UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, DC 20549

                                   FORM 10-QSB

(Mark One) 

(X)  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934

     For the quarterly period ended:     March 31, 1999

                                       OR

( )  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934
     For the transition period from __________ to  __________

                         Commission File Number: 0-28260

                               EP MEDSYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

         New Jersey                                     22-3212190   
(State or other jurisdiction of                         (I.R.S. Employer
incorporation or organization)                          Identification No.)

100 Stierli Court, Mount Arlington, New Jersey            07856
(Address of principal executive offices)                (Zip Code)

Registrant's telephone number, including area code:     (973) 398-2800
 
Check  whether  the  issuer  (1) has  filed  all  reports  required  to be filed
bySection 13 or 15(d) of the Exchange Act during the past 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. _X_Yes ___No

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: Common Stock, no par value, 9,872,417
shares outstanding at May 8, 1999.


Transitional Small Business Disclosure Format:       Yes___     No  _X_


<PAGE>


                      EP MEDSYSTEMS, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



PART I. -- Financial INFORMATION                                       Page
                                                                    -----------

     Item 1.   Financial Statements

               Consolidated Balance Sheet at March 31, 1999
               (unaudited)                                                 3

               Consolidated Statements of Operations for three months
               ended March 31, 1999 and 1998(unaudited)                    4

               Consolidated Statements of Cash Flows for three months
               ended March 31, 1999 and 1998 (unaudited)                   5

               Notes to Consolidated Financial Statements (unaudited)    6-7

     Item 2.   Management's Discussion and Analysis or Plan of
               Operation                                                7-12


PART II -- OTHER INFORMATION

     Item 1.     Legal Proceedings                                        12

     Item 2.     Changes in Securities and Use of Proceeds                12

     Item 3.     Defaults Upon Senior Securities                          13

     Item 4.     Submission of Matters to a Vote of Secure                13

     Item 5.     Other Information                                        13

     Item 6.     Exhibits and Reports on Form 8-K                         13

     Signatures                                                           14

     Exhibit Index                                                        14




                                       2
<PAGE>


PART I.-- FINANCIAL INFORMATION

Item 1.  Financial Statements

                      EP MEDSYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET

                                                                    March 31,
ASSETS                                                                1999
                                                                   -------------
Current assets:                                                    (unaudited)
   Cash and cash equivalents                                    $     1,691,504
   Short-term investments                                               729,351
   Accounts receivable, net of allowances for
        Doubtful accounts of $99,275                                  2,362,435
   Inventories                                                        1,828,321
   Prepaid expenses and other current assets                            135,782
                                                                   -------------
          Total current assets                                        6,747,393 
Property and equipment, net                                           1,289,519
Intangible assets, net                                                  543,388
Other assets                                                              9,423
                                                                   -------------
          Total assets                                           $    8,589,723
                                                                  ==============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                              $      796,237
   Payables due to related parties                                      445,744
   Accrued expenses                                                     432,939
   Deferred revenue                                                      82,500
   Customer deposits                                                     46,572
   Current portion of long-term debt                                     47,514
                                                                    ------------
          Total  current liabilities                                  1,851,506
   Long-term debt, less current portion                                 475,000
                                                                    ------------
          Total liabilities                                       $   2,326,506
                                                                    ------------
Commitments and contingencies
Shareholders' equity:
   Preferred Stock, no par value, 5,000,000 shares
         authorized, no shares issued and outstanding                        --
   Common stock, $.001 stated value, 25,000,000
         shares authorized, 9,872,417 shares issued
         and outstanding                                                  9,872
   Additional paid-in capital                                        21,432,375
   Accumulated deficit                                              (15,179,030)
                                                                   -------------
          Total shareholders' equity                                  6,263,217
                                                                   =============
          Total liabilities and shareholders' equity              $   8,589,723
                                                                   =============

               The accompanying notes are an integral part of these statements.


                                       3
<PAGE>

                       EP MEDSYSTEMS, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)

                                              For the Three Months Ended
                                             March 31,              March 31,
                                               1999                   1998
                                           --------------         --------------

Sales                                     $    2,534,411         $    1,454,609
Cost of products sold                          1,193,166                886,806
                                           --------------         --------------
      Gross profit                             1,341,245                567,803

Operating costs and expenses:
   Sales and marketing expenses                1,070,547                699,786
   General and administrative expenses           597,579                348,267
   Research and development expenses             444,737                349,351
                                           --------------         --------------
      Loss from operations                      (771,618)              (829,601)

Interest income, net                               27,54                 34,215
                                          ===============         ==============
      Net loss                           $      (744,071)        $     (795,386)
                                          ===============         ==============

Basic loss per share                     $         (0.08)        $         (.10)
                                          ===============         ==============

Diluted loss per share                   $         (0.08)        $         (.10)
                                          ===============         ==============

Weighted average shares outstanding 
used to compute basic and diluted 
loss per share                                 9,872,417              7,599,917
                                          ===============         ==============












        The accompanying notes are an integral part of these statements.


                                       4
<PAGE>

                      EP MEDSYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)

                                                 For the Three Months Ended
                                               March 31,            March 31,
                                                 1999                 1998
                                             --------------      --------------
Cash flows from operating activities:
 Net loss                                    $   (744,071)           (795,386)
 Adjustments to reconcile net loss to net
  cash used in operating activities:
  Depreciation and amortization                    57,974              67,028
 Changes in assets and liabilities:
  (Increase) in accounts receivable               (56,937)           (129,488)
  (Increase) decrease in inventories              (27,630)             98,962
  Decrease (increase) in prepaid and other 
   current assets                                  16,113             (35,381)
  Decrease in other assets                         10,000              32,801
  Increase in payables due to related parties     256,955              18,569
  Increase in accounts payable                     23,598               5,782
  (Decrease) in accrued expenses, deferred
    revenue and customer deposits                (150,078)           (253,769)
                                             --------------      --------------
    Net cash used in operating activities    $   (614,076)           (990,882)
                                             --------------      --------------

Cash flows from investing activities:
 Proceeds of held to maturity investments              --             759,937
 Patent costs                                          --             (20,541)
 Capital expenditures                            (534,851)            (58,866)
                                             --------------      --------------
    Net cash provided by investing 
     activities                              $   (534,851)            680,530
                                             --------------      --------------

Cash flows from financing activities:
 Net borrowings under note payable                507,500                  --
                                             --------------      --------------
    Net cash provided by financing 
     activities                              $    507,500                  --
                                             --------------      --------------

Net (decrease) in cash and cash 
 equivalents                                     (641,427)           (310,352)
Cash and cash equivalents, beginning of 
 period                                         2,332,931             752,068
                                             --------------      --------------
Cash and cash equivalents, end of period     $  1,691,504             441,716
                                             ==============      ==============

 
        The accompanying notes are an integral part of these statements.



                                       5
<PAGE>

                      EP MEDSYSTEMS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Note 1. Basis of Presentation 
The accompanying  unaudited consolidated financial statements have been prepared
in  accordance  with  generally  accepted  accounting   principles  for  interim
financial  information and in accordance  with the  instructions to Form 10-QSB.
Accordingly,  they do not include all of the financial information and footnotes
required by generally  accepted  accounting  principles  for complete  financial
statements.  In the opinion of management,  all  adjustments  (including  normal
recurring  adjustments)  considered  necessary for a fair presentation have been
included.

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial  statements and accompanying notes.
Actual results could differ from those estimates.

The results of operations for the respective interim periods are not necessarily
indicative  of the results to be expected  for the full year.  The  accompanying
unaudited  consolidated  financial statements should be read in conjunction with
the audited consolidated  financial statements and the notes thereto included in
the  Company's Form 10-KSB for the year ended  December 31, 1998 filed with the
Securities and Exchange Commission.

Note 2. Net Loss Per Common Share
Effective for the year ended December 31, 1997, the Company adopted Statement of
Financial  Accounting  Standards No. 128, "Earnings Per Share" ("SFAS 128"). The
Company's basic and diluted  earnings per share are equal,  due to the exclusion
of  common  stock   equivalents,   which  would  make  the  earnings  per  share
calculations anti-dilutive.

Note 3.  Inventories
Inventories consist of the following:
                                        March 31, 1999
     Raw materials                        $   941,825
     Work in process                           46,621
     Finished goods                           839,875
                                        --------------
                                          $ 1,828,321
                                        ==============



Note 4. Long-Term Debt

Effective  March 31, 1999, the Company  entered into two debt  agreements with a
bank: a $2,000,000  revolving  line of credit  ("revolver")  and a $500,000 term
note.

                                       6
<PAGE>

The  proceeds  of the  revolver,  when drawn down are  intended  to fund  future
working capital needs.  Borrowings bear interest at either the bank's Prime Rate
plus 1/2% or LIBOR plus 3%. A facility  fee is payable  quarterly on the average
unused commitment at a rate of 3/4%.

The  purpose of the term note is to fund the  purchase  of 7,500  square feet of
manufacturing  and  warehouse  space at the  Company's  ProCath  subsidiary  and
building  improvements.  Interest is payable  monthly in arrears at either Prime
plus 3/4% or LIBOR plus 3 1/4%.  Principal is payable commencing January 2000 in
48 equal  monthly  installments  under a 15 year  amortization  schedule  with a
balloon payment due in December 2004.

The Company is required to maintain certain financial  ratios,  and meet certain
net worth and indebtedness tests. The debt is collateralized by a first priority
lien on all  corporate  assets.  The agreement  also  prohibits the Company from
incurring certain additional indebtedness, limits investments, advances or loans
and restricts substantial asset sales, capital expenditures and cash dividends.

Item 2. Management's Discussion and Analysis or Plan of Operation

Overview
 
The Company was  incorporated  in New Jersey in January  1993 and  operates in a
single industry segment. The Company develops, manufactures, markets and sells a
line of  products  for  the  cardiac  electrophysiology  ("EP")  market  used to
diagnose,  monitor and treat irregular  heartbeats  known as arrhythmias.  Since
inception,  the Company has acquired technology,  has developed new products and
has  begun  marketing  various  electrophysiology  products,  including  the  EP
WorkMate[REGISTERED]    electrophysiology   workstation,   the   EP-3[TRADEMARK]
Stimulator,   diagnostic  electrophysiology  catheters,  internal  cardioversion
catheters and related disposable supplies.

The Company has  developed a new product for  internal  cardioversion  of atrial
fibrillation  known  as the  ALERT[REGISTERED]  System,  which  uses a  patented
electrode catheter to deliver measured, variable, low energy electrical impulses
directly to the inside of the heart in order to convert atrial fibrillation to a
normal heart rhythm.  The  ALERT[REGISTERED]  System is not approved for sale in
the United States,  but is currently  undergoing  clinical  trials.  The Company
intends to market a full family of internal  cardioversion  catheters around the
ALERT[REGISTERED] platform.

The Company has also developed an intracardiac ultrasound product line including
the   ViewMate[TRADEMARK]   ultrasound  imaging  console  and  U-View[TRADEMARK]
deflectable  intracardiac  imaging  catheter.  These  products  are  designed to
improve a  physician's  ability to  visualize  inside the chambers of the heart,
including  the  internal  anatomy of the heart.  The Company  believes  that the
ViewMate[TRADEMARK]  and U-View[TRADEMARK] may play an important role as new and
effective  treatment  options are developed for the treatment of complex cardiac
arrhythmias,  including ventricular tachyarrhythmia and atrial fibrillation. The



                                       7
<PAGE>

Company's ultrasound products are not approved for sale and the Company does not
anticipate   receiving   approval   to   sell   the    ViewMate[TRADEMARK]    or
U-View[TRADEMARK] for at least several months, if approved at all.

Forward-Looking Statements
This report contains certain statements of a forward-looking  nature relating to
such matters as  anticipated  financial and  operational  performance,  business
prospects, technological developments, results of clinical trials, new products,
research  and  development  activities  and similar  matters.  Stockholders  are
cautioned that such  statements are only  predictions  and that actual events or
results  may differ  materially.  In  evaluating  such  statements,  prospective
investors  should  specifically  consider  the  various  factors  effecting  the
industry and economy  generally,  as well as those identified in this report and
in  the  Company's   other  reports  filed  with  the  Securities  and  Exchange
Commission,  which could cause actual  results to differ  materially  from those
indicated by such forward-looking statements.

RESULTS OF OPERATIONS

Three months ended March 31, 1999 compared to three months ended March 31, 1998

Sales increased  $1,080,000 (or 74%) in the three months ended March 31, 1999 as
compared to the prior period in 1998. The majority of the increase in revenue in
the quarter resulted from increased sales of the EP  WorkMate[REGISTERED], which
represented a substantial  percentage of sales during the three-month  period in
1999.  The Company  also  realized  increased  sales of certain of its  catheter
products during the period.

The level of sales for the remaining nine months of 1999 will depend  materially
on sales of the EP WorkMate[REGISTERED] and diagnostic catheters and the ability
of the  Company's  direct sales force and network of  international  independent
distributors to effectively market and sell the Company's existing products. The
ALERT[REGISTERED]  System is  currently  undergoing  clinical  trials and is not
approved for sale in the United States.  The  ALERT[REGISTERED]  System has been
introduced for sale in Europe.  However, the Company cannot accurately determine
the sales level of the  ALERT[REGISTERED]  System for the remaining  quarters in
1999 at this time or when it will be available at all in the United States.  The
Company expects the ALERT[REGISTERED]  System to contribute a greater proportion
of revenues in the second half of 1999 and beyond.

Cost of products  sold  increased  $306,000  (or 35%) due to the 74% increase in
sales for the three  months  ended March 31,  1999 as  compared  to 1998.  Gross
profit on sales for the three months ended March 31, 1999 was $1,341,000 (or 53%
as a percentage of sales),  as compared with $568,000 (or 39% as a percentage of
product  sales) for the  comparable  period in 1998.  The  Company  realized  an
increase in gross profit on sales of existing products during first quarter 1999
primarily due to increased sales of the EP WorkMate,  which  currently  yields a
higher gross margin than certain of the Company's  other  products.  The Company


                                       8
<PAGE>

hopes  to  improve  its  overall  gross  profit   percentage  as  sales  of  the
ALERT[REGISTERED]  System and other catheter products increase, which may offset
the fixed costs associated with maintaining a catheter manufacturing operation.

Sales and marketing  expenses  increased  $371,000 (or 53%),  but decreased as a
percentage  of revenue  from  product  sales from 48% to 42% in the three months
ended  March 31,  1999 as compared to 1998.  The dollar  increase  during  first
quarter 1999 was  primarily  due to the impact of expanding  the domestic  sales
force from 6 employees  as of March 31, 1998 to 9 employees as of March 31, 1999
and the increase in travel,  trade show related expenses,  product promotion and
physician   educational   materials  in  support  of  its  sales  efforts.   The
international  distribution  network is currently  supported by a team of direct
international  sales and marketing  professionals,  international field clinical
engineers and administrative support personnel.

General and administrative  expenses increased $249,000 (or 72%) and remained at
24% of sales  revenue in the three  months  ended  March 31, 1999 as compared to
1998.  The increase  during first  quarter 1999 was due to increased  personnel,
occupancy  and other  administrative  costs  necessary to support the  increased
operations. It is anticipated that these expenses may decline as a percentage of
revenues as incremental sales are generated.

Research and development expenses increased $95,000 (or 27%)%), but decreased as
a percentage  of revenue from product  sales from 23% to 18% in the three months
ended March 31, 1999 as compared to 1998.  in the three  months  ended March 31,
1999 as compared to 1998.  During the three  months  ended March 31,  1999,  the
Company  incurred  research and development  expenses in connection with ongoing
development efforts on existing products, including the EP WorkMate[REGISTERED],
costs  associated  with the clinical  trials for the  ALERT[REGISTERED]  System,
development  costs and costs of  preparing  regulatory  submissions  for the new
ultrasound  imaging  product line, as well as costs  associated with several new
products under  development.  The Company  expects that research and development
expenses  are  likely to  increase  in future  periods,  in part due to  ongoing
expenses related to the  ALERT[REGISTERED]  System clinical trials,  new product
development activities and regulatory  applications aimed at gaining approval to
sell other new products.

The net loss for the three  months ended March 31, 1999 was $744,000 as compared
to a net loss of $795,000  during the  comparable  period in first quarter 1998.
The basic and diluted  loss per share for the three  months ended March 31, 1999
was $0.08 per share as compared to $.10 in first quarter 1998.

Liquidity and Capital Resources

Since inception, the Company's expenses have exceeded its sales, resulting in an
accumulated deficit of approximately $15,179,000 at March 31, 1999.

The Company  entered  into two  financing  arrangements  in March of 1999 with a
bank: a $2,000,000 revolving line of credit and a $500,000 term loan. Management
believes  that its current  liquidity  position  will be  sufficient to meet the


                                       9
<PAGE>

needs of the Company  until at least March 31, 2000. In the event that it cannot
generate  additional capital funds during 1999, the Company believes that it can
reduce  non-core  related  expenditures,  which will allow it to continue in its
operations for a significant period.

Net cash used in operating  activities for the three months ended March 31, 1999
decreased  $377,000  (or  38%)  as  compared  to  1998.  The  net use of cash in
operations  during first quarter 1999 was  primarily  due to the Company's  loss
from  operations.  Payables  to related  parties  increased  $257,000  due to an
increase in purchases of components for the Alert[REGISTERED]  System.  Payments
to  related  parties  are made on  terms  similar  to those of other  suppliers.
Accrued expenses payable decreased by $150,000.

Capital  expenditures,  were  $535,000  during first quarter 1999 as compared to
$59,000 in first quarter 1998.  During  February 1999, the Company  purchased an
additional 7,500 square feet of manufacturing and warehouse space at ProCath for
a purchase  price of  approximately  $400,000.  Costs to  prepare  the space for
intended  use are  estimated to be  $100,000.  This  purchase was financed via a
$500,000  term loan  executed  subsequent  to December  31,  1998.  The purchase
provided  for  expansion of the existing  manufacturing  operations,  additional
warehousing,  shipping  and  quality  assurance  activities  and  relocation  of
ProCath's administrative offices.

Net  borrowings  under note  payable  increased  $508,000  as  compared to first
quarter  1998 due to the proceeds the Company  received  from the $500,000  term
loan.

As of the date of this  Report on Form  10-QSB,  the  Company  does not have any
other  material  commitments  for  capital  expenditures.  However,  the Company
expects  to  purchase  capital  equipment  and to expand its  manufacturing  and
assembly  capabilities  as it continues to grow.  The Company  leases office and
manufacturing space and certain office equipment under operating leases.

During  February  1997,  the Company  licensed the rights to several  ultrasound
technologies  from  EchoCath,  for use in the  field of  electrophysiology.  The
agreement with EchoCath calls for the Company to make payments  totaling up to a
maximum of $700,000, in four installments, as certain development milestones and
initial sales are achieved on the EchoMark and EchoEye technologies.  One of the
milestones  calls  for a  $400,000  payment  payable  upon the  completion  of a
development  program for the  EchoEye.  This  milestone  was only payable in the
event that the  development  was completed by September 30, 1998. To the best of
the  Company's  knowledge,  the  milestone  was not  achieved  and no  milestone
payments are accrued or payable to EchoCath as of March 31, 1999.

The Company  expects its  operating  losses to continue in the near future as it
will continue to expend substantial funds for research and development, clinical
trials in support of regulatory approvals,  increased manufacturing capacity and
expansion  of sales and  marketing  activities.  The amount and timing of future
losses will be  dependent  upon,  among  other  things,  increased  sales of the
Company's  existing  products,  clinical  approval and market  acceptance of the
ALERT[REGISTERED] System and developmental, regulatory and market success of new


                                       10
<PAGE>

products under development.  There can be no assurance that any of the Company's
development  projects will be successful or that if  development  is successful,
that the  products  will  generate any sales.  Based upon its current  plans and
projections,  the Company believes that its existing  capital  resources will be
sufficient  to meet its  anticipated  capital needs for at least the next twelve
months.

Year 2000 Readiness

The Year 2000 issue could affect  computers,  software and other equipment used,
operated or maintained by the Company. The Company has substantially completed a
review of its internal computer programs and systems to ensure that the programs
and systems will be Year 2000 compliant.  The Company  presently  believes that,
based on current  plans and efforts to date,  its internal  programs and systems
will be Year 2000 compliant in a timely manner.

The Year 2000 issue can also affect  products sold by the Company,  particularly
the EP  WorkMate[REGISTERED]  and ALERT[REGISTERED]  Companion.  The Company has
performed  an  assessment  of its  products  and,  as a result  of this  review,
believes that it has  substantially  identified  and resolved the potential Year
2000 issues with these products.  However,  the Company also believes that it is
not  possible to determine  with  complete  certainty  that all Year 2000 issues
affecting  the Company's  products have been  identified or corrected due to the
complexity  of these  products and the fact that these  products  interact  with
other third party  products or operate on computer  systems  which are not under
the Company's control.

The Company  believes  that its greatest  Year 2000 risk for  disruption  to its
business is the potential  noncompliance of third parties.  In this regard,  the
Company has  initiated  communications  with its vendors,  major  customers  and
service  providers  in order to  determine  the  extent to which  the  Company's
business is vulnerable to the third parties'  failure to make their systems Year
2000 compliant. Since the Company has no control over the actions of these third
parties,  there can be no assurance that these third parties will resolve any or
all Year 2000  issues.  Any failure of these third  parties to resolve Year 2000
issues in a timely manner could have a material  adverse effect on the Company's
financial condition and results of operations.

The  Company  currently  does  not have a  contingency  plan in the  event  that
particular  systems,  including the systems of material third  parties,  are not
Year 2000  compliant.  It is intended  that such a plan will be  developed if it
becomes clear that the Company is not going to achieve its scheduled  compliance
objectives.   Although  no  assurance  can  be  given  that  there  will  be  no
interruption  of  operations  as a result of the Year 2000  issue,  the  Company
believes  and  assuming  that third  parties  with whom the Company has material
business  relationships  successfully remediate their own Year 2000 issues) that
it has reasonably  assessed its systems in order to ensure that the Company will
not suffer any  material  adverse  effect from the Year 2000  issue.  Though the
Company has used and will continue to use internal resources to resolve its Year
2000 issues,  the Company may retain third party  consultants  to assist in this
regard.

                                       11
<PAGE>

Costs  specifically  associated  with  Year  2000  compliance  are  expensed  as
incurred.  To date, the Company has not spent a material amount on this project.
The Company does not expect the total costs relating to Year 2000  compliance to
have a material  effect on the  Company's  results of  operations  or  financial
condition.  However,  the total costs that the Company will incur in  connection
with the Year 2000 issue will be influenced  by (i) its ability to  successfully
identify Year 2000 issues, (ii) the nature and amount of programming required to
remediate the issues,  (iii) the related labor and/or  consulting costs for such
remediation  and (iv) the  ability of third  parties  with whom the  Company has
business  relationships  to  successfully  address their own Year 2000 concerns.
These and other  unforeseen  factors could have a material adverse effect on the
Company's results of operations or financial condition.




PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

During October 1997, the Company filed a lawsuit against  EchoCath in the United
States  District  Court for the  District  of New Jersey  alleging,  among other
things,  that  EchoCath  made  fraudulent  misrepresentations  and  omissions in
connection  with the prior  sale of  $1,400,000  of its  preferred  stock to the
Company.

EchoCath filed an answer to the complaint, denying the allegations and asserting
a counterclaim against the Company seeking its costs and expenses in the action.
EchoCath also filed a motion to dismiss the complaint.  During October 1998, the
complaint  was  dismissed by the District  Court.  The Company is appealing  the
decision.  The Company  believes that  EchoCath's  counterclaim  and request for
reimbursement  of its costs and  expenses  is without  merit.  As a result,  the
Company has not accrued for such costs and  expenses at March 31,  1999.  In the
opinion of management, the ultimate resolution of the counterclaim will not have
a material  adverse  impact of the Company's  financial  condition or results of
operations.  The Company cannot determine the outcome of the EchoCath litigation
at this time.

Item 2. Changes in Securities

None.


Item 3. Defaults Upon Senior Securities

None.

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

None.

                                       12
<PAGE>

Item 5. Other Information

None.


Item 6. Exhibits and Reports on Form 8-K


  (a)     Exhibits
               The following exhibits will be filed as part of this Form 10-QSB:

               Exhibit 10.34         Loan and Security Letter Agreement dated
                                     March 31, 1999 between Fleet National Bank
                                     and the Company
               Exhibit 27            Financial Data Schedule (SEC filing only)

  (b)     Reports on Form 8-K
                    None

 
















                                       13
<PAGE>


                                   SIGNATURES

In accordance with the  requirements of the Exchange Act, the Registrant  caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.

                                       EP MEDSYSTEMS, INC.
                                           (Registrant)

Date: May 11, 1999         By:  /s/ David A. Jenkins
                                    David A. Jenkins
                                    President and Chief Executive Officer

Date: May 11, 1999         By:  /s/ Joseph M. Turner
                                    Joseph M. Turner
                                    Vice President and Chief Financial Officer
                                    (Principal Financial and Accounting Officer)






                                  EXHIBIT INDEX

Exhibit
Number              Description of Exhibit
-------------       -------------------------------------------

Exhibit 10.34       Loan and Security Letter Agreement dated March 31, 1999
                    between Fleet National Bank and the Company

Exhibit 27          Financial Data Schedule
                    (SEC filing only)





                                       14
<PAGE>


                                 EXHIBIT 10.34

                               EP MEDSYSTEMS, INC.
                                100 Stierli Court
                        Mount Arlington, New Jersey 07856



                                 March 31, 1999


Fleet National Bank
One Federal Street, 7th Floor
Boston, MA 02110

Ladies and Gentlemen:

     This Loan and Security Letter  Agreement (the "Letter  Agreement") will set
forth  certain  understandings  between  EP  MedSystems,   Inc.,  a  New  Jersey
corporation  (the  "Borrower") and Fleet National Bank (the "Bank") with respect
to Revolving  Loans and Term Loans (each as  hereinafter  defined)  which may be
made by the Bank to the Borrower and with respect to letters of credit which may
hereinafter  be  issued  by  the  Bank  for  the  account  of the  Borrower.  In
consideration of the mutual promises contained herein and in the other documents
referred to below,  and for other good and valuable  consideration,  receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Bank agree as
follows:

     I.   AMOUNTS AND TERMS

     1.1  Reference  to  Documents.  Reference  is made  to:  (i)  that  certain
$2,000,000  face principal  amount  revolving  promissory  note (the  "Revolving
Note") of even date  herewith  made by the  Borrower and payable to the order of
the Bank; (ii) that certain  $500,000 face principal amount term promissory note
(the "Term  Note") of even date  herewith  made by  Borrower  and payable to the
order of the Bank;  (iii) the  Disclosure  Schedule to this Letter  Agreement of
even date herewith; and (iv) the Closing Agenda, of even date herewith.

     1.2  Revolving  Loans; Revolving Note.  Subject to the terms and conditions
hereinafter  set  forth,  the Bank will make  loans  ("Revolving  Loans") to the
Borrower, in such amounts as the Borrower may request, on any Business Day prior
to the  first  to  occur  of (i)  the  Expiration  Date,  or  (ii)  the  earlier
termination of the within-described revolving financing arrangements pursuant to
[SECTION]5.2  or  [SECTION]6.7;   provided,  however,  that  (1)  the  aggregate
principal  amount of  Revolving  Loans  outstanding  shall at no time exceed the
Maximum Revolving Amount  (hereinafter  defined) and (2) the Aggregate Revolving
Bank  Liabilities  (hereinafter  defined)  shall at no time exceed the Borrowing
Base  (hereinafter  defined).  Within such limits,  and subject to the terms and
conditions  hereof,  the Borrower may obtain  Revolving  Loans,  repay Revolving
Loans and obtain  Revolving Loans again on one or more occasions.  The Revolving



      
<PAGE>

Loans shall be evidenced by the  Revolving  Note and interest  thereon  shall be
payable at the times and at the rate provided for in the Revolving Note. Overdue
principal of the Revolving  Loans and, to the extent  permitted by law,  overdue
interest shall bear interest at a fluctuating  rate per annum which at all times
shall be equal to the sum of (i) four (4%)  percent  per annum plus (ii) the per
annum rate otherwise payable under the Revolving Note (but in no event in excess
of the  maximum  rate  from  time to time  permitted  by then  applicable  law),
compounded  monthly  and  payable on demand.  The  Borrower  hereby  irrevocably
authorizes  the Bank to make or cause to be made, on a schedule  attached to the
Revolving  Note or on the books of the Bank,  at or following the time of making
each  Revolving  Loan and of receiving any payment of principal,  an appropriate
notation  reflecting such  transaction and the then aggregate  unpaid  principal
balance of the Revolving Loans. The amount so noted shall constitute presumptive
evidence as to the amount owed by the Borrower  with respect to principal of the
Revolving  Loans.  Failure  of the  Bank to make any such  notation  shall  not,
however,  affect  any  obligation  of the  Borrower  or any  right  of the  Bank
hereunder or under the Revolving Note.

     1.3  Repayment;  Renewal of Revolving  Loan  Facility.  The Borrower  shall
repay in full all  Revolving  Loans and all  interest  thereon upon the first to
occur of: (i) the Expiration Date, or (ii) an acceleration under [SECTION]5.2(a)
following  an Event of  Default.  The  Borrower  may repay at any time,  without
penalty or premium, the whole or any portion of any Revolving Loan. In addition,
if at any time the  Borrowing  Base is in an amount  which is less than the then
outstanding  Aggregate  Revolving Bank Liabilities,  the Borrower will forthwith
prepay  so much of the  Revolving  Loans  as may be  required  (or  arrange  for
termination  of such letters of credit as may be required) so that the Aggregate
Revolving Bank  Liabilities will not exceed the Borrowing Base. The Bank may, at
its sole discretion,  renew the revolving  financing  arrangements  described in
this Letter  Agreement by extending the  Expiration  Date in a writing signed by
the Bank and  accepted by the  Borrower.  Neither the  inclusion  in this Letter
Agreement  or  elsewhere  of  covenants  relating  to  periods of time after the
Expiration  Date,  nor any other  provision  hereof,  nor any  action  (except a
written extension pursuant to the immediately preceding sentence), non-action or
course of  dealing  on the part of the Bank will be deemed an  extension  of, or
agreement on the part of the Bank to extend, the Expiration Date.

     1.4  Term Loans: Term Note. In addition to the foregoing, the Bank may make
one or more loans (the "Term  Loans") to the Borrower in an aggregate  principal
amount up to $500,000. A Term Loan shall be made, no more than once per calendar
quarter (except that more than one Term Loan may be made in any calendar quarter
provided  that any  additional  Term Loan in any one  calendar  quarter is in an
amount of at least $250,000),  in order to finance costs of Qualifying Equipment
or  Qualifying  Real  Property  acquired  by the  Borrower  within  the 90  days
preceding the request for such Term Loan, each Term Loan to be in such amount as
may be requested by the  Borrower;  provided  that (i) no Term Loan will be made
after the earlier of (A) December 31, 1999 or (b) the earlier termination of the
within-described  term loan facility,  pursuant to [SECTION]5.2 or [SECTION]7.7;
(ii) the aggregate  original principal amounts of all Term Loans will not exceed
$500,000;  and (iii) no Term Loan will be in an amount more than 80% of the Fair
Market Value of Qualifying Real Property  (excluding  appraisals,  environmental
assessments  and reports,  insurance  and other  closing  costs);  or 80% of the



                                       2
<PAGE>

invoiced  actual costs of the tangible  property of  equipment  and/or  fixtures
constituting  the items of Qualifying  Equipment with respect to which such Term
Loan  is  made  (excluding  taxes,  shipping,  software,  installation  charges,
training fees and other "soft  costs");  or 30% of the invoiced  actual costs of
software.  Prior to the making of each Term Loan, and as a precondition thereto,
the  Borrower  will  provide  the  Bank  with:  (i)  appraisals,   environmental
assessments  and reports,  title reports and other  information  of the relevant
Qualifying  Real  Property  or  invoices  supporting  the costs of the  relevant
Qualifying  Equipment;  or (ii) such evidence as the Bank may reasonably require
showing that the Qualifying Equipment has been delivered to and installed at the
Premises, has become fully operational, has been paid for by the Borrower and is
owned by the Borrower free of all liens and interests of any other Person (other
than the security  interest of the Bank  provided for herein);  or (iii) Uniform
Commercial  Code  financing  statements.  If  needed,  reflecting  the  relevant
Qualifying Equipment or Qualifying Real Property with respect to which such Term
Loan is  being  made;  and  (iv)  evidence  Satisfactory  to the  Bank  that the
Qualifying  Equipment  or  Qualifying  Real  Property is fully  insured  against
casualty loss,  with  insurance  naming the Bank as secured party and first loss
payee.  The Term Loans will be evidenced by the Term Note.  Interest on the Term
Loans  shall be  payable at the times and at the rate  provided  for in the Term
Note.  Overdue  principal of any Term Loan and, to the extent  permitted by law,
overdue  interest  shall bear interest at a fluctuating  rate per annum which at
all times shall be equal to the sum of (i) four (4%) percent per annum plus (ii)
the per annum  rate  otherwise  payable  under the Term Note (but in no event in
excess of the maximum rate from time to time permitted by then applicable  law),
compounded  monthly  and  payable on demand.  The  Borrower  hereby  irrevocably
authorizes  the Bank to make or cause to be made, on a schedule  attached to the
Term Note or on the books of the Bank,  at or following  the time of making each
Term Loan and of receiving any payment of  principal,  an  appropriate  notation
reflecting such transaction and the then aggregate  unpaid principal  balance of
the Term Loans. The amount so noted shall constitute  presumptive evidence as to
the amount owed by the  Borrower  with  respect to  principal of the Term Loans.
Failure of the Bank to make any such  notation  shall not,  however,  affect any
obligation of the Bank hereunder or under the Term Note.

     1.5 Principal  Repayment of Term Loans.  The Borrower shall repay principal
of each  Term  Loan in 47 equal  consecutive  monthly  installments  (each in an
amount  equal to 1/180th  of the  aggregate  principal  amount of the Term Loans
outstanding at the close of business on December 31, 1999) commencing on January
31, 2000 and continuing on the last Business Day of each month through  November
30, 2004 plus a 48th and final  payment of all  remaining  principal  and unpaid
interest  due  and  payable  on  December  31,  2004.  In any  event,  the  then
outstanding  principal  balance of each Term Loan and all interest  then accrued
but unpaid  thereon  shall be due and payable in full no later than December 31,
2004.  The  Borrower  may  prepay,  at any time,  or from time to time,  without
premium or  penalty,  the whole or any portion of any Term Loan;  provided  that
each such principal  prepayment  shall be accompanied by payment of all interest
on the sum so prepaid  accrued  but unpaid to the date of  payment. Any  partial
prepayment  of  principal of the Term Loans will be applied to  installments  of
principal  of the Term Loans  thereafter  coming due in inverse  order of normal
maturity.  Amounts  repaid or  prepaid  with  respect  to the Term Loans are not
available for reborrowing.

     1.6  Interest Rates and Payment. Interest on the Revolving Loans and on the



                                       3
<PAGE>

Term Loans shall be calculated as follows:

          (a)  Except as otherwise provided below in this [SECTION]1.6, interest
on the Revolving  Loans and on the Term Loans will be payable monthly in arrears
as provided in the Notes at a fluctuating  rate per annum (the "Floating  Rate")
which shall at all times be equal to the sum of (i) (A) for the Revolving Loans,
one half of one percent  (0.50%);  or (B) for the Term Loans,  there quarters of
one percent  (0.75%) plus (ii) the Prime Rate as defined in the Notes in effects
from time to time (but in no event in excess of the maximum  rate  permitted  by
then applicable law), with a change in such rate of interest to become effective
on each day when a change in the Prime Rate becomes effective.

          (b) Subject to the conditions set forth herein, the Borrower may elect
that all or a portion of any Revolving Loan to be made under [SECTION]1.2 or any
Term Loan to be made under  [SECTION]1.4 be made as a London  Interbank  Offered
Rate ("LIBOR") Loan at the rate of (i) (A) for a Revolving  Loan,  three percent
(3%); or (B) for a Term Loan,  three and one quarter  percent  (3.25%) plus (ii)
30, 60 or 90 day LIBOR (as the  Borrower  may  select),  as provided  for in the
Notes;  that all or any portion of any Floating Rate Loan will be converted to a
30, 60 or 90 day (as the Borrower may select)  LIBOR Loan at such rates;  and/or
that any LIBOR Loan will be continued at the expiration of the Interest  Period,
as defined herein,  as a 30, 60 or 90 day (as the Borrower may select) new LIBOR
Loan. As used herein,  "Interest  Period" shall mean , with respect to each such
advance conversion or continuation, the chosen 30,60 or 90 day period commencing
on and including the date on which such advance,  conversion or  continuation is
made and ending on and including the date  preceding the next  succeeding  date,
when payment of interest is due, or, if such  interest  payment date should fall
within thirty (30) days of the date of such advance, conversion or continuation,
the net interest payment date thereafter.

          (c)  A LIBOR Loan election shall be made by the Borrower giving to the

Bank a written or telephonic  notice received by the Bank within the time period
and  containing  the  information  described in the next  following  sentence (a
"LIBOR  Borrowing  Notice").  The LIBOR Borrowing Notice must be received by the
Bank no later than 10:00 a.m.  (Boston  time) on that day which is two  Business
Days prior to the date of any such advance conversion or continuation,  and must
specify:  (i) the amount of the LIBOR Loan requested (which shall be $500,000 or
an integral multiple of $100,000 in excess of $500,000; (ii) the particular Term
Loan(s) or Revolving Loan(s) to be so advanced,  converted or continued,  as the
case may be; and (iii) the proposed  commencement  date of the relevant Interest
Period and its 30, 60 or 90 day duration.  The Bank shall determine the LIBOR as
quoted to it by leading banks in the London Interbank  Eurodollar  Market, at or
about 5:00 p.m.  (London time) on the date a LIBOR Borrowing  Notice is received
(or, if such date is a banking  holiday in London,  of the last LIBOR  quoted to
the Bank),  which will be in effect on the date of the  advance,  conversion  or
continuation  as the case may be (which in any case must be a Business Day) with
respect to the Term Loan or Revolving  Loan or LIBOR Loan in question,  having a
maturity  date of 30, 60 or 90 days from the date of the advance,  conversion or
continuation,  as the case may be. Each determination of LIBOR by the Bank shall
be  conclusive  evidence,  in the absence of manifest  error,  or such LIBOR and


                                       4
<PAGE>

shall be promptly communicated to the Borrower.  However, if the Borrower if the
Borrower has not delivered a notice to the Bank in a timely manner in accordance
with the  provisions of this  [SECTION]1.6  (c), the Borrower shall be deemed to
have chosen to have the  interest on such  Revolving  Loan or Term Loan or LIBOR
Loan  calculated  on the  applicable  Floating Rate basis.  Any LIBOR  Borrowing
Notice shall,  upon receipt by the Bank,  become  irrevocable and binding on the
Borrower,  and the Borrower shall, upon demand and receipt of a Bank Certificate
with respect thereto,  forthwith  indemnify the Bank against any loss or expense
incurred  by the Bank as a result of any  failure by the  Borrower to borrow any
requested  LIBOR  Loan,  including,  without  limitation,  any  loss or  expense
incurred by reason of the liquidation or redeployment of deposits or other funds
acquired by the Bank to fund or maintain  such LIBOR Loan.  Notwithstanding  the
foregoing,  the Bank need not make a LIBOR Loan, convert a Floating Rate Loan to
a LIBOR Loan or continue a LIBOR Loan at any time at which there exists an Event
of Default.

          (d)  Nothing  contained  herein shall be construed as authorizing  the
Borrower,  with  respect  to the  determination  of LIBOR  (i) to choose a LIBOR
Interest  Period in  respect of which the  Interest  Period  extends  beyond the
Expiration  Date in the case of  Revolving  Loans or beyond  the due date of the
applicable  installment  in the case of Term Loans;  or (ii) to choose an amount
for an advance,  conversion or  continuation  amount greater than that permitted
under [SECTION]1.2 for Revolving Loans or [SECTION]1.4 for Term Loans.

               (e)  The  actual  annual  rate of  interest  to which  the  rates
determined in accordance  with  [SECTION]1.6(b)  are equivalent is the specified
rate multiplied by the actual number of days during the year, divided by 360:

                    (LIBOR + Margin) x 365*/360 = % per year

* (in a leap year, substitute 366 for 365). LIBOR Loan interest shall be payable
in arrears on each applicable Interest Period payment date.

               (f) In the  event  that  the  Bank  determines  that  (i) for any
reason,  adequate and reasonable methods for determining the LIBOR applicable to
any  Interest  Period  do not  exist;  or  (ii)  the  making,  conversion  to or
continuation of LIBOR Loan has been made  impracticable or unlawful by reason of
London Interbank  market  conditions or events or by compliance by the Bank with
any applicable  law,  regulation,  guideline or other or change of, or change in
the  interpretation of, any such law,  regulation,  guideline or order; or (iii)
LIBOR, in the Bank's  reasonable  determination,  does not adequately and fairly
reflect the Bank's cost in funding  such LIBOR Loans for such  Interest  Period,
then the Bank shall give Borrower notice of such  determination,  which shall be
conclusive  and binding on  Borrower,  and the Bank's  obligation  to make LIBOR
Loans shall be suspended until the Bank determines that the conditions that gave
rise to its prior determination no longer exist.

               (g)  If, due to acceleration or prepayment  (whether voluntary or
mandatory) or for any other reason,  the Bank receives payment for any principal
of any  LIBOR  Loan on any  date  prior to the  last  day of such  LIBOR  Loan's
relevant Interest Period, the Borrower shall, upon receipt of a Bank Certificate
from  the  Bank  with  respect  thereto,  pay  forthwith  to the  Bank  a  yield


                                       5
<PAGE>

maintenance  fee in an amount  computed as follows:  the current rate for United
States Treasury  securities (bills on a discounted basis shall be converted to a
bond  equivalent)  with a maturity  date closest to the last day of the Interest
Period  applicable to the affected LIBOR Loan shall be subtracted from the "cost
of funds" component (i.e.,  reserve-adjusted  LIBOR) of the fixed rate in effect
at the  date  of such  prepayment  or  conversion.  If the  result  is zero or a
negative  number,  there shall be no yield  maintenance  fee. If the result is a
positive number, then the resulting percentage shall be multiplied by the amount
of the principal balance being prepaid. The resulting amount shall be divided by
360 and  multiplied  by the number of days  remaining in the  relevant  Interest
Period.  Such amount shall be reduced to present  value  calculated by using the
number  of days  remaining  in the  relevant  Interest  Period  and by using the
above-referenced  United States  Treasury  securities rate as the discount rate.
The  resulting  amount  shall be the  yield  maintenance  fee due the Bank  upon
prepayment or conversion of the  applicable  LIBOR Loan. Any  acceleration  of a
LIBOR Loan due to an Event of Default will give rise to a yield  maintenance fee
calculated  with respect to such LIBOR Loan on the date of such  acceleration in
the same manner as though the Borrower had  exercised a right of  prepayment  at
that date, such yield maintenance fee being due and payable at that date.

     1.7  Advances and Payments.  The proceeds of all Loans shall be credited by
the Bank to a general deposit account  maintained by the Borrower with the Bank.
The  proceeds of each  Revolving  Loan will be used by the  Borrower  solely for
working  capital  purposes.  The  proceeds of each Term Loan will be used by the
Borrower solely to pay or reimburse acquisition costs of Qualifying Equipment or
Qualifying Real Property.

     The Bank may charge any general deposit account of the Borrower at the Bank
with the amount of all payments of interest,  principal and other sums when same
are due, from time to time,  under this Letter  Agreement and/or any Note and/or
with respect to any letter of credit; and will thereafter notify the Borrower of
the amount so  charged.  The  failure of the Bank so to charge any account or to
give any such  notice  shall not affect the  obligation  of the  Borrower to pay
interest,  principal or overdue principal,  overdue interest or default interest
as provided herein or in any Note or with respect to any letter of credit.

     Whenever any payment to be made to the Bank  hereunder or under any Note or
with respect to any letter of credit shall be stated to be due on a day which is
not a Business  Day,  such payment may be made on the next  succeeding  Business
Day, and  interest  payable on each such date shall  include the amount  thereof
which shall accrue during the period of such  extension of time. All payments by
the Borrower  hereunder and/or in respect of any Note and/or with respect to any
letter  of credit  shall be made net of any  impositions  or taxes  and  without
deduction, set-off or counterclaim, notwithstanding any claim which the Borrower
any now or at any  time  hereafter  have  against  the  Bank.  All  payments  of
interest,  principal and any other sum payable  hereunder  and/or under any Note
and/or with respect to any letterof  credit shall be made to the Bank, in lawful
money of the United States in immediately  available funds, at its office at One
Federal Street, 7th Floor, Boston, MA 02110 or at such other address as the Bank
may from time to time direct.  All payments received by the Bank after 2:00 p.m.
on any day shall be deemed received as of the next succeeding Business Day. All


                                       6
<PAGE>

monies received by the Bank shall be applied first to fees,  charges,  costs and
expenses  payable to the Bank under this Letter  Agreement,  any Note and/or
any of the other Loan  Documents  and/or  with  respect to any letter of credit,
next to interest  then  accrued on account of any Loans or letter of credit next
to  interest  then  accrued  on  account  of  any  Loans  or  letter  of  credit
reimbursement  obligations  and only  thereafter  to  principal  of the Loans or
letter of credit  reimbursement  obligations  being  applied  against  the Loans
and/or  such  obligations  in such order as the  Borrower  may  designate  (and,
failing  such  designation,  being  applied  first  against the letter of credit
reimbursement  obligations,  next  against the  Revolving  Loans and  thereafter
against installments of the Term Loans in inverse order of normal maturity). All
interest and fees payable hereunder and/or under nay Note shall be calculated on
the basis of a 360-day year for the actual number of days elapsed.

     1.8  Letters of Credit. At the Borrower's request,  the Bank may, from time
to time,  in its sole  discretion  issue one or more  letters  of credit for the
account of the  Borrower;  provided  that at the time of such issuance and after
giving effect thereto the Aggregate  Revolving Bank Liabilities will in no event
exceed the lesser of (i) Borrower or (ii) the then effective Borrowing Base. Any
such  letter of  credit  will be  issued  for such fee and upon  such  terms and
conditions  as may be  agreed  to by the  Bank and the  Borrower  at the time of
issuance.  The Borrower hereby authorizes the Bank, without further request from
the Borrower, to cause the Borrower's liability to the Bank for reimbursement of
funds drawn under any such letter of credit to be repaid from the  proceeds of a
Revolving Loan to be made thereunder.  The Borrower hereby irrevocably  requests
that such Revolving Loans be made.

     1.9  Conditions  to  Advance.  Prior  to the  making  of the  initial  Loan
hereunder or the issuance of any letter of credit hereunder,  the Borrower shall
deliver to the Bank duly executed copies of this Letter Agreement, the Revolving
Note,  the Term Note, all other Loan Documents and the documents and other items
listed on the Closing Agenda delivered herewith by the Bank to the Borrower, all
of which, as well as all legal matters incident to the transactions contemplated
hereby, shall be satisfactory in form and substance to the Bank and its counsel.
As a  material  condition  precedent  to the  granting  of any  advance  for the
purchase of Qualifying Real Property (including, without limitation, purchase of
the building or part of the building containing the Premises, Borrower agrees to
execute in the Bank's  favor a senior first  mortgage in a form  supplied by the
Bank for the  entirety  of the  Qualifying  Real  Property,  and, in the case of
purchase  of part of the  building  containing  the  Premises,  a  senior  first
mortgage on the entire  building and lot containing  the Premises.  As a further
material  precondition t the making of an advance for the purchase of Qualifying
Real  Property,  Borrower  agrees  that such  advance  is to be paid by the Bank
directly to the Seller of such  Qualifying Real Property at the closing and that
Borrower  will,  prior  to  such  closing,   furnish  to  the  Bank  appraisals,
environmental   assessments  and  reports,  title  information  and  such  other
documents and information as the Bank may require to ascertain the value,  clear
title,  freedom from liens and validity of the Bank's Security  Interest in such
Qualifying  Real  Property,  including  those  set  forth in the  definition  of
"Qualifying Real Property" in [SECTION]8.1 herein.

     Without  limiting  the  foregoing,  any Loan or letter  of credit  issuance
(including  the  initial  Loan or letter of credit  issuance)  is subject to the


                                       7
<PAGE>

further conditions precedent that on the date on which such Loan is made or such
letter of credit is issued ( and after giving effect thereto):

          (a)  All  statements.  representations  and warranties of the Borrower
made in this  Letter  Agreement  shall  continue  to be correct in all  material
respects as of the date of such Loan or  issuance  of such letter of credit,  as
the case may be.

          (b)  All covenants and  agreements  of the Borrower  contained  herein
and/or in any of the other Loan  Documents  shall have been complied  within all
material  respects on and as of the date of such Loan or issuance of such letter
of credit, as the case may be.

          (c)  No event which constitutes, or which with notice or lapse of time
or both  could  constitute,  an Event of  Default  shall  have  occurred  and be
continuing.

          (d)  No material  adverse  change shall have occurred in the financial
condition of the Borrower from that disclosed in the financial  statements  then
most recently furnished to the Bank.
     
     Each  request by the  Borrower for any Loan or for the issuance of a letter
of credit and each  acceptance  by the  Borrower of the  proceeds of any Loan or
delivery of a letter of credit, will be deemed a representation  and warranty by
the Borrower that at the date of such Loan or letter of credit issuance,  as the
case may be, and after giving effect  thereto all of the conditions set forth in
the foregoing clauses (a)-(d) of this 1.9 will be satisfied. Each request for a
Revolving  Loan or letter of credit  issuance will be accompanied by a borrowing
base  certificate  on a form  satisfactory  to the Bank,  executed  by the chief
financial  officer of the Borrower,  unless such a  certificate  shall have been
previously furnished setting forth the Borrowing Base as at a date not more than
30 days prior to the date of the requested  borrowing or the requested letter of
credit issuance as the case may be.

     II.  REPRESENTATIONS AND WARRANTIES

     2.1  Representations  and Warranties.  In order to induce the Bank to enter
into this Letter  Agreement and to make Loans hereunder  and/or issue letters of
credit hereunder, the Borrower warrants and represents to the Bank as follows:

          (a) The Borrower is a corporation duly organized, validly existing and
in good standing  under the laws of New Jersey.  The Borrower has full corporate
power to own its  property  and conduct its  business  as now  conducted  and as
contemplated  to be  conducted,  to grant the  security  interests  contemplated
herein and execute, deliver and perform this Letter Agreement and the other Loan
Documents. The Borrower is duly qualified to do business and in good standing in
each other  jurisdiction  in which the Borrower  maintains any  facility,  sales
office or  warehouse  and in each  other  jurisdiction  where the  failure so to
qualify could (singly or in the aggregate  with all other such  failures) have a
material adverse effect on the financial condition, business or prospects of the
Borrower, all such jurisdictions, as at the date of this Letter Agreement, being
listed on item 2.1(a) of the attached Disclosure  Schedule.  At the date hereof,
the borrower has no Subsidiaries, except as shown on said item 2.1(a) of the


                                       8
<PAGE>

attached  Disclosure  Schedule.  The  Borrower  is  not a  member  of  any  such
partnership or joint venture.

          (b)  At the  date of this  Letter  Agreement,  all of the  outstanding
capital stock of the Borrower is owned, of record and beneficially, as set forth
on item 2.1(b) of the attached  Disclosure  Schedule.  The Borrower owns 100% of
the outstanding capital stock of each Subsidiary.

          (c) The  execution  delivery and  performance  by the Borrower of this
Letter  Agreement and each of the other Loan Documents have been duly authorized
by all necessary corporate and other action and do not and will not:

          (i)  violate any  provision  of, or require  any  filings  (other than
               filings under the UCC), registration,  consent or approval under,
               any law, rule,  regulation,  order, writ,  judgment,  injunction,
               decree,   determination  or  award  presently  in  effect  having
               applicability to the Borrower;

          (ii) violate any  provision of the charter or by-laws of the Borrower,
               or result in a breach of or  constitute  a default or require any
               waiver or consent under nay indenture or loan credit agreement or
               any other  material  agreement,  lease or instrument to which the
               Borrower  is a  party  or by  which  the  Borrower  or any of its
               properties  may be bound or affected or require any other consent
               of any Person; or

          (iii)result in, or require,  the  creation or  imposition  of any Lien
               (other than in favor of the Bank), upon or with respect to any of
               the properties now owned or hereafter acquired by the Borrower.

          (d)  This Letter  Agreement  and each of the other Loan  Documents has
been duly  authorized,  executed  and  delivered  by the  Borrower and each is a
legal,  valid and binding  obligation of the Borrower,  enforceable  against the
Borrower in accordance with its respective terms.

          (e) Except as  described  on item  2.1(e) of the  attached  Disclosure
Schedule, there are no actions, suits, proceedings or investigations pending or,
to the knowledge of the  Borrower,  threatened by or against the Borrower or any
Subsidiary  of  the  Borrower  before  any  court  or  governmental  department,
commission, board, bureau, agency or instrumentality, domestic or foreign, which
could hinder or prevent the consummation of the transactions contemplated hereby
or call into question the validity of this Letter  Agreement or any of the other
Loan  Documents or any other  instrument  provided for or  contemplated  by this
Letter Agreement or any of the other Loan Documents or any action taken or to be
taken in  connection  with the  transactions  contemplated  hereby or thereby or
which in any  single  case or in the  aggregate  might  result  in any  material
adverse change in the business,  prospects,  condition, affairs or operations of
the Borrower or any such Subsidiary.

          (f)  The  Borrower  is not in  material  violation  of any term of its

                                       9
<PAGE>

charter  or  by-laws  as now in effect.  As used  herein,  a material  violation
includes any  violation  that  invalidates,  or impairs the legal effect of, the
execution,  delivery or performance  of this Letter  Agreement or any other Loan
Document. Neither the Borrower nor any Subsidiary of the Borrower is in material
violation of any term of any mortgage,  indenture or judgment,  decree or order,
or any other  instrument,  contract  or  agreement  to which it is a party or by
which any of its property is bound.

          (g) The  Borrower  has filed (and has caused  each  Subsidiary  of the
Borrower to file) all federal, foreign, state and local tax returns, reports and
estimates  required to be filed by the Borrower or by any such  Subsidiary.  All
such filed  returns,  reports  and  estimates  are proper and  accurate  and the
borrower (or the Subsidiary  concerned,  as the case may be) has paid all taxes,
assessments,  impositions,  fees and other  governmental  charges required to be
paid in respect of the periods covered by such returns, reports or estimates. No
deficiencies for any tax,  assessment or governmental  charge have been asserted
or  assessed,  and the  Borrower  knows of no material  tax  liability  or basis
therefor.

          (h) The Borrower is in  compliance  with (and each  Subsidiary  of the
Borrower is in compliance  with) all  requirements  of law,  federal,  state and
local,  and all  requirements  of all  governmental  bodies or  agencies  having
jurisdiction over it, the conduct of its business, the use of its properties and
assets,  and all  premises  occupied  by it,  failure to comply with which could
(singly  or in the  aggregate  with all other  such  failures)  have a  material
adverse effect upon the assets,  business,  financial  condition or prospects of
the  Borrower  or any such  Subsidiary.  Without  limiting  the  foregoing,  the
Borrower has all the franchises,  licenses,  leases,  permits,  certificates and
authorizations  needed  for  the  conduct  of its  business  and  the use of its
properties and all premises occupied by it, as now conducted, owned and used and
as proposed to be conducted, owned and used.

          (i)  The   audited   financial   statements  of  the  Borrower  as  at
December  31,  1997 and the  management-generated  financial  statements  of the
Borrower as at September 30, 1998,  each  heretofore  delivered to the Bank, are
complete and accurate and fairly present the financial condition of the Borrower
as at the date  thereof  and for the period  covered  thereby,  except  that the
management-generated  statements  do not have  footnotes and thus do not present
the  information  which would  normally be  contained  in footnotes to financial
statements. Neither the Borrower nor any of the Borrowers's Subsidiaries has any
liability,  contingent or otherwise, not disclosed in the aforesaid December 31,
1997 and  September 30, 1998  financial  statements or in the notes thereto that
could materially affect the financial condition of the Borrower. Since September
30,  1998,  there has been no material  adverse  development  in the business or
condition of the Borrower, and the Borrower has not entered into any transaction
other than in the ordinary course.

          (j)  The principal  place of business and chief  executive  offices of
the Borrower are located at 100 Stierli Court,  Mount Arlington,  New Jersey and
those of the Borrower's  subsidiary,  Procath Corporation  ("Procath") at Cooper
Run Executive  Park  Condominium,  575 Route 73 North,  West Berlin,  New Jersey
(collectively,  the  "Premises").  All  of  the  Collateral  is  located  at the
Premises.  Except  as  described  on  item  2.1(j)  of the  attached  Disclosure
Schedule, no Collateral is located at any other address. Said item 2.1(j) of the


                                       10
<PAGE>

attached  Disclosure  Schedule  sets forth the names and addresses of all record
owners of the Premises.

          (c)  The Borrower  owns or has a valid and  unencumbered  right to use
all of the collateral free of all Liens except those in favor of the Bank.

          (l)  None of the  executive  officers or key employees of the Borrower
is subject to any  agreement in favor of anyone  other than the  Borrower  which
limits or  restricts  that  person's  right to  engage  in the type of  business
activity  conducted  or proposed to be conducted by the Borrower or which grants
to anyone other than the Borrower  any rights in any  inventions  or other ideas
susceptible  to legal  protection  developed or conceived by any such officer or
key employee.

          (m)  The Borrower is not a party to any  contract or  agreement  which
now has or, as far as can be foreseen by the  Borrower at the date  hereof,  may
have a material adverse effect on the financial condition,  business,  prospects
or properties of the Borrower.

     III. AFFIRMATIVE COVENANTS AND REPORTING REQUIREMENTS
     
     Without  limitation  of any covenants and  agreements  contained  herein or
elsewhere,  the  Borrower  agrees  that so long  as the  financing  arrangements
contemplated  hereby are in effect or any Revolving Loan or any Term Loan or any
of the other  Obligation  shall be  outstanding  or any letter of credit  issued
hereunder shall be outstanding;

     3.1  Legal Existence; Qualification: Compliance. The Borrower will maintain
(and will cause each  Subsidiary  of the  Borrower to  maintain)  its  corporate
existence  and good  standing  in the  jurisdiction  of its  incorporation.  The
Borrower  will  remain  qualified  to do  business  and in good  standing in New
Jersey.  The Borrower  will qualify to do business and remain  qualified  and in
good  standing  (and will cause each  Subsidiary  of the Borrower to qualify and
remain  qualified  and in good  standing) in each other  jurisdiction  where the
Borrower or such  Subsidiary,  as the case may be,  maintains  any plant,  sales
office,  warehouse or other facility and in each other jurisdiction in which the
failure so to qualify  could  (singly  or in the  aggregate  with all other such
failures) have a material adverse effect on the financial condition, business or
prospects of the Borrower or any such Subsidiary.  The Borrower will comply (and
will cause each Subsidiary of the Borrower to comply) with its charter documents
and by-laws.  The Borrower  will comply with (and will cause each  Subsidiary of
the  Borrower  to  comply  with) all  applicable  laws,  rules  and  regulations
(including,  without  limitation,  ERISA and  those  relating  to  environmental
protection   other  than  (i)  laws,   rules  or  regulations  the  validity  or
applicability  of which the Borrower or such  Subsidiary  shall be contesting in
good faith by proceedings which serve as a matter of law to stay the enforcement
thereof and (ii) those laws,  rules and  regulations  the failure to comply with
any of which  could not  (singly or in he  aggregate)  have a  material  adverse
effect on the financial condition,  business or prospects of the Borrower or any
such Subsidiary.

     3.2  Maintenance  of Property;  Insurance.  The Borrower  will maintain and
preserve  (and will  cause each  Subsidiary  of the  Borrower  to  maintain  and


                                       11
<PAGE>

preserve)  all of its property in good working order and  condition,  making all
necessary repairs thereto and replacements thereof. The Borrower, in addition to
all such  insurance  as may be required  under  Section  6.5  herein,  will also
maintain, with financially sound and reputable insurers,  insurance with respect
to  its  property  and  business  against  such   liabilities,   casualties  and
contingencies  and of such  type and in such  amounts  as  shall  be  reasonably
satisfactory  to the Bank from time to time and in any event all such  insurance
as may from  time to time be  customary  for  companies  conducting  a  business
similar to that of the Borrower in similar locales.

     3.3 Payment of Taxes and Charges.  The Borrower will pay and discharge (and
will cause each  Subsidiary  of the  Borrower to pay and  discharge)  all taxes,
assessments  and  governmental  charges  or levies  imposed  upon it or upon its
income or property, including without limitation, taxes, assessments, charges or
levies relating to real and personal property, franchises, income, unemployment,
old age  benefits,  withholding,  or  sales  or use,  prior to the date on which
penalties  would attach  thereon and all lawful  claims  (whether for any of the
foregoing or  otherwise)  which,  if unpaid,  might give rise to a lien upon any
property of the  Borrower or any such  Subsidiary,  except any of the  foregoing
which is being  contested  in good faith and by  appropriate  proceedings  which
serve as a matter  of law to stay the  enforcement  thereof  and for  which  the
Borrower has established and is maintaining adequate reserves. The Borrower will
pay, and will cause each of its  Subsidiaries  to pay, in a timely  manner,  all
lease obligations,  all trade debt, purchase money obligations,  equipment lease
obligations  and  all of its  other  material  Indebtedness,  except  any of the
foregoing which is being contested in good faith and by appropriate  proceedings
which  serve as a matter of law to stay the  enforcement  thereof  for which the
Borrower has established and is maintaining adequate reserves. The Borrower will
perform and fulfill all material  covenants and  agreements  under any leases of
real estate,  agreements  relating to purchase money debt,  equipment leases and
other material  contracts.  The Borrower will maintain in full force and effect,
and comply  with the terms and  conditions  of,  all  permits,  permissions  and
licenses necessary or desirable for its business.

     3.4  Accounts.  The Borrower will maintain its principal operating accounts
with the Bank.

     3.5  Conduct  of  Business.  The  Borrower  will  conduct,  in the ordinary
course,  the business in which it is presently  engaged.  The Borrower will not,
without the prior written consent of the Bank, directly or indirectly (itself or
through any Subsidiary),  enter into any other lines of business,  businesses or
ventures.

     3.6  Reporting Requirements. The Borrower will furnish to the Bank:

          (i)  Within 120 days  after the end of each  fiscal  year  (commencing
          with the fiscal year ending December 31, 1997 of the Borrower), a copy
          of the annual  audit  report for such  fiscal  year for the  Borrower,
          including  therein  consolidated  balance  sheets of the  Borrower and
          Subsidiaries   as  at  the  end  of  such   fiscal  year  and  related
          consolidated statements of income,  stockholder's equity and cash flow
          for the fiscal  year then  ended.  The annual  consolidated  financial
          statements shall be certified by


                                       12
<PAGE>

          independent public accountants selected by the Borrower and reasonably
          acceptable to the Bank,  such  certification  to be in such form as is
          generally recognized as "unqualified".

          (ii) Within  45  days  after  the end of each  fiscal  quarter  of the
          Borrower,   consolidated  balance  sheets  of  the  Borrower  and  its
          Subsidiaries  and related  consolidated  statements of income and cash
          flow,  unaudited  but complete and accurate and prepared in accordance
          with generally  accepted  accounting  principles fairly presenting the
          financial  condition of the  Borrower as at the dates  thereof and for
          the periods  covered  thereby  (except that such quarterly  statements
          need not contain  footnotes)  and  certified  as accurate  (subject to
          normal year-end audit adjustments, which shall not be material) by the
          chief financial officer of the Borrower,  such balance sheets to be as
          at the end of each such  fiscal  quarter  and for the  fiscal  year to
          date, in each case together with a comparison to budget.

          (iii)At the time of delivery of each annual or quarterly  statement of
          the Borrower,  a certificate  executed by the chief financial offer of
          the Borrower stating that he or she has reviewed this Letter Agreement
          and the other Loan  Documents  and has no  knowledge of any default by
          the Borrower in the performance or observance of any of the provisions
          of this Letter  Agreement or of any of the other Loan Documents or, if
          he or she has such  knowledge,  specifying each default and the nature
          thereof.  Each  such  certificate  given  as at the end of any  fiscal
          quarter  shall also set forth the  calculations  necessary to evidence
          compliance with [SECTION SECTION]3.7-3.10.

          (iv) Monthly, within 30 days after the end of each month, (A) an aging
          report in form  satisfactory  to the Bank covering all  Receivables of
          the  Borrower  outstanding  as at  the  end of  such  month  and(B)  a
          certificate  of the chief  financial  officer of the Borrower  setting
          forth  the  Borrowing  Base as at the end of such  month,  all in form
          reasonably satisfactory to the Bank.

          (v)  Promptly after receipt, a copy of all audits or reports submitted
          to the Borrower by independent  public  accountants in connection with
          any annual, special or interim audits of the books of the Borrower and
          any "management letter" prepared by such accountants and a copy of the
          current year income statement balance sheet and cash flow projections.

          (vi) Borrower  will furnish to the Bank,  promptly  upon same becoming
          available,  one copy of each financial  statement,  report,  notice or
          proxy statement sent by the Borrower to stockholders or the holders of
          debt securities generally,  and of each regular or periodic report and
          any  registration   statement,   prospectus  or  listing   application
          (including,  without  limitation,  Forms  10-K and 10-Q)  filed by the
          Borrower  with the National  Association  of Securities  Dealers,  any
          securities  exchange or the Securities and Exchange  Commission or any
          successor agency.



                                       13
<PAGE>

          (vii)As soon as  possible  and in any  event  within  five days of the
          occurrence of any Event of Default or any event which, with the giving
          of notice or passage  of time or both,  would  constitute  an Event of
          Default,  the statement of the Borrower  setting forth details of such
          Event of Default or event and the action which the  Borrower  proposes
          to take with respect thereto.

          (viii) Promptly after the commencement thereof,  notice of all actions
          and  proceedings   before  any  court  or   governmental   department,
          commission,  board,  bureau,  agency or  instrumentality,  domestic or
          foreign,  to which the Borrower or any Subsidiary of the Borrower is a
          party,  except for civil  proceedings in which less than $50,000 is in
          controversy.

          (ix) Promptly upon applying for, or being granted,  a federal or state
          registration for any copyright,  trademark or patent or purchasing any
          registered copyright,  trademark or patent, written notice to the Bank
          describing same.

          (x)  Promptly after the Borrower has knowledge thereof, written notice
          of any development or circumstance which may reasonably be expected to
          have a  material  adverse  effect  on the  Borrower  or its  business,
          properties, assets, Subsidiaries or condition, financial or otherwise.

          (xi) Promptly  upon request,  such other  information  respecting  the
          financial condition, operations,  Receivables, inventory, machinery or
          equipment of the Borrower or any  Subsidiary as the Bank may from time
          to time reasonably request.

     3.7  Debt to Worth. The Borrower will maintain as at the end of each fiscal
quarter of the Borrower (commencing with its results as at December 31, 1998) on
a  consolidated  basis a  Leverage  Ration  of not more  than 1.00 to 1. As used
herein,  "Leverage  Ratio" means the ration of (x)  Adjusted  Senior Debt of the
Borrower and Subsidiaries to (y) Capital Base of the Borrower.

     3.8  Capital  Base.  The  Borrower  will  maintain  as  at  the end of each
fiscal quarter of the Borrower  (commencing  with its results as at December 31,
1998)  a   consolidated   Capital   Base  which  shall  not  be  less  than  the
then-effective  Capital  Base  Requirement.  As used herein,  the "Capital  Base
Requirement" will be deemed to have been $4,500,000 as at December 31, 1998.

     3.9  Liquidity.  The  Borrower  will  maintain as at the end of each fiscal
quarter of the Borrower  (commencing  with its results as at December 31, 1998 a
ratio of Net Quick Assets to Adjusted Current Liabilities,  which ratio shall be
not less than 1.5 to1.

     3.10 Profitability.  The Borrower  will achieve  quarterly Net Income of at
least  $1.00  for its  fiscal  quarter  ending  December  31,  1999 and for each
subsequent  fiscal  quarter  ending  December  31, 2000 and for each  subsequent
fiscal year.

                                       14
<PAGE>

     3.11 Books and Records.  The Borrower  will maintain (and cause each of its
Subsidiaries  to maintain)  complete and  accurate  books,  records and accounts
which will at all times accurately and fairly reflect all of its transactions in
accordance with generally accepted accounting  principles  consistently applied.
The Borrower will, at any reasonable  time and from time to time upon reasonable
notice  and  during  normal  business  hours  (and at any time and  without  any
necessity for notice  following the  occurrence of an Event of Default),  permit
the Bank, and any agents or representatives  thereof, to examine and make copies
of and take  abstracts  from the  records and books of account of, and visit the
properties  of the  Borrower  and any of its  Subsidiaries,  and to discuss  its
affairs,  finances and accounts  with its  managers,  officers or directors  and
independent  accountants,  all of whom are hereby  authorized  and  directed  to
cooperate with the Bank in carrying out the intent of this  [SECTION]3.11.  Each
financial  statement of the Borrower hereafter delivered pursuant to this Letter
Agreement  will be complete and accurate and will fairly  present the  financial
condition  of the  Borrower as at the date  thereof and for the periods  covered
thereby.

     IV.  NEGATIVE COVENANTS

     Without limitation of any covenants and agreements contained in this Letter
Agreement  or  elsewhere  the  Borrower  agrees  that so  long as the  financing
arrangements contemplated hereby are in effect or any Revolving Loan or any Term
Loan or any of the other Obligation shall be outstanding or any letter of credit
issued hereunder shall be outstanding:

     4.1  Indebtedness. The Borrower will not create, incur, assume or suffer to
exist any  Indebtedness  (nor allow any of its  Subsidiaries  to create,  incur,
assume or suffer to exist any Indebtedness), except for:

          (i)  Indebtedness owed to the Bank, including, without limitation, the
               Indebtedness  represented  by the Notes and any  Indebtedness  in
               respect of letters of credit issued by the Bank;

          (ii) Indebtedness  of  the  Borrower  or  any  Subsidiary  for  taxes,
               assessments  and  governmental  charges or levies not yet due and
               payable;

          (iii)unsecured  current  liabilities of the Borrower or any Subsidiary
               (other than for money borrowed or for purchase money Indebtedness
               with respect to fixed assets)  incurred upon  customary  terms in
               the ordinary course of business;

          (iv) purchase  money  indebtedness  (including,   without  limitation,
               Indebtedness in respect of capitalized  equipment leases) owed to
               equipment  vendors  and/or  lessors for  equipment  purchased  or
               leased  by the  Borrower  for  use in  the  Borrower's  business,
               provided  that the total of  Indebtedness  permitted  under  this
               clause (iv) plus presently-existing equipment financing permitted
               under clause (v) of this  [SECTION]4.1 will not exceed $1,000,000
               in the aggregate outstanding at any one time.



                                       15
<PAGE>

          (v)  other  Indebtedness  existing at the date hereof, but only to the
               extent set forth on item 4.1 of the attached Disclosure Schedule;

          (vi) any  guaranties  or  other   contingent   liabilities   expressly
               permitted pursuant to [SECTION]4.3.

          4.2  Liens. The Borrower will not create,  incur,  assume or suffer to
exist (nor allow any of its Subsidiaries to create,  incur,  assume or suffer to
exist)  any Lien upon or with  respect  to any of the  Collateral,  now owned or
hereafter acquired, except:

          (i)  Liens for taxes, assessments or governmental charges or levies on
               property of the Borrower or any of its  Subsidiaries  if the same
               shall not at the time be  delinquent  or  thereafter  can be paid
               without interest or penalty;

          (ii) Liens  imposed  by law,  such as  carrier's,  warehousemen's  and
               mechanics'  liens and other similar Liens arising in the ordinary
               course  of  business  for  sums not yet due or  which  are  being
               contested  in good  faith and by  appropriate  proceedings  which
               serve as a matter of law to stay the  enforcement  thereof and as
               to which adequate reserves have been made;

          (iii)pledges  or   deposits   under   workmen's   compensation   laws,
               unemployment insurance,  social security,  retirement benefits or
               similar legislation;

          (iv) Liens in favor of the Bank;

          (v)  Liens  in favor  of  equipment  vendors  and/or  lessors securing
               purchase  money  Indebtedness  to the extent  permitted by clause
               (iv) of  [SECTION]4.1;  provided that no such Lien will extend to
               any  property of the  Borrower or any  Subsidiary  other than the
               specific items of equipment financed;

          (vi) Liens permitted under [SECTION]6.3 of this Letter Agreement; or

          (vii)other Liens  existing at the date hereof,  but only to the extent
               and with the  relative  priorities  set  forth on item 4.2 of the
               attached Disclosure Schedule.

     4.3  Guaranties.  The Borrower will not,  without the prior written consent
of the  Bank,  assume,  guarantee,  endorse  or  otherwise  become  directly  or
contingently liable (including,  without limitation, liable by way of agreement,
contingent or otherwise,  to purchase,  to provide funds for payment,  to supply
funds to or  otherwise  invest in any debtor or otherwise to assure any creditor
against  loss)  (and  will not  permit  any of its  Subsidiaries  so to  assume,
guaranty  or become  directly or  contingently  liable) in  connection  with any
indebtedness  of any other  Person,  except (i)  guaranties by  endorsement  for
deposit or collection  in the ordinary  course of business;  and (ii)  currently


                                       16
<PAGE>

existing guaranties described in item 4.3 of the attached Disclosure Schedule.

     4.4  Dividends. The Borrower will not, without the prior written consent of
the Bank, make any distributions to its  shareholders,  pay any dividends (other
than  dividends  payable  solely in capital  stock of the  Borrower)  or redeem,
purchase or otherwise acquire directly or indirectly any of its capital stock.

     4.5  Loans and  Advances.  The Borrower will not make any loans or advances
(and will not permit any of its  Subsidiaries  to make any loans or advances) to
any Person, including,  without limitation,  the Borrower's directors,  officers
and employees, except advances to directors,  officers or employees with respect
to expenses incurred by them in the ordinary course of their duties and advances
against  salary,  all  of  which  will  not  exceed  in the  aggregate  $500,000
outstanding at any one time.

     4.6  Investments.  The Borrower will not,  without the Bank's prior written
consent,  invest in, hold or purchase any stock or securities of any Person (nor
will the Borrower permit any of its  Subsidiaries to invest in, purchase or hold
any such stock or securities)  except (i) readily  marketable direct obligations
of, or  obligations  guaranteed  by, the United  States of America or any agency
thereof;  (ii) other investment  grade debt securities;  (iii) mutual funds, the
assets of which are  primarily  invested in items of the kind  described  in the
foregoing  clauses  (i) and (ii) of this  [SECTION]4.6;  (iv)  deposits  with or
certificates of deposit issued by the Bank and any other obligations of the Bank
or the Bank's parent; (v) deposits with or certificates of deposit issued by any
United States commercial bank having more than $100,000,000 in capital, and (vi)
investments  in any  Subsidiaries  now  existing  or  hereafter  created  by the
Borrower pursuant to [SECTION]4.7 below; provided that in any event the Tangible
Net Worth of the Borrower alone (exclusive of its investment in Subsidiaries and
any debt owed by any  Subsidiary to the  Borrower)  will not be less than 90% of
the consolidated Tangible Net Worth of the Borrower and Subsidiaries.

     4.7  Subsidiaries;  Acquisitions.  The Borrower will not, without the prior
written  consent of the Bank,  form or acquire any  Subsidiary or make any other
acquisition  of the stock of any  Person or of all or  substantially  all of the
assets  of any other  Person.  The  Borrower  will not  become a partner  in any
partnership.

     4.8  Merger.  The Borrower will not,  without the prior written  consent of
the Bank,  merge or  consolidate  with any Person or sell,  lease,  transfer  or
otherwise  dispose of any material portion of its assets (whether in one or more
transactions), other than sale of inventory in the ordinary course.

     4.9  Affiliate  Transactions.  The  Borrower  will not,  without  the prior
written  consent of the Bank,  enter into any  transaction,  including,  without
limitation,  the purchase,  sale or exchange of any property or the rendering of
any service,  with any affiliate of the Borrower,  except in the ordinary course
of and pursuant to the reasonable  requirements of the  Borrower's  business and


                                       17
<PAGE>

upon fair and  reasonable  terms no less favorable to the Borrower than would be
obtained  in a  comparable  arms'-length  transaction  with  any  Person  not an
affiliate;  provided  that  nothing  in this  [SECTION]4.9  shall be  deemed  to
prohibit  the  payment of salary or other  similar  payments  to any  officer or
director  of the  Borrower  at a level  consistent  with the  salary  and  other
payments  being  paid at the  date  of  this  Letter  Agreement  and  heretofore
disclosed  in writing  to the Bank,  nor to  prevent  the  hiring of  additional
officers at a salary level  consistent  with industry  practice,  nor to prevent
reasonable  periodic  increases  in  salary.  For the  purposes  of this  Letter
Agreement,  "affiliate" means any Person which, directly or indirectly, controls
or is controlled by or is under common control with the Borrower; any officer or
director or former  officer or director of the  Borrower;  any Person  owning of
record  or  beneficially,  directly  or  indirectly,  5% or more of any class of
capital  stock of the  Borrower  or 5% or more of any class of capital  stock or
other equity interest having voting power (under ordinary  circumstances) of any
of the other Persons  described above; and any member of the immediate family of
any of the foregoing. "Control" means possession, directly or indirectly, of the
power to direct or cause the  direction  of the  management  or  policies of any
Person, whether through ownership of voting equity, by contract or otherwise.

     4.10 Change of Address, etc. The Borrower will not change its name or legal
structure,  nor will the Borrower move its chief executive  offices or principal
place  of  business  from  the  address  described  in  the  first  sentence  of
[SECTION]2.1(j)  above,  nor will the Borrower  remove any books or records from
such address,  nor will the Borrower keep any  Collateral at any location  other
than the Premises without,  in each instance,  giving the Bank at least 30 days'
prior written notice and providing all such financing  statements,  certificates
and  other  documentation  as the Bank may  request  in  order to  maintain  the
perfection  and  priority of the  security  interests  granted or intended to be
granted  herein.  The  Borrower  will not change  its fiscal  year or methods of
financial  reporting  unless,  in each  instance,  prior written  notice of such
change is given to the Bank and prior to such  change the  Borrower  enters into
amendments to this Letter  Agreement in form and substance  satisfactory  to the
Bank in order to preserve  unimpaired the rights of the Bank and the obligations
of the Borrower hereunder.

     4.11 Hazardous  Waste.  Except as provided  below,  the  Borrower  will not
dispose  of or suffer or permit to exist any  hazardous  material  or oil on any
site or vessel owned,  occupied or operated by the Borrower or any Subsidiary of
the Borrower,  nor shall the Borrower  store (or permit any Subsidiary to store)
on any site or vessel  owned,  occupied or operated by the  Borrower or any such
Subsidiary,  or transport or arrange the transport of, any hazardous material or
oil (the terms "hazardous material",  "oil", "site" and "vessel",  respectively,
being used herein with the meanings  given those terms in Mass.  Gen.  Laws, Ch.
21E or any  comparable  terms in any  comparable  statute in effect in any other
relevant jurisdiction).  The Borrower shall provide the Bank with written notice
of (i) the intended storage or transport of any hazardous material or oil by the
Borrower or any Subsidiary of the Borrower,  (ii) any potential or known release
or threat of release  of any  hazardous  material  or oil at or from any site or
vessel  owned,  occupied or operated by the  Borrower or any  Subsidiary  of the
Borrower,  and (iii) any  incurring of any expense or loss by any  government or
governmental authority in connection with the assessment, containment or removal
of any  hazardous  material or oil for which expense or loss the Borrower or any
Subsidiary of the Borrower may be liable.  Notwithstanding  the  foregoing,  the


                                       18
<PAGE>

Borrower and its  Subsidiaries  may use, store and transport and need not notify
the  Bank  of the  use,  storage  or  transportation  of (x)  oil in  reasonable
quantities,  as fuel for heating of their respective  facilities or for vehicles
or machinery used in the ordinary course of their respective  businesses and (y)
hazardous  materials that are solvents,  cleaning agents or other materials used
in the ordinary course of the respective business operations of the Borrower and
its Subsidiaries,  in reasonable quantities, as long as in any case the Borrower
or the  Subsidiary  concerned (as the case may be) has obtained and maintains in
effect any necessary governmental permits, licenses and approvals, complies with
all  requirements  of applicable  federal,  state and local law relating to such
use,  storage or  transportation,  follows the protective and safety  procedures
that a prudent  businessperson  conducting  a business the same as or similar to
that of the Borrower or such  Subsidiary (as the case may be) would follow,  and
disposes of such  materials  (not consumed in the ordinary  course) only through
licensed providers of hazardous waste removal services.

     4.12 No Margin  Stock.  No proceeds  of any Loan shall be used  directly or
indirectly to purchase or carry any margin security.

     4.13 Subordinated  Debt. The Borrower will not directly or indirectly  make
any optional or voluntary prepayment or purchase of Subordinated Debt or modify,
alter or add any  provisions  with  respect to payment or terms of  Subordinated
Debt.  The Borrower will not make any payment of any principal of or interest on
any  Subordinated  Debt at any time when there exists,  or if there would result
therefrom, any Event of Default hereunder.

     4.14 Corporate Assets Including  Intellectual  Property.  The Borrower will
not directly or indirectly sell, assign,  license,  lease,  transfer,  alienate,
encumber or otherwise dispose of any corporate assets, whether held by purchase,
assignment,  license,  lease  or any  other  form  of  transfer  or  alienation,
including,  without  limitation,  any  register  and patent  license,  copyright
trademark,  trade name or  franchise,  without the written  consent of the Bank,
except for commercially  acceptable  transactions made in the ordinary course of
the Borrower's business as defined in [SECTION]3.5 of this Letter Agreement, nor
will the Borrower make any covenant or agreement equivalent to that contained in
this [SECTION]4.14 with any third party.

     V.   DEFAULT AND REMEDIES

     5.1  Events of Default.  The occurrence of any one of the following  events
shall constitute an Event of Default hereunder:

          (a)  The  Borrower  shall fail to make any payment of  principal of or
interest on the Revolving  Note or the Term Note on or before the date when due;
or the  Borrower  shall  fail to pay when due any  amount  owed to the Bank with
respect to any letter of credit now or hereafter issued by the Bank; or

          (b)  Any  representation or warranty of the Borrower  contained herein
shall at any time prove to have been incorrect in any material respect when made


                                       19
<PAGE>


or any  representation  or warranty made by the Borrower in connection  with any
Loan or letter of credit  shall at any time prove to have been  incorrect in any
material respect when made; or

          (c)  The Borrower  shall default in the  performance  or observance of
any agreement or obligation  under any of [SECTION  SECTION]3.1,  3.3, 3.6, 3.7,
3.8, 3.9 or 3.10 or Article IV; or

          (d)  The Borrower  shall default in the performance of any other term,
covenant or agreement  contained in this Letter Agreement and such default shall
continue  unremedied  for 30 days after notice  thereof shall have been given to
the Borrower; or

          (e)  Any default on the part of the Borrower or any  Subsidiary of the
Borrower shall exist, and shall remain unwaived or uncured beyond the expiration
of any  applicable  notice  and/or  grace  period,  under  any  other  contract,
agreement, or undertaking now existing or hereafter entered into with or for the
benefit of the Bank (or any affiliate of the Bank); or

          (f)  Any  default  shall  exist and remain  unwaived  or uncured  with
respect  to any  Subordinated  Debt  of the  Borrower  or  with  respect  to any
instrument evidencing,  guaranteeing, securing or otherwise relating to any such
Subordinated  Debt, or any such  Subordinated Debt shall not have been paid when
due, whether by acceleration or otherwise, or shall have been declared to be due
and payable prior to its stated  maturity,  or any event or  circumstance  shall
occur which  permits,  or with the lapse of time or the giving of notice or both
would permit,  the acceleration of the maturity of any Subordinated  Debt by the
holder or holders thereof; or

          (g)  Any  default  shall  exist and remain  unwaived  or uncured  with
respect to any Indebtedness of the Borrower or any Subsidiary of the Borrower in
excess  of  $250,000  in  aggregate  principal  amount  or with  respect  to any
instrument evidencing,  guaranteeing, securing or otherwise relating to any such
Indebtedness,  or any such  Indebtedness  in excess  of  $250,000  in  aggregate
principal  amount shall not have been paid when due,  whether by acceleration or
otherwise, or shall have been declared to be due and payable prior to its stated
maturity,  or any event or circumstance  shall occur which permits,  or with the
lapse of time or the giving of notice or both would permit,  the acceleration of
the maturity of any such Indebtedness by the holder or holders thereof; or

          (h)  The  Borrower  shall  be  dissolved,   or  the  Borrower  or  any
Subsidiary  of the Borrower  shall  become  insolvent or bankrupt or shall cease
paying its debts as they mature or shall make an  assignment  for the benefit of
creditors,  or a trustee,  receiver or  liquidator  shall be  appointed  for the
Borrower or any  Subsidiary  of the  Borrower or for a  substantial  part of the
property of the Borrower or any such Subsidiary, or bankruptcy,  reorganization,
arrangement, insolvency or similar proceedings shall be instituted by or against
the Borrower or any such Subsidiary under the laws of any  jurisdiction  (except
for an  involuntary  proceeding  filed against the Borrower or any Subsidiary of
the  Borrower  which is  dismissed  within  60 days  following  the  institution
thereof); or

          (i)  Any  attachment,  execution or similar process shall be issued or
levied  against any of the Collateral of the Borrower or any Subsidiary and such


                                       20
<PAGE>

attachment,  execution or similar process shall not be paid,  stayed,  released,
vacated or fully bonded within 10 days after its issue or levy; or

          (j)  Any final  uninsured  judgment  in excess  of  $100,000  shall be
entered  against the Borrower or any  Subsidiary of the Borrower by any court of
competent jurisdiction; or

          (k)  The Borrower or any Subsidiary of the Borrower shall fail to meet
its  minimum  funding  requirements  under  ERISA with  respect to any  employee
benefit plan (or other class of benefit which the PBGC has elected to insure) or
any such plan shall be the subject of termination proceedings (whether voluntary
or  involuntary)  and there shall  result from such  termination  proceedings  a
liability of the Borrower or any Subsidiary of the Borrower to the PBGC which in
the reasonable  opinion of the Bank may have a material  adverse effect upon the
financial condition of the Borrower or any such Subsidiary; or

          (l)  This Letter  Agreement or any other Loan  Document  shall for any
reason  (other than due to payment in full of all amounts  secured or  evidenced
thereby or due to discharge in writing by the Bank) not remain in full force and
effect; or

          (m)  The security interests and liens of the Bank in and on any of the
Collateral  covered or intended to be covered by this Letter Agreement shall for
any reason (other than written release by the Bank) not be fully perfected liens
and security interests; or

          (n)  If,  at any time,  more than 50% of any class of voting  stock of
the Borrower shall be held, of record and/or  beneficially,  by any Person or by
any "group" (as defined in the Securities Exchange Act of 1934, as amended,  and
the regulations  thereunder)  other than by one or more of the Persons listed on
item 5.1(n) of the attached Disclosure Schedule; or

          (o)  David A. Jenkins, or a replacement that the Borrower has proposed
to the Bank  prior to hiring or  installing  such  person  and that the Bank has
approved in writing  within  thirty  (30) days of David A.  Jenkins not being an
executive officer of Borrower,  shall for any reason not be an executive officer
of the Borrower actively involved in the management of the Borrower; or

          (p)  There  shall  occur  any  other  material  adverse  change in the
condition (financial or otherwise),  operations, properties, assets, liabilities
or earnings of the Borrower.

          (q)  Borrower or any third party commences any action or proceeding to
contest  the  validity  or  enforceability  of any,  or any  part  of any,  Loan
Document.

          (r)  If all,  or a  controlling  interest  of,  the  capital  stock of
Borrower  shall be sold,  assigned  or  otherwise  transferred  or if a security
interest  or other  encumbrance  shall be granted  or  otherwise  acquired  with
respect thereto.

     5.2  Rights and Remedies on Default.  Upon the  occurrence  of any Event of


                                       21
<PAGE>

Default,  in addition to any other  rights and  remedies  available  to the Bank
hereunder  or  otherwise,  the Bank may,  at any time,  at its sole  option  and
without  notice  or  demand  to the  Borrower,  exercise  anyone  or more of the
following rights and remedies  alternatively,  successively or concurrently (all
of which shall be cumulative):

          (a)  Declare the entire unpaid principal amounts of the Revolving Note
and the Term Note then outstanding,  all interest accrued and unpaid thereon and
all other amounts payable under this Letter Agreement and all other Indebtedness
of the Borrower to the Bank to be forthwith due and payable,  whereupon the same
shall become forthwith due and payable, without presentment,  demand, protest or
notice of any kind, all of which are hereby expressly waived by the Borrower.

          (b)  Terminate  the  revolving  financing  arrangements  and Term Loan
facility provided for by this Letter Agreement.

          (c)  Exercise  any and all  rights  and  remedies  of a secured  party
available under the UCC and all other  applicable law and notify account debtors
that the  Collateral  has been  assigned  to the Bank and that  payments by such
accounts  debtors  shall be made  directly  to the Bank.  At any time  after the
occurrence  of an  Event  of  Default,  the  Bank  may  collect  the  Borrower's
Receivables,  or any of same,  directly from account  debtors and may charge the
collection costs and expenses to the Borrower.  Upon the occurrence of any Event
of Default, the Borrower will assemble and make available to the Bank all books,
records  and  data,   whether  in  written  form  or  electronically   recorded,
representing any of the Collateral  (including,  without limitation,  all source
codes in  Intellectual  Property  (whether  modified by the Borrower or not) and
object codes for the Borrower's software).

          (d)  Exercise all rights and remedies  hereunder,  under the Revolving
Note,  under the Term Note and under each and any other agreement with the Bank;
and  exercise  all other  rights  and  remedies  which  the Bank may have  under
applicable law.

     5.3  Set-off.  In addition  to any rights now or  hereafter  granted  under
applicable  law  and not by way of  limitation  of any  such  rights,  upon  the
occurrence of any Event of Default,  the Bank is hereby authorized at anytime or
from time to time,  without  presentment,  demand protest or other notice of any
kind to the Borrower or to any other Person,  all of which are hereby  expressly
waived,  to set off and to  appropriate  and apply any and all  deposits and any
other  Indebtedness  at any time  held or  owing  by the  Bank or any  affiliate
thereof  to or for the  credit or the  account of the  Borrower  against  and on
account of the  obligations  and  liabilities  of the Borrower to the Bank under
this Letter  Agreement  or  otherwise,  irrespective  of whether or not the Bank
shall have made any demand hereunder and although said obligations,  liabilities
or claims,  or any of them,  may then be  contingent  or  unmatured  and without
regard for the availability or adequacy of other collateral. As further security
for the  Obligations,  the Borrower also grants to the Bank a security  interest
with  respect to all its deposits and all  securities  or other  property in the
possession of the Bank or any affiliate of the Bank from time to time, and, upon
the  occurrence  of any Event of Default,  the Bank may  exercise all rights and
remedies of a secured party under the UCC.



                                       22
<PAGE>

ANY AND ALL RIGHTS TO REQUIRE THE BANK TO EXERCISE  ITS RIGHTS OR REMEDIES  WITH
RESPECT TO ANY OTHER  COLLATERAL  WHICH SECURES ANY OF THE OBLIGATIONS  PRIOR TO
THE  EXERCISE BY THE BANK OF ITS RIGHT OF SET-OFF  UNDER THIS SECTION ARE HEREBY
KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.

     5.4  Letters of Credit.  Without limitation of any other right or remedy of
the Bank, (i) if an Event of Default shall have occurred and the Bank shall have
accelerated  the  Revolving  Loans or (ii) if this Letter  Agreement  and/or the
revolving  financing  arrangements  described herein shall have expired or shall
have been earlier  terminated by either the Bank or the Borrower for any reason,
the  Borrower  will  forthwith  deposit with the Bank in cash a sum equal to the
total of all then undrawn amounts of all outstanding letters of credit issued by
the Bank for the account of the Borrower.

     VI.  COLLATERAL AND INDEBTEDNESS SECURED

     6.1  Security Interest. To secure the due payment and performance of all of
the  Obligations of the Borrower to the Bank, the Borrower  hereby grants to the
Bank a continuing  security  interest in, and a Lien on, the following  property
and rights of Borrower  wherever  located  and  whether  now owned or  hereafter
acquired:

          (a)  All accounts,  contracts,  contract rights, notes, bills, drafts,
acceptances,  general  intangibles,  chattel paper,  chooses in action,  and all
other debts,  obligations and  liabilities,  in whatever form, owing to Borrower
from any person,  firm or  corporation,  or any other legal entity,  whether now
existing or  hereafter  arising,  now or  hereafter  received by or belonging or
owing to  Borrower,  for  goods  sold by it or for  services  rendered  by it or
however otherwise same may have been established or created,  all guarantees and
securities  therefor,   all  right,  title  and  interest  of  Borrower  in  the
merchandise  or  services  which  gave rise  thereto,  including  the  rights of
reclamation  and  stoppage  in  transit,  all  rights  of an  unpaid  seller  of
merchandise  or  services,  and  in the  proceeds  thereof,  including,  without
limitation,  all  proceeds  of  credit,  fire or  other  insurance,  and any tax
refunds; and

          (b)  All goods,  merchandise,  raw materials,  goods, work product and
work in process,  finished goods and other tangible personal property, now owned
or  hereafter  acquired  and held  for  sale or  lease,  or  furnished  or to be
furnished under contract of service,  or used or consumed in Borrower's business
and in the products and proceeds thereof,  including,  without  limitation,  all
proceeds  of fire or other  insurance.  This  portion  of the  Collateral  being
sometimes referred to as "Inventory;" and

          (c)  All machinery, equipment and other goods (as defined in Article 9
of the UCC)  whether now owned or  hereafter  acquired by Borrower  and wherever
located,  goods  (as  defined  in  Article  9 of the UCC)  whether  now owned or
hereafter  acquired by Borrower  and  wherever  located,  all  replacements  and


                                       23
<PAGE>

substitutions  therefor or  accessions  thereto and all  proceeds  thereof,  and
including, also without limitation, all proceeds of fire or other insurance: and

          (d)  All  of the  Borrower's  files,  books  and  records  (including,
without limitation,  all electronically  recorded data) all whether now owned or
existing or hereafter acquired, created or arising; and

          (e)  Any and all real property and fixtures  appurtenant  to such real
property now owned by the  Borrower or  purchased by the Borrower  with any Term
Loans hereunder.

     All of the  property  and  rights  set  forth  in (a)  through  (e)  above,
including, without limitation, all proceeds of fire and other insurance thereon,
are hereinafter referred to collectively as "Collateral."

     6.2  Obligations  Secured.  The  Collateral  and all  proceeds and products
thereof shall be security for all Obligations.  Until all Obligations  have been
fully satisfied.  Bank's security  interest in the Collateral,  and all proceeds
and products  thereof,  shall continue in full force and effect and Bank will at
all times after the occurrence and during the continuance of an Event of Default
(as defined herein) have the right to take physical  possession of the Inventory
and other  Collateral and to maintain such possession on Borrower's  premises or
to remove the Inventory  and other  Collateral or any part thereof to such other
places as Bank may desire.  If Bank exercises Bank's right to take possession of
the Inventory and other Collateral, Borrower shall, upon Bank's demand, assemble
the  Inventory  and other  Collateral  and make it  available to Bank at a place
reasonably convenient to Bank.

     6.3  No Disposal of Collateral.  Except for sales, licenses and leases made
in the ordinary course of business on a non-exclusive  basis and the disposal of
obsolete or worn-out equipment made in the ordinary course of business, Borrower
shall not sell, license,  assign, lease, grant a Lien on or dispose of or permit
the  sale,  license,  lease,  establishment  of a  Lien  on or  disposal  of any
Collateral  or remove any  Inventory  from the  Premises  without  Bank's  prior
written  consent.  A transfer of any interest of Borrower's in any Collateral in
total or  partial  satisfaction  of a debt shall not be deemed to be made in the
ordinary course of business.

     6.4  Perfection  of Security  Interest.  Borrower  shall sign and file,  or
permit  the  filing,  in form and  substance  satisfactory  to the Bank,  of the
financing  statements  and shall perform any and all steps  requested by Bank to
perfect Bank's security interest in the Collateral, such as, without limitation,
leasing  warehouses to Bank or its designee,  placing and maintaining  signs and
appointing  custodians.  This Letter Agreement,  coupled with the filing of such
UCC Financing  statements  with the filing  offices and public  authorities  set
forth in the Closing Agenda (which are the only locations for filing required by
the UCC),  creates  in the Bank's  favor a valid and  perfected  first  priority
security  interest  in the  Collateral,  which  security  interest  secures  the
Obligations.  If  any  Inventory  is in  the  possession  or  control  of any of
Borrower's agents or processors, Borrower shall notify such agents or processors
of Bank's  interest  therein,  and upon request  instruct  them to hold all such
Inventory  for Bank's  account  and subject to Bank's  instructions.  A physical


                                       24
<PAGE>

listing of all Inventory,  wherever located, shall be taken by Borrower whenever
requested by Bank, and a copy of each such physical listing shall be supplied to
Bank. Bank may examine and inspect the Inventory and other  Collateral on or off
the Premises at any time on reasonable  notice and during  business  hours or at
any time without any necessity for notice  following the  occurrence of an Event
of Default.

     6.5  Insurance.  Borrower  agrees to keep all the Inventory and  Collateral
insured with fire and extended  coverage as insurance  policies in amounts:  (i)
not less than that  usually  carried  by one  engaged in a like  business;  (ii)
sufficient to provide for full replacement cost coverage; and (iii) in any event
not less than that  required by Bank naming the Bank as secured  party and first
loss payee. Borrower hereby appoints Bank as attorney for Borrower in obtaining,
adjusting,  settling and canceling such insurance and endorsing any drafts.  All
premiums on such insurance shall be paid by Borrower and the policies  delivered
to the Bank. If Borrower fails to do so, the Bank may procure such insurance and
charge the cost to Borrower's loan account. As further assurance for the payment
and  performance of the  Obligations.  Borrower  hereby assigns to Bank all sums
including  returned or unearned  premiums,  which may become  payable  under any
policy of insurance on the Collateral and Borrower hereby directs each insurance
company issuing any such policy to make payment of such sums directly to Bank.

     6.6 Right to Discharge.  Bank may, at its sole option, discharge any taxes,
liens,  security interests or other encumbrances at any time levied or placed on
the  Collateral  and not  permitted  by this  Letter  Agreement  and pay for the
maintenance and preservation of the Collaterals. Borrower will reimburse Bank on
demand for any payment made or any expense  incurred  with  interest at the rate
provided in this Letter  Agreement.  Where  practical  and  consistent  with its
rights to take such actions to preserve or protect the Collateral, the Bank will
give Borrower reasonable notice of its intention to take such actions.

     6.7  Deficiency.  If in the event of the sale of the Collateral by the Bank
following an Event of Default,  the proceeds thereof are insufficient to pay all
amounts  to which  Bank is  legally  entitled.  Borrower  will be liable for the
deficiency,  together with interest  thereon at the rate provided in this Letter
Agreement and the  reasonable  fees of any attorney  employed by Bank to collect
such deficiency.

     6.8  Defense of Collateral.  The Borrower agrees to defend its title to the
Collateral  and to take all steps  reasonably  necessary  to preserve  its title
and/or  right to the  Collateral  and  ability to use same,  including,  without
limitation,  defense of any claim of infringement  of Intellectual  Property and
action against any infringers of Intellectual Property.

     6.9  Bank's Duties with Respect to Collateral.  The powers conferred on the
Bank herein are solely to protect its interest in the  Collateral  and shall not
impose any duty upon it to exercise any such powers. Except for the safe custody
of any  Collateral  actually in its  possession  and the  accounting  for monies
actually  received  by it  hereunder,  the  Bank  shall  have  no duty as to any
Collateral.  The Bank  shall not be liable  for any  acts,  omissions,  error of
judgment  or  mistakes  of  fact or law  including,  without  limitation,  acts,


                                       25
<PAGE>

omissions,  error or mistakes with respect to the  Collateral,  except for those
arising out of or in  connection  with the Bank's  gross  negligence  or willful
misconduct.  The Bank shall be deemed to have exercised  reasonable  care in the
custody and  preservation  of the Collateral in its possession if the Collateral
is accorded treatment substantially equal to that which the Bank accords its own
like  property  or  rights.  The Bank shall be under no  obligation  to take any
necessary  steps to collect any Collateral  or  preserve  rights  against  prior
parties or any other rights  pertaining to any Collateral,  but may do so at its
sole option, and all expenses incurred in so doing shall be for the sole account
of the Borrower and shall be deemed part of the Obligations.

     6.10 Other  Collateral.  This Letter Agreement shall not be construed to be
in limitation  of or in  substitution  for any other grant of security  interest
from Borrower to Bank made prior to or  contemporaneously  herewith and no other
such  grant of a  security  interest  made  subsequent  to or  contemporaneously
herewith shall be construed to be in limitation of or in  substitution  for this
Letter Agreement unless expressly and specifically provided therein.

     VII. MISCELLANEOUS

     7.1 Costs and Expenses:  Indemnity.  The Borrower  agrees to pay at closing
all costs and expenses  (including,  without  limitation,  reasonable legal fees
determined  on the basis of the hourly rates  charged by the Bank's law firm for
attorneys  and  staff,  such legal  fees  estimated  to be, and to be capped at,
$8,000  exclusive of costs and disbursement and pursuant to the Term Sheet dated
as of  February  9, 1999 and the  annexed  letter of the  Bank's  counsel  dated
February 5, 1999) in connection with the preparation,  execution and delivery of
this  Letter  Agreement,  the  Revolving  Note,  the  Term  Note  and all  other
instruments  and documents to be delivered in connection with any Loan or letter
of credit issued  hereunder and any  amendments or  modifications  of any of the
foregoing, as well as the costs and expenses (including, without limitation, the
reasonable  fees  and  expenses  of  legal  counsel)  incurred  by the  Bank  in
connection with preserving, enforcing or exercising, upon default, any rights or
remedies under this Letter Agreement,  the Revolving Note, the Term Note and all
other  instruments  and documents  delivered or to be delivered  hereunder or in
connection herewith, all whether or not legal action is instituted. THE BORROWER
IS ON NOTICE THAT THE BANK'S AND THE  BORROWERS'  INTERESTS MAY BE DIFFERENT AND
MAY CONFLICT,  AND THAT THE BANK'S ATTORNEY REPRESENTS ONLY THE BANK AND NOT THE
BORROWER.  THE BORROWER IS THEREFORE ADVISED TO CONSULT A NEW JERSEY ATTORNEY OF
ITS OWN CHOOSING TO REPRESENT ITS INTERESTS.  In addition, the Borrower shall be
obligated to pay any and all stamp and other taxes  payable or  determined to be
payable in connection with the execution and delivery of this Letter  Agreement,
the Revolving Note, the Term Note and all other  instruments and documents to be
delivered in connection  with any  Obligation.  Borrower agrees to indemnify and
hold harmless the Bank from and against any and all liability, loss, damage, and
all  costs  or  expense  (including,  without  limitation,  reasonable  fees and
disbursements  of  counsel,  experts  and  agents)  imposed  on,  incurred by or
asserted  against the Bank arising out of or in connection with: (i) preparation
of the Loan Documents,  or amendments,  modifications or waivers  thereof:  (ii)
taxes  (excluding  any  corporate  excise or income taxes payable by the Bank by
reason hereof or otherwise) and other  governmental  charges in connection  with
this Letter  Agreement and the  Collateral;  (iii) exercise of the Bank's rights
with respect


                                       26
<PAGE>

to the Collateral; (iv) any enforcement, collection or other resulting therefrom
or  any   negotiations   or  other   measures  to  preserve  the  Bank's  rights
hereunder:(v)  the  custody  or  preservation  of,  or  the  sale  of  or  other
realization  upon,  any of the  Collateral;  (vi) any failure by the Borrower to
perform or observer any of the  provisions of this Letter  Agreement;  (vii) any
investigative, administrative or judicial proceeding (whether or not the Bank is
a party thereto) relating to or arising out of this Letter Agreement;  or (viii)
any bankruptcy, insolvency or other similar proceeding relating to the Borrower,
unless the Bank was at fault with respect to such liability,  loss, damage, cost
or expense or acted in bad fait with respect thereto. The Borrower's obligations
under this Section  constitute  Obligations and shall survive the termination of
this Letter Agreement. Any fees, costs, expenses or other charges which the Bank
is entitled to receive from the Borrower  under this Section shall bear interest
from the date of any  demand  therefor  until  the date  when paid at a rate per
annum  equal to the sum of (i) four (4%)  percent  plus (ii) the per annum  rate
otherwise payable under the Notes (but in no event in excess of the maximum rate
permitted by then applicable law).

     7.2  Capital Adequacy.  If the Bank shall have determined that the adoption
or phase-in  after the date hereof of any  applicable  law,  rule or  regulation
regarding  capital  requirements  for banks or bank  holding  companies,  or any
change  therein after the date hereof,  or any change in the  interpretation  or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration  thereof, or compliance
by the Bank with any  request or  directive  of such  entity  regarding  capital
adequacy  (whether  or not  having  the force of the law) has or would  have the
effect of  reducing  the  return  on the  Bank's  capital  with  respect  to the
Revolving  Loans,  the Term  Loans,  LIBOR  Loans  and/or the  within  described
revolving  and Term Loan  facilities  and/or  letters  of credit  issued for the
account of the Borrower to a level below that which the Bank could have achieved
(taking, into consideration the Bank's policies with respect to capital adequacy
immediately  before such adoption,  phase-in,  change or compliance and assuming
the Bank's  capital was then fully  utilized) but for such  adoption,  phase-in,
change of compliance  by any amount  deemed by the Bank to be material:  (i) the
Bank shall  promptly  after its  determination  of such  occurrence  give notice
thereof to the Borrower;  and (ii) the Borrower  shall pay forthwith to the Bank
as an  additional  fee such amount as the Bank  certifies  to be the amount that
will compensate it for such reduction with respect to the Revolving  Loans,  the
Term Loans, the LIBOR loans (excluding, with respect to any LIBOR loan, any such
requirement   already   included  in  such  LIBOR  loan's  reserve  rate),   the
within-described  revolving  and Term Loan  facilities  and/or  such  letters of
credit.

     A certificate of the Bank claiming compensation on under this Section shall
be conclusive in the absence of manifest error. Such certificate shall set forth
the nature of the occurrence  giving rise to such  compensation,  the additional
amount or  amounts  to be paid to it  hereunder  and the  method  by which  such
amounts were  determined.  In  determining  such  amounts,  the Bank may use any
reasonable averaging and attribution methods. No failure on the part of the Bank
to demand  compensation  on any one  occasion  shall  constitute a waiver of its
right to demand such  compensation  on any other  occasion and no failure on the
part of the Bank to deliver any  certificate in a timely manner shall reduce any
obligation of the Borrower to the Bank under this Section.

                                       27
<PAGE>

     7.3 Facility Fees.  With respect to the Term Loans,  the Borrower is paying
to the Bank, at closing, a non-refundable  facility fee in the amount of $3,750.
The Borrower  will pay to the Bank with respect to the within  arrangements  for
Revolving Loans, on the last day of each calendar  quarter  (commencing on March
31, 1999 as long as the  within-described  revolving  loan  arrangements  are in
effect and on the Expiration  Date,  non-refundable  commitment  fees,  computed
quarterly in arrears on the daily average unused portion of the revolving credit
amount  during the  calendar  quarter for which such  commitment  fees are to be
determined,  appropriately  prorate for any partial  calendar  quarter.  As used
herein, the "unused portion of the revolving credit amount" as at any date means
that  amount  by  which  (x)  $2,000,000  exceeds  (y) the sum of the  aggregate
principal  amount of all  Revolving  Loans then  outstanding  plus the aggregate
undrawn amounts of all letters of credit then outstanding.  Such commitment fees
will be payable,  based on such daily  average  unused  portion of the revolving
credit  amount,   at  the  rate  of  0.75%  per  annum.  In  addition,   if  the
within-described revolving financing arrangements are terminated by the Borrower
for any  reason or by the Bank as the  result  of the  Borrower's  default,  the
Borrower shall  forthwith upon such  termination  pay to the Bank a sum equal to
all of the commitment  fees which would have become due pursuant to this Section
for the period from the date of such  termination  through the  Expiration  Date
assuming that no Revolving Loans and no letters of credit are outstanding during
such period.  Fees described in this Section are in addition to any balances and
fees required by the Bank or any of its affiliates in connection  with any other
services now or hereafter made available to the Borrower.

     7.4  Other  Agreements.  The provisions of this Letter Agreement are not in
derogation  or  limitation  of any  obligations,  liabilities  or  duties of the
Borrower  under any of the other Loan  Documents or any other  agreement with or
for the benefit of the Bank. No inconsistency in default provisions between this
Letter Agreement and any of the other Loan Documents or any such other agreement
will be deemed to create any additional grace period or otherwise  derogate from
the express  terms of each such default  provisions.  No covenant,  agreement or
obligation of the Borrower contained herein, nor any right or remedy of the Bank
contained herein,  shall in any respect be limited by or be deemed in limitation
of any inconsistent or additional  provisions contained in any of the other Loan
Documents or in any such other agreement.

     7.5  Governing  Law. This Letter  Agreement and the Notes shall be governed
by and construed and enforced in accordance  with, the laws of The  Commonwealth
of Massachusetts, without giving effect to its provisions governing conflicts of
laws.

                                       28
<PAGE>

     7.6  Addresses for Notices, etc. All notices,  requests,  demands and other
communications provided for hereunder shall be in writing and shall be mailed or
delivered to the applicable party at the address indicated below:

               If to the Borrower:

               EP MEDSYSTEMS, INC.
               100 Stierli Court
               Arlington, NJ 07856
               Attention:     Joseph Turner,
                              Chief Financial Officer

               If to the Bank:

               Fleet National Bank
               High Technology Division
               One Federal Street
               Boston, MA 02110
               Attention:     Kimberly A. Martone,
                              Senior Vice President

or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to the other party complying as to delivery with
the  terms of this  Section.  All such  notices,  requests,  demands  and  other
communications  shall be  effective  two (2) days  after  deposit  in the United
States mails,  if sent postage  prepaid,  certified or registered  mail,  return
receipt requested,  addressed as aforesaid.  If any such notice, request, demand
or other communication is hand delivered, same shall be effective upon receipted
delivery.

     7.7  Binding Effect; Assignment;  Termination.  This Letter Agreement shall
be binding upon the Borrower,  its successors and assigns and shall inure to the
benefit of the Borrower and the Bank and their respective  permitted  successors
and assigns.  The  Borrower  may not assign this Letter  Agreement or any rights
hereunder  without the  express  written  consent of the Bank.  The Bank may, in
accordance with applicable law, from time to time assign or grant participations
in this  Letter  Agreement,  the Loans,  the Notes  and/or any letters of credit
issued hereunder. Without limitation of the foregoing generality,

          (i)  The Bank may at any time  pledge all or any portion of its rights
               under the Loan  Documents  (including any portion of any Note) to
               any of the twelve Federal Reserve Banks organized under Section 4
               of the Federal Reserve Act, 12 U.S.C. Section 341. No such pledge
               or the  enforcement  thereof  shall  release  the  Bank  from its
               obligations sunder any of the Loan Documents.

          (ii) The Bank shall have the  unrestricted  right at any time and from


                                       29
<PAGE>

               time to  time,  and  without  the  consent  of or  notice  to the
               Borrower,  to  grant  to one or more  banks  or  other  financial
               institutions (each, a "Participant")  participating  interests in
               the Bank's  obligation to lend hereunder and/or any or all of the
               Loans held by the Bank hereunder.  In the event of any such grant
               by the Bank of a participating interest to a Participant, whether
               or not  upon  notice  to the  Borrower,  the  Bank  shall  remain
               responsible for the performance of its obligations  hereunder and
               the Borrower  shall continue to deal solely and directly with the
               Bank  in  connection  with  the  Bank's  rights  and  obligations
               hereunder.  The Bank may furnish any  information  concerning the
               Borrower  in its  possession  from  time to  time to  prospective
               assignees and Participants;  provided that the bank shall require
               any such prospective  assignee or Participant to agree in writing
               to maintain the  confidentiality  of such information to the same
               extent  as  the  Bank  would  be  required   to   maintain   such
               confidentiality.

     The  Borrower  may  terminate  this  Letter  Agreement  and  the  financing
arrangements  made herein by giving  written  notice of such  termination to the
Bank, together with the payment described in the fifth sentence of [SECTION]7.3;
provided that no such termination will release or waive any of the Bank's rights
or remedies or any of the Borrower's  obligations under this Letter Agreement or
any of the other Loan  Documents  unless and until the Borrower has paid in full
all  Loans  and all  interest  thereon  and all  fees  and  charges  payable  in
connection  therewith  and all  letters  of credit  issued  hereunder  have been
terminated.

     7.8  Consent  to  Jurisdiction.  The  Borrower  irrevocably  submits to the
non-exclusive  jurisdiction  of any  Massachusetts  court or any  federal  court
sitting  within  The  Commonwealth  of  Massachusetts  over any suit,  action or
proceeding  arising out of or relating to this Letter Agreement and/or any Note.
The Borrower  irrevocably  waives,  to the fullest extent  permitted by law, any
objection  which it may now or hereafter have to the laying of venue of any such
suit,  action or proceeding  brought in such a court and any claim that any such
suit,  action or  proceeding  has been  brought in an  inconvenient  forum.  The
Borrower  agrees  that final  judgment  in any such suit,  action or  proceeding
brought in such a court shall be enforced in any court of proper jurisdiction by
a suit upon such judgment, provided that service of process in such action, suit
or  proceeding  shall have been effected upon the Borrower in one of the manners
specified  in the  following  paragraph  of this  [SECTION]6.8  or as  otherwise
permitted by law.

     The Borrower hereby consents to process being served in any suit, action or
proceeding  of  the  nature  referred  to in the  preceding  paragraph  of  this
[SECTION]7.8  either (i) by mailing a copy  thereof by  registered  or certified
mail, postage prepaid,  return receipt requested, to it at its address set forth
in  [SECTION]7.6  or (ii) by serving a copy  thereof  upon it at its address set
forth in [SECTION]7.6.

     7.9  Severability. In the event that any provision of this Letter Agreement
or the application  thereof to any Person,  property or  circumstances  shall be
held to any extent to be invalid or unenforceable,  the remainder of this Letter


                                       30
<PAGE>

Agreement,  and the  application  of such  provision to Persons,  properties  or
circumstances  other  than  those  as to  which it has  been  held  invalid  and
unenforceable,  shall not be affected thereby, and each provision of this Letter
Agreement shall be valid and enforced to the fullest extent permitted by law.

     7.10 Replacement  Note.  Upon  receipt of an affidavit of an officer of the
Bank as to the loss,  theft,  destruction  or  mutilation  of any Note or of any
other Loan  Document  which is not of public record and, in the case of any such
mutilation, upon surrender and cancellation of such Note or other Loan Document,
the Borrower  will issue,  in lieu  thereof,  a  replacement  Note or other Loan
Document in the same principal  amount (as to any Note) and in any event of like
tenor.

     7.11 Usury.  All  agreements  between the  Borrower and the Bank are hereby
expressly  limited  so that in no  contingency  or event whatsoever,  whether by
reason of acceleration  of maturity of the Notes or otherwise,  shall the amount
paid or  agreed  to be paid to the  Bank for the use or the  forbearance  of the
Indebtedness  represented  by any Note  exceed  the  maximum  permissible  under
applicable law. In this regard,  it is expressly agreed that it is the intent of
the Borrower and the Bank,  in the  execution,  delivery and  acceptance  of the
Notes,  to contract in strict  compliance  with the laws of The  Commonwealth of
Massachusetts.   If,  under  any   circumstances   whatsoever,   performance  or
fulfillment  of any  provision  of any of the  Notes  or any of the  other  Loan
Documents at the time such  provision  is to be  performed  or  fulfilled  shall
involve  exceeding the limit of validity  prescribed by applicable law, then the
obligation so to be performed or fulfilled shall be reduced automatically to the
limits of such  validity,  and if under any  circumstances  whatsoever  the Bank
should ever receive as interest an amount which would exceed the highest  lawful
rate,  such amount  which would be  excessive  interest  shall be applied to the
reduction of the principal balance evidenced by the Notes and not to the payment
of interest.  The  provisions  of this Section  7.11 shall  control  every other
provision of this Letter Agreement and of each Note.

     7.12 Generally Accepted  Accounting  Principles or ("GAAP").  Any financial
calculation to be made, all financial statements and other financial information
to be  provided,  and all books and  records to be kept in  connection  with the
provisions  of this  Letter  Agreement  shall be in  accordance  with  generally
accepted  accounting  principles  consistently  applied during each interval and
from  interval to  interval;  provided,  however,  that in the event  changes in
generally  accepted  accounting  principles  shall be mandated by the  Financial
Accounting  Standards  Board  or  any  similar  accounting  body  of  comparable
standing,  or should be recommended by Borrower's certified public accounts,  to
the extent such changes  would affect any financial  calculations  to be made in
connection   herewith,   such  changes  shall  be  implemented  in  making  such
calculations  only from and after  such date as  Borrower  and Bank  shall  have
amended this  Agreement  to the extent  necessary to reflect such changes in the
financial and other covenants to which such calculations relate.

     7.13 WAIVER OF JURY TRIAL.  THE  BORROWER  AND THE BANK  HEREBY  KNOWINGLY,
VOLUNTARILY  AND  INTENTIONALLY  MUTUALLY  WAIVE THE RIGHT TO A TRAIL BY JURY IN
RESPECT OF ANY CLAIM BASED HEREON,  ARISING OUT OF, UNDER OR IN CONNECTION  WITH
THIS LETTER AGREEMENT, ANY NOTE OR ANY OTHER LOAN DOCUMENTS OR OUT OF ANY COURSE


                                       31
<PAGE>

OF CONDUCT,  COURSE OF DEALING,  STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS
OF ANY PARTY.  THIS WAIVER  CONSTITUTES  A MATERIAL  INDUCEMENT  FOR THE BANK TO
ENTER INTO THIS LETTER AGREEMENT AND TO MAKE LOANS AS CONTEMPLATED HEREIN.

     VIII. DEFINED TERMS.

     8.1  Definitions. In addition to the terms defined elsewhere in this Letter
Agreement  as used in this  Letter  Agreement,  the  following  terms  have  the
following respective meanings:

     "Adjusted Current  Liabilities" - All Current  Liabilities,  other than any
such Liabilities  which consist of the current portion of Deferred  Revenue,  as
defined by GAAP.

     "Adjusted Senior Debt" - All Indebtedness of the Borrower and/or any of its
Subsidiaries,   other  than  (i)  any  such   Indebtedness   which   constitutes
Subordinated  Debt and (ii) any such  Indebtedness  which  consists  of Deferred
Revenue, as defined by GAAP.

     "Aggregate  Revolving  Bank  Liabilities" - At any time, the sum of (i) the
principal  amount of all Revolving  Loans then  outstanding,  plus (ii) all then
undrawn  amounts of letters of credit  issued by the Bank for the account of the
Borrower,  plus (iii) all amounts  then drawn on any such letter of credit which
at said date shall not have been reimbursed to the Bank by the Borrower.

     "Borrowing  Base" - At any time, 80% of the aggregate  principal  amount of
the Qualified Receivables of the Borrower then outstanding, plus 80% of Eligible
insured foreign accounts  receivable  (including  accounts receivable secured by
irrevocable  letters  of  credit),  plus  50% of  Eligible  non-insured  foreign
accounts receivable up to $250,000.

     "Business Day" - Any day which is not a Saturday, nor a Sunday nor a public
holiday  under the laws of the United States of America or The  Commonwealth  of
Massachusetts applicable to a national bank.

     "Capital Base" - At any time, the sum of (i) the consolidated  Tangible Net
Worth of the Borrower and  Subsidiaries  then  existing  plus (ii) the principal
amount of Subordinated Debt of the Borrower then outstanding  (nothing contained
herein being deemed to authorize  the incurring of any  additional  Subordinated
Debt).

     "Collateral"  - All property  now or hereafter  owned by the Borrower or in
which the  Borrower  now or  hereafter  has any  interest  which is described as
"Collateral" in [SECTION]6.1.

     "Current  Liabilities" - All  liabilities of the Borrower and/or any of its
Subsidiaries  which  would  properly  be  shown  as  current  liabilities  on  a
consolidated balance sheet of the Borrower prepared in accordance with generally
accepted accounting  principles applied consistently with the Borrower's audited
financial statements as at December 31, 1997, heretofore provided to the Bank.

                                       32
<PAGE>

     "Deferred  Revenue" - All  liabilities of the Borrower which would properly
be shown as  "deferred  revenue"  on a balance  sheet of  consistently  with the
balance sheet included in the Borrower's audited annual financial  statements as
of December 31, 1997 heretofore provided to the Bank.

     "ERISA" - The Employee Retirement Income Security Act of 1974, as amended.

     "Expiration  Date" - March 31,  2001,  unless  extended by the Bank,  which
extension may be given or withheld by sole discretion.

     "Indebtedness" - The total of all obligations of a Person,  whether current
or  long-term,  senior  or  subordinated,  which in  accordance  with  generally
accepted  accounting  principles  would be  included  as  liabilities  upon such
Person's balance sheet at the date as of which Indebtedness is to be determined,
and shall also include  guaranties,  endorsements  (other than for collection in
the ordinary course of business) or other arrangements whereby responsibility is
assumed  for the  obligations  of others,  whether by  agreement  to purchase or
otherwise acquire the obligations of others, including any agreement, contingent
or  otherwise,  to furnish  funds  through the  purchase  of goods,  supplies or
services for the purpose of payment of the obligations of others.

     "Lien" - Any mortgage,  deed of trust, pledge, lien, security interest,  or
other charge or encumbrance  (including the lien or retained security title of a
conditional vendor) whether voluntary or involuntary.

     "Loan" - Any Revolving Loan or any Term Loan.

     "Loan Documents" - Each of this Letter  Agreement,  the Revolving Note, the
Term  Note,  and  each  other  instrument,  document  or  agreement  evidencing,
securing,  guaranteeing  or relating in any way to any of the Loans or to any of
the letters of credit  issued  hereunder,  all whether now existing or hereafter
arising or entered into.

     "Maximum  Revolving  Amount"  - At  any  date  as of  which  same  is to be
determined by which (x)  $2,000,000  exceeds (y) the sum of (i) all then undrawn
amounts of letters of credit  issued by the Bank for the account of the Borrower
plus (ii) all amounts then drawn on any such letter of credit which at said date
shall not have been reimbursed to the Bank by the Borrower.

     "Net  Income" (or "Net  Loss") - The book net income (or book net loss,  as
the case may be) of a Person for any period,  after all taxes  actually  paid or
accrued  and all  expenses  and other  charges  determined  in  accordance  with
generally accepted accounting principles consistently applied.

     "Net Quick  Assets" - Such  current  assets of the  Borrower  as consist of
cash, cash- equivalents,  readily marketable securities and Receivables (less an
allowance for bad debt consistent with the Borrower's prior experience).



                                       33
<PAGE>

     "Notes" - Collectively, the Revolving Note and the Term Note.

     "Obligations" - All Indebtedness,  covenants,  agreements,  liabilities and
obligations, now existing or hereafter arising, made by the Borrower with or for
the benefit of the Bank or owed by the  Borrower to the Bank in any  capacity of
every name and nature  whatsoever,  direct or indirect,  absolute or contingent,
now existing or hereafter arising or acquired,  including,  without  limitation,
the due payment and performance of all  liabilities  and  obligations  under the
Loan Documents and under any and all notes,  including,  but not limited to, the
Notes and obligations to perform or refrain from performing any acts.

     "PBGC" - The Pension Benefit Guaranty Corporation or any successor thereto.

     "Person" - An individual, corporation, company, partnership, joint venture,
trust or unincorporated organization, or a government or any agency or political
subdivision thereof.

     "Premises" - As defined in Subsection 2.1(j) above.

     "Qualified  Receivables"  - Only those  Receivables  of the Borrower  which
arise out of bona fide sales made to customers of the Borrower (which  customers
are  located in the United  States and are  unrelated  to the  Borrower)  in the
ordinary course of the Borrower's  business and which remain unpaid no more than
90 days past the respective  invoice dates of such  Receivables,  the payment of
which  is not in  dispute.  Unless  the Bank in its  sole  discretion  otherwise
determines with respect to any Receivable, a Receivable which would otherwise be
a Qualified  Receivable shall be deemed not to be a Qualified  Receivable (i) if
the Bank does not have a fully  perfected  first priority  security  interest in
such  Receivable;  (ii) if such  Receivable  is not fee and clear of all adverse
interests in favor of any other Person;  (iii) if such  Receivable is subject to
any deduction,  off-set,  contra account,  counterclaim or condition,  (iv) if a
field  examination made by the Bank fails to confirm that such Receivable exists
and satisfies all of the criteria set forth herein to be a Qualified Receivable;
(v) if such Receivable is not properly invoiced at the date of sale; (vi) if the
customer or account debtor has disputed liability or made any claim with respect
to the  Receivable  or the  merchandise  covered  thereby or with respect to any
other  Receivable due from said customer to the Borrower;  (vii) if the customer
or account debtor has filed a petition for  bankruptcy or any other  application
for relief  under the  Bankruptcy  Code or has  effected an  assignment  for the
benefit of  creditors,  or if any petition or any other  application  for relief
under the  Bankruptcy  Code has been  filed  against  said  customer  or account
debtor,  or if the customer or account  debtor has  suspended  business,  become
insolvent,  ceased to pay its debts as they  become  due,  or had or  suffered a
receiver or trustee to be appointed for any of its assets or affairs;  (viii) if
the customer or account  debtor has failed to pay other  Receivables  so that an
aggregate of 25% of the total Receivables owing to the Borrower by such customer
or  account  debtor  has been  outstanding  for more than 90 days:  (ix) if such
Receivable is owed by the United  States  Government or any agency or department
thereof  (unless  assigned  to the Bank under the Federal  Assignment  of Claims
Act); or (x) if the Bank reasonably  believes that collection of such Receivable
is insecure or that it may not be paid by reason of  financial  inability to pay
or otherwise,  or that such Receivable is not for any reason suitable for use as


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<PAGE>

a basis for borrowing hereunder.

     "Qualifying Equipment" - Equipment (not including prepackaged software) and
fixtures  purchased  by the  Borrower  after  September  30, 1998 for use in the
Borrower's business which meets all of the following criteria:  (i) such item of
equipment and fixtures  consists of one of the items shown on the Equipment List
heretofore  delivered by the Borrower to the Bank or has otherwise been approved
by the Bank for use in supporting a Term Loan,  (ii) each item of such equipment
and fixtures has been  delivered to and installed at the Premises and has become
fully  operational,  (iii) the  Borrower  has paid in full for each item of such
equipment and holds title to same, free of all interests and claims of any other
Person  (other than the  security  interest of the Bank),  and (iv) the Bank has
fully perfected first security interest in such equipment.

     "Qualifying  Real  Property"  -  shall  mean  (i)  any  part  or all of the
buildings and lots  containing the Premises and (ii) such other real property as
the Bank may  agree,  in  writing  and in its sole  discretion,  may  constitute
Qualifying  Real  Property,  subject  in  either  case to the  Bank's  review of
appraisals,  environmental  assessments  and  reports  and  other  documentation
reasonably  required by the Bank to assess its  Security  Interest in respect of
such  Qualifying Real Property.  Such documents and  information  shall include,
without  limitation,  a  "marked-up"  title  insurance  commitment  from a title
insurance  company  acceptable to the Bank  agreeing to issue a mortgagee  title
insurance  policy  insuring the mortgage as a valid first lien on the Qualifying
Real  Property  free  and  clear  of all  liens,  encumbrances,  exceptions  and
restrictions,  a current survey of the Qualifying Real Property  certified to be
true  and  correct  to  the  Bank  which  shall  not   disclose   any   boundary
encroachments,  and a letter  from the New Jersey  Department  of  Environmental
Protection  indicating  that the Qualifying  Real Property is not subject to the
New Jersey Industrial Site Recovery Act.

     "Receivables" - All of the Borrower's resent and future accounts,  accounts
receivable and notes, drafts,  acceptances and other instruments representing or
evidencing a right to payment for goods sold or for services rendered.

     "Security Interest" - shall mean the security interests granted to the Bank
by the Borrower in [SECTION]6.1.

     "Subordinated  Debt" - Any  Indebtedness of the Borrower which is expressly
subordinated,  pursuant  to a  subordination  agreement  in form  and  substance
satisfactory  to the Bank,  to all  Indebtedness  now or  hereafter  owed by the
Borrower to the Bank.

     "Subsidiary" - Any corporation or other entity of which the Borrower and/or
any of its  Subsidiaries,  directly,  or  indirectly,  owns, or has the right to
control or direct the voting of, fifty (50%) percent or more of the  outstanding
capital stock or other  ownership  interest  having  general voting power (under
ordinary circumstances).

     "Tangible  Net Worth" - An amount  equal to the total  assets of any Person
(excluding  (i) the total  intangible  assets of such Person and (ii) any assets


                                       35
<PAGE>

representing  amounts due from any officer,  employee or other affiliate of such
Person) minus the total  liabilities  of such Person.  Total  intangible  assets
shall be deemed to include, but shall not be limited to, the excess of cost over
book  value  of  acquired  businesses  accounted  for  by the  purchase  method,
formulae,  trademarks, trade names, patents, patent rights and deferred expenses
(including,   but  not  limited  to,  unamortized  debt  discount  and  expense,
organizational   expense,   capitalized  software  costs  and  experimental  and
development expenses).

     "UCC" - The Uniform  Commercial  Code as in effect from time to time in the
Commonwealth of Massachusetts, except that with respect to Collateral located or
deemed located in any other  jurisdiction,  such term shall refer to the Uniform
Commercial Code as in effect in each such other  jurisdiction.  Unless otherwise
defined in this Letter Agreement,  capitalized words shall have the meanings set
forth in the UCC as in effect on the date of this Agreement in the  Commonwealth
of Massachusetts.

     Any defined term used in the plural preceded by the definite  article shall
be taken to encompass all members of the relevant  class.  Any defined term used
in the  singular  preceded by "any" shall be taken to indicate any number of the
members of the relevant class.

     This Letter  Agreement is executed,  as an instrument under seal, as of the
day and year first above written.

                              Very truly yours,



                              EP MEDSYSTEMS INC.


                              By:/s________________________________
                                   Name:
                                   Title:

Accepted and agreed:

FLEET NATIONAL BANK


By:/s____________________________
     Its

By:/s____________________________
     Its


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