EXHIBIT 10.3
                                                                    ------------


                       SECOND LOAN MODIFICATION AGREEMENT


         This  Second  Loan  Modification  Agreement  is executed on January 17,
2001,  to be  effective  as of  December  29,  2000,  by and  between  DATAWATCH
CORPORATION,  a Delaware  corporation with its chief executive office located at
175 Cabot Street, Suite 503, Lowell,  Massachusetts  01854-3633 ("Borrower") and
SILICON VALLEY BANK, a  California-chartered  bank ("Bank"),  with its principal
place of business at 3003 Tasman  Drive,  Santa Clara,  CA 95054 and with a loan
production  office  located  at One  Newton  Executive  Park,  Suite  200,  2221
Washington  Street,  Newton,  MA 02462,  doing  business under the name "Silicon
Valley East".

1. DESCRIPTION OF EXISTING  INDEBTEDNESS.  Among other indebtedness which may be
owing by  Borrower to Bank,  Borrower  is  indebted  to Bank  pursuant to a loan
arrangement dated March 16, 1999, evidenced by, among other documents, a certain
Amended and Restated Loan and Security  Agreement  dated as of March 16, 1999 by
and among the  Borrower,  Personics  Corporation,  and the Bank, as amended by a
certain  First Loan  Modification  Agreement  dated as of  December  27, 1999 by
Borrower  and  Bank (as  amended,  the  "Loan  Agreement").  The Loan  Agreement
established  a working  capital  line of credit in favor of the  Borrower in the
maximum   principal   amount  of  One  Million  Five  Hundred  Thousand  Dollars
($1,500,000.00) (the "Committed Revolving Line"). Capitalized terms used but not
otherwise defined herein shall have the same meaning as in the Loan Agreement.

Hereinafter,  all indebtedness owing by Borrower to Bank shall be referred to as
the "Obligations".

2.  DESCRIPTION  OF COLLATERAL.  Repayment of the  Obligations is secured by the
Collateral  as  described  in the Loan  Agreement,  and a  certain  Intellectual
Property  Security  Agreement dated as of December 27, 1999 by Borrower in favor
of Bank (the "Intellectual Property Security Agreement") (hereinafter,  the Loan
Agreement,  as amended hereby, and the Intellectual Property Security Agreement,
together with any other  collateral  security granted to Bank, shall be referred
to as the "Security Documents").

Hereinafter,   the  Security  Documents,   together  with  all  other  documents
evidencing  or securing the  Obligations  shall be referred to as the  "Existing
Loan Documents".

3.       DESCRIPTION OF CHANGE IN TERMS.
         ------------------------------

         A. Modification(s) to Loan Agreement.

                  1.       The Loan  Agreement  shall be amended by deleting the
                           Tangible  Net Worth  covenants  appearing  as Section
                           6.7(a)(ii)  and Section  6.7(b)(ii)  and inserting in
                           lieu thereof the following  text to appear as Section
                           6.7(c) thereof:

                                    "(c) Tangible Net Worth.  The Borrower shall
                                    maintain,  as of the last day of each month,
                                    commencing  with the month ending  September
                                    30,  2000,  a Tangible Net Worth of not less
                                    than  Four  Million  Five  Hundred  Thousand
                                    Dollars ($4,500,000.00)."

                  2.       The Loan  Agreement  shall be amended by deleting the
                           following   definition   appearing  in  Section  13.1
                           thereof:

                                    ""EXIM  Agreement"  shall mean that  certain
                                    Export-Import  Loan and  Security  Agreement
                                    dated  December  27, 1999 by and between the
                                    Borrower and the Bank."

                           and inserting in lieu thereof the following:

<PAGE>

                                    ""EXIM  Agreement"  shall mean that  certain
                                    Export-Import  Loan and  Security  Agreement
                                    dated  December  27, 1999 by and between the
                                    Borrower  and  the  Bank,  as  amended  by a
                                    certain  First Loan  Modification  Agreement
                                    (EXIM Line) dated  January 17, 2001,  as may
                                    be further amended from time to time."

                  3.       The Loan  Agreement  shall be amended by deleting the
                           following   definition   appearing  in  Section  13.1
                           thereof:

                            ""Revolving Maturity Date" means December 27, 2000."

                           and inserting in lieu thereof the following:

                            ""Revolving Maturity Date" means December 31, 2001."

                  4.       The Compliance  Certificate appearing as Exhibit D to
                           the  Loan  Agreement  is  hereby  replaced  with  the
                           Compliance Certificate attached as Exhibit A hereto.

                  5.       The Borrower  ratifies,  confirms and reaffirms,  all
                           and  singular,  the terms and  conditions  of:  (i) a
                           certain  Collateral  Assignment,  Patent Mortgage and
                           Security  Agreement dated as of November 1, 1994 (the
                           "1994 IP Agreement")  between  Borrower and Bank, and
                           acknowledges,   confirms   and   agrees   that   said
                           Collateral  Assignment,  Patent Mortgage and Security
                           Agreement shall remain in full force and effect,  and
                           (ii)  a  certain   Intellectual   Property   Security
                           Agreement dated as of December 27, 1999 (the "1999 IP
                           Agreement")   by  Borrower  in  favor  of  Bank,  and
                           acknowledges,   confirms   and   agrees   that   said
                           Intellectual Property Security Agreement shall remain
                           in full force and effect.

                           The Borrower hereby acknowledges, confirms and agrees
                           that the  Collateral  under the 1994 IP Agreement and
                           the Intellectual  Property  Collateral under the 1999
                           IP  Agreement  shall be amended to  include,  without
                           limitation,  the  intellectual  property  owed by the
                           Borrower  appearing on Exhibit B attached  hereto and
                           made a part hereof.

4. FEE.  Borrower shall pay to Bank a fee for the  modification  of the domestic
line equal to Twelve Thousand Five Hundred Dollars ($12,500.00), which fee shall
be due on the date  hereof  and  shall be  deemed  fully  earned  as of the date
hereof.  The Borrower  shall also reimburse Bank for all legal fees and expenses
incurred in connection with this amendment to the Existing Loan Documents.

5. CONSISTENT  CHANGES.  The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.

6.  RATIFICATION OF LOAN  DOCUMENTS.  Borrower hereby  ratifies,  confirms,  and
reaffirms all terms and conditions of all security or other  collateral  granted
to the Bank,  and  confirms  that the  indebtedness  secured  thereby  includes,
without limitation, the Obligations.

7. NO DEFENSES OF BORROWER.  Borrower  agrees that,  as of this date,  it has no
defenses against the obligations to pay any amounts under the Obligations.

8. CONTINUING  VALIDITY.  Borrower  understands and agrees that in modifying the
existing   Obligations,   Bank  is  relying  upon  Borrower's   representations,
warranties, and agreements, as set forth in the Existing Loan Documents.  Except
as expressly modified pursuant to this Loan Modification

                                       2

<PAGE>

Agreement, the terms of the Existing Loan Documents remain unchanged and in full
force and effect.  Bank's agreement to modifications to the existing Obligations
pursuant to this Loan  Modification  Agreement in no way shall  obligate Bank to
make  any  future  modifications  to  the  Obligations.  Nothing  in  this  Loan
Modification Agreement shall constitute a satisfaction of the Obligations. It is
the  intention  of Bank and  Borrower to retain as liable  parties all makers of
Existing  Loan  Documents,  unless the party is  expressly  released  by Bank in
writing.  No  maker  will  be  released  by  virtue  of this  Loan  Modification
Agreement.

9.  JURISDICTION/VENUE.  Borrower  accepts for itself and in connection with its
properties,  unconditionally,  the  non-exclusive  jurisdiction  of any state or
federal court of competent  jurisdiction in the Commonwealth of Massachusetts in
any action, suit, or proceeding of any kind against it which arises out of or by
reason of this Loan Modification Agreement;  provided,  however, that if for any
reason  Bank  cannot  avail  itself  of  the  courts  of  the   Commonwealth  of
Massachusetts, then venue shall lie in Santa Clara County, California.

10.  COUNTERSIGNATURE.  This Loan Modification  Agreement shall become effective
only when it shall have been executed by Borrower and Bank  (provided,  however,
in no event shall this Loan Modification Agreement become effective until signed
by an officer of Bank in California).

                                       3

<PAGE>

         This Loan  Modification  Agreement  is executed as a sealed  instrument
under the laws of the Commonwealth of Massachusetts as of the date first written
above.

BORROWER:                                                     BANK:

DATAWATCH CORPORATION             SILICON VALLEY BANK, doing business as
                                  SILICON VALLEY EAST

By:  /s/  Bruce R. Gardner        By: /s/  Jonathan L. Gray
    -----------------------          --------------------------------

Name:  Bruce R. Gardner           Name: Jonathan L. Gray
      ---------------------            ------------------------------

Title: President                  Title: SVP
      ---------------------             -----------------------------


                                  SILICON VALLEY BANK

                                  By: /s/  Maggie Garcia
                                     --------------------------------

                                  Name: Maggie Garcia
                                       ------------------------------

                                  Title: Loan Administrative Team Leader
                                        --------------------------------------
                                      (signed in Santa Clara County, California)


                                       4

<PAGE>

                                    EXHIBIT A
                             COMPLIANCE CERTIFICATE

TO:               SILICON VALLEY BANK

FROM:             DATAWATCH CORPORATION

         The  undersigned  authorized  officer of DATAWATCH  CORPORATION  hereby
certifies  that in  accordance  with the  terms and  conditions  of the Loan and
Security Agreement between Borrower and Bank (the "Agreement"),  (i) Borrower is
in complete  compliance for the period ending with all required covenants except
as noted below and (ii) all representations and warranties of Borrower stated in
the  Agreement  are true and  correct in all  material  respects  as of the date
hereof.  Attached  herewith  are the  required  documents  supporting  the above
certification.  The  Officer  further  certifies  that  these  are  prepared  in
accordance  with  Generally  Accepted  Accounting   Principles  (GAAP)  and  are
consistently  applied  from one  period to the next  except as  explained  in an
accompanying  letter or footnotes.  The Officer  expressly  acknowledges that no
borrowings may be requested by the Borrower at any time or date of determination
that Borrower is not in compliance  with any of the terms of the Agreement,  and
that such  compliance is  determined  not just at the date this  certificate  is
delivered.

                   Please  indicate  compliance  status by circling Yes/No under
"Complies" column.
<TABLE><CAPTION>
     <S>                              <C>                                    <C>

     Reporting Covenant               Required                                Complies
     ------------------               --------                                --------

     Financial Statements & CC        Monthly within 35 days*                 Yes    No
     Annual (CPA Audited)             FYE within 120 days                     Yes    No
     10-Q, 10-K and 8-K               Within 5 days after filing w/ SEC       Yes    No
     BBC & A/R Agings                 Monthly within 25 days*                 Yes    No

  *when Advances are outstanding or have been requested

     Financial Covenant               Required                   Actual       Complies
     ------------------               --------                   ------       --------

Maintain on a Monthly Basis:

     Minimum Adjusted Quick Ratio**   1.50:1.0                   _____:1.0    Yes    No
     Minimum Tangible Net Worth       $4,500,000(begin 9/30/00)  $________    Yes    No

  **only for months ending January, February, April, May, July, August, October and November

Maintain on a Quarterly Basis:

     Minimum Adjusted Quick Ratio     1.75:1.0                   _____:1.0    Yes    No

</TABLE>

================================
         BANK USE ONLY
Received By:____________________
Date:________________
Reviewed By:____________________
Compliance Status:  Yes / No
================================


Comments Regarding Exceptions:

Sincerely,

_______________________    Date:_______________
SIGNATURE
------------------------
TITLE



                                       5

<PAGE>

                 Exhibit B to Second Loan Modification Agreement
                 -----------------------------------------------


Trademark:  QUETZAL/SC
Status:  Pending
Application Number:  821,537
Country:  Australia
Owner:  Datawatch Corporation
Filed:  28-Jan-2000
Classes:          9

Trademark:  QUETZAL/SC
Status:  Pending
Application Number:  1,045,423
Country:  Canada
Owner:  Datawatch Corporation
Filed:  03-Feb-2000
Classes:         9