demand hereunder or thereunder and although such obligations may be
contingent or unmatured. The rights of the Bank under this Section are in
addition to other rights and remedies (including, without limitation, other
rights of set-off) which the Bank may have.

                                  ARTICLE IX.

                                 MISCELLANEOUS

          Section 9.01  Notices. All notices and other communications provided
                        -------
for hereunder shall, unless otherwise specified, be in writing and sent by
United States certified or registered mail, postage prepaid return receipt
requested, or by telegraph, telex, telecopier (confirmed by certified or
registered mail or private delivery service), addressed as follows:

               If to the Bank:

                    PNC Bank, National Association
                    1000 Westlakes Drive, Suite 200
                    Berwyn, PA 19312
                    Attention: Mark D. Lavelle
                    Facsimile No.: (610) 725-5775


               If to Borrower or either Guarantor :

                    c/o Innovative Solutions and Support, LLC
                    420 Lapp Road
                    Malvern, PA 19355
                    Attention: Geoffrey S. M. Hedrick
                    Facsimile No.: (610) 651-5506

                                       40
<PAGE>

                 If to the Trustee:

                    Chase Manhattan Trust Company,
                     National Association
                    One Liberty Place, 52/nd/ Floor
                    1650 Market Street, Suite 5200
                    Philadelphia, PA 19103
                    Attention: Capital Markets Fiduciary Services
                    Facsimile No.: (215) 972-1685


               If to the Remarketing Agent:

                    PNC Capital Markets, Inc.,
                     Remarketing Agent
                    One PNC Plaza, 26/th/ Floor
                    249 Fifth Avenue
                    Pittsburgh, PA 15222-2707
                    Attention: Manager - Remarketing Desk
                    Facsimile No.: (412) 762-9543

Any such notice to the Bank shall refer to this Agreement and PNC Bank, National
Association Irrevocable Letter of Credit No. S231762NWP. Either party hereto and
the Trustee, and the Remarketing Agent may change the address to which notices
to it are to be sent by written notice given to the other persons listed in this
Section. All notices shall, when mailed as aforesaid, be effective on the date
indicated on the return receipt, and all notices given by other means shall be
effective when received.

          Section 9.02  Successors and Assigns. This Agreement shall inure to
                        ----------------------
the benefit of and shall be binding upon the parties hereto and their respective
successors and assigns. The Borrower may not assign its rights under this
Agreement without the prior written consent of the Bank. The Borrower and the
Bank intend that no other person shall have any claim or interest under this
Agreement or right of action hereon or hereunder.

          Section 9.03  Survival of Covenants. All covenants made by the
                        ---------------------
Borrower herein and in any document delivered pursuant hereto shall survive the
delivery of this Agreement and the Letter of Credit and any advances under the
Letter of Credit.

          Section 9.04  Counterparts. The execution hereof by each party hereto
                        ------------
shall constitute a contract between them for the uses and purposes herein set
forth, and this Agreement may be executed in any number of counterparts, with
each executed counterpart constituting an original and all counterparts together
constituting one agreement.

          Section 9.05  Costs, Expenses and Taxes. The Borrower agrees to pay
                        -------------------------
promptly following Bank's request therefor all costs and expenses of the Bank in
connection with the

                                       41
<PAGE>

preparation, execution, delivery and administration of this Agreement, the
Letter of Credit, the Collateral Documents, and any other documents that may be
delivered in connection with this Agreement, the Letter of Credit, the
Collateral Documents or the Bond Documents or any amendments or supplements
thereto, including without limitation the reasonable fees and expenses of
counsel for the Bank with respect thereto and with respect to advising the Bank
as to its rights and responsibilities under this Agreement, the Letter of
Credit, the Collateral Documents and such other documents, and all costs and
expenses, if any, including without limitation reasonable counsel fees and
expenses of the Bank, in connection with the enforcement of this Agreement, the
Letter of Credit, the Collateral Documents, and such other documents. In
addition, the Borrower shall pay any and all stamp and other taxes and
governmental fees payable or determined to be payable in connection with the
execution and delivery of this Agreement, the Letter of Credit, the Collateral
Documents, and such other documents and agrees to indemnify and to hold the Bank
harmless from and against any and all liabilities with respect to or resulting
from any delay in paying or omission to pay such taxes and fees; provided the
Bank promptly notifies the Borrower of any such taxes and fees.

          Section 9.06  Amendments. This Agreement may be amended by an
                        ----------
instrument in writing executed and delivered by the Borrower and the Bank.

          Section 9.07  Severability; Interest Limitation. If any provision
                        ---------------------------------
hereof is found by a court of competent jurisdiction to be prohibited or
unenforceable in any jurisdiction, it shall be ineffective as to such
jurisdiction only to the extent of such prohibition or unenforceability, and
such prohibition or unenforceability shall not invalidate the balance of such
provision as to such jurisdiction to the extent it is not prohibited or
unenforceable, nor invalidate such provision in any other jurisdiction, nor
invalidate the other provisions hereof, all of which shall be liberally
construed in favor of the Bank in order to effect the provisions of this
Agreement. Notwithstanding anything to the contrary herein contained, the total
liability of the Borrower for payment of interest pursuant hereto shall not
exceed the maximum amount, if any, of such interest permitted by applicable law
to be contracted for, charged or received, and if any payments by the Borrower
to the Bank include interest in excess of such a maximum amount, the Bank shall
apply such excess to the reduction of the unpaid principal amount due pursuant
hereto, or if none is due, such excess shall be refunded to the Borrower;
provided that, to the extent permitted by applicable law, in the event the
interest is not collected, is applied to principal or is refunded pursuant to
this sentence and interest thereafter payable pursuant hereto shall be less than
such maximum amount, then such interest thereafter so payable shall be increased
up to such maximum amount to the extent necessary to recover the amount of
interest, if any, theretofore uncollected, applied to principal or refunded
pursuant to this sentence. Any such application or refund shall not cure or
waive any Event of Default. In determining whether or not any interest payable
under this Agreement exceeds the highest rate permitted by law, any nonprincipal
payment (except payments specifically stated in this Agreement to be "interest")
shall be deemed, to the extent permitted by applicable law, to be an expense,
fee, premium or penalty rather than interest.

          Section 9.08  Conflicts. Insofar as possible the provisions of this
                        ---------
Agreement shall be deemed complementary to the terms of the Collateral
Documents, but in the event of conflict the terms hereof shall control to the
extent such are enforceable under applicable law.

                                       42
<PAGE>

          Section 9.09  Complete Agreement. Taken together with the Collateral
                        ------------------
Documents and the other instruments and documents delivered in compliance
herewith, this Agreement is a complete memorandum of the agreement of the
Borrower and the Bank. Waivers or modifications of any provision hereof must be
in writing signed by the party to be charged with the effect thereof.

          Section 9.10  Consent to Jurisdiction; Venue; Waiver of Jury Trial.
                        ----------------------------------------------------
The Borrower hereby irrevocably (i) agrees that any suit, action or other legal
proceeding arising out of or relating to this Agreement, the Collateral
Documents or the Letter of Credit may be brought in any federal or state court
located in the Commonwealth of Pennsylvania and consents to the jurisdiction of
such court in any such suit, action or proceeding, (ii) agrees that any suit,
action or other legal proceeding by the Borrower against the Bank shall be
brought solely in a federal or state court located in the Commonwealth of
Pennsylvania and (iii) waives any objection which it may have to the laying of
venue of any such suit, action or proceeding in any such court and any claim
that any such suit, action or proceeding has been brought in an inconvenient
forum. The Borrower agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law. Nothing in this
Section shall affect the right of the Bank to bring any suit, action or
proceeding against the Borrower or its property in the courts of any other
jurisdiction. The Borrower and the Bank hereby waive the right to trial by jury
in any action arising hereunder or under any of the Collateral Documents or
otherwise in connection herewith.

          Section 9.11  Governing Law. This Agreement shall be governed by, and
                        -------------
construed in accordance with, the laws of the Commonwealth of Pennsylvania
without reference to its principles of conflicts of law. The Letter of Credit
shall be governed and construed as set forth in paragraph 12 thereof.

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

                                       43
<PAGE>

          IN WITNESS WHEREOF, the Borrower and the Bank have caused this
Agreement to be duly executed and delivered as of the date first above.

                          INNOVATIVE SOLUTIONS AND SUPPORT, LLC,
                          by its sole Member and Manager INNOVATIVE
                          SOLUTIONS AND SUPPORT, INCORPORATED


                          By:________________________________
                               Name:  James Reilly
                               Title: Chief Financial Officer



                          PNC BANK, NATIONAL ASSOCIATION


                          By:________________________________
                               Name:
                               Title:

This execution page is part of the Reimbursement, Credit and Security Agreement
dated as of August 1, 2000 between Innovative Solutions and Support, LLC and PNC
Bank, National Association.

                                       44
<PAGE>

                                   EXHIBIT A

                             [Letterhead of Bank]

                  IRREVOCABLE LETTER OF CREDIT NO. S231762NWP


                                                          August 8, 2000


Chase Manhattan Trust Company,
  National Association, as Trustee
1650 Market Street
Suite 5210
Philadelphia, Pennsylvania 19103
Attention: Global Trust Services

Dear Sirs:

          1.   At the request and for the account of Innovative Solutions and
Support, LLC (the "Borrower"), we hereby establish in your favor, as Trustee
under the Trust Indenture dated as of August 1, 2000 (the "Indenture") between
Chase Manhattan Trust Company, National Association, as Trustee (the "Trustee"),
and Chester County Industrial Development Authority (the "Issuer"), pursuant to
which $4,335,000.00 aggregate principal amount of Industrial Development Revenue
Bonds, 2000 Series A (Innovative Solutions and Support, LLC Project) (the
"Bonds") have been issued by the Issuer, our Irrevocable Letter of Credit No.
S231762NWP (the "Letter of Credit") in the amount of $4,406,261.00 (as more
fully described below), effective immediately and expiring at 5:00 p.m. on
August 7, 2003 or, if such day is not a Business Day, on the next succeeding
Business Day (the "Stated Expiration Date"), provided that the Stated Expiration
Date shall automatically be extended for one additional year effective on each
anniversary of the date of this Letter of Credit, unless we shall have given you
notice at least ninety (90) days prior to such anniversary that the Stated
Expiration Date will not be so extended. This Letter of Credit is subject to
automatic termination as provided in paragraph 8 hereof.

          2.   We hereby irrevocably authorize you to draw on us in accordance
with the terms and conditions hereinafter set forth, by one or more drafts on
us, an aggregate amount not exceeding Four Million Four Hundred Six Thousand Two
Hundred Sixty One Dollars $4,406,261.00 (as reduced and reinstated from time to
time in accordance with the provisions hereof, the "Letter of Credit Amount"),
of which (i) an aggregate amount not exceeding $4,335,000.00 (as reduced and
reinstated from time to time in accordance with the provisions hereof, the
"Principal Component") may be drawn upon with respect to principal of the Bonds
and (ii) an aggregate amount not exceeding $71,261.00 (as reduced and reinstated
from time to time in accordance with the provisions hereof, the "Interest
Component") may be drawn upon with respect to interest accrued on the Bonds. The
Principal Component shall not be available to

                                      A-1
<PAGE>

pay amounts corresponding to the interest on the Bonds, and the Interest
Component shall not be available to pay amounts corresponding to principal of
the Bonds.

          3.   Funds under this Letter of Credit are available to you at the
time specified below, (a) in one or more drawings by one or more of your drafts,
each dated the date of its presentation and stating on its face: "Drawn under
PNC Bank, National Association Irrevocable Letter of Credit No. S231762NWP",
accompanied by one or more of your certificates in the form of Annex 1 attached
hereto appropriately completed and executed (any such draft accompanied by such
certificate being herein called an "Interest Draft"); (b) in one or more
drawings by one or more of your drafts, each dated the date of its presentation
and stating on its face: "Drawn under PNC Bank, National Association Irrevocable
Letter of Credit No. S231762NWP", accompanied by one or more of your
certificates in the form of Annex 2 attached hereto appropriately completed and
executed (any such draft accompanied by such certificate being herein called a
"Tender Draft"); and (c) in one or more drawings by one or more of your drafts,
each dated the date of its presentation and stating on its face: "Drawn under
PNC Bank, National Association Irrevocable Letter of Credit No. S231762NWP",
accompanied by one or more of your certificates in the form of Annex 3 attached
hereto appropriately completed and executed (any such draft accompanied by such
certificate being herein called a "Redemption Draft"). Each such draft and
certificate shall be presented, at our office at PNC Bank, National Association,
237 Fifth Avenue, Third Floor, Annex Building, Pittsburgh, PA 15222, Attention:
Letter of Credit Department or such other office of ours in Pittsburgh,
Pennsylvania that we hereafter designate by written notice to you, and shall be
made either (i) in the form of a letter on your letterhead manually signed by
one of your officers and addressed to us at PNC Bank, National Association, 237
Fifth Avenue, Third Floor, Annex Building, Pittsburgh, PA 15222, Attention:
Letter of Credit Department or at any other office in Pennsylvania that we
hereafter designate by written notice delivered to you, or (ii) in the form of a
telecopy transmission of the documents described in clause (i) of this sentence
to Telecopier No. 412-705-0966 (with transmission confirmed by call to Telephone
No. 412-762-2078) or such other telecopier and telephone numbers that we
hereafter designate by written notice delivered to you. If drawing is made by
telecopier, it must contain a certification by you that originals of the draft
and certificate on your letterhead manually signed by one of your officers will
be mailed to us concurrently by first class United States mail. If we receive
your Interest Draft or Redemption Draft at such office, all in strict conformity
with the terms and conditions of this Letter of Credit, at or prior to 12:00
noon, on a Business Day, we will honor the same in accordance with your payment
instructions by 12:00 noon on the later of (a) the Business Day immediately
following the Business Day on which you present to us your draft and certificate
or (b) the "Value Date" set forth in such certificate; and if we receive your
Interest Draft or Redemption Draft at such office, all in strict conformity with
the terms and conditions of this Letter of Credit, after 12:00 noon, on a
Business Day, we will honor the same in accordance with your payment
instructions by 12:00 noon on the later of (1) the second Business Day
immediately following the Business Day on which you present to us your draft and
certificate or (2) the "Value Date" set forth in such certificate. If we receive
your Tender Draft at such office, all in strict conformity with the terms and
conditions of this Letter of Credit, at or prior to 11:00 a.m., on a Business
Day, we will honor the same in accordance with your payment instructions by 3:00
p.m. on the later of (x) the Business Day on which you present to us your draft
and certificate or (y) the "Value Date" set forth in such certificate; and if we
receive your Tender Draft at such office, all in strict conformity with the

                                      A-2
<PAGE>

terms and conditions of this Letter of Credit, after 11:00 a.m., on a Business
Day, we will honor the same in accordance with your payment instructions by 3:00
p.m. on the later of (i) the Business Day immediately following the Business Day
on which you present to us your draft and certificate or (ii) the "Value Date"
set forth in such certificate. For purposes of this Letter of Credit, we shall
be deemed to have "honored" a draft at the time at which we commence and confirm
by a federal reference number a wire transfer of immediately available funds in
accordance with your instructions. All payments made by us under this Letter of
Credit will be made with our own funds.

          4.   As used herein the term "Business Day" means any day other than
(i) a Saturday or Sunday, (ii) a day on which commercial banking institutions in
New York, New York, Pittsburgh, Pennsylvania or Philadelphia, Pennsylvania or in
any other city where your principal corporate trust office or our office at
which drafts are to be presented under this Letter of Credit is located are
required or authorized by law (including executive order) to close or on which
either such office is closed for a reason not related to financial condition, or
(iii) a day on which the New York Stock Exchange is closed. References to any
time of day in this Letter of Credit shall refer to Eastern standard time or
Eastern daylight saving time, as in effect in Philadelphia, Pennsylvania on such
day.

          5.   Each drawing honored by us hereunder shall reduce the Letter of
Credit Amount and the respective Principal and Interest Components thereof by
the respective amounts of such drawing and the corresponding components of such
drawing. In addition, the Letter of Credit Amount and the respective Principal
and Interest Components thereof shall be reduced automatically, without notice
to you, upon our receipt from you of a certificate in the form of Annex 4
attached hereto appropriately completed and executed, each such reduction to be
(i) in the amounts necessary to reduce the Letter of Credit Amount and the
Principal and Interest Components thereof to the respective amounts specified by
you in such certificate and (ii) effective on the Business Day on which we
receive such certificate from you. No drawing hereunder honored by us shall
exceed the Letter of Credit Amount at the time of such drawing, as the Letter of
Credit Amount has been reduced and reinstated in accordance with the terms
hereof, and no component of any such drawing corresponding to principal of or
interest on the Bonds shall exceed the corresponding Principal and Interest
Component of the Letter of Credit Amount as such Component has been reduced and
reinstated in accordance with the terms hereof.

          6.   On the tenth calendar day following the date of each drawing
under this Letter of Credit by your Interest Draft, the Letter of Credit Amount
and the Interest Component shall be automatically reinstated by an amount equal
to the amount of such drawing, unless before said tenth day, we give written
notice specifically referring to "PNC Bank, National Association Irrevocable
Letter of Credit No. S231762NWP" signed by our authorized officer and received
by you and the Trustee, to the effect that an Event of Default has occurred
under the Reimbursement, Credit and Security Agreement dated as of August 1,
2000 between the Borrower, and us and such reinstatement shall not occur, in
which case such reinstatement shall not occur.

                                      A-3
<PAGE>

          7.   Following any drawing under this Letter of Credit by your Tender
Draft, the Letter of Credit Amount and the Principal and Interest Components
thereof shall be reinstated with respect to such drawing (a) automatically when
and to the extent that both (i) we have received reimbursement for such drawing
in immediately available funds (or you have received immediately available funds
which, pursuant to Section 4.05 of the Indenture, you will immediately remit to
us as reimbursement for such drawing, such funds to be remitted to the attention
of our Letter of Credit Department stating that they are repayments for Tender
Drafts drawn under PNC Bank, National Association Letter of Credit No.
S231762NWP) and (ii) you have delivered to us a certificate in respect of such
reinstatement in the form of Annex 5 attached hereto appropriately completed and
executed, which may be sent by tested telex or telecopier in the manner, to the
numbers and with the confirmations and follow-up mailings described in paragraph
3 of this Letter of Credit, or (b) when and to the extent that we, at our
option, upon the Borrower's request, otherwise advise you in writing that such
reinstatement shall occur, it being understood that we shall have no obligation
to grant any such reinstatement except as provided in clause (a) of this
sentence.

          8.   This Letter of Credit shall automatically terminate upon the
first to occur of: (a) the Stated Expiration Date (as such date may have been
extended), (b) the date on which we receive a certificate from you in the form
of Annex 6 attached hereto, appropriately completed and executed, to the effect
that there are no Bonds Outstanding (as defined in the Indenture) other than
Bonds bearing interest at a Term Rate or secured by an Alternate Letter of
Credit (as defined in the Indenture) or (c) the date on which the final drawing
available hereunder is honored. This Letter of Credit shall be promptly
surrendered to us by you upon such termination.

          9.   This Letter of Credit is transferable in its entirety (but not in
part) to any transferee who you certify to us has succeeded you as Trustee under
the Indenture, and may be successively transferred. Transfer of this Letter of
Credit to such transferee shall be effected by the presentation to us of this
Letter of Credit accompanied by a certificate substantially in the form of Annex
7 attached hereto appropriately completed and executed.

          10.  Only you (or a transferee permitted by the terms of this Letter
of Credit) may make drawings under this Letter of Credit. Upon the payment to
you or your account of the amount specified in a draft drawn hereunder, we shall
be fully discharged of our obligation under this Letter of Credit with respect
to such draft, and we shall not thereafter be obligated to make any further
payments under this Letter of Credit with respect to such draft.

          11.  This Letter of Credit sets forth in full the terms of our
undertaking, and this undertaking shall not in any way be modified, amended,
amplified or limited by reference to any document, instrument or agreement
referred to herein or in which this Letter of Credit is referred to or to which
this Letter of Credit relates, except only the drafts and certificates referred
to herein; and any such reference shall not be deemed to incorporate herein by
reference any document, instrument or agreement, except such drafts and
certificates. Payment of all drawings honored under this Letter of Credit will
be made with our own funds.

                                      A-4
<PAGE>

          12.  This Letter of Credit is subject to the provisions of the Uniform
Customs and Practice for Documentary Credits, 1993 Revision, International
Chamber of Commerce Publication Number 500 (the "UCP") other than Article 48(g)
thereof. This Letter of Credit shall be deemed to be issued under the laws of
the Commonwealth of Pennsylvania and shall, as to matters not governed by the
UCP, be governed and construed in accordance with the laws of said state,
without regard to principles of conflicts of law.

                                         Very truly yours,

                                         PNC BANK, NATIONAL ASSOCIATION




                                         By __________________________


                                         Title _______________________

                                      A-5
<PAGE>

ANNEX 1 to PNC Bank, National Association
Irrevocable Letter of Credit No. S231762NWP
- -------------------------------------------

To:  PNC Bank, National Association
     237 Fifth Avenue
     Third Floor, Annex Building
     Pittsburgh, PA 15222
     Attention: Letter of Credit Department

          CERTIFICATE FOR INTEREST DRAWING OF ACCRUED INTEREST ON
          INDUSTRIAL DEVELOPMENT REVENUE BONDS, 2000 SERIES A
          (INNOVATIVE SOLUTIONS AND SUPPORT, LLC PROJECT), ISSUED BY
          THE CHESTER COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY
          ----------------------------------------------------------

          The undersigned, a duly authorized officer of [Name of Trustee],
                                                         ---------------
TRUSTEE (the "Trustee") under the Trust Indenture dated as of August 1, 2000
between the Issuer and the Trustee (the "Indenture") under which the Bonds have
been issued, hereby certifies, with reference to Irrevocable Letter of Credit
No. S231762NWP (the "Letter of Credit") issued by PNC Bank, National Association
(the "Bank") in favor of the Trustee (the capitalized terms used herein and not
defined herein shall have the meanings ascribed to them in the Letter of
Credit), that:

          1.   The Trustee is the Trustee under the Indenture for the holders of
the Bonds.

          2.   This Certificate accompanies a draft in the amount of $_________
by which the Trustee is making a drawing under the Letter of Credit in respect
of the payment of accrued interest on Bonds, which payment is due on or before
_____________________ (the "Value Date"). None of such Bonds is a Borrower Bond
or a Pledged Bond as defined in the Indenture.

          3.   The Trustee has not received a notice from the Bank that
reinstatement of the Letter of Credit in respect of any Interest Draft shall not
occur.

          4.   The amount of the draft accompanying this Certificate (i) is
being drawn against the Interest Component of the Letter of Credit Amount and
does not exceed the Letter of Credit Amount, as reduced and reinstated in
accordance with the terms of the Letter of Credit, or the Interest Component, as
reduced and reinstated in accordance with the terms of the Letter of Credit,
(ii) was computed in accordance with the terms and conditions of the Bonds and
the Indenture, (iii) does not include any amount in respect of interest on Bonds
which was included in any Interest Draft, Tender Draft or Redemption Draft
presented and not dishonored on or prior to the date of this Certificate, and
(iv) shall be applied pursuant to the provisions of the Bonds

                               Page 1 of Annex 1

                                      A-6
<PAGE>

and the Indenture to the payment of accrued interest on Bonds which are not
Borrower Bonds or Pledged Bonds.

         5. If this Certificate and the accompanying draft are initially
presented by telex or telecopier, the originals of such draft and this
Certificate on the Trustee's letterhead manually signed by one of its officers
are being mailed to you concurrently by first class United States mail.

         IN WITNESS WHEREOF, the Trustee has executed and delivered this
Certificate as of the ____ day of _____________.


                                               [TRUSTEE NAME],
                                                 TRUSTEE

                                               By __________________________

                                               Name ________________________

                                               Title _______________________


                               Page 2 of Annex 1

                                      A-7
<PAGE>

ANNEX 2 to PNC Bank, National Association
Irrevocable Letter of Credit No. S231762NWP
- -------------------------------------------


To:      PNC Bank, National Association
         237 Fifth Avenue
         Third Floor, Annex Building
         Pittsburgh, PA 15222,
         Attention: Letter of Credit Department

                  CERTIFICATE FOR TENDER DRAWING IN RESPECT OF
                  PRINCIPAL AND ACCRUED INTEREST ON INDUSTRIAL
                  DEVELOPMENT REVENUE BONDS, 2000 SERIES A (INNOVATIVE
                  SOLUTIONS AND SUPPORT, LLC PROJECT), ISSUED BY THE
                  CHESTER COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY
                  ----------------------------------------------------

                  The undersigned, a duly authorized officer of [Name of
                                                                 -------
Trustee], TRUSTEE (the "Trustee") under the Trust Indenture dated as of August
- -------
1, 2000 between the Issuer and the Trustee (the "Indenture") under which the
Bonds have been issued, hereby certifies, with reference to Irrevocable Letter
of Credit No. S231762NWP (the "Letter of Credit") issued by PNC Bank, National
Association (the "Bank") in favor of the Trustee (the capitalized terms used
herein and not defined herein shall have the meanings ascribed to them in the
Letter of Credit), that:

                  1. The Trustee is the Trustee under the Indenture for the
holders of the Bonds.

                  2. This Certificate accompanies a draft in the amount of
$___________ by which the Trustee is making a drawing under the Letter of Credit
in respect of the payment of the purchase price of Bonds, corresponding to the
principal thereof and accrued interest thereon, tendered for purchase pursuant
to the provisions of the Indenture and, in the case of Bonds tendered pursuant
to Section 4.01 of the Indenture, not successfully remarketed by the Remarketing
Agent (as defined in the Indenture) with the purchase price therefor received
prior to 10:00 a.m. on the date of this Certificate. Such Bonds are herein
called "Tendered Bonds". The purchase price payment for the Tendered Bonds is
due on or before _________________________ (the "Value Date"). None of the
Tendered Bonds is presently a Borrower Bond or a Pledged Bond as defined in the
Indenture.

                  3. The amount of the draft accompanying this Certificate is
equal to the sum of (i) $___________ being drawn against the Principal Component
of the Letter of Credit Amount in respect of the payment of the portion of the
purchase price of the Tendered Bonds corresponding to the principal thereof and
(ii) $___________ being drawn against the Interest

                               Page 1 of Annex 2

                                      A-8
<PAGE>

Component of the Letter of Credit Amount in respect of the portion of the
purchase price of the Tendered Bonds corresponding to accrued interest thereon.

                  4. The amount of the draft accompanying this Certificate does
not exceed the Letter of Credit Amount, as reduced and reinstated in accordance
with the terms of the Letter of Credit. Neither of the components of the amount
of the draft set forth in paragraph 3 of this Certificate exceeds the
corresponding component of the Letter of Credit Amount as reduced and reinstated
in accordance with the terms of the Letter of Credit. The amount of the draft
accompanying this Certificate (i) was computed in accordance with the terms and
conditions of the Bonds and the Indenture, (ii) does not include any amount in
respect of principal of or interest on the Bonds which was included in any
Interest Draft, Tender Draft or Redemption Draft presented and not dishonored on
or prior to the date of this Certificate and (iii) shall be applied pursuant to
the provisions of the Bonds and the Indenture, to the payment of purchase price
of the Tendered Bonds.

                  5. If this Certificate and the accompanying sight draft are
initially presented by telex or telecopier, the originals of such draft and this
Certificate on the Trustee's letterhead manually signed by one of its officers
are being mailed to you concurrently by first class United States mail.

                  IN WITNESS WHEREOF, the Trustee has executed and delivered
this certificate this ____ day of __________.


                                              [TRUSTEE NAME],
                                                TRUSTEE

                                              By ___________________________

                                              Name _________________________

                                              Title ________________________

                               Page 2 of Annex 2

                                      A-9
<PAGE>

ANNEX 3 to PNC Bank, National Association
Irrevocable Letter of Credit No. S231762NWP
- -------------------------------------------

To:  PNC Bank, National Association
     237 Fifth Avenue
     Third Floor, Annex Building
     Pittsburgh, PA 15222
     Attention: Letter of Credit Department

             CERTIFICATE FOR REDEMPTION OR FINAL PAYMENT DRAWING IN
             RESPECT OF PRINCIPAL AND ACCRUED INTEREST ON INDUSTRIAL
             DEVELOPMENT REVENUE BONDS, 2000 SERIES A (INNOVATIVE
             SOLUTIONS AND SUPPORT, LLC PROJECT), ISSUED BY THE
             CHESTER COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY
             ------------------------------------------------------

             The undersigned, a duly authorized officer of [Name of Trustee],
                                                            ---------------
TRUSTEE (the "Trustee") under the Trust Indenture dated as of August 1, 2000
between the Issuer and the Trustee (the "Indenture") under which the Bonds have
been issued, hereby certifies, with reference to Irrevocable Letter of Credit
No. S231762NWP (the "Letter of Credit") issued by PNC Bank, National Association
(the "Bank") in favor of the Trustee (the capitalized terms used herein and not
defined herein shall have the meanings ascribed to them in the Letter of
Credit), that:

             1.   The Trustee is the Trustee under the Indenture for the holders
of the Bonds.

             2.   This Certificate accompanies a draft in the amount of
$___________ by which the Trustee is making a drawing under the Letter of Credit
in respect of the payment of principal of and accrued interest on Bonds (other
than Borrower Bonds or Pledged Bonds as defined in the Indenture) upon the
applicable event indicated in paragraph 3 of this Certificate, which payment is
due on or before _______________________ (the "Value Date").

             3.   The Trustee is presenting this Certificate and the
accompanying draft in connection with (check and complete one):

             [ ]  A mandatory redemption of the Bonds in whole pursuant to
                  Sections 3.01(e) or 3.01(f) of the Indenture.


                               Page 1 of Annex 3

                                     A-10
<PAGE>

             [ ]  An optional redemption of the Bonds in the principal amount of
                  $_____________ pursuant to Section 3.01(b) or 3.01(c) of the
                  Indenture. After such redemption, $____________ principal
                  amount of the Bonds will remain Outstanding and will not
                  presently be Borrower Bonds or Pledged Bonds.

             [ ]  The payment of the Bonds upon acceleration of the maturity
                  thereof pursuant to Section 7.03 of the Indenture

             [ ]  The payment of the Bonds at final maturity thereof pursuant to
                  Section 5.04 of the Indenture.

             4.   The amount of the draft accompanying this Certificate is equal
to the sum of (i) $__________ being drawn against the Principal Component of the
Letter of Credit Amount in respect of the principal of Bonds (other than Bonds
which are presently Borrower Bonds or Pledged Bonds) and (ii) $___________ being
drawn against the Interest Component of the Letter of Credit Amount in respect
of interest accrued on such Bonds.

             5.   The amount of the draft accompanying this Certificate does not
exceed the Letter of Credit Amount, as reduced and reinstated in accordance with
the terms of the Letter of Credit. Neither of the components of the amount of
the draft set forth in paragraph 4 of this Certificate exceeds the corresponding
component of the Letter of Credit Amount, as reduced and reinstated in
accordance with the terms of the Letter of Credit. The amount of the draft
accompanying this Certificate (i) was computed in accordance with the terms and
conditions of the Bonds and the Indenture, (ii) does not include any amount in
respect of principal of or interest on the Bonds which was included in any
Interest Draft, Tender Draft or Redemption Draft presented and not dishonored on
or prior to the date of this Certificate, and (iii) shall be applied pursuant to
the provisions of the Bonds and the Indenture to the payment of the principal of
and accrued interest on Bonds which are not Borrower Bonds or Pledged Bonds.

             6.   If this Certificate and the accompanying draft are initially
presented by telex or telecopier, the originals of such draft and this
Certificate on the Trustee's letterhead manually signed by one of its officers
are being mailed to you concurrently by first class United States mail.

                               Page 2 of Annex 3

                                     A-11
<PAGE>

          IN WITNESS WHEREOF, the Trustee has executed and delivered this
Certificate this ____ day of _____________.


                                                [TRUSTEE NAME],
                                                 TRUSTEE

                                                By _________________________

                                                Name _______________________

                                                Title ______________________


                               Page 3 of Annex 3

                                     A-12
<PAGE>

ANNEX 4 to PNC Bank, National Association
Irrevocable Letter of Credit No. S231762NWP
- -------------------------------------------

To:  PNC Bank, National Association
     237 Fifth Avenue
     Third Floor, Annex Building
     Pittsburgh, PA 15222
     Attention: Letter of Credit Department

            CERTIFICATE FOR REDUCING PNC BANK, NATIONAL ASSOCIATION
            (THE "BANK") IRREVOCABLE LETTER OF CREDIT NO. S231762NWP
            (THE "LETTER OF CREDIT") SUPPORTING INDUSTRIAL DEVELOPMENT
            REVENUE BONDS, 2000 SERIES A (INNOVATIVE SOLUTIONS AND
            SUPPORT, LLC PROJECT), ISSUED BY THE CHESTER COUNTY
            INDUSTRIAL DEVELOPMENT AUTHORITY
            -----------------------------------------------------------

            The undersigned, a duly authorized officer of [Name of Trustee],
                                                           ---------------
TRUSTEE (the "Trustee") under the Trust Indenture dated as of August 1, 2000
between the Issuer and the Trustee (the "Indenture") under which the Bonds have
been issued, hereby certifies that (the capitalized terms used herein and not
defined herein shall have the meanings ascribed to them in the Letter of
Credit):

            1. The Trustee is the Trustee under the Indenture for the holders of
the Bonds.

            2. Pursuant to the provisions of the Bonds and the Indenture
$___________ principal amount of the Bonds have been redeemed or are deemed to
have been paid pursuant to

                               Page 1 of Annex 4

                                     A-13
<PAGE>

Article X of the Indenture, and the remaining aggregate principal amount of the
Bonds Outstanding is $___________.

            3. Pursuant to the terms of the Letter of Credit, the Bank is hereby
directed to reduce the Letter of Credit Amount and the Principal and Interest
Components thereof, effective on the Business Day on which you receive this
Certificate, so that after such reduction the Letter of Credit Amount shall be
$__________, of which $__________ shall be the Principal Component and
$__________ shall be the Interest Component (calculated on the basis of 50 days
interest on the Outstanding Bonds and a 365-day year, at an assumed maximum
interest rate of 12% per annum).

            4. If this Certificate is initially presented by telex or
telecopier, the originals of this Certificate on the Trustee's letterhead
manually signed by one of its officers are being mailed to you concurrently by
first class United States mail.

            IN WITNESS WHEREOF, the Trustee has executed and delivered this
Certificate this _____ day of ------------.


                                              [TRUSTEE NAME],
                                                TRUSTEE

                                              By _________________________

                                              Name _______________________

                                              Title ______________________

                               Page 2 of Annex 4

                                     A-14
<PAGE>

ANNEX 5 to PNC Bank, National Association
Irrevocable Letter of Credit No. S231762NWP
- -------------------------------------------

To:  PNC Bank, National Association
     237 Fifth Avenue
     Third Floor, Annex Building
     Pittsburgh, PA 15222
     Attention: Letter of Credit Department

           CERTIFICATE FOR REINSTATING PNC BANK, NATIONAL ASSOCIATION
           (THE "BANK") IRREVOCABLE LETTER OF CREDIT NO. S231762NWP
           (THE "LETTER OF CREDIT") SUPPORTING INDUSTRIAL DEVELOPMENT
           REVENUE BONDS, 2000 SERIES A (INNOVATIVE SOLUTIONS AND
           SUPPORT, LLC PROJECT), ISSUED BY THE CHESTER COUNTY
           INDUSTRIAL DEVELOPMENT AUTHORITY
           -----------------------------------------------------------

           The undersigned, a duly authorized officer of [Name of Trustee],
                                                          ---------------
TRUSTEE (the "Trustee") under the Trust Indenture dated as of August 1, 2000
between the Issuer and the Trustee (the "Indenture") under which the Bonds have
been issued, hereby certifies that (the capitalized terms used herein and not
defined herein shall have the meanings ascribed to them in the Letter of
Credit):

           1. The Trustee is the Trustee under the Indenture for the holders of
the Bonds.

           2. On the date of this Certificate $_________ aggregate principal
amount of Bonds are being purchased upon a remarketing thereof by the
Remarketing Agent (as defined in the Indenture). All of such Bonds were
heretofore purchased (or anticipated to be purchased) with the proceeds of one
or more Tender Drafts in the total drawing amount of $__________, of which
proceeds $__________ was drawn in respect of principal of such Bonds and
$__________ was drawn in respect of accrued interest on such Bonds. Prior to the
date of this Certificate there has been no reinstatement of the Letter of Credit
Amount with respect to amounts drawn by such Tender Drafts to purchase such
Bonds.

           3. The Trustee has received for immediate payment (or repayment) to
the Bank in respect of the Bonds described in paragraph 2 of this Certificate
the total amount of $__________, consisting of $__________ from the Remarketing
Agent, $__________ from the Borrower and $__________ from the Bank. Such total
amount is being paid to the Bank at the above address with reference to Letter
of Credit No. S231762NWP, pursuant to Section 4.05 of the Indenture, as
reimbursement for amounts drawn under the Letter of Credit by the Tender Drafts
described in paragraph 2 of this Certificate; provided that, unless such
reimbursement is

                               Page 1 of Annex 5

                                     A-15
<PAGE>

being made on the same day that payment of such Tender Drafts was received by
the Trustee from the Bank, the Trustee will release the Bonds described in
paragraph 2 of this Certificate for remarketing and will make such payment to
the Bank only upon receipt by the Trustee of telephonic confirmation from the
Bank of the reinstatement described in paragraph 6 below. Such confirmation
shall be made to the Trustee at (___) __________, Attention:
_____________________ (which confirmation shall thereafter be sent in writing to
the Trustee at its address on file with you).

         4. Of the total amount referred to in paragraph 3 of this Certificate,
$__________ represents the aggregate principal amount of Bonds described in
paragraph 2 of this Certificate and $__________ represents accrued interest on
such Bonds.

         5. Payment of the total amount referred to in paragraph 3 of this
Certificate, together with other amounts heretofore paid to the Bank by or on
behalf of the Borrower, represents reimbursement for the entire outstanding
balance of all amounts drawn in respect of the Bonds described in paragraph 2 of
this Certificate. The foregoing certification is made in reliance upon
representations by the Borrower and/or the Bank to the Trustee that, upon
payment of such amounts, the Bank will be fully reimbursed for all Tender Drafts
(or allocable portions thereof) presented to the Bank to purchase such Bonds. No
Certification is made by the Trustee as to the payment of interest accrued
pursuant to the Reimbursement, Credit and Security Agreement described in the
Letter of Credit on the amounts drawn by such Tender Drafts.

         6. Pursuant to paragraph 7 of the Letter of Credit, the Letter of
Credit Amount shall be automatically reinstated by an amount equal to
$__________ (which does not exceed the aggregate amount of the Tender Drafts, or
allocable portions thereof, paid by the Bank to purchase such Bonds), of which
$__________ (which does not exceed the aggregate amount of such Tender Drafts,
or allocable portions thereof, drawn against the Principal Component) shall be
applied to the Principal Component and $__________ (which does not exceed the
aggregate amount of such Tender Drafts, or allocable portions thereof, drawn
against the Interest Component) shall be applied to the Interest Component.

         7. If this Certificate is initially presented by telex or telecopier,
the original of this Certificate on the Trustee's letterhead manually signed by
one of its officers is being mailed to you concurrently by first class United
States mail.

                               Page 2 of Annex 5

                                     A-16
<PAGE>

          IN WITNESS WHEREOF, the Trustee has executed and delivered this
Certificate this __________day of ___________.


                                                  [TRUSTEE NAME],
                                                   TRUSTEE


                                                  By______________________

                                                  Name____________________

                                                  Title___________________

                               Page 3 of Annex 5

                                     A-17
<PAGE>

ANNEX 6 to PNC Bank, National Association
Irrevocable Letter of Credit No. S231762NWP
- -------------------------------------------

To:      PNC Bank, National Association
         237 Fifth Avenue
         Third Floor, Annex Building
         Pittsburgh, PA 15222
         Attention: Letter of Credit Department


               CERTIFICATE FOR TERMINATING PNC BANK,
               NATIONAL ASSOCIATION (THE "BANK") IRREVOCABLE
               LETTER OF CREDIT NO. S231762NWP (THE "LETTER
               OF CREDIT") SUPPORTING INDUSTRIAL DEVELOPMENT
               REVENUE BONDS, 2000 SERIES A (INNOVATIVE
               SOLUTIONS AND SUPPORT, LLC PROJECT), ISSUED
               BY THE CHESTER COUNTY INDUSTRIAL DEVELOPMENT
               AUTHORITY
               --------------------------------------------

               The undersigned, a duly authorized officer of [Name of Trustee],
                                                              ---------------
TRUSTEE (the "Trustee") under the Trust Indenture dated as of August 1, 2000
between the Issuer and the Trustee (the "Indenture") under which the Bonds have
been issued, hereby certifies that (the capitalized terms used herein and not
defined herein shall have the meanings ascribed to them in the Letter of
Credit):

               1.   The Trustee is the Trustee under the Indenture for the
holders of the Bonds.

               2.   Pursuant to the Indenture and the Letter of Credit, the
Letter of Credit shall be terminated on the date the Bank receives this
Certificate, and the Trustee is herewith surrendering the Letter of Credit for
cancellation, because no Bonds remain Outstanding other than Bonds bearing
interest at a Term Rate or secured by an Alternate Letter of Credit.

                               Page 1 of Annex 6

                                     A-18
<PAGE>

          IN WITNESS WHEREOF, the Trustee has executed and delivered this
Certificate this _____ day of _____________.


                                               [TRUSTEE NAME],
                                                TRUSTEE

                                               By _________________________

                                               Name _______________________

                                               Title ______________________

                               Page 2 of Annex 6

                                     A-19
<PAGE>

ANNEX 7 to PNC Bank, National Association
Irrevocable Letter of Credit No. S231762NWP
- -------------------------------------------


                                             --------------,


To:      PNC Bank, National Association
         237 Fifth Avenue
         Third Floor, Annex Building
         Pittsburgh, PA 15222
         Attention: Letter of Credit Department

                  Re:      PNC Bank, National Association
                           Irrevocable Letter of Credit
                           No. S231762NWP
                           ------------------------------

Gentlemen:

                  For value received, the undersigned beneficiary hereby
irrevocably transfers to:

                  (Name of Transferee)

                  (Address)

all rights of the undersigned beneficiary to draw under the above Letter of
Credit in its entirety. Said transferee has succeeded to the undersigned as
Trustee under the Trust Indenture dated as of August 1, 2000 between the Chester
County Industrial Development Authority and Chase Manhattan Trust Company,
National Association, as Trustee.

                  By this transfer, all rights of the undersigned beneficiary in
such Letter of Credit are transferred to the transferee and the transferee shall
have the sole rights as beneficiary thereof, including sole rights relating to
any amendments whether increases or extensions or other amendments and whether
now existing or hereafter made. All amendments are to be advised direct to the
transferee without necessity of any consent of or notice to the undersigned
beneficiary.

                               Page 1 of Annex 7

                                     A-20
<PAGE>

          The original of such Letter of Credit is returned herewith, and in
accordance therewith we ask you to transfer the Letter of Credit to the
transferee in the Letter of Credit Amount (as defined in the Letter of Credit)
with provision for reinstating or increasing the Letter of Credit Amount with
respect to all drawings by Interest Drafts and Tender Drafts (as defined in the
Letter of Credit) with respect to which the Letter of Credit Amount may be
reinstated, and forward it directly to the transferee with your customary notice
of transfer.

                                            Very truly yours,

SIGNATURE AUTHENTICATED                     CHASE MANHATTAN TRUST COMPANY,
                                            NATIONAL ASSOCIATION, TRUSTEE

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


____________________________                By _________________________________
         (Authorized Signature)


                                            Title ______________________________

                               Page 2 of Annex 7

                                     A-21
<PAGE>

                                                                     EXHIBIT B
                                                                     ---------



                        PROJECT FACILITIES DESCRIPTION

         The Project Facilities consist of the construction and equipping of an
approximately 44,800 square foot building, to be owned and operated by the
Borrower as a facility for the manufacturing of avionics instrumentation.

                                      B-1
<PAGE>

                                                                      EXHIBIT C
                                                                      ---------



                             ENVIRONMENTAL MATTERS


                                     None

                                      C-1
<PAGE>

                                                                      EXHIBIT D
                                                                      ---------



                            OUTSTANDING OBLIGATIONS


                                     None

                                      D-1
<PAGE>

                                                                      EXHIBIT E
                                                                      ---------



                        OUTSTANDING MATERIAL CONTRACTS


          Agreement of Lease between Rouse & Associates - 420 Lapp Road Limited
Partnership and Innovative Solutions & Support for 420 Lapp Road, Malvern,
Pennsylvania 19355, signed September 24, 1997, as amended.

                                      E-1
<PAGE>

                                                                      EXHIBIT F
                                                                      ---------



                                PERMITTED LIENS


1.   Unrecorded easements, discrepancies or conflicts in boundary lines,
     shortages in area and encroachments which an accurate and complete survey
     would disclose.

2.   Rights granted to Keystone Pipeline in Misc. Deed Book 56 page 280, 56 page
     281, 57 page 317, and 68 page 247.

3.   Rights granted to BF Warren in Misc. Deed Book 19 page 313.

4.   Water Rights as in Misc. Deed Book 3 page 70.

5.   Rights granted to Philadelphia Electric Company and Bell Telephone Company
     in Misc. Deed Book 69 page 516.

6.   Rights granted to Bell Atlantic-Pennsylvania, Inc. in Record Book 4639 page
     424.

7.   The Declaration of General Conditions for Covenants under Act 515 in
     Chester County in Misc. Deed Book 240 page 335, and Contract and Covenant
     pursuant thereto in Chester County in Misc. Deed Book 265 page 341, 264
     page 348 and Record Book 2674 page 164.

8.   Easement Agreement in Misc. Deed Book 655 page 536.

9.   Agreement to Release Easement in Misc. Deed Book 655 page 541.

10.  Rights granted to Philadelphia Electric Company in Misc. Deed Book 541 page
     108, and 92 page 211 and Record Book 1158 page 230.

11.  Rights granted to Uwchlan Township Municipal Authority in Record Book 1154
     page 168 and 1154 page 174.

12.  Declaration of Easements and Protective Covenants and Restrictions for
     Eagleview Corporate Center in Record Book 1070 page 185. Amendment thereto
     in Record Book 1678 page 217, Second Amendment thereto in Record Book 1851
     page 313, Third Amendment thereto in Record Book 1885 page 55.

13.  Amended and Restated Declaration of Easements and Protective Covenants and
     Restrictions for Eagleview Corporate Center in Record Book 2074 page 240,
     First Amendment thereto in Record Book 2074 page 240, Second Amendment
     thereto in Record Book 3590 page 1986, Third Amendment thereto in Record
     Book 3672 page 579,

                                      F-1
<PAGE>

     Fourth Amendment thereto in Record Book 4177 page 2306, Fifth Amendment
     thereto in Record Book 4206 page 1534, Sixth Amendment thereto in Record
     Book 4365 page 649, Seventh Amendment thereto in Record Book 4744 page 278.

14.  Rights of First Refusal as in Record Book 1397 page 66.

15.  Unsettled taxes due the Commonwealth of Pennsylvania by mortgagor
     corporation, not presently a lien, all of which taxes when assessed or
     settled, if not paid will constitute a prior lien against any fund created
     at a judicial sale.

                                      F-2
<PAGE>

                                                                      EXHIBIT H
                                                                      ---------


                         OPTIONAL REDEMPTION OF BONDS


         Redemption Date                 Principal Amount of Bonds
           (August 1)                         To be Redeemed
         ---------------                 -------------------------

         2001                                  $100,000
         2002                                   150,000
         2003                                   200,000
         2004                                   250,000
         2005                                   250,000
         2006                                   340,000
         2007                                   340,000
         2008                                   340,000
         2009                                   340,000
         2010                                   340,000
         2011                                   340,000
         2012                                   340,000
         2013                                   340,000
         2014                                   340,000
         2015                                   325,000
- ------------------------------

                                      H-1
<PAGE>

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

                 REIMBURSEMENT, CREDIT AND SECURITY AGREEMENT

                          Dated as of August 1, 2000

                                    Between

                     INNOVATIVE SOLUTIONS AND SUPPORT, LLC

                                      and

                        PNC BANK, NATIONAL ASSOCIATION

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

<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                         Page
<S>                                                                      <C>
Recitals................................................................   1

                                  ARTICLE I.
                                 DEFINITIONS 2
Section 1.01  Definitions ..............................................   2
Section 1.02  Rules of Construction; Time of Day .......................   8

                                  ARTICLE II.
                      LETTER OF CREDIT AND REIMBURSEMENT

Section 2.01  Issuance of Letter of Credit .............................   8
Section 2.02  Reimbursement and Other Payments .........................   9
Section 2.03  Transfer; Reduction; Reinstatement .......................  12
Section 2.04  Obligations Absolute .....................................  13
Section 2.05  Indemnification ..........................................  13
Section 2.06  Liability of Bank ........................................  14

                                 ARTICLE III.
                                   SECURITY

Section 3.01  Security and Subrogation under Indenture .................  15
Section 3.02  Pledge of Rights to Certain Funds and Investments.........  15
Section 3.03  Pledged Bonds ............................................  15
Section 3.04  Mortgage; Additional Security.............................  17
Section 3.05  Financing Statements .....................................  17
Section 3.06  Guaranty .................................................  17

                                  ARTICLE IV.
                             CONDITIONS PRECEDENT

Section 4.01  Documentation ............................................  17
Section 4.02  Issuance of Bonds ........................................  18

                                  ARTICLE V.
                        REPRESENTATIONS AND WARRANTIES

Section 5.01  Existence ................................................  19
Section 5.02  Power, Authorization and No Conflicts ....................  19
Section 5.03  Governmental Authorizations and Other Approvals ..........  19
Section 5.04  Validity and Binding Effect ..............................  19
Section 5.05  No Litigation ............................................  20
</TABLE>

                                       i
<PAGE>

<TABLE>
<S>                                                                      <C>
Section 5.06  No Violations ............................................  20
Section 5.07  Compliance ...............................................  20
Section 5.08  Title to Properties; Liens and Encumbrances ..............  20
Section 5.09  Utilities and Access .....................................  21
Section 5.10  Financial Information ....................................  21
Section 5.11  ERISA ....................................................  21
Section 5.12  Environmental Representations ............................  21
Section 5.13  Outstanding Obligations ..................................  22
Section 5.14  Other Material Contracts .................................  22
Section 5.15  Solvency .................................................  22
Section 5.16  Disclosure ...............................................  22
Section 5.17  Representations in Other Documents .......................  22

                                  ARTICLE VI.
                               GENERAL COVENANTS

Section 6.01  Maintenance of Existence .................................  23
Section 6.02  Disposition of Assets ....................................  23
Section 6.03  Compliance with Laws .....................................  23
Section 6.04  Maintenance of Governmental Authorizations ...............  23
Section 6.05  Maintenance of Insurance .................................  23
Section 6.06  Compliance with Bond Documents and Other Contracts .......  24
Section 6.07  Maintenance of Properties ................................  24
Section 6.08  Visitation Rights ........................................  24
Section 6.09  Keeping of Books .........................................  24
Section 6.10  Reporting Requirements ...................................  24
Section 6.11  Consents Under Bond Documents ............................  26
Section 6.12  Amendments to Bond Documents .............................  26
Section 6.13  Limitation on Optional Calls and Conversions .............  26
Section 6.14  Liens; Negative Pledge ...................................  26
Section 6.15  Payment of Debt ..........................................  27
Section 6.16  Environmental Covenants ..................................  27
Section 6.17  ERISA ....................................................  29
Section 6.18  Tax Returns ..............................................  29
Section 6.19  Leases ...................................................  29
Section 6.20  Optional Redemptions of Bonds ............................  29
Section 6.21  Financial Covenants ......................................  30
Section 6.22  Further Assurances .......................................  30

                          ARTICLE VII.
                       CONSTRUCTION COVENANTS

Section 7.01  Application of Project Fund...............................  31
Section 7.02  Requisitions Approval.....................................  33
Section 7.03  Construction; Completion Date.............................  34
Section 7.04  Certain Contracts Prohibited..............................  35
</TABLE>

                                     F-ii
<PAGE>

<TABLE>
<S>                                                                      <C>
Section 7.05  Certain Notices...........................................  35
Section 7.06  Releases..................................................  35
Section 7.07  Change Orders.............................................  35
Section 7.08  Subcontracts..............................................  35

                                 ARTICLE VIII.
                             DEFAULTS AND REMEDIES

Section 8.01  Defaults..................................................  36
Section 8.02  Remedies..................................................  39
Section 8.03  Waivers; Consents.........................................  39
Section 8.04  No Waiver; Remedies Cumulative............................  39
Section 8.05  Set-Off...................................................  40

                                  ARTICLE IX.
                                 MISCELLANEOUS

Section 9.01  Notices...................................................  40
Section 9.02  Successors and Assigns....................................  41
Section 9.03  Survival of Covenants.....................................  41
Section 9.04  Counterparts..............................................  41
Section 9.05  Costs, Expenses and Taxes.................................  41
Section 9.06  Amendments................................................  42
Section 9.07  Severability; Interest Limitation.........................  42
Section 9.08  Conflicts.................................................  42
Section 9.09  Complete Agreement........................................  43
Section 9.10  Consent to Jurisdiction; Venue; Waiver of Jury Trial......  43
Section 9.11  Governing Law.............................................  43
Section 9.12  Headings..................................................  43


EXECUTION...............................................................  44
</TABLE>

                                     F-iii
<PAGE>

<TABLE>
<S>                                                                       <C>
EXHIBIT A - Form of Letter of Credit....................................  A-1

EXHIBIT B - Project Facilities Description..............................  B-1

EXHIBIT C - Environmental Matters.......................................  C-1

EXHIBIT D - Outstanding Obligations.....................................  D-1

EXHIBIT E - Outstanding Material Contracts..............................  E-1

EXHIBIT F - Permitted Liens ............................................  F-1

EXHIBIT G - [Intentionally Omitted].....................................  G-1

EXHIBIT H - Optional Redemption of Bonds ...............................  H-1
</TABLE>

                                     F-iv
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.10
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>LOAN AGREEMENT
<TEXT>

<PAGE>

                                                                   EXHIBIT 10.10

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

                                LOAN AGREEMENT

                          Dated as of August 1, 2000

                                    Between

                CHESTER COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY

                                      And

                     INNOVATIVE SOLUTIONS AND SUPPORT, LLC


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


             Bond Counsel                 Authority Counsel
             ------------                 -----------------

             Stevens & Lee                Conrad O'Brien Gellman & Rohn, P.C.
             111 North Sixth Street       17 West Gay Street Suite 100
             Reading, PA  19601           West Chester, PA  19380-3090



                 ---------------------------------------------
                 ---------------------------------------------
<PAGE>

                               Table of Contents
                               -----------------

<TABLE>
<CAPTION>
                                                                                                            Page
                                                                                                            ----
<S>                                                                                                         <C>
                                                      ARTICLE I

                                                     DEFINITIONS

   Section 1.1  Use of Terms Defined in Indenture.......................................................      1

   Section 1.2  Definitions.............................................................................      2

   Section 1.3  Interpretation..........................................................................      5

   Section 1.4  Captions, Headings and Table of Contents................................................      5

                                                      ARTICLE II

                                                   REPRESENTATIONS

   Section 2.1  Representations and Findings of Issuer..................................................      6

   Section 2.2  Representations of Borrower.............................................................      7

                                                     ARTICLE III

                               ACQUISITION OF PROJECT; ISSUANCE OF BONDS; PROJECT FUND

   Section 3.1  Acquisition of Project..................................................................      9

   Section 3.2  Additions and Changes to Project........................................................      9

   Section 3.3  Issuance of Bonds; Application of Proceeds..............................................      9

   Section 3.4  Disbursements from Project Fund.........................................................     10

   Section 3.5  Borrower Required to Pay Costs in Event Project Fund Insufficient.......................     10

   Section 3.6  Completion..............................................................................     11

   Section 3.7  Investment and Use of Fund Moneys.......................................................     12

   Section 3.8  Rebate Fund.............................................................................     12
</TABLE>

                                       i
<PAGE>

                               Table of Contents
                               -----------------

                                  (continued)

<TABLE>
<CAPTION>
                                                                                                                Page
                                                                                                                ----
<S>                                                                                                             <C>
                                                         ARTICLE IV

                                         LOAN BY ISSUER; LOAN PAYMENTS; OTHER PAYMENTS

   Section 4.1   Loan by Issuer................................................................................  13

   Section 4.2   Loan Payments.................................................................................  13

   Section 4.3   Purchase Payments.............................................................................  13

   Section 4.4   Additional Payments...........................................................................  13

   Section 4.5   Obligations Unconditional.....................................................................  14

   Section 4.6   Assignment of Issuer's Rights.................................................................  14

   Section 4.7   Letter of Credit..............................................................................  14

                                                         ARTICLE V

                                              ADDITIONAL COVENANTS OF BORROWER

   Section 5.1   Maintenance of Existence......................................................................  16

   Section 5.2   Compliance with Laws; Commencement and Continuation of Operations
   at Project; No Sale, Removal or Demolition of Project.......................................................  16

   Section 5.3   Right of Inspection...........................................................................  16

   Section 5.4   Lease by Borrower.............................................................................  16

   Section 5.5   Financial Statements; Books and Records.......................................................  17

   Section 5.6   Taxes, Other Governmental Charges and Utility Charges.........................................  17

   Section 5.7   Insurance.....................................................................................  17

   Section 5.8   Damage to or Condemnation of Project..........................................................  18

   Section 5.9   Litigation Notice.............................................................................  18

   Section 5.10  Indemnification...............................................................................  18
</TABLE>

                                      ii
<PAGE>

                               Table of Contents
                               -----------------

                                  (continued)

<TABLE>
<CAPTION>
                                                                                                                Page
                                                                                                                ----
<S>                                                                                                             <C>
   Section 5.11  Tax Covenants of Borrower and Issuer..........................................................  19

   Section 5.12  Further Tax Covenants of Borrower.............................................................  20

   Section 5.13  No Control of Bank............................................................................  23

   Section 5.14  Annual Certificate............................................................................  23

   Section 5.15  Nondiscrimination.............................................................................  24

                                                         ARTICLE VI

                                                     REDEMPTION OF BONDS

   Section 6.1   Optional Redemption...........................................................................  25

   Section 6.2   Extraordinary Optional Redemption.............................................................  25

   Section 6.3   Mandatory Redemption..........................................................................  26

   Section 6.4   Actions by Issuer.............................................................................  26

                                                         ARTICLE VII

                                               EVENTS OF DEFAULT AND REMEDIES

   Section 7.1   Events of Default.............................................................................  27

   Section 7.2   Remedies on Default...........................................................................  28

   Section 7.3   Remedies Not Exclusive........................................................................  29

   Section 7.4   Payment of Legal Fees and Expenses............................................................  29

   Section 7.5   No Waiver.....................................................................................  29

   Section 7.6   Notice of Default.............................................................................  30

                                                        ARTICLE VIII

                                                       MISCELLANEOUS

   Section 8.1   Term of Agreement.............................................................................  31
</TABLE>

                                      iii
<PAGE>

                               Table of Contents
                               -----------------

                                  (continued)

<TABLE>
<CAPTION>
                                                                                                                Page
                                                                                                                ----
<S>                                                                                                             <C>
   Section 8.2   Notices.......................................................................................  31

   Section 8.3   Limitation of Liability; No Personal Liability................................................  32

   Section 8.4   Binding Effect................................................................................  32

   Section 8.5   Amendments....................................................................................  32

   Section 8.6   Counterparts..................................................................................  33

   Section 8.7   Severability..................................................................................  33

   Section 8.8   Governing Law.................................................................................  33

   Section 8.9   Assignment....................................................................................  33

   Section 8.10  Receipt of Indenture..........................................................................  33
</TABLE>

Exhibit A - Project Site Description

Exhibit B - Project Description

Exhibit C - Form of Disbursement Request

Exhibit D - Nondiscrimination Clause

                                      iv
<PAGE>

                                LOAN AGREEMENT

          THIS LOAN AGREEMENT dated as of August 1, 2000 between CHESTER COUNTY
INDUSTRIAL DEVELOPMENT AUTHORITY (the "Issuer"), a public instrumentality and
body corporate and politic of the Commonwealth of Pennsylvania, and INNOVATIVE
SOLUTIONS AND SUPPORT, LLC (the "Borrower"), a limited liability company duly
organized and validly existing under the laws of the Commonwealth of
Pennsylvania (the capitalized terms not defined in the recitals being used
therein as defined or otherwise described in Article I of this Agreement),

                               WITNESSETH THAT:

          A.   The Issuer is a public instrumentality and a body corporate and
politic of the Commonwealth of Pennsylvania organized and existing under the
Act. Under the Act, and in furtherance of the public purposes thereof, the
Issuer is authorized to enter into agreements providing for the financing of the
Project described below.

          B.   The Issuer has undertaken the financing of certain costs of a
Project to be located on certain real property more fully described in Exhibit A
attached hereto (the "Project Site"). The Project Site and such facilities are
herein collectively called the "Project". The Project will be owned and operated
by the Borrower. A more complete description of the Project and the estimated
costs thereof are set forth in Exhibit B attached hereto.

          C.   In order to finance the Project, the Issuer has duly authorized
the issuance and sale of its Industrial Development Revenue Bonds, 2000 Series A
(Innovative Solutions and Support, LLC Project) (the "Bonds") to be issued under
the terms of a Trust Indenture dated as of the date hereof (as the same may
hereafter be amended or supplemented from time to time, the "Indenture") by and
between the Issuer and Chase Manhattan Trust Company, National Association, as
Trustee.

          D.   The Issuer and the Borrower intend that the interest on the Bonds
will not be included in the gross income of the recipients thereof under the
Code.

          E.   The Issuer has entered into this Agreement with the Borrower for
the purposes of providing for (i) the loan of the proceeds of the Bonds to the
Borrower in order to finance the Project and (ii) the repayment of such loan by
the Borrower in amounts sufficient to pay, when due, the principal of, premium,
if any, on and interest on the Bonds.

          NOW, THEREFORE, intending to be legally bound, the Issuer and the
Borrower hereby agree as follows:

                                   ARTICLE I

                                  DEFINITIONS

          Section 1.1    Use of Terms Defined in Indenture. Terms used in this
                         ---------------------------------
Agreement which are defined in the Indenture and are not otherwise defined in
this Agreement shall have the meanings set forth in the Indenture unless the
context or use clearly indicates another meaning or intent.

                                       1
<PAGE>

          Section 1.2    Definitions. In addition to the terms defined in the
                         -----------
recital clauses of this Agreement, as used herein:

               "Additional Payments" means the amounts required to be paid by
     the Borrower pursuant to Section 4.4.

               "Agreement" means this Loan Agreement, as amended or supplemented
     from time to time.

               "Authorized Representative" means, with respect to the Issuer,
     each person at the time designated to act on behalf of the Issuer by
     written certificate furnished to the Trustee containing the specimen
     signature of such person and signed on behalf of the Issuer by its
     Secretary or Assistant Secretary, and, with respect to the Borrower, each
     person at the time designated to act on behalf of the Borrower by written
     certificate furnished to the Trustee containing the specimen signature of
     such person and signed on behalf of the Borrower by its Secretary or
     Assistant Secretary.

               "Bond Purchase Agreement" means the Bond Purchase Agreement among
     the Issuer, the Borrower and PNC Capital Markets, Inc., as the underwriter,
     relating to the Bonds.

               "Bond Service" means, for any period or payable at any time, the
     principal of, premium, if any, on and interest on the Bonds for that period
     or payable at the time whether due on an Interest Payment Date, at maturity
     or upon acceleration or redemption.

               "Borrower's Agreements" means this Agreement, the Bond Purchase
     Agreement, the Remarketing Agreement and the Reimbursement Agreement.

               "Code" means the Internal Revenue Code of 1986, as amended from
     time to time. References to the Code and Sections of the Code include
     relevant applicable regulations, temporary regulations and proposed
     regulations thereunder and under the Internal Revenue Code of 1954, as
     amended, and any successor provisions to those Sections, regulations,
     temporary regulations or proposed regulations.

               "Completion Date" means the date of completion of the Project
     evidenced in accordance with the requirements of Section 3.6.

               "Construction Period" means the period between the beginning of
     the acquisition, construction, installation, equipment or improvement of
     the Project or the date on which the Bonds are issued, whichever is
     earlier, and the Completion Date.

               "Event of Default" means any of the events described as an Event
     of Default in Section 7.1.

               "Exempt Facility Bonds" means bonds issued to finance exempt
     facilities as defined in the Code or in the Internal Revenue Code of 1954.

               "Issuer's Fee" means the amount of $33,537.50.


                                       2
<PAGE>

               "Loan" means the loan by the Issuer to the Borrower of the
     proceeds of the Bonds pursuant to Section 4.1 in the original principal
     amount of $4,335,000.

               "Loan Payments" means the amounts required to be paid by the
     Borrower in repayment of the Loan pursuant to Section 4.2.

               "Principal User" shall mean, with respect to any facility, a
     "principal user" as such term is used in Section 144(a) of the Code,
     including, without limiting the generality of the foregoing, (i) any Person
     whose ownership interest in such facility exceeds 10% or, if no ownership
     interest in such facility exceeds 10%, any Person (or Persons, in the case
     of multiple equal owners) holding the largest ownership interest in such
     facility, (ii) any Person who leases more than 10% of such facility under a
     lease with a term (taking into account all options to renew and reasonably
     anticipated renewals) of more than one year, and (iii) any Person who
     enjoys the use of such facility in a degree comparable to the enjoyment of
     a Person described in clauses (i) and (ii); for purposes of determining the
     extent of a Person's ownership interest, lease interest, lease term and
     degree of enjoyment of a facility, the term "Person" includes a Person and
     all Related Persons with respect to such Person.

               "Project Approval" means the initial official action of the
     Issuer declaring its intent with respect to the financing of the Project
     with the proceeds of the Issuer's bonds. The date of the Project Approval
     is November 17, 1999.

               "Project Costs" means costs of the Project permitted under the
     Act, including, but not limited to, the following:

                    (a)  Costs incurred in acquisition, construction,
          installation, equipment or improvement of the Project, including costs
          incurred in respect of the Project for preliminary planning and
          studies; architectural, engineering, accounting, consulting, legal and
          other professional fees and expenses; labor, services and materials;

                    (b)  Fees, charges and expenses incurred in connection with
          the authorization, sale, issuance and delivery of the Bonds, including
          without limitation bond discount, printing expense, title insurance,
          recording fees and the initial fees and expenses of the Trustee, the
          Issuer, the Remarketing Agent and the Bank; provided that the amount
          of the proceeds of the Bonds used to finance issuance costs (but
          excluding Bank letter of credit fees) shall not exceed 2% of the
          aggregate face amount of the Bonds within the meaning of Section
          147(g) of the Code;

                    (c)  Payment of interest on the Bonds and fees of the Bank,
          Trustee and Remarketing Agent accruing during the Construction Period;

                    (d)  Any other costs, expenses, fees and charges properly
          chargeable to the cost of acquisition, construction, installation,
          equipment or improvement of the Project; and

                    (e)  Payments made to the Rebate Fund.

                                       3
<PAGE>

               "Purchase Payments" means the amounts required to be paid by the
     Borrower pursuant to Section 4.3.

               "Rehabilitation Expenditure" shall mean a "rehabilitation
     expenditure" as such term is defined in Section 147(d)(3) of the Code,
     including, without limiting the generality of the foregoing, a capital
     expenditure incurred in connection with the rehabilitation of a building or
     structure which is part of the Project, if such expenditure is incurred by
     the Borrower, the seller of such building to the Borrower (if incurred
     pursuant the sales contract between such seller and the Borrower) or a
     successor to the Borrower; provided, that:

                    (1)  if an integrated operation is contained in such
          building or structure before its acquisition by the Borrower,
          expenditures incurred to rehabilitate existing equipment or to replace
          existing equipment with equipment having substantially the same
          function is treated as incurred in connection with the rehabilitation
          of such building or structure; and

                    (2)  notwithstanding the foregoing, the term "Rehabilitation
          Expenditure" does not include any expenditure:

                         (a)  with respect to which the method and period of
               depreciation is other than the straight line method over a period
               determined under Section 168(c) or (g) of the Code, unless the
               alternative depreciation system of Section 168(g) of the Code
               applies to such expenditure by reason of Section 168(g)(1)(B) or
               (C) of the Code;

                         (b)  for the cost of acquiring any building or interest
               therein;

                         (c)  attributable to enlargement of an existing
               building;

                         (d)  attributable to the rehabilitation of a certified
               historic structure or a building in a registered historic
               district, unless either the rehabilitation is a certified
               rehabilitation or, with respect to a building other than a
               certified historic structure, the Secretary of the Interior has
               certified to the Secretary of the Treasury that the building is
               not of historic significance to the district (all terms used in
               this paragraph (d) have the meanings assigned in Section
               47(c)(2)(B) of the Code);

                         (e)  allocable to the portion of such building which
               is, or may reasonably be expected to be, tax-exempt use property
               within the meaning of Section 168(h) of the Code; or

                         (f)  by a lessee of such building.

               "Reimbursement Agreement" means the Reimbursement, Credit and
     Security Agreement between the Bank and the Borrower relating to the Letter
     of Credit and the Bonds, as amended, supplemented or replaced from time to
     time.

                                       4
<PAGE>

               "Related Person" shall have the meaning set forth in Section
          144(a)(3) of the Code and shall include (to the extent there provided)
          any parent, subsidiary, affiliated corporation or unincorporated
          enterprise, majority shareholder and commonly owned entity.

               "Remarketing Agreement" means the Remarketing Agreement between
          the Borrower and the Remarketing Agent relating to the Bonds, as
          amended, supplemented or replaced from time to time.

               "Remedial Action Date" means the earliest of the following dates:
          (i) the Completion Date; (ii) the date on which the Borrower
          determines that the Project will not be completed; or (iii) the date
          on which the entire Project is placed in service, within the meaning
          of the Code.

               "Resolutions" means the resolution or resolutions of the Issuer
          approving and authorizing the Bonds, the Indenture and this Agreement.

               "Small Issue Bonds" means bonds issued under the $1,000,000 or
          $10,000,000 limits imposed by the Section 144(a) of the Code or
          Section 103 of the Internal Revenue Code of 1954.

               "Test Period" means the three-year period beginning on the later
          of the date tax-exempt bonds are issued or the date the facilities
          financed by such tax-exempt bonds are placed in service.

               "Unassigned Issuer's Rights" means all of the rights of the
          Issuer to receive Additional Payments under Section 4.4, to be held
          harmless and indemnified under Section 5.10, to be reimbursed for
          attorney's fees and expenses under Section 7.4, and to give or
          withhold consent to or approval of amendments, modifications,
          termination or assignment of this Agreement, or amendment, sale,
          transfer, assignment, lease (or assignment of lease) or other disposal
          of the Project, under Sections 3.2, 5.1, 5.2, 5.4, 8.5 and 8.9.

             Section 1.3   Interpretation. In this Agreement, unless the context
                           --------------
indicates otherwise, words importing the singular number include the plural
number, and vice versa, the terms "hereof", "hereby", "herein", "hereto",
"hereunder" and similar terms refer to this Agreement, and the term "hereafter"
means after and the term "heretofore" means before the Series Issue Date, and
words of any gender include the correlative words of the other genders. In this
Agreement, unless otherwise indicated, all references to particular Articles,
Sections, Subsections or paragraphs are references to the Articles, Sections,
Subsections or paragraphs of this Agreement.

             Section 1.4   Captions, Headings and Table of Contents. The
                           ----------------------------------------
captions, headings and table of contents in this Agreement are solely for
convenience of reference and in no way define, limit or describe the scope or
intent of any Articles, Sections, Subsections or paragraphs hereof.

                                       5
<PAGE>

                                  ARTICLE II

                                REPRESENTATIONS

          Section 2.1    Representations and Findings of Issuer. The Issuer
                         --------------------------------------
hereby confirms its findings and represents that:

                    (a)  The Issuer is a public body corporate and politic
established in the Commonwealth of Pennsylvania pursuant to the laws of the
Commonwealth of Pennsylvania (including the Act). Under the Act, the Issuer has
the power to enter into the Indenture, the Bond Purchase Agreement and this
Agreement and to carry out its obligations thereunder and to issue the Bonds to
finance the Project.

                    (b)  By adoption of the Resolutions at one or more duly
convened meetings of the Issuer at which a quorum was present and acting
throughout, the Issuer has duly authorized the execution and delivery of the
Indenture, the Bond Purchase Agreement and this Agreement and performance of its
obligations thereunder and the issuance of the Bonds. Simultaneously with the
execution and delivery of this Agreement, the Issuer has duly executed and
delivered the Indenture and issued and sold the Bonds.

                    (c)  Based on representations and information furnished to
the Issuer by or on behalf of the Borrower, the Issuer has found that the
Borrower is qualified to be a beneficiary of financing provided by the Issuer
pursuant to the Act.

                    (d)  Based on representations and information furnished to
the Issuer by or on behalf of the Borrower, the Issuer has found that the
Project (i) will promote the public purposes of the Act, (ii) is located within
the boundaries of the Commonwealth of Pennsylvania and within the boundaries of
the County of Chester, and (iii) will constitute a project within the meaning of
the Act.

                    (e)  The Issuer has filed a Preliminary Allocation Request
("PAR") for purposes of receiving an allocation of the tax-exempt bond authority
of the Commonwealth of Pennsylvania and has received approval of the PAR from
the Pennsylvania Department of Community and Economic Development (the
"Department"), certifying approval of such allocation for the Project as
required by Section 146 of the Code. The Issuer will simultaneously with the
issuance of the Bonds deliver a Final Allocation Request to the Department to
obtain a final confirmation of such allocation.

                    (f)  The Project has been approved (1) by the Pennsylvania
Secretary of Community and Economic Development, as required by the Act, (2) by
the Board of Commissioners of the County of Chester, Pennsylvania, as the
"applicable elected representative", as that term is defined under the Code,
after a public hearing held upon reasonable notice, as required by the Code, and
(3) by the Issuer by adoption of the Resolutions, as required by the Act.

                    (g)  The Issuer has not and will not pledge the income and
revenues derived from this Agreement other than pursuant to and as set forth in
the Indenture.

                                       6
<PAGE>

                    (h)  The Issuer hereby elects to have the $10,000,000 limit
for Small Issue Bonds under the Code apply to the Bonds.

          Section 2.2  Representations of Borrower. The Borrower represents
                       ---------------------------
that:

                    (a)  The Borrower is a limited liability company duly
organized and validly existing under the laws of the Commonwealth of
Pennsylvania, and has full power and authority to execute, deliver and perform
its obligations under the Borrower's Agreements and to enter into and carry out
the transactions contemplated thereby.

                    (b)  The Borrower's Agreements have been duly authorized,
executed and delivered by the Borrower and constitute valid and binding
obligations of the Borrower. The execution, delivery and performance of the
Borrower's Agreements by the Borrower do not, and will not, violate any
provision of law applicable to the Borrower or the Borrower's certificate of
organization or operating agreement or any agreement or instrument to which the
Borrower is a party or by which it or any of its properties is bound.

                    (c)  The Project will promote the public purposes of the Act
and will not cause, directly or indirectly, the removal, either in whole or in
part, of a plant, facility or establishment from one area of the Commonwealth of
Pennsylvania to another. The Project is located within the boundaries of the
County of Chester, Pennsylvania.

                    (d)  The Borrower has acquired or will acquire before they
are needed all permits and licenses, and has satisfied or will satisfy other
requirements necessary, for the acquisition, construction, installation and/or
operation of the Project. The Project is a project within the meaning of the Act
and will be operated as such.

                    (e)  The Borrower presently intends to use or operate the
Project in a manner consistent with the Act until the date on which the Bonds
have been fully paid and knows of no reason why the Project will not be so used
or operated.

                    (f)  The aggregate of the following amounts does not, at the
Series Issue Date, exceed $10,000,000:

                         (i)    The outstanding amount of prior Small Issue
     Bonds with respect to facilities which are to be or have been used by the
     Borrower, any other Principal User of the Project or any Related Person and
     are located within the same city, town, borough, township or other
     incorporated municipality as the Project;

                         (ii)   The face amount of the Bonds; and

                         (iii)  Any and all capital expenditures, including any
     expenditures which could at the option of any Person be capitalized under
     any provision of the Code, paid or incurred by any Person within three
     years preceding the Series Issue Date, with respect to any facilities
     located in the same city, town, borough, township or other incorporated
     municipality as the Project of which the Borrower, any other Principal User
     of the Project or any Related Person is a Principal User, except
     expenditures made with proceeds of any prior Small Issue Bonds or
     expenditures reimbursed with the proceeds of the Bonds.

                                       7
<PAGE>

                    (g)  The information furnished by the Borrower and used by
the Issuer in preparing the arbitrage certificate pursuant to Section 148 of the
Code and information statement pursuant to Section 149(e) of the Code is
accurate and complete as of the Series Issue Date.

                    (h)  The proceeds of the Bonds will not exceed the Project
Costs.

                    (i)  The costs of issuance financed with proceeds of the
Bonds, including any bond discount on the sale of the Bonds, but not including
fees and charges in respect of the Letter of Credit, will not exceed 2% of the
proceeds of the Bonds.

                    (j)  No costs of the Project to be financed with the
proceeds of the Bonds have been paid by or on behalf of the Borrower or any
Related Person more than 60 days prior to the date of the Project Approval.

                              (End of Article II)

                                       8
<PAGE>

                                  ARTICLE III

            ACQUISITION OF PROJECT;ISSUANCE OF BONDS; PROJECT FUND

          Section 3.1  Acquisition of Project. The Borrower (a) has acquired, or
                       ----------------------
on the Series Issue Date is acquiring, the Project Site and shall construct,
install, equip and/or improve the Project on the Project Site with all
reasonable dispatch and in accordance with the description thereof in Exhibit B
attached hereto and applicable law, (b) shall procure or cause to be procured
all permits and licenses necessary for the prosecution of any and all work on
the Project, and (c) shall pay when due all costs and expenses incurred in
connection with such acquisition, construction, installation, equipment and
improvement from funds made available therefor in accordance with this Agreement
or otherwise. It is understood that the Project is the property of the Borrower
and that any contracts made by the Borrower with respect thereto and any work to
be done by the Borrower on the Project are made or done by the Borrower in its
own behalf and not as agent or contractor for the Issuer.

          Section 3.2  Additions and Changes to Project. Subject to Sections
                       --------------------------------
5.11 and 5.12, the Borrower may, at its option and at its own cost and expense,
at any time and from time to time, revise the description of the Project in
Exhibit B attached hereto and/or make such additions and changes to the Project
as it may deem to be desirable for its uses and purposes, provided that (i) such
additions and changes shall constitute part of the Project, (ii) the Borrower
shall supplement the information contained in Exhibit B attached hereto by
filing with the Issuer and the Trustee such supplemental information as is
necessary to reflect such additions and changes so that the Issuer and the
Trustee will be able to ascertain the nature and cost of the facilities included
in the Project and covered by this Agreement and (iii) if an addition or change
is substantial in relation to the Bonds, the Borrower shall have first obtained
and filed with the Issuer and the Trustee an opinion of Bond Counsel to the
effect that such addition or change is authorized or permitted under the Act and
will not adversely affect the exclusion from gross income of interest on the
Bonds under the Code. In any case, the Borrower shall obtain the Issuer's
approval of the addition to the Project of any proposed facilities or any other
changes not generally described in Exhibit B attached hereto on the date of
delivery of this Agreement, and the Borrower shall delete any facilities from
the Project if such deletion is necessary to maintain the exclusion from gross
income of interest on the Bonds under the Code.

          Section 3.3  Issuance of Bonds; Application of Proceeds. To provide
                       ------------------------------------------
funds to make the Loan for the purpose of paying Project Costs in accordance
with Exhibit B attached hereto, the Issuer will issue the Bonds in the aggregate
principal amount of $4,335,000. The Bonds will be issued pursuant to the
Indenture and will bear interest, mature and be subject to redemption and
tender, all as set forth therein. The Borrower hereby approves the terms and
conditions of the Indenture and the Bonds, and the terms and conditions under
which the Bonds will be issued, sold and delivered.

          The proceeds from the sale of the Bonds (including any bond discount)
shall be loaned to the Borrower pursuant to Section 4.1 and such proceeds (net
of any bond discount) shall be paid over to the Trustee for deposit in the
Project Fund. Pending disbursement pursuant to Section 3.4, the proceeds of the
Bonds so deposited in the Project Fund, together

                                       9
<PAGE>

with any investment earnings thereon, shall constitute a part of the Trust
Estate and shall be subject to the lien of the Indenture pursuant to the
granting clauses therein as security for the obligations described in such
granting clauses, and to such end the Borrower hereby grants to the Trustee as
security for such obligations a security interest in all of the Borrower's
right, title and interest in and to the Project Fund.

          Section 3.4  Disbursements from Project Fund. Subject to the
                       -------------------------------
provisions below, disbursements from the Project Fund shall be made to reimburse
or pay the Borrower, or any Person designated by the Borrower, for Project
Costs. The Borrower agrees that the sums so disbursed from the Project Fund will
be used only for the payment of Project Costs, and will not be used for any
other purpose.

          Any disbursements from the Project Fund for the payment of the Project
Costs shall be made by the Trustee only upon the written order of an Authorized
Representative of the Borrower, with the written approval of the Bank, delivered
to the Trustee; provided that disbursements made for costs described in clause
(b) of the definition of Project Costs may be made by the Trustee upon delivery
to the Trustee of a closing statement signed by the respective Authorized
Representatives of the Borrower and approved by the Bank. Each such written
order shall be substantially in the form of the disbursement request attached
hereto as Exhibit C and shall be consecutively numbered and accompanied by
invoices or other appropriate documentation supporting the payments or
reimbursements requested. Any disbursement for any item not described in, or the
cost for which item is other than as described in, the information statement
filed by the Issuer in connection with the issuance of the Bonds as required by
Section 149(e) of the Code and referred to in Section 5.12, shall be accompanied
by an opinion of a Bond Counsel to the effect that such disbursement does not
result in the interest on the Bonds becoming included in the gross income of the
Holders for federal income tax purposes. In case any contract provides for the
retention by the Borrower of a portion of the contract price, there shall be
paid from the Project Fund only the net amount remaining after deduction of any
such portion, and only when that retained amount is due and payable, may it be
paid from the Project Fund.

          Any moneys in the Project Fund (including the earnings from
investments therein) remaining after the Completion Date and payment, or
provision for payment, in full of the Project Costs shall, at the written
direction of an Authorized Representative of the Borrower, be transferred to the
General Account of the Bond Fund and applied as provided in Subsection 5.04(c)
of the Indenture; provided that (i) any such transfer and application shall be
made only to the extent that such use or application does not, in the opinion of
Bond Counsel or under ruling of the Internal Revenue Service, cause the interest
on the Bonds to become included in the gross income of the Holders for federal
income tax purposes, and (ii) unless there shall be delivered to the Trustee a
similar opinion of Bond Counsel, the Borrower shall not direct the investment of
such remaining moneys in "investment property" (as defined in Section 148 of the
Code) at a yield in excess of the yield on the Bonds.

          Section 3.5  Borrower Required to Pay Costs in Event Project Fund
                       ----------------------------------------------------
Insufficient. If moneys in the Project Fund are not sufficient to pay all
- ------------
Project Costs, the Borrower nonetheless shall complete the Project in accordance
with Exhibit B attached hereto and shall pay all such additional Project Costs.
The Borrower shall not be entitled to any

                                       10
<PAGE>

reimbursement for any such payments from the Issuer, the Trustee, the Bank or
any Holder; nor shall it be entitled to any abatement, diminution or
postponement of the Loan Payments.

          Section 3.6  Completion. Except to the extent otherwise approved by
                       ----------
the Issuer and by an opinion of Bond Counsel furnished by the Borrower to the
Trustee, within three years of the date of original delivery and payment for the
Bonds, the Borrower shall have completed the Project and caused all of the
proceeds of the Bonds to be expended for Project Costs in accordance with
Exhibit B attached hereto or otherwise applied as described in Section 3.4. The
Borrower shall notify the Issuer and the Trustee of the Completion Date by a
certificate signed by an Authorized Representative of the Borrower stating

               (a)  the date on which the Project was substantially completed,

               (b)  that all other facilities necessary in connection with the
Project have been acquired, constructed, installed, equipped and improved,

               (c)  that the acquisition, construction, installation, equipment
and/or improvement of the Project and such other facilities have been
accomplished in such a manner as to conform with all applicable zoning,
planning, building, environmental and other similar governmental regulations,

               (d)  that except as provided in clause (e) below, all costs of
the Project then or theretofore due and payable have been paid, and

               (e)  the amounts which the Trustee shall retain in the Project
Fund for the payment of Project Costs not yet due or for liabilities which the
Borrower is contesting or which otherwise should be so retained and the reasons
therefor.

Such certificate may state that it is given without prejudice to any rights
against third parties which then exist or subsequently may come into being. The
Authorized Representative of the Borrower shall include with such certificate a
statement specifically describing all items of personal property comprising a
part of the Project. The certificate shall be delivered as promptly as
practicable after the Borrower is in a position to certify as to the matters
referred to in clauses (a) through (e) above. Within 10 days of the delivery by
the Authorized Representative of the Borrower of such certificate evidencing the
Completion Date, the Trustee shall retain in the Project Fund a sum equal to the
amounts necessary for payment of Project Costs not then due and payable or the
liability for which the Borrower is contesting as set forth in said certificate.
Any amount not to be retained in the Project Fund for such costs, and all
amounts so retained but not subsequently used and for which written notice of
such failure of use has been given by the Borrower to the Trustee, and all
amounts on deposit in the Project Fund if the Borrower determines that the
Project will not be completed, shall be segregated by the Trustee and used by
the Trustee, at the written direction of the Authorized Representative of the
Borrower, within 90 days of the Remedial Action Date for one of the following
purposes: (a) to redeem Bonds prior to maturity on the earliest redemption date
permitted by this Agreement and the Indenture, (b) to purchase Bonds prior to
such redemption date for the purpose of cancellation, or (c) for any other
purpose; provided that the Trustee is furnished with an opinion of Bond Counsel
to the effect that such use is lawful under the Act and does not adversely
affect the exclusion of interest on any of the Bonds from gross income of the
owners thereof for federal income tax purposes. Until used for one or more of
the foregoing purposes, such segregated amount may be invested as permitted

                                       11
<PAGE>

by Section 3.7, but may not be invested by the Borrower, without an opinion of
Bond Counsel to the effect that such investment does not adversely affect the
exclusion of interest on any of the Bonds from gross income of the owners
thereof for federal income tax purposes, to produce a yield on such amount
(computed from the Completion Date and taking into account any investment of
such amount from the Completion Date) greater than the yield on the Bonds,
computed in accordance with the applicable provisions of the Code. The Issuer
agrees to cooperate with the Trustee and take all required action necessary to
redeem the Bonds or to accomplish any other purpose contemplated by this
Section.

          Section 3.7  Investment and Use of Fund Moneys. At the oral or written
                       ---------------------------------
direction of an Authorized Representative of the Borrower, any moneys held as
part of the Bond Fund (except moneys in the Letter of Credit Debt Service
Account created under Section 5.04 of the Indenture and except any moneys
representing principal of, or premium, if any, or interest on, any Bonds which
are deemed paid under Section 10.02 of the Indenture) or the Project Fund shall
be invested or reinvested by the Trustee in Eligible Investments. The Issuer and
the Borrower each hereby covenants that it will restrict that investment and
reinvestment and the use of the proceeds of the Bonds in such manner and to such
extent, if any, as may be necessary, after taking into account reasonable
expectations at the time of delivery of and payment for the Bonds, so that the
Bonds will not constitute arbitrage bonds under Section 148 of the Code.

          Any Authorized Representative of the Issuer having responsibility for
issuing the Bonds is authorized and directed, alone or in conjunction with an
Authorized Representative of the Borrower and/or any other officer, partner,
employee or agent of or consultant to the Issuer or the Borrower, to give an
appropriate certificate of the Issuer pursuant to Section 148 of the Code, for
inclusion in the transcript of proceedings for the issuance of the Bonds,
setting forth the reasonable expectations of the Issuer regarding the amount and
use of the proceeds of the Bonds and the facts, estimates and circumstances on
which those expectations are based, all as of the Series Issue Date. The
Borrower shall provide the Issuer with, and the Issuer's certificate may be
based on, a certificate of the Authorized Representative of the Borrower or
other appropriate officer, partner, employee or agent of or consultant to the
Borrower setting forth the reasonable expectations of the Borrower on the Series
Issue Date regarding the amount and use of the proceeds of the Bonds and the
facts, estimates and circumstances on which they are based.

          Section 3.8  Rebate Fund. The Borrower agrees to engage a Financial
                       -----------
Consultant to determine Excess Earnings, to make such payments to the Trustee as
are required of the Borrower under Section 5.08 of the Indenture and to
otherwise comply with requirements of Section 5.08 of the Indenture applicable
to the Borrower. The obligation of the Borrower to make such payments shall
remain in effect and be binding upon the Borrower notwithstanding the release
and discharge of the Indenture.


                             (End of Article III)

                                       12
<PAGE>

                                  ARTICLE IV

                 LOAN BY ISSUER; LOAN PAYMENTS;OTHER PAYMENTS

          Section 4.1  Loan by Issuer. Upon the terms and conditions of this
                       --------------
Agreement, the Issuer will make the Loan to the Borrower on the Series Issue
Date in a principal amount equal to the aggregate principal amount of the Bonds.
The Loan shall be deemed fully advanced upon deposit of the proceeds of the
Bonds (net of any bond discount) in the Project Fund pursuant to Section 3.3.

          Section 4.2  Loan Payments. In consideration of and in repayment of
                       -------------
the Loan, the Borrower shall make, as Loan Payments, payments which correspond,
as to amounts and due dates, to the Bond Service on the Bonds. Amounts received
upon a drawing by the Trustee under the Letter of Credit for the payment of Bond
Service shall be credited against the Loan Payments otherwise payable by the
Borrower corresponding to such Bond Service; provided that the Bank has been
fully reimbursed for such drawing by the Borrower.

          It is the intention of the Issuer and the Borrower that,
notwithstanding any other provision of this Agreement, the Trustee, as assignee
of the Issuer, shall receive funds from or on behalf of the Borrower (taking
into account such credits for amounts drawn on the Letter of Credit) in such
amounts and at such times as will enable the Issuer to pay when due all of its
Bond Service on the Bonds and any obligations arising under Section 4.3 and any
such obligations surviving the payment of the Bonds.

          All Loan Payments shall be payable in lawful money of the United
States of America and shall be made by, or on behalf of the Borrower, to the
Trustee at its Principal Office for the account of the Issuer and deposited in
the General Account of the Bond Fund created by the Indenture. Such Loan
Payments shall be applied as provided in the Indenture.

          The Borrower shall be entitled to credits against the Loan Payments as
and to the extent provided in Subsection 5.04(f) of the Indenture.

          Section 4.3  Purchase Payments. To the extent that moneys on deposit
                       -----------------
in the Remarketing Proceeds Purchase Account or the Letter of Credit Purchase
Account established under the Indenture are insufficient to pay the full
purchase price of Bonds payable pursuant to Sections 4.01 and 4.02 of the
Indenture on the applicable Purchase Date, the Borrower shall also pay to the
Trustee as Purchase Payments for deposit in the Borrower Purchase Account
established under the Indenture amounts sufficient to cover the shortfalls.

          Section 4.4  Additional Payments. The Borrower shall pay as Additional
                       -------------------
Payments hereunder: (a) to the Issuer, the Issuer's Fee on the Series Issue Date
and any and all costs and expenses (including reasonable legal fees and
expenses) incurred or to be paid by the Issuer in connection with the issuance
and delivery of the Bonds or otherwise related to actions taken by the Issuer
under this Agreement or the Indenture or any amendment thereof, supplement
thereto or waiver or consent thereunder, including without limitation, any
annual charge made by a Rating Service to maintain a rating on the Bonds; (b) to
the Remarketing Agent, the fees and expenses of the Remarketing Agent under the
Indenture and the Remarketing Agreement for

                                       13
<PAGE>

services rendered in connection with the Bonds; (c) to the Trustee, the
reasonable fees, charges and expenses of the Trustee and its agents for acting
as such under the Indenture; and (d) all other reasonable fees and expenses
incurred in connection with the issuance of the Bonds.

          Section 4.5  Obligations Unconditional. The obligations of the
                       -------------------------
Borrower to make Loan Payments, Purchase Payments, Additional Payments and any
payments required under Section 3.8 shall be absolute and unconditional, and the
Borrower shall make such payments without abatement, diminution or deduction
regardless of any cause or circumstances whatsoever including without limitation
any defense, set-off, recoupment or counterclaim which the Borrower may have or
assert against the Issuer, the Trustee, the Remarketing Agent, the Bank or any
other Person, whether express or implied, or any duty, liability or obligation
arising out of or connected with this Agreement, it being the intention of the
parties that the payments required of the Borrower hereunder will be paid in
full when due without any delay or diminution whatsoever. Loan Payments and
Purchase Payments required to be paid by or on behalf of the Borrower hereunder
shall be received by the Issuer or the Trustee as net sums and the Borrower
agrees to pay or cause to be paid all charges against or which might diminish
such net sums.

          Section 4.6  Assignment of Issuer's Rights. To secure the payment of,
                       -----------------------------
first, the Bond Service, and second, the Borrower's obligations under the
- -----                        ------
Reimbursement Agreement, the Issuer shall pledge and assign to the Trustee all
the Issuer's rights in, to and under this Agreement (except for the Unassigned
Issuer's Rights), the Revenues and the other property comprising the Trust
Estate. The Borrower consents to such pledge and assignment and agrees to make
or cause to be made Loan Payments and Purchase Payments directly to the Trustee
without defense or set-off by reason of any dispute between the Borrower and the
Trustee. Whenever the Borrower is required to obtain the consent of the Issuer
hereunder, the Borrower shall also obtain the consent of the Trustee; provided
that, except as otherwise expressly stipulated herein or in the Indenture, the
Borrower shall not be required to obtain the Trustee's consent with respect to
the Unassigned Issuer's Rights.

          Section 4.7  Letter of Credit. Concurrently with the initial delivery
                       ----------------
of the Bonds pursuant to Section 2.01 of the Indenture, the Borrower shall cause
the initial Letter of Credit to be issued by the Bank pursuant to the
Reimbursement Agreement, which Letter of Credit (1) shall be substantially in
the same form as the exhibit attached to the Reimbursement Agreement; (2) shall
be dated the date of delivery of the Bonds; and (3) shall authorize the Trustee
to draw on the Bank, subject to the terms and conditions thereof, up to (a) an
amount equal to the principal amount of the Bonds (i) to enable the Trustee to
pay the principal amount of the Bonds when due at maturity or upon redemption or
acceleration and (ii) to enable the Trustee to pay the portion of the purchase
price of Bonds tendered to it for purchase and not remarketed corresponding to
the principal amount of such Bonds, plus (b) an amount equal to 50 days interest
on the Bonds at the Maximum Rate with respect to the Weekly Rate (i) to enable
the Trustee to pay interest on the Bonds when due and (ii) to enable the Trustee
to pay the portion of the purchase price of Bonds tendered to it for purchase
and not remarketed corresponding to the accrued interest on such Bonds. The
Letter of Credit may be extended, amended or replaced by an Alternate Letter of
Credit or other credit enhancement complying with the provisions of Sections
2.05 and 5.09 of the Indenture.

                                       14
<PAGE>

          It is anticipated that all payments of principal of and interest on
the Bonds, and all payments of purchase price of the Bonds payable upon optional
or mandatory tender for purchase for the payment of which remarketing proceeds
are not available pursuant to Article IV of the Indenture, will be funded from
draws on the Letter of Credit.

          The Borrower shall take whatever action may be necessary to maintain
the Letter of Credit in full force and effect during the period required by the
Indenture, including the payment of any transfer fees required by the Bank upon
any transfer of the Letter of Credit to any successor Trustee.


                              (End of Article IV)

                                       15
<PAGE>

                                   ARTICLE V

                       ADDITIONAL COVENANTS OF BORROWER

          Section 5.1  Maintenance of Existence. If the Borrower is a
                       ------------------------
corporation, partnership, limited liability company or other entity, the
Borrower shall do all things necessary to preserve and keep in full force and
effect its existence, rights, franchises and qualification to do business in the
Commonwealth of Pennsylvania and shall not (a) dissolve or otherwise sell,
transfer or dispose of all, or substantially all, of its assets or (b)
consolidate with or merge into any other entity; provided that, subject to the
provisions of Sections 5.11 and 5.12, the preceding restrictions shall not apply
to a transaction to which the Issuer and the Bank consent in writing if the
transferee or the surviving or resulting entity, if other than the Borrower, by
written instrument satisfactory to the Trustee, irrevocably and unconditionally
assumes and agrees to perform and observe the agreements and obligations of the
Borrower under this Agreement and the provisions of Section 8.9 are satisfied.

          Section 5.2  Compliance with Laws; Commencement and Continuation of
                       ------------------------------------------------------
Operations at Project; No Sale, Removal or Demolition of Project. The Borrower
- ----------------------------------------------------------------
will acquire, construct, install, operate and maintain the Project in such
manner as to comply with the Act and all applicable requirements of federal,
state and local laws and the regulations, rules and orders of any federal, state
or local agency, board, commission or court having jurisdiction over the Project
or the operation thereof, including without limitation applicable zoning,
planning, building and environmental laws, regulations, rules and orders;
provided that the Borrower shall be deemed in compliance with this Section so
long as it is contesting in good faith any such requirement by appropriate legal
proceedings. The Borrower (or its lessee) shall commence operations at the
Project within three years from the Series Issue Date and shall continue such
operations throughout the term of this Agreement. The Borrower shall not sell,
assign or otherwise dispose of (whether in one transaction or in a series of
transactions) its interest in the Project or any material portion thereof (other
than as permitted by Section 5.1 and other than leases permitted under Section
5.4) or undertake or permit the demolition or removal of the Project or any
material portion thereof without (i) the prior written consent of the Issuer and
(ii) delivery to the Trustee of an opinion of Bond Counsel to the effect that
such sale, assignment or other disposal does not adversely affect the exclusion
from gross income of interest on the Bonds for federal income tax purposes;
provided that the Borrower shall be permitted to sell, transfer, assign or
otherwise dispose of or remove any portion of the Project which is retired or
replaced in the ordinary course of business.

          Section 5.3  Right of Inspection. Subject to reasonable security and
                       -------------------
safety regulations and upon reasonable notice, the Issuer and the Trustee, and
their respective agents, shall have the right during normal business hours to
inspect the Project.

          Section 5.4  Lease by Borrower. The Borrower may, subject to the
                       -----------------
provisions of Sections 5.11 and 5.12, lease the Project, in whole or in part, to
one or more other Persons, provided that:

                                       16
<PAGE>

               (a)  No such lease shall relieve the Borrower from its
obligations under this Agreement, the Reimbursement Agreement or the Remarketing
Agreement;

               (b)  In connection with any such lease the Borrower shall retain
such rights and interests as will permit it to comply with its obligations under
this Agreement, the Reimbursement Agreement and the Remarketing Agreement;

               (c)  No such lease shall impair materially the accomplishment of
the purposes of the Act to be accomplished by operation of the Project as herein
provided;

               (d)  Any such lease shall require the lessee to operate the
Project as a "project" under the Act as long as the Bonds are outstanding;

               (e)  In the case of a lease to a new lessee or an assignment of
an existing lease to a new lessee of substantially all of the Project, such new
lessee shall have been approved by the Issuer (such approval not to be
unreasonably withheld); and

               (f)  The lessees under any such leases, including any leases in
force on the Series Issue Date, shall be subject to the applicable terms and
conditions of Section 5.12.

       Section 5.5  Financial Statements; Books and Records. The Borrower
                    ---------------------------------------
shall prepare or have prepared such financial statements and reports in such
form as are required by the Bank or as otherwise shall be in accordance with
generally accepted accounting principles, and shall keep true and proper books
of records and accounts in which full and correct entries are made of all its
business transactions. Copies of such financial statements and reports shall be
provided to the Issuer and the Trustee promptly upon request, and such books of
records and accounts shall be made available for inspection during normal
business hours upon request by the Issuer, the Trustee and their respective
agents.

       Section 5.6  Taxes, Other Governmental Charges and Utility Charges.
                    -----------------------------------------------------
The Borrower shall pay, or cause to be paid before the same become delinquent,
all taxes, assessments, whether general or special, and governmental charges of
any kind whatsoever that may at any time be lawfully assessed or levied against
or with respect to the Project, including any equipment or related property
installed or brought by the Borrower therein or thereon, and all utility and
other charges incurred in the operation, maintenance, use, occupancy and upkeep
of the Project. With respect to special assessments or other governmental
charges that lawfully may be paid in installments over a period of years, the
Borrower shall be obligated to pay only such installments as are required to be
paid during the term hereof. The Borrower may, at its expense, in good faith
contest any such taxes, assessments and other charges and, in the event of any
such contest, may permit the taxes, assessments or other charges so contested to
remain unpaid during the period of such contest and any appeal therefrom, unless
the Issuer or the Trustee shall notify the Borrower that, in the opinion of
counsel selected by the Issuer or the Trustee, by nonpayment of any such items
the Project or any part thereof will be subject to loss or forfeiture, in which
event such taxes, assessments or charges shall be paid promptly. The Borrower
shall also comply at its own cost and expense with all notices received from
public authorities with respect to the Project.

       Section 5.7  Insurance. The Borrower shall at its own cost and
                    ---------
expense obtain or cause to be obtained insurance policies against such risks,
and in such amounts, as are

                                       17
<PAGE>

customarily insured against by entities owning facilities of like size and type
to the Project, paying, as the same become due and payable, all premiums in
respect thereof.

          Section 5.8  Damage to or Condemnation of Project. In the event of
                       ------------------------------------
damage, destruction or condemnation of part or all of the Project, the Borrower
shall either: (i) restore the Project or (ii) if permitted by the terms of the
Bonds, direct the Issuer to call the Bonds for redemption as set forth in
Section 6.2. Damage to, destruction of or condemnation of all or a portion of
the Project shall not terminate this Agreement or cause any abatement of or
reduction in the payments to be made by the Borrower under this Agreement.

          Section 5.9  Litigation Notice. The Borrower shall give the Trustee,
                       -----------------
the Remarketing Agent and the Bank prompt notice of any action, suit or
proceeding pending or threatened against it at law or in equity, or before any
governmental instrumentality or agency, which, if adversely determined, would
materially impair the right of the Borrower to carry on the business which is
contemplated in connection with the Project or would materially and adversely
affect its business, operations, properties, assets or condition.

          Section 5.10 Indemnification. The Borrower will indemnify and hold
                       ---------------
harmless the Issuer and each member, director, officer, employee, attorney and
agent of the Issuer for and against any and all claims, losses, damages or
liabilities (including the costs and expenses of defending against any such
claims) to which the Issuer or any member, director, officer, employee or agent
of the Issuer may become subject, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise directly or indirectly out of
(a) any loss or damage to property or injury to or death of or loss by any
Person that may be occasioned by any cause whatsoever pertaining to the
construction, maintenance, operation and use of the Project; (b) any breach or
default on the part of the Borrower in the performance of any covenant or
agreement of the Borrower under any of the Borrower's Agreements or any related
document, or arising from any act or failure to act by the Borrower or any of
its agents, contractors, servants, employees or licensees; (c) the
authorization, issuance and sale of the Bonds, or the provision of any
information or certification furnished in connection therewith concerning the
Bonds, the Project or the Borrower (including, without limitation, any
information furnished by the Borrower for inclusion in any certification made by
the Issuer or for inclusion in, or as a basis for preparation of, the
information statements furnished by the Issuer and any information or
certification obtained from the Borrower) to assure the exclusion of the
interest on the Bonds from the gross income of the Holders for federal income
tax purposes; (d) the Borrower's failure to comply with any requirements of this
Agreement pertaining to compliance with the Code to assure such exclusion of the
interest or the provisions set forth in Sections 5.11 and 5.12; (e) any failure
by the Borrower to comply with the provisions of the Act; and (f) any claim,
action or proceeding brought with respect to any matter set forth in clause (a),
(b), (c), (d) or (e) above.

          The Borrower will indemnify and hold the Trustee and its directors,
officers, agents and employees harmless from and against any and all claims,
liabilities, losses, damages, fines, penalties and expenses (including out-of-
pocket, incidental expenses, legal fees and expenses, and the allocated costs
and expenses of in-house counsel and legal staff) that may be imposed on,
incurred by, or asserted against, the Trustee and its directors, officers,
agents and employees or any of them for following any instruction or other
direction upon which the Trustee is authorized to rely pursuant to the terms of
this Agreement, the Indenture, the Bonds and the Letter of Credit. In addition
to and not in limitation of the immediately preceding

                                       18
<PAGE>

sentence, the Borrower will indemnify and hold the Trustee and its directors,
officers, agents and employees and each of them harmless from and against any
and all claims, liabilities, losses, damages, fines, penalties and expenses
(including out-of-pocket, incidental expenses, legal fees and expenses, and the
allocated costs and expenses of in-house counsel and legal staff) that may be
imposed on, incurred by, or asserted against the Trustee and its directors,
officers, agents and employees or any of them in connection with or arising out
of the Trustee's performance under this Agreement, the Indenture, the Bonds and
the Letter of Credit; provided the Trustee has not acted with gross negligence
or engaged in willful misconduct. The provisions of this paragraph shall survive
the termination of this Agreement and the Indenture and the resignation or
removal of the Trustee for any reason.

          The Borrower will indemnify and hold harmless the Remarketing Agent
for and against all liabilities, claims, costs and expenses incurred without
gross negligence or bad faith on the part of the Remarketing Agent on account of
any action taken or omitted to be taken by the Remarketing Agent in accordance
with the terms of this Agreement, the Bonds, the Reimbursement Agreement, the
Letter of Credit, the Remarketing Agreement or the Indenture or any action taken
at the request of or with the consent of the Borrower, including the costs and
expenses incurred by the Remarketing Agent in defending itself against any such
claims.

          In case any action or proceeding is brought against the Issuer, the
Remarketing Agent or the Trustee in respect of which indemnity may be sought
hereunder, the party seeking indemnity promptly shall give notice of that action
or proceeding to the Borrower, and the Borrower upon receipt of that notice
shall have the obligation and the right to assume the defense of the action or
proceeding; provided that failure of a party to give that notice shall not
relieve the Borrower from any of its obligations under this Section unless (and
then only to the extent) that failure prejudices the defense of the action or
proceeding by the Borrower. At its own expense, an indemnified party may employ
separate counsel and participate in the defense. The Borrower shall not be
liable for any settlement made without its consent, which shall not be
unreasonably withheld. The Borrower shall not settle any claim or action
affecting the Issuer, the Trustee or the Remarketing Agent without the consent
of the Issuer, the Trustee or the Remarketing Agent, as applicable, which
consent shall not be unreasonably withheld.

          The indemnification set forth above is intended to and shall (i)
include the indemnification of all affected directors, officers, agents and
employees of the Issuer, the Remarketing Agent and the Trustee, respectively,
and (ii) be enforceable by the Issuer, the Remarketing Agent and the Trustee,
respectively, to the full extent permitted by law.

          Section 5.11  Tax Covenants of Borrower and Issuer. The Borrower
                        ------------------------------------
covenants and represents that it will at all times do and perform all acts and
things necessary or desirable and within its reasonable control in order to
assure that interest paid on the Bonds shall not be includable in the gross
income of any Holder for federal income tax purposes, unless such Holder is a
"substantial user" of the Project or a "related person" of such a user within
the meaning of Section 147(a) of the Code. The Borrower also covenants and
represents that it shall not take or omit to take, or permit to be taken on its
behalf, any actions which, if taken or omitted, would adversely affect the
excludability from the gross income of the Holders of interest paid on the Bonds
for federal income tax purposes. The Issuer and the Borrower mutually covenant
for the benefit of the Holders that they will not use the proceeds of the Bonds,
any moneys derived, directly or indirectly, from the use or investment thereof
or any other

                                       19
<PAGE>

moneys on deposit in any fund or account maintained in respect of the Bonds
(whether such moneys were derived from the proceeds of the sale of the Bonds or
from other sources) in a manner which would cause the Bonds to be treated as
"arbitrage bonds" within the meaning of Section 148 of the Code or would
otherwise violate Section 6.08 of the Indenture.

          Section 5.12   Further Tax Covenants of Borrower. The Borrower further
                         ---------------------------------
represents and covenants as follows:

                    (a)  Action to Maintain Tax-Exempt Status. The Borrower will
                         ------------------------------------
take such actions as shall be necessary or desirable, from time to time and
within its reasonable control, to cause all of the representations and
warranties in this Section to remain true and correct during such periods as
shall be necessary to maintain at all times the exclusion of interest paid on
the Bonds from the gross income of the Holders for federal income tax purposes
(other than a Holder who is a "substantial user" of the Project or a "related
person" as those terms are used in Section 147(a) of the Code), pursuant to the
requirements of the Code.

                    (b)  Operation as Manufacturing Facility. Until payment in
                         -----------------------------------
full of the Bonds, the Borrower shall operate the Project as a "manufacturing
facility" within the meaning of Section 144(a)(12)(C) of the Code. Without
limiting the generality of the foregoing definition, a "manufacturing facility"
is, generally, any facility which is used in the manufacturing or production of
tangible personal property, including processing resulting in a change of
condition of such property. The Borrower shall use no more than 25% of the net
proceeds of the Bonds to provide on-site facilities which are directly related
and ancillary to the manufacturing facility, including temporary warehousing of
raw materials and finished product, office facilities and product development
facilities.

                    (c)  Ninety-five Percent Capital Costs Test. The Borrower
                         --------------------------------------
shall spend not less than 95% of the net proceeds of the Bonds for capital costs
of the manufacturing facility being financed. Capital costs are defined as costs
of land or property of a character subject to allowance for depreciation under
Section 167 of the Code and do not include inventory or working capital.

                    (d)  Land Acquisition Limitation. The Borrower will not use,
                         ---------------------------
directly or indirectly, 25% or more of the net proceeds of the Bonds for the
acquisition of land or an interest therein.

                    (e)  Existing Facility and Rehabilitation Limitations. The
                         ------------------------------------------------
Borrower will not use any proceeds of the Bonds to acquire any property of which
the Borrower would not be the first user, except as permitted by the next
sentence. If any proceeds of the Bonds are used to acquire (i) an existing
building, (ii) an existing building and equipment thereof, (iii) an existing
structure (other than a building), or (iv) an existing structure and equipment
thereof, then the Borrower will, within two years of the later of the Series
Issue Date or the date the Borrower acquires such building or structure, incur
Rehabilitation Expenditures in an amount at least equal to (x) 15% of the
portion of the cost of acquiring all existing buildings and equipment thereof
which is financed with net proceeds of the Bonds, plus (y) 100% of the portion
of the cost of acquiring all existing structures (other than a building) and
equipment thereof which is financed with net proceeds of the Bonds.

                                       20
<PAGE>

                    (f)  Limitation on Financing Certain Facilities. The
                         ------------------------------------------
Borrower will not use more than 25% of the net proceeds of the Bonds to provide
any portion of the Project the primary purpose of which is to provide retail
food or beverage services (exclusive of grocery stores), automobile sales or
services, or the provision of recreation or entertainment.

                    (g)  Prohibition on Financing Certain Facilities. The
                         -------------------------------------------
Borrower will not use any proceeds of the Bonds to provide any portion of the
Project to be used for a private or commercial golf course, country club,
massage parlor, tennis club, skating facility (including roller skating,
skateboard and ice skating), racquet sports facility (including any handball or
racquetball court), hot tub facility, suntan facility or racetrack. The Borrower
will not use any proceeds of the Bonds to provide any airplane, any sky box or
other private luxury box, any health club facility, any facility primarily used
for gambling, or any store the principal business of which is the sale of
alcoholic beverages for consumption off premises.

                    (h)  $10,000,000 Limitation. Neither the Borrower, any other
                         ----------------------
Principal User of the portion of the Project financed with Bond proceeds nor any
Related Person with respect to the Borrower or any such Principal User of the
Project will, during the six-year period beginning three years before the Series
Issue Date, pay or incur any capital expenditures, or become a Principal User of
a facility with respect to which capital expenditures have been made in such
period, if --

                         (i)   The capital expenditures are financed other than
     with the proceeds of the Bonds;

                         (ii)  The facility with respect to which the capital
     expenditures are paid or incurred is the Project or is located in the city,
     borough, town, township or other incorporated municipality in which the
     Project is located; and

                         (iii) The amount of the capital expenditures, when
     added to the face amount of the Bonds and any other prior tax-exempt
     obligations outstanding on the Series Issue Date subject to aggregation
     with the Bonds under the Code, would exceed $10,000,000.

Neither the Borrower, any other Principal User of the portion of the Project
financed with Bond proceeds nor any Related Person with respect to the Borrower
or any such Principal User of the Project will, during the Test Period in
respect of the Bonds, merge with, acquire more than 50% of the stock of or
otherwise become a Related Person to another entity so as to cause the foregoing
$10,000,000 limitation to be violated when the capital expenditures and prior
tax-exempt obligations with respect to such entity and all Related Persons with
respect to such entity are taken into account.

                    (i)  $40,000,000 Limitation on Acquisition of Other
                         ----------------------------------------------
Property, Mergers and Leases. If the taxability condition described below is
- ----------------------------
present, then neither Borrower, any other Principal User of the portion of the
Project financed with Bond proceeds nor any Related Person with respect to the
Borrower or any such Principal User of the Project will, during the Test Period
in respect of the Bonds, either (i) be or become a Principal User of a facility
financed with tax-exempt bonds issued prior to the Series Issue Date (a "prior
issue") or (ii) merge with or become a Related Person with respect to a
Principal User of a facility financed by a prior issue. The taxability condition
that, if present, shall prevent the Borrower, any other Principal User of

                                       21
<PAGE>

the portion of the Project financed with Bond proceeds and any Related Person
with respect to the Borrower or any such Principal User of the Project from
entering into the foregoing transactions during the Test Period, is that the
prior issue is either Exempt Facility Bonds, an issue of qualified redevelopment
bonds (as defined in Section 144(c) of the Code) or Small Issue Bonds, the Test
Period for the prior issue has not expired as of the Series Issue Date, and the
portion of the prior issue allocable under the Code to the Borrower (and all
Related Persons with respect to the Borrower) or any other Principal User of the
portion of the Project financed with Bond proceeds (and all Related Persons with
respect to such Principal User), when added to the outstanding amount of the
Bonds and any other prior tax-exempt financing allocable under the Code to the
Borrower (and such Related Persons) or such Principal User (and such Related
Persons), as the case may be, would exceed $40,000,000.

               (j)  Lease of Project. In connection with any lease or grant by
                    ----------------
the Borrower of the use of the portion of the Project financed with Bond
proceeds, the Borrower will require that the lessee or user of any portion of
the Project and all Related Persons with respect to such lessee or user will not
violate the covenants set forth herein.

               (k)  Bond Maturity Limitation. The average reasonably expected
                    ------------------------
economic life of the property financed with the proceeds of the Bonds,
disregarding land, will be at least 84% of the average maturity of the Bonds, as
determined pursuant to Section 147(b) of the Code.

               (l)  Aggregation of Issues with Respect to Single Project. The
                    ----------------------------------------------------
portion of the Project financed with Bond proceeds does not and will not
comprise a part of a single building, an enclosed shopping mall or a strip of
offices, stores or warehouses using substantial common facilities, any portion
of which has been financed through any other tax-exempt issue.

               (m)  Arbitrage Rebate. As required by Section 3.8, the Borrower
                    ----------------
will pay to or for the account of the Issuer all amounts needed to comply with
the requirements of Section 148 of the Code, concerning arbitrage bonds,
including Section 148(f), which requires generally a rebate payment to the
United States of America of arbitrage profit from investment of the proceeds of
the Bonds in obligations other than tax-exempt obligations. The obligation of
the Borrower to make such payments is unconditional and is not limited to funds
representing the proceeds of the Bonds or income from the investment thereof or
any other particular source.

               (n)  Nonpurpose Investments. After the expiration of any
                    ----------------------
applicable temporary period under Section 148(c) of the Code, (i) at no time
during any bond year will the aggregate amount of gross proceeds of the Bonds
invested in nonpurpose investments with a yield higher than the yield on the
Bonds exceed 150% of the debt service on the Bonds for such bond year, and the
aggregate amount of gross proceeds of the Bonds invested in nonpurpose
investments with a yield higher than the yield on the Bonds, if any, will be
promptly and appropriately reduced as the amount of outstanding Bonds is
reduced, provided that the foregoing shall not require the sale or disposition
of any investments in nonpurpose investments if such sale or disposition would
result in a loss which exceeds the amount which would be paid to the United
States pursuant to Section 5.08 of the Indenture (but for such sale or
disposition) at the time of such sale or disposition if a payment under Section
5.08 of the Indenture were due at such time and (ii) not more than the lesser of
5% of the proceeds of the Bonds or $100,000 (in addition to the amounts allowed
under Sections 148(c) and (d) of the Code and subject to the

                                       22
<PAGE>

yield adjustment provisions of Treasury Regulations ss.1.148-5(C)) of the
proceeds of the Bonds will be invested in higher yielding investments.

               At no time will any funds constituting gross proceeds of the
Bonds be used to acquire investments at other than fair market value within the
meaning of the applicable Treasury Regulations pertaining to, or in any other
fashion as would constitute failure of compliance with, Section 148 of the Code.
Investments or deposits in certificates of deposit or pursuant to investment
contracts shall not be made without compliance, at or prior to such investment
or deposit, with the requirements of Treasury Regulations Section 1.148-
5(d)(6)(ii) and (iii), respectively, or with any successor provisions thereto.

               Theterms "bond year", "proceeds", "gross proceeds", "nonpurpose
investments", "yield", "higher yielding investments" and "debt service" have the
meanings assigned to them for purposes of Section 148 of the Code.

               (o)    No Higher Yield Collateral to Bank. In no event will the
                      ----------------------------------
Borrower provide collateral to the Bank which bears a yield higher than the
yield on the Bonds within the meaning of Section 148 of the Code and any lawful
regulations promulgated thereunder, except upon receipt by the Borrower of an
opinion of Bond Counsel to the effect that the pledge of such collateral shall
not cause the interest on the Bonds to be included in the gross income of the
Holders for federal income tax purposes; provided that no such yield restriction
or opinion is required with respect to the pledge of any collateral that
consists of obligations, the interest on which is excluded from the gross income
of the holders thereof for federal income tax purposes.

               (p)    No Same Issue Bonds. Neither the Borrower nor any other
                      -------------------
Principal User of the portion of the Project financed with Bond proceeds nor any
Related Person has participated, or will participate, in the offering for sale
or sale of any issue of Exempt Facility Bonds, Small Issue Bonds or qualified
redevelopment bonds (as defined in Section 144(b) of the Code), which are or
will be required to be aggregated with the Bonds as part of the "same issue"
within the meaning of Section 144(a)(6) of the Code.

        Section 5.13  No Control of Bank. The Bank does not control,
                      ------------------
either directly or indirectly through one or more intermediaries, the Borrower.
Likewise, the Borrower does not control, either directly or indirectly, through
one or more intermediaries, the Bank. "Control" for this purpose has the meaning
given to such term in Section 2(a)(9) of the Investment Company Act of 1940, as
amended and as interpreted by the Securities and Exchange Commission. (Under
Section 2(a)(9), "control" means the power to exercise a controlling influence
over the management or policies of a company, unless such power is solely the
result of an official position with such company. Any Person who owns
beneficially, either directly or through one or more controlled companies, more
than 25% of the voting securities of a company shall be presumed to control such
company. Any Person who does not own more than 25% of the voting securities of
any company shall be presumed not to control such company.) The Borrower will
provide written notice to the Trustee and the Remarketing Agent 30 days prior to
consummation of any transaction that would result in the Borrower controlling or
being controlled by the Bank.

        Section 5.14  Annual Certificate. The Borrower will furnish to
                      ------------------
the Issuer and to the Trustee within 120 days after the close of each fiscal
year of the Borrower, a certificate of the Borrower signed by the Authorized
Representative of the Borrower stating that the Borrower has

                                       23
<PAGE>

made a review of its activities during such fiscal year for the purpose of
determining whether or not the Borrower has complied with all of the terms,
provisions and conditions of this Agreement and the Borrower has kept, observed,
performed and fulfilled each and every covenant, provision and condition of this
Agreement on its part to be performed, and is not in default in the performance
or observance of any of the terms, covenants, provisions or conditions hereof,
or if the Borrower shall be in default such certificate shall specify all such
defaults and the nature thereof.

        Section 5.15  Nondiscrimination.  The Borrower hereby accepts and agrees
                      -----------------
to be bound by the nondiscrimination clause set forth in Exhibit D attached
hereto.

                              (End of Article V)

                                       24
<PAGE>

                                  ARTICLE VI

                              REDEMPTION OF BONDS

          Section 6.1  Optional Redemption. Provided no Event of Default shall
                       -------------------
have occurred and be subsisting, at any time and from time to time, the Borrower
may deliver or cause to be delivered Loan Payments to the Trustee in addition to
the scheduled Loan Payments required to be made under Section 4.2 and direct the
Trustee to use the Loan Payments so delivered for the purpose of calling Bonds
for optional redemption in accordance with the applicable provisions of the
Indenture and redeeming such Bonds at the redemption price stated in the
Indenture. Such Loan Payments shall be held and applied as provided in Section
5.04 of the Indenture and delivery thereof shall not operate to abate or
postpone Loan Payments otherwise becoming due or to alter or suspend any other
obligations of the Borrower under this Agreement. Whenever the Bonds are subject
to optional redemption pursuant to the Indenture, the Issuer will, but only upon
direction of the Borrower, direct the Trustee to call the same for redemption as
provided in the Indenture.

          Section 6.2  Extraordinary Optional Redemption. The Borrower shall
                       ---------------------------------
have, subject to the conditions hereinafter imposed, the option to direct the
redemption of the Bonds in accordance with the applicable provisions of the
Indenture upon the occurrence of any of the following events:

                 (a)   The Project shall have been damaged or destroyed to such
an extent that (1) it cannot reasonably be expected by the Borrower to be
restored, within a period of six months, to the condition thereof immediately
preceding such damage or destruction or (2) its normal use and operation is
reasonably expected by the Borrower to be prevented for a period of six
consecutive months.

                 (b)   Title to, or the temporary use of, all or a significant
part of the Project shall have been taken under the exercise of the power of
eminent domain (1) to such extent that the Project cannot reasonably be expected
by the Borrower to be restored within a period of six months to a condition of
usefulness comparable to that existing prior to the taking or (2) as a result of
the taking, normal use and operation of the Project is reasonably expected by
the Borrower to be prevented for a period of six consecutive months.

                 (c)   As a result of any changes in state or federal laws or as
a result of legislative or administrative action (whether state or federal) or
by final decree, judgment or order of any court or administrative body (whether
state or federal) entered after the contest thereof by the Issuer or the
Borrower in good faith, this Agreement shall have become void or unenforceable
or impossible of performance in accordance with the intent and purpose of the
parties as expressed in this Agreement, or if unreasonable burden or excessive
liability shall have been imposed with respect to the Project or the operation
thereof, including without limitation federal, state or other ad valorem,
property, income or other taxes not being imposed on the date of this Agreement
other than ad valorem taxes presently generally levied upon privately owned
property used for the same general purpose as the Project.

                                       25
<PAGE>

          (d)    Changes in the economic availability of raw materials,
operating supplies, energy sources or supplies, or facilities (including, but
not limited to, facilities in connection with the disposal of industrial wastes)
necessary for the operation of the Project shall have occurred or technological
or other changes shall have occurred which the Borrower cannot reasonably
overcome or control and which in the Borrower's reasonable judgment render the
Project uneconomic.

     To exercise such option, the Borrower shall, within 90 days following the
event giving rise to the exercise of that option, or at any time during the
continuation of the condition referred to in clause (d) above, give written
notice to the Issuer and the Trustee specifying the date on which the Borrower
will deliver the funds required for such redemption, which date shall be not
more than 90 days from the date such notice is mailed and shall make
arrangements satisfactory to the Trustee for the giving of the required notice
of redemption.

     The amount payable by the Borrower in the event of its exercise of the
option granted in this Section shall be the sum of (i) an amount of money which,
when added to the moneys and investments held to the credit of the Bond Fund,
will be sufficient pursuant to Section 5.04 and Article X of the Indenture to
pay, or provide for the payment of, the redemption price of Bonds on the
redemption date and to fully reimburse the Bank with respect to all drawings on
the Letter of Credit, such amount to be paid to the Trustee, plus (ii) an amount
of money equal to the Additional Payments accrued and to accrue until actual
final payment and redemption of the Bonds, such amount or applicable portions
thereof to be paid to the Trustee or to the Persons to whom those Additional
Payments are or will be due. The requirement of clause (ii) above with respect
to Additional Payments to accrue may be met if provisions satisfactory to the
Trustee and the Issuer are made for paying those amounts as they accrue.

     Section 6.3 Mandatory Redemption. The Borrower shall deliver or cause to be
                 --------------------
delivered to the Trustee the moneys needed to redeem the Bonds in accordance
with the mandatory redemption provisions set forth in the Bonds and the
Indenture and to fully reimburse the Bank with respect to all drawings on the
Letter of Credit with respect thereto. Whenever the Bonds are subject to
mandatory redemption pursuant to the Indenture, the Borrower will cooperate with
the Issuer and the Trustee in effecting such redemption.

     Section 6.4 Actions by Issuer. At the request of the Borrower or the
                 -----------------
Trustee, the Issuer shall take all steps required of it under the applicable
provisions of the Indenture or the Bonds to effect the redemption of all or a
portion of the Bonds pursuant to this Article.

                              (End of Article VI)

                                       26
<PAGE>

                                  ARTICLE VII

                        EVENTS OF DEFAULT AND REMEDIES

     Section 7.1 Events of Default. Each of the following shall be an Event of
                 -----------------
Default:

          (a)    Failure by the Borrower to make or cause to be made any Loan
Payment or Purchase Payment on or prior to the date on which such payment is due
and payable;

          (b)    Failure by the Borrower to observe and perform any other
agreement, term or condition contained in this Agreement and continuation of
such failure for a period of 30 days after notice thereof shall have been given
to the Borrower by the Issuer or the Trustee, or for such longer period as the
Issuer and the Trustee may agree to in writing; provided that if the failure is
other than the payment of money and is of such nature that it can be corrected
but not within the applicable period, such failure shall not constitute an Event
of Default so long as the Borrower institutes curative action within the
applicable period and diligently pursues such action to completion;

          (c)    The Borrower shall (i) apply for or consent to the appointment
of a receiver, trustee, liquidator or custodian or the like of itself or of its
property, or (ii) admit in writing its inability to pay its debts generally as
they become due, or (iii) make a general assignment for the benefit of
creditors, or (iv) be adjudicated a bankrupt or insolvent, or (v) commence a
voluntary case under the United States Bankruptcy Code, or file a voluntary
petition or answer seeking reorganization, an arrangement with creditors or an
order for relief, or seeking to take advantage of any insolvency law or file an
answer admitting the material allegations of a petition filed against it in any
bankruptcy, reorganization, or insolvency proceeding, or action shall be taken
by it for the purpose of effecting any of the foregoing, or (vi) have instituted
against it, without the application, approval or consent of the Borrower, a
proceeding in any court of competent jurisdiction, under any law relating to
bankruptcy, insolvency, reorganization or relief of debtors, seeking in respect
of the Borrower an order for relief or an adjudication in bankruptcy,
reorganization, dissolution, winding up, liquidation, a composition or
arrangement with creditors, a readjustment of debts, the appointment of a
trustee, receiver, liquidator or custodian or the like of the Borrower or of all
or any substantial part of its assets, or other like relief in respect thereof
under any bankruptcy or insolvency law, and, if such proceeding is being
contested by the Borrower in good faith, the same shall (A) result in the entry
of an order for relief or any such adjudication or appointment or (B) remain
unvacated, undismissed and undischarged for a period of 60 days;

          (d)    Any representation or warranty made by the Borrower herein or
any statement in any report, certificate, financial statement or other
instrument furnished in connection with this Agreement or with the purchase of
the Bonds shall at any time prove to have been false or misleading in any
material respect when made or given;

          (e)    For any reason the Bonds are declared due and payable by
acceleration in accordance with Section 7.03 of the Indenture;

                                       27
<PAGE>

          (f)    The Trustee receives written notice from the Bank (i) stating
that an Event of Default as defined in the Reimbursement Agreement has occurred
and is continuing and (ii) directing the Trustee to call the Bonds for mandatory
purchase (if the Bonds are in the Weekly Mode) or to declare the principal of
the outstanding Bonds immediately due and payable; or

          (g)    The Trustee receives notice from the Bank prior to the tenth
calendar day following payment of a drawing under the Letter of Credit for
interest on Bonds which remain outstanding after the application of the proceeds
of such drawing, stating that the Letter of Credit will not be reinstated with
respect to such interest.

     The declaration of an Event of Default under paragraph (c) above, and the
exercise of remedies upon any such declaration, shall be subject to any
applicable limitations of federal bankruptcy law affecting or precluding that
declaration or exercise during the pendency of or immediately following any
bankruptcy, liquidation or reorganization proceedings.

     Section 7.2 Remedies on Default.
                 -------------------

          (a)    Whenever an Event of Default shall have happened and be
subsisting, any one or more of the following remedial steps may be taken:

                 (i)   If acceleration of the principal amount of the Bonds has
     been declared pursuant to Section 7.03 of the Indenture, the Trustee shall
     declare all Loan Payments to be immediately due and payable, whereupon the
     same shall become immediately due and payable; and

                 (ii)  The Issuer or the Trustee may pursue any and all remedies
     now or hereafter existing at law or in equity to collect all amounts then
     due and thereafter to become due under this Agreement or the Letter of
     Credit or to enforce the performance and observance of any other obligation
     or agreement of the Borrower under this Agreement.

          (b)    The Borrower covenants that, in case it shall fail to pay or
cause to be paid any Loan Payments or Purchase Payments as and when the same
shall become due and payable whether at maturity, upon redemption prior to
maturity or by acceleration or otherwise, then, upon demand of the Trustee, the
Borrower will pay to the Trustee the whole amount that then shall have become
due and payable hereunder; and, in addition thereto, such further amounts as
shall be sufficient to cover the costs and expenses of collection, including a
reasonable compensation to the Trustee and its agents, and any expenses or
liabilities incurred by the Issuer or the Trustee (including reasonable legal
fees and expenses). In case the Borrower shall fail forthwith to pay such
amounts upon such demand, the Trustee shall be entitled and empowered to
institute any actions or proceedings at law or in equity for the collection of
the sums so due and unpaid.

          (c)    In case there shall be pending proceedings for the bankruptcy
or reorganization of the Borrower under the federal bankruptcy laws or any other
applicable law, or in case a receiver or trustee shall have been appointed for
the benefit of the creditors or the property of the Borrower, the Trustee shall
be entitled and empowered, by intervention in such proceedings or otherwise, to
file and prove a claim or claims for the whole amount due

                                       28
<PAGE>

hereunder, including interest owing and unpaid in respect thereof, and, in case
of any judicial proceedings, to file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee allowed in such judicial proceedings relative to the Borrower, its
creditors or its property, and to collect and receive any moneys or other
property payable or deliverable on any such claims, and to distribute the same
after the deduction of its charges and expenses. Any receiver, assignee or
trustee in bankruptcy or reorganization is hereby authorized to make such
payments to the Issuer or the Trustee, and to pay to the Issuer or the Trustee
any amount due it for compensation and expenses, including counsel fees and
expenses incurred by it up to the date of such distribution.

     Notwithstanding the foregoing, the Trustee shall not be obligated to take
any step which in its opinion will or might cause it to expend money or
otherwise incur liability unless and until a satisfactory indemnity bond or
other indemnity satisfactory to it has been furnished to the Trustee at no cost
or expense to the Trustee. Any amounts collected as Loan Payments or applicable
to Loan Payments and any other amounts which would be applicable to payment of
Bond Service collected pursuant to action taken under this Section shall be paid
into the Bond Fund and applied in accordance with the provisions of the
Indenture or, if the outstanding Bonds have been paid and discharged in
accordance with the provisions of the Indenture, shall be paid as provided in
Article X of the Indenture for transfers of remaining amounts in the Bond Fund.

     The provisions of this Section are subject to the further limitation that
the annulment by the Trustee of its declaration that all of the Bonds are
immediately due and payable also shall constitute an annulment of any
corresponding declaration made pursuant to Subsection 7.2(a)(i); provided that
no such waiver or rescission shall extend to or affect any subsequent or other
default or impair any right consequent thereon.

     Section 7.3 Remedies Not Exclusive. No remedy conferred upon or reserved to
                 ----------------------
the Issuer or the Trustee by this Agreement is intended to be exclusive of any
other available remedy or remedies, but each and every such remedy shall be
cumulative and shall be in addition to every other remedy given under this
Agreement or the Letter of Credit, or now or hereafter existing at law or in
equity. No delay or omission to exercise any right or power accruing upon any
default shall impair that right or power or shall be construed to be a waiver
thereof, but any such right and power may be exercised from time to time and as
often as may be deemed expedient. In order to entitle the Issuer or the Trustee
to exercise any remedy reserved to it in this Article, it shall not be necessary
to give any notice, other than any notice required by law or for which express
provision is made herein.

     Section 7.4 Payment of Legal Fees and Expenses. If an Event of Default
                 ----------------------------------
should occur and the Issuer or the Trustee should incur expenses, including
attorneys' fees and expenses, in connection with the enforcement of this
Agreement or the Letter of Credit or the collection of sums due thereunder, the
Borrower shall reimburse the Issuer and the Trustee, as applicable, for the
expenses so incurred, upon demand.

     Section 7.5 No Waiver. No failure by the Issuer or the Trustee to insist
                 ---------
upon the strict performance by the Borrower of any provision hereof shall
constitute a waiver of their right to strict performance and no express waiver
shall be deemed to apply to any other existing or subsequent right to remedy the
failure by the Borrower to observe or comply with any provision hereof.

                                       29
<PAGE>

     The Issuer and the Trustee may waive any Event of Default hereunder only
with the prior written consent of the Bank.

     Section 7.6 Notice of Default. The Borrower shall notify the Trustee, the
                 -----------------
Issuer and the Bank in writing immediately if it becomes aware of the occurrence
of any Event of Default hereunder or of any fact, condition or event which, with
the giving of notice or passage of time or both, would become an Event of
Default.

                             (End of Article VII)

                                       30
<PAGE>

                                 ARTICLE VIII

                                 MISCELLANEOUS

      Section 8.1 Term of Agreement. This Agreement shall be and remain in full
                  -----------------
force and effect from the Series Issue Date until such time as all of the Bonds
shall have been fully paid (or provision made for such payment) pursuant to the
Indenture, the Indenture shall have been released pursuant to Section 10.01
thereof, and all other sums payable by the Borrower under this Agreement and the
Reimbursement Agreement shall have been paid, except for obligations of the
Borrower under Section 5.10, which shall survive any termination of this
Agreement.

      Section 8.2 Notices. All notices, certificates, requests or other
                  -------
communications hereunder shall be in writing and shall be deemed to be
sufficiently given when mailed by registered or certified mail, postage prepaid,
or hand delivered or sent by express delivery service or telecopy (with
transmission confirmed) and addressed as follows:

      If to the Borrower:     Innovative Solutions and Support, LLC
                              420 Lapp Road
                              Malvern, PA 19355
                              Attention: Mr. Roger Mitchell
                              Telephone: (610) 651-5570
                              Telecopier: (610) 651-5506

      If to the Issuer:       Chester County Industrial Development Authority
                              750 North Pottstown Pike
                              Exton, PA 19341
                              Attention: Mr. Gary Smith
                              Telephone: (610) 363-6110
                              Telecopier: (610) 363-2160

      If to the Trustee:      Chase Manhattan Trust Company, National
                              Association, Trustee
                              1650 Market Street, 52nd Floor
                              Philadelphia, PA 19103
                              Attention: Capital Markets Fiduciary Services
                              Telephone: (215) 988-1327
                              Telecopier: (215) 972-1685

      If to the Remarketing
      Agent:                  PNC Capital Markets, Inc.
                              249 Fifth Avenue
                              Pittsburgh, PA 15222-2707
                              Attention: Sales Department
                              Telephone: (412) 762-4287
                              Telecopier: (412) 762-9124

                                       31
<PAGE>

        If to the Bank:       PNC Bank, National Association
                              1000 Westlakes Drive, Suite 2000
                              Berwyn, PA 19312
                              Attention: Mr. Mark D. Lavelle
                              Telephone: (610) 725-5775
                              Telecopier: (610) 725-5799

The Borrower, the Issuer, the Trustee, the Bank and the Remarketing Agent, by
notice given hereunder to the Persons listed above, may designate any further or
different addresses or telecopier numbers to which subsequent notices,
certificates, requests or other communications shall be sent.

     Section 8.3 Limitation of Liability; No Personal Liability. In the exercise
                 ----------------------------------------------
of the powers of the Issuer, the Trustee or the Remarketing Agent hereunder or
under the Indenture, including without limitation the application of moneys and
the investment of funds, neither the Issuer, the Trustee, the Remarketing Agent
nor their members, directors, officers, employees or agents shall be accountable
to the Borrower for any action taken or omitted by any of them in good faith and
with the belief that it is authorized or within the discretion or rights or
powers conferred. The Issuer, the Trustee, the Remarketing Agent and their
members, directors, officers, employees and agents shall be protected in acting
upon any paper or document believed to be genuine, and any of them may
conclusively rely upon the advice of counsel and may (but need not) require
further evidence of any fact or matter before taking any action. In the event of
any default by the Issuer hereunder, the liability of the Issuer to the Borrower
shall be enforceable only out of the Issuer's interest under this Agreement and
there shall be no other recourse for damages by the Borrower against the Issuer,
its members, directors, officers, attorneys, agents and employees, or any of the
property now or hereafter owned by it or them. All covenants, obligations and
agreements of the Issuer contained in this Agreement or the Indenture shall be
effective to the extent authorized and permitted by applicable law. No such
covenant, obligation or agreement shall be deemed to be a covenant, obligation
or agreement of any present or future member, director, officer, agent or
employee of the Issuer, and no official executing the Bonds shall be liable
personally on the Bonds or be subject to any personal liability or
accountability by reason of the issuance thereof or by reason of the covenants,
obligations or agreements of the Issuer contained in this Agreement or the
Indenture.

     Section 8.4 Binding Effect. This Agreement shall inure to the benefit of
                 --------------
and shall be binding in accordance with its terms upon the Issuer, the Borrower
and their respective successors and assigns; provided that this Agreement may
not be assigned by the Borrower (except in connection with a sale or transfer of
assets pursuant to Section 5.1 or in compliance with Section 8.9) and may not be
assigned by the Issuer except to the Trustee pursuant to the Indenture or as
otherwise may be necessary to enforce or secure payment of Bond Service. This
Agreement may be enforced only by the parties, their assignees and others who
may, by law, stand in their respective places. In addition, the Remarketing
Agent and the Bank are hereby explicitly recognized as third party beneficiaries
of this Agreement.

     Section 8.5 Amendments. Except as otherwise expressly provided in this
                 ----------
Agreement or the Indenture, subsequent to the issuance of the Bonds and unless
and until all conditions provided for in the Indenture for release of the
Indenture having been met, this Agreement may not be effectively amended,
modified or terminated except by an instrument in

                                       32
<PAGE>

writing signed by the Borrower and the Issuer, consented to by the Trustee, and
in accordance with the provisions of Article IX of the Indenture, as applicable.

     Section 8.6  Counterparts. This Agreement may be executed in any number of
                  ------------
counterparts, each of which shall be regarded as an original and all of which
shall constitute one and the same instrument.

     Section 8.7  Severability. If any provision of this Agreement is determined
                  ------------
by a court to be invalid or unenforceable, such determination shall not affect
any other provision hereof, each of which shall be construed and enforced as if
the invalid or unenforceable portion were not contained herein. Such invalidity
or unenforceability shall not affect any valid and enforceable application
thereof, and each such provision shall be deemed to be effective, operative and
entered into in the manner and to the full extent permitted by applicable law.

     Section 8.8  Governing Law. This Agreement shall be deemed to be a contract
                  -------------
made under the laws of the Commonwealth of Pennsylvania and for all purposes
shall be governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania.

     Section 8.9  Assignment. The Borrower shall not assign this Agreement or
                  ----------
any interest of the Borrower herein, either in whole or in part, without the
prior written consent of the Trustee, which consent shall be given if the
following conditions are fulfilled: (i) the assignee assumes in writing all of
the obligations of the Borrower hereunder; (ii) in the opinion of counsel to the
Borrower, neither the validity nor the enforceability of this Agreement shall be
adversely affected by such assignment; (iii) the Project shall continue in the
opinion of Bond Counsel to be a "project" as such term is defined in the Act
after such assignment; (iv) such assignment shall not, in the opinion of Bond
Counsel, have an adverse effect on the exclusion from gross income for federal
income tax purposes of interest on the Bonds; and (v) consent by the Issuer,
which consent shall not be unreasonably withheld. For purposes of this Section,
no foreclosure by the Bank, or conveyance in lieu thereof, or other transfer to
the Bank or an affiliate of the Bank, shall, of itself, be deemed an assignment
for purposes of this Section or a sale, transfer, assignment or other
disposition for purposes of Section 5.2. Subject to the foregoing, the terms
"Issuer", "Borrower", "Trustee" and "Remarketing Agent" shall, where the context
requires, include the respective successors and assigns of such Persons. No
assignment pursuant to this Section shall release the Borrower from its
obligations under this Agreement, unless the Bank has consented to such release.

     Section 8.10 Receipt of Indenture. The Borrower hereby acknowledges that it
                  --------------------
has received an executed copy of the Indenture and is familiar with its
provisions, and agrees that it is subject to and bound by the terms thereof and
it will take all such actions as are required or contemplated of it under the
Indenture to preserve and protect the rights of the Trustee and of the Holders
and the Bank thereunder and that it will not take any action which would cause a
default thereunder. Any redemption of Bonds prior to maturity shall be effected
as provided in the Indenture.

                             (End of Article VIII)

                                       33
<PAGE>

     IN WITNESS WHEREOF, the Issuer and the Borrower, intending to be legally
bound, have caused this Agreement to be duly executed in their respective names,
all as of the date first above written.

                                        CHESTER COUNTY INDUSTRIAL
                                        DEVELOPMENT AUTHORITY



Attest: _________________________       By: ________________________________
Name:                                   Name:
Title:                                  Title:



                                        INNOVATIVE SOLUTIONS AND
                                        SUPPORT, LLC, by its sole Member and
                                        Manager INNOVATIVE SOLUTIONS
                                        AND SUPPORT, INCORPORATED



                                        By: ________________________________
                                        Name: James Reilly
                                        Title: Chief Financial Officer

     This execution page is part of the Loan Agreement dated as of August 1,
2000 between Chester County Industrial Development Authority and Innovative
Solutions and Support, LLC.

                                       34
<PAGE>

                                   EXHIBIT A

                                 PROJECT SITE
                              [Legal Description]


                                      A-1
<PAGE>

                                   EXHIBIT B

                 INNOVATIVE SOLUTIONS AND SUPPORT, LLC PROJECT
                 ---------------------------------------------

                 The Project consists of an approximately 44,800 square foot
manufacturing facility and related equipment to be located on approximately 7.5
acres of land at 710 Pennsylvania Drive (Lot 7) in the Township of Upper
Uwchlan, Chester County, Pennsylvania, to be acquired, constructed and equipped
by the Borrower and operated by the Borrower as a facility for the manufacture
of airplane parts.

                 Sources and Uses of Funds to Acquire Project
                 --------------------------------------------
<TABLE>
<CAPTION>
                                                                         Other
                                                 Bond                  Borrowed
                                               Proceeds                 Funds            Equity             Total
                                               --------                --------          ------             -----
<S>                                            <C>                     <C>               <C>              <C>
Acquisition of Land                             $  200,000                   --         $  805,750         $1,005,750
New Construction                                 4,048,300                   --            755,950          4,804,250
Acquisition of New Equipment                            --                   --                 --                 --
Costs of Issuance                                   86,700                                 103,300            190,000
                                               -----------             --------          ---------        -----------
Total                                           $4,335,000                   --         $1,665,000         $6,000,000
</TABLE>

                                      B-1
<PAGE>

                                   EXHIBIT C

                         FORM OF DISBURSEMENT REQUEST
                         ----------------------------

         STATEMENT NO. ________ REQUESTING DISBURSEMENT OF FUNDS FROM
         PROJECT FUND PURSUANT TO SECTION 3.4 OF THE LOAN AGREEMENT
         DATED AS OF AUGUST 1, 2000 ("LOAN AGREEMENT") BETWEEN CHESTER
         COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY ("ISSUER") AND
         INNOVATIVE SOLUTIONS AND SUPPORT, LLC ("BORROWER").

         The terms used herein shall have the meanings specified for such terms
in or pursuant to the Loan Agreement. Pursuant to Section 3.4 of the Loan
Agreement, the undersigned Authorized Representative of the Borrower hereby
requests and authorizes the Trustee to pay to the Borrower or to the Person(s)
listed on the Disbursement Schedule hereto out of the moneys deposited in the
Project Fund the aggregate sum of $___________ to reimburse the Borrower or to
pay such Person(s), as indicated in the Disbursement Schedule, for the items of
Project Cost listed in the Disbursement Schedule.

         In connection with the foregoing request and authorization,the
undersigned hereby certifies that:

         (a)  Each item for which disbursement is requested hereunder is due, is
              an item of incurred Project Cost properly reimbursable or payable
              out of the Project Fund in accordance with the terms and
              conditions of the Loan Agreement and none of those items has
              formed the basis for any disbursement heretofore made from the
              Project Fund.

         (b)  Each such item is or was necessary or appropriate in connection
              with the acquisition, construction or equipment of the Project.

         (c)  Each such item is as described in the information statement filed
              by the Issuer in connection with the issuance of the Bonds (as
              defined in the Loan Agreement), as required by Section 149(e) of
              the Code; provided that if any such item is not as described in
              that information statement, attached hereto is an opinion of Bond
              Counsel that such disbursement will not result in the interest on
              the Bonds becoming included in the gross income of the Holders for
              federal income tax purposes.

         (d)  The reimbursement or payment of the Project Costs requisitioned
              hereby will comply with the restrictions contained in Sections
              3.4, 5.11 and 5.12 of the Loan Agreement.

                                      C-1
<PAGE>

         (e)  This statement and all exhibits hereto, including the Disbursement
              Schedule, shall constitute full warrant, protection and authority
              to the Trustee for its actions taken pursuant hereto.

Dated: ________________

                                      INNOVATIVE SOLUTIONS AND SUPPORT, LLC



                                      By: _______________________________
                                               Authorized Representative

Approved by PNC BANK, NATIONAL ASSOCIATION



By:_________________________
     Authorized Signatory



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

                             DISBURSEMENT SCHEDULE

                  TO STATEMENT NO. ___________ REQUESTING AND
                  AUTHORIZING DISBURSEMENT OF FUNDS FROM PROJECT FUND
                  PURSUANT TO SECTION 3.4 OF THE LOAN AGREEMENT DATED
                  AS OF AUGUST 1, 2000 BETWEEN CHESTER COUNTY
                  INDUSTRIAL DEVELOPMENT AUTHORITY AND INNOVATIVE
                  SOLUTIONS AND SUPPORT, LLC.

                    PAYEE               AMOUNT                PURPOSE
                    -----               ------                -------

                                      C-2
<PAGE>

                                   EXHIBIT D

                           NONDISCRIMINATION CLAUSE

         During the term of this contract, the Borrower agrees as to itself and
each tenant of the Project controlling, controlled by or under common control
with the Borrower (each of the Borrower and each such tenant, a "Contractor") as
follows:

         1. Contractor shall not discriminate against any employee, applicant
for employment, independent contractor or any other person because of race,
color, religious creed, handicap, ancestry, national origin, age or sex.
Contractor shall take affirmative action to insure that applicants are employed,
and that employees or agents are treated during employment, without regard to
their race, color, religious creed, handicap, ancestry, national original age or
sex. Such affirmative action shall include, but not limited to: employment,
upgrading, demotion or transfer, recruitment or recruitment advertising; layoff
or termination; rates of pay or other forms of compensation; and selection for
training. Contractor shall post in conspicuous places, available to employees,
applicants for employment and other persons, a notice to be provided by the
contracting agency setting forth the provisions of this nondiscrimination
clause.

         2. Contractor shall in advertisements or requests for employment placed
by it or on its behalf, state that all qualified applicants will receive
consideration for employment without regard to race, color, religious creed,
handicap, ancestry, national origin, age or sex.

         3. Contractor shall send to each labor union or workers' representative
with which it has a collective bargaining agreement or other contract or
understanding, a notice advising said labor union or workers' representative of
its commitment to this nondiscrimination clause. Similar notice shall be sent to
every other source of recruitment regularly utilized by Contractor.

         4. It shall be no defense to a finding of noncompliance with this
nondiscrimination clause that Contractor had delegated some of its employment
practices to any union, training program or other source of recruitment which
prevents it from meeting its obligations. However, if the evidence indicates
that Contractor was not on notice of the third-party discrimination or made a
good faith effort to correct it, such factor shall be considered a mitigating
circumstance in determining appropriate sanctions.

         5. Where the practices of a union or of any training program or other
program of recruitment will result in the exclusion of minority group persons,
so that Contractor will be unable to meet its obligations under this
nondiscrimination clause, Contractor shall then employ and fill vacancies
through other nondiscriminatory employment procedures.

         6. Contractor shall comply with all applicable state and federal laws
prohibiting discrimination in hiring or employment opportunities. In the event
of Contractor's noncompliance with the nondiscrimination clause of this contract
or with any such laws, the Loan Payments may be accelerated, and Contractor may
be declared temporarily ineligible for further Commonwealth of Pennsylvania
contracts, and other sanctions may be imposed and remedies invoked.

         7. Contractor shall furnish all necessary employment documents and
records to, and permit access to its books, records and accounts by, the
contracting agency for purposes

                                      D-1
<PAGE>

of investigation to ascertain compliance with the provisions of this clause. If
Contractor does not possess documents or records reflecting the necessary
information requested, it shall furnish such information on reporting forms
supplied by the contracting agency.

         8.  Contractor shall actively recruit minority subcontractors and women
subcontractors or subcontractors with substantial minority or women
representation among their employees.

         9.  Contractor shall include the provisions of this nondiscrimination
clause in every subcontract, so that such provisions will be binding upon each
subcontractor.

         10. Contractor obligations under this clause are limited to
Contractor's facilities within Pennsylvania or, where the contract is for
purchase of goods manufactured outside of Pennsylvania, the facilities at which
such goods are actually produced.

                                      D-2
<PAGE>

"WORD"



Long Document Name:               LOAN AGREEMENT - CHESTER COUNTY INDUSTRIAL
                                  DEVELOPMENT AUTHORITY AND INNOVATIVE
                                  SOLUTIONS & SUPPORT

System Document Number:           54609 - PTE

Additional Information:           converted from i:\wpd\loan agreement.doc and
                                  formatted
================================================================================
You will have line numbers down the side of each draft document unless you
indicate otherwise. 1.5 line spacing will be used on all drafts unless you
indicate otherwise.

Return To:                                                    Location:
           _______                                                      _______

Return:   _____draft     _____final     _____redlined     _____stapled

Line Spacing:     _____ same     _____ 1.0     _____ 1.5     _____ 2.0

Duplicate: _____ yes _____ no (New Client/Matter No: _        )
                                                     ---------
Save New Version For Redlining Prior To Revisions:  _____ yes _____ no

Caret Method _____  Standard Method _____
================================================================================
Notes:


Origination Date:     March 23, 2000

Author's Initials:    pte

Last Revised By:      aml/kad (toc only)/pte/lel/pte/kmc(@tr145)/laz/SJG/nb/
                      pte/nb

Last Edit Date:       3/24;3/24;3-27; 3-28;4-27;7-20;7-28;7-31;8-1

                                       3
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.11
<SEQUENCE>5
<FILENAME>0005.txt
<DESCRIPTION>TRUST INDENTURE
<TEXT>

<PAGE>

                                                                   EXHIBIT 10.11

         ____________________________________________________________

                CHESTER COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY

                                      and

              CHASE MANHATTAN TRUST COMPANY, NATIONAL ASSOCIATION




                                TRUST INDENTURE


                          Dated as of August 1, 2000

                             ____________________



                CHESTER COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY
                            INDUSTRIAL DEVELOPMENT
                         REVENUE BONDS, 2000 SERIES A
                (INNOVATIVE SOLUTIONS AND SUPPORT, LLC PROJECT)


         ____________________________________________________________


BOND COUNSEL                            AUTHORITY SOLICITOR
- ------------                            -------------------
Stevens & Lee                           Conrad O'Brien Gellman & Rohn, P.C.
111 North Sixth Street                  17 West Gay Street, Suite 100
Reading, Pennsylvania  19601            West Chester, Pennsylvania 19380-3090
<PAGE>

<TABLE>
<S>                                                                                                                 <C>
                                                          ARTICLE I

                                                         DEFINITIONS

SECTION 1.01  Definitions........................................................................................    3
SECTION 1.02  Interpretation; Time of Day........................................................................   12
SECTION 1.03  Captions, Headings and Table of Contents...........................................................   13

                                                         ARTICLE II

                                              AUTHORIZATION AND TERMS OF BONDS

SECTION 2.01  Amount, Form and Issuance of Bonds.................................................................   14
SECTION 2.02  Designation, Denominations, Maturity, Dated Dates, Interest Accrual and Tender.....................   14
SECTION 2.03  Weekly Rate........................................................................................   15
SECTION 2.04  Term Rate..........................................................................................   16
SECTION 2.05  Conversion at Option of Borrower...................................................................   17
SECTION 2.06  Execution and Authentication of Bonds..............................................................   18
SECTION 2.07  Source of Payment of Bonds.........................................................................   18
SECTION 2.08  Payment and Ownership of Bonds.....................................................................   18
SECTION 2.09  Registration, Transfer and Exchange of Bonds.......................................................   19
SECTION 2.10  Mutilated, Lost, Wrongfully Taken or Destroyed Bonds...............................................   20
SECTION 2.11  Cancellation of Bonds..............................................................................   21
SECTION 2.12  Special Agreement with Holders.....................................................................   21
SECTION 2.13  Book Entry System for the Bonds....................................................................   22

                                                         ARTICLE III

                                                     REDEMPTION OF BONDS


SECTION 3.01  Terms of Redemption................................................................................   25
SECTION 3.02  Partial Redemption.................................................................................   28
SECTION 3.03  Issuer's Election to Redeem........................................................................   28
SECTION 3.04  Notice of Redemption...............................................................................   28
SECTION 3.05  Payment of Redeemed Bonds..........................................................................   30

                                                         ARTICLE IV

                                              PURCHASE AND REMARKETING OF BONDS

SECTION 4.01  Purchase on Demand of Holder During Weekly Mode....................................................    31
SECTION 4.02  Mandatory Purchase on Conversion Date and at End of Term Rate Period; Upon Expiration of Letter
                of Credit; Upon Issuance of Alternate Letter of Credit; and at Direction of Bank.................    33
SECTION 4.03  Remarketing........................................................................................    35
SECTION 4.04  Drawings on Letter of Credit for Purchase of Bonds.................................................    36
SECTION 4.05  Bonds Purchased with Proceeds of Letter of Credit..................................................    37
</TABLE>

                                      (i)
<PAGE>

<TABLE>
<S>                                                                                                                 <C>
SECTION 4.06  Borrower Bonds....................................................................................    38
SECTION 4.07  No Purchases After Acceleration; Inadequate Funds for Purchases...................................    38

                                                          ARTICLE V

                                                 FUNDS AND LETTER OF CREDIT

SECTION 5.01  Creation of Project Fund..........................................................................    40
SECTION 5.02  Disbursements from and Records of Project Fund....................................................    40
SECTION 5.03  Disposition of Excess Bond Proceeds...............................................................    40
SECTION 5.04  Bond Fund.........................................................................................    40
SECTION 5.05  Investment of Bond Fund, Project Fund and Rebate Fund.............................................    42
SECTION 5.06  Bond Fund Moneys to be Held in Trust..............................................................    44
SECTION 5.07  Nonpresentment of Bonds...........................................................................    44
SECTION 5.08  Creation of Rebate Fund...........................................................................    44
SECTION 5.09  Letter of Credit..................................................................................    46

                                                         ARTICLE VI

                                           COVENANTS AND REPRESENTATIONS OF ISSUER

SECTION 6.01  Corporate Existence; Compliance with Laws.........................................................    50
SECTION 6.02  Payment of Bond Service...........................................................................    50
SECTION 6.03  No Further Assignment of Revenues.................................................................    50
SECTION 6.04  Filings...........................................................................................    50
SECTION 6.05  Rights and Enforcement of Financing Agreement.....................................................    50
SECTION 6.06  Further Assurances................................................................................    51
SECTION 6.07  Issuer Not to Adversely Affect Tax-Exempt Status..................................................    51
SECTION 6.08  Bonds Not to Become Arbitrage Bonds...............................................................    51
SECTION 6.09  Observance and Performance Agreements.............................................................    51
SECTION 6.10  Representations and Warranties....................................................................    51

                                                         ARTICLE VII

                                                    DEFAULT AND REMEDIES

SECTION 7.01  Defaults; Events of Default.......................................................................    52
SECTION 7.02  Notice of Default.................................................................................    53
SECTION 7.03  Acceleration                                                                                          53
SECTION 7.04  Other Remedies; Rights of Holders.................................................................    54
SECTION 7.05  Right of Holders to Direct Proceedings............................................................    55
SECTION 7.06  Application of Moneys.............................................................................    56
SECTION 7.07  Remedies Vested in Trustee........................................................................    57
SECTION 7.08  Rights and Remedies of Holders....................................................................    57
SECTION 7.09  Termination of Proceedings........................................................................    58
SECTION 7.10  Waivers of Events of Default......................................................................    58
SECTION 7.11  Trustee's Right to Appointment of Receiver........................................................    59
SECTION 7.12  Trustee and Holders Entitled to All Benefits Under Act............................................    59
</TABLE>

                                     (ii)
<PAGE>

<TABLE>
<S>                                                                                                                <C>
SECTION 7.13  Trustee's Obligation to Bank Upon Payment of All Amounts Due Holders..............................    59

                                                        ARTICLE VIII

                                                TRUSTEE AND REMARKETING AGENT

SECTION 8.01  Trustee's Acceptance and Responsibilities.........................................................    60
SECTION 8.02  Certain Rights and Obligations of Trustee.........................................................    61
SECTION 8.03  Fees, Charges and Expenses of Trustee.............................................................    64
SECTION 8.04  Intervention by Trustee...........................................................................    65
SECTION 8.05  Successor Trustee.................................................................................    65
SECTION 8.06  Resignation by Trustee............................................................................    65
SECTION 8.07  Removal of Trustee................................................................................    66
SECTION 8.08  Appointment of Successor Trustee..................................................................    66
SECTION 8.09  Adoption of Authentication........................................................................    67
SECTION 8.10  Designation and Succession of Authenticating Agent, Bond Registrar, Transfer Agent, Tnder Agent
                           and Paying Agent.....................................................................    67
SECTION 8.11  Dealing in Bonds..................................................................................    68
SECTION 8.12  Representations, Agreements and Covenants of Trustee..............................................    68
SECTION 8.13  Appointment of Remarketing Agent..................................................................    69
SECTION 8.14  Qualifications of Remarketing Agent...............................................................    69
SECTION 8.15  Compensation and Expenses of Remarketing Agent....................................................    70

                                                         ARTICLE IX

                                                 SUPPLEMENTS AND AMENDMENTS

SECTION 9.01  Supplemental Indentures Not Requiring Consent of Holders..........................................    71
SECTION 9.02  Supplemental Indentures Requiring Consent of Holders..............................................    72
SECTION 9.03  Consent of Borrower...............................................................................    72
SECTION 9.04  Authorization to Trustee; Effect of Supplement....................................................    72
SECTION 9.05  Modification by Unanimous Consent.................................................................    73
SECTION 9.06  Amendment of Financing Agreement..................................................................    73
SECTION 9.07  Amendment of Letter of Credit.....................................................................    73
SECTION 9.08  Trustee Authorized to Join in Supplements and Amendments; Reliance on Counsel.....................    73
SECTION 9.09  Consent of Bank...................................................................................    74
SECTION 9.10  Notice to Rating Service..........................................................................    74

                                                          ARTICLE X

                                                         DEFEASANCE

SECTION 10.01  Defeasance.......................................................................................    75
SECTION 10.02  Provision for Payment............................................................................    75
SECTION 10.03  Deposit of Funds for Payment of Bonds............................................................    76
SECTION 10.04  Survival of Certain Provisions...................................................................    77
</TABLE>

                                     (iii)
<PAGE>

<TABLE>
<S>                                                                                                                 <C>
                                                         ARTICLE XI

                                                        MISCELLANEOUS

SECTION 11.01  Limitation of Rights; No Personal Recourse.......................................................     78
SECTION 11.02  Severability.....................................................................................     78
SECTION 11.03  Notices..........................................................................................     78
SECTION 11.04  Suspension of Mail...............................................................................     79
SECTION 11.05  Payments Due on Saturdays, Sundays and Holidays..................................................     80
SECTION 11.06  Instruments of Holders...........................................................................     80
SECTION 11.07  Binding Effect...................................................................................     81
SECTION 11.08  Counterparts.....................................................................................     81
SECTION 11.09  Governing Law....................................................................................     81
SECTION 11.10  Certain References to Bank.......................................................................     81
</TABLE>

                                     (iv)
<PAGE>

                                TRUST INDENTURE

          THIS TRUST INDENTURE, dated as of August 1, 2000 between CHESTER
COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY, a public instrumentality and body
corporate and politic of the Commonwealth of Pennsylvania, and CHASE MANHATTAN
TRUST COMPANY, NATIONAL ASSOCIATION, a national banking association organized
and validly existing under the laws of the United States of America, as Trustee
(the capitalized terms used in the recitals and granting clauses hereof being
used therein as defined in Article I of this Trust Indenture),

                               WITNESSETH THAT:

          A. Pursuant to the Act, the Issuer has authorized and approved the
Project and the financing thereof through the issuance of the Bonds and the use
of the proceeds thereof pursuant to the Financing Agreement to finance costs of
the Project;

          B. The Bonds will be issued under and secured by this Indenture, and
the Issuer is empowered and authorized to execute and deliver this Indenture and
the Financing Agreement and to do or cause to be done all acts provided or
required herein or therein to be performed on its part;

          C. All acts and conditions required to happen, exist and be performed
precedent to and in the issuance of the Bonds and the execution and delivery of
this Indenture have happened, exist and have been performed (i) to make the
Bonds, when issued, delivered and authenticated, valid and binding legal
obligations of the Issuer and (ii) to make this Indenture a valid, binding and
legal trust agreement for the security of the Bonds; and

          D. The Trustee has accepted the trusts created by this Indenture, and
in evidence thereof has joined in the execution hereof.

          NOW, THEREFORE, the Issuer, intending to be legally bound, in
consideration of the acceptance by the Trustee of the trusts hereby created and
of the purchase and acceptance of the Bonds by the Holders, and of the sum of
One Dollar, lawful money of the United States of America, to it duly paid by the
Trustee at or before the execution and delivery of these presents, and for other
good and valuable consideration, the receipt of which is hereby acknowledged, in
order to secure, in the following order of priority, first, the payment of the
                                                     -----
principal of, premium, if any, on and interest on the Bonds according to their
tenor and effect and the performance and observance by the Issuer of all the
covenants expressed or implied herein and in the Bonds, and, second, the payment
                                                             ------
to the Bank and performance of the reimbursement and other obligations of the
Borrower under the Reimbursement Agreement, does hereby assign, transfer and
pledge to the Trustee and its successors in trust and its and their assigns
forever and grant to the Trustee and its successors in trust and its and their
assigns a security interest in:

          a. All right, title and interest (but not the obligations) of the
     Issuer under and pursuant to the terms of the Financing Agreement, all Loan
     Payments (i.e., all loan payments required to be paid by the Borrower
     pursuant to Section 4.2 of the Financing Agreement) and all other payments,
     revenues and receipts receivable by the Issuer under the Financing
     Agreement (except for the Unassigned Issuer's Rights); and

                                       1
<PAGE>

          b. All of the right, title and interest of the Issuer in and to all
     Funds (other than the Rebate Fund) and Accounts established under this
     Indenture and all moneys and investments now or hereafter held therein and
     all present and future Revenues.

          TO HAVE AND TO HOLD, the Financing Agreement, Funds, Accounts,
Revenues and the other right, title and interest hereby assigned, transferred
and pledged or agreed or intended so to be (collectively the "Trust Estate") to
the Trustee and its successors in said trust and to its and their assigns
forever;

          IN TRUST NEVERTHELESS, upon the terms herein set forth, first, for the
                                                                  -----
equal and proportionate benefit, security and protection of all present and
future Holders of the Bonds issued under and secured by this Indenture without
privilege, priority or distinction as to the lien or otherwise of any of the
Bonds over any other of the Bonds except as provided herein, and, second, for
                                                                  ------
the benefit and security of the Bank with respect to the Borrower's obligations
under the Reimbursement Agreement;

          PROVIDED, HOWEVER, that if the Issuer, its successors or assigns,
shall well and truly pay, or cause to be paid, the principal of the Bonds and
the interest and premium, if any, due or to become due thereon, at the times and
in the manner mentioned in the Bonds according to the true intent and meaning
thereof, or shall provide, as permitted hereby, for the payment thereof by
depositing with the Trustee the entire amount due or to become due thereon, and
shall well and truly keep, perform and observe all the covenants and conditions
pursuant to the terms of this Indenture to be kept, performed and observed by
the Issuer, and shall pay or cause to be paid to the Trustee all sums due or to
become due to it in accordance with the terms and provisions hereof, and if the
Borrower shall pay and perform or cause to be paid and performed all of its
reimbursement and other obligations under the Reimbursement Agreement, then,
upon such final payments and subject to the provisions of Article X, this
Indenture and the rights hereby granted shall cease, determine and be void, and
the Trustee shall forthwith release, surrender and otherwise cancel any interest
it may have in the Trust Estate; otherwise this Indenture shall be and remain in
full force and effect.

          THIS INDENTURE FURTHER WITNESSETH, and it is expressly declared, that
all Bonds issued and secured hereunder are to be issued, authenticated and
delivered and the Trust Estate, including all said payments, revenues and
receipts hereby pledged, is to be dealt with and disposed of, under, upon and
subject to the terms, conditions, stipulations, covenants, agreements, trusts,
uses and purposes as hereinafter expressed, and the Issuer has agreed and
covenanted, and does hereby agree and covenant, with the Trustee and with the
respective Holders, from time to time, of the Bonds, or any part thereof, as
follows:

                  (Balance of page intentionally left blank)

                                       2
<PAGE>

                                   ARTICLE I

                                  DEFINITIONS

          SECTION 1.01    Definitions. In this Indenture, the following terms
                          -----------
shall have the meanings specified in this Article, unless the context otherwise
requires:

          "Act" means the Pennsylvania Economic Development Financing Law (Act
No. 102, approved August 23, 1967, P.L. 251, as amended, including the
amendments effected by Act No. 48, approved July 10, 1987, P.L. 273 and Act No
74, approved December 17, 1993, P.L. 490). The Act is codified at 73 P.S.ss. 371
et seq.
- -- ---

          "Affiliate" means any Person directly or indirectly controlling,
controlled by or under common control with the Borrower as certified to the
Trustee and the Remarketing Agent by an Authorized Representative of the
Borrower. In addition, the term "Affiliate" shall also include (i) any General
Partner and (ii) any Person who has guaranteed the payment of the Borrower's
obligations under the Financing Agreement or the Reimbursement Agreement.

          "Alternate Letter of Credit" means an irrevocable letter of credit
authorizing drawings thereunder by the Trustee, issued by a national banking
association, a bank, a trust company or other financial institution as the Bank,
and satisfying the requirements of Section 5.09.

          "Authorized Representative" shall have the meaning assigned to such
term in the Financing Agreement.

          "Available Moneys" means (i) proceeds of a drawing under the Letter of
Credit and (ii) any moneys paid to the Trustee and with respect to which the
Trustee has received an opinion of nationally recognized counsel experienced in
bankruptcy matters and acceptable to the Trustee and the Rating Service to the
effect that the use of such moneys to pay principal of, premium (if any) on or
interest on the Bonds, as applicable, will not constitute an avoidable transfer
under Section 547 of the United States Bankruptcy Code in the event of a
bankruptcy case under the United States Bankruptcy Code by the Issuer or by or
against the Borrower or any Affiliate, as debtor; provided that when used with
respect to payment of amounts due in respect of any Pledged Bonds or Borrower
Bonds or any payments due at any time when a Letter of Credit is not held by the
Trustee, "Available Moneys" means any moneys held by the Trustee and available
for such payment pursuant to the terms of this Indenture except for moneys drawn
under the Letter of Credit.

          "Bank" means, initially, PNC Bank, National Association, a national
banking association, as issuer of the Letter of Credit, and its successors and
assigns in that capacity and, in the event an Alternate Letter of Credit is
outstanding, the issuer of the Alternate Letter of Credit.

          "Bond Counsel" shall mean an attorney-at-law or a firm of attorneys of
nationally recognized standing in matters pertaining to bonds (including the tax
status of interest thereon) issued by states and their political subdivisions,
duly admitted to the practice of law before the highest court of any state of
the United States of America.

                                       3
<PAGE>

               "Bond Fund" means the fund so designated and established pursuant
to Section 5.04.

               "Bond Service" means, for any period or payable at any time, the
principal of, premium, if any, on and interest on the Bonds for that period or
payable at that time whether due on an Interest Payment Date, at maturity or
upon acceleration or redemption.

               "Bond Year" means, while Bonds remain outstanding, the annual
period provided for the computation of Excess Earnings under Section 148(f) of
the Code.

               "Bondholder Tender Notice" means a written notice meeting the
requirements of Section 4.01.

               "Bonds" means the $4,335,000 Industrial Development Revenue
Bonds, 2000 Series A (Innovative Solutions and Support, LLC Project) of the
Issuer issued, authenticated and delivered pursuant to Section 2.01.

               "Borrower" means Innovative Solutions and Support, LLC, a limited
liability company duly organized and validly existing under the laws of the
Commonwealth of Pennsylvania, and its successors and assigns.

               "Borrower Bonds" means any Bonds of which ownership is registered
in the name of the Borrower or any Affiliate, other than Pledged Bonds.

               "Borrower Purchase Account" means the special trust account so
designated and established by the Trustee pursuant to Section 4.04.

               "Business Day" means any day other than a Saturday or Sunday or a
day on which banks located in Pittsburgh, Pennsylvania, New York, New York or
any other city in which the Designated Office or Payment Office of the Trustee
or the office of the Bank at which drawing documents are required to be
presented under the Letter of Credit is located are required or authorized to
close or on which The New York Stock Exchange is closed.

               "Code" means the Internal Revenue Code of 1986, as amended from
time to time. References to the Code and Sections of the Code include the
relevant regulations, temporary regulations and proposed regulations thereunder
and under the Internal Revenue Code of 1954, as amended, and any successor
provisions to those Sections, regulations, temporary regulations or proposed
regulations.

               "Conversion Date" means any Interest Payment Date on which the
Rate Mode of the Bonds is converted to another Rate Mode pursuant to Section
2.05.

               "Determination of Taxability" means (1) the receipt by the
Trustee of notice of the enactment of legislation or the adoption of final
regulations or a final decision, ruling or technical advice by any federal
judicial or administrative authority which, in the opinion of Bond Counsel, has
the effect of requiring interest on the Bonds to be included in the gross income
of the Holders for federal income tax purposes (other than a Holder who is a
"substantial user" of the Project or a "related person" as those terms are used
in Section 147(a) of the Code) or (2) the receipt by the Trustee of an opinion
of Bond Counsel furnished by the Borrower to the effect that

                                       4
<PAGE>

interest on the Bonds is to be included in the gross income of the Holders for
federal income tax purposes (other than a Holder who is a "substantial user" of
the Project or a "related person" as those terms are used in Section 147(a) of
the Code) or (3) the delivery to the Trustee of a written statement signed by an
Authorized Representative of the Borrower to the effect that the maximum amount
of capital expenditures permitted under Section 144(a)(4) of the Code has been
or will be exceeded or that the Borrower or another "test-period beneficiary"
(as that term is defined in Section 144(a)(10)(D) of the Code) has exceeded or
will exceed the maximum amount of tax-exempt obligations permitted to be
outstanding under Section 144(a)(10) of the Code; provided that no decision by
any court or decision, ruling or technical advice by any administrative
authority shall be considered final (a) unless the Holder involved in the
proceeding or action giving rise to such decision, ruling or technical advice
(i) gives the Borrower, the Issuer, the Bank and the Trustee prompt written
notice of the commencement thereof and (ii) offers the Borrower the opportunity
to control the contest thereof, provided the Borrower shall have agreed to bear
all expenses in connection therewith and to indemnify that Holder against all
liabilities in connection therewith, and (b) until the expiration of all periods
for judicial review or appeal.

     "DTC" means The Depository Trust Company, New York, New York and its
successors and assigns.

     "Eligible Investments" means

     (i)   Government Obligations; the Trustee, in purchasing Government
Obligations, (a) may make any such purchase subject to agreement with the seller
for repurchase by the seller at a later date, and in such connection may accept
the seller's agreement for the payment of interest in lieu of the right to
receive the interest payable by the issuer of the securities purchased, provided
that title to the Government Obligations so purchased by the Trustee shall vest
in the Trustee, that the Trustee shall have actual or constructive possession of
such Government Obligations, and that the current market value of such
Government Obligations (or of cash or additional Government Obligations pledged
with the Trustee as collateral for the purpose) is at all times at least equal
to the principal and interest thereafter to become payable by the seller under
said agreement, or (b) may purchase shares of a fund whose sole assets are of a
type described in this clause (i) and such repurchase agreements thereof;

     (ii)   obligations issued or guaranteed by any state or political
subdivision thereof and rated in the highest category, if rated as short-term
obligations, or not lower than the third highest category, if rated as long term
obligations, by Moody's or by Standard & Poor's, or their successors; the
Trustee, in purchasing obligations of the type described in this clause (ii),
may purchase shares of a fund whose sole assets are such obligations or
obligations of the type described in clause (i) above;

     (iii)  commercial or finance company paper which is rated in the highest
rating category by either Moody's or Standard & Poor's;

     (iv)   deposit accounts, investment agreements, bankers' acceptances,
certificates of deposit or bearer deposit notes in any bank, trust company or
savings and loan association (including without limitation the Trustee or any
bank affiliated with the Trustee) organized under the laws of the United States
of America or any state thereof having a rating of

                                       5
<PAGE>

its unsecured senior long-term debt obligations within one of the three highest
rating categories by either Moody's or Standard & Poor's; and

     (v)  obligations evidencing indebtedness described in Section 103(a) of the
Code which obligations are not investment property as defined in Section
148(b)(2) and (3) of the Code and are rated within one of the three highest
rating categories by Moody's or Standard & Poor's; the Trustee, in purchasing
securities of the type described in this clause (v), may purchase an interest in
a regulated investment company to the extent that at least 95% of the income to
the holder of such interest is interest that is excludable from gross income
under Section 103 of the Code and, in lieu of such securities being individually
rated as aforesaid, such company (or the fund in question) is rated within one
of the three highest rating categories by Moody's or Standard & Poor's.

     "Event of Default" means any of the events described as an Event of Default
in Section 7.01.

     "Excess Earnings" means an amount equal to the sum of (i) plus (ii) where:

     (i)  is the excess of (a) the aggregate amount earned from the date of
issuance of the Bonds on all nonpurpose investments in which gross proceeds of
the Bonds are invested (other than investments attributable to an excess
described in this clause (i)), over (b) the amount that would have been earned
if such nonpurpose investments (other than amounts attributable to an excess
described in this clause (i)) were invested at a rate equal to the yield on the
Bonds; and

     (ii) is any income attributable to the excess described in clause (i).

The sum of (i) plus (ii) shall be determined in accordance with Section 148(f)
of the Code. As used herein, the terms "gross proceeds", "nonpurpose
investments" and "yield" have the meanings assigned to them for purposes of
Section 148(f) of the Code. "Excess Earnings", however, shall not include any
amount earned on the Bond Fund during any Bond Year if the gross earnings on
such Fund for such Bond Year are less than $100,000.

     "Expiration Date" means the stated expiration date of the Letter of Credit,
as such date may be extended from time to time by the Bank.

     "Extraordinary Services" and "Extraordinary Expenses" mean all services
rendered and all reasonable expenses properly incurred by the Trustee or any of
its agents under this Indenture, other than Ordinary Services and Ordinary
Expenses.

     "Financial Consultant" means a firm of investment bankers, a financial
consulting firm, a law firm or a firm of certified public accountants,
satisfactory to the Borrower and the Trustee, which is experienced in the
calculation of amounts required to be rebated to the United States under Section
148(f) of the Code.

     "Financing Agreement" means the Loan Agreement dated as of the date hereof
between the Issuer and the Borrower, as amended from time to time, pursuant to
which (i) the Issuer has agreed to cause the proceeds of the Bonds to be made
available to or for the benefit of the Borrower to pay Project Costs and (ii)
the Borrower has agreed to make loan payments corresponding to the Bond Service
for the term of the Bonds.

                                       6
<PAGE>

     "General Account" means the account so designated which is established
pursuant to Section 5.04.

     "General Partner" means, if the Borrower is a partnership, any Person who
is a general partner of the Borrower.

     "Government Obligations" means direct obligations of, or obligations the
principal of and interest on which are unconditionally guaranteed by, the United
States of America, including obligations issued or held in book-entry form on
the books of the Department of the Treasury of the United States of America and
including a receipt, certificate or any other evidence of an ownership interest
in such obligations or in specified portions thereof (which may consist of
specified portions of interest thereon).

     "Holder" means the Person in whose name a Bond is registered on the
Register.

     "Indenture" means this Trust Indenture, as amended or supplemented from
time to time.

     "Interest Payment Date" means (i) with respect to Weekly Rate interest, the
first Business Day of each calendar month commencing September 1, 2000 and (ii)
with respect to Term Rate interest, each Semiannual Date.

     "Interest Rate for Advances" means the rate per annum which is two
percentage points in excess of that interest rate announced by the Trustee's
primary commercial banking affiliate as its "prime rate".

     "Issuer" means Chester County Industrial Development Authority, a
Pennsylvania public instrumentality and body corporate and politic organized and
existing under the Act.

     "Issuer's Fee" means the fee of the Issuer payable pursuant to Section 4.4
   of the Financing Agreement.

     "Letter of Credit" means the irrevocable letter of credit issued by the
Bank to the Trustee on the date of execution and delivery of this Indenture and
any Alternate Letter of Credit, under which the Trustee is authorized, subject
to the terms and conditions thereof, to draw up to (a) an amount equal to the
principal amount of the outstanding Bonds (i) to enable the Trustee to pay the
principal amount of the Bonds when due at maturity, upon redemption or upon
acceleration and (ii) to enable the Trustee to pay the portion of the purchase
price of Bonds tendered to it and not remarketed corresponding to the principal
amount of such Bonds, plus (b) while the Bonds bear interest at a Weekly Rate,
an amount equal to interest to accrue at the Maximum Rate on the outstanding
Bonds for 50 days and, while the Bonds bear interest at a Term Rate, an amount
equal to interest to accrue at a rate not less than the Term Rate then in effect
on the outstanding Bonds for 200 days (i) to enable the Trustee to pay interest
on the Bonds when due and (ii) to enable the Trustee to pay the portion of the
purchase price of Bonds tendered to it and not remarketed corresponding to the
accrued interest on such Bonds, as the same may be amended, transferred,
reissued or extended in accordance with this Indenture, plus (c) while the Bonds
bear interest at a Term Rate, an amount equal to the sum of the optional
redemption premium (if any) and supplemental premium (if any) which would become
payable

                                       7
<PAGE>

on the Bonds upon mandatory redemption if such irrevocable letter of credit or
Alternate Letter of Credit were not extended beyond the Expiration Date set
forth therein.

     "Letter of Credit Debt Service Account" means the account so designated and
established pursuant to Section 5.04 in the Bond Fund.

     "Letter of Credit Purchase Account" means the special trust account so
designated and established pursuant to Section 4.04.

     "Loan Payments" means the loan payments required to be made by the Borrower
pursuant to Section 4.2 of the Financing Agreement corresponding to the Bond
Service for the term of the Bonds.

     "Maximum Rate" means (i) with respect to Weekly Rate interest, 12% per
annum and (ii) with respect to Term Rate interest, 25% per annum.

     "Moody's" means Moody's Investors Service, Inc., and its successors and
assigns.

     "No Call Period" means the period of time referred to in the column under
that heading in the table in Section 3.01(e).

     "Nominal Term Rate Period" means, with respect to a Term Mode, a period of
two or more consecutive Semiannual Periods (expressed in years and half years)
determined pursuant to Sections 2.04 and 2.05.

     "Ordinary Services" and "Ordinary Expenses" mean those services normally
rendered, and those expenses normally incurred, by a trustee under instruments
similar to this Indenture, but excluding any services rendered or fees incurred
as a result of a default or Event of Default hereunder or under the Financing
Agreement or pursuant to Article IX.

     "Outstanding Bonds", "Bonds outstanding" or "outstanding" as applied to
Bonds mean, as of the applicable date, all Bonds which have been authenticated
and delivered, or which are being delivered by the Trustee under this Indenture,
except:

     (a)  Bonds cancelled or required to be cancelled upon surrender, exchange
or transfer, or cancelled or required to be cancelled because of payment or
redemption on or prior to that date pursuant to Section 2.11;

     (b)  On or after any Purchase Date for Bonds to be purchased pursuant to
Article IV, all Undelivered Bonds (or portions of Bonds) which are purchased on
such date, provided that funds sufficient for such purchase are on deposit with
the Trustee;

     (c)  Bonds which are deemed paid in accordance with Article X; and

     (d)  Bonds in substitution for which others have been authenticated and
delivered under Section 2.10.

For purposes of approval or consent by the Holders, "outstanding Bonds," "Bonds
outstanding" or "outstanding" as applied to Bonds shall not include Bonds owned
by or on behalf of the

                                       8
<PAGE>

Issuer, the Borrower or an Affiliate (unless all of the Bonds are so owned), or
the Bank (unless all of the Bonds are so owned).

     "Person" or words importing persons means firms, associations, partnerships
(including without limitation general and limited partnerships), limited
liability companies, joint ventures, societies, estates, trusts, corporations,
public or governmental bodies, other legal entities and natural persons.

     "Pledged Bonds" shall have the meaning assigned to such term in Section
4.05.

     "Project" means an approximately 44,800 square foot manufacturing facility
and related equipment to be owned and operated by the Borrower in fee, located
at 701 Pennsylvania Drive (Lot 7) in the Township of Upper Uwchlan, Chester
County, Pennsylvania as more fully described in the Financing Agreement.

     "Project Costs" shall have the meaning assigned to such term in the
Financing Agreement.

     "Project Fund" means the fund so designated and established pursuant to
Section 5.01.

     "Purchase Date" means (a) with respect to any optional tender for purchase
pursuant to Section 4.01 of Bonds in the Weekly Mode, any Business Day
designated as the date of such purchase pursuant to such Section and (b) with
respect to any mandatory purchase pursuant to Section 4.02 (1) in the case of
Bonds which are to be purchased upon conversion from one Rate Mode to another
Rate Mode, the Conversion Date, or if such Conversion Date is not a Business
Day, the first Business Day succeeding such Conversion Date, (2) in the case of
Bonds which are to be purchased upon expiration of a Term Rate Period, the first
Business Day following the end of such Term Rate Period, (3) in the case of
Bonds to be purchased in anticipation of the expiration of the Letter of Credit
or the issuance of an Alternate Letter of Credit, the Interest Payment Date next
preceding the Expiration Date of the Letter of Credit or the Interest Payment
Date on which an Alternate Letter of Credit becomes effective, as applicable,
and (4) in the case of Bonds to be purchased at the direction of the Bank, the
purchase date stipulated by the Bank pursuant to Section 7.03.

     "Rate Mode" means the Weekly Mode or a Term Mode.

     "Rating Service" means Moody's Investors Service, Inc., if the Bonds are
rated by such at the time, and Standard & Poor's Ratings Services, a Division of
The McGraw-Hill Companies, Inc., if the Bonds are rated by such at the time, and
their successors and assigns, or if either shall be dissolved or no longer
assigning credit ratings to long term debt, then any other nationally recognized
entity assigning credit ratings to long term debt designated in writing by the
Issuer and satisfactory to the Trustee.

     "Rebate Fund" means the fund so designated and established pursuant to
Section 5.08.

     "Register" means the books kept and maintained by the Trustee for
registration and transfer of Bonds pursuant to Section 2.09.

                                       9
<PAGE>

     "Regular Record Date" means, while the Bonds are in the Weekly Mode, the
close of business on the last Business Day preceding an Interest Payment Date
and, while the Bonds are in the Term Mode, the close of business on the
fifteenth day of the calendar month next preceding an Interest Payment Date.

     "Reimbursement Agreement" means the Reimbursement, Credit and Security
Agreement dated as of August 1, 2000, between the Borrower and the Bank relating
to the Letter of Credit and the Bonds, as amended, supplemented or replaced from
time to time.

     "Remarketing Agent" means, initially, PNC Capital Markets, Inc. and any
Person meeting the qualifications of, and designated from time to time to act as
Remarketing Agent under, Section 8.14. "Principal Office" of the Remarketing
Agent means the office of the Remarketing Agent at the address of the
Remarketing Agent set forth in Section 11.03, or any other office so designated
in writing by the Remarketing Agent to the Issuer, the Trustee, the Borrower and
the Bank.

     "Remarketing Agreement" means the Remarketing Agreement between the
Borrower and the Remarketing Agent relating to the Bonds, as amended,
supplemented or replaced from time to time.

     "Remarketing Proceeds Purchase Account" means the special trust account so
designated and established pursuant to Section 4.03.

     "Representation Letter" shall mean the blanket representation letter from
the Issuer to DTC in the form attached hereto as Exhibit B.

     "Revenues" means (a) the Loan Payments, (b) all other moneys received or to
be received by the Issuer or the Trustee in respect of Loan Payments, including
without limitation, all moneys and investments in the Bond Fund, (c) any
proceeds of Bonds originally deposited with the Trustee for the payment of
interest accrued on the Bonds or otherwise paid to the Trustee by or on behalf
of the Borrower or the Issuer for deposit in the Bond Fund or any excess moneys
remaining in the Project Fund following completion of the Project, (d)
investment income with respect to any moneys held by the Trustee under this
Indenture, except for Excess Earnings and investment income on moneys held in
the Rebate Fund, and (e) any moneys paid to the Trustee under the Letter of
Credit; provided that the term "Revenues" does not include any moneys or
investments in the Rebate Fund, the Remarketing Proceeds Purchase Account, the
Letter of Credit Purchase Account or the Borrower Purchase Account.

     "Semiannual Date" means each February 1 and each August 1.

     "Semiannual Period" means a six month period commencing on a Semiannual
Date and ending on and including the day immediately preceding the next
Semiannual Date.

     "Series Issue Date" means the date of original issuance and first
authentication and delivery of the Bonds to the initial purchaser thereof
against payment therefor.

     "Special Record Date" means, with respect to any Bond, the date established
by the Trustee in connection with the payment of overdue interest on that Bond
pursuant to Section 2.08.

                                       10
<PAGE>

     "Standard & Poor's" means Standard & Poor's Ratings Services, a Division of
The McGraw-Hill Companies, Inc., and its successors and assigns.

     "Supplemental Indenture" means any indenture supplemental to this Indenture
entered into between the Issuer and the Trustee in accordance with Article IX.

     "Term Mode" means, with respect to the Bonds, the mode of accruing interest
thereon at Term Rates based on a constant Nominal Term Rate Period.

     "Term Rate" means the rate of interest borne by the Bonds for a Term Rate
Period determined pursuant to Section 2.04.

     "Term Rate Calculation Date" means a Business Day not more than 15 days and
not less than one day prior to the first day of the corresponding Term Rate
Period.

     "Term Rate Period" means a period of two or more consecutive Semiannual
Periods equal to the applicable Nominal Term Rate Period determined pursuant to
Section 2.05 commencing on the Semiannual Date immediately following the last
day of the immediately preceding Term Rate Period and running through and ending
on the day immediately preceding the Semiannual Date which follows such
commencement date by a period equal to such Nominal Term Rate Period; except
that the first Term Rate Period after conversion from a Weekly Rate to a Term
Rate shall commence on the Conversion Date of such conversion and end on and
include the day immediately preceding the Semiannual Date which follows the
Semiannual Date occurring on or immediately preceding such Conversion Date by a
period equal to such Nominal Term Rate Period.

     "Term Rate Period End Interest Payment Date" means the Semiannual Date
immediately following the last day of a Term Rate Period.

     "Trustee" means Chase Manhattan Trust Company, National Association,
Philadelphia, Pennsylvania, until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter,
"Trustee" shall mean the successor Trustee. "Designated Office" of the Trustee
means the corporate trust office of the Trustee at the address of the Trustee
set forth in Section 11.03 and designated as the Designated Office for purposes
of this Indenture, or any other corporate trust office so designated in writing
by the Trustee to the Issuer, the Remarketing Agent, the Borrower and the Bank.
"Payment Office" of the Trustee means the office from which payments of
principal, premium (if any), interest and tender purchase price are made and
where Bonds may be surrendered for payment of upon redemption or acceleration or
at maturity, which office may be the office of an agent of the Trustee for such
purpose and shall be the office so designated in Section 11.03 or another office
of the Trustee or its agent so designated in a separate writing by the Trustee
to the Issuer, the Remarketing Agent, the Borrower and the Bank. "Transfer
Office" of the Trustee means the office where Bonds may be delivered to the
Trustee for transfer or exchange, which office may be the office of an agent of
the Trustee for such purpose and shall be the office so designated in Section
11.03 or another office of the Trustee or its agent so designated in a separate
writing by the Trustee to the Issuer, the Remarketing Agent, the Borrower and
the Bank. "Delivery Office" of the Trustee means, with respect to Bonds held in
certificated form, the office where such Bonds tendered for purchase may be
delivered to the Trustee, which office may be the office of an agent of the
Trustee for such purpose and shall be designated in Section 11.03 or another

                                       11
<PAGE>

office of the Trustee or its agent so designated in a separate writing by the
Trustee to the Issuer, the Remarketing Agent, the Borrower and the Bank.

     "Trust Estate" shall have the meaning assigned to such term in the
foregoing habendum clause of this Indenture.

     "Unassigned Issuer's Rights" shall have the meaning assigned to such in the
Financing Agreement.

     "Undelivered Bonds" means any Bonds subject to purchase pursuant to Section
4.01 or 4.02 which the Holder thereof has failed to deliver as described in such
Sections.

     "Weekly Mode" means, with respect to the Bonds, the mode of bearing
interest thereon at a Weekly Rate.

     "Weekly Rate" means a floating weekly interest rate on the Bonds
established and adjusted in accordance with Section 2.03.

     "Weekly Rate Calculation Date" means Wednesday in each calendar week or, if
any Wednesday is not a Business Day, the first Business Day preceding such
Wednesday.

     "Weekly Rate Period" means the seven-day period commencing on the first
Thursday following the corresponding Weekly Rate Calculation Date and running
through Wednesday of the following calendar week; except that (i) the first
Weekly Rate Period shall commence on the Series Issue Date and end on and
include the first Wednesday occurring after the Series Issue Date, (ii) the
first Weekly Rate Period following a conversion from a Term Mode to the Weekly
Mode shall commence on the Conversion Date for such conversion and end on and
include the first Wednesday occurring after such date, and (iii) the last Weekly
Rate Period prior to a conversion from the Weekly Mode to the Term Mode shall
end on and include the last day immediately preceding the Conversion Date for
such conversion.

     SECTION 1.02   Interpretation; Time of Day. Unless the context indicates
                    ---------------------------
otherwise, words importing the singular number include the plural number, and
vice versa. The terms "hereof", "hereby", "herein", "hereto", "hereunder",
"hereinafter" and similar terms refer to this Indenture; and the term
"hereafter" means after, and the term "heretofore" means before, the Series
Issue Date. Words of any gender include the correlative words of the other
genders, unless the context indicates otherwise.

     In this Indenture, unless otherwise indicated, all references to particular
Articles, Sections or Subsections are references to the Articles, Sections or
Subsections of this Indenture.

     In this Indenture, all references to any time of the day shall refer to
Eastern standard time or Eastern daylight saving time, as in effect in the City
of Philadelphia, Pennsylvania on such day.

                                       12
<PAGE>

     SECTION 1.03  Captions, Headings and Table of Contents. The captions,
                   ----------------------------------------
headings and table of contents in this Indenture are solely for convenience of
reference and in no way define, limit or describe the scope of any Articles,
Sections, Subsections, paragraphs, subparagraphs or clauses hereof.

(End of Article I)

                                       13
<PAGE>

                                  ARTICLE II

                       AUTHORIZATION AND TERMS OF BONDS

     SECTION 2.01   Amount, Form and Issuance of Bonds. The Bonds shall, except
                    ----------------------------------
as provided in Section 2.10, be limited to $4,335,000 in aggregate principal
amount and shall contain substantially the terms recited in the form of Bonds
set forth in Exhibit A to this Indenture. No additional series of Bonds may be
issued under this Indenture. All Bonds shall provide that Bond Service in
respect thereof shall be payable only out of the Revenues. The Issuer may cause
a copy of the text of the opinion of Bond Counsel delivered in connection with
the issuance of the Bonds to be printed on, or attached to, the Bonds, and, upon
request of the Issuer and deposit with the Trustee of an executed counterpart of
such opinion, the Trustee shall certify by manual or facsimile signature that
printed on, or attached to, the Bonds is the complete text of such opinion.
Pursuant to recommendations promulgated by the Committee on Uniform Security
Identification Procedures, "CUSIP" numbers may be printed on the Bonds. The
Bonds may bear such endorsement or legend satisfactory to the Trustee as may be
required to conform to usage or law with respect thereto.

     Upon the execution and delivery hereof, the Issuer shall execute the Bonds
in the principal amount of $4,335,000 and deliver them to the Trustee for
authentication. The Trustee shall authenticate the Bonds and deliver them to, or
on the order of, the initial purchaser thereof upon receipt of a written request
and authorization to the Trustee on behalf of the Issuer, signed by an
Authorized Representative of the Issuer, and upon payment to the Trustee of the
amount specified therein, which amount shall be deposited as provided in Section
5.01.

     SECTION  2.02  Designation, Denominations, Maturity, Dated Dates, Interest
                    -----------------------------------------------------------
Accrual and Tender.
- ------------------

     (a)  The Bonds shall be designated "Chester County Industrial Development
Authority Industrial Development Revenue Bonds, 2000 Series A (Innovative
Solutions and Support, LLC Project)" and shall be substantially in the form
attached hereto as Exhibit A.

     (b)  The Bonds shall be issuable in denominations of $100,000 or any whole
multiple of $5,000 in excess thereof.

     (c)  The Bonds shall mature, subject to prior redemption as provided in the
form thereof recited in this Indenture, on August 1, 2015.

     (d)  The Series Issue Date shall be set forth on the face side of all Bonds
authenticated by the Trustee. Each Bond shall bear the date of its
authentication.

     (e)  The Bonds shall bear interest from the Interest Payment Date to which
interest has been paid next preceding the date of authentication, unless the
date of authentication (i) is an Interest Payment Date to which interest has
been paid, in which event the Bonds shall bear interest from the date of
authentication, or (ii) is prior to the first Interest Payment Date for the
Bonds, in which event such Bonds shall bear interest from the Series Issue Date.
Interest on the Bonds shall be paid on each Interest Payment Date. Each Bond
shall bear interest on overdue principal at the rates borne by the Bonds during
the period such principal is overdue. So long as the Bonds bear interest at a
Weekly Rate, interest on the Bonds shall be computed on the basis of

                                       14
<PAGE>

a year of 365 or 366 days, as applicable, for the number of days actually
elapsed. Interest accruing on the Bonds at a Term Rate shall be computed on the
basis of a 360-day year of twelve 30-day months.

          (f)  Bonds authenticated and delivered while bearing interest in the
Weekly Mode shall set forth on the face side thereof, in the place provided for
designating the interest rate, the words "Weekly Rate".

          (g)  Bonds authenticated and delivered while bearing interest in a
Term Mode shall set forth on the face side thereof, in the place provided for
designating the interest rate, the words "__% Term Rate for Term Rate Period
ending __________ 1, ____".

          (h)  All Bonds shall initially bear interest at a Weekly Rate from the
Series Issue Date determined in accordance with Section 2.03. The Bonds may be
converted from one Rate Mode to another Rate Mode as provided in Section 2.05.

          (i)  The Bonds shall be subject to optional and mandatory tender for
   purchase as provided in Article IV.

          SECTION 2.03      Weekly Rate. A Weekly Rate shall be determined for
                            -----------
each Weekly Rate Period as described below. For each Weekly Rate Period and so
long as the Bonds are in the Weekly Mode, the interest rate on the Bonds shall
be the current market rate determined by the Remarketing Agent on the
immediately preceding Weekly Rate Calculation Date, in accordance with this
Section. On each Weekly Rate Calculation Date, the Remarketing Agent shall
determine the Weekly Rate for the next succeeding Weekly Rate Period as the rate
which if borne by the Bonds would, in the judgment of the Remarketing Agent,
taking into account prevailing financial market conditions, be the interest rate
necessary, but would not exceed the interest rate necessary, to enable the
Remarketing Agent to arrange for the sale of all of the outstanding Bonds at a
price equal to the principal amount thereof plus accrued interest thereon.
Notice of such Weekly Rate shall be given by the Remarketing Agent to the
Trustee by the close of business on the Weekly Rate Calculation Date. No notice
of Weekly Rates will be given to the Issuer, the Borrower, the Bank or the
Holders; however, the Issuer, the Borrower, the Bank and the Holders may obtain
Weekly Rates from the Trustee or the Remarketing Agent upon request therefor.
Anything herein to the contrary notwithstanding, in no event shall the Weekly
Rate borne by the Bonds exceed the Maximum Rate.

          In determining each Weekly Rate to be effective pursuant to this
Section, prevailing financial market conditions which the Remarketing Agent
shall take into account shall include (i) existing short-term tax-exempt market
rates and indexes of such short-term rates, (ii) the existing market supply and
demand for short-term tax-exempt securities, (iii) existing yield curves for
short-term tax-exempt securities for obligations of credit quality comparable to
the Bonds, (iv) general economic conditions, (v) industry, economic and
financial conditions that may affect or be relevant to the Bonds, and (vi) such
other facts, circumstances and conditions as the Remarketing Agent, in its sole
discretion, shall determine to be relevant.

          If for any reason the Remarketing Agent does not determine a Weekly
Rate for any Weekly Rate Period as aforesaid, or if a court holds a rate for any
Weekly Rate Period to be invalid or unenforceable, the Weekly Rate for that
Weekly Rate Period shall be equal to the Weekly Rate in effect for the
immediately preceding Weekly Rate Period. The Weekly Rate for

                                       15
<PAGE>

any consecutive succeeding Weekly Rate Period for which the Remarketing Agent
does not determine a Weekly Rate, or a court holds a rate to be invalid or
unenforceable, shall be the 30-day tax-exempt commercial paper rate published
for that Weekly Rate Period by Munifacts Wire System, Inc. (or a replacement
publisher of a tax-exempt commercial paper rate designated in writing by the
Issuer to the Trustee and Remarketing Agent in the event Munifacts Wire System,
Inc. no longer published such rate), representing, as of the publication date,
the average of 30-day yield evaluations at par of tax-exempt securities rated by
each Rating Service in its highest commercial paper rating category; provided
that if Munifacts Wire System, Inc. or such replacement publisher does not
publish such a tax-exempt commercial paper rate on a day on which a Weekly Rate
is to be set, the Weekly Rate shall be 85% of the interest rate for 30-day
taxable commercial paper (prime paper placed through dealers) announced on such
day by the Federal Reserve Bank of New York.

          The determination of the Weekly Rate by the Remarketing Agent pursuant
to this Indenture shall be conclusive and binding upon the Issuer, the Trustee,
the Borrower, the Remarketing Agent, the Bank and the Holders of the Bonds.

          SECTION 2.04      Term Rate. A Term Rate shall be determined for each
                            ---------
Term Rate Period as described below. Upon conversion to a Term Mode, a Nominal
Term Rate Period shall be fixed by the Borrower pursuant to Section 2.05 as a
term of two or more consecutive Semiannual Periods constituting the nominal
length of each Term Rate Period thereafter until the date of a conversion to
another Rate Mode. A Term Mode based on one Nominal Term Rate Period and a Term
Mode based on another Nominal Term Rate Period are different Rate Modes. Each
Term Rate shall be determined by the Remarketing Agent, on the Term Rate
Calculation Date, as the lowest rate of interest that, in the judgment of the
Remarketing Agent, taking into account prevailing financial market conditions,
would be necessary to enable the Remarketing Agent to arrange for the sale of
the Bonds in the respective Term Mode in a secondary market sale at a price
equal to the principal amount thereof, plus accrued interest, on the first
Business Day of the respective Term Rate Period; provided that (1) if the
Remarketing Agent fails for any reason to determine the Term Rate for any Term
Rate Period, such Term Rate shall be equal to 80% of the average of the annual
bond equivalent yield evaluations at par as of the first day of the
corresponding Term Rate Period or, if such day is not a Business Day, the next
preceding Business Day of United States Treasury obligations having a term to
maturity similar to such Term Rate Period, and (2) no Term Rate shall exceed the
lesser of (i) the maximum interest rate at which the Letter of Credit then in
effect provides coverage for at least 200 days interest and (ii) 25% per annum.
In determining a Term Rate pursuant to this Section, prevailing financial market
conditions which the Remarketing Agent shall take into account shall include (i)
existing long-term tax-exempt market rates and indexes of such long-term rates,
(ii) the existing market supply and demand for long-term tax-exempt securities,
(iii) existing yield curves for long-term tax-exempt securities for obligations
of credit quality comparable to the Bonds, (iv) general economic conditions, (v)
industry, economic and financial conditions that may affect or be relevant to
the Bonds, and (vi) such other facts, circumstances and conditions as the
Remarketing Agent, in its sole discretion, shall determine to be relevant.
Notice of each Term Rate shall promptly be given by telephone (promptly
confirmed in writing) by the Remarketing Agent to the Trustee, the Issuer, the
Borrower and the Bank. Determinations of Term Rates pursuant to this Section
shall be conclusive and binding upon the Issuer, the Borrower, the Trustee, the
Bank and the Holders.

                                       16
<PAGE>

          SECTION 2.05      Conversion at Option of Borrower. The Borrower shall
                            --------------------------------
have the option to convert the Bonds from one Rate Mode to another Rate Mode as
herein provided on any Conversion Date the Borrower shall select; provided that
(i) each Conversion Date shall be an Interest Payment Date and (ii) Bonds in a
Term Mode cannot be converted to another Rate Mode prior to the date on or after
which the Bonds may first be redeemed at a redemption price of par, plus accrued
interest, pursuant to their terms. The Borrower may exercise its option to
convert the Bonds regardless of the number of times the Bonds have previously
been converted pursuant to the exercise of its option to convert. The Borrower
shall exercise such option by giving written notice from an Authorized
Representative of the Borrower to the Issuer, the Trustee, the Remarketing Agent
and the Bank, stating its election to convert the Rate Mode of the Bonds to
another Rate Mode specified in such notice and stating the Conversion Date
therefor, not less than 45 days (or such shorter period as shall be acceptable
to the Trustee) prior to such Conversion Date. Upon receipt of such notice by
the Trustee, the Trustee may conclusively assume that the Issuer, the
Remarketing Agent and the Bank also received a copy of such notice and that such
condition has been complied with. In connection with each conversion to a Term
Mode, the Nominal Term Rate Period shall be selected by the Borrower and
designated in such notice. Notice of the exercise of an option to convert shall
not be effective unless, within 10 days (or such greater period as shall be
acceptable to the Trustee) of the delivery of such notice, there shall have been
delivered to the Trustee (1) an opinion of Bond Counsel addressed to the
Trustee, the Issuer, the Borrower, the Bank and the Remarketing Agent to the
effect that (i) such conversion is authorized or permitted by this Indenture and
the Act and (ii) either (A) such conversion is not treated as a reissuance of
the Bonds and does not adversely affect the exclusion from gross income of the
interest on the Bonds for federal income tax purposes or (B) the interest on the
Bonds is excluded from gross income for federal income tax purposes, which
opinion shall be confirmed by such Bond Counsel on the Conversion Date, (2)
written consent of the Bank to such conversion, (3) in the case of a conversion
to a Term Mode, an amendment to the Letter of Credit or an Alternate Letter of
Credit which provides for (i) an Expiration Date not earlier than one year after
the Conversion Date, (ii) on and after such Conversion Date, coverage of 200
days accrued interest on the Bonds at a rate not less than the interest rate at
which the then current letter of credit provides coverage, subject to adjustment
on the Conversion Date to the actual Term Rate as the same shall be fixed on the
Conversion Date, and (iii) on and after such Conversion Date, coverage of
premium (if any) on the Bonds in an amount equal to the sum of the optional
redemption premium and supplemental premium which would become payable on the
Bonds upon mandatory redemption if the Letter of Credit (as amended by such
amendment) or such Alternate Letter of Credit were not extended beyond the
Expiration Date set forth therein, (4) in the case of a conversion from a Term
Mode to the Weekly Mode an amendment to the Letter of Credit or an Alternate
Letter of Credit which provides for (i) an Expiration Date not earlier than one
year after the Conversion Date and (ii) on and after such Conversion Date,
coverage for 50 days accrued interest on the Bonds at a maximum rate of 12% per
annum, and (5) written notice from the Rating Service that such conversion and
the related amendment to the Letter of Credit or delivery of an Alternate Letter
of Credit will not result in a withdrawal or reduction of the then current
rating or ratings on the Bonds or setting forth a new rating or ratings on the
Bonds effective upon such conversion. In the case of a conversion from one Rate
Mode to another Rate Mode, the Trustee shall give notice by first class mail
(postage prepaid) to the Holders not less than 30 days prior to the proposed
Conversion Date stating (i) that, in the case of a conversion to a Term Mode,
the interest rate on the Bonds is scheduled to be converted to a Term Rate and
stating the Nominal Term Rate Period on which such Term Rate will be based, or
in the case of a conversion to the Weekly

                                       17
<PAGE>

Mode, the interest rate on the Bonds is scheduled to be converted to a Weekly
Rate, (ii) the proposed Conversion Date, (iii) that the Borrower, on or before
the tenth day prior to the proposed Conversion Date, may determine not to
convert the Bonds in which case the Trustee shall notify the Holders in writing
to such effect, and (iv) that all outstanding Bonds will be subject to a
mandatory purchase on the Conversion Date, or if such Conversion Date is not a
Business Day, the first Business Day following such Conversion Date at a price
of par plus accrued interest, if any. The Issuer, the Borrower, the Trustee, the
Bank and the Remarketing Agent shall not be liable to any Holders for failure to
give any notice required above or for failure of any Holders to receive any such
notice. Upon each conversion under this Section, the Bonds shall be subject to
mandatory purchase pursuant to Section 4.02 on the Conversion Date or if such
Conversion Date is not a Business Day, the first Business Day following such
Conversion Date.

          SECTION 2.06      Execution and Authentication of Bonds. The Bonds
                            -------------------------------------
shall be executed by the manual or facsimile signature of the Chairman, Vice
Chairman, Executive Director or Deputy Director of the Issuer, and the corporate
seal of the Issuer or a facsimile thereof shall be affixed, imprinted,
lithographed or reproduced thereon and attested by the manual or facsimile
signature of the Secretary or Assistant Secretary of the Issuer. In case any
officer whose signature or a facsimile of whose signature shall appear on any
Bond shall cease to be that officer before the authentication of the Bond, the
signature of such officer or the facsimile thereof nevertheless shall be valid
and sufficient for all purposes, the same as if he had remained in office until
that time. Any Bond may be executed on behalf of the Issuer by an officer who,
on the date of execution is the proper officer, although on the date of
authentication of the Bond that person was not the proper officer.

          No Bond shall be valid or become obligatory for any purpose or shall
be entitled to any security or benefit under this Indenture unless and until a
certificate of authentication, substantially in the form set forth in Exhibit A
to this Indenture, has been signed by the Trustee. The authentication by the
Trustee upon any Bond shall be conclusive evidence that the Bond so
authenticated has been duly authenticated and delivered hereunder and is
entitled to the security and benefit of this Indenture. The certificate of the
Trustee may be executed by any person authorized by the Trustee, and it shall
not be necessary that the same authorized person sign the certificates of
authentication on all of the Bonds.

          SECTION 2.07      Source of Payment of Bonds. To the extent provided
                            --------------------------
in and except as otherwise permitted by this Indenture, (i) the Bonds shall be
limited obligations of the Issuer and the Bond Service thereon shall be payable
equally and ratably solely from the Revenues and (ii) the payment of Bond
Service on the Bonds shall be secured by the Trust Estate pursuant to the
granting clauses of this Indenture. Neither the general credit nor the taxing
power of the Issuer, the Commonwealth of Pennsylvania or any political
subdivision thereof is pledged to the payment of the Bonds, and the Bonds shall
not be or be deemed obligations of the Commonwealth of Pennsylvania or any
political subdivision thereof. The Issuer has no taxing power.

          SECTION 2.08      Payment and Ownership of Bonds. Bond Service shall
                            ------------------------------
be payable in lawful money of the United States of America without deduction for
the services of the Trustee. Subject to the provisions of the second paragraph
of this Section and Sections 2.12 and 2.13, (i) the principal of and any premium
on any Bond shall be payable when due to a

                                       18
<PAGE>

Holder upon presentation and surrender of such Bond at the Payment Office of the
Trustee, and (ii) interest on any Bond shall be paid on each Interest Payment
Date by check or draft which the Trustee shall cause to be mailed on that date
to the Person in whose name the Bond is registered at the close of business on
the Regular Record Date applicable to that Interest Payment Date on the Register
at the address appearing therein. If and to the extent, however, that the Issuer
shall fail to make payment or provision for payment of interest on any Bond on
any Interest Payment Date, that interest shall cease to be payable to the Person
who was the Holder of that Bond as of the applicable Regular Record Date. When
moneys become available for payment of that interest, (x) the Trustee shall,
pursuant to Subsection 7.06(d), establish a Special Record Date for the payment
of that interest which shall be not more than 15 nor fewer than 10 days prior to
the date of the proposed payment, and (y) the Trustee shall cause notice of the
proposed payment and of the Special Record Date to be mailed by first class
mail, postage prepaid, to each Holder at its address as it appears on the
Register not fewer than 10 days prior to the Special Record Date and,
thereafter, that interest shall be payable to the Persons who are the Holders of
the Bonds at the close of business on the Special Record Date.

          The interest and the principal or redemption price and purchase price
becoming due with respect to the Bonds shall, at the written request of the
Holder of at least $1,000,000 aggregate principal amount of such Bonds received
by the Trustee at least two Business Days before the corresponding Regular
Record Date or maturity, redemption or purchase date, be paid by wire transfer
within the continental United States in immediately available funds to the bank
account number of such Holder specified in such request and entered by the
Trustee on the Register, but, in the case of principal or redemption price and
purchase price, only upon presentation and surrender of such Bonds at the
Payment Office of the Trustee.

          Subject to the foregoing, each Bond delivered under this Indenture
upon transfer thereof, or in exchange for or in replacement of any other Bond,
shall carry the rights to interest accrued and unpaid, and to accrue on that
Bond, or which were carried by that Bond.

          Except as provided in this Section and in the first paragraph of
Section 2.10, (i) the Holder of any Bond shall be deemed and regarded as the
absolute owner thereof for all purposes of this Indenture, (ii) payment of or on
account of the Bond Service on any Bond shall be made only to or upon the order
of that Holder or its duly authorized attorney in the manner permitted by this
Indenture, and (iii) neither the Issuer nor the Trustee shall, to the extent
permitted by law, be affected by notice to the contrary. All of those payments
shall be valid and effective to satisfy and discharge the liability upon that
Bond, including without limitation the interest thereon to the extent of the
amount or amounts so paid.

          SECTION 2.09      Registration, Transfer and Exchange of Bonds. All
                            --------------------------------------------
Bonds shall be issued in fully registered form. The Bonds shall be registered
upon original issuance and upon subsequent transfer or exchange as provided in
this Indenture. The Trustee shall act as registrar and transfer agent for the
Bonds. So long as any of the Bonds remain outstanding, the Issuer will cause
books for the registration and transfer of Bonds, as provided in this Indenture,
to be maintained and kept by the Trustee.

          Bonds may be exchanged, at the option of their Holder, for Bonds of
any authorized denomination or denominations in an aggregate principal amount
equal to the unmatured and unredeemed principal amount of, and bearing interest
at the same rate and

                                       19
<PAGE>

maturing on the same date or dates as, the Bonds being exchanged. The exchange
shall be made upon presentation and surrender of the Bonds being exchanged at
the Transfer Office of the Trustee, together with an assignment duly executed by
the Holder or its duly authorized attorney in form and with guarantee of
signature satisfactory to the Trustee.

          Any Bond may be transferred upon the Register, upon presentation and
surrender thereof at the Transfer Office of the Trustee, together with an
assignment duly executed by the Holder or its duly authorized attorney in form
and with guarantee of signature satisfactory to the Trustee. Upon transfer of
any Bond, the Issuer shall execute in the name of the transferee, and the
Trustee shall authenticate and deliver, a new Bond or Bonds of any authorized
denomination or denominations in an aggregate principal amount equal to the
unmatured and unredeemed principal amount of, and bearing interest at the same
rate and maturing on the same date or dates as, the Bonds presented and
surrendered for transfer.

          In all cases in which Bonds shall be exchanged or transferred
hereunder, the Issuer shall execute, and the Trustee shall authenticate and
deliver, Bonds in accordance with the provisions of this Indenture. The exchange
or transfer shall be made without charge; provided that the Issuer or the
Trustee may make a charge for every exchange or transfer of Bonds sufficient to
reimburse them for any tax or excise required to be paid with respect to the
exchange or transfer. The charge shall be paid before a new Bond is delivered.

          All Bonds issued upon any transfer or exchange of Bonds shall be the
valid obligations of the Issuer, evidencing the same debt, and entitled to the
same benefits under this Indenture, as the Bonds surrendered upon transfer or
exchange. While the Bonds are in a Term Mode, the Trustee shall not be required
to exchange or transfer (i) any Bond during a period beginning at the opening of
business 15 days before the date of the mailing of a notice of redemption of
Bonds and ending at the close of business on the day of such mailing, or (ii)
any Bond selected for redemption, in whole or in part.

          In case any Bond is redeemed in part only, on or after the redemption
date and upon presentation and surrender of the Bond, the Issuer, subject to the
provisions of Sections 2.12 and 2.13, shall cause execution of, and the Trustee
shall authenticate and deliver, a new Bond or Bonds in authorized denominations
in an aggregate principal amount equal to the unmatured and unredeemed portion
of, and bearing interest at the same rate and maturing on the same date or dates
as, the Bond redeemed in part.

          SECTION 2.10      Mutilated, Lost, Wrongfully Taken or Destroyed
                            ----------------------------------------------
Bonds. If any Bond is mutilated, lost, wrongfully taken or destroyed, in the
- -----
absence of written notice to the Issuer or the Trustee that a lost, wrongfully
taken or destroyed Bond has been acquired by a bona fide purchaser, the Issuer
shall execute, and the Trustee shall authenticate and deliver, a new Bond of
like date, maturity, interest rate and denomination and of the same series as
the Bond mutilated, lost, wrongfully taken or destroyed; provided that (i) in
the case of any mutilated Bond, the mutilated Bond first shall be surrendered to
the Trustee, and (ii) in the case of any lost, wrongfully taken or destroyed
Bond, there first shall be furnished to the Issuer, the Borrower and the Trustee
evidence of the loss, wrongful taking or destruction satisfactory to the
Trustee, together with indemnity satisfactory to it and to the Authorized
Representative of the Issuer. The Issuer and the Trustee may charge the Holder
of a mutilated, lost, wrongfully taken or destroyed Bond their reasonable fees
and expenses in connection with their actions pursuant to this Section.

                                       20
<PAGE>

          Notwithstanding the foregoing, the Trustee shall not be required to
authenticate and deliver any substitute Bond for a Bond which has been called
for redemption or which has matured or is about to mature and, in any such case,
the principal or redemption price and interest then due or becoming due shall be
paid by the Trustee with funds available under the Indenture for such purpose in
accordance with the terms of the mutilated, lost, wrongfully taken or destroyed
Bond without substitution therefor.

          Any Bond authenticated and delivered under this Section 2.10 in
substitution for a lost, wrongfully taken or destroyed Bond shall, except as
otherwise provided in this Section, be deemed to evidence the same debt as the
lost, wrongfully taken or destroyed Bond. Every substituted Bond issued pursuant
to this Section shall constitute an additional contractual obligation of the
Issuer and shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Bonds duly issued hereunder unless the
Bond alleged to have been lost, wrongfully taken or destroyed shall be at any
time enforceable by a bona fide purchaser for value without notice. In the event
the Bond alleged to have been lost, wrongfully taken or destroyed shall be
enforceable by anyone, the Issuer may recover the substitute Bond from the
Bondholder to whom it was issued or from anyone taking under such Bondholder
except a bona fide purchaser for value without notice.

          All Bonds shall be held and owned on the express condition that the
foregoing provisions of this Section are exclusive with respect to the
replacement or payment of mutilated, lost, wrongfully taken or destroyed Bonds
and, to the extent permitted by law, shall preclude any and all other rights and
remedies with respect to the replacement or payment of negotiable instruments or
other investment securities without their surrender, notwithstanding any law or
statute to the contrary now existing or hereafter enacted.

          SECTION 2.11      Cancellation of Bonds. Any Bond surrendered pursuant
                            ---------------------
to this Article for the purpose of payment, redemption, retirement, exchange,
replacement or transfer shall be cancelled upon presentation and surrender
thereof to the Trustee. Bonds purchased pursuant to Section 4.01 or 4.02 shall
not be surrendered Bonds and shall be outstanding Bonds, unless otherwise
specifically provided in this Indenture.

          The Borrower may deliver at any time to the Trustee for cancellation
any Bonds previously authenticated and delivered hereunder, which the Borrower
may have purchased pursuant to the provisions of this Indenture. All Bonds so
delivered shall be cancelled promptly by the Trustee. Cancelled Bonds shall be
destroyed by the Trustee by shredding, incineration or other method promptly
after their cancellation. Upon written request from the Issuer, the Trustee
shall provide certificates describing the destruction of cancelled Bonds to the
Issuer.

          SECTION 2.12      Special Agreement with Holders. Notwithstanding any
                            ------------------------------
provision of this Indenture or of any Bond to the contrary, the Trustee may
enter into an agreement with any Holder providing for making all payments to
that Holder of principal of and interest and any premium on that Bond or any
part thereof at a place and by a method (including wire transfer of federal
funds) other than as provided in this Indenture and in the Bond, without
presentation or surrender of the Bond, upon any conditions which shall be
satisfactory to the Trustee; provided that (i) except as otherwise provided in
Section 2.13, payment of principal shall be made only upon presentation and
surrender of the Bond and (ii) payment in any event shall be made to the Person
in whose name a Bond shall be registered on the Register, with

                                       21
<PAGE>

respect to payment of principal and premium, on the date such principal and
premium is due, and, with respect to the payment of interest, as of the
applicable Regular Record Date, Special Record Date or other date agreed upon,
as the case may be. The Trustee will furnish a copy of each such agreement, upon
request, to the Issuer, the Bank and the Borrower. Any payment of principal,
premium or interest pursuant to such an agreement shall constitute payment
thereof pursuant to, and for all purposes of, this Indenture.

          SECTION 2.13      Book Entry System for the Bonds.
                            -------------------------------

          (a)  Notwithstanding the foregoing provisions of this Article II, the
Bonds shall initially be issued in the form of one fully-registered bond for the
aggregate principal amount of the Bonds of each maturity, which Bonds shall be
registered in the name of Cede & Co., as nominee of DTC. Except as provided in
paragraph (g) below, all of the Bonds shall be registered in the Register in the
name of Cede & Co., as nominee of DTC; provided that if DTC shall request that
the Bonds be registered in the name of a different nominee, the Trustee shall
exchange all or any portion of the Bonds for an equal aggregate principal amount
of Bonds registered in the name of such nominee or nominees of DTC. No Person
other than DTC or its nominee shall be entitled to receive from the Issuer or
the Trustee either a Bond or any other evidence of ownership of the Bonds, or
any right to receive any payment in respect thereof, unless DTC or its nominee
shall transfer record ownership of all or any portion of the Bonds on the
Register in connection with discontinuing the book entry system as provided in
paragraph (g) below or otherwise.

          (b)  So long as any Bonds are registered in the name of DTC or any
nominee thereof, all payments of the principal, Purchase Price or redemption
price of or interest on such Bonds shall be made to DTC or its nominee in
accordance with the Representation Letter on the dates provided for such
payments under this Indenture. Each such payment to DTC or its nominee shall be
valid and effective to fully discharge all liability of the Issuer or the
Trustee with respect to the principal or redemption price of or interest on the
Bonds to the extent of the sum or sums so paid. In the event of the redemption
of less than all of the Bonds outstanding of any maturity, the Trustee shall not
require surrender by DTC or its nominee of the Bonds so redeemed, but DTC (or
its nominee) may retain such Bonds and make an appropriate notation on the Bond
certificate as to the amount of such partial redemption; provided that DTC shall
deliver to the Trustee, upon request, a written confirmation of such partial
redemption and thereafter the records maintained by the Trustee shall be
conclusive as to the amount of the Bonds of such maturity which have been
redeemed.

          (c)  The Issuer and the Trustee may treat DTC (or its nominee) as the
sole and exclusive owner of the Bonds registered in its name for the purposes of
payment of the principal, redemption price or purchase price of or interest on
the Bonds, selecting the Bonds or portions thereof to be redeemed, giving any
notice permitted or required to be given to Holders under this Indenture,
registering the transfer of Bonds, obtaining any consent or other action to be
taken by Holders and for all other purposes whatsoever; and neither the Issuer
nor the Trustee shall be affected by any notice to the contrary. Neither the
Issuer nor the Trustee shall have any responsibility or obligation to any
participant in DTC, any Person claiming a beneficial ownership interest in the
Bonds under or through DTC or any such participant, or any other Person which is
not shown on the Register as being a Holder, with respect to either: (1) the
Bonds, (2) the accuracy of any records maintained by DTC or any such
participant, (3) the

                                       22
<PAGE>

payment by DTC or any such participant of any amount in respect of the
principal, redemption price or purchase price of or interest on the Bonds, (4)
any notice which is permitted or required to be given to Holders under this
Indenture, (5) the selection by DTC or any such participant of any Person to
receive payment in the event of a partial redemption of the Bonds, and (6) any
consent given or other action taken by DTC as Holder.

          (d)  So long as any Bonds are registered in the name of DTC or any
nominee thereof, all notices required or permitted to be given to the Holders of
such Bonds under this Indenture shall be given to DTC as provided in the
Representation Letter.

          (e)  In connection with any notice or other communication to be
provided to Holders pursuant to this Indenture by the Issuer or the Trustee with
respect to any consent or other action to be taken by Holders, DTC shall
consider the date of receipt of notice requesting such consent or other action
as the record date for such consent or other action, provided that the Issuer or
the Trustee may establish a special record date for such consent or other
action. The Issuer or the Trustee shall give DTC notice of such special record
date not less than 15 calendar days in advance of such special record date to
the extent possible.

          (f)  Any successor Trustee shall, in its written acceptance of its
duties under this Indenture, agree to take any actions necessary from time to
time to comply with the requirements of the Representation Letter.

          (g)  The book-entry system for registration of the ownership of the
Bonds may be discontinued at any time if either (1) after written notice to the
Issuer and the Trustee, DTC determines to resign as securities depository for
the Bonds, or (2) after written notice to DTC and the Trustee, the Issuer
determines that continuation of the system of book-entry transfers through DTC
(or through a successor securities depository) is not in the best interests of
the Issuer. In either of such events (unless in the case described in clause (2)
above, the Issuer appoints a successor securities depository), the Bonds shall
be delivered in registered certificate form to such Persons, and in such
maturities and principal amounts, as may be designated in writing by DTC, but
without any liability on the part of the Issuer or the Trustee for the accuracy
of such designation. Whenever DTC requests the Issuer and the Trustee to do so,
the Issuer and the Trustee shall cooperate with DTC in taking appropriate action
after reasonable notice to arrange for another securities depository to maintain
custody of certificates evidencing the Bonds.

          (h)  Anything herein to the contrary notwithstanding, so long as any
Bonds are registered in the name of DTC or any nominee thereof, (i) in
connection with any optional tender of such Bonds bearing interest at a Weekly
Rate, the beneficial owners of such Bonds are responsible for submitting the
Bondholder Tender Notice to the Remarketing Agent only, and (ii) in the
definition of "Determination of Taxability" in Article I, the term "Holder"
shall be deemed to refer to the beneficial owners of such Bonds.

          (i)  Upon remarketing of Bonds in accordance with Section 4.03 herein,
payment of the purchase price thereof shall be made to DTC and no surrender of
certificates is expected to be required. Such sales shall be made through DTC
participants (which may include the Remarketing Agent) and the new beneficial
owners of such Bonds shall not receive delivery of Bond certificates. DTC shall
transmit payment to DTC participants, and DTC participants shall transmit
payment to beneficial owners whose Bonds were purchased pursuant to a

                                       23
<PAGE>

remarketing. Neither the Issuer, the Trustee nor the Remarketing Agent is
responsible for transfers of payment to DTC participants or beneficial owners.

          (j)  The provisions of this Section 2.13 are subject to the provisions
   of Article IV relating to Pledged Bonds.

(End of Article II)

                                       24
<PAGE>

                                  ARTICLE III

                              REDEMPTION OF BONDS

          SECTION 3.01      Terms of Redemption. The Bonds are subject to
                            -------------------
redemption prior to stated maturity as follows:

          (a)  Mandatory Sinking Fund Redemption. The Bonds are not subject to
               ---------------------------------
mandatory sinking fund redemption.

          (b)  Extraordinary Optional Redemption. The Bonds are subject to
               ---------------------------------
redemption prior to maturity by the Issuer in the event of the exercise by the
Borrower of its option to direct that redemption upon occurrence of any of the
events described in Section 6.2 of the Financing Agreement, at any time in whole
or on any Interest Payment Date in part, in each case, at a redemption price of
100% of the principal amount redeemed plus accrued interest to the redemption
date.

          (c)  Optional Redemption During Weekly Mode. While the Bonds are in
               --------------------------------------
the Weekly Mode, the Bonds may be redeemed by the Issuer, at the direction of
the Borrower, in whole at any time or in part on any Interest Payment Date,
prior to maturity at a redemption price equal to 100% of the principal amount
thereof plus accrued interest to the redemption date.

          (d)  Optional Redemption During Term Mode. While the Bonds are in a
               ------------------------------------
Term Mode, the Bonds shall be subject to optional redemption prior to maturity
by the Issuer, at the direction of the Borrower, only (i) in whole or in part on
a Term Rate Period End Interest Payment Date at a redemption price equal to 100%
of the principal amount thereof plus accrued interest to the redemption date or
(ii) prior to the end of the then current Term Rate Period in whole at any time
or in part on any Interest Payment Date, provided that the Bonds shall not be
redeemable during the No Call Period shown below, which shall begin on the first
day of the current Term Rate Period. In each Term Rate Period, after the
applicable No Call Period, the Bonds shall be redeemable at a redemption price
equal to the percentage of their principal amount shown below in the Initial
Redemption Price column, plus accrued interest to the redemption date. The
redemption price (expressed as a percentage of the principal amount of the Bonds
to be redeemed) shall decline annually by the amount shown below in the Annual
Reduction in Premium column until the Bonds shall be redeemable at a redemption
price equal to 100% of the principal amount thereof plus accrued interest,
without premium, after the year indicated in the No Premium column.

                                       25
<PAGE>

                               Term Rate Period
                               ----------------

 Equal to or                         Initial      Annual
   Greater     But Less   No Call  Redemption  Reduction in    No Premium
     Than        Than     Period      Price       Premium         After
  ----------   --------   -------  -----------  -----------     --------

   10 Years      N/A      8 Years     102%         1/2%       12/th/ Year
    5 Years    10 Years   5 Years     101%         1/2%        7/th/ Year
     N/A        5 Years   2 Years     101%         1/2%        4/th/ Year

          In connection with any conversion to a Term Mode, the Issuer (at the
direction of the Borrower) may, by written stipulation delivered to the Trustee,
the Remarketing Adviser and the Bank, waive or otherwise alter its right to
direct the optional redemption of the Bonds and any redemption premium that may
become payable in connection therewith; provided that, at least 30 days (or such
shorter period as shall be acceptable to the Trustee, the Remarketing Agent and
the Bank) prior to the respective Conversion Date, there is delivered to the
Trustee, the Remarketing Agent and the Bank (1) a notice from the Issuer setting
forth such waiver or alteration and (2) an opinion of Bond Counsel to the effect
that such waiver or alteration is authorized or permitted under this Indenture
and the Act and that (i) such waiver or alteration is not treated as causing a
reissuance of the Bonds and does not adversely affect the exclusion from gross
income of interest on the Bonds for federal income tax purposes or (ii) the
interest on the Bonds is excluded from gross income for federal income tax
purposes.

          The Issuer may only call Bonds for optional redemption pursuant to
this Subsection which would require a payment of a premium if (i) the Trustee
can draw under the Letter of Credit moneys sufficient to pay such premium with
respect to all Bonds other than any Pledged Bonds or Borrower Bonds and (ii) the
Bank has consented to such optional redemption.

          If optional redemption at a redemption price exceeding 100% of the
principal amount to be redeemed is to take place as of any applicable mandatory
redemption date identified in Subsection 3.01(a), the Bonds, or portions
thereof, to be so redeemed shall be selected pursuant to the provisions of
Section 3.02 prior to the selection of the Bonds to be redeemed on the same date
by operation of the mandatory redemption provisions of Subsection 3.01(a).

          (e)  Mandatory Redemption Upon Expiration of Letter of Credit Without
               ----------------------------------------------------------------
Replacement. While the Bonds are in a Term Mode, the Bonds are subject to
- -----------
mandatory redemption in whole by the Issuer on the Interest Payment Date next
preceding the Expiration Date of the Letter of Credit unless at least 45 days
(or such shorter period as shall be acceptable to the Trustee) prior to such
Interest Payment Date the Trustee has received notice that the Letter of Credit
has been or will be extended; provided that, if such Interest Payment Date is a
Term Rate Period End Interest Payment Date, then such Bonds shall not be so
redeemed but shall be subject to mandatory purchase as provided in Section 4.02.
The redemption price of Bonds so redeemed shall be equal to the redemption price
that would be applicable to such Bonds if they were redeemed by optional
redemption pursuant to Subsection 3.01(d); provided that if such redemption will
occur during the applicable No Call Period under Subsection 3.01(d), then the
redemption price shall be equal to the optional redemption price that would be
applicable to such Bonds on the first day after the expiration of the applicable
No Call Period plus a supplemental

                                       26
<PAGE>

premium in the amount (expressed as a percentage of the principal amount of the
Bonds to be redeemed) that corresponds to the then remaining No Call Period, as
follows:

                Remaining No Call Period      Supplemental Premium
                ------------------------      --------------------
                Equal to or But Less Than          Greater Than
                -------------------------          ------------

                         6 Years                       3%

                    3 Years - 6 Years                  2%

                      N/A - 3 Years                    1%

          In connection with any conversion to a Term Mode, the Issuer (at the
direction of the Borrower) may, by written stipulation delivered to the Trustee,
the Remarketing Agent and the Bank, waive or otherwise alter any redemption
premium or any supplemental premium which may become payable in connection with
a mandatory redemption upon expiration of the Letter of Credit; provided that,
at least 30 days (or such shorter period as shall be acceptable to the Trustee,
the Remarketing Agent and the Bank) prior to the respective Conversion Date,
there is delivered to the Trustee, the Remarketing Agent and the Bank (1) a
notice from the Issuer setting forth such waiver or alteration and (2) an
opinion of Bond Counsel to the effect that such waiver or alteration is
authorized or permitted under this Indenture and the Act and that (i) such
waiver or alteration is not treated as causing a reissuance of the Bonds and
does not adversely affect the exclusion from gross income of interest on the
Bonds for federal income tax purposes or (ii) the interest on the Bonds is
excluded from gross income for federal income tax purposes.

          (f)  Mandatory Redemption Upon Determination of Taxability. Upon the
               -----------------------------------------------------
occurrence of a Determination of Taxability, the Bonds are subject to mandatory
redemption in whole prior to maturity by the Issuer at a redemption price equal
to 100% of the outstanding principal amount thereof plus accrued interest to the
redemption date, at the earliest practicable date selected by the Trustee, after
consultation with the Borrower, but in no event later than 90 days following the
Trustee's receipt of written notification of the Determination of Taxability.

          If the Trustee receives written notice that a Determination of
Taxability has occurred, the Trustee shall forthwith consult with the Issuer,
the Borrower and the Bank and thereafter (if a Determination of Taxability has
in fact occurred) proceed to enforce payments under the Financing Agreement in
respect of the necessary redemption price and to redeem the Bonds as soon as
practicable after the date the Trustee first receives written notice of the
Determination of Taxability. In making any determination in respect of the
occurrence of a Determination of Taxability or a redemption relating thereto,
the Trustee may rely on an opinion of counsel.

          All of the Bonds outstanding on the redemption date selected shall be
redeemed by the Issuer on that date, except that Bonds for the payment or
redemption of which sufficient moneys or investments are held by the Trustee as
provided in Section 10.02 shall be redeemed on the redemption date in accordance
with that Section and not otherwise.

          (g)  Use of Certain Funds to Redeem Bonds. The Trustee shall draw on
               ------------------------------------
the Letter of Credit in the manner provided by Section 5.04 to pay the principal
of and premium (if

                                       27
<PAGE>

any) and interest on any Bonds called for redemption pursuant to this Section.
Except as otherwise provided in this Section, the Trustee shall pay the
redemption price on all Bonds redeemed under this Section in the manner and from
the sources set forth in Section 5.04 with respect to the payment of Bond
Service. The Trustee shall only call Bonds for optional redemption pursuant to
subsection 3.01(c) or 3.01(d) if (i) it holds moneys in the Bond Fund available
for payment of the Bonds to be redeemed pursuant to Section 5.04(c) or (ii) the
Bank has consented to such optional redemption.

          SECTION 3.02      Partial Redemption. If fewer than all of the Bonds
                            ------------------
are to be redeemed, the selection of Bonds or portions thereof to be redeemed
shall be made by lot or by such other method as the Trustee deems fair and
appropriate; provided that (i) any Pledged Bonds shall be redeemed first and any
Borrower Bonds shall be redeemed second, and (ii) if any Bond is to be redeemed
in part, the principal portion to remain outstanding must be equal to $100,000
or any whole multiple of $5,000 in excess thereof. In the case of a partial
redemption of Bonds when Bonds of denominations greater than $100,000 are then
outstanding, each $100,000 unit (or unit of $100,000 plus an integral multiple
of $5,000 in excess thereof, if applicable) of face value of principal thereof
shall be treated as though it were a separate Bond of the denomination of
$100,000. If it is determined that a portion, but not all, of the face value
represented by a Bond is to be called for redemption, then upon notice of
redemption of the portion to be redeemed, the Holder of that Bond shall, subject
to Section 2.13, surrender the Bond to the Trustee (a) for payment of the
redemption price of the portion called for redemption (including without
limitation the interest accrued to the date fixed for redemption and any
premium) and (b) for issuance, without charge to the Holder thereof, of a new
Bond or Bonds of any authorized denomination or denominations in an aggregate
principal amount equal to the unmatured and unredeemed portion of, and bearing
interest at the same rate and maturing on the same date as, the Bond
surrendered.

          SECTION 3.03      Issuer's Election to Redeem. Except in the case of
                            ---------------------------
redemption pursuant to any mandatory redemption provisions of this Indenture,
Bonds shall be redeemed only by written notice from the Borrower on behalf of
the Issuer to the Trustee and the Bank. Such notice shall specify the redemption
date and the principal amount of Bonds to be redeemed, and shall be given at
least 45 days prior to the redemption date or such shorter period as shall be
acceptable to the Trustee.

          SECTION 3.04      Notice of Redemption.
                            --------------------

          (a)  When required to redeem Bonds under any provision of this
Indenture, or when directed to do so by the Issuer or the Borrower pursuant to
the provisions of this Indenture, the Trustee shall cause notice of the
redemption to be given not more than 60 days and not less than 15 days (30 days
if the Bonds are in a Term Mode) prior to the redemption date, except in the
case of a redemption pursuant to Subsection 3.01(e) in which case the Trustee
shall cause notice to be given not more than 45 days and not less than 15 days
(30 days if the Bonds are in a Term Mode) prior to the redemption date, by
mailing copies of such notice of redemption by first class mail, postage
prepaid, to all Holders of Bonds to be redeemed at their registered addresses,
but failure to mail any such notice or defect in the mailing thereof in respect
of any Bond shall not affect the validity of the redemption of any other Bond
with respect to which notice was properly given. Each such notice shall be dated
and shall be given in the name of the Issuer and shall state the following
information:

                                       28
<PAGE>

               (i)    the identification numbers, as established under this
Indenture, and the CUSIP numbers, if any, of the Bonds being redeemed, provided
that any such notice shall state that no representation is made as to the
correctness of CUSIP numbers either as printed on such Bonds or as contained in
the notice of redemption and that reliance may be placed only on the
identification numbers contained in the notice or printed on such Bonds;

               (ii)   any other descriptive information needed to identify
accurately the Bonds being redeemed;

               (iii)  in the case of partial redemption of any Bonds, the
respective principal amounts thereof to be redeemed;

               (iv)   the redemption date;

               (v)    the redemption price;

               (vi)   that on the redemption date the redemption price will
become due and payable upon each such Bond or portion thereof called for
redemption, and that interest thereon shall cease to accrue from and after said
date; and

               (vii)  the place where such Bonds are to be presented and
surrendered for payment of the redemption price, which place of payment shall be
the Payment Office of the Trustee.

In addition, the Trustee shall at all reasonable times make available to any
interested party complete information as to Bonds which have been redeemed or
called for redemption.

          (b)  In addition to the foregoing notice, further notice of any
redemption of Bonds hereunder shall be given by the Trustee, at least two
Business Days in advance of the mailed notice to Holders, by registered or
certified mail or overnight delivery service to (i) the Rating Service and to
The Bond Buyer, or their respective successors, if any, and to (ii) Financial
Information, Inc.'s "Daily Called Bond Service", 30 Montgomery Street, 10th
Floor, Jersey City, New Jersey 07302, Attention: Editor; Kenny Information
Services' "Called Bond Service", 55 Bond Street, 28th Floor, New York, New York
10004; Moody's "Municipal and Government", 99 Church Street, 8th Floor, New
York, New York 10007, Attention: Municipal News Report; and Standard and Poor's
"Called Bond Record", 26 Broadway, 3rd Floor, New York, New York 10004; or, in
accordance with then-current guidelines of the Securities and Exchange
Commission, to such other addresses and/or such other services, as the Issuer
may designate in writing with respect to the Bonds, or no such services, as the
Issuer may designate in a certificate of the Issuer delivered to the Trustee. So
long as the Bonds or any portion thereof are held by DTC, the Trustee shall send
each notice of redemption of the Bonds to DTC at 711 Stewart Avenue, Garden
City, New York, 11530, Attention: Call Notification Department (FAX: 516-227-
4039) or at such other address as may be provided by DTC in writing to the
Trustee from time to time. The foregoing notice of redemption shall be sent to
DTC by legible facsimile transmission, certified or registered mail, overnight
delivery service or another secure method which enables the Trustee subsequently
to verify the transmission of such notice. Such further notice shall contain the
information required in Subsection 3.04(a). Failure to give all or any portion
of such further notice shall not in any manner defeat the effectiveness

                                       29
<PAGE>

of a call for redemption if notice thereof is given to the Holders as prescribed
in Subsection 3.04(a).

          (c)  If at the time of mailing of notice of any optional redemption
there shall not have been deposited moneys in the Bond Fund available for
payment pursuant to Subsection 5.04(c) sufficient to redeem all the Bonds called
for redemption, such notice may state that it is conditional in that it is
subject to the deposit of the redemption moneys in the Bond Fund available for
payment pursuant to Section 5.04 not later than 12:00 noon on the redemption
date, in which case such notice shall be of no effect unless moneys are so
deposited.

          SECTION 3.05      Payment of Redeemed Bonds. If (a) unconditional
                            -------------------------
notice of the redemption has been duly given or duly waived by the Holders of
all Bonds called for redemption or (b) conditional notice of redemption has been
so given or waived and Available Moneys for such redemption have been duly
deposited with the Trustee, then in either such case the Bonds called for
redemption shall be payable on the redemption date at the applicable redemption
price. Payment of the redemption price together with accrued interest shall be
made by the Trustee, out of Revenues or other funds deposited for such purpose,
to or upon the order of the Holders of the Bonds called for redemption upon
surrender of such Bonds, except as otherwise provided in Section 2.13.

          Upon the payment of the redemption price of Bonds being redeemed, each
check or other transfer of funds issued for such purpose shall bear the CUSIP
number identifying, by issue and maturity, the Bonds being redeemed with the
proceeds of such check or other transfer.

          All moneys deposited in the Bond Fund and held by the Trustee for the
redemption of particular Bonds shall be held in trust for the account of the
Holders thereof and shall be paid to them, respectively, upon presentation and
surrender of those Bonds, except as otherwise provided in Section 2.13.

(End of Article III)

                                       30
<PAGE>

                                  ARTICLE IV

                       PURCHASE AND REMARKETING OF BONDS

          SECTION 4.01 Purchase on Demand of Holder During Weekly Mode. While
                       -----------------------------------------------
the Bonds are in the Weekly Mode, any Bond (or portion thereof in an authorized
denomination) shall be purchased on the demand of the Holder thereof on any
Business Day designated by such Holder in a Bondholder Tender Notice at a
purchase price equal to 100% of the principal amount thereof plus accrued
interest, if any, to the Purchase Date, if there is delivered to the Trustee at
its Designated Office, and to the Remarketing Agent at its Principal Office, a
Bondholder Tender Notice which (i) states the principal amount (or portion
thereof) of such Bond and (ii) states the Purchase Date on which such Bond (or
portion thereof) shall be purchased pursuant to this Section, which date shall
be a Business Day not prior to the seventh day next succeeding the date of the
delivery of such notice to the Trustee and the Remarketing Agent; provided that,
in the case of a Bond to be purchased in part, both the portion of the Bond to
be purchased and the portion which is not to be purchased must be in an
authorized denomination. By delivering the Bondholder Tender Notice, the Holder
irrevocably agrees to deliver such Bond, if not held in book-entry form, duly
endorsed for transfer in blank and with guarantee of signature satisfactory to
the Trustee, to the Delivery Office of the Trustee or any other address
designated by the Trustee at or prior to 10:00 a.m. on the Purchase Date
specified in the Bondholder Tender Notice. The determination by the Trustee of a
Holder's compliance with the Bondholder Tender Notice and Bond delivery
requirements of this Section is in the sole discretion of the Trustee and
binding on the Borrower, the Issuer, the Remarketing Agent, the Bank and the
Holder of the Bonds. Any Bondholder Tender Notice which the Trustee determines
is not in compliance with this Section shall be of no force or effect.

          So long as the Bonds are registered to, and held in book-entry form
by, DTC or its nominee, the beneficial owner of Bonds is responsible for
submitting the Bondholder Tender Notice and shall be treated as the Holder of
such Bonds for such purpose, and such notice need only be submitted to the
Remarketing Agent.

          Any election by a Holder to tender a Bond (or portion thereof) for
purchase on a Business Day in accordance with this Section shall be irrevocable
and shall be binding on the Holder making such election and on any transferee of
such Holder. Each Bondholder Tender Notice shall automatically constitute (i) an
irrevocable offer to sell the Bond (or portion thereof) to which such notice
relates on the Purchase Date at a price equal to the purchase price of such Bond
(or portion thereof), (ii) an irrevocable authorization and instruction to the
Trustee to effect transfer of such Bond (or portion thereof) upon payment of the
purchase price to the Trustee on the Purchase Date, (iii) with respect to a
tender of a portion of a Bond, an irrevocable authorization and instruction to
the Trustee to effect the exchange of such Bond in part for other Bonds in a
principal amount equal to the retained portion so as to facilitate the sale of
the tendered portion of such Bond, and (iv) an acknowledgment that such Holder
will have no further rights with respect to such Bond (or portion thereof) upon
payment of the purchase price thereof to the Trustee on the Purchase Date,
except for the right of such Holder to receive such purchase price upon
surrender of such Bond, if not held in book-entry form, to the Trustee endorsed
for transfer in blank and with guarantee of signature satisfactory to the
Trustee and that after the Purchase Date such Holder will hold such Bond as
agent for the Trustee. If the Bonds

                                       31
<PAGE>

are not held in book-entry form and, after delivery to the Trustee and the
Remarketing Agent of a Bondholder Tender Notice in accordance with this Section,
the Holder making such election shall fail to deliver such Bond or Bonds
described in the Bondholder Tender Notice to the Trustee at its Delivery Office
on or before 10:00 a.m. on the applicable Purchase Date as required by this
Section, then the undelivered Bond or portion thereof (the "Undelivered Bond")
described in such Bondholder Tender Notice shall be deemed to have been tendered
for purchase to the Trustee and, to the extent that there shall be held by the
Trustee on or before the applicable Purchase Date an amount sufficient to pay
the purchase price thereof and available for such purpose pursuant to the terms
of this Section, such Undelivered Bond shall on such Purchase Date cease to bear
interest and no longer shall be considered to be outstanding. Moneys held by the
Trustee for the purchase of the Undelivered Bonds in accordance with the
provisions of this Section shall be held in a special separate trust account for
the Holders of such Undelivered Bonds. Such moneys shall be held by the Trustee
uninvested and without liability for interest pending delivery of such
Undelivered Bonds to the Trustee.

          The Trustee shall, as to any Undelivered Bond, promptly place a stop
transfer against an appropriate amount of Bonds registered in the name of the
Holder thereof on the Register. The Trustee shall place such stop transfer
commencing with the lowest serial number Bond registered in the name of such
Holder (until stop transfers have been placed against an appropriate amount of
Bonds) until the appropriate tendered Bonds are delivered to the Trustee. Upon
such delivery, the Trustee shall make any necessary adjustments to the Register.

          If the Bonds are not held in book-entry form and if for any reason a
Holder fails to deliver a tendered Bond to the Trustee on the Purchase Date, the
Issuer shall execute and the Trustee shall authenticate and deliver in
accordance with Section 4.03 a new Bond or Bonds in replacement of the
Undelivered Bond. The replacement of any such Undelivered Bond shall not be
deemed to create new indebtedness, but such Bond as is issued in replacement
shall be deemed to evidence the indebtedness previously evidenced by the
Undelivered Bond.

          A Holder who gives a Bondholder Tender Notice may repurchase the Bonds
so tendered on the Purchase Date if the Remarketing Agent agrees to remarket
such Bond to such Holder, and if the Remarketing Agent agrees to remarket the
specified Bond to such Holder prior to delivery of such Bonds as set forth
above, the delivery requirement set forth above shall be waived.

          Upon surrender of any Bond (which is not held in book-entry form) for
purchase in part only, the Issuer shall execute and the Trustee shall
authenticate and deliver to the Holder thereof a new Bond or Bonds of the same
maturity, of authorized denominations, in an aggregate principal amount equal to
the unpurchased portion of the Bond surrendered.

          On the date set for purchase of Bonds to be purchased pursuant to this
Section and upon receipt by the Trustee of 100% of the aggregate purchase price
of such Bonds, the Trustee shall pay the purchase price of such Bonds to the
selling Holders thereof at its Payment Office at or before 3:00 p.m.; provided
that such Bond (if not held in book-entry form) shall have been surrendered to
the Trustee properly endorsed for transfer on such date with all signatures
guaranteed at or prior to 10:00 a.m. on such Purchase Date. Such payment shall
be made in immediately available funds and shall be made only with the following
funds in the following order of availability:

                                       32
<PAGE>

               (1)  moneys held in the Remarketing Proceeds Purchase Account
     representing proceeds from the remarketing of such Bonds by the Remarketing
     Agent to any Person other than the Issuer, the Borrower or any Affiliate;

               (2)  moneys constituting Available Moneys held in the Bond Fund
     and available to make such payment pursuant to Section 10.02;

               (3)  proceeds from a drawing on the Letter of Credit deposited
     directly into the Letter of Credit Purchase Account (provided that such
     proceeds shall not be applied to purchase Pledged Bonds or Borrower Bonds);
     and

               (4)  payments made by the Borrower pursuant to Section 4.3 of the
     Financing Agreement.

          No purchase of Bonds pursuant to this Section shall be deemed to be a
payment or a redemption of such Bonds or any portion thereof and such purchase
will not operate to extinguish or discharge the indebtedness of such Bonds.

          SECTION 4.02   Mandatory Purchase on Conversion Date and at End of
                         ---------------------------------------------------
Term Rate Period; Upon Expiration of Letter of Credit; Upon Issuance of
- -----------------------------------------------------------------------
Alternate Letter of Credit; and at Direction of Bank. The Bonds shall be subject
- ----------------------------------------------------
to mandatory purchase at a purchase price equal to the principal amount thereof
plus, in the case of purchases on a Purchase Date which is not an Interest
Payment Date, accrued interest thereon, as follows:

          (a)  on each Conversion Date, or if such Conversion Date is not a
Business Day, the first Business Day succeeding such Conversion Date, and on the
first Business Day immediately following the end of each Term Rate Period;

          (b)  while the Bonds are in the Weekly Mode, on the Interest Payment
Date next preceding by at least two Business Days the Expiration Date of the
Letter of Credit unless at least 45 days (or such shorter period as shall be
acceptable to the Trustee) prior to such Interest Payment Date the Trustee has
received notice that the Letter of Credit has been or will be extended;

          (c)  on the Interest Payment Date on which an Alternate Letter of
   Credit is issued pursuant to Section 5.09; and

          (d)  while the Bonds are in the Weekly Mode, on the Purchase Date
stipulated by the Bank pursuant to Section 7.03 in the event the Bank directs
the Trustee pursuant to Section 7.03 to call the Bonds for mandatory purchase
pursuant to this clause.

The Trustee shall cause notice of any mandatory purchase to be given not more
than 45 and not less than 15 days prior to the Purchase Date, by mailing copies
of such notice of mandatory purchase by first class mail, postage prepaid, to
all Holders of Bonds to be purchased at their registered addresses, but failure
to mail any such notice or defect in the mailing thereof in respect of any Bond
shall not affect the validity of the mandatory purchase of any other Bond with
respect to which notice was properly given. Each such notice shall be dated and
shall be given in the name of the Issuer and shall state the following
information: (i) the identification numbers, as established under this
Indenture, and the CUSIP numbers, if any, of the Bonds being

                                       33
<PAGE>

purchased; (ii) any other descriptive information needed to identify accurately
the Bonds; (iii) the Purchase Date; (iv) the purchase price; (v) that on the
Purchase Date the purchase price will become due and payable upon each Bond;
(vi) the place where the Bonds are to be delivered for payment of the purchase
price, which place of payment shall be the Delivery Office of the Trustee; and
(vii) the Holders of Bonds subject to mandatory purchase shall be required to
deliver their Bonds for purchase to the Trustee at its Delivery Office prior to
10:00 a..m. on the corresponding Purchase Date, and any Bond not so delivered
prior to 10:00 a.m. on the applicable Purchase Date (an "Undelivered Bond")
shall be deemed to have been tendered to the Trustee as of such Purchase Date
and, from and after such Purchase Date, shall cease to bear interest and no
longer shall be considered to be outstanding. In the event of a failure by a
Holder to deliver such Holder's Bond on or before the applicable Purchase Date,
such Holder shall not be entitled to any payment (including any interest to
accrue subsequent to such Purchase Date) other than the purchase price for such
Undelivered Bond, such Undelivered Bond shall no longer be entitled to the
benefits of this Indenture, except for the purpose of payment of the purchase
price therefor, and such Holder shall thereafter hold such Undelivered Bond as
agent for the Trustee. If for any reason a Holder fails to deliver to the
Trustee on or before the applicable Purchase Date any Bond remarketed by the
Remarketing Agent pursuant to Section 4.03, the Issuer shall execute and the
Trustee shall authenticate and deliver to the Remarketing Agent for redelivery
to the purchaser a new Bond or Bonds in replacement of the Undelivered Bond. The
replacement of any such Undelivered Bond shall not be deemed to create new
indebtedness, but such Bond as is issued in replacement shall be deemed to
evidence the indebtedness previously evidenced by the Undelivered Bond.

          On the date set for purchase of Bonds to be purchased pursuant to this
Section 4.02 and upon receipt by the Trustee of 100% of the aggregate purchase
price of such Bonds, the Trustee shall pay the purchase price of such Bonds to
the selling Holders thereof at its Delivery Office at or before 3:00 p.m.;
provided that such Bonds shall have been surrendered to the Trustee properly
endorsed for transfer on such date with all signatures guaranteed at or prior to
10:00 a.m. on such date. Such payment shall be made in immediately available
funds and payment for Bonds purchased pursuant to this Section shall be made
only with the following funds in the following order of availability:

               (1)  moneys held in the Remarketing Proceeds Purchase Account
     representing proceeds from the remarketing of such Bonds by the Remarketing
     Agent to any Person other than the Issuer, the Borrower or any Affiliate;

               (2)  moneys constituting Available Moneys held in the Bond Fund
     and available to make such payment pursuant to Section 10.02;

               (3)  proceeds from a drawing on the Letter of Credit deposited
     directly into the Letter of Credit Purchase Account (provided that such
     proceeds shall not be applied to purchase Pledged Bonds or Borrower Bonds);
     and

               (4)  payments made by the Borrower pursuant to Section 4.3 of the
     Financing Agreement.

                                       34
<PAGE>

     No purchase of Bonds pursuant to this Section shall be deemed to be a
payment or a redemption of such Bonds or any portion thereof and such purchase
will not operate to extinguish or discharge the indebtedness of such Bonds.

     SECTION 4.03   Remarketing. Upon delivery of a Bondholder Tender Notice to
                    -----------
the Trustee and the Remarketing Agent (or to the Remarketing Agent only in the
case of Bonds held in book-entry form) pursuant to Section 4.01 and not later
than the fifth day preceding the Purchase Date for each mandatory purchase
pursuant to Section 4.02, the Remarketing Agent shall use its best efforts to
find purchasers for and arrange for the sale of the Bonds identified in the
Bondholder Tender Notice pursuant to Section 4.01 or all Bonds subject to
mandatory purchase pursuant to Section 4.02 (other than any Bonds purchased in
anticipation of the expiration of the Letter of Credit or at the direction of
the Bank), at a price equal to the principal amount thereof plus, in the case of
purchases on a Purchase Date which is not an Interest Payment Date, accrued
interest thereon, for settlement in immediately available funds at or before
10:30 a.m. on the applicable Purchase Date. Except as otherwise expressly
provided herein, the Remarketing Agent may not remarket to the Issuer, the
Borrower or any Affiliate any Bonds to be purchased pursuant to Section 4.01 or
4.02. In its capacity as a registered broker-dealer, the Remarketing Agent may,
but is not obligated to, acquire for its own account any Bonds to be so
purchased, but not otherwise remarketed, in which case the Remarketing Agent
shall have remarketed such Bonds to itself. The Remarketing Agent may purchase
and sell Bonds for its own account at any time.

     At or before 2:00 p.m. on the Business Day preceding the Purchase Date of
Bonds to be purchased pursuant to Section 4.01 or 4.02 and remarketed pursuant
to this Section (or such other time as to which the Trustee and the Remarketing
Agent may agree), the Remarketing Agent shall give notice by telegram, telex,
telecopy or other similar communication to the Trustee of the names, addresses
and taxpayer identification numbers of the purchasers and the denominations of
Bonds to be delivered to each purchaser and, if available, the payment
instructions for regularly scheduled interest payments.

     The Remarketing Agent shall, at or before 10:30 a.m. on the Purchase Date
of Bonds to be purchased pursuant to Section 4.01 or 4.02 and remarketed
pursuant to this Section, give telephonic notice, promptly confirmed in writing,
to the Trustee, the Borrower and the Bank specifying the principal amount of
Bonds remarketed and not remarketed, respectively, and the amount representing
the purchase price of Bonds which the Remarketing Agent does not then hold in
trust.

     The Remarketing Agent shall cause to be paid to the Trustee in immediately
available funds by 1:00 p.m. on the Purchase Date of Bonds to be purchased
pursuant to Section 4.01 or 4.02 and remarketed pursuant to this Section, all
amounts (if any) then held by the Remarketing Agent representing proceeds of the
remarketing of such Bonds. All such remarketing proceeds received by the Trustee
shall be deposited by the Trustee in the special trust account designated as the
Remarketing Proceeds Purchase Account which the Trustee shall establish and use
as provided in this Article IV and shall not be commingled with other funds held
by the Trustee. All moneys in the Remarketing Proceeds Purchase Account shall be
held in trust, uninvested and without liability for interest thereon, pending
application of such moneys by the Trustee pursuant to this Article.

                                       35
<PAGE>

     On the Purchase Date of Bonds to be purchased pursuant to Sections 4.01 or
4.02, the Trustee shall register (or hold) all Bonds purchased on such date as
follows:

     (a)  Bonds remarketed by the Remarketing Agent shall be registered and made
available (at the Delivery Office of the Trustee) to the Remarketing Agent or
the purchasers thereof in accordance with the instructions of the Remarketing
Agent delivered to the Trustee pursuant to this Section 4.03, provided that the
provisions of this clause (a) shall not apply to Bonds purchased pursuant to
Section 4.01 which are held in book-entry form; and

     (b)  Bonds purchased with proceeds of a drawing on the Letter of Credit
which are Pledged Bonds shall be held as Pledged Bonds in accordance with
Section 4.05.

     Any Bond (or portion thereof) with respect to which the Trustee receives a
Bondholder Tender Notice pursuant to Section 4.01 on or after the date notice of
a mandatory purchase pursuant to Section 4.02 or redemption pursuant to Section
3.04 is given and before the corresponding mandatory Purchase Date or redemption
date, respectively, shall not be remarketed except to a buyer who receives and
acknowledges the binding effect of such notice. Bonds purchased on or after the
date notice of mandatory purchase is given and before the corresponding
mandatory Purchase Date and not remarketed, shall not be subject to mandatory
purchase, but shall remain outstanding. In addition, Bonds which are deemed paid
pursuant to Article X shall not be remarketed but shall be canceled upon being
purchased pursuant to Section 4.01 or 4.02 in accordance with the Bond
cancellation provisions of Section 2.11.

     Anything in this Indenture to the contrary notwithstanding, the Remarketing
Agent shall have no obligation (i) to remarket any Bonds which are not supported
by the Letter of Credit or an Alternate Letter of Credit as contemplated by this
Indenture or (ii) to determine Term Rates or to find purchasers for and arrange
for the sale of the Bonds on or after a Conversion Date or to make any effort to
such end, except to the extent the Remarketing Agent shall have expressly and
specifically agreed in writing with the Borrower to perform such duties.

     SECTION 4.04   Drawings on Letter of Credit for Purchase of Bonds. As
                    --------------------------------------------------
provided by Section 4.03, the Remarketing Agent shall advise the Trustee of the
amounts not held by the Remarketing Agent which shall be drawn under the Letter
of Credit in order for the Trustee to make timely payments of purchase price of
Bonds from remarketing proceeds or moneys drawn under the Letter of Credit. In
the absence of such notice, the Trustee shall be deemed to have received notice
from the Remarketing Agent specifying that no portion of the purchase price of
such Bonds is held by the Remarketing Agent, in which case the Trustee shall
draw the entire amount thereof under the Letter of Credit. Prior to 11:00 a.m.
on each Purchase Date, the Trustee shall take all action necessary to draw on
the Letter of Credit in accordance with its terms, the amounts specified (or
deemed specified) for receipt by the Trustee on such Purchase Date. The Trustee
shall establish a special trust account designated as the Letter of Credit
Purchase Account into which the Trustee shall deposit and hold in trust,
uninvested and without liability for interest thereon, all such amounts (and
only such amounts) received by the Trustee from drawings on the Letter of Credit
for purchases of Bonds pending application of such amounts by the Trustee
pursuant to this Article IV. Any remaining amounts in the Letter of Credit
Purchase Account after any application required by this Article IV shall be paid
over by the Trustee to the Bank as reimbursement for the drawing on the Letter
of Credit from which such amounts were derived; provided that the Letter of
Credit shall be reinstated to the extent of

                                       36
<PAGE>

such reimbursement and the Trustee shall take all necessary action on its part
pursuant to the Letter of Credit to effect such reinstatement. Anything herein
to the contrary notwithstanding, no amounts drawn on the Letter of Credit shall
be applied to the purchase of Pledged Bonds or Borrower Bonds.

     Any moneys paid by the Borrower pursuant to Section 4.3 of the Financing
Agreement for purchase of Bonds tendered for purchase pursuant to this Indenture
shall be deposited by the Trustee in a special trust account designated as the
Borrower Purchase Account which the Trustee shall establish and use to (i)
reimburse the Bank for drawings under the Letter of Credit for such purpose or
(ii) if moneys derived from a drawing under the Letter of Credit are
insufficient to pay such purchase price, pay the purchase price of such Bonds.

     SECTION 4.05   Bonds Purchased with Proceeds of Letter of Credit.
                    -------------------------------------------------

     (a)  Pledged Bonds. Bonds purchased with proceeds of a drawing on the
          -------------
Letter of Credit pursuant to this Article shall constitute "Pledged Bonds" and
shall be held by the Trustee as agent for the Bank as pledgee of the Borrower
pursuant to the Reimbursement Agreement (and shall be shown as such on the
Register and, if held in book-entry form, in the ownership records maintained by
DTC and any applicable DTC participant) unless and until (1) the Trustee has
confirmation from the Bank to the extent contemplated by the terms of the Letter
of Credit that the Letter of Credit has been reinstated with respect to such
drawing and (2) the Bank has notified the Trustee by telephone (thereafter
promptly confirmed in writing) that such Bonds have been released from the
pledge pursuant to the Reimbursement Agreement and are no longer Pledged Bonds.
Pending reinstatement of the Letter of Credit and release of such pledge as
aforesaid, the Bank shall be entitled to receive all payments of principal of
and interest on Pledged Bonds as pledgee of the Borrower and such Bonds shall
not be transferable or deliverable to any party (including the Borrower) except
the Bank pursuant to the Reimbursement Agreement.

     (b)  Remarketing of Pledged Bonds. The Remarketing Agent shall continue to
          ----------------------------
use its best efforts to arrange for the sale of any Pledged Bonds required to be
remarketed pursuant to Section 4.03, subject to full reinstatement of the Letter
of Credit with respect to the drawings with which such Bonds were purchased, at
a price equal to the principal amount thereof plus accrued interest.

     (c)  Notice of Remarketing. At or prior to 2:00 p.m. on the Business Day
          ---------------------
preceding each day on which any Pledged Bonds that are successfully remarketed
by the Remarketing Agent are to be purchased, the Remarketing Agent shall give
telephonic notice, promptly confirmed in writing, to the Trustee, the Borrower
and the Bank specifying:

          (i)  the Business Day on which such purchase will take place and the
principal amount of Pledged Bonds successfully remarketed by the Remarketing
Agent, and

          (ii) to the Trustee only, the names, addresses and tax identification
numbers of the proposed purchasers thereof and the denominations of Bonds to be
delivered to each purchaser and, if available, the payment instructions for
regularly scheduled interest payments.

                                       37
<PAGE>

     (d)  Delivery of Remarketed Pledged Bonds and Proceeds Thereof.
          ---------------------------------------------------------
Contemporaneously with reinstatement of the Letter of Credit as described in
Subsection 4.05(a) and the sale of Pledged Bonds arranged by the Remarketing
Agent as described in Subsection 4.05(b), (i) such Bonds (if not held in book-
entry form) shall be made available (at the Delivery Office of the Trustee) to
the Remarketing Agent or the purchasers thereof in accordance with the
instructions of the Remarketing Agent and (ii) the proceeds of such sale shall
be delivered to the Bank for the account of the Borrower to be applied to any
unpaid reimbursement obligation under the Reimbursement Agreement with respect
to the prior drawings made on the Letter of Credit in respect of the purchase of
such Bonds.

     SECTION 4.06   Borrower Bonds.
                    --------------

     (a)  Remarketing of Borrower Bonds. Subject to the provisions and
          -----------------------------
limitations of the Remarketing Agreement and Section 4.03, the Remarketing
Advisor shall, if so directed by the Borrower, use its best efforts to arrange
for the sale of any Borrower Bonds, at a price equal to the principal amount
thereof, plus accrued interest.

     (b)  Notice of Remarketing. On or prior to each Business Day on which any
          ---------------------
Borrower Bonds that are successfully remarketed by the Remarketing Agent
pursuant to Section 4.06(a) are to be purchased, the Remarketing Agent shall
give telephonic notice, promptly confirmed in writing, to the Trustee, the
Borrower and the Bank specifying:

          (i)  the Business Day on which such purchase will take place and the
principal amount of Borrower Bonds successfully remarketed by the Remarketing
Agent, and

          (ii) to the Trustee only, the names, addresses and tax identification
numbers of the proposed purchasers thereof, the denominations of Bonds to be
delivered to each purchaser and, if available, the payment instructions for
regularly scheduled interest payments.

     (c)  Delivery of Remarketed Borrower Bonds and Proceeds Thereof. Upon the
          ----------------------------------------------------------
sale of Borrower Bonds arranged by the Remarketing Agent pursuant to Section
4.06(a), (i) such Bonds (if not held in book-entry form) shall be made available
(at the Delivery Office of the Trustee) to the Remarketing Agent or the
purchasers thereof in accordance with the instructions of the Remarketing Agent
and (ii) the proceeds of such sale shall be delivered to the Borrower.

     SECTION 4.07   No Purchases After Acceleration; Inadequate Funds for
                    -----------------------------------------------------
Purchases. Anything in this Indenture to the contrary notwithstanding, there
- ---------
shall be no purchases of Bonds pursuant to this Article if the Bonds have been
declared immediately due and payable pursuant to Section 7.03 and such
declaration has not been annulled, stayed or otherwise suspended.

                                       38
<PAGE>

     If the funds available for purchases of Bonds are inadequate for the
purchase of all Bonds tendered on any Purchase Date pursuant to this Article,
the Trustee shall, after any applicable grace period: (a) return all tendered
Bonds to the Holders thereof; and (b) return all moneys received for the
purchase of such Bonds (other than moneys provided by the Borrower and other
than Letter of Credit proceeds, unless the Letter of Credit is reinstated with
respect thereto) to the Persons providing such moneys; provided that the Holders
shall retain all rights to tender Bonds pursuant to the terms of this Article
IV.

(End of Article IV)

                                       39
<PAGE>

                                   ARTICLE V

                          FUNDS AND LETTER OF CREDIT

     SECTION 5.01   Creation of Project Fund. There is hereby established with
                    ------------------------
the Trustee a trust fund designated "Project Fund" for the payment of Project
Costs. There shall be deposited in the Project Fund all proceeds of the sale of
the Bonds and any equity contribution of the Borrower. The Trustee shall
maintain a record of the income on investments and interest earned on amounts
held in the Project Fund and on proceeds of Bonds held in respect of accrued or
capitalized interest held by the Trustee as Revenues. Subject to the provisions
of Section 5.08, such income or interest may be expended at any time or from
time to time to pay the Project Costs in the same manner as the proceeds of
Bonds deposited in the Project Fund are expended.

     Pending disbursement pursuant to the Financing Agreement, the moneys and
Eligible Investments to the credit of the Project Fund shall be held as security
for the outstanding Bonds and for the Borrower's obligations under the
Reimbursement Agreement.

     SECTION 5.02   Disbursements from and Records of Project Fund. Moneys in
                    ----------------------------------------------
the Project Fund shall be disbursed in accordance with the provisions of the
Financing Agreement. The Trustee shall cause to be kept and maintained adequate
records pertaining to the Project Fund and all disbursements therefrom. The
Trustee shall make such records available for inspection by, or shall provide
copies thereof to, the Issuer, the Borrower and/or the Bank upon prior written
request.

     SECTION 5.03   Disposition of Excess Bond Proceeds. The completion of the
                    -----------------------------------
Project and payment of all Project Costs payable out of the Project Fund (except
for amounts, if any, to be retained by the Trustee as provided under the
Financing Agreement for the payment of Project Costs not then due and payable)
shall be evidenced by the filing with the Trustee of the certificate of the
Authorized Representative of the Borrower required by Section 3.6 of the
Financing Agreement. As soon as practicable after the filing with the Trustee of
such certificate, any balance remaining in the Project Fund (other than the
amounts retained by the Trustee as described in the preceding sentence) shall be
deposited or applied in accordance with the written direction of the Authorized
Representative of the Borrower pursuant to Section 3.4 of the Financing
Agreement. In addition, such balance shall not be invested by the Borrower at a
yield in excess of the yield on the Bonds, unless there shall have been
delivered to the Trustee an opinion of Bond Counsel that such investment will
not cause the interest on the Bonds to be included in the gross income of the
Holders for federal income tax purposes.

     SECTION 5.04   Bond Fund.
                    ---------

     (a)  Revenues to be Paid Over to the Trustee. The Issuer has caused the
          ---------------------------------------
Revenues to be paid directly to the Trustee. If, notwithstanding these
arrangements, the Issuer receives any payments pursuant to the Financing
Agreement (other than payments to the Issuer in accordance with Section 4.4,
5.10 or 7.4 thereof), the Issuer shall immediately pay over the same to the
Trustee to be held as Revenues or otherwise applied pursuant to this Indenture.
Any moneys received by the Trustee with the written stipulation that they
constitute payments by the

                                       40
<PAGE>

Borrower under Subsection 4.3 of the Financing Agreement corresponding to
payments of purchase price of Bonds shall be identified as such and deposited
and applied pursuant to Article IV. Except as provided in the immediately
preceding sentence and as otherwise specifically directed under the terms of
this Indenture, all Revenues received by the Trustee shall be deposited into the
General Account of the Bond Fund.

          (b)  Creation of Bond Fund and Accounts. There is hereby established
               ----------------------------------
with the Trustee a trust fund designated as the "Bond Fund", within which there
shall be established a General Account and a Letter of Credit Debt Service
Account. Moneys held by the Trustee in the General Account shall be applied in
accordance with Section 5.04(c)(ii) and the other provisions of this Indenture
(i) to reimburse the Bank with respect to drawings on the Letter of Credit to
pay the principal of, premium, if any, on or interest on Bonds, (ii) to make
payments of principal of, premium, if any, on and interest on the Bonds or (iii)
to pay any amount required pursuant to Section 5.08, to the extent other moneys
are unavailable therefor. All moneys (and only those moneys) received by the
Trustee from drawings under the Letter of Credit to pay principal of, premium,
if any, on and interest on the Bonds shall be deposited in the Letter of Credit
Debt Service Account and applied to such purpose.

          (c)  Application of Bond Fund. Except as otherwise provided in Section
               ------------------------
7.06, moneys in the Bond Fund shall be applied as follows:

               (i)  Moneys in the Letter of Credit Debt Service Account shall be
applied to the payment when due of principal of, premium, if any, on and
interest on the Bonds (other than Pledged Bonds or Borrower Bonds, for which
such moneys shall not be Available Moneys).

               (ii) Moneys in the General Account shall be applied to the
following in the order of priority indicated:

                    (A)  the payment of any obligation due under Section 5.08,
     to the extent other moneys are unavailable therefor;

                    (B)  the reimbursement of the Bank when due for moneys drawn
     under the Letter of Credit and deposited in the Letter of Credit Debt
     Service Account for payment of principal of, premium, if any, on and
     interest on the Bonds (in applying moneys pursuant to this clause, the
     Trustee shall transfer such moneys by wire transfer of immediately
     available funds);

                    (C)  when insufficient moneys have been received under the
     Letter of Credit for application pursuant to Subsection 5.04(c)(i), the
     payment when due of principal of, premium, if any, on and interest on the
     Bonds, other than Borrower Bonds or Pledged Bonds;

                    (D)  the payment when due of principal of, premium, if any,
     on and interest on Pledged Bonds; and

                    (E)  the payment when due of principal of, premium, if any,
     on and interest on Borrower Bonds, provided that if the Trustee shall have
     received written notice from the Bank that any amounts are due and owing to
     the Bank under the

                                       41
<PAGE>

     Reimbursement Agreement, such payments shall be made to the Bank for the
     account of the Borrower.

               (d)  Drawings on Letter of Credit. By 12:00 noon on the Business
                    ----------------------------
Day immediately preceding each Interest Payment Date, each redemption date and
the maturity date of the Bonds, the Trustee shall present the requisite draft
and certificate for a drawing on the Letter of Credit so as to comply with the
provisions of the Letter of Credit for payment to be made in sufficient time for
the Trustee to receive the proceeds of such drawing at or before 12:00 noon on
such Interest Payment Date, redemption date or maturity date, as the case may
be, to pay principal of, premium, if any, on and interest on the Bonds due on
such date. In addition, the Trustee shall draw on the Letter of Credit pursuant
to its terms in accordance with and in order to satisfy the requirements of
Section 7.03. By 5:00 p.m. on each date it presents the requisite documents for
a drawing on the Letter of Credit, the Trustee shall give notice to the Borrower
by telephone, promptly confirmed in writing, of the amount so drawn. The Trustee
shall promptly notify the Borrower by facsimile transmission or by oral or
telephonic communication confirmed in writing if the Bank fails to transfer
funds in accordance with the Letter of Credit upon the presentment of the
requisite draft and certificate. In calculating the amount to be drawn on the
Letter of Credit for the payment of principal of and interest on the Bonds,
whether on an Interest Payment Date, at maturity or upon redemption or
acceleration, the Trustee shall not take into account the potential receipt of
funds from the Borrower under the Financing Agreement on such Interest Payment
Date, or the existence of any other moneys in the Bond Fund, but shall draw on
the Letter of Credit for the full amount of principal and interest coming due on
the Bonds.

               (e)  Payment in Full. Whenever the amount in the Bond Fund
                    ---------------
available for the payment of principal or redemption price and interest in
accordance with Subsection 5.04(c) is sufficient to redeem all of the
outstanding Bonds and to pay interest accrued to the redemption date, the Issuer
will, upon request of the Borrower, cause the Trustee to redeem all such Bonds
on the redemption date specified by the Borrower pursuant to the Bonds and this
Indenture. Any amounts remaining in the Bond Fund after payment in full of the
principal of and premium, if any, and interest on the Bonds (or provision for
payment thereof) and the fees, charges and expenses of the Issuer and the
Trustee shall be paid to the Person entitled thereto in accordance with Section
10.01.

               (f)  Credits. If at any time the Trustee has funds, including
                    -------
funds received pursuant to the Letter of Credit, which under the provisions of
this Indenture are to be applied to pay the principal of, premium, if any, on or
interest on the Bonds, the Borrower, to the extent that such funds are to be so
applied, shall be entitled to a credit, equal to the amount of such funds,
against payments due from the Borrower under the Financing Agreement; provided
that, with respect to funds received pursuant to one or more drawings on the
Letter of Credit, the Bank has been reimbursed therefor.

               SECTION 5.05  Investment of Bond Fund, Project Fund and Rebate
                             ------------------------------------------------
Fund. All moneys received by the Trustee under this Indenture shall be deposited
- ----
with the Trustee, until or unless invested or deposited as provided in this
Section. All deposits with the Trustee (whether original deposits or deposits or
redeposits in time accounts) shall be secured as required by applicable law for
such trust deposits.

                                       42
<PAGE>

               Moneys in the Bond Fund (except moneys in the Letter of Credit
Debt Service Account and except any moneys held to pay principal of, or premium,
if any, or interest on, any Bonds which are deemed paid under Section 10.02) and
the Project Fund shall be invested and reinvested by the Trustee in Eligible
Investments at the written direction of an Authorized Representative of the
Borrower, subject to the requirements of Section 5.12(n) of the Financing
Agreement. Except as otherwise provided in Section 10.02, moneys deposited in
the Letter of Credit Debt Service Account, the Letter of Credit Purchase
Account, the Borrower Purchase Account or the Remarketing Proceeds Purchase
Account shall not be invested but shall be held in their respective accounts
pending application pursuant to Section 5.04 or Article IV, as applicable.
Moneys in the Bond Fund held to pay principal of, or premium, if any, or
interest on, any Bonds which are deemed paid under Section 10.02 shall be
invested only if and as provided in Section 10.02.

               Investments pursuant to this Section of moneys in the Bond Fund
shall mature or be redeemable at the written direction of the Borrower at the
times and in the amounts necessary to provide moneys to make Bond Service
payments as they become due on Interest Payment Dates, at stated maturity or by
redemption, or to reimburse the Bank when due for drawings on the Letter of
Credit applied to make Bond Service payments. The Trustee shall sell or redeem
investments credited to the Bond Fund to produce sufficient moneys available
hereunder at the times required for the purpose of paying Bond Service (or
reimbursing the Bank for drawings on the Letter of Credit therefor) when due as
aforesaid, and shall do so without necessity for any order by or on behalf of
the Issuer or the Borrower and without restriction by reason of any order. Each
investment of moneys in the Project Fund shall mature or be redeemable by the
Trustee at the written direction of the Borrower at such time as may be
foreseeably necessary to make payments from the Project Fund. Subject to any
written directions from an Authorized Representative of the Borrower with
respect thereto and subject to the requirements of Section 5.12(n) of the
Financing Agreement, the Trustee may, from time to time, sell investments in the
Project Fund or the Bond Fund made pursuant to this Section and reinvest the
proceeds therefrom in Eligible Investments maturing or redeemable as aforesaid.

               Any investment of moneys in any Fund established under this
Indenture may be purchased from or through, or sold to, the Trustee or any
affiliate of the Trustee; and any such investment made through the purchase of
shares in a fund described in clause (i), (ii) or (v) of the definition of
Eligible Investments may be in a fund for which the Trustee or an affiliate of
the Trustee serves as investment manager, administrator, shareholder servicing
agent, and/or custodian or subcustodian, notwithstanding that (i) the Trustee or
an affiliate of the Trustee receives fees from such funds for services rendered,
(ii) the Trustee charges and collects fees for services rendered pursuant to
this Indenture, which fees are separate from the fees received from such funds,
and (iii) services performed for such funds and pursuant to this Indenture may
at times duplicate those provided to such funds by the Trustee or its
affiliates.

               Moneys in the Rebate Fund shall be invested and reinvested by the
Trustee at the written direction of the Borrower in Government Obligations
maturing, or subject to redemption by the holder at not less than the principal
amount thereof or the cost of acquisition, whichever is lower, on or before the
date or dates when the payments for which such moneys are held are to become
due.

                                       43
<PAGE>

               An investment made from moneys credited to the Bond Fund, the
Project Fund or the Rebate Fund shall constitute part of that respective Fund,
and each respective Fund shall be credited with all proceeds of sale and income
from investment of moneys credited thereto. For purposes of this Indenture,
those investments shall be valued at face amount or market value, whichever is
less.

               If the Borrower shall not give directions as to investments of
moneys held by the Trustee in the Project Fund or the Bond Fund, or if an Event
of Default has occurred and is continuing hereunder, the Trustee shall make such
investments in Eligible Investments described in clause (i) of the definition
thereof.

               SECTION 5.06  Bond Fund Moneys to be Held in Trust. Revenues and
                             ------------------------------------
investments thereof in the Bond Fund shall, until applied as provided in this
Indenture, be held by the Trustee for the benefit of the Holders of all
outstanding Bonds and the Bank in the order of priority set forth in the
granting clauses of this Indenture, except that any portion of the Revenues
representing principal of, and premium, if any, and interest on, any Bonds which
have matured or been called for redemption in accordance with Article III or
which are otherwise deemed paid under Section 10.02, shall be held for the
benefit of the Holders of such Bonds only.

               SECTION 5.07  Nonpresentment of Bonds. In the event that any Bond
                             -----------------------
shall not be presented for payment when the principal thereof becomes due in
whole or in part, either at stated maturity or by redemption or a check or draft
for interest is uncashed, all liability of the Issuer to that Holder for such
Bond or such check or draft thereupon shall cease and be discharged completely;
provided that moneys sufficient to pay the principal and accrued interest then
due of that Bond or such check or draft shall have been made available to the
Trustee for the benefit of its Holder. Thereupon, it shall be the duty of the
Trustee to hold those moneys subject to the provisions of Section 10.03.

               SECTION 5.08  Creation of Rebate Fund. There is established with
                             -----------------------
the Trustee a fund designated "Rebate Fund"; provided that the Trustee shall
only be required to establish the Rebate Fund on its books at such time as it is
first determined that there are Excess Earnings. Any provision hereof to the
contrary notwithstanding, amounts credited to the Rebate Fund shall be free and
clear of any lien hereunder.

               The Borrower shall, at its expense, engage and furnish
information to a Financial Consultant to calculate, as soon as is practical
after the end of each Bond Year for the Bonds and as soon as is practical after
the payment in full of all outstanding Bonds, the amount of Excess Earnings as
of the end of that Bond Year or the date of such final payment. The Trustee
shall provide to the Borrower and its Financial Consultant information
maintained by the Trustee necessary for the Financial Consultant to perform its
obligations pursuant to this Section. The Borrower shall promptly notify the
Trustee in writing of (i) the name, address and telephone number of the
Financial Consultant retained by the Borrower pursuant to this Section and (ii)
the amount of Excess Earnings determined by such Financial Consultant as at the
end of each Bond Year and at the date of final payment of the Bonds in full. If
the amount then on deposit in the Rebate Fund is in excess of the Excess
Earnings as determined by the Financial Consultant, the Trustee shall forthwith
pay that excess amount to the Borrower. If the amount then on deposit in the
Rebate Fund is less than such Excess Earnings, the Borrower shall, within five
days after

                                       44
<PAGE>

receipt of the Financial Consultant's determination thereof, pay to the Trustee
for deposit in the Rebate Fund an amount sufficient to cause the Rebate Fund to
contain an amount equal to such Excess Earnings. If the Borrower does not pay
that required amount within five days after receipt of the Financial
Consultant's determination of the Excess Earnings, the Trustee shall immediately
transfer that amount from the Project Fund or the General Account of the Bond
Fund to the Rebate Fund to the extent there are moneys available in the Project
Fund or the General Account of the Bond Fund, as the case may be. If the
Borrower shall fail to engage a Financial Consultant as required hereunder, the
Trustee may (but shall not be required to) engage a Financial Consultant at the
Borrower's expense for the purposes hereof, in which case (i) the Trustee shall
notify the Borrower in writing of any determination of the Financial Consultant
with respect to Excess Earnings and (ii) the Borrower shall pay the Trustee any
amounts necessary to make the required deposits to the Rebate Fund within five
days after the Trustee's notification to the Borrower. Within 60 days after the
end of the fifth Bond Year and every fifth Bond Year thereafter, the Trustee,
acting on behalf of the Issuer, shall, at the written direction of the Borrower,
pay to the United States of America in accordance with Section 148(f) of the
Code from the moneys then on deposit in the applicable account in the Rebate
Fund an amount equal to 90% (or such greater percentage not in excess of 100% as
the Borrower in writing may direct the Trustee to pay) of the Excess Earnings
earned from the date of the original delivery of the Bonds to the end of such
fifth Bond Year (less the amount of Excess Earnings, if any, previously paid to
the United States of America pursuant to this Section). Within 60 days after the
payment in full of all outstanding Bonds, the Trustee shall, at the written
direction of the Borrower, pay to the United States of America in accordance
with Section 148(f) of the Code from the moneys then on deposit in the
applicable account in the Rebate Fund an amount equal to 100% of the Excess
Earnings earned from the date of the original delivery of the Bonds to the date
of such payment (less the amount of Excess Earnings, if any, previously paid to
the United States of America pursuant to this Section) and any moneys remaining
in the applicable account in the Rebate Fund following such payment shall be
paid to the Borrower. All computations of Excess Earnings pursuant to this
Section and Section 3.8 of the Financing Agreement shall treat the amount or
amounts, if any, previously paid to the United States of America pursuant to
this Section and Section 3.8 of the Financing Agreement as amounts on deposit in
the Rebate Fund.

               The Trustee shall keep records of the computations made pursuant
to this Section provided to it by the Borrower.

               If all the gross proceeds of the Bonds, within the meaning of
Section 148(f) of the Code, together with the gross proceeds of any other
obligations treated as part of the same issue for purposes of Section 148(f) of
the Code, are invested solely in tax-exempt obligations or are fully expended
for the governmental purpose for which the Bonds were issued within six months
of the date of issuance of the Bonds, or if the Bonds qualify for the exemption
from rebate pursuant to the 18-month spend-out exception contained in the
regulations promulgated under Section 148(f) of the Code, then the provisions of
this Section and Section 3.8 of the Financing Agreement shall not be applicable
to the investment of original proceeds of the Bonds in the Project Fund and the
Borrower shall not be required to engage a Financial Consultant or otherwise
comply with the foregoing provisions of this Section; provided that the Borrower
shall remain responsible to determine Excess Earnings, if any, and to cause to
be paid to the Trustee for deposit in the Rebate Fund and payment to the United
States of America such amounts, if any, at such times as may be necessary to
comply with the requirements of Section 148(f) of the Code with respect to the
Bonds. The Issuer hereby elects the application of provisions for

                                       45
<PAGE>

qualified temporary investments relating to investment of proceeds in
obligations described in subsection (v) of Eligible Investments pursuant to
Treasury regulations under Section 148 of the Code, providing for certain
temporary investments of proceeds which are invested exclusively in tax-exempt
obligations. In determining whether any of the exceptions provided for in this
paragraph to the applicability of this Section and Section 3.8 of the Agreement
apply, the Trustee shall be entitled to receive, at the expense of the Borrower,
an opinion of Bond Counsel.

          SECTION 5.09     Letter of Credit.
                           ----------------

          (a)  Extension or Replacement in Anticipation of Expiration. At least
               ------------------------------------------------------
45 days (or such shorter period as shall be acceptable to the Trustee) prior to
the Interest Payment Date next preceding the Expiration Date of the current
Letter of Credit, the Borrower may provide for the delivery to the Trustee of
(1) an amendment to the Letter of Credit which extends the Expiration Date to a
date that is not earlier than six months from its then current Expiration Date
and that follows an Interest Payment Date by not less than two Business Days and
not more than 15 calendar days or (2) if the Bonds are in a Weekly Mode or if
the Interest Payment Date next preceding the Expiration Date of the current
Letter of Credit is a Term Rate Period End Interest Payment Date, an Alternate
Letter of Credit issued by a national banking association, a bank, a trust
company or other financial institution or credit provider, which shall have
terms which are the same in all material respects (except the Expiration Date
and except any changes pursuant to this Indenture with respect to interest or
premium coverage in connection with a concurrent interest rate reset or
conversion) as the current Letter of Credit and which shall have an Expiration
Date that is not earlier than one year from the Expiration Date of the Letter of
Credit then in effect and that follows an Interest Payment Date by not less than
two Business Days and not more than 15 calendar days. The Borrower shall be
deemed to have provided for such amendment extending the Letter of Credit or for
such Alternate Letter of Credit if the Borrower shall have delivered to the
Trustee, in form satisfactory to the Trustee, a commitment from the Bank or the
proposed provider of the Alternate Letter of Credit to deliver such amendment or
Alternate Letter of Credit on or before the Interest Payment Date next preceding
the current Expiration Date of the Letter of Credit; provided that if such
amendment or Alternate Letter of Credit is not delivered to the Trustee on or
before such Interest Payment Date, an Event of Default shall be deemed to have
occurred under Subsection 7.01(h).

          Any such amended Letter of Credit or Alternate Letter of Credit shall
provide for drawings to pay up to (i) while the Bonds are in the Weekly Mode, an
amount equal to the principal amount of the outstanding Bonds, plus 50 days
interest thereon computed at 12% per annum based on a 365-day year, and (ii)
while the Bonds are in a Term Mode, an amount equal to the principal amount of
the outstanding Bonds, plus 200 days interest thereon at a rate not less than
the applicable Term Rate based on a 360-day year (consisting of twelve 30-day
months), plus an amount equal to the sum of the optional redemption premium (if
any) and supplemental premium (if any) which would become payable on the Bonds
upon mandatory redemption if such amended Letter of Credit or Alternate Letter
of Credit were not extended beyond the Expiration Date set forth therein.

          The Trustee shall not accept an Alternate Letter of Credit under this
Subsection unless there shall have been delivered to the Trustee (1) an opinion
of counsel to the Bank satisfactory to the Trustee with respect to the validity,
binding effect and enforceability of such Alternate Letter of Credit and (2) an
opinion of Bond Counsel to the effect that either (i) such

                                       46
<PAGE>

action is not treated as causing a reissuance of the Bonds and does not
adversely affect the exclusion from gross income of interest on the Bonds for
federal income tax purposes or (ii) the interest on the Bonds is excluded from
gross income for federal income tax purposes.

          If the Letter of Credit is extended as described above, the mandatory
redemption pursuant to Subsection 3.01(e), or the mandatory purchase pursuant to
Section 4.02(b), shall not occur. If an Alternate Letter of Credit is delivered,
the Bonds will be subject to mandatory purchase pursuant to Section 4.02(c).
Unless all of the conditions of this Subsection which are required to be met 45
days (or such shorter period as shall be acceptable to the Trustee) preceding
the Interest Payment Date next preceding the Expiration Date of the Letter of
Credit have been satisfied, the Trustee shall take all action necessary to call
the Bonds for mandatory redemption pursuant to Section 3.01(e), or mandatory
purchase pursuant to clause (b) of Section 4.02, as applicable, on the Interest
Payment Date next preceding such Expiration Date; provided that if the Borrower
shall have notified the Trustee in writing that it expects to meet all the
conditions for the delivery of an amendment extending the existing Letter of
Credit on or before the Interest Payment Date next preceding the Expiration Date
of the existing Letter of Credit, then the notice of mandatory redemption
pursuant to Subsection 3.01(e), or mandatory purchase pursuant to clause (b) of
Section 4.02, shall state that it is subject to rescission, and the Trustee
shall rescind such notice, if such conditions are so met (in which case such
mandatory redemption or mandatory purchase shall not occur).

          The provisions of this Subsection with respect to the substitution of
an Alternate Letter of Credit in the event that the Expiration Date of the
Letter of Credit is not extended shall apply equally to the substitution of
another Alternate Letter of Credit in the event that the Expiration Date of an
existing Alternate Letter of Credit is not extended.

          (b)  Other Replacement. The delivery of an Alternate Letter of Credit
               -----------------
in anticipation of the expiration of the current Letter of Credit shall be
governed by Subsection 5.09(a). In addition, except as provided in the following
sentence, the Borrower may at any time provide for the delivery to the Trustee
of an Alternate Letter of Credit which shall have terms which are the same in
all material respects (except as to Expiration Date and except any changes
pursuant to this Indenture with respect to interest or premium coverage in
connection with a concurrent interest rate reset or conversion) as the current
Letter of Credit. Notwithstanding the foregoing, if the Bonds are in a Term
Mode, an Alternate Letter of Credit may be substituted for the then current
Letter of Credit only on a Term Rate Period End Interest Payment Date. Any
Alternate Letter of Credit delivered pursuant to this paragraph (b) shall (1)
replace the then existing Letter of Credit on an Interest Payment Date, (2) have
an Expiration Date that is not less than one year from the date of its delivery
and not sooner than the Expiration Date of the current Letter of Credit then in
effect and that follows an Interest Payment Date by not less than two Business
Days and not more than 15 calendar days, (3) be issued by a national banking
association, a bank, a trust company or other financial institution or credit
provider, and (4) be accompanied by an opinion of counsel to the Bank with
respect to the validity, binding effect and enforceability of such Alternate
Letter of Credit, and an opinion of Bond Counsel to the effect that either (i)
the issuance of such Alternate Letter of Credit is not treated as causing a
reissuance of the Bonds and does not adversely affect the exclusion from gross
income of interest on the Bonds for federal income tax purposes or (ii) the
interest on the Bonds is excluded from gross income for federal income tax
purposes. The Borrower shall deliver to the Trustee at least 45 days (or such
shorter period as shall be acceptable to the Trustee) prior to the proposed

                                       47
<PAGE>

replacement of a Letter of Credit, the Alternate Letter of Credit or a
commitment, in form satisfactory to the Trustee, from the Bank to deliver such
Alternate Letter of Credit on the effective date thereof, together with the
opinions referred to above.

          Any Alternate Letter of Credit shall provide for drawings to pay up to
(i) while the Bonds are in the Weekly Mode, an amount equal to the principal
amount of the outstanding Bonds, plus 50 days interest thereon computed at 12%
per annum based on a 365-day year, and (ii) while the Bonds are in a Term Mode,
an amount equal to the principal amount of the outstanding Bonds, plus 200 days
interest thereon at a rate not less than the applicable Term Rate based on a
360-day year (consisting of twelve 30-day months). The Trustee shall take all
action necessary to call the Bonds for mandatory purchase pursuant to Section
4.02(c) in connection with the delivery of an Alternate Letter of Credit.

          If the requirements set forth in this Subsection are met, then the
Trustee shall accept such Alternate Letter of Credit and promptly surrender for
cancellation the previously held Letter of Credit to the issuer thereof in
accordance with the terms of such Letter of Credit; provided, however, that such
Letter of Credit shall not be so surrendered until after the Trustee has drawn
upon such Letter of Credit with respect to any amount necessary to pay principal
of or interest on the Bonds then due and the purchase price of Bonds subject to
mandatory purchase pursuant to Section 4.02(c), and any amounts so drawn have
been received by the Trustee.

          (c)  Reduction. In each case that Bonds are redeemed or deemed to have
               ---------
been paid pursuant to Section 10.01, the Trustee shall take such action as may
be permitted under the Letter of Credit to reduce the amount available
thereunder to an amount equal to the principal amount of the outstanding Bonds,
plus (i) while the Bonds are in the Weekly Mode, 50 days interest on such
principal amount computed at 12% per annum based on a 365-day year, and (ii)
while the Bonds are in Term Mode, 200 days interest on such principal amount
computed at a rate not less than the applicable Term Rate based on a 360-day
year (consisting of twelve 30-day months); provided that such action by the
Trustee shall not be required if the Letter of Credit so reduces automatically
pursuant to its terms.

          (d)  Substitution by Bank. Upon reduction of the amount available
               --------------------
under the Letter of Credit pursuant to the terms of the Letter of Credit and
Subsection 5.09(c) as a result of redemption of Bonds, the Bank shall have the
right, at its option, to require the Trustee to promptly surrender the
outstanding Letter of Credit to the Bank and to accept in substitution therefor
a substitute Letter of Credit in the same form, dated the date of such
substitution, for an amount equal to the amount available under the Letter of
Credit as so reduced, but otherwise having terms identical to the then
outstanding Letter of Credit.

          (e)  Other Credit Enhancement; No Credit Enhancement. After a
               -----------------------------------------------
mandatory purchase of the Bonds pursuant to clause (b) or (d) of Section 4.02,
nothing in this Section shall limit the Borrower's right to provide other credit
enhancement (such as a letter of credit not meeting the requirements of this
Section or bond insurance) or no credit enhancement as security for the Bonds;
provided that any such credit enhancement shall have administrative provisions
reasonably satisfactory to the Trustee and the Borrower shall have furnished to
the Trustee with respect thereto an opinion of Bond Counsel to the effect that
either (i) such action does not adversely effect the exclusion from gross income
of interest on the Bonds for federal income tax

                                       48
<PAGE>

purposes or (ii) the interest on the Bonds is excluded from gross income for
federal income tax purposes.

(End of Article V)

                                       49
<PAGE>

                                  ARTICLE VI

                     COVENANTS AND REPRESENTATIONS OF ISSUER

          SECTION 6.01  Corporate Existence; Compliance with Laws. The Issuer
                        -----------------------------------------
shall maintain its corporate existence; shall use its best efforts to maintain
and renew all its rights, powers, privileges and franchises; and shall comply
with all valid and applicable laws, rules, regulations, orders, requirements and
directions of any legislative, executive, administrative or judicial body
relating to the Issuer's participation in the Project or the issuance of the
Bonds.

          SECTION 6.02  Payment of Bond Service. The Issuer will pay all Bond
                        -----------------------
Service, or cause it to be paid, solely from the sources provided herein, on the
dates, at the places and in the manner provided in this Indenture.

          SECTION 6.03  No Further Assignment of Revenues. The Issuer will not
                        ---------------------------------
assign the Revenues or create any debt, lien or charge thereon, other than the
assignment thereof under this Indenture.

          SECTION 6.04  Filings. The Issuer shall cause this Indenture or
                        -------
financing statements relating hereto to be filed, in such manner and at such
places as may be required by law fully to protect the security of the Holders
and the right, title and interest of the Trustee in and to the Trust Estate or
any part thereof, all as may be reasonably requested by the Trustee. From time
to time, the Trustee may, but shall not be required to, obtain an opinion of
counsel setting forth what, if any, actions by the Issuer or the Trustee should
be taken to preserve such security. The Issuer shall execute or cause to be
executed any and all further instruments as shall reasonably be requested by the
Trustee for such protection of the interests of the Holders, and shall furnish
satisfactory evidence to the Trustee of the filing and refiling of such
instruments and of every additional instrument which shall be necessary to
preserve the lien of this Indenture upon the Trust Estate or any part thereof
until the principal of and interest on the Bonds issued hereunder shall have
been paid. The Trustee shall execute or join in the execution of any such
further or additional instrument and file or join in the filing thereof at such
time or times and in such place or places as it may be advised by an opinion of
counsel will preserve the lien of this Indenture upon the Trust Estate or any
part thereof until the aforesaid principal and interest shall have been paid.

          SECTION 6.05  Rights and Enforcement of Financing Agreement. The
                        ---------------------------------------------
Trustee may enforce, in its name or in the name of the Issuer, all rights of the
Issuer for and on behalf of the Holders, except for Unassigned Issuer's Rights,
and may enforce all covenants, agreements and obligations of the Borrower under
and pursuant to the Financing Agreement, regardless of whether the Issuer is in
default in the pursuit or enforcement of those rights, covenants, agreements or
obligations. The Issuer will take all actions within its authority to keep the
Financing Agreement in effect in accordance with the terms thereof. So long as
no Event of Default hereunder shall have occurred and be continuing, the Issuer
may exercise all its rights under the Financing Agreement, including the right
to amend the same pursuant to the provisions thereof and hereof. The Issuer
shall give prompt notice to the Trustee of any default known to the Issuer under
the Financing Agreement.

                                       50
<PAGE>

          SECTION 6.06  Further Assurances. Except to the extent otherwise
                        ------------------
provided in this Indenture, the Issuer shall not enter into any contract or take
any action by which the rights of the Trustee or the Holders may be impaired and
shall, from time to time, execute and deliver such further instruments and take
such further action as may be required to carry out the purposes of this
Indenture.

          SECTION 6.07  Issuer Not to Adversely Affect Tax-Exempt Status. The
                        ------------------------------------------------
Issuer covenants that it shall take, or cause to be taken, all actions that may
be required of the Issuer for the interest on the Bonds to be and remain
excluded from the gross income of the Holders for federal income tax purposes,
and shall not take any actions which would adversely affect that exclusion under
the provisions of federal tax laws that apply to the Bonds.

          SECTION 6.08  Bonds Not to Become Arbitrage Bonds. The Issuer
                        -----------------------------------
covenants for the benefit of the Holders from time to time of the Bonds that it
will not act so as to cause the proceeds of the Bonds, any moneys derived,
directly or indirectly, from the use or investment thereof and any other moneys
on deposit in any fund or account maintained in respect of the Bonds (whether
such moneys were derived from the proceeds of the sale of the Bonds or from
other sources) to be used in a manner which could cause the Bonds to be treated
as "arbitrage bonds" within the meaning of the Code. The Borrower by its
execution of the Financing Agreement has covenanted to restrict the investment
or other use of money in the Funds created under this Indenture in such manner
and to such extent, if any, as may be necessary, after taking into account
reasonable expectations at the time the Bonds are delivered to their original
purchaser, so that the Bonds will not constitute "arbitrage bonds" under the
Code, and the Trustee hereby agrees to comply with the Borrower's written
instructions to such end with respect to the investment of money in the Funds
and Accounts created under this Indenture.

          SECTION 6.09  Observance and Performance Agreements. The Issuer will
                        -------------------------------------
observe and perform faithfully at all times covenants, agreements, authority,
actions, undertakings, stipulations and provisions to be observed or performed
on its part under the Financing Agreement, this Indenture and the Bonds, and
under all proceedings of the Issuer pertaining thereto.

          SECTION 6.10 Representations and Warranties. The Issuer represents and
                       ------------------------------
warrants that:

          (a)  It is duly authorized by the Constitution and laws of the
Commonwealth of Pennsylvania, including the Act, to issue the Bonds, to execute
and deliver this Indenture and the Financing Agreement and to provide the
security for payment of the Bond Service in the manner and to the extent set
forth in this Indenture.

          (b)  All actions required on its part to be performed for the
issuance, sale and delivery of the Bonds and for the execution and delivery of
this Indenture and the Financing Agreement have been or will be taken duly and
effectively.

          (c)  The Bonds will be valid and binding limited obligations of the
Issuer according to their terms.

(End of Article VI)

                                       51
<PAGE>

                                  ARTICLE VII

                              DEFAULT AND REMEDIES

          SECTION 7.01  Defaults; Events of Default. The occurrence of any of
                        ---------------------------
the following events is defined as and declared to be and to constitute an Event
of Default hereunder:

          (a) Failure to pay the principal of or any premium on any Bond when
such principal or premium shall become due and payable, whether at stated
maturity, by redemption, by acceleration or otherwise;

          (b) Failure to pay any interest on any Bond within one Business Day of
when such interest shall become due and payable;

          (c) Failure to pay the purchase price due to the Holder of any Bond
who has tendered such Bond for purchase pursuant to Article IV within one
Business Day of when such purchase price shall have become due and payable;

          (d) Failure by the Issuer to comply with the provisions of the Act
relating to the Bonds or the Project or to observe or perform any other
covenant, agreement or obligation on its part to be observed or performed and
which is contained in this Indenture or in the Bonds, which failure shall have
continued for a period of 90 days after written notice, by registered or
certified mail, to the Issuer, the Bank and the Borrower specifying the failure
and requiring that it be remedied, which notice may be given by the Trustee in
its discretion and shall be given by the Trustee at the written request of the
Holders of not less than 25% in principal amount of the Bonds outstanding;

          (e) The occurrence and continuance of an Event of Default as defined
in Section 7.1 of the Financing Agreement;

          (f) Receipt by the Trustee of a written notice from the Bank stating
that an event of default has occurred under the Reimbursement Agreement and
directing the Trustee to call the Bonds for mandatory purchase (if the Bonds are
in the Weekly Mode) or to declare the principal of the outstanding Bonds
immediately due and payable;

          (g) Receipt by the Trustee of a written notice from the Bank, prior to
the tenth calendar day following payment of a drawing under the Letter of Credit
for interest on Bonds which remain outstanding after the application of the
proceeds of such drawing, stating that the Letter of Credit will not be
reinstated with respect to such interest; or

          (h) Failure by the Borrower to cause an amendment extending the
Expiration Date of the current Letter of Credit on or before the Interest
Payment Date next preceding such Expiration Date, unless the Bonds have been
called for mandatory redemption or mandatory purchase on such Interest Payment
Date pursuant to Subsection 3.01(e) or clause (b) of Section 4.02.

          The term "default" or "failure" as used in this Article means a
default or failure by the Issuer in the observance or performance of any of the
covenants, agreements or obligations

                                       52
<PAGE>

on its part to be observed or performed contained in this Indenture or in the
Bonds or a default or failure by the Borrower under the Financing Agreement,
exclusive of any period of grace or notice required to constitute an Event of
Default as provided above or in the Financing Agreement.

          SECTION 7.02  Notice of Default. If an Event of Default shall occur,
                        -----------------
the Trustee shall give written notice of the Event of Default, by registered or
certified mail, to the Issuer, the Borrower, the Bank and the Remarketing Agent
within five (5) days after the Trustee acquires actual knowledge of the Event of
Default. If an Event of Default occurs of which the Trustee has notice pursuant
to this Indenture, the Trustee shall give written notice thereof, within 30 days
after the Trustee's receipt of notice of its occurrence, to the Holders of all
Bonds outstanding as shown by the Register at the close of business one Business
Day prior to the mailing of that notice; provided that except in the case of a
default in the payment of the principal or Purchase Price of or any premium or
interest on any Bond, the Trustee shall be protected in withholding such notice
if and so long as the board of directors, the executive committee or a trust
committee of directors or responsible officers of the Trustee in good faith
determine that the withholding of notice to the Holders is in the best interests
of the Holders.

          SECTION 7.03  Acceleration. Upon the occurrence of any Event of
                        ------------
Default under Subsection 7.01(d), (e) or (f), the Trustee shall, upon the
written direction of the Bank (or, in the case of an Event of Default under
Subsection 7.01(d), upon the written request of the Holders of 100% in principal
amount of the Bonds outstanding), declare, by a notice in writing delivered to
the Issuer and the Borrower, the principal of all Bonds outstanding (if not then
already due and payable), together with interest accrued thereon, to be due and
payable immediately; provided that, if the Bonds are in the Weekly Mode, the
Bank may, at its option, but subject to the following provisions of this
paragraph, direct the Trustee in writing to call (in which case the Trustee
shall call) the Bonds for mandatory purchase pursuant to clause (d) of Section
4.02 on a Business Day stipulated by the Bank in such direction, which Business
Day shall not be earlier than 20 days (or such shorter period as shall be
acceptable to the Trustee) after the date the Trustee receives such direction.
Irrespective of whether an Event of Default has occurred under Section 7.01(d),
(e) or (f) for which the Bank has directed the Trustee to call the Bonds for
mandatory purchase, upon the occurrence of an Event of Default under Subsection
7.01(g) or (h), the Trustee shall, and upon the occurrence of an Event of
Default under Subsection 7.01(a), (b) or (c) the Trustee may and upon the
written request of the Holders of a majority in principal amount of the Bonds
outstanding shall, declare the principal of all Bonds outstanding (if not then
already due and payable), and the interest accrued thereon, to be due and
payable immediately, such declaration to be made by a notice in writing
delivered to the Issuer and the Borrower. Upon any declaration that the
principal of and interest on the Bonds are due and payable immediately, such
principal and interest shall become and be due and payable immediately, and, in
addition, in the case of any such declaration as a result of an Event of Default
under Subsection 7.01(e), (f), (g) or (h) while the Bonds are in a Term Mode,
there shall also become due and payable immediately a premium equal to the sum
of the optional redemption premium and supplemental premium which would become
payable with respect to the Bonds if they were redeemed pursuant to a mandatory
redemption under Subsection 3.01(e) on the Interest Payment Date next preceding
the Expiration Date of the Letter of Credit.

          Written notice of any such declaration shall be given concurrently to
the Bank and the Remarketing Agent. The Trustee immediately upon such
declaration shall give notice

                                       53
<PAGE>

thereof in the same manner as provided in Section 3.04 with respect to
redemption of the Bonds, except that there shall be no minimum period of notice
prior to the date of payment. Such notice shall specify the date on which
payment of principal and interest shall be tendered to the Holders of the Bonds.

          Upon any such declaration hereunder, the Trustee shall (i) immediately
exercise such rights as it may have under the Financing Agreement to declare all
payments thereunder to be immediately due and payable and (ii) immediately draw
upon the Letter of Credit to the full extent permitted by the terms thereof
(such drawing to provide for payment by the Bank to be due at the earliest time
which the Trustee may require under the Letter of Credit and in no case later
than two Business Days after the date of declaration of acceleration and to
include amounts in respect of interest accruing on the Bonds through the date
payment of such drawing by the Bank is due). Upon receipt by the Trustee of
payment of the full amount drawn on the Letter of Credit and provided sufficient
moneys are available in the Bond Fund to pay pursuant to Section 5.04 all sums
due on the Bonds, (i) interest on the Bonds shall cease to accrue as provided in
Section 10.03 and (ii) the Bank shall succeed to and be subrogated to the right,
title and interest of the Trustee and the Holders in and to the Financing
Agreement, all funds held under this Indenture (except any funds held in the
Bond Fund or any account with respect to Undelivered Bonds which are identified
for the payment of the Bonds or of the purchase price of Undelivered Bonds and
any funds held in the Rebate Fund) and any other security held for the payment
of the Bonds, all of which, upon payment of any fees and expenses due and
payable to the Trustee pursuant to the Financing Agreement or this Indenture,
shall be assigned by the Trustee to the Bank.

          If, after the principal of the Bonds has been so declared to be due
and payable, all arrears of principal of and interest on the Bonds outstanding
are paid, and the Issuer and the Borrower also perform all other things in
respect of which either of them may have been in default hereunder or under the
Financing Agreement and pay the reasonable charges of the Trustee, the Holders
and any trustee appointed under the Act, including reasonable attorney's fees
and expenses, then, and in every such case, the Trustee or the Holders of a
majority in principal amount of the Bonds outstanding, by written notice to the
Issuer and the Borrower (and to the Holders or the Trustee, as the case may be),
may annul such declaration and its consequences, and such annulment shall be
binding upon the Trustee and all Holders; provided that there shall be no
annulment of any declaration resulting from (1) any Event of Default specified
in Subsection 7.01(f) or (g) without the prior written consent of the Bank or
(2) any Event of Default which has resulted in a drawing under the Letter of
Credit unless the Trustee has received written notice from the Bank that the
Letter of Credit has been reinstated (i) while the Bonds are in the Weekly Mode,
to an amount equal to the principal amount of the Bonds outstanding, plus 50
days interest thereon at the Maximum Rate, and (ii) while the Bonds are in a
Term Mode, to an amount equal to the principal amount of the Bonds outstanding,
plus 200 days interest thereon at a rate not less than the current Term Rate. No
annulment shall extend to or affect any subsequent Event of Default or shall
impair any rights consequent thereon.

          SECTION 7.04  Other Remedies; Rights of Holders. With or without
                        ---------------------------------
taking action under Section 7.03, upon the occurrence and continuance of an
Event of Default, the Trustee may pursue any available remedy to enforce the
payment of Bond Service or the observance and performance of any other covenant,
agreement or obligation under this

                                       54
<PAGE>

Indenture, the Financing Agreement or the Letter of Credit or any other
instrument providing security, directly or indirectly, for the Bonds.

          If any Event of Default has occurred and is continuing, the Trustee in
its discretion may, and upon the written request of Holders of a majority in
principal amount of the Bonds outstanding and receipt of indemnity to its
satisfaction shall, in its own name:

          (a)  By mandamus, or other suit, action or proceeding at law or in
equity, enforce all rights of the Holders, including the right to require the
Issuer to enforce any rights under the Financing Agreement and to require the
Issuer to carry out any other provisions of this Indenture for the benefit of
the Holders and to perform its duties under the Act;

          (b)  Bring suit upon the Bonds;

          (c)  By action or suit in equity require the Issuer to account as if
it were the trustee of an express trust for the Holders; and

          (d)  By action or suit in equity enjoin any acts or things which may
be unlawful or in violation of the rights of the Holders.

If an Event of Default under Subsection 7.01(e) occurs and is continuing, the
Trustee in its discretion may, and upon the written request of Holders of a
majority in principal amount of the Bonds outstanding or of the Bank and receipt
of indemnity to its satisfaction shall, enforce each and every right granted to
it as assignee of the Financing Agreement.

          No remedy conferred upon or reserved to the Trustee (or to the
Holders) by this Indenture is intended to be exclusive of any other remedy. Each
remedy shall be cumulative and shall be in addition to every other remedy given
hereunder or otherwise to the Trustee or to the Holders now or hereafter
existing.

          No delay in exercising or omission to exercise any remedy, right or
power accruing upon any default or Event of Default shall impair that remedy,
right or power or shall be construed to be a waiver of any default or Event of
Default or acquiescence therein. Every remedy, right and power may be exercised
from time to time and as often as may be deemed to be expedient.

          No waiver of any default or Event of Default hereunder, whether by the
Trustee or by the Holders, shall extend to or shall affect any subsequent
default or Event of Default or shall impair any remedy, right or power
consequent thereon.

          As the grantee of a security interest in the Financing Agreement
(except for the Unassigned Issuer's Rights), the Trustee is empowered to enforce
each remedy, right and power granted to the Issuer under the Financing
Agreement. In exercising any remedy, right or power thereunder or hereunder, the
Trustee shall take any action which would best serve the interests of the
Holders in the judgment of the Trustee, applying the standards described in
Sections 8.01 and 8.02.

          SECTION 7.05  Right of Holders to Direct Proceedings. The Holders of a
                        --------------------------------------
majority in aggregate principal amount of Bonds outstanding shall have the right
to direct, by an

                                       55
<PAGE>

instrument or document in writing executed and delivered to the Trustee, the
method and place of conducting all remedial proceedings hereunder; provided that
(i) any direction shall be in accordance with the provisions of law and of this
Indenture, (ii) the Trustee shall be indemnified as provided in Sections 8.01
and 8.02, (iii) the Trustee may take any other action which it deems to be
proper and which is not inconsistent with the direction, and (iv) if the Letter
of Credit is in effect and no default has occurred and is continuing thereunder,
then the Bank shall have the right to give such direction in lieu of such
Holders.

          SECTION 7.06  Application of Moneys. All moneys received by the
                        ---------------------
Trustee pursuant to any drawing made upon the Letter of Credit pursuant to
Section 7.03 shall be applied by the Trustee to and only to the payment of
principal of or premium, if any, or interest on the Bonds (other than Borrower
Bonds and Pledged Bonds). All other moneys received or collected by the Trustee
pursuant to any right given or action taken under the provisions of this Article
or the provisions of the Financing Agreement, after payment of any amount
required pursuant to Section 5.08 and any costs, expenses, liabilities and
advances paid, incurred or made by the Trustee (including, without limitation,
reasonable attorneys' fees and expenses, except as limited by law or judicial
order or decision entered in any action taken under this Article), shall be
applied as follows, subject to Sections 3.05, 5.06 and 5.07:

          (a)  Unless the principal of all of the Bonds shall have become, or
shall have been declared to be, due and payable, all of those moneys shall be
deposited in the Bond Fund and shall be applied:

          First -- To the payment to the Holders entitled thereto of all
          -----
installments of interest then due on the Bonds (other than Pledged Bonds and
Borrower Bonds), in the order of the dates of maturity of the installments of
that interest, beginning with the earliest date of maturity and, if the amount
available is not sufficient to pay in full any particular installment, then to
the payment thereof ratably, according to the amounts due on that installment,
to the Holders entitled thereto, without any discrimination or privilege, except
as to any difference in the respective rates of interest specified in the Bonds;

          Second -- To the payment to the Holders entitled thereto of the unpaid
          ------
principal of any of the Bonds which shall have become due (other than Pledged
Bonds and Borrower Bonds and other than Bonds previously called for redemption
for the payment of which moneys are held pursuant to the provisions of this
Indenture), whether at stated maturity or by redemption, in the order of their
due dates, beginning with the earliest due date, with interest on those Bonds
from the respective dates upon which they became due at the rates specified in
those Bonds, and if the amount available is not sufficient to pay in full all
Bonds due on any particular date, together with that interest, then to the
payment thereof ratably, according to the amounts of principal due on that date,
to the Holders entitled thereto, without any discrimination or privilege; and

          Third, -- To the payment of the principal of and interest on Pledged
          -----
Bonds and Borrower Bonds, in that order.

          The surplus, if any, remaining after the application of the moneys as
set forth above shall to the extent of any unreimbursed drawing under the Letter
of Credit, or other obligations owing to the Bank under the Reimbursement
Agreement, as certified by the Bank to

                                       56
<PAGE>

the Trustee, be paid to the Bank. Any remaining moneys shall be paid to the
Borrower or the Person lawfully entitled to receive the same as a court of
competent jurisdiction may direct.

          (b)  If the principal of all of the Bonds shall have become due or
shall have been declared to be due and payable pursuant to this Article, all of
those moneys shall be deposited into the Bond Fund and shall be applied, first,
                                                                         -----
to the payment of the principal, premium (if any) and interest then due and
unpaid upon the Bonds (other than Pledged Bonds and Borrower Bonds), without
preference or priority of principal over interest, of interest over principal,
of any installment of interest over any other installment of interest, or of any
Bond over any other Bond, ratably, according to the amounts due respectively for
principal and interest, to the Holders entitled thereto, without any
discrimination or privilege, except as to any difference in the respective rates
of interest specified in the Bonds, and second, to the payment of principal of
                                        ------
and interest on the Pledged Bonds and the Borrower Bonds, if any, in that order.

          (c)  If the principal of all of the Bonds shall have been declared to
be due and payable pursuant to this Article, and if that declaration thereafter
shall have been rescinded and annulled under the provisions of Section 7.03 or
7.10, subject to the provisions of paragraph (b) of this Section in the event
that the principal of all of the Bonds shall become due and payable later, the
moneys shall be deposited in the Bond Fund and shall be applied in accordance
with the provisions of Article V.

          (d)  Whenever moneys are to be applied pursuant to the provisions of
this Section, those moneys shall be applied at such times, and from time to
time, as the Trustee shall determine, having due regard to the amount of moneys
available for application and the likelihood of additional moneys becoming
available for application in the future. Whenever the Trustee shall direct the
application of those moneys, it shall fix the date upon which the application is
to be made (and with respect to acceleration such date shall be fixed in
accordance with Section 7.03), and upon that date, interest shall cease to
accrue on the amounts of principal, if any, to be paid on that date, provided
the moneys are available therefor. The Trustee shall give notice of the deposit
with it of any moneys and of the fixing of that date, all consistent with the
requirements of Section 2.08 for the establishment of, and for giving notice
with respect to, a Special Record Date for the payment of overdue interest.
Except as otherwise provided in Section 2.13, the Trustee shall not be required
to make payment of principal of and any premium on a Bond to the Holder thereof,
until the Bond shall be presented to the Trustee for appropriate endorsement or
for cancellation if it is paid fully.

          SECTION 7.07  Remedies Vested in Trustee. All rights of action
                        --------------------------
(including without limitation, the right to file proof of claims) under this
Indenture or under any of the Bonds may be enforced by the Trustee without the
possession of any of the Bonds or the production thereof in any trial or other
proceeding relating thereto. Any suit or proceeding instituted by the Trustee
shall be brought in its name as Trustee without the necessity of joining any
Holders as plaintiffs or defendants. Any recovery of judgment shall be for the
benefit of the Holders of the outstanding Bonds and the Bank, subject to the
provisions of this Indenture.

          SECTION 7.08  Rights and Remedies of Holders. A Holder shall not have
                        ------------------------------
any right to institute any suit, action or proceeding for the enforcement of
this Indenture, for the execution of any trust hereof, or for the exercise of
any other remedy hereunder, unless:

                                       57
<PAGE>

          (a)  there has occurred and is continuing an Event of Default of which
the Trustee has been notified, as provided in Subsection 8.02(f), or of which it
is deemed to have notice under that Subsection,

          (b)  the Holders of at least a majority in aggregate principal amount
of Bonds then outstanding shall have made written request to the Trustee and
shall have afforded the Trustee reasonable opportunity to proceed to exercise
the remedies, rights and powers granted herein or to institute the suit, action
or proceeding in its own name, and shall have offered indemnity to the Trustee
as provided in Sections 8.01 and 8.02, and

          (c)  the Trustee thereafter shall have failed or refused to exercise
the remedies, rights and powers granted herein or to institute the suit, action
or proceeding in its own name.

At the option of the Trustee, such notification (or notice), request,
opportunity and offer of indemnity are conditions precedent in every case, to
the institution of any suit, action or proceeding described above.

          No one or more Holders shall have any right to affect, disturb or
prejudice in any manner whatsoever the security or benefit of this Indenture by
its or their action, or to enforce, except in the manner provided herein, any
remedy, right or power hereunder. Any suit, action or proceedings shall be
instituted, had and maintained in the manner provided herein for the benefit of
the Holders of all Bonds outstanding. Notwithstanding the foregoing provisions
of this Section or any other provision of this Indenture, the obligation of the
Issuer shall be absolute and unconditional to pay hereunder, but solely from the
Revenues and other funds pledged under this Indenture, the principal or
redemption price of, and interest on, the Bonds to the respective Holders
thereof on the respective due dates thereof, and nothing herein shall affect or
impair the right of action, which is absolute and unconditional, of such Holders
to enforce such payment; provided that no Holder shall have a right to draw upon
the Letter of Credit.

          SECTION 7.09  Termination of Proceedings. In case the Trustee shall
                        --------------------------
have proceeded to enforce any remedy, right or power under this Indenture in any
suit, action or proceeding, and the suit, action or proceeding shall have been
discontinued or abandoned for any reason, or shall have been determined
adversely to the Trustee, the Issuer, the Trustee, the Bank and the Holders
shall be restored to their former positions and rights hereunder, respectively,
and all rights, remedies and powers of the Trustee shall continue as if no suit,
action or proceeding had been taken.

          SECTION 7.10  Waivers of Events of Default. Except as hereinafter
                        ----------------------------
provided, at any time, in its discretion, the Trustee, but only with the express
prior consent of the Bank, may (and, upon the written request of the Holders of
a majority in aggregate principal amount of all Bonds outstanding, shall) waive
any Event of Default hereunder and its consequences and annul any corresponding
acceleration of maturity of principal of the Bonds. There shall not be so
waived, however, any Event of Default described in Subsection 7.01(a), (b), (c),
(f), (g) or (h) nor shall any acceleration in connection therewith be annulled,
except with written consent of the Bank and unless at the time of that waiver or
annulment payments of the amounts and satisfaction of the other conditions
provided in Section 7.03 for annulment have been made or provision has been made
therefor. No waiver shall extend to any subsequent or other Event of Default or
impair any right consequent thereon.

                                       58
<PAGE>

          SECTION 7.11  Trustee's Right to Appointment of Receiver. Upon the
                        ------------------------------------------
occurrence and continuance of an Event of Default and as provided by law
(including the Act), the Trustee shall be entitled as of right to the
appointment of a receiver; and the Trustee, the Holders and any receiver so
appointed shall have such rights and powers and be subject to such limitations
and restrictions as are provided by law (including in the Act).

          SECTION 7.12  Trustee and Holders Entitled to All Benefits Under Act.
                        ------------------------------------------------------
It is the purpose of this Article to provide such remedies to the Trustee and
the Holders as may be lawfully granted under the provisions of the Act, but
should any remedy herein granted be held unlawful, the Trustee and the Holders
shall nevertheless be entitled to every remedy provided by the Act. It is
further intended that, insofar as lawfully possible, the provisions of this
Article shall apply to and be binding upon any trustee or receiver appointed
under this Indenture or the Act.

          SECTION 7.13  Trustee's Obligation to Bank Upon Payment of All Amounts
                        --------------------------------------------------------
Due Holders. Once the principal of and premium, if any, and interest on all
- -----------
Bonds issued hereunder have been paid, or provision has been made pursuant to
Article X for payment of the same and any purchase price of Bonds that is
payable pursuant to Article IV, together with the compensation and expenses of
the Trustee and all other sums payable hereunder by the Issuer or the Borrower,
the Trustee's sole obligation hereunder shall be to assign promptly and turn
over to the Bank, as successor, subrogee or otherwise, (i) all of the Trustee's
right, title and interest under this Indenture, (ii) all balances held hereunder
not required for the payment of the Bonds and such other obligations (except the
Rebate Fund) and (iii) the Trustee's right, title and interest in, to and under
the Financing Agreement.

(End of Article VII)

                                       59
<PAGE>

                                 ARTICLE VIII

                          TRUSTEE AND REMARKETING AGENT

          SECTION 8.01    Trustee's Acceptance and Responsibilities.
                          -----------------------------------------

          (a)  The Trustee accepts the trusts imposed upon it by this Indenture,
and agrees to observe and perform those trusts, but only upon and subject to the
terms and conditions set forth in this Article, to all of which the parties
hereto and the Holders agree. In its capacity as Trustee hereunder, the Trustee
shall authenticate the Bonds and shall act as Bond registrar, transfer agent,
tender agent and paying agent, all as provided herein.

          (b)  Prior to the occurrence of a default or an Event of Default of
which the Trustee has been notified, as provided in Subsection 8.02(f), or of
which by that Subsection the Trustee is deemed to have notice, and after the
cure or waiver of all defaults or Events of Default which may have occurred,

               (i)   the Trustee undertakes to perform only those duties and
obligations which are set forth specifically in this Indenture, and no duties or
obligations shall be implied to the Trustee; and

               (ii)  in the absence of bad faith on its part, the Trustee may
rely conclusively, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates, opinions or other writings
furnished to the Trustee and conforming to the requirements of this Indenture;
but in the case of any such certificates, opinions or other writings which by
any provision hereof are required specifically to be furnished to the Trustee,
the Trustee shall be under a duty to examine the same to determine whether or
not they conform to the requirements of this Indenture.

          (c)  In case a default or an Event of Default has occurred and is
continuing hereunder (of which the Trustee has been notified, or is deemed to
have notice), the Trustee shall exercise those rights and powers vested in it by
this Indenture and shall use the same degree of care and skill in their exercise
as a prudent Person would exercise or use under the circumstances in the conduct
of its own affairs.

          (d)  No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own grossly negligent action, its own grossly
negligent failure to act, or its own willful misconduct, except that

               (i)  this Subsection shall not be construed to affect the
limitation of the Trustee's duties and obligations provided in Subsection
8.01(b)(i) or the Trustee's right to rely on the truth of statements and the
correctness of opinions as provided in Subsection 8.01(b)(ii);

               (ii) the Trustee shall not be liable for any error of judgment
made in good faith by any of its officers, unless it shall be established that
the Trustee was grossly negligent in ascertaining the pertinent facts;

                                       60
<PAGE>

               (iii)  the Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in good faith in accordance with the
direction of the Holders of not less than a majority in principal amount of the
Bonds then outstanding relating to the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust or
power conferred upon the Trustee, under this Indenture; and

               (iv)   no provision of this Indenture shall require the Trustee
to expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its duties hereunder, or in the exercise of any of its
rights or powers if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it; provided that this clause (iv) shall not relieve
the Trustee of its duties to take actions required to be taken under Section
7.03 and with respect to drawings to be made under the Letter of Credit and
making payments on the Bonds when due.

          (e)  Every provision of this Indenture relating to the conduct or
affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Section.

          (f)  The Trustee accepts and agrees to perform any and all duties
which are imposed upon the Trustee or the Issuer under the Representation
Letter.

          (g)  The Trustee will promptly notify the Holders upon receiving
written notice from the Borrower pursuant to Section 5.13 of the Financing
Agreement or from the Bank to the effect that a transaction is expected to occur
which would result in the Borrower controlling or being controlled by the Bank.

          SECTION 8.02 Certain Rights and Obligations of Trustee. Except as
                       -----------------------------------------
otherwise provided in Section 8.01:

          (a)  The Trustee (i) may execute any of the trusts or powers hereof
and perform any of its duties by or through attorneys, agents, receivers or
employees (but shall be answerable therefor only in accordance with the standard
specified above), (ii) shall be entitled to the advice of counsel concerning all
matters of trusts hereof and duties hereunder, and (iii) may pay reasonable
compensation in all cases to all of those attorneys, agents, receivers and
employees reasonably employed by it in connection with the trusts hereof. The
Trustee may act or refrain from acting upon the opinion or advice of any
attorney (who may be the attorney or attorneys for the Issuer or the Borrower)
approved by the Trustee in the exercise of reasonable care. The Trustee shall
not be responsible for any loss or damage resulting from any action taken or
omitted to be taken in good faith in reliance upon that opinion or advice.

          (b)  Except for its certificate of authentication on the Bonds, the
Trustee shall not be responsible for (i) any recital in this Indenture or in the
Bonds, (ii) the validity, priority, recording, rerecording, filing or refiling
of this Indenture or any Supplemental Indenture, (iii) any instrument or
document of further assurance or collateral assignment, (iv) the preparation,
filing or refiling any financing statements, amendments thereto or continuation
statements, (v) the validity of the execution by the Issuer of this Indenture,
any Supplemental Indenture or instruments or documents of further assurance,
(vi) the sufficiency of the security for the Bonds issued hereunder or intended
to be secured hereby, (vii) the value of or title to the Project, or insurance
of the Project or collection of insurance moneys, (viii) the maintenance of the
security hereof, or (ix) the use of any funds disbursed by the Trustee in
accordance with the

                                       61
<PAGE>

provisions of this Indenture and the Financing Agreement. The Trustee shall not
be bound to ascertain or inquire as to the observance or performance of any
covenants, agreements or obligations on the part of the Issuer or the Borrower
under the Financing Agreement except as set forth hereinafter; but the Trustee
may require of the Issuer or the Borrower full information and advice as to the
observance or performance of those covenants, agreements and obligations. Except
as otherwise provided in Section 7.04, the Trustee shall have no obligation to
observe or perform any of the duties of the Issuer under the Financing
Agreement.

          (c)  The Trustee shall not be accountable for the application by the
Borrower or any other Person of the proceeds of any Bonds authenticated or
delivered hereunder.

          (d)  The Trustee may, in the absence of bad faith on its part, act
upon any notice, request, consent, certificate, order, affidavit, letter,
telegram or other paper or document reasonably believed by it to be genuine and
correct and to have been signed or sent by the proper Person or Persons, and
shall not be bound to investigate the facts or matters stated therein, but, in
its discretion, may make such further inquiry or investigation as to such facts
or matters as it deems appropriate. Any action taken by the Trustee pursuant to
this Indenture upon the request or authority or consent of any Person who is the
Holder of any Bonds at the time of making the request or giving the authority or
consent, shall be conclusive and binding upon all future Holders of the same
Bond and of Bonds issued in exchange therefor or in place thereof.

          (e)  As to the existence or nonexistence of any fact for which the
Issuer, the Bank or the Borrower may be responsible or as to the sufficiency or
validity of any instrument, document, report, paper or proceeding, the Trustee,
in the absence of bad faith on its part, shall be entitled to rely upon a
certificate signed on behalf of the Issuer, the Bank or the Borrower by an
Authorized Representative or authorized officer thereof, as applicable, as
sufficient evidence of the facts recited therein. Prior to the occurrence of a
default or Event of Default hereunder of which the Trustee has been notified, as
provided in Subsection 8.02(f), or of which by that Subsection the Trustee is
deemed to have notice, the Trustee may accept a similar certificate to the
effect that any particular dealing, transaction or action is necessary or
expedient; provided that the Trustee in its discretion may require and obtain
any further evidence which it deems to be necessary or advisable; and provided
further that the Trustee shall not be bound to secure any further evidence. The
Trustee may accept a certificate of the officer, or an assistant thereto, having
charge of the appropriate records, to the effect that a resolution has been
adopted by the Issuer in the form recited in that certificate, as conclusive
evidence that the resolution has been duly adopted and is in full force and
effect.

          (f)  The Trustee shall not be required to take notice, and shall not
be deemed to have notice, of any default or Event of Default hereunder, except
Events of Default described in Subsections 7.01(a), (b), (c), (f), (g) and (h),
unless the Trustee shall be notified specifically of the default or Event of
Default in a written instrument or document delivered to it by the Issuer, the
Bank or by the Holders of at least 10% of the aggregate principal amount of
Bonds outstanding. In the absence of delivery of a notice satisfying those
requirements, the Trustee may assume conclusively that there is no default or
Event of Default, except as noted above.

          (g)  At any reasonable time, the Trustee and its duly authorized
agents, attorneys, experts, engineers, accountants and representatives (i) may
inspect and copy fully all

                                       62
<PAGE>

books, papers and records of the Issuer pertaining to the Project and the Bonds,
and (ii) may make any memoranda from and in regard thereto as the Trustee may
desire.

          (h)  The Trustee shall not be required to give any bond or surety with
respect to the execution of these trusts and powers or otherwise in respect of
the premises.

          (i)  Notwithstanding anything contained elsewhere in this Indenture to
the contrary, the Trustee may demand any showings, certificates, reports,
opinions (including, without limitation, opinions of Bond Counsel that any
actions proposed to be taken by the Trustee will not adversely affect any
applicable exemption from taxes imposed by the United States of America or the
Commonwealth of Pennsylvania with respect to the Bonds), appraisals and other
information, and any corporate action and evidence thereof, in addition to that
required by the terms hereof, as a condition to the authentication of any Bonds
or the taking of any action whatsoever within the purview of this Indenture, if
the Trustee deems it to be desirable for the purpose of establishing the right
of the Issuer to the authentication of any Bonds or the right of any Person to
the taking of any other action by the Trustee; provided that the Trustee shall
not be required to make any such demand.

          (j)  Before taking action hereunder pursuant to Section 8.04 or
Article VII (with the exception of any action required to be taken under Section
7.03 and except with respect to drawings made under the Letter of Credit and
with respect to payment on the Bonds when due), the Trustee may require that a
satisfactory indemnity bond be furnished to it for the reimbursement of all
expenses which it may incur and to protect it against all liability by reason of
any action so taken, except liability which is adjudicated to have resulted from
its gross negligence or willful misconduct; provided that no such bond shall be
required from the Issuer. The Trustee may take action without that indemnity,
and in that case, the Issuer shall cause the Borrower to reimburse the Trustee
for all of the Trustee's expenses pursuant to Section 8.03.

          (k)  Unless otherwise provided herein, all moneys received by the
Trustee under this Indenture shall be held in trust for the purposes for which
those moneys were received, until those moneys are used, applied or invested as
provided herein; provided that those moneys need not be segregated from other
moneys, except to the extent required by this Indenture or by law. The Trustee
shall not have any liability for interest on any moneys received hereunder,
except to the extent expressly provided herein or agreed with the Issuer or the
Borrower.

          (l)  Any resolution of the Issuer, and any opinions, certificates and
other instruments and documents for which provision is made in this Indenture,
may be accepted by the Trustee, in the absence of bad faith on its part, as
conclusive evidence of the facts and conclusions stated therein and shall be
full warrant, protection and authority to the Trustee for its actions taken
hereunder.

          (m)  The Trustee may construe any ambiguous or inconsistent provisions
of this Indenture in such manner as it deems reasonable, and any such
construction of such provisions by the Trustee shall be binding upon the Issuer,
the Borrower, the Bank, the Remarketing Agent and the Holders.

          (n)  Notwithstanding any provision of this Indenture to the contrary,
the Trustee shall not be liable or responsible for any calculation or
determination which may be

                                       63
<PAGE>

required in connection with or for the purpose of complying with Section 148 of
the Code, including, without limitation, the calculation of amounts required to
be paid to the United States of America under the provisions of Section 148 of
the Code, the maximum amount which may be invested in "nonpurpose obligations"
as defined in the Code and the fair market value of any investments made
hereunder, and the sole obligation of the Trustee with respect to the
investments of funds hereunder shall be to invest the moneys received by the
Trustee as provided herein pursuant to the written instructions of the Borrower.

          (o)  Except as otherwise expressly provided hereunder, the Trustee
shall not be required to give or furnish any notice, demand, report, reply,
statement, advice or opinion to any Holder, the Issuer or any other Person, and
the Trustee shall not incur any liability for its failure or refusal to give or
furnish the same unless obligated or required to do so by express provisions
hereof.

          (p)  The permissive rights of the Trustee to take actions enumerated
in this Indenture shall not be construed as duties.

          (q)  In acting or omitting to act pursuant to the Financing Agreement,
the Trustee shall be entitled to all of the rights and immunities accorded to it
under this Indenture, including but not limited to this Article VIII.

          (r)  The Trustee shall have no responsibility with respect to any
information in any offering memorandum or other disclosure material distributed
with respect to the Bonds or for compliance with securities laws in connection
with the issuance and sale of the Bonds.

          (s)  No provision of this Indenture or the Financing Agreement shall
require the Trustee to expend or risk its own funds or otherwise incur any
financial liability in the performance of its duties.

          SECTION 8.03 Fees, Charges and Expenses of Trustee. The Trustee shall
                       -------------------------------------
be entitled to payment or reimbursement by the Borrower, as provided in the
Financing Agreement, for reasonable fees for the Ordinary Services of the
Trustee and its agents rendered hereunder and for all advances, counsel fees and
other Ordinary Expenses reasonably and necessarily paid or incurred by it and
its agents in connection with the provision of Ordinary Services. For purposes
hereof, fees for Ordinary Services provided for by their respective standard fee
schedule or other fee arrangement shall be considered reasonable. In the event
that it should become necessary for any of them to perform Extraordinary
Services, they shall be entitled to reasonable extra compensation therefor and
to reimbursement for reasonable and necessary Extraordinary Expenses incurred in
connection therewith. The Trustee shall not be entitled to compensation or
reimbursement for Extraordinary Services or Extraordinary Expenses occasioned by
its gross negligence or willful misconduct.

          The fees for the Trustee's Ordinary Services and Ordinary Expenses and
Extraordinary Service and Extraordinary Expenses shall be entitled to payment
and reimbursement only from (i) the Project Fund, (ii) Additional Payments made
by the Borrower pursuant to the Financing Agreement, or (iii) from other moneys
available therefor. Any amounts payable to the Trustee pursuant to this Section
shall be payable upon demand and shall bear interest from five Business Days
following the date of demand therefor at the Interest Rate for Advances. The
initial or acceptance fees of the Trustee and the fees, charges and expenses of

                                       64
<PAGE>

the Trustee and its agents described above, may be paid by the Trustee from the
Project Fund as and when due to the extent that those fees, charges and expenses
become due during the Construction Period (as defined in the Financing
Agreement).

          SECTION 8.04 Intervention by Trustee. The Trustee may intervene on
                       -----------------------
behalf of the Holders, and shall intervene if requested to do so in writing by
the Holders of at least 25% in the principal amount of Bonds outstanding, in any
judicial proceeding to which the Issuer or the Borrower is a party and which in
the opinion of the Trustee and its counsel has a substantial bearing on the
interests of Holders of the Bonds. The rights and obligations of the Trustee
under this Section are subject to the approval of that intervention by a court
of competent jurisdiction. The Trustee may require that a satisfactory indemnity
bond be provided to it in accordance with Sections 8.01 and 8.02 before it takes
action hereunder.

          SECTION 8.05 Successor Trustee. Anything herein to the contrary
                       -----------------
notwithstanding,

          (a)  any corporation or association (i) into which the Trustee may be
converted or merged, (ii) with which the Trustee or any successor to it may be
consolidated, or (iii) to which the Trustee may sell or transfer its corporate
trust business as a whole or substantially as a whole, or any corporation or
association resulting from any such conversion, merger, consolidation, sale or
transfer, ipso facto, shall be and become successor Trustee hereunder and shall
          ---- -----
be vested with all of the title to the whole property or trust estate hereunder;
and

          (b)  that corporation or association, as successor Trustee, shall be
vested further, as was its predecessor, with each and every trust, property,
remedy, power, right, duty, obligation, discretion, privilege, claim, demand,
cause of action, immunity, estate, title, interest and lien expressed or
intended by this Indenture to be exercised by, vested in or conveyed to the
Trustee, without the execution or filing of any instrument or document or any
further act on the part of any of the parties hereto.

Any successor Trustee, however, (i) shall be a trust company or a bank having
the powers of a trust company, (ii) shall be in good standing within the
Commonwealth of Pennsylvania, (iii) shall be duly authorized to exercise trust
powers within the Commonwealth of Pennsylvania, and (iv) shall have a reported
capital and surplus of not less than $50,000,000 and a rating assigned to its or
its parent entity's or primary commercial banking affiliate's long-term
unsecured debt by Moody's at least equal to "Baa3" (if the Bonds are then rated
by Moody's) and by Standard & Poor's at least equal to "BBB-" (if the Bonds are
then rated by Standard & Poor's) unless the Issuer receives written confirmation
from the respective Rating Service that the appointment of a particular
successor trustee not meeting such rating requirement will not result in a
reduction or withdrawal of its rating of the Bonds.

          SECTION 8.06 Resignation by Trustee. The Trustee may resign at any
                       ----------------------
time from the trusts created hereby by giving written notice of the resignation
to the Issuer, the Borrower, the Bank and the Remarketing Agent and by mailing
written notice of the resignation to the Holders as their names and addresses
appear on the Register at the close of business one Business Day prior to the
mailing. The resignation shall take effect only upon the appointment of a
successor Trustee and transfer of the Letter of Credit to such successor.

                                       65
<PAGE>

          SECTION 8.07 Removal of Trustee. The Trustee may be removed at any
                       ------------------
time by an instrument or document or concurrent instruments or documents
delivered to the Trustee at least five Business Days prior to the date of
removal, with copies thereof mailed to the Issuer, the Borrower, the Bank and
the Remarketing Agent, and signed by or on behalf of the Holders of not less
than a majority in principal amount of the Bonds outstanding.

          The Trustee also may be removed at any time for any breach of trust or
for acting or proceeding in violation of, or for failing to act or proceed in
accordance with, any provision of this Indenture with respect to the duties and
obligations of the Trustee by any court of competent jurisdiction upon the
application of the Issuer or the Holders of not less than 25% in principal
amount of the Bonds outstanding.

          The removal of the Trustee pursuant to this Section shall take effect
only upon the appointment of a successor Trustee and transfer of the Letter of
Credit to such successor.

          SECTION 8.08 Appointment of Successor Trustee. If (i) the Trustee
                       --------------------------------
shall resign, shall be removed, shall be dissolved, or shall become otherwise
incapable of acting hereunder, (ii) the Trustee shall be taken under the control
of any public agency, or (iii) a receiver shall be appointed for the Trustee by
a court, then a successor Trustee shall be appointed by the Issuer, with the
written consent of the Borrower and the Bank; provided that if a successor
Trustee is not so appointed within 10 days after (a) a notice of resignation or
an instrument or document of removal is received by the Issuer, as provided in
Sections 8.06 and 8.07, respectively, or (b) the Trustee is dissolved, taken
under control, becomes otherwise incapable of acting or a receiver is appointed,
in each case, as provided above, then, so long as the Issuer shall not have
appointed a successor Trustee, the Holders of a majority in aggregate principal
amount of Bonds outstanding may designate a successor Trustee by an instrument
or document or concurrent instruments or documents in writing signed by or on
behalf of those Holders. If no appointment of a successor Trustee shall be made
pursuant to the foregoing provisions of this Section, the Holder of any Bond
outstanding or any retiring Trustee, at the Borrower's expense, may apply to any
court of competent jurisdiction to appoint a successor Trustee. Such court may
thereupon, after such notice, if any, as such court may deem proper and
prescribe, appoint a successor Trustee.

          Every successor Trustee appointed pursuant to this Section (i) shall
be a trust company or a bank having the powers of a trust company, (ii) shall be
in good standing within the Commonwealth of Pennsylvania, (iii) shall be duly
authorized to exercise trust powers within the Commonwealth of Pennsylvania,
(iv) shall have a reported capital and surplus of not less than $50,000,000 and
a rating assigned to its or its parent entity's or primary commercial banking
affiliate's long-term unsecured debt by Moody's at least equal to "Baa3" (if the
Bonds are then rated by Moody's) and by Standard & Poor's at least equal to
"BBB-" (if the Bonds are then rated by Standard & Poor's) unless the Issuer
receives written confirmation from the Rating Service that the appointment of a
particular successor trustee not meeting such rating requirement will not result
in a reduction or withdrawal of its rating of the Bonds, and (v) shall be
willing to accept the trusteeship under the terms and conditions of this
Indenture.

          Every successor Trustee appointed hereunder shall execute and
acknowledge, and shall deliver to its predecessor, the Issuer, the Borrower, the
Bank and the Remarketing Agent, an instrument or document in writing accepting
the appointment. Thereupon, without any

                                       66
<PAGE>

further act, the successor shall become vested with all of the trusts,
properties, claims, demands, causes of action, immunities, estates, titles,
interests and liens of its predecessor. Upon the written request of its
successor, the Issuer, the Borrower, the Bank or the Remarketing Agent, the
predecessor Trustee (i) shall execute and deliver an instrument or document
transferring to its successor all of the trusts, properties, remedies, powers,
rights, duties, obligations, discretions, privileges, claims, demands, causes of
action, immunities, estates, titles, interests and liens of the predecessor
Trustee hereunder, and (ii) shall take any other action necessary to duly
assign, transfer and deliver to its successor all property (including, without
limitation, all securities and moneys and the Letter of Credit) held by it as
Trustee, but shall not be required to pay any Letter of Credit transfer fee.
Should any instrument or document in writing from the Issuer be requested by any
successor Trustee for vesting and conveying more fully and certainly in and to
that successor the trusts, properties, remedies, powers, rights, duties,
obligations, discretions, privileges, claims, demands, causes of action,
immunities, estates, titles, interests and liens vested or conveyed or intended
to be vested or conveyed hereby in or to the predecessor Trustee, the Issuer
shall execute, acknowledge and deliver that instrument or document.

          In the event of a change in the Trustee, the predecessor Trustee shall
cease to be custodian of any moneys which it may hold pursuant to this Indenture
and shall cease to be Bond registrar, transfer agent, tender agent,
authenticating agent and paying agent for the Bonds. The successor Trustee shall
become custodian for moneys held under this Indenture and Bond registrar,
transfer agent, tender agent, authenticating agent and paying agent as and to
the extent provided herein.

          SECTION 8.09 Adoption of Authentication. In case any of the Bonds
                       --------------------------
shall have been authenticated, but shall not have been delivered, any successor
Trustee may adopt the certificate of authentication of any predecessor Trustee
and may deliver those Bonds so authenticated as provided herein. In case any
Bonds shall not have been authenticated, any successor Trustee may authenticate
those Bonds either in the name of any predecessor or in its own name. In all
cases, the certificate of authentication shall have the same force and effect as
provided in the Bonds or in this Indenture with respect to the certificate of
authentication of the predecessor Trustee.

          SECTION 8.10 Designation and Succession of Authenticating Agent, Bond
                       --------------------------------------------------------
Registrar, Transfer Agent, Tender Agent and Paying Agent. The Trustee may, with
- --------------------------------------------------------
the consent of the Issuer, appoint an agent or agents, with power to act on the
Trustee's behalf and subject to the Trustee's direction in the authentication,
registration, transfer and exchange and tender of Bonds and payment of Bond
Service under the provisions of this Indenture; provided that any tender agent
or paying agent so appointed shall have and maintain a rating assigned to its or
its parent entity's or primary commercial banking affiliate's long-term
unsecured debt by Moody's at least equal to "Baa3" (if the Bonds are then rated
by Moody's) and by Standard & Poor's at least equal to "BBB-" (if the Bonds are
then rated by Standard & Poor's) unless the Issuer receives written confirmation
from the Rating Service that the appointment of a tender agent or paying agent
not meeting such rating requirement will not result in a reduction or withdrawal
of its rating of the Bonds. For all purposes of this Indenture, the
authentication, registration and delivery of Bonds by any such agent pursuant to
this Section shall be deemed to be authentication, registration and delivery of
those Bonds by the Trustee.

                                       67
<PAGE>

          Any corporation or association with or into which any such agent may
be merged or converted or with which it may be consolidated, or any corporation
or association resulting from any merger, consolidation or conversion to which
any such agent shall be a party, or any corporation or association succeeding to
all or substantially all of the corporate trust business of any such agent,
shall be the successor of that agent hereunder, if that successor corporation or
association is otherwise eligible hereunder, without the execution or filing of
any paper or any further act on the part of the parties hereto or the such agent
or such successor corporation.

          Any such agent may at any time resign by giving written notice of
resignation to the Trustee and to the Issuer, the Borrower and the Remarketing
Agent. The Trustee may at any time terminate the agency of any such agent by
giving written notice of termination to such agent and to the Issuer, the
Borrower and the Remarketing Agent. Upon receiving such a notice of resignation
or upon such a termination, or in the case at any time any such agent shall
cease to be eligible under this Section, the Trustee may appoint a successor
agent. The Trustee shall give written notice of appointment of a successor agent
to the Issuer, the Borrower and the Remarketing Agent and shall mail, within 10
days after that appointment, notice thereof to all Holders as their names and
addresses appear on the Register one Business Day prior to the mailing of such
notice.

          The Trustee shall pay to any such agent from time to time reasonable
compensation for its services, and the Trustee shall be entitled to be
reimbursed for such payments as Ordinary Expenses, subject to Section 8.03.

          The pertinent provisions of Subsections 8.02(b), (c), (d), (h) and (i)
shall be applicable to any such agent.

          SECTION 8.11 Dealing in Bonds. The Trustee, the Bank and the
                       ----------------
Remarketing Agent, their affiliates, and any directors, officers, employees or
agents thereof, in good faith, may become the owners of Bonds secured hereby
with the same rights which it or they would have hereunder if the Trustee, the
Bank or the Remarketing Agent did not serve in those capacities. The Trustee may
be, or be affiliated with, the Remarketing Agent or the Bank. The Trustee may
also engage in or be interested in any financial or other transaction with the
Issuer, the Borrower, the Bank, the Remarketing Agent or any related party.

          SECTION 8.12 Representations, Agreements and Covenants of Trustee.
                       ----------------------------------------------------
Chase Manhattan Trust Company, National Association hereby represents and
covenants that it is a national banking association duly organized and validly
existing under the laws of the United States of America, with all requisite
corporate trust powers to undertake and perform its obligations under this
Indenture, and that it, or its parent entity or primary commercial banking
affiliate, has a rating assigned to its long-term unsecured debt by Moody's at
least equal to "Baa3" (if the Bonds are then rated by Moody's) and by Standard &
Poor's at least equal to "BBB-" (if the Bonds are then rated by Standard &
Poor's). All federal, state and local governmental, public and regulatory
authority, approvals, consents, notices, authorizations, registrations,
licenses, exemptions and filings that are required to have been obtained or made
by Trustee with respect to the authorization, execution, delivery and
performance by, or the enforcement against or by, the Trustee of this Indenture
have been obtained and are in full force and effect and all conditions of such
approvals, consents, notices, authorizations, registrations, licenses,
exemptions and filings have been fully complied with.

                                       68
<PAGE>

          SECTION 8.13 Appointment of Remarketing Agent. The Issuer shall, with
                       --------------------------------
the consent of the Borrower, appoint the Remarketing Agent for the Bonds,
subject to the conditions set forth in Section 8.14. The Remarketing Agent shall
designate to the Trustee its Principal Office and signify its acceptance of the
duties and obligations imposed upon it hereunder by a written instrument of
acceptance delivered to the Issuer, the Borrower and the Trustee under which the
Remarketing Agent will agree, particularly:

          (a)  to hold all Bonds delivered to it by the Trustee for delivery to
the Holders of such Bonds;

          (b)  to hold all moneys representing the purchase price of Bonds for
the benefit of the Person or entity entitled to receive the payment of such
purchase price pursuant to this Indenture until transfer to the Trustee as
provided in this Indenture;

          (c)  to determine the Weekly Rate and the Term Rate in accordance with
Sections 2.03 and 2.04 of this Indenture, and to give notice to the Trustee of
the Weekly Rate, and to the Trustee, the Issuer, the Borrower and the Bank of
the Term Rate, on the date of the determination thereof; and

          (d)  to keep such books and records as shall be consistent with
prudent industry practice and to make such books and records available for
inspection by the Issuer, the Trustee, the Borrower and the Bank at all
reasonable times.

In addition, the Remarketing Agent will enter into the Remarketing Agreement
with the Borrower in form and substance mutually satisfactory to them. The
Remarketing Agent shall be entitled to advice of legal counsel on any matter
relating to the Remarketing Agent's obligations hereunder and shall be entitled
to act upon the opinion of such counsel in the exercise of reasonable care in
fulfilling such obligations.

          SECTION 8.14 Qualifications of Remarketing Agent. The Remarketing
                       -----------------------------------
Agent shall be a national banking association or a bank or trust company or a
member of the National Association of Securities Dealers, Inc., authorized by
law to perform all the duties imposed upon it by this Indenture and under the
Remarketing Agreement and shall have a rating assigned to its long-term
unsecured debt by Moody's at least equal to "Baa3" (if the Bonds are then rated
by Moody's) and by Standard & Poor's at least equal to "BBB-" (if the Bonds are
then rated by Standard & Poor's) unless the Issuer receives written confirmation
from the Rating Service that the appointment of a particular Remarketing Agent
not meeting such rating requirement will not result in a reduction or withdrawal
of its rating of the Bonds. The Remarketing Agent may at any time resign and be
discharged of the duties and obligations created by this Indenture by giving at
least 30 days' prior written notice by registered or certified mail to the
Trustee, the Issuer, the Borrower and the Bank. The Remarketing Agent may be
removed at any time by the Issuer, with the consent of the Borrower (provided
that the Borrower shall be deemed to have consented to the removal of a
Remarketing Agent which has ceased to meet the foregoing qualifications), upon
30 days' notice which shall be in writing, signed by the Issuer and delivered to
the Remarketing Agent, the Borrower, the Trustee and the Bank.

          In the event of the resignation or removal of the Remarketing Agent,
the Issuer, with the consent of the Borrower and the Bank, shall appoint a
successor Remarketing Agent meeting the qualifications set forth in this Section
and the Remarketing Agent shall pay over,

                                       69
<PAGE>

assign and deliver any moneys and Bonds held by it in such capacity to its
successor or, if there be no successor, to the Trustee as hereinafter provided.

          In the event that the Remarketing Agent shall resign or be removed, or
be dissolved, or if the property or affairs of the Remarketing Agent shall be
taken under the control of any state or federal court or administrative body
because of bankruptcy or insolvency, or for any other reason, and the Issuer
shall not have appointed its successor as Remarketing Agent, the Trustee,
notwithstanding the provisions of the first paragraph of this Section, shall
ipso facto be deemed to be the Remarketing Agent for all purposes of this
Indenture until the appointment by the Issuer of the successor Remarketing
Agent; provided that the Trustee, in its capacity as Remarketing Agent, shall
not be required to remarket Bonds nor to establish the Weekly Rate or the Term
Rate.

          SECTION 8.15 Compensation and Expenses of Remarketing Agent. Pursuant
                       ----------------------------------------------
to Section 4.4 of the Financing Agreement, the Borrower is obligated to pay
directly reasonable compensation to and the reasonable expenses of the
Remarketing Agent. The terms of such obligation may be set forth in the
Remarketing Agreement.

(End of Article VIII)

                                       70
<PAGE>

                                  ARTICLE IX

                          SUPPLEMENTS AND AMENDMENTS

          SECTION 9.01   Supplemental Indentures Not Requiring Consent of
                         ------------------------------------------------
Holders. Without the consent of or notice to any Holders, the Issuer and the
- -------
Trustee may enter into indentures supplemental to this Indenture for any one or
more of the following purposes:

          (a)  To cure any ambiguity, inconsistency or formal defect or omission
in this Indenture;

          (b)  To grant to or confer upon the Trustee for the benefit of the
Holders any additional rights, remedies, powers or authority;

          (c)  To confirm any pledge of or lien on the Revenues, to assign
additional revenues under this Indenture or to accept additional security or
instruments of further assurance;

          (d)  To add to the covenants, agreements and obligations of the Issuer
under this Indenture, other covenants, agreements and obligations to be observed
for the protection of the Holders, or to surrender or limit any right, power or
authority reserved to or conferred upon the Issuer in this Indenture;

          (e)  To permit the use of a book entry system to identify the owner of
an interest in an obligation issued by the Issuer under this Indenture, whether
that obligation was formerly, or could be, evidenced by a tangible security;

          (f)  To permit the Trustee to comply with any obligations imposed upon
it by law;

          (g)  To specify further the duties and responsibilities of, and to
define further the relationship between, the Trustee and the Remarketing Agent;

          (h)  To achieve compliance of this Indenture with any applicable
federal securities or tax laws;

          (i)  To make amendments to the provisions hereof relating to arbitrage
matters under Section 148 of the Code, if, in the opinion of Bond Counsel
selected by the Issuer and approved by the Trustee, those amendments would not
cause the interest on the Bonds outstanding to become included in the gross
income of the Holders thereof for federal income tax purposes, which amendments
may, among other things, change the responsibility for making the relevant
arbitrage calculations;

          (j)  To evidence the appointment of a new Trustee or a new Remarketing
Agent;

          (k)  To provide for an Alternate Letter of Credit or any other credit
enhancement permitted by the terms of this Indenture;

                                       71
<PAGE>

          (l)  To make any amendments required to secure a rating on the Bonds
from a Rating Service equal to the rating of the Bank's unsecured indebtedness;

          (m)  To implement a conversion to a Term Mode Rate; or

          (n)  To permit any other amendment which is not materially adverse to
the interests of the Trustee or the Holders.

Before the Issuer and the Trustee shall enter into any Supplemental Indenture
pursuant to this Section, there shall have been delivered to the Trustee and the
Issuer an opinion of Bond Counsel to the effect that such Supplemental Indenture
is authorized or permitted by this Indenture and the Act, will, upon the
execution and delivery thereof, be valid and binding upon the Issuer in
accordance with its terms, and does not adversely affect the exclusion from
gross income of interest on the Bonds for federal income tax purposes.

          SECTION 9.02   Supplemental Indentures Requiring Consent of Holders.
                         ----------------------------------------------------
In addition to the Supplemental Indentures permitted by Section 9.01, this
Indenture may be amended or supplemented from time to time by a Supplemental
Indenture consented to by the Borrower and approved by Holders of a majority in
aggregate principal amount of the Bonds then outstanding, except that, other
than as permitted by Section 9.01, this Indenture may not be amended with
respect to (1) the principal or redemption price or interest payable upon any
Bonds, (2) the Interest Payment Dates, the dates of maturity or the redemption
or purchase provisions of any Bonds, and (3) this Article. This Indenture may be
amended with respect to the matters enumerated in clauses (1) to (3) of the
preceding sentence only with the unanimous consent of all Holders. Before the
Issuer and the Trustee may enter into such Supplemental Indenture, there shall
have first been delivered to the Trustee (a) the required consents, in writing,
of Holders and (b) an opinion of Bond Counsel to the effect that such
Supplemental Indenture is authorized or permitted by this Indenture and the Act,
will, upon the execution and delivery thereof, be valid and binding upon the
Issuer in accordance with its terms, and does not adversely affect the exclusion
from gross income of interest on the Bonds for federal income tax purposes.

          SECTION 9.03   Consent of Borrower. Anything contained herein to the
                         -------------------
contrary notwithstanding, a Supplemental Indenture executed and delivered in
accordance with this Article which affects any rights of the Borrower shall not
become effective unless and until the Borrower shall have consented in writing
to the execution and delivery of that Supplemental Indenture.

          SECTION 9.04   Authorization to Trustee; Effect of Supplement. The
                         ----------------------------------------------
Trustee is authorized to join with the Issuer in the execution and delivery of
any Supplemental Indenture in accordance with this Article and to make the
further agreements and stipulations which may be contained therein. Thereafter,
(a) such Supplemental Indenture shall form a part of this Indenture; (b) all
terms and conditions contained in that Supplemental Indenture as to any
provision authorized to be contained therein shall be deemed to be a part of the
terms and conditions of this Indenture for any and all purposes; (c) this
Indenture shall be deemed to be modified and amended in accordance with the
Supplemental Indenture; and (d) the respective rights, duties and obligations
under this Indenture of the Issuer, the Borrower, the Trustee, the Remarketing
Agent, the Bank and all Holders of Bonds outstanding shall be determined,

                                       72
<PAGE>

exercised and enforced hereunder in a manner which is subject in all respects to
those modifications and amendments made by the Supplemental Indenture. The
Trustee shall not be required to execute any Supplemental Indenture containing
provisions adverse to the Trustee.

          SECTION 9.05   Modification by Unanimous Consent. Notwithstanding
                         ---------------------------------
anything contained elsewhere in this Indenture, the rights and obligations of
the Issuer and of the Holders, and the terms and provisions of the Bonds and
this Indenture or any Supplemental Indenture, may be modified or altered in any
respect with the consent of (i) the Issuer, (ii) the Holders of all of the Bonds
outstanding, (iii) the Bank and (iv) the Borrower.

          SECTION 9.06   Amendment of Financing Agreement. If the Issuer and the
                         --------------------------------
Borrower propose to amend the Financing Agreement, the Trustee may consent
thereto; provided that if such proposal would amend the Financing Agreement in
such a way as would materially adversely affect the interests of the Holders,
the Trustee shall notify Holders of the proposed amendment and may consent
thereto with the consent of Holders of a majority in aggregate principal amount
of the Bonds then outstanding, except that no amendment materially adversely
affecting the interests of the Holders shall be consented to by the Trustee
without the unanimous consent of all Holders if such materially adverse
amendment would (1) decrease the amounts payable under the Financing Agreement
constituting Revenues, (2) change the date of payment or prepayment provisions
under the Financing Agreement, or (3) change any provisions with respect to
amendment of the Financing Agreement. Before the Issuer shall enter into, and
the Trustee shall consent to, any modification, alteration, amendment or
supplement to the Financing Agreement pursuant to this Section, there shall have
been delivered to the Issuer and the Trustee an opinion of Bond Counsel to the
effect that such amendment is authorized or permitted by this Indenture and the
Act and does not adversely affect the exclusion from gross income of interest on
the Bonds for federal income tax purposes.

          SECTION 9.07   Amendment of Letter of Credit. If the Bank proposes to
                         -----------------------------
amend the Letter of Credit, the Trustee may consent thereto, provided that (a)
if such proposal would amend the Letter of Credit in such a way as would
materially adversely affect the interests of the Holders, the Trustee shall
notify the Holders and the Rating Service (if the Bonds are then rated by a
Rating Service) of the proposed amendment and may consent thereto only with (i)
the prior written consent of Holders of a majority in aggregate principal amount
of the Bonds then outstanding and (ii) the confirmation by such Rating Service
that such amendment will not result in a withdrawal or reduction of its rating
of the Bonds, and (b) the Trustee shall not, without the unanimous consent of
all Holders, consent to any amendment materially adversely affecting the
interests of the Holders which would decrease or delay the amounts payable under
the Letter of Credit in respect of outstanding Bonds on any Interest Payment
Date or on any date of redemption, acceleration, payment at maturity or purchase
of the Bonds, or advance the Expiration Date of the Letter of Credit to an
earlier date. No consent of the Holders shall be required for amendments to the
Letter of Credit which are provided for or contemplated by this Indenture.

          SECTION 9.08   Trustee Authorized to Join in Supplements and
                         ---------------------------------------------
Amendments; Reliance on Counsel. The Trustee is authorized to join with the
- -------------------------------
Issuer in the execution and delivery of any Supplemental Indenture or amendment
permitted by this Article and in so doing shall be fully protected by an opinion
of Counsel that such Supplemental Indenture or amendment is so permitted.

                                       73
<PAGE>

          SECTION 9.09   Consent of Bank. Notwithstanding anything herein
                         ---------------
contained, so long as a Letter of Credit is held by the Trustee, no supplement
or amendment shall be made to this Indenture or the Financing Agreement without
the prior written consent of the Bank.

          SECTION 9.10   Notice to Rating Service. The Trustee shall promptly
                         ------------------------
notify the Rating Service (if the Bonds are then rated by a Rating Service) of
(i) any material supplement or amendment to this Indenture, the Financing
Agreement, the Remarketing Agreement, the Letter of Credit or the Reimbursement
Agreement of which it has actual knowledge; (ii) changes in the identity of the
Trustee, Paying Agent or Remarketing Agent; and (iii) any acceleration of the
Bonds pursuant to Section 7.03.

(End of Article IX)

                                       74
<PAGE>

                                   ARTICLE X

                                  DEFEASANCE

          SECTION 10.01  Defeasance. When the principal of, and premium (if any)
                         ----------
and interest on, all Bonds issued hereunder have been paid, or provision has
been made for payment of the same and any tender purchase price which may become
payable pursuant to Article IV, together with the compensation and expenses of
the Trustee and all other sums payable hereunder by the Issuer or the Borrower
have been paid or provision has been made for such payment, the right, title and
interest of the Trustee in and to the Trust Estate shall thereupon cease and the
Trustee, on the written demand of the Issuer or the Borrower, shall release this
Indenture and shall execute such documents to evidence such release as may be
reasonably required by the Issuer or the Borrower and shall turn over to the
Borrower or to such Person as may be entitled to receive the same all balances
then held by it hereunder not required for the payment of the Bonds and such
other sums and shall surrender the Letter of Credit to the Bank; provided that
(a) any proceeds of the Letter of Credit not required for payment of the Bonds
shall be turned over to the Bank and (b) in the event there has been a drawing
under the Letter of Credit for which the Bank has not been fully reimbursed
pursuant to the Reimbursement Agreement or any other obligations are then due
and owing to the Bank under the Reimbursement Agreement, the Trustee shall
assign and turn over to the Bank, as successor, subrogee or otherwise, all of
the Trustee's right, title and interest under this Indenture, all balances held
hereunder (excluding the Rebate Fund) not required for the payment of the Bonds
and such other sums and the Trustee's right, title and interest in, to and under
the Financing Agreement and any other property comprising the Trust Estate. If
payment or provision therefor is made with respect to less than all of the
Bonds, the particular Bonds (or portions thereof) for which provision for
payment shall have been considered made shall be selected by lot or by such
other method as the Trustee deems fair and appropriate, and thereupon the
Trustee shall take similar action for the release of this Indenture with respect
to such Bonds.

          SECTION 10.02  Provision for Payment.
                         ---------------------

          (a)  Provision for the payment of Bonds shall be deemed to have been
made when the Trustee holds in the Bond Fund (1) cash in an amount sufficient to
make all payments (including principal, premium, if any, interest and tender
purchase price payments, if any, with respect to the Bonds) specified in Section
10.01, or (2) noncallable, direct obligations issued by the United States of
America, maturing on or before the date or dates when the payments specified
above shall become due, the principal amount of which and the interest thereon,
when due, is or will be, in the aggregate, sufficient without reinvestment to
make all such payments, or (3) any combination of cash and such obligations the
amounts of which and interest thereon, when due, are or will be, in the
aggregate, sufficient without reinvestment to make all such payments; provided
that (i) such amount on deposit shall be deemed sufficient only if (A) while the
Bonds bear interest at a Weekly Rate, it provides for payment of interest at the
Maximum Rate and the Issuer shall have surrendered any power hereunder to
thereafter change the Maximum Rate, or (B) while the Bonds bear interest at a
Term Rate, it provides for payment of interest at such Term Rate and the Bonds
have been irrevocably called or designated for redemption in accordance with
Subsection 10.02(c) on or before the Term Rate Period End Interest Payment Date
of the Term Period for which such Term Rate has been set, (ii) the Trustee shall
have received an opinion of Bond Counsel to the effect that a deposit of
obligations

                                       75
<PAGE>

described in clause (2) or (3) above does not adversely affect the exclusion
from gross income for federal income tax purposes of the interest on any of the
Bonds or cause any of the Bonds to be classified as "arbitrage bonds" within the
meaning of Section 148 of the Code, and (iii) provision for payment of Bonds
shall be deemed to be made only if (A) the Trustee holds in the Bond Fund cash
constituting Available Moneys and/or such obligations purchased with Available
Moneys for payment of such Bonds pursuant to Section 5.04 in amounts sufficient
to make all payments specified above with respect to such Bonds, as verified by
an accountant's certification in form and by an accountant acceptable to the
Trustee and the Rating Service (if any), and (B) in the case of Bonds in the
Weekly Mode, the Bonds have been called for redemption on a date not more than
60 days from the date provision for payment is being made pursuant to this
Section and, in determining the sufficiency of amounts held to make payments
with respect to the Bonds, there shall be excluded any and all interest expected
to be earned on obligations held by the Trustee.

          (b)  Neither the moneys nor the obligations deposited with the Trustee
pursuant to this Article for the payment of principal, redemption price or
purchase price of or interest on the Bonds shall be withdrawn or used for any
purpose other than, and such moneys and obligations shall be segregated and held
in trust for, the payment of the principal or redemption price of, premium, if
any, on and interest on, the Bonds (or portions thereof), or for the payment of
the purchase price of such Bonds in accordance with Article IV. While the Bonds
are in the Weekly Mode, such moneys, if not then needed for such purpose, shall,
but only to the extent practicable, be invested and reinvested in direct
obligations issued by the United States of America maturing on or prior to the
earlier of (i) the date moneys may be required for the purchase of Bonds
pursuant to Article IV and (ii) the Interest Payment Date next succeeding the
date of investment or reinvestment.

          (c)  Whenever moneys or obligations shall be deposited with the
Trustee for the payment or redemption of Bonds more than 60 days prior to the
date that such Bonds are to mature or be redeemed, the Trustee shall mail a
notice to the Holders of Bonds for the payment of which such moneys or
obligations are being held at their registered addresses stating that such
moneys or obligations have been deposited. Such notice shall also be sent by the
Trustee to the Rating Service. Notwithstanding the foregoing, no delivery to the
Trustee under this Section shall be deemed a payment of any Bonds which are to
be redeemed prior to their stated maturity until such Bonds shall have been
irrevocably called or designated for redemption on a date thereafter on which
such Bonds may be redeemed in accordance with the provisions of this Indenture
and proper notice of such redemption shall have been given in accordance with
Article III or the Issuer shall have given the Trustee, in form satisfactory to
the Trustee, irrevocable instructions to give, in the manner and at the times
prescribed by Article III, notice of redemption.

          SECTION 10.03  Deposit of Funds for Payment of Bonds. If the principal
                         -------------------------------------
or tender purchase price of any Bonds becoming due, either at maturity or by
call for redemption or tender or otherwise, together with the premium (if any)
thereon and all interest accruing thereon to the due date, has been paid or
provision therefor made in accordance with Section 10.02, all interest on such
Bonds shall cease to accrue on the due date and all liability of the Issuer with
respect to such Bonds shall likewise cease, except as hereinafter provided.
Thereafter, (a) any surplus balance held by the Trustee with respect to such
Bonds over the principal of, premium (if any) on and actual interest accrued on
such Bonds shall be paid to the Bank as a return of excess

                                       76
<PAGE>

funds drawn under the Letter of Credit (or, if the Rating Service shall have
confirmed its rating of the Bonds in connection with the provision for payment
of the Bonds, such surplus shall be paid as may otherwise be approved by the
Rating Service in connection with such confirmation) and (b) the Holders of such
Bonds shall be restricted exclusively to the funds so deposited for any claim of
whatsoever nature with respect to such Bonds, and the Trustee shall hold such
funds in trust for such Holders uninvested and without liability for interest
thereon. Moneys so deposited with the Trustee which remain unclaimed five years
after the date payment thereof becomes due shall, at the written request of the
Borrower (or the Bank) and if neither the Issuer nor the Borrower is at the time
to the knowledge of the Trustee in default with respect to any covenant
contained in this Indenture, the Bonds or the Financing Agreement, be paid to
the Borrower (or to the Bank as provided in Section 10.01 with respect to
surplus balances), and the Holders of the Bonds for which the deposit was made
shall thereafter be limited to a claim against the Borrower; provided that (i)
such moneys shall not be remitted to the Borrower unless the Trustee shall have
received an opinion of counsel experienced in matters pertaining to the United
States Bankruptcy Code to the effect that the contemplated delivery of such
moneys to the Borrower will not cause any other moneys paid to the Holders to be
transfers of property voidable under Section 547 of the United States Bankruptcy
Code should the Issuer or the Borrower become a debtor under the United States
Bankruptcy Code, and (ii) the Trustee, before making payment to the Borrower,
may, at the expense of the Borrower, cause a notice to be given to the Holders
at their registered addresses, stating that the moneys remaining unclaimed will
be returned to the Borrower after a specified date. Upon any such disposition to
the Borrower, all liability of the Trustee with respect to such funds shall
cease, and the Holders of the Bonds shall thereafter look to the Borrower for
payment of any amounts then due. In the absence of any such written request of
the Borrower, the Trustee shall from time to time deliver such unclaimed funds
to or as directed by any pertinent escheat authority, as identified by the
Trustee in its sole discretion, pursuant to and in accordance with applicable
unclaimed property laws, rules or regulations. Any such delivery shall be in
accordance with the customary practices and procedures of the Trustee and
escheat authority. All moneys held by the Trustee and subject to this Section
shall be held uninvested and without liability for interest thereon.

          SECTION 10.04  Survival of Certain Provisions. Notwithstanding the
                         ------------------------------
foregoing, any provisions of this Indenture which relate to the maturity of
Bonds, interest payments and dates thereof, optional and mandatory redemption
provisions, exchange, transfer and registration of Bonds, replacement of
mutilated, lost, wrongfully taken or destroyed Bonds, safekeeping and
cancellation of Bonds, nonpresentment of Bonds, holding of moneys in trust,
payment of moneys to the Borrower and the Bank, the rebate of moneys to the
United States of America in accordance with Section 5.08, and the duties of the
Trustee in connection with all of the foregoing, shall remain in effect and be
binding upon the Trustee and the Holders notwithstanding the release and
discharge of this Indenture. The provisions of this Article shall survive the
release, discharge and satisfaction of this Indenture.

(End of Article X)

                                       77
<PAGE>

                                  ARTICLE XI

                                 MISCELLANEOUS

          SECTION 11.01  Limitation of Rights; No Personal Recourse. With the
                         ------------------------------------------
exception of rights conferred expressly in this Indenture, nothing expressed or
mentioned in or to be implied from this Indenture or the Bonds is intended or
shall be construed to give to any Person other than the parties hereto, the
Borrower, the Remarketing Agent, the Bank and the Holders of the Bonds any legal
or equitable right, remedy, power or claim under or with respect to this
Indenture or any covenants, agreements, conditions and provisions contained
herein.

          This Indenture does not pledge the general credit nor the taxing power
of the Commonwealth of Pennsylvania or any political subdivision thereof. The
liability of the Issuer hereunder and under the Bonds and the Financing
Agreement shall be limited to its interest in the Trust Estate.

          No covenant or agreement contained in this Indenture, the Bonds or the
Financing Agreement shall be deemed to be the covenant or agreement of any
member, director, officer, attorney, agent or employee of the Issuer in an
individual capacity. No recourse shall be had for the payment of any claim based
thereon against any member, director, officer, agent, attorney or employee of
the Issuer past, present or future, or its successors or assigns, as such,
either directly or through the Issuer, or any such successor corporation,
whether by virtue of any constitutional provision, statute or rule of law, or by
the enforcement of any assessment or penalty, or otherwise.

          SECTION 11.02  Severability. In case any section or provision of this
                         ------------
Indenture, or any covenant, agreement, stipulation, obligation, act or action,
or part thereof, made, assumed, entered into or taken under this Indenture, or
any application thereof, is held to be illegal or invalid for any reason, or is
inoperable at any time, such illegality, invalidity or inoperability shall not
affect the remainder thereof or any other section or provision of this Indenture
or any other covenant, agreement, stipulation, obligation, act or action, or
part thereof, made, assumed, entered into or taken under this Indenture, all of
which shall be construed and enforced at the time as if the illegal, invalid or
inoperable portion were not contained therein.

          SECTION 11.03  Notices. Except as provided in Sections 3.04 and 7.02,
                         -------
it shall be sufficient service or giving of any notice, request, complaint,
demand or other instrument or document, if it is duly mailed by first class mail
or hand delivered or sent by express delivery service or telecopy (with
transmission confirmed). Notices to the Issuer, the Trustee, the Borrower, the
Bank and the Remarketing Agent shall be addressed as follows:

          (a)  If to the Issuer, at Chester County Industrial Development
Authority, 750 North Pottstown Pike, Exton, Pennsylvania, 19341 Attention:
Executive Director (Telephone: (610) 363-6110; Fax: (610) 363-2160);

          (b)  If to the Trustee, at Chase Manhattan Trust Company, National
Association, Trustee, 1650 Market Street, 52/nd/ Floor, Philadelphia,
Pennsylvania, 19103, Attention: Capital Markets Fiduciary Services (Telephone:
(215) 988-1327; FAX: (215) 972-1685);

                                       78
<PAGE>

          (c)  If to the Borrower, at Innovative Solutions and Support, LLC, 420
Lapp Road, Malvern, Pennsylvania 19355, Attention: Mr. Roger Mitchell
(Telephone: (610) 651-5570, FAX: (610) 651-5506);

          (d)  If to the Bank, at PNC Bank, National Association, 1000 Westlakes
Drive, Suite 200, Berwyn, Pennsylvania 19312, Attention: Mr. Mark D. Lavelle
(Telephone: (610) 725-5775; FAX: (610) 725-5799);

          (e)  If to the Remarketing Agent, at PNC Capital Markets, Inc., One
PNC Plaza, 26/th/ Floor, 249 Fifth Avenue, Pittsburgh, PA 15222-2707, Attention:
Mr. Richard Dameron (Telephone: (412) 762-4287, FAX: (412) 762-9124).

The foregoing parties may designate, by notice given hereunder, any further or
different addresses to which any subsequent notice, request, demand or other
instrument or document shall be sent. The Trustee shall designate, by notice to
the Issuer, the Borrower, the Bank and the Remarketing Agent addresses to which
notices or copies thereof shall be sent to the Trustee's agents hereunder.

          In connection with any notice mailed pursuant to the provisions of
this Indenture, a certificate of the Trustee, the Issuer, the Borrower, the
Bank, the Remarketing Agent or the Holders, whichever mailed that notice, that
the notice was so mailed shall be conclusive evidence of the proper mailing of
the notice.

          The Trustee hereby agrees to send written notice to the Rating Service
upon its receipt of actual notice of the occurrence of any of the following
events: (1) any change in the Trustee or the Remarketing Agent or any tender
agent or paying agent; (2) any amendment to this Indenture, the Financing
Agreement, the Reimbursement Agreement or the Letter of Credit; (3) any
termination, expiration or extension of the Letter of Credit; (4) each
conversion of the interest rate on the Bonds; and (5) payment of all principal,
interest and premium, if any, on all of the Bonds.

          The Designated Office of the Trustee is Chase Manhattan Trust Company,
National Association, 1650 Market Street, 52/nd/ Floor, Philadelphia,
Pennsylvania 19103 Attention: Capital Markets Fiduciary Services. Such
Designated Office is subject to change as provided in this Indenture.

          The Payment Office and the Transfer Office of the Trustee are Chase
Manhattan Trust Company, National Association, c/o Chase Bank of Texas, 1201
Main Street, Dallas, Texas 75202, Attention: Corporate Trust Services.

          The Delivery Office of the Trustee is Chase Manhattan Trust Company,
National Association, Corporate Trust Window, Room 234, Building N, 53 Water
Street, New York, New York 10041, Attention: Capital Markets Fiduciary Services.
Such Delivery Office is subject to change as provided in this Indenture.

          SECTION 11.04  Suspension of Mail. If because of the suspension of
                         ------------------
delivery of first class mail or, for any other reason, the Trustee shall be
unable to mail by first class of mail any notice required to be mailed by the
provisions of this Indenture, the Trustee shall give such notice in such other
manner as in the judgment of the Trustee shall most

                                       79
<PAGE>

effectively approximate first class mailing thereof, and the giving of that
notice in that manner for all purposes of this Indenture shall be deemed to be
in compliance with the requirement for the mailing thereof. Except as otherwise
provided herein, the mailing of any notice shall be deemed complete upon deposit
of that notice in the mail and the giving of any notice by any other means of
delivery shall be deemed complete upon receipt of the notice by the delivery
service.

          SECTION 11.05  Payments Due on Saturdays, Sundays and Holidays. If any
                         -----------------------------------------------
Interest Payment Date, date of maturity of any Bonds, or date fixed for
redemption or purchase of any Bonds is a Saturday, Sunday or a day on which the
Trustee or any paying agent is required, authorized or not prohibited, by law
(including without limitation executive orders) to close and is closed, then
payment of interest, principal, redemption price and purchase price need not be
made by the Trustee or any paying agent on that date, but that payment may be
made on the next succeeding Business Day on which the Trustee or any paying
agent is open for business with the same force and effect as if that payment
were made on the Interest Payment Date, date of maturity or date fixed for
redemption or purchase, and no interest shall accrue for the period after that
date; provided that if the Trustee is open for business on the applicable
Interest Payment Date, date of maturity or date fixed for redemption or
purchase, it shall make any payment required hereunder with respect to payment
of interest on outstanding Bonds and payment of principal, redemption price or
purchase price of Bonds presented to it for payment or purchase, regardless of
whether any paying agent shall be open for business or closed on the applicable
Interest Payment Date, date of maturity or date fixed for redemption.

          SECTION 11.06  Instruments of Holders. Any writing, including without
                         ----------------------
limitation any consent, request, direction, approval, objection or other
instrument or document, required under this Indenture to be executed by any
Holder may be in any number of concurrent writings of similar tenor and may be
executed by that Holder in person or by an agent or attorney appointed in
writing. Proof of (i) the execution of any such writing, (ii) the execution of
any writing appointing any agent or attorney, and (iii) the ownership of Bonds,
shall be sufficient for any of the purposes of this Indenture, if made in the
following manner, and if so made, shall be conclusive in favor of the Trustee
with regard to any action taken thereunder, namely:

          (a)  The fact and date of the execution by any Person of any writing
may be proved by the certificate of any officer in any jurisdiction, who has
power by law to take acknowledgments within that jurisdiction, that the Person
signing the writing acknowledged that execution before that officer, or by
affidavit of any witness to that execution; and

          (b)  The fact of ownership of Bonds shall be proved by the Register
maintained by the Trustee.

          Nothing contained herein shall be construed to limit the Trustee to
the foregoing proof, and the Trustee may accept any other evidence of the
matters stated therein which it deems to be sufficient. Any writing, including
without limitation any consent, request, direction, approval, objection or other
instrument or document, of the Holder of any Bond shall bind every future Holder
of the same Bond, with respect to anything done or suffered to be done by the
Issuer, the Trustee or the Remarketing Agent pursuant to that writing.

                                       80
<PAGE>

          SECTION 11.07  Binding Effect. This Indenture shall inure to the
                         --------------
benefit of and shall be binding upon the Issuer and the Trustee and their
respective successors and assigns, subject, however, to the limitations
contained herein.

          SECTION 11.08  Counterparts. This Indenture may be executed in any
                         ------------
number of counterparts, each of which shall be regarded as an original and all
of which shall constitute but one and the same instrument.

          SECTION 11.09  Governing Law. This Indenture and the Bonds shall be
                         --------------
deemed to be contracts made under the laws of the Commonwealth of Pennsylvania
and for all purposes shall be governed by and construed in accordance with the
laws of the Commonwealth of Pennsylvania.

          SECTION 11.10  Certain References to Bank. If a Letter of Credit (or
                         --------------------------
an Alternate Letter of Credit) has terminated, no Alternate Letter of Credit has
been delivered to the Trustee and no amounts are due and owing to the Bank under
the Reimbursement Agreement, then, if and so long as no Alternate Letter of
Credit is thereafter delivered to the Trustee, any provision of this Indenture
pertaining to the Bank or maintenance of the Letter of Credit or giving the Bank
rights under this Indenture, including without limitation the right to consent
to certain actions, shall be deemed deleted from this Indenture.

(End of Article XI)

                                       81
<PAGE>

          IN WITNESS WHEREOF, the Issuer has caused this Indenture to be
executed and delivered on its behalf by one of its duly authorized officers and
its corporate seal to be hereunto affixed and attested by one of its duly
authorized officers and the Trustee has caused this Indenture to be executed and
delivered on its behalf by one of its duly authorized officers and its corporate
seal to be hereunto affixed and attested by one of its duly authorized officers
all as of the day and year first above written.

[SEAL]                                  CHESTER COUNTY INDUSTRIAL
                                        DEVELOPMENT AUTHORITY



Attest: ________________________        By: ______________________________
Name:                                        Name:
Title:                                       Title:


[SEAL]                                  CHASE MANHATTAN TRUST COMPANY,
                                        NATIONAL ASSOCIATION, as Trustee


Attest: ________________________        By: ______________________________
Name:                                        Name:
Title:                                       Title:

          This execution page is part of the Trust Indenture dated as of August
1, 2000 between Chester County Industrial Development Authority and Chase
Manhattan Trust Company, National Association, as Trustee, providing for the
issuance of Industrial Development Revenue Bonds, 2000 Series A (Innovative
Solutions and Support, LLC Project).

                                       82
<PAGE>

                                   EXHIBIT A

                                  [BOND FORM]

REGISTERED                 United States of America                REGISTERED
NO.                      Commonwealth of Pennsylvania              $

                CHESTER COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY
                     Industrial Development Revenue Bonds,
                                 2000 Series A
                (Innovative Solutions and Support, LLC Project)

SERIES ISSUE DATE                MATURITY DATE                       CUSIP
August 8, 2000                  August 1, 2015


INTEREST RATE:

REGISTERED OWNER:

PRINCIPAL AMOUNT:

          Chester County Industrial Development Authority (the "Issuer"), a
public instrumentality and body corporate and politic of the Commonwealth of
Pennsylvania, for value received, promises to pay to the registered owner
specified above, or registered assigns, upon surrender hereof, but solely from
the sources and in the manner referred to herein, the Principal Amount specified
above on August 1, 2015, unless this Bond has been called for earlier redemption
and payment of the redemption price shall have been duly made or provided for,
and to pay from those sources interest thereon from the most recent Interest
Payment Date (hereinafter defined) to which interest has been paid or duly
provided for or from the Series Issue Date specified above if no interest has
been paid, at the rates determined as provided herein, until the Principal
Amount is paid or duly provided for, commencing on the first Interest Payment
Date after the Date of Authentication hereof.

          So long as this Bond bears interest at a Weekly Rate (hereinafter
defined) as specified above, this Bond shall be purchased on demand of the
registered owner hereof as hereinafter described.

          The principal of and any premium on this Bond are payable upon
presentation and surrender hereof at the Payment Office of Chase Manhattan Trust
Company, National Association (the "Trustee"), or at the duly designated payment
office of any duly appointed alternate or successor trustee. Interest on this
Bond is payable on each Interest Payment Date by check or draft mailed on such
Interest Payment Date to the registered owner of this Bond (the "Holder") in
whose name ownership of this Bond is registered, at such Holder's address as it
appears on the registration books (the "Register") for this issue maintained by
the Trustee at the close of business on the Regular Record Date which shall be
(i) while this Bond bears interest at a Weekly Rate, the last Business Day
preceding an Interest Payment Date and (ii) while this Bond bears interest at a
Term Rate (hereinafter defined), the fifteenth day of the calendar month next
preceding the Interest Payment Date (the "Regular Record Date"). Any interest
which is not timely paid or duly provided for shall cease to be payable to the
Holder as of the Regular Record

                                      A-1
<PAGE>

Date, and shall be payable to the Holder in whose name this Bond is registered
at the close of business on a Special Record Date to be fixed by the Trustee for
the payment of such overdue interest. Notice of the Special Record Date shall be
mailed to Holders not less than ten days prior thereto. The interest and the
principal or redemption price and purchase price becoming due with respect to
the Bonds (hereinafter defined) shall, at the written request of the Holder of
at least $1,000,000 aggregate principal amount of such Bonds, be paid by wire
transfer within the continental United States in immediately available funds to
the bank account number of such Holder appearing on the Register, but, in the
case of principal or redemption price and purchase price, only upon presentation
and surrender of such Bonds at the Payment Office of the Trustee. The principal
or purchase price of and interest and any premium on this Bond are payable in
lawful money of the United States of America.

          This Bond is one of a duly authorized issue of Industrial Development
Revenue Bonds, 2000 Series A (Innovative Solutions and Support, LLC Project)
(the "Bonds"), issued under and secured by a Trust Indenture dated as of August
1, 2000 (the "Indenture") between the Issuer and the Trustee, in the aggregate
principal amount of $4,335,000. The Issuer has entered into a Loan Agreement
dated as of August 1, 2000 (the "Financing Agreement") with Innovative Solutions
and Support, LLC (the "Borrower") providing for the use of the proceeds of the
Bonds to finance certain costs of the acquisition, construction and installation
of an approximately 44,800 square foot manufacturing facility and related
equipment to be located on approximately 7.5 acres of land in the Township of
Upper Uwchlan, Chester County, Pennsylvania, as more fully described in the
Financing Agreement (the "Project") to be owned and operated by the Borrower in
fee, and providing for loan payments by the Borrower in amounts sufficient to
pay, when due, the principal of, premium, if any, on and interest on the Bonds.
The Bonds have been issued by the Issuer pursuant to the Pennsylvania Economic
Development Financing Law, as amended (the "Act") to aid in the financing of the
Project to accomplish the public purposes of the Act. The Issuer has assigned to
the Trustee as security for the Bonds under and pursuant to the Indenture all of
the Issuer's right, title and interest in and to (i) the Financing Agreement and
all amounts payable thereunder (except for payments with respect to certain
expenses, indemnification and excess investment earnings) and (ii) all moneys
and investments held by the Trustee from time to time in certain funds and
accounts established under the Indenture.

          THIS BOND IS A LIMITED OBLIGATION OF THE ISSUER AND IS PAYABLE SOLELY
FROM THE SOURCES REFERRED TO HEREIN. NEITHER THE COMMONWEALTH OF PENNSYLVANIA
NOR ANY POLITICAL SUBDIVISION THEREOF IS OR SHALL BE OBLIGATED TO PAY THE
PRINCIPAL OF OR PREMIUM, IF ANY, OR INTEREST ON THIS BOND, AND THIS BOND SHALL
NOT BE OR BE DEEMED AN OBLIGATION OF THE COMMONWEALTH OF PENNSYLVANIA OR ANY
POLITICAL SUBDIVISION THEREOF. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER
OF THE COMMONWEALTH OF PENNSYLVANIA OR ANY POLITICAL SUBDIVISION THEREOF IS
PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR PREMIUM, IF ANY, OR THE INTEREST
ON THIS BOND. THE ISSUER HAS NO TAXING POWER.

          No recourse shall be had for the payment of the principal of or
interest or any premium on this Bond, or for any claim based hereon or on the
Indenture, against any member, director, officer or employee, past, present or
future, of the Issuer or of any successor body, as such, either directly or
through the Issuer or any such successor body, under any constitutional

                                      A-2
<PAGE>

provision, statute or rule of law, or by the enforcement of any assessment or by
any legal or equitable proceeding or otherwise.

          The Bonds are payable solely from payments to be made by the Borrower
to the Trustee pursuant to the Financing Agreement and from any other moneys
pledged to or held by the Trustee under the Indenture for such purpose, and
there shall be no other recourse against the Issuer or any other property now or
hereafter owned by it. Except as otherwise specified in the Indenture, this Bond
is entitled to the benefits of the Indenture equally and ratably as to
principal, premium, if any, and interest with all other Bonds issued under the
Indenture. No additional Bonds may be issued under the Indenture. Reference is
made to the Indenture and the Financing Agreement for a description of the
rights of the Holders of the Bonds; the rights and obligations of the Issuer and
the Borrower; the rights, duties and obligations of the Trustee; and the
provisions relating to amendments and modifications thereof. The acceptance of
the terms and conditions of such documents and the Letter of Credit described
below, copies of which are on file at the Designated Office of the Trustee, is
an explicit and material part of the consideration of the Issuer's issuance
hereof, and each Holder by acceptance of this Bond accepts and assents to all
such terms and conditions as if fully set forth herein. The Holder shall have no
right to enforce the provisions of the Indenture, the Financing Agreement or the
Letter of Credit or the rights and remedies thereunder, except as provided in
the Indenture. Capitalized terms used in this Bond which are not defined herein
but which are defined in the Indenture shall have the respective meanings set
forth in the Indenture.

          The Borrower has caused to be issued and delivered to the Trustee by
PNC Bank, National Association an irrevocable letter of credit pursuant to which
the Trustee is authorized, subject to the terms and conditions thereof, to draw
up to (a) an amount equal to the principal amount of the Bonds (i) to enable the
Trustee to pay the principal amount of the Bonds when due at maturity or upon
redemption or acceleration and (ii) to enable the Trustee to pay the portion of
the purchase price of Bonds tendered to it and not remarketed corresponding to
the principal amount of such Bonds, plus (b) an amount equal to 50 days accrued
interest on the outstanding Bonds at 12% per annum while the Bonds bear interest
at the Weekly Rate, (i) to enable the Trustee to pay interest on the Bonds when
due and (ii) to enable the Trustee to pay the portion of the purchase price of
Bonds tendered to it and not remarketed corresponding to the accrued interest on
such Bonds. Such irrevocable letter of credit or any alternate letter of credit
delivered to the Trustee in accordance with the terms of the Indenture is herein
called the "Letter of Credit". The Indenture provides that, while the Bonds bear
interest at a Term Rate, the Letter of Credit must be increased to provide for
(i) 200 days accrued interest on the outstanding Bonds at a rate not less than
the applicable Term Rate and (ii) coverage of premium in an amount equal to the
sum of the optional redemption premium (if any) and supplemental premium (if
any) which would become payable on the Bonds upon mandatory redemption if such
Letter of Credit were not extended beyond the Expiration Date set forth therein.
As used herein, the term "Bank" shall mean PNC Bank, National Association as
issuer of the Letter of Credit or the bank issuing any Alternate Letter of
Credit. The Letter of Credit expires on August ___, 2003, unless terminated
earlier pursuant to its terms or extended. Subject to the provisions of the
Indenture, the Issuer may, but is not required to, cause the Letter of Credit to
be extended or replaced with an Alternate Letter of Credit having substantially
the same terms. The Bank is under no obligation to extend the Letter of Credit.
Unless the Letter of Credit is extended or replaced in accordance with the terms
of the Indenture, this Bond will become subject to mandatory purchase or
redemption, as described below. The Letter of Credit is being issued pursuant to
a

                                      A-3
<PAGE>

Reimbursement Agreement (as the same may be amended or replaced, the
"Reimbursement Agreement") between the Bank and the Borrower. The Borrower is
obligated, among other things, to reimburse the Bank for all drawings under the
Letter of Credit.

INTEREST ON BONDS

          General. This Bond shall bear interest at a Weekly Rate or a Term
          -------
Rate, as specified above and described below. The Bonds shall initially bear
interest at a Weekly Rate, subject to conversion to a Term Rate, as described
herein. A "Weekly Rate" is an interest rate for a Weekly Rate Period determined
and adjusted weekly as described below. A "Term Rate" is an interest rate for a
Term Rate Period determined as described below. The Bonds are in the "Weekly
Mode" if they bear interest at a Weekly Rate and a "Term Mode" if they bear
interest at a Term Rate. The Weekly Mode and each Term Mode are each a "Rate
Mode". All computations of interest at a Weekly Rate shall be based on a year of
365 or 366 days, as appropriate; and all computations of interest at a Term Rate
shall be based on a 360-day year of twelve 30-day months. As used in this Bond,
the term "Interest Payment Date" means (i) with respect to Weekly Rate Interest,
the first Business Day of each calendar month commencing September 1, 2000 and
(ii) with respect to Term Rate Interest, each February 1 and August 1.

          Weekly Rate. A Weekly Rate shall be determined for each Weekly Rate
          -----------
Period as described below. On each Weekly Rate Calculation Date, the Remarketing
Agent under the Indenture (the "Remarketing Agent"), initially PNC Capital
Markets, Inc., shall determine the Weekly Rate (for the Weekly Rate Period
commencing on the next Thursday) as the rate which if borne by the Bonds would,
in the judgment of the Remarketing Agent, taking into account prevailing
financial market conditions, be the lowest interest rate necessary to enable the
Remarketing Agent to arrange for the sale of all of the outstanding Bonds at a
price equal to the principal amount thereof plus accrued interest thereon.
Anything herein to the contrary notwithstanding, in no event shall any Weekly
Rate exceed 12% per annum. As used in this Bond, "Weekly Rate Calculation Date"
means Wednesday in each calendar week or, if any Wednesday is not a Business
Day, the first Business Day preceding such Wednesday, and "Weekly Rate Period"
means the seven-day period commencing on the first Thursday following the
corresponding Weekly Rate Calculation Date and running through Wednesday of the
following calendar week, except that (i) the first Weekly Rate Period shall
commence on the Series Issue Date and end on and include the first Wednesday
occurring after the Series Issue Date, (ii) the first Weekly Rate Period
following a conversion from a Term Mode to the Weekly Mode shall commence on the
date of such conversion and end on and include the first Wednesday occurring
after such conversion date and (iii) the last Weekly Rate Period prior to a
conversion from the Weekly Mode to a Term Mode shall end on and include the last
day immediately preceding the date of such conversion.

          If for any reason the Remarketing Agent does not determine a Weekly
Rate for any Weekly Rate Period as aforesaid, or if a court holds a rate for any
Weekly Rate Period to be invalid or unenforceable, the Weekly Rate for that
Weekly Rate Period shall be equal to the Weekly Rate in effect for the
immediately preceding Weekly Rate Period. The Weekly Rate for any consecutive
Weekly Rate Period for which the Remarketing Agent does not determine a Weekly
Rate, or a court holds a rate to be invalid or unenforceable, shall be the 30-
day tax-exempt commercial paper rate published for that Weekly Rate Period by
Munifacts Wire System, Inc. (or a replacement publisher of a tax-exempt
commercial paper rate designated in

                                      A-4
<PAGE>

writing by the Issuer to the Trustee and Remarketing Agent in the event
Munifacts Wire System, Inc. no longer publishes such rate), representing, as of
the publication date, the average of 30-day yield evaluations at par of tax-
exempt securities rated by each Rating Service in its highest commercial paper
rating category; provided that if Munifacts Wire System, Inc. or such
replacement publisher does not publish such a tax-exempt commercial paper rate
on a day on which a Weekly Rate is to be set, the Weekly Rate shall be 85% of
the interest rate for 30-day taxable commercial paper (prime paper placed
through dealers) announced on such day by the Federal Reserve Bank of New York.

          No notice of Weekly Rates will be given to the Holders of the Bonds;
however, the Holders may obtain Weekly Rates from the Trustee or the Remarketing
Agent. The determination of the Weekly Rate by the Remarketing Agent shall be
conclusive and binding upon the Issuer, the Trustee, the Borrower, the
Remarketing Agent, the Bank and the Holders.

          Term Rate. A Term Rate shall be determined for each Term Rate Period
          ---------
as described below. Upon conversion to a Term Mode, a Nominal Term Rate Period
shall be fixed by the Borrower as a term of two or more consecutive Semiannual
Periods constituting the nominal length of each Term Rate Period thereafter
until the date of a conversion to another Rate Mode. A Term Mode based on one
Nominal Term Rate Period and a Term Mode based on another Nominal Term Rate
Period are different Term Modes. Each Term Rate shall be determined by the
Remarketing Agent, on the Term Rate Calculation Date, as the lowest rate of
interest that, in the judgment of the Remarketing Agent taking into account
prevailing financial market conditions, would be necessary to enable the
Remarketing Agent to arrange for the sale of the Bonds in the respective Term
Mode in a secondary market sale at a price equal to the principal amount thereof
on the first Business Day of the respective Term Rate Period; provided that (1)
if the Remarketing Agent fails for any reason to determine the Term Rate for any
Term Rate Period, such Term Rate shall be equal to 80% of the average of the
annual bond equivalent yield evaluations at par as of the first day of the
corresponding Term Rate Period or, if such day is not a Business Day, the next
preceding Business Day of United States Treasury obligations having a term to
maturity similar to such Term Rate Period, and (2) no Term Rate shall exceed the
lesser of (i) the maximum interest rate at which the Letter of Credit then in
effect provides coverage for at least 200 days interest and (ii) 25% per annum.
Determinations of Term Rates shall be conclusive and binding upon the Issuer,
the Borrower, the Trustee, the Bank and the Holders. As used in this Bond,
"Nominal Term Rate Period" means, with respect to a Term Mode, a period of two
or more consecutive Semiannual Periods (expressed in years and half years);
"Semiannual Date" means each February 1 and each August 1; "Semiannual Period"
means a six month period commencing on a Semiannual Date and ending on and
including the day immediately preceding the next Semiannual Date; "Term Rate
Calculation Date" means a Business Day not more than 15 days and not less than
one day prior to the first day of the corresponding Term Rate Period; "Term Rate
Period" means a period of two or more consecutive Semiannual Periods equal to
the applicable Nominal Term Rate Period commencing on the Semiannual Date
immediately following the last day of the immediately preceding Term Rate Period
and running through and ending on the day immediately preceding the Semiannual
Date which follows such commencement date by a period equal to such Nominal Term
Rate Period, except that the first Term Rate Period after conversion from a
Weekly Rate to a Term Rate shall commence on the date of conversion and end on
and include the day immediately preceding the Semiannual Date which follows the
Semiannual Date occurring on or immediately preceding such conversion date by a
period equal to such Nominal Term Rate Period.

                                      A-5
<PAGE>

          Conversion. The Indenture provides that the Borrower shall have the
          ----------
option to convert the Bonds from the Weekly Mode to a Term Mode, from a Term
Mode to the Weekly Mode and from one Term Mode to another Term Mode on any
Conversion Date the Borrower shall select; provided that (i) each Conversion
Date shall be an Interest Payment Date and (ii) Bonds in a Term Mode cannot be
converted to another Rate Mode prior to the date on or after which the Bonds may
first be redeemed at a redemption price of par pursuant to their terms. The
Borrower may exercise such option by giving written notice to the Issuer, the
Trustee, the Remarketing Agent and the Bank, stating its election to convert the
Rate Mode of the Bonds to another Rate Mode specified in such notice and stating
the Conversion Date therefor, not less than 45 days (or such shorter period as
shall be acceptable to the Trustee) prior to such Conversion Date. In connection
with each conversion to a Term Mode, the Nominal Term Rate Period shall be
selected by the Borrower and designated in such notice. Notice of the exercise
of an option to convert from one Rate Mode to another Rate Mode shall not be
effective unless certain conditions set forth in the Indenture are satisfied
with respect to such conversion. In the case of a conversion from one Rate Mode
to another Rate Mode, the Trustee shall give notice by first class mail to the
Holders of the Bonds not less than 30 days prior to the proposed Conversion Date
stating (i) that, in the case of a conversion to a Term Mode, the interest rate
on the Bonds is scheduled to be converted to a Term Rate and the Nominal Term
Rate Period on which such Term Rate will be based, or in the case of a
conversion to the Weekly Mode, the interest rate on the Bonds is scheduled to be
converted to a Weekly Rate, (ii) the proposed Conversion Date, (iii) that the
Borrower may determine not to convert the Bonds in which case the Trustee shall
notify the Holders in writing to such effect, and (iv) that all outstanding
Bonds will be subject to a mandatory purchase on the Conversion Date, or if such
Conversion Date is not a Business Day, the first Business Day immediately
following such Conversion Date, at a price of par plus accrued interest. Upon
each conversion the Bonds shall be subject to mandatory purchase on the
Conversion Date, or if such Conversion Date is not a Business Day, the first
Business Day immediately following such Conversion Date. As used in this Bond,
"Conversion Date" means any Interest Payment Date on which the Rate Mode of the
Bonds is converted to another Rate Mode.

OPTIONAL AND MANDATORY TENDER

          Optional Tender for Purchase in Weekly Mode. While the Bonds bear
          -------------------------------------------
interest at a Weekly Rate, any Bond shall be purchased on the demand of the
Holder thereof on any Business Day designated by such Holder in a Bondholder
Tender Notice (hereinafter defined) at a purchase price equal to 100% of the
principal amount thereof plus accrued interest, if any, to the date of purchase,
if there is delivered to the Trustee at its Designated Office, and to the
Remarketing Agent at its Principal Office, a written notice (the "Bondholder
Tender Notice") which (i) states the principal amount (or portion thereof) of
such Bond and (ii) states the date on which such Bond (or portion thereof) shall
be purchased, which date shall be a Business Day not prior to the seventh day
next succeeding the date of the delivery of such notice to the Trustee and the
Remarketing Agent; provided that, in the case of a Bond to be purchased in part,
both the portion to be purchased and the portion which is not to be purchased
must be in an authorized denomination. By delivering the Bondholder Tender
Notice, the Holder irrevocably agrees to deliver such Bond, if held in
certificated form, duly endorsed for transfer in blank and with guarantee of
signature satisfactory to the Trustee, to the Delivery Office of the Trustee or
any other address designated by the Trustee at or prior to 10:00 a.m. eastern
time on the Business Day specified in the Bondholder Tender Notice. The
determination by the Trustee of a Holder's

                                      A-6
<PAGE>

compliance with such Bondholder Tender Notice and Bonds delivery requirements is
in the sole discretion of the Trustee and binding on the Borrower, the Issuer,
the Remarketing Agent, the Bank and the Holder. Any Bondholder Tender Notice
which the Trustee determines is not in compliance with the provisions of this
paragraph shall be of no force or effect.

          Any election by a Holder to tender a Bond (or portion thereof) for
purchase on a Business Day shall be irrevocable and shall be binding on the
Holder making such election and on any transferee of such Holder. Each
Bondholder Tender Notice shall automatically constitute (i) an irrevocable offer
to sell the Bond (or portion thereof) to which such notice relates on the
Purchase Date at a price equal to the purchase price of such Bond (or portion
thereof) described above, (ii) an irrevocable authorization and instruction to
the Trustee to effect transfer of such Bond (or portion thereof) upon payment of
the purchase price to the Trustee on the Purchase Date, (iii) with respect to a
tender of a portion of a Bond, an irrevocable authorization and instruction to
the Trustee to effect the exchange of such Bond in part for other Bonds in a
principal amount equal to the retained portion so as to facilitate the sale of
the tendered portion of such Bond, and (iv) an acknowledgment that such Holder
will have no further rights with respect to such Bond (or portion thereof) upon
payment of the purchase price thereof to the Trustee on the Purchase Date,
except for the right of such Holder to receive such purchase price upon
surrender of such Bond, if held in certificated form, to the Trustee endorsed
for transfer in blank and with guarantee of signature satisfactory to the
Trustee and that after the Purchase Date such Holder will hold such Bond as
agent for the Trustee. If the Bonds are not held in book-entry form and, after
delivery to the Trustee and the Remarketing Agent of such Bondholder Tender
Notice, the Holder making such election shall fail to deliver such Bond or Bonds
described in the Bondholder Tender Notice to the Trustee at its Delivery Office
on or before 10:00 a.m. eastern time on the applicable Purchase Date as
described herein, then the undelivered Bond or portion thereof (the "Undelivered
Bond") described in such Bondholder Tender Notice shall be deemed to have been
tendered for purchase to the Trustee and, to the extent that there shall be held
by the Trustee on or before the applicable Purchase Date an amount sufficient to
pay the purchase price thereof and available for such purpose pursuant to the
Indenture, such Undelivered Bond (or portion thereof) shall on such Purchase
Date cease to bear interest and no longer shall be considered to be outstanding
under the Indenture. Moneys held by the Trustee for the purchase of the
Undelivered Bonds in accordance with the foregoing shall be held in a special
separate trust account for the Holders of such Undelivered Bonds. Such moneys
shall be held by the Trustee uninvested and without liability for interest
pending delivery of such Undelivered Bonds to the Trustee.

          Mandatory Tender. This Bond is subject to mandatory tender for
          ----------------
purchase, at a price equal to the principal amount hereof plus accrued interest,
(a) on each Conversion Date, or if such Conversion Date is not a Business Day,
the first Business Day immediately following such Conversion Date, in the event
of a conversion of the Bonds from one Rate Mode to another Rate Mode, and the
first Business Day immediately following the end of each Term Rate Period; (b)
while the Bonds are in the Weekly Mode, on the Interest Payment Date next
preceding by at least two Business Days the Expiration Date of the Letter of
Credit unless at least 45 days (or such shorter period as shall be acceptable to
the Trustee) prior to such Interest Payment Date the Trustee has received notice
that the Letter of Credit has been or will be extended; (c) on the Interest
Payment Date on which an Alternate Letter of Credit is issued pursuant to the
Indenture; and (d) while the Bonds are in the Weekly Mode, on the Purchase Date
stipulated by the Bank pursuant to the Indenture in the event the Bank directs
the Trustee pursuant to the Indenture to

                                      A-7
<PAGE>

call the Bonds for mandatory purchase. Any Bond which is not delivered for
purchase prior to 10:00 a.m. eastern time on the applicable Purchase Date shall
be deemed to have been tendered to the Trustee as of such Purchase Date and
interest on such Undelivered Bond shall cease to accrue on such Purchase Date.
Thereafter, the Holder of such Undelivered Bond shall not be entitled to any
payment other than the purchase price for such Undelivered Bond upon surrender
thereof to the Trustee endorsed for transfer in blank and with guaranty of
signature satisfactory to the Trustee. Except for payment of such purchase price
from moneys held by the Trustee for such purpose, such Undelivered Bond shall no
longer be outstanding and entitled to the benefits of the Indenture.

          BY ACCEPTANCE OF THIS BOND, THE HOLDER HEREOF AGREES THAT THIS BOND
WILL BE PURCHASED, WHETHER OR NOT SURRENDERED, ON ANY DATE SPECIFIED BY THE
HOLDER HEREOF IN THE EXERCISE OF THE OPTIONAL TENDER FOR PURCHASE DESCRIBED
ABOVE AND ON THE PURCHASE DATE IN CONNECTION WITH ANY MANDATORY TENDER FOR
PURCHASE. IN SUCH EVENT, THE HOLDER OF THIS BOND SHALL NOT BE ENTITLED TO
RECEIVE FURTHER INTEREST HEREON, SHALL HAVE NO FURTHER RIGHTS UNDER THIS BOND OR
THE INDENTURE EXCEPT FOR PAYMENT OF THE PURCHASE PRICE HELD THEREFOR, AND, IF
THIS BOND IS NOT SURRENDERED ON SUCH DATE, SHALL THEREAFTER HOLD THIS BOND AS
AGENT FOR THE TRUSTEE.

OPTIONAL REDEMPTIONS

          Weekly Rate Bonds. While the Bonds bear interest at a Weekly Rate, the
          -----------------
Bonds are subject to redemption prior to maturity at the option of the Issuer,
at the direction of the Borrower, in whole at any time or in part on any
Interest Payment Date, at a redemption price equal to 100% of the principal
amount thereof plus accrued interest to the redemption date.

          Term Rate Bonds. While the Bonds bear interest at a Term Rate, the
          ---------------
Bonds shall be subject to optional redemption by the Issuer, at the direction of
the Borrower, in whole at any time or in part on any Interest Payment Date;
provided that the Bonds shall not be redeemable during the No Call Period set
forth in or stipulated pursuant to the Indenture. After such No Call Period, the
Bonds shall be redeemable at the redemption price set forth in or stipulated
pursuant to the Indenture, plus accrued interest to the redemption date.

          Extraordinary Optional Redemption. The Bonds are subject to
          ---------------------------------
extraordinary optional redemption by the Issuer, at the Borrower's option, upon
the occurrence of certain events as provided in Section 6.2 of the Financing
Agreement at any time in whole or on any Interest Payment Date in part, in each
case, at a redemption price of 100% of the principal amount redeemed plus
accrued interest to the redemption date.

MANDATORY REDEMPTIONS

          Mandatory Redemption Upon Expiration of Letter of Credit During Term
          --------------------------------------------------------------------
Mode. While the Bonds are in a Term Mode, the Bonds are subject to mandatory
- ----
redemption by the Issuer on the Interest Payment Date next preceding the
Expiration Date of the Letter of Credit, unless at least 45 days (or such
shorter period as shall be acceptable to the Trustee) prior to such Interest
Payment Date the Trustee has received notice that the Letter of Credit has been
or will be extended; provided that, if such Interest Payment Date is a Term Rate
Period End Interest

                                      A-8
<PAGE>

Payment Date, then such Bonds shall not be so redeemed but shall be subject to
mandatory purchase as provided in the Indenture. As used in this Bond, "Term
Rate Period End Interest Payment Date" means the Interest Payment Date
immediately following the last day of a Term Rate Period. The redemption price
of Bonds so redeemed shall be equal to the redemption price that would be
applicable to such Bonds if they were redeemed by optional redemption; provided
that if such redemption will occur during the applicable No Call Period set
forth in or stipulated pursuant to the Indenture, then the redemption price
shall be equal to the optional redemption price that would be applicable to such
Bonds on the first day after the expiration of the applicable No Call Period
plus a supplemental premium in the amount set forth in or stipulated pursuant to
the Indenture.

          Mandatory Redemption Upon Determination of Taxability. The Bonds are
          -----------------------------------------------------
subject to mandatory redemption upon the occurrence of a Determination of
Taxability, as defined in the Indenture, at a redemption price equal to 100% of
the principal amount thereof plus accrued interest to the redemption date, at
the earliest practicable date selected by the Trustee, after consultation with
the Borrower, but in no event later than 90 days following the Trustee's receipt
of notification of the Determination of Taxability.

GENERAL PROVISIONS

          If less than all Bonds are to be redeemed at one time, the selection
of the Bonds to be redeemed shall be made by lot or by such other method as the
Trustee deems fair and appropriate; provided that any Bonds pledged to the Bank
shall be redeemed first and any Bonds owned by the Borrower shall be redeemed
second.

          If Bonds or portions thereof are called for redemption and if on the
redemption date moneys for the redemption thereof are held by the Trustee,
thereafter those Bonds or portions thereof to be redeemed shall cease to bear
interest, and shall cease to be secured by, and shall not be deemed to be
outstanding under, the Indenture.

          Any notice of redemption shall be given not more than 60 days and at
least 15 days (30 days if the Bonds are in a Term Mode) prior to the date fixed
for redemption, by mailing a copy of the redemption notice by first class mail,
postage prepaid, to the Holder of each Bond to be redeemed in whole or in part
at the address shown on the Register. Notice of optional redemption may be
conditioned upon the deposit of moneys in the Bond Fund established under the
Indenture, in an amount sufficient for such redemption not later than the close
of business on the Business Day prior to the date fixed for redemption and such
notice shall be of no effect and the redemption shall be deemed cancelled unless
such moneys are so deposited.

          If an Event of Default as defined in the Indenture occurs, the
principal of all Bonds issued under the Indenture may be declared due and
payable upon the conditions and in the manner and with the effect provided in
the Indenture.

          If at any time the Trustee holds moneys or securities as described in
the Indenture sufficient to pay at redemption or maturity the principal or
redemption price of and premium, if any, and interest on all Bonds outstanding
under the Indenture and any purchase price payable pursuant to the Indenture in
respect thereof, and if all other sums then payable by the Issuer under the
Indenture have been paid, then subject to the provisions of the Indenture the
lien of the

                                      A-9
<PAGE>

Indenture and other security held by the Trustee for the benefit of the Holders
will be discharged. After such discharge, Holders must look only to the
deposited moneys and securities for payment.

          The Indenture permits certain amendments or supplements to the
Financing Agreement and the Indenture not materially prejudicial to the Holders
to be made without the consent of or notice to the Holders, and other amendments
or supplements thereto to be made with the consent of the Holders of not less
than a majority in aggregate principal amount of the Bonds outstanding.

          The Holder of each Bond has only those remedies provided in the
Indenture.

          The Bonds are issuable only as fully registered bonds in the
denominations of $100,000 and any whole multiple of $5,000 in excess thereof and
are exchangeable for Bonds of other authorized denominations in equal aggregate
principal amounts at the Transfer Office of the Trustee, but only in the manner
and subject to the limitations provided in the Indenture. This Bond is
transferable at the Transfer Office of the Trustee, by the Holder in person or
by his attorney, duly authorized in writing, upon presentation and surrender
hereof to the Trustee. While the Bonds bear interest at a Term Rate, the Trustee
is not required to transfer or exchange (i) any Bond during a period beginning
at the opening of business 15 days before the day of the mailing of a notice of
redemption of Bonds and ending at the close of business on the day of such
mailing or (ii) any Bonds selected for redemption in whole or in part.

          This Bond shall not be entitled to any security or benefit under the
Indenture or be valid or become obligatory for any purpose until the Certificate
of Authentication hereon shall have been signed.

          Unless this Bond is presented by an authorized representative of The
Depository Trust Company, a New York corporation ("DTC"), to the Trustee or its
agent for registration of transfer, exchange or payment, and any bond issued is
registered in the name of Cede & Co. or in such other name as is required by an
authorized representative of DTC (and any payment is made to Cede & Co. or to
such other entity as is requested by an authorized representative of DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest
herein.

                                     A-10
<PAGE>

          IN WITNESS WHEREOF, the Issuer has caused this Bond to be executed in
its name by the manual or facsimile signature of its Chairman or Vice Chairman
and its corporate seal or a facsimile thereof to be affixed, imprinted,
lithographed or reproduced hereon and attested by the manual or facsimile
signature of its Secretary or Assistant Secretary.

[SEAL]                                  CHESTER COUNTY INDUSTRIAL
                                        DEVELOPMENT AUTHORITY


Attest:______________________           By:_____________________________
Title:                                       Title:

[FORM OF CERTIFICATE OF AUTHENTICATION]

          This Bond is one of the Bonds described in the within-mentioned
Indenture. Attached hereto is the complete text of the opinion of Stevens & Lee,
a professional corporation, Reading, Pennsylvania, Bond Counsel, dated the date
of initial delivery of and payment for the Bonds, a signed original of which is
on file with the Trustee.

Date of Authentication:                 CHASE MANHATTAN TRUST COMPANY,
                                        NATIONAL ASSOCIATION, as Trustee


                                        By:_____________________________
                                             Authorized Signature

                                     A-11
<PAGE>

                             [FORM OF ASSIGNMENT]

Assignment

          For value received, the undersigned sells, assigns and transfers unto
__________________ the within Bond and irrevocably constitutes and appoints
__________________ attorney to transfer that Bond on the books kept for
registration thereof, with full power of substitution in the premises.

Assignor's Signature:_______________________________
Dated:___________________
Signature Guaranteed:_______________________________
Social Security
  Number or Other Identifying
  Number of Assignee:    ________________

Notice: The assignor's signature to this assignment must correspond with the
        name as it appears upon the face of the within bond in every particular,
        without alteration or any change whatever.

                            [FORM OF ABBREVIATIONS]

          The following abbreviations, when used in the inscription on the face
of the within Bond, shall be construed as though they were written out in full
according to applicable laws or regulations.

          TEN COM - as tenants in common

          TEN ENT - as tenants by the entireties

          JT TEN -  as joint tenants with the right of
                    survivorship and not as tenants in common

UNIFORM TRANS MIN ACT - _________________  Custodian___________________

                              (Cust)                        (Minor

                    under Uniform Transfers to Minors

                    Act ____________________

                              (State)

Additional abbreviations may also be used though not in the above list.

                                     A-12
<PAGE>

                                   EXHIBIT B

                       Blanket Letter of Representations

                                      B-1
<PAGE>

"WORD"

Long Document Name:           TRUST INDENTURE - CHESTER COUNTY - INNOVATIVE
                              SOLUTIONS
System Document Number:       54617 PTE

Additional Information:       converted

================================================================================
You will have line numbers down the side of each draft document unless you
indicate otherwise. 1.5 line spacing will be used on all drafts unless you
indicate otherwise.

Return To:___________________________   Location:_____________________________

Return: _____ draft   _____ final   _____ redlined   _____ stapled

Line Spacing: _____ same   _____ 1.0    _____ 1.5   _____ 2.0

Duplicate: _____ yes  _____ no (New Client/Matter No:________________________)

Save New Version For Redlining Prior To Revisions: _____ yes _____ no

Caret Method _____  Standard Method __X___

================================================================================
Notes: Doc. in final format (dsh)

Origination Date:        March 23, 2000

Author's Initials:       PTE

Last Revised By:         nc&kad/pte/iez;/kmc(@tr145)/pte/iez/dsh/nb/nb/pte

Last Edit Date:          3-24;3-24;3-28;4-27;7/20;7-21;7-28;7-31

Quick Fill No.:          ARTICLE I, SECTION 1.0, (a), (i), (1), (A)

                                      101
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>6
<FILENAME>0006.txt
<DESCRIPTION>SUBSIDIARIES OF IS&S.
<TEXT>

<PAGE>

                                                                      Exhibit 21

                        Subsidiaries of the Registrant
                        ------------------------------


Innovative Solutions and Support, LLC, a Pennsylvania limited liability company

IS&S Delaware, Inc., a Delaware corporation

IS&S Holdings, Inc., a Delaware corporation

IS&S Aviation, Inc., a Delaware corporation

IS&S Aviation, LLC, a Delaware limited liability company


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>7
<FILENAME>0007.txt
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>

<TABLE> <S> <C>

<PAGE>

<ARTICLE> 5

<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          SEP-30-2000
<PERIOD-END>                               SEP-30-2000
<CASH>                                      42,799,122
<SECURITIES>                                         0
<RECEIVABLES>                                8,469,304
<ALLOWANCES>                                  (75,000)
<INVENTORY>                                  4,265,144
<CURRENT-ASSETS>                            56,059,363
<PP&E>                                       5,807,139
<DEPRECIATION>                             (1,683,973)
<TOTAL-ASSETS>                              60,746,527
<CURRENT-LIABILITIES>                        5,114,764
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                        12,594
<OTHER-SE>                                  50,809,902
<TOTAL-LIABILITY-AND-EQUITY>                60,746,527
<SALES>                                     33,273,890
<TOTAL-REVENUES>                            33,273,890
<CGS>                                       14,819,043
<TOTAL-COSTS>                               14,819,043
<OTHER-EXPENSES>                             8,226,440
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              34,722
<INCOME-PRETAX>                             10,792,962
<INCOME-TAX>                               (4,043,405)
<INCOME-CONTINUING>                          6,749,557
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                 6,749,557
<EPS-BASIC>                                       0.86
<EPS-DILUTED>                                     0.66


</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
