Document:

<PAGE>

                                                                    Exhibit 10.6

                          LOAN AND SECURITY AGREEMENT

                                     Among

                              DRUGMAX.COM, INC.,
                                      and
                             VALLEY DRUG COMPANY,
                                 as Borrowers

                                      and

                              THE GUARANTORS FROM
                           TIME TO TIME PARTY HERETO

                                      and

                              MELLON BANK, N.A.,
                                    as Bank

                         Dated as of: October 24, 2000
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                                TABLE OF CONTENTS
                                -----------------
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1.  DEFINITIONS AND CONSTRUCTION...........................................   1
    1.1  Definitions.......................................................   1
    1.2  Accounting Terms and Determinations...............................  18
    1.3  UCC...............................................................  19
    1.4  Construction......................................................  19
    1.5  Schedules and Exhibits............................................  19
    1.6  Obligor's Knowledge...............................................  19

2.  THE REVOLVING CREDIT FACILITY..........................................  19
    2.1  The Facility......................................................  19
    2.2  Revolver Note.....................................................  20
    2.3  Borrowing Base....................................................  20
    2.4  Sublimits.........................................................  21
    2.5  Reserves..........................................................  21
    2.6  Reduction in Advance Rates........................................  21

3.  ADVANCES UNDER THE REVOLVING CREDIT FACILITY...........................  22
    3.1  General...........................................................  22
    3.2  Borrowing Procedures..............................................  22
    3.3  Funding Procedure.................................................  22

4.  THE TERM LOAN..........................................................  23
    4.1  Term Loan.........................................................  23
    4.2  Term Note.........................................................  23
    4.3  Advance of the Term Loan..........................................  23

5.  USE OF LOAN PROCEEDS...................................................  23

6.  LETTERS OF CREDIT......................................................  23
    6.1  General...........................................................  23
    6.2  Conditions to Issuance............................................  23
    6.3  Tenor.............................................................  24
    6.4  Sublimits.........................................................  24
    6.5  Procedure and Documentation.......................................  24
    6.6  Reduction of Availability.........................................  24
    6.7  Draws.............................................................  24
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                                       i
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    6.8  Cash Collateral...................................................  24
    6.9  Indemnification...................................................  25
    6.10 Obligations Irrevocable...........................................  25
    6.11 Risk Under Letters of Credit......................................  26

7.  INTEREST RATE..........................................................  27
    7.1  Interest Rate Options for the Revolving Credit Facility...........  27
    7.2  Interest Rate Options for the Term Loan...........................  28
    7.3  Base Rate Fall Back...............................................  29
    7.4  LIBOR Rate Unascertainable or Unavailable.........................  30
    7.5  LIBOR Unlawful....................................................  30
    7.6  Indemnification...................................................  30
    7.7  Determinations....................................................  30
    7.8  Default Rate......................................................  31
    7.9  Post Judgment Interest............................................  31
    7.10 Calculations......................................................  31
    7.11 Limitation of Interest to Maximum Lawful Rate.....................  31

8.  PAYMENTS AND FEES......................................................  32
    8.1  Interest Payments on the Revolving Credit Facility................  32
    8.2  Principal Payments on the Revolving Credit Facility...............  32
    8.3  Interest Payments on the Term Loan................................  32
    8.4  Principal Payments on Term Loan...................................  33
    8.5  Letter of Credit Fees.............................................  33
    8.6  Facility Fee......................................................  33
    8.7  Collateral Management Fee.........................................  33
    8.8  Unused Facility Fee...............................................  33
    8.9  Late Charge.......................................................  34
    8.10 Termination of Revolving Credit Facility and Termination Fee......  34
    8.11 Prepayment of Term Loan...........................................  34
    8.12 Interest and Breakage Costs on LIBOR Rate Loans...................  35
    8.13 Payment Method and Application....................................  35
    8.14 Reinstatement of Obligations......................................  36
    8.15 Maintenance of Loan Account; Statements of Obligations............  36
    8.16 Indemnity.........................................................  37
    8.17 Loss of Margin....................................................  37
    8.18 Savings Clause....................................................  38

9.  TAXES..................................................................  38
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                                      ii
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10. SECURITY; COLLECTION OF RECEIVABLES AND PROCEEDS OF
    COLLATERAL.............................................................  39
    10.1  Personal Property................................................  39
    10.2  Collateral Assignment of Licenses................................  41
    10.3  Management Support and Validity Agreements.......................  41
    10.4  Negotiable Collateral............................................  41
    10.5  Surety...........................................................  41
    10.6  Stock Pledges....................................................  41
    10.7  General..........................................................  42
    10.8  Collection of Accounts; Proceeds of Collateral...................  42

11. REPRESENTATIONS AND WARRANTIES.........................................  43
    11.1  Valid Organization, Good Standing and Qualification..............  43
    11.2  Licenses.........................................................  44
    11.3  Ownership Interests..............................................  44
    11.4  Subsidiaries.....................................................  44
    11.5  Financial Statements.............................................  44
    11.6  No Material Adverse Change in Financial Condition................  44
    11.7  Pending Litigation or Proceedings................................  44
    11.8  Due Authorization; No Legal Restrictions.........................  45
    11.9  Enforceability...................................................  45
    11.10 No Default Under Other Obligations, Orders or Governmental
          Regulations......................................................  45
    11.11 Governmental Consents............................................  45
    11.12 Taxes............................................................  45
    11.13 Title to Collateral..............................................  46
    11.14 Names; Addresses and State of Formation..........................  46
    11.15 Current Compliance...............................................  46
    11.16 United States Pension and Benefit Plans..........................  46
    11.17 Leases and Contracts.............................................  46
    11.18 Intellectual Property............................................  47
    11.19 Eligible Accounts................................................  47
    11.20 Eligible Inventory...............................................  47
    11.21 Business Interruptions...........................................  48
    11.22 Business.........................................................  48
    11.23 Affiliate Transactions...........................................  48
    11.24 Property of Obligors.............................................  48
    11.25 Inventory Records................................................  49
    11.26 FEIN.............................................................  49
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                                      iii
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    11.27 Solvency.........................................................  49
    11.28 Subordinated Indebtedness........................................  49
    11.29 Inventory Locations..............................................  49
    11.30 Investment Company Act; Public Utility Holding Company Act.......  50
    11.31 Employee Relations...............................................  50
    11.32 Investment Property..............................................  51
    11.33 Common Enterprise................................................  51
    11.34 Insurance........................................................  51
    11.35 Web Sites........................................................  51
    11.36 Accuracy of Representations and Warranties.......................  51

12. AFFIRMATIVE COVENANTS..................................................  51
    12.1  Payment of Principal, Interest and Other Amounts Due.............  52
    12.2  Claims for Labor and Materials...................................  52
    12.3  Existence; Approvals; Qualification; Compliance with Laws........  52
    12.4  Maintenance of Properties........................................  52
    12.5  Intellectual Property............................................  52
    12.6  Insurance........................................................  53
    12.7  Inspections; Examinations........................................  54
    12.8  Pension Plans....................................................  54
    12.9  Bank Accounts....................................................  55
    12.10 Maintenance of Management........................................  55
    12.11 Transactions with Affiliates.....................................  56
    12.12 Additional Documents and Future Actions..........................  56
    12.13 Title to Equipment...............................................  56
    12.14 Taxes............................................................  56
    12.15 Leases...........................................................  57
    12.16 Notices..........................................................  57
    12.17 Assignment of Claims Act.........................................  57
    12.18 Additional Guarantors............................................  57
    12.19 Instruments; Promissory Notes....................................  58
    12.20 Future Leases....................................................  58
    12.21 Web Sites........................................................  58

13. NEGATIVE COVENANTS.....................................................  59
    13.1  Limitation on Sale and Leaseback.................................  59
    13.2  Limitation on Indebtedness.......................................  59
    13.3  Loans............................................................  60
    13.4  Investments......................................................  60
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                                      iv
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        13.5    Guaranties.....................................................    60
        13.6    Disposition of Assets..........................................    60
        13.7    Merger; Consolidation; Business Acquisitions; Siubsidiaries....    60
        13.8    Liens..........................................................    61
        13.9    Letters of Credit..............................................    62
        13.10   Insurance......................................................    62
        13.11   Default Under Other Indebtedness...............................    62
        13.12   Transactions with Affiliates...................................    62
        13.13   Name or Chief Executive Address Change.........................    62
        13.14   Change in Location of Collateral...............................    62
        13.15   Material Adverse Contracts.....................................    63
        13.16   Restrictions on Use of Proceeds................................    63
        13.17   Subordinated Indebtedness......................................    63
        13.18   Prepayments; Amendments and License Agreements.................    64
        13.19   Distributions; Stock Redemptions...............................    64
        13.20   Issuance of Capital Stock......................................    64
        13.21   Prohibited Transactions Under ERISA............................    64
        13.22   Licenses.......................................................    65
        13.23   Consignments...................................................    65
        13.24   Trademark and Tradename Licenses...............................    65
        13.25   Equipment Becoming Fixture.....................................    65

14.     FINANCIAL COVENANTS....................................................    66
        14.1   Net Income......................................................    66
        14.2   Stand-Alone Net Income..........................................    66
        14.3   Net Worth.......................................................    67
        14.4   Current Ratio...................................................    68
        14.5   Capital Expenditures............................................    68
        14.6   Cash on Deposit.................................................    69
        14.7   Changes to Financial Covenants..................................    70
        14.8   Most Favored Lender.............................................    70

15.      ACCOUNTING RECORDS, REPORTS AND FINANCIAL STATEMENTS..................    70
        15.1   Annual Statements...............................................    70
        15.2   Projections and Cash Flow.......................................    71
        15.3   Monthly Statements..............................................    71
        15.4   Collateral Reporting............................................    72
        15.5   Tax Returns.....................................................    73
        15.6   SEC Reporting...................................................    73
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                                       v
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<S>     15.7   Audit Reports....................................................  <C>
        15.8   Reports to Governmental Agencies and Other Creditors.............   74
        15.9   Requested Information............................................   74
        15.10  Compliance Certificates..........................................   74
        15.11  Accountant's Certificate.........................................   74
                                                                                   74

16.     CONDITIONS PRECEDENT TO THE INITIAL ADVANCE OR LETTER OF CREDIT.........   74
        16.1   Searches.........................................................   75
        16.2   UCC-1 Filings....................................................   75
        16.3   Executed Loan Documents..........................................   75
        16.4   Authorizing Resolutions..........................................   75
        16.5   Governing Documents..............................................   75
        16.6   Material Agreements..............................................   75
        16.7   Good Standing Certificates.......................................   76
        16.8   Insurance........................................................   76
        16.9   Collateral Access Agreements.....................................   76
        16.10  Opinions of Counsel..............................................   76
        16.11  Tax Returns......................................................   76
        16.12  March 31, 2000 Financial Statements..............................   76
        16.13  July 31, 2000 and August 31, 2000 Financial Statements...........   76
        16.14  Licenses, Approvals, Etc.........................................   77
        16.15  Excess Availability..............................................   77
        16.16  No Material Adverse Change.......................................   77
        16.17  Fees.............................................................   77
        16.18  SEC Reporting....................................................   77
        16.19  Reference Checks.................................................   77
        16.20  Subordination....................................................   77
        16.21  Equipment Leases.................................................   77
        16.22  Releases.........................................................   77

17.     CONDITIONS PRECEDENT TO ALL ADVANCES AND LETTERS OF CREDIT..............   78
        17.1   Representations and Warranties...................................   78
        17.2   No Default or Event of Default...................................   78
        17.3   No Injunction or Order...........................................   78
        17.4   No Bankruptcy....................................................   78
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18.     DEFAULT AND REMEDIES...................................................    78
        18.1   Events of Default...............................................    78
        18.2   Remedies........................................................    81
        18.3   Application of Proceeds.........................................    82
        18.4   Sale or Other Disposition of Collateral.........................    82
        18.5   Actions With Respect to Accounts................................    83
        18.6   Actions With Respect to Web Sites...............................    85
        18.7   Set-Off.........................................................    86
        18.8   Turnover of Property Held by Bank...............................    86
        18.9   Delay or Omission Not Waiver....................................    86
        18.10  Remedies Cumulative.............................................    87
        18.11  Consents, Approvals and Discretion..............................    87
        18.12  Certain Fees, Costs, Expense Expenditures.......................    87

19.     INDEMNIFICATION........................................................    88

20.     COMMUNICATIONS AND NOTICES.............................................    89

21.     WAIVERS................................................................    89
        21.1   Waivers.........................................................    89
        21.2   Forbearance.....................................................    90
        21.3   Limitation on Liability.........................................    90
        21.4   Waiver of Subrogation...........................................    91

22.     SUBMISSION TO JURISDICTION.............................................    91

23.     MISCELLANEOUS..........................................................    91
        23.1   Brokers.........................................................    91
        23.2   Use of Bank's Name..............................................    91
        23.3   No Joint Venture................................................    92
        23.4   Survival........................................................    92
        23.5   No Assignment...................................................    92
        23.6   Assignment or Sale by Bank......................................    92
        23.7   Publicity.......................................................    92
        23.8   Injunctive Relief...............................................    92
        23.9   Time is of the Essence..........................................    92
        23.10  All Powers Coupled With Interest................................    93
        23.11  Disclosure and Disclaimer Regarding Power of Attorney...........    93
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   23.12  Binding Effect.......................................................    93
   23.13  Severability.........................................................    93
   23.14  No Third Party Beneficiaries.........................................    94
   23.15  Modifications........................................................    94
   23.16  Holidays.............................................................    94
   23.17  Law Governing........................................................    94
   23.18  Integration..........................................................    94
   23.19  Exhibits and Schedules...............................................    94
   23.20  Headings.............................................................    94
   23.21  Counterparts; Facsimile Signatures...................................    94
   23.22  Joint and Several....................................................    94
   23.23  Limitation on Damages................................................    95
   23.24  Waiver of Right to Trial by Jury.....................................    95
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                                     viii
<PAGE>

                          LOAN AND SECURITY AGREEMENT
                          ---------------------------

               THIS LOAN AND SECURITY AGREEMENT is made effective as of October
24, 2000 by and among DRUGMAX.COM, INC., a Nevada corporation ("DrugMax");
VALLEY DRUG COMPANY, an Ohio corporation ("Valley") (DrugMax and Valley being
collectively hereinafter referred to as "Borrowers"); each of the GUARANTORS (as
defined hereinbelow) from time to time party hereto; and MELLON BANK, N.A.
("Bank").

               NOW, THEREFORE, in consideration of the terms and conditions
contained herein, and of any extensions of credit now or hereafter made to or
for the benefit of Borrowers under this Agreement, the parties hereto, intending
to be legally bound hereby, agree as follows:

               1.          DEFINITIONS AND CONSTRUCTION.
                           ----------------------------

                           1.1    Definitions. The following words and phrases
                                  -----------
as used in capitalized form in this Agreement, whether in the singular or
plural, shall have the meanings indicated:

               Account Debtor means any Person who is or who may become
obligated under, with respect to, or on account of, an Account.

               Accounts means, with respect to a Person, all of such Person's
now owned and hereinafter acquired rights to payment for goods sold or leased or
for services rendered which is not evidenced by any instrument or chattel paper,
whether or not it has been earned by performance, and any other property or
interest in property that is classified as an account pursuant to the UCC.

               Advances means an advance by Bank under the Revolving Credit
Facility, the Term Loan or this Agreement, including without limitation, Base
Rate Loans, LIBOR Rate Loans, advances under Letters of Credit, or advances to
pay Bank Expenses.

               Affiliate means, with respect to any Person, (a) any officer,
director or managing member of such Person, (b) any Subsidiary of such Person,
(c) any other Person (other than a Subsidiary) that, (i) directly or indirectly
through one or more intermediaries, controls or is controlled by, or is under
common control with, such Person, (ii) directly or indirectly beneficially owns
or holds twenty percent (20%) or more of any class of Voting Stock of such
Person or any Subsidiary of such Person, or (iii) twenty percent (20%) or more
of the Voting Stock of which is directly or indirectly beneficially owned or
held by such Person or a Subsidiary of such Person, and (d) without limiting the
foregoing, with respect to any Obligor, each other Obligor. The term "control"
means the possession directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through ownership
of the Voting Stock, by contract or otherwise.

               Agreement means this Loan and Security Agreement.
<PAGE>

                  Applicable Law means, with respect to any Person, all
provisions of constitutions, statutes, regulations and orders of any
Governmental Authority applicable to such Person or its property, including,
without limitation, all orders and decrees of all courts and arbitrators in
proceedings or actions to which such Person is a party. In respect of contracts
relating to interest or finance charges that are made or performed in the
Commonwealth of Pennsylvania, "Applicable Law" shall mean the laws of the U.S.,
including without limitation 12 U.S.C. (S)(S) 85 and 86(a), as amended from time
to time, and any other statute of the U.S. now or at any time hereinafter
prescribing the maximum rates of interest on loans and extensions of credit, and
the laws of the Commonwealth of Pennsylvania.

                  Applicable Margin is equal to the percent per annum in excess
of the Base Rate or LIBOR Rate as set forth in the following pricing matrix:

<TABLE>
<CAPTION>
                      Ratio of                    Revolving                    Term
                       Funded                  Credit Facility                 Loan
                                             -------------------         ----------------
                       Debt to                 Base      LIBOR            Base    LIBOR
Level                  EBITDA       Rate +     Rate+     Rate+            Rate+
-----              ---------------- ------     -----     -----            -----
<S>               <C>               <C>        <C>      <C>              <C>
Level I **3.50:1                     .75%     3.00%      1.25%             3.50%

Level II         ** 3.00 * 3.50:1              .50%      2.75%             1.00%      3.25%

Level III        ** 2.50:1 * 3.00: 1           .25%      2.50%              .75%      3.00%

Level IV         *  2.00:1 * 2.50:1            .00%      2.25%              .50%      2.75%

Level V   * 2.00:1                             .00%      2.00%              .25%      2.50%
</TABLE>

** denotes greater than or equal to
*  denotes less than

From the Closing Date through the date of receipt of the fiscal year-end March
31, 2001 audited consolidated financial statements of Borrowers, the Applicable
Margin for Advances under the Revolving Credit Facility and the Term Loan shall
be the Applicable Margin set forth on Level III in the above-described pricing
matrix. Thereafter, the Applicable Margin will be based upon the ratio of Funded
Debt of Borrowers to EBITDA of Borrowers on an annual basis as reflected on the
year-end audited consolidated financial statements of Borrowers delivered to
Bank pursuant to Section 15.1 for each fiscal year ending after March 31, 2001,
                 ------------
provided, however, if the year end financial statements are not delivered at the
--------  ------
time specified in Section 15.1 below, then the Applicable Margin for any given
                  ------------
kind of Loan shall be the highest Applicable Margin set forth above for such
kind of Loan during any period that the Borrowers are delinquent in the delivery
of such financial statements. The adjustment in the Applicable Margin, if any,
will be effective five (5) Business Days after receipt by Bank of the
consolidated financial statements of Borrowers delivered to Bank pursuant to
Section 15.1 below. There shall be no reduction in the Applicable Margin if (a)
------------
a Default or an Event of Default has occurred and is continuing uncured; (b)
Borrowers have not averaged at least $1,000,000.00 of Excess Availability under
the Revolving Credit Facility for the 30 days immediately preceding the date of
such reduction; or (c) Borrowers do not have at least $1,000,000.00 of Excess
Availability under the Revolving Credit Facility on the date of such reduction.

                                       2
<PAGE>

                 Assignment of Patents, Trademarks, Licenses and Copyrights
means the collateral assignments of patents, trademarks, licenses and copyrights
of even date herewith executed by each Obligor in favor of Bank as security for
the Obligations.

                 Availability means, as of the date of determination, the result
(so long as such result is a positive number) of (a) the lesser of (i) the
Borrowing Base, or (ii) the Maximum Revolving Credit Facility Amount; less (b)
                                                                      ----
the Revolving Credit Facility Usage.

                 Average Unused Portion of Maximum Revolving Credit Facility
Amount means, as of any date of determination, (a) the Maximum Revolving Credit
Facility Amount, less (b) the sum of (i) the average Daily Balance of Advances
that were outstanding under the Revolving Credit Facility during the immediately
preceding month, plus (ii) the average Daily Balance of the undrawn principal
amount of Letters of Credit that were outstanding during the immediately
preceding month.

                 Bank means Mellon Bank, N.A., a national banking association,
its successors and assigns.

                 Bank Expenses has the meaning set forth in Section 18.12.
                                                            -------------

                 Bankruptcy Code means the United States Bankruptcy Code (11
U.S.C.(S)101 et seq.), as amended, and any successor statute.
             -- ---

                 Base Rate means the higher of (a) the Bank's Prime Rate in
effect from time to time, or (b) the effective Federal Funds Rate in effect from
time to time plus .50% per annum, with changes in each case to take effect
immediately upon any change in the Prime Rate or the Federal Funds Rate as
applicable.

                 Base Rate Loan means Advances made under the Revolving Credit
Facility or the Term Loan bearing interest at the Base Rate plus Applicable
Margin.

                 Base Rate Loan Request has the meaning set forth in Section
                                                                     -------
3.2(a)
------

                 Benefit Plan means a "defined benefit plan" (as defined in
Section 3(35) of ERISA) for which any Obligor, any Subsidiary of any Obligor, or
any ERISA Affiliate has been an "employer" (as defined in Section 3(5) of ERISA)
within the past six years.

                 Blocked Account Agreement means an agreement between any
Borrower, Bank and a depository institution at which any Borrower maintains a
deposit account into which cash, checks or drafts constituting proceeds of such
Borrower's Accounts or Inventory are to be deposited as provided in this
Agreement, in form and content satisfactory to Bank, limiting the transfer of
funds in such deposit account solely as directed by Bank.

                 Books means all of a Person's books and records, including
without limitation, ledgers; records indicating, summarizing, or evidencing such
Person's properties or assets (including the

                                       3
<PAGE>

Collateral) or liabilities; all information relating to such Person's business
operations or financial condition; and all computer programs, disk or tape
files, printouts, runs or other computer prepared information.

                 Borrowers means DrugMax and Valley, collectively, and their
successors and assigns. Borrower means DrugMax and Valley, individually, and
their individual successors and assigns.

                 Borrowing Base has the meaning set forth in Section 2.3
                                                             -----------

                 Borrowing Base Certificate means the borrowing base certificate
prepared by the Borrowers and submitted to Bank in the form of Exhibit E
                                                               ---------
attached hereto.

                 Business means the wholesale distribution of pharmaceutical
products, including over-the-counter pharmaceutical products, health and beauty
care products, and nutritional supplements.

                 Business Day means any day that is not a Saturday, Sunday, or
other day on which commercial banks in Pennsylvania are authorized or required
to close.

                 Capital Expenditures means any expenditure that would be
classified as a capital expenditure in accordance with GAAP.

                 Capital Stock means corporate stock and any and all shares,
partnership interests, limited partnership interests, membership interests,
equity interests, rights, securities or other equivalent evidences of ownership
(however designated) issued by any entity (whether a corporation, partnership,
limited liability company, limited partnership, business trust or other type of
entity).

                 Capitalized Lease means any lease of Property, the obligations
for the rental of which are required to be capitalized in accordance with GAAP.

                 Capitalized Lease Obligations means all amounts payable with
respect to a Capitalized Lease.

                 Cash Collateral Account has the meaning set forth in Section in
Section 10.8(c)
--------------

                 Change of Control shall be deemed to have occurred at such time
                 -----------------
as (a) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2)
of the Securities Exchange Act of 1934), other than one or more of the members
of the Management Group, becomes the "beneficial owner" (as defined in Rule 13d-
3 under the Securities Exchange Act of 1934), directly or indirectly, of more
than 51% of the total Voting Stock then outstanding of DrugMax or of more than
51% of the total Capital Stock then outstanding of DrugMax; (b) DrugMax ceases
to own 100% of all Voting Stock and Capital Stock of Valley; (c) DrugMax ceases
to own 100% of all Voting Stock and Capital Stock of Desktop; and (d) DrugMax
ceases to own 70% of all Voting Stock and Capital Stock of VetMall.

                 Closing Date means the date of this Agreement.

                                       4
<PAGE>

                 Collateral has the meaning set forth in Section 10.7
                                                         ------------

                 Collateral Access Agreement means a landlord waiver, mortgagee
waiver, bailee letter, or acknowledgment agreement of any warehouseman,
processor, lessor, consignee, or other Person in possession of, having a Lien
upon, or having rights or interests in any Obligor's Equipment, Inventory or
Books, in each case, in form and substance satisfactory to Bank.

                 Compliance Certificate means a certificate substantially in the
form of Exhibit A and delivered by the chief executive officer or chief
        ---------
financial officer of Borrowers, to Bank, as required under Section 15.10.
                                                           -------------

                 Contract Period means the period of time commencing on the date
of this Agreement and expiring on October 24, 2003.

                 Controlled Substance has the meaning given in Section 802(6) of
                                                               --------------
Title 21, United States Code (U.S.C.), as amended.

                 Current Assets at a particular date means the aggregate amount
of all assets of Borrowers which would be classified as current assets on a
consolidated balance sheet of Borrowers at such date, in accordance with GAAP,
including without limitation all cash, marketable securities, mutual funds,
treasury bills and other investment property.

                 Current Liabilities at any particular date means the
liabilities (including tax and other proper accruals) of Borrowers which would
be included as current liabilities on a consolidated balance sheet of Borrowers
at such date, in accordance with GAAP, including in all cases the outstanding
principal balance of the Revolving Credit Facility.

                 Current Ratio means the ratio of Current Assets to Current
Liabilities.

                 Daily Balance means the amount of an Obligation owed at the end
of a given day.

                 Default means an event, condition or default that, with the
giving of notice, the passage of time, or both, would be an Event of Default.

                 Default Rate has the meaning set forth in Section 7.8.
                                                           -----------

                 Desktop means Desktop Media Group, Inc., a Florida corporation.

                 Disbursement Letter means an instructional letter executed and
delivered by Borrowers to Bank regarding the extensions of credit to be made on
the Closing Date, the form and substance of which shall be satisfactory to Bank.

                 Dollars or $ means freely transferable U.S. Dollars.

                 Draw Amount has the meaning set forth in Section 6.7.
                                                          -----------

                                       5
<PAGE>

                 EBITDA, shall mean for any period, without duplication, the Net
Income of Borrowers (exclusive of extraordinary gains) for such period, plus the
                                                                        ----
aggregate amounts deducted in determining such Net Income in respect of (i)
Interest Expense, (ii) Tax Expense, and (iii) depreciation and amortization
expenses for such period, each determined on a consolidated basis and in
accordance with GAAP.

                 Eligible Accounts means Accounts owed to a Borrower in which
Bank has a prior, perfected first priority lien, which have been due no more
than ninety (90) days from the original invoice date, are not subject to
offsets, deductions, counterclaim, discount, credit, charge back, freight claim,
allowance or adjustment, and which are and at all times continue to be
acceptable to Bank in all respects; provided, however, that standards of
                                    --------  -------
eligibility may be fixed and revised from time to time by Bank in its
discretion. Eligible Accounts shall not include:

                         (a)   Accounts with 30-day payment terms which have
been due more than the lesser of (i) 60 days from the due date, or (ii) 90 days
from the original invoice date;

                         (b)   Accounts with 7- or 15-day payment terms which
have been due more than the lesser of (i) 45 days from the due date, or (ii) 60
days from the original invoice date;

                         (c)   Accounts which are evidenced by a note, chattel
paper or instrument, unless Bank has a valid perfected first priority security
interest in such note, chattel paper or instrument;

                         (d)   Accounts which are evidenced by judgments;

                         (e)   Accounts with respect to which the applicable
Borrower does not have absolute title;

                         (f)   any Account which is subject to an unresolved
dispute with the Account Debtor;

                         (g)   Accounts with respect to which the Account
Debtors are not Solvent or are subject to a bankruptcy or similar proceeding;

                         (h)   Accounts with respect to which the Account Debtor
is another Obligor, an Affiliate of any Obligor or an Affiliate of any member,
officer or director of any Obligor;

                         (i)   Accounts arising with respect to goods which have
not been shipped or services not performed, conditional sales, sale on approval,
sales subject to repurchase or return, consignment sales, or similar
transactions in which the sale to or the obligation of the Account Debtor to pay
is contingent;

                                       6
<PAGE>

                         (j)      non-trade receivables;

                         (k)      contra-accounts;

                         (l)      Accounts subject to the Assignment of Claims
Act of 1940, as amended from time to time, or any Applicable Law now or
hereafter existing similar in effect thereto, or to any other prohibition (under
Applicable Law, by contract or otherwise) against its assignment or requiring
notice of or consent to such assignment, unless all such required notices have
been given, all such required consents have been received and all other
procedures have been complied with that such receivable shall have been duly and
validly assigned to Bank, in form and content satisfactory to Bank;

                         (m)      Accounts which are not subject to a valid and
perfected first priority security interest in favor of Bank;

                         (n)      finance charges;

                         (o)      lease receivables;

                         (p)      Accounts owed by a Person if fifty percent
(50%) or more of such Person's Accounts owed to any Borrower have been due more
than ninety (90) days past the original invoice date or would be deemed
ineligible as a result of subsections (a) or (b) above;
                          ----------------------

                         (q)      Accounts subject to a Lien in favor of any
Person (other than Bank);

                         (r)      Accounts concentrated in individual Account
Debtors which exceed 25% of all then Eligible Accounts;

                         (s)      an Account not evidenced by an invoice;

                         (t)      Accounts with respect to which the applicable
Borrower is in breach of any express or implied representation or warranty with
respect to the goods or services the sale of which gave rise to such Account or
in breach of any representation or warranty, covenant or other agreement
contained in the Loan Documents with respect to such Account;

                         (u)      Accounts arising with respect to bill-and-hold
sales, unless the applicable Borrower has received and delivered to Bank a bill-
and-hold agreement in form and content acceptable to Bank;

                         (v)      Accounts with respect to which the Account
Debtor is located outside the United States or which are payable in a currency
other than U.S. Dollars, unless payment of such

                                       7
<PAGE>

Accounts is fully secured by a letter of credit in form and content and issued
by a commercial bank reasonably acceptable to Bank;

                         (w)      Accounts arising with respect to sales in any
state or jurisdiction in which the applicable Borrower is not properly licensed
(if required by applicable law) as a wholesale distributor of pharmaceuticals,
dangerous drugs or Controlled Substances; and

                         (x)      Accounts with respect to which the Account
Debtor is determined by Bank in its discretion to be ineligible for any other
reason.

                 Eligible Inventory means FIFO Inventory of a Borrower
consisting of first quality finished goods held for sale in the ordinary course
of such Borrower's business, which are and at all times continue to be
acceptable to Bank in all respects; provided, however, that standards of
                                    --------  -------
eligibility may be fixed and revised from time to time by Bank in its
discretion. An item of Inventory shall not be included in Eligible Inventory if:

                         (a)      it is or contains a Controlled Substance;

                         (b)      it is not of good and merchantable quality,
free from any material defects or damage;

                         (b)      it is subject to any licensing, patent,
royalty, trademark, tradename, copyright or other agreement with any third
parties which restricts Bank's right as a secured party to sell such Inventory
after an Event of Default;

                         (c)      it consists of goods held on consignment by
any Borrower or delivered by any Borrower to a third Person for sale by such
third Person on consignment for such Borrower;

                         (d)      the applicable Borrower does not have good,
valid and marketable title thereto;

                         (e)      it is not located at an Eligible Inventory
Location;

                         (f)      if the Inventory is not located on premises
owned by the applicable Borrower, it is not segregated or otherwise separately
identifiable from goods of others, if any, stored on such premises;

                         (g)      it is not subject to a valid and perfected
first priority security interest in favor of the Bank;

                                       8
<PAGE>

                         (h)      it consists of goods returned or rejected by a
Borrower's customers, or goods classified as "return to vendor", unless such
goods are resaleable in the ordinary course of business;

                         (i)      it is obsolete or custom item which is not
saleable in the ordinary course of business, or constitutes repair or
replacement machine parts, packaging and shipping materials or supplies used or
consumed in a Borrower's business;

                         (j)      it is subject to a Lien in favor of any Person
(other than Bank);

                         (k)      it consists of bill-and-hold goods;

                         (m)      it is slow-moving, as determined by Bank in
good faith;

                         (n)      it consists of raw materials or work-in-
process;

                         (o)      it consists of finished goods which do not
meet the specifications of the applicable purchase order and cannot be easily
resold in the ordinary course of business;

                         (p)      it consists of goods produced in violation of
the Fair Labor Standards Act and subject to the so-called "hot goods" provision
in Title 29 U.S.C. Section 215(a);

                         (q)      it consists of goods that are expired; or

                         (r)      it consists of goods for which Bank would need
a registration, license, permit or consent of another Person to sell or dispose
of, other than registrations, licenses, permits or consents to be a wholesale
distributor of pharmaceuticals, dangerous drugs, prescription drugs or
Controlled Substances.

                 Eligible Inventory Buy-Back Agreement means an agreement in
form and content acceptable to Bank pursuant to which a supplier or a publically
owned wholesaler of Inventory, whose creditworthiness is acceptable to Bank,
agrees to unconditionally repurchase from the applicable Borrower and from Bank
as a secured party the Inventory of such Borrower at a price greater than 80% of
the cost of such Inventory including all shipping, restocking and other charges.

                 Eligible Inventory Locations means each of the locations
 described on Schedule 11.29(b), as such Schedule 11.29(b) may be amended from
              -----------------          -----------------
 time to time pursuant to Section 11.29(c).
                          ----------------

                 Environmental Agreement means that certain Environmental
Agreement executed of even date with this Agreement by the Obligors in favor of
Bank.

                                       9
<PAGE>

                 Equipment means all of a Person's present and hereafter
acquired cars, trucks, vehicles, machinery, machine tools, motors, equipment,
furniture, furnishings, fixtures, trailers, tools, dies, jigs, molds, parts,
goods (other than consumer goods, farm products, or Inventory), wherever
located, including, without limitation (a) any interest of such Person in any of
the foregoing, and (b) all attachments, accessories, accessions, replacements,
substitutions, additions, and improvements to any of the foregoing.

                 ERISA means the Employee Retirement Income Security Act of
1974, 29 U.S.C.(S)(S)1000 et seq., amendments thereto, successor statutes, and
regulations or guidance promulgated thereunder.

                 ERISA Affiliate means (a) any Person subject to ERISA whose
employees are treated as employed by the same employer as the employees of any
Obligor under IRC Section 414(b), (b) any trade or business subject to ERISA
whose employees are treated as employed by the same employer as the employees of
any Obligor under IRC Section 414(c), (c) solely for purposes of Section 302 of
ERISA and Section 412 of the IRC, any Person subject to ERISA that is a member
of an affiliated service group of which any Obligor is a member under IRC
Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section
412 of the IRC, any Person subject to ERISA that is a party to an arrangement
with any Obligor and whose employees are aggregated with the employees of any
Obligor under IRC Section 414(o).

                 ERISA Event means (a) a Reportable Event with respect to any
Benefit Plan or Multiemployer Plan, (b) the withdrawal of any Obligor, any of
its Subsidiaries or ERISA Affiliates from a Benefit Plan during, a plan year in
which it was a "substantial employer" (as defined in Section 4001(a)(2) of
ERISA), (c) the providing of notice of intent to terminate a Benefit Plan in a
distress termination (as described in Section 4041(c) of ERISA), (d) the
institution by the PBGC of proceedings to terminate a Benefit Plan or
Multiemployer Plan, (e) any event or condition (i) that provides a basis under
Section 4042(a)(1), (2), or (3) of ERISA for the termination of, or the
appointment of a trustee to administer, any Benefit Plan or Multiemployer Plan,
or (ii) that may result in termination of a Multiemployer Plan pursuant to
Section 4041A of ERISA, (or the partial or complete withdrawal within the
meaning of Sections 4203 and 4205 of ERISA, of any Obligor, any of its
Subsidiaries or ERISA Affiliates from a Multiemployer Plan, or (g) providing any
security to any Plan under Section 401(a)(29) of the IRC by any Obligor or any
of its Subsidiaries or any of their ERISA Affiliates.

                 Event of Default has the meaning set forth in Section 18.1.
                                                               ------------

                 Excess Availability means, as of any date of determination, the
excess, if any, of (i) Availability under the Revolving Credit Facility on such
date, minus (ii) the aggregate amount of all accounts payable of Borrowers which
      -----
are then more than 30 days past due.

                 Federal Funds Rate means the daily rate of interest announced
from time to time by the

                                      10
<PAGE>

Board of Governors of the Federal Reserve System in publication H.15 as the
"Federal Funds Rate."

                 FEIN means Federal Employer Identification Number.

                 Financial Asset means any financial asset, now owned or
hereafter acquired that is classified as a "financial asset" pursuant to Chapter
8 (or Article 8) of the UCC.

                 Funded Debt shall mean without duplication, all Indebtedness of
Borrowers for borrowed money, and all guaranties of Borrowers of any or all of
the foregoing. Funded Debt shall include, without limitation, all Subordinated
Indebtedness of Borrowers and Capitalized Lease Obligations of Borrowers.

                 Funding Date means the date, which must be a Business Day, on
which the funding of an Advance occurs.

                 GAAP means generally accepted accounting principles in the
United States of America, in effect from time to time, consistently applied and
maintained.

                 General Intangibles means all of a Person's present and future
general intangibles and other personal property (including contract rights,
rights arising under common law, statutes, or regulations, licenses, lease
rights, permits, approvals, choses or things in action, goodwill, trade secrets,
methods, processes, know-how, formulas, label designs, domain names, domain name
registrations, patents, patent rights and applications, trade names, brand
names, logos, inventions, trademarks and registrations or applications therefor,
servicemarks and registrations or applications therefor, copyrights and
registrations or applications therefor, blueprints, plans, patterns, drawings,
specifications, designs, manufacturing or processing rights, purchase orders,
customer lists, monies due or recoverable from pension funds, route lists,
rights to payment and other rights under any royalty or licensing agreements,
infringement claims, software and computer programs, information contained on
computer disks or tapes, literature, reports, catalogs, deposit accounts,
insurance premium rebates, tax refunds, tax refund claims, government subsidy
payments, databases, all notes and records with respect to any research and
development and all physical embodiments of the foregoing), other than
Inventory, Accounts, Equipment and Negotiable Collateral. General Intangibles
shall also include, without limitation, all assets necessary to the operation
and maintenance of all present and future websites, including without
limitation, all equipment, lease agreements, hosting agreements, line leases,
intellectual property, copyrights, patents, trademarks, software licenses and
general intangibles, and all intellectual property assets described on Schedule
                                                                       --------
11.18.
------

                 Governing Documents means the certificate or articles of
incorporation, by-laws, partnership agreement, joint venture agreement,
operating agreement or other organizational or governing documents of any
Person.

                                      11
<PAGE>

          Governmental Authority means any nation or government, any federal,
state, county, municipal, parish, provincial or other political subdivision
thereof and any department, commission, board, court, agency or other
instrumentality or entity exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government.

          Guarantor means each of (a) Desktop, (b) VetMall, and (c) each other
Person who shall become a "Guarantor" pursuant to or as required under Section
                                                                       -------
12.18, and their respective successors and assigns.
-----

          Indebtedness, as applied to a Person, means:

               (a)  all items (except items of capital stock or of surplus)
which in accordance with GAAP would be included in determining total liabilities
as shown on the liability side of a balance sheet of such Person as at the date
as of which Indebtedness is to be determined;

               (b)  to the extent not included in the foregoing, all
indebtedness, obligations, and liabilities secured by any mortgage, pledge,
lien, conditional sale or other title retention agreement or other security
interest to which any property or asset owned or held by such Person is subject,
whether or not the indebtedness, obligations or liabilities secured thereby
shall have been assumed by such Person; and

               (c)  to the extent not included in the foregoing, all
indebtedness, obligations and liabilities of others which such Person has
directly or indirectly guaranteed, endorsed (other than for collection or
deposit in the ordinary course of business), sold with recourse, or agreed
(contingently or otherwise) to purchase or repurchase or otherwise acquire or in
respect of which such Person has agreed to supply or advance funds (whether by
way of loan, stock purchase, capital contribution or otherwise) or otherwise to
become directly or indirectly liable.

          Indemnified Parties has the meaning set forth in Section 19.
                                                           ----------

          Interest Expense as applied to Borrowers means for any period, the
amount of interest expense on Indebtedness of Borrowers for such period,
determined in accordance with GAAP.

          Inventory means all present and future inventory in which a Person has
any interest, including goods held for sale or lease or to be furnished under a
contract of service and all of such Person's present and future raw materials,
work in process, finished goods, packaging, packing and shipping materials,
goods used or consumed in the Person's business, component parts, supplies and
returned, rejected or repossessed goods, wherever located.

                                      12
<PAGE>

          Inventory Reserves means reserves (determined from time to time by
Bank in its discretion) for the estimated costs relating to unpaid freight
charges, warehousing or storage charges, taxes, duties, processing charges,
handling charges and other similar unpaid costs associated with any Borrower's
Inventory.

          Investment Property means any investment property, now owned or
hereafter acquired, that is classified as "investment property" pursuant to the
UCC.

          IRC means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.

          Lease means any lease of real estate under which any Obligor is the
lessee.

          Leasehold Property means any real estate which is the subject of a
Lease.

          Letters of Credit means the Standby Letters of Credit and the
Merchandise Letters of Credit issued by Bank pursuant to this Agreement.

          LIBOR Loan Request  has the meaning set forth in Section 3.2 (a).
                                                           ---------------

          LIBOR Rate means with respect to any Advance under the Revolving
Credit Facility or the Term Loan accruing interest at a LIBOR Rate plus
Applicable Margin as permitted hereunder, for any day during each Rate Period,
the per annum rate of interest (computed on a basis of a year of 360 days and
actual days elapsed) determined by Bank to be equal to the quotient of (a) the
per annum rate of interest estimated in good faith by Bank in accordance with
its usual procedures (which determination shall be conclusive) to be the average
of the rate per annum for deposits, in an amount denominated in U.S. Dollars
comparable to the amount of principal relating to such Rate Period and having
maturities comparable to such Rate Period, offered to major money center banks
in the London interbank market as referenced by Reuters Screen "LIBOR" at or
about 11:00 a.m., London time, two (2) London business days prior to such Rate
Period, divided by (b) a number equal to 1.00 minus the LIBOR Reserve Percentage
for the relevant Rate Period. In the event that the LIBOR Rate is unavailable or
cannot be ascertained, Bank will have the right to designate the LIBOR Rate on
such basis as it shall reasonably determine.

          LIBOR Rate Loan means any Advance under the Revolving Credit Facility
or the Term Loan bearing interest at the LIBOR Rate plus Applicable Margin.

          LIBOR Rate Notification means a written notification from Borrower to
be delivered to Bank electing to convert an existing Base Rate Loan to a LIBOR
Rate Loan or to continue an existing LIBOR Rate Loan as a new LIBOR Rate Loan
for an additional Rate Period, in the form of Exhibit B attached hereto.
                                              ---------

          LIBOR Reserve Percentage means the maximum rate at which reserves
(including any marginal, supplemental or emergency reserves) are required to be
maintained during the relevant Rate

                                      13
<PAGE>

Period under Regulation D (and/or other similar regulation) of the Board of
Governors of the Federal Reserve System against "Eurocurrency Liabilities" (as
such term is used in Regulation D). Without limiting the effect of the
foregoing, the LIBOR Reserve Percentage shall reflect any other reserves
required to be maintained by reason of any regulatory change against (a) any
category of liabilities which includes deposits by reference to which the LIBOR
Rate is to be determined as provided in the definition of "LIBOR Rate" or (b)
any category of extensions of credit or other assets which include loans, the
interest rate of which is based on the LIBOR Rate.

          Licenses means all licenses, permits, consents, approvals and
authorizations issued by a Governmental Authority with respect to or in
connection with the operation of the Borrowers' Business.

          Lien means any interest in property securing an obligation owed to, or
a claim by, any Person other than the owner of the property, whether such
interest shall be based on the common law, statute, or contract, whether such
interest shall be recorded, published, registered or perfected, and whether such
interest shall be contingent upon the occurrence of some future event or events
or the existence of some future circumstance or circumstances, including the
lien or security interest arising, from a mortgage, debenture, charge, deed of
trust, encumbrance, pledge, assignment, deposit arrangement, security agreement,
adverse claim or charge, conditional sale or trust receipt, or from a lease,
consignment, or bailment for security purposes and also including reservations,
exceptions, encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases, and other title exceptions and encumbrances affecting any
real property.

          Loan Account has the meaning set forth in Section 8.15.
                                                    ------------

          Loan Documents means this Agreement, any Notes executed by Borrowers
and payable to Bank, the Pledge Agreements, the Environmental Agreement, the
Disbursement Letter, the Letters of Credit, the Subordination Agreements, each
Surety Agreement, the Assignment of Patents, Trademarks, Licenses and Copyrights
and any other assignment or other agreement entered into, now or in the future,
in connection with this Agreement, the Obligations or any of the transactions
contemplated hereunder.

          Loan Request means a Base Rate Loan Request or a LIBOR Rate Loan
Request.

          Loans means all Advances outstanding under the Revolving Credit
Facility and the Term Loan, including without limitation Base Rate Loans and
LIBOR Rate Loans.

          Management Group means collectively (a) Jugal K. Taneja, (b) William
L. LaGamba, (c) Stephen M. Watters, and (d) Ronald J. Patrick.

                                      14
<PAGE>

          Material Adverse Change means (a) a material adverse change, as
determined by Bank in good faith, in the business, operations, results of
operations, assets, liabilities or condition (financial or otherwise) of any
Obligor, (b) the material impairment, as determined by Bank in good faith, of
any Obligor's ability to perform its obligations under the Loan Documents to
which it is a party or of the Bank's ability to enforce the Obligations of the
Loan Documents or to realize upon the Collateral, (c) a material adverse effect,
as determined by Bank in good faith, on the value of the Collateral or the
amount that Bank would be likely to receive (after giving consideration to
delays in payment and costs of enforcement) in the liquidation of such
Collateral, or (d) a material impairment, as determined by Bank in good faith,
of the priority of the Liens in favor of Bank with respect to the Collateral.

          Maximum Revolving Credit Facility Amount means $15,000,000.00.

          Merchandise Letter of Credit means a documentary Letter of Credit
issued by Bank to support the purchase by a Borrower of Inventory prior to
transit to an Eligible Inventory Location, that provides that all draws
thereunder must require presentation of customary documentation (including, if
applicable, commercial invoices, packing list, certificate of origin, bill of
lading or airway bill, customs clearance documents, quota statement, inspection
certificate, beneficiaries statement, and bill of exchange, bills of lading,
dock warrants, dock receipts, warehouse receipts, or other documents of title)
in form and substance satisfactory to Bank and reflecting the passage to such
Borrower of title to first quality Inventory conforming to such Borrower's
contract with the seller thereof.

          Multiemployer Plan means a "multiemployer plan" (as defined in Section
4001(a)(3) of ERISA) to which any Obligor, any of its Subsidiaries, or any ERISA
Affiliate has contributed, or was obligated to contribute, within the past six
years.

          Negotiable Collateral means all of a Person's present and future
letters of credit, notes, drafts, instruments, Investment Property, Financial
Assets, Capital Stock of direct and indirect Subsidiaries of Borrower,
documents, personal property leases (wherein such Person is the lessor), chattel
paper, and such Person's Books relating to any of the foregoing.

          Net Income means income (or loss) after Tax Expense and shall have the
meaning given such term by GAAP, provided that, there shall be specifically
                                 -------- ----
excluded therefrom (a) gains from the sale of capital assets, (b) net income of
any other Person in which the Person or Persons whose net income is being
determined has an ownership interest, unless received by the Person or Persons
whose net income is being determined in a cash distribution, and (c) any gains
arising from extraordinary items, as defined by GAAP.

          Net Worth shall mean, at any time, net worth as defined by GAAP.

          Non-Assignable Contracts has the meaning set forth in Section 10.1(e).
                                                                ---------------

          Notes means collectively the Revolver Note and Term Note executed and
delivered pursuant to Sections 2.2 and 4.2.
                      --------------------

                                      15
<PAGE>

          Obligations means all Loans, Advances, debts, principal, interest
(including any interest that, but for the provisions of the Bankruptcy Code,
would have accrued), contingent reimbursement obligations under any outstanding
Letters of Credit, indebtedness arising from any derivative transactions,
liabilities (including all amounts charged to the Loan Account pursuant hereto),
obligations, fees, charges, costs, or Bank Expenses (including any fees or
expenses that, but for the provisions of the Bankruptcy Code, would have
accrued), lease payments, guaranties, covenants, and duties owing by any Obligor
to Bank of any kind and description (whether pursuant to or evidenced by the
Loan Documents or pursuant to any other agreement between Bank and any Obligor,
and irrespective of whether for the payment of money), whether as principal or
surety, direct or indirect, absolute or contingent, due or to become due, now
existing or hereafter arising, and including any debt, liability, or obligation
owing from any Obligor to others that Bank may have obtained by assignment or
otherwise, and further including all interest not paid when due and all Bank
Expenses that any Obligor is required to pay or reimburse by the Loan Documents,
by law, or otherwise.

          Obligors means Borrowers and Guarantors, collectively. Obligor means
each Borrower and Guarantor, individually.

          Operating Agreement means any material equipment lease, advertising
contract, supply agreement, employment agreement, collective bargaining
agreement or other similar agreement or contract relating to the operation of
the Business.

          Out-Of-Formula Advance means the amount by which the then outstanding
Advances and the undrawn amount of Letters of Credit issued under the Revolving
Credit Facility exceed the Borrowing Base.

          Pay-Off Letter means a letter addressed to the appropriate Obligor and
to Bank executed by the applicable lender pursuant to which such lender agrees
to accept a fixed amount in full satisfaction of all obligations owed by such
Obligor to such lender, containing such wire instructions, releases and other
provisions as may be required by Bank.

          PBGC means the Pension Benefit Guaranty Corporation as defined in
Title IV of ERISA, or any successor thereto.

          Person means and includes natural persons, legal persons,
corporations, limited liability companies, limited partnerships, general
partnerships, limited liability partnerships, joint ventures, trusts, land
trusts, business trusts, or other organizations, irrespective of whether they
are legal entities, and any governments and agencies and political subdivisions
thereof.

          Plan means any employee benefit plan, program, or arrangement
maintained or contributed to by any Obligor or with respect to which it may
incur liability.

          Pledge Agreements means collectively the pledge agreements in form and
substance satisfactory to Bank of even date herewith pursuant to which all
Capital Stock in each Guarantor and

                                      16
<PAGE>

any other Subsidiaries of DrugMax are pledged to Bank as security for the
Obligations.

          Prime Rate means the annual interest rate established from time to
time by Bank and generally known by Bank as its "prime rate", whether published
by it publicly or only for the internal guidance of its loan officers. The Prime
Rate is used merely as a pricing index and is not and should not be considered
to represent the lowest or best rate available to a borrower.

          Property shall mean all types of real, personal or mixed property and
all types of tangible or intangible property.

          Rate Period means for any principal portion of the Revolving Credit
Facility or the Term Loan for which Borrowers elect a LIBOR Rate plus Applicable
Margin, the period of time for which such rate shall apply to such principal.
Rate Periods for principal accruing interest at the LIBOR Rate plus Applicable
Margin under the Revolving Credit Facility shall be for periods of one, two,
three, or six months and for no other length of time, provided that, no Rate
                                                      -------- ----
Period may extend beyond the expiration of the Contract Period. Rate Periods for
principal accruing interest at the LIBOR Rate plus Applicable Margin under the
Term Loan shall be for periods of one, two, three or six months and for no other
length of time, provided that, no Rate Period may extend beyond the Term Loan
                -------- ----
Maturity Date.

          Reportable Event means any of the events described in Section 4043(c)
of ERISA or the regulations thereunder.

          Reserves means reserves against Availability under the Revolving
Credit Facility, established by Bank at its discretion from time to time,
including without limitation, Inventory Reserves.

          Revolver Note has the meaning set forth in Section 2.2.
                                                     -----------

          Revolving Credit Facility means the revolving credit facility
established for Borrowers under this Agreement.

          Revolving Credit Facility Usage means as of the date of determination,
the aggregate amount of (a) all outstanding Advances under the Revolving Credit
Facility, and (b) the outstanding undrawn amount of all outstanding Letters of
Credit.

          Solvent means, with respect to any Person on a particular date, that
on such date (a) at fair valuations, all of the properties and assets of such
Person are greater than the sum of the debts, including contingent liabilities,
of such Person, (b) the present fair salable value of the properties and assets
of such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured, (c) such Person is able to realize upon its properties and assets and
pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (d) such Person
does not intend to, and does not believe that it will, incur debts beyond such
Person's ability to pay as such debts mature or fall due, and (e) such Person is
not engaged in business or a transaction, and is not about to engage in business
or a

                                      17
<PAGE>

transaction, for which such Person's properties and assets would constitute
unreasonably small capital after giving due consideration to the prevailing
practices in the industry in which such Person is engaged. In computing the
amount of contingent liabilities at any time, it is intended that such
liabilities will be computed at the amount that, in light of all the facts and
circumstances existing at such time, represents the amount that reasonably can
be expected to become an actual or matured liability.

          Standby Letters of Credit means the standby letters of credit (not
Merchandise Letters of Credit) issued by Bank pursuant to this Agreement.

          Subordinated Indebtedness means Indebtedness of any Obligor which has
maturities and terms, and which is subordinated to payment of the Obligations in
a manner, approved in writing by Bank, and in each such case any renewals,
modifications or amendments thereof which are approved in writing by Bank.

          Subordination Agreements shall mean the subordination agreements from
each Obligor in favor of Bank.

          Subsidiary of a Person means a corporation, partnership, limited
liability company, or other entity in which that Person directly or indirectly
owns or controls the shares of Capital Stock having ordinary voting power to
elect a majority of the board of directors (or appoint other comparable
managers) of such corporation, partnership, limited liability company, or other
entity.

          Surety Agreement has the meaning set forth in Section 10.5
                                                        ------------

          Tax Expense as applied to Borrowers means for any period, the amount
of tax expense of Borrowers for such period, determined in accordance with GAAP.

          Term Loan has the meaning set forth in Section 4.1.
                                                 -----------

          Term Loan Maturity Date means October 24, 2003.

          Term Note has the meaning set forth in Section 4.2.
                                                 -----------

          U.S. means the United States of America.

          UCC means (i) the Uniform Commercial Code as adopted in Pennsylvania,
as it may be amended, revised or replaced from time to time, and (ii) the
Uniform Commercial Code as in effect from time to time in such other states as
any Collateral may be located, as and to the extent applicable.

          Value means (i) with respect to Eligible Inventory, the lower of cost
(determined on a first-in-first-out basis) or market value, determined in all
cases in accordance with GAAP, and (ii) with respect to Eligible Accounts, the
undisputed unpaid amount of such Eligible Account.

          VetMall means VetMall, Inc., a Florida corporation.

                                      18
<PAGE>

          Voting Stock means Capital Stock of a Person having ordinary voting
power for the election of the members of its board of directors or other
governing body of such Person.

               1.2  Accounting Terms and Determinations. Except as otherwise
                    -----------------------------------
provided in this Agreement, all computations and determinations as to accounting
or financial matters shall be made in accordance with GAAP, and all accounting
or financial terms shall have the meanings ascribed to such terms by GAAP as in
effect on the date of determination. All financial statements to be delivered
pursuant to this Agreement shall be prepared in accordance with GAAP.

               1.3  UCC. Any terms used in this Agreement that are defined in
                    ---
the UCC shall be construed and defined as set forth in the UCC unless otherwise
defined herein. To the extent that the definitions of any categories or types of
collateral are expanded in any revision to, amendment of or new version of the
UCC, such changed or expanded definitions will apply to this Agreement as of the
effective date of such revision, amendment or new statute.

               1.4  Construction. Unless the context of this Agreement clearly
                    ------------
requires otherwise, references to the plural include the singular, references to
the singular include the plural, the term "including" is not limiting, and the
term "or" has, except where otherwise indicated, the inclusive meaning
represented by the phrase "and/or." The words "hereof," "herein," "hereby,"
"hereunder," and similar terms in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement. An Event of Default
shall "continue" or be "continuing" until such Event of Default has been cured
or waived in writing by Bank. Section, subsection, clause, schedule, and exhibit
references are to sections, subsections, clauses, schedules and exhibits in this
Agreement unless otherwise specified. Any reference in this Agreement or in the
Loan Documents to this Agreement, any of the Loan Documents or any other
document or agreement shall include all alterations, amendments, changes,
extensions, modifications, renewals, replacements, substitutions, supplements,
and restatements thereto and thereof, as applicable.

               1.5  Schedules and Exhibits. All of the schedules and exhibits
                    ----------------------
attached to this Agreement, as they may from time to time be amended or
restated, shall be deemed incorporated herein by reference.

               1.6  Obligor's Knowledge. Any statements, representations or
                    -------------------
warranties that are based upon the best knowledge of any Obligor or an officer
thereof shall be deemed to have been made after due inquiry by such Obligor or
such officer, as applicable, with respect to the matter in question.

          2.   THE REVOLVING CREDIT FACILITY.
               -----------------------------

               2.1  The Facility. Subject to the terms and conditions of this
                    ------------
Agreement and the Loan Documents, Bank agrees to establish for Borrowers a
revolving credit facility (the "Revolving Credit Facility") pursuant to which
during the Contract Period, Bank agrees to extend to Borrowers

                                      19
<PAGE>

Advances under the Revolving Credit Facility and pursuant to which Bank agrees
to issue Letters of Credit for the account of Borrowers, provided that, the
                                                         -------- ----
Revolving Credit Facility Usage shall not exceed at any time the lesser of (a)
the Borrowing Base, or (b) the Maximum Revolving Credit Facility Amount.

               2.2  Revolver Note. Borrowers' obligation to repay Advances and
                    -------------
other extensions of credit under the Revolving Credit Facility shall be further
evidenced by a promissory note executed and delivered by Borrowers in the face
amount of the Maximum Revolving Credit Facility Amount payable to the order of
Bank (the "Revolver Note"), which shall be in a form acceptable to Bank.

               2.3  Borrowing Base. The "Borrowing Base" as of the applicable
                    --------------
date of determination shall be determined based upon the following advance rates
and calculations:

                    (a)  An advance rate of up to 85% of the Value of the
Borrowers' Eligible Accounts; plus
                              ----

                    (b)  An advance rate of up to 65% of the Value of the
Borrowers' Eligible Inventory not subject to an Eligible Inventory Buy-Back
Agreement; plus
           ----

                    (c)  An advance rate of up to 75% of the Value of the
Borrowers' Eligible Inventory subject to an Eligible Inventory Buy-Back
Agreement; minus
           -----

                    (d)  The total outstanding undrawn amount of all Letters
of Credit; minus
           -----

                    (e)  All Reserves.

          Notwithstanding the foregoing, there shall be no increase of the
advance rate for Eligible Inventory subject to an Eligible Inventory Buy-Back
Agreement from 65% to 75% (i) unless and until Bank has received the audited
annual financial statements required under Section 15.1 for the Borrowers and
                                           ------------
their Subsidiaries for the fiscal year ending March 31, 2001; or (ii) if a
Default or Event of Default has occurred.

          Percentages used from time to time in calculating the Borrowing Base
are for the sole purpose of determining the maximum amount of Advances under
Revolving Credit Facility that may be outstanding from time to time under this
Agreement and shall not be evidentiary of or binding upon the Bank with respect
to the market value or liquidation value of any Collateral. In the event that
Bank has any questions regarding the Borrowers' calculation of the Borrowing
Base, funding of Advances under the Revolving Credit Facility shall be subject
to a resolution of such questions to Bank's satisfaction. Any request for an
Advance under Revolving Credit Facility which, if funded, would result in the
unpaid balance

                                      20
<PAGE>

of an Advance under Revolving Credit Facility being in excess of the amount
allowed by this Agreement may be declined by Bank in its sole discretion without
prior notice.

               2.4  Sublimits.
                    ---------

                    (a)  Eligible Inventory Sublimit. Notwithstanding anything
                         ---------------------------
herein or elsewhere to the contrary, the maximum amount of Revolving Credit
Facility Usage based upon (i) the Eligible Inventory shall not exceed
$6,000,000.00 at any time, (ii) Eligible inventory subject to an Eligible
Inventory Buy-Back Agreement shall not exceed an amount to be determined by
Bank.

                    (b)  Letter of Credit Sublimit. Notwithstanding anything
                         -------------------------
herein or elsewhere to the contrary, the issuance of Letters of Credit under the
Revolving Credit Facility by the Bank is subject to the limitations set forth in
Section 6 below.
---------

                    (c)  Borrower Sublimits. Each Borrower will only be entitled
                         ------------------
to receive Advances under the Revolving Credit Facility based upon Availability
determined by such Borrower's Eligible Accounts and Eligible Inventory. Each
Borrower will submit separate Borrowing Base Certificates on a stand-alone
basis.

               2.5  Reserves. The amount of the Borrowing Base shall be reduced
                    --------
by Reserves established by Bank from time to time at Bank's discretion,
including without limitation Inventory Reserves. Such Reserves may be
established by Bank from time to time regardless of whether a Default or Event
of Default has occurred or is continuing.

               2.6  Reduction in Advance Rates. Notwithstanding anything herein
                    --------------------------
or elsewhere to the contrary, Bank may, in its sole discretion, from time to
time, among other permissible discretionary actions that Bank may take with
respect to the Revolving Credit Facility:

                    (a)  reduce the advance rate with respect to Eligible
Accounts, among other permissible reasons, to the extent that Bank determines
that: (i) the dilution with respect to Borrowers' Accounts for any period (based
on the ratio of (A) the aggregate amount of reductions in Accounts other than as
a result of payments in cash, to (B) the aggregate amount of total sales)
exceeds five percent (5%), in which case Bank shall reduce the advance rate
applicable to Eligible Accounts by one percent (1%) for each percent of such
dilution in excess of five percent (5%), or (ii) the general creditworthiness of
Account Debtors has declined; or

                    (b)  reduce the advance rate with respect to Eligible
Inventory, among other permissible reasons, to the extent that Bank determines
that: (i) the number of days of the turnover of the Inventory for any period has
changed in any material respect or (ii) the liquidation value of the Eligible

                                      21
<PAGE>

Inventory, or any category thereof, has decreased, or (iii) the nature and
quality of Inventory has deteriorated.

                    (c)  In determining whether to reduce the advance rate(s),
Bank may consider, among other factors, events, conditions, contingencies or
risks which are also considered in determining Eligible Accounts, Eligible
Inventory or in establishing Reserves.

          Notwithstanding anything herein or elsewhere to the contrary, Bank
may, after the occurrence of a Default or Event of Default, reduce the advance
rates with respect to Eligible Accounts and Eligible Inventory.

          3.   ADVANCES UNDER THE REVOLVING CREDIT FACILITY.
               --------------------------------------------

               3.1  General. Advances under the Revolving Credit Facility shall
                    -------
be made by Bank to Borrowers in accordance with the procedures set forth below.
Within the limitations set forth in this Agreement, Borrowers may borrow, repay
and reborrow under the Revolving Credit Facility.

               3.2  Borrowing Procedures.
                    --------------------

                    (a)  Form of Request. Borrowers may request an Advance under
                         ---------------
the Revolving Credit Facility by delivering to the officer of Bank designated
from time to time by Bank, a written Loan Request. Such written request for an
Advance shall be in the form of Exhibit C, if the request is for a Base Rate
                                ---------
Loan (a "Base Rate Loan Request"), or in the form of Exhibit D if the request is
                                                     ---------
for a LIBOR Rate Loan (a "LIBOR Loan Request"). Such Loan Request forms may be
in such other form as Bank may require from time to time upon notice to
Borrowers. Each Loan Request received by Bank shall be conclusively presumed to
be executed and delivered by a duly authorized officer or employee of Borrowers.
Once received by Bank, each Loan Request shall be deemed irrevocable.
Notwithstanding the foregoing, Borrowers may request a Base Rate Loan by a
telephone request to the offices of Bank designated from time to time by Bank.
Each telephone request received by Bank shall be conclusively presumed to be
made by a duly authorized officer or employee of Borrowers. Once received by
Bank, each telephone Loan Request shall be deemed irrevocable. Bank, at its
discretion, may require that each telephone Loan Request be confirmed promptly
by Borrowers in writing.

                    (b)  Availability. Availability under the Revolving Credit
                         ------------
Facility will be determined by Bank based upon information received by Bank and
upon the most recent Borrowing Base Certificate required under Section 15.4,
                                                               ------------
accompanied by the collateral and back-up information required under such
Section.

                    (c)  Timing of Request. Each Base Rate Loan Request must be
                         -----------------
received by Bank no later than 12:00 noon Eastern time on the requested Funding
Date. Each LIBOR

                                      22
<PAGE>

Rate Loan Request must be received by Bank no later than 12:00 noon Eastern time
three (3) Business Days prior to the requested Funding Date.

               3.3  Funding Procedure. Subject to the conditions set forth in
                    -----------------
this Agreement, Bank shall disburse Advances under the Revolving Credit Facility
to Borrowers by transferring into the applicable Borrower's operating account
maintained with Bank immediately available funds in the amount of such Advances,
or otherwise in accordance with procedures acceptable to Bank.

          4.   THE TERM LOAN.
               -------------

               4.1  Term Loan. Subject to the terms and conditions of this
                    ---------
Agreement and the Loan Documents, Bank agrees to extend to Borrowers a term loan
in the original principal amount of Two Million Dollars ($2,000,000.00) (the
"Term Loan").

               4.2  Term Note. Borrowers' obligations to repay the Term Loan
                    ---------
shall be further evidenced by a promissory note executed and delivered by
Borrowers to Bank in the face amount of $2,000,000.00 (the "Term Note") which
shall be in a form acceptable to Bank.

               4.3  Advance of the Term Loan. The proceeds of the Term Loan
                    ------------------------
shall be advanced at closing hereunder in accordance with such procedures as
Bank may require.

          5.   USE OF LOAN PROCEEDS. Borrowers agree to use Advances under the
               --------------------
Revolving Credit Facility and the proceeds of the Term Loan solely (a) to repay
existing Indebtedness, (b) to pay closing costs and expenses incurred by the
Obligors in connection with the transactions contemplated hereunder, and (c) to
provide for future working capital requirements and for other general corporate
purposes of Borrowers consistent with the terms and conditions of this
Agreement.

          6.   LETTERS OF CREDIT.
               -----------------

               6.1  General. Subject to the terms and conditions of this
                    -------
Agreement, Bank agrees to issue from time to time until the expiration of the
Contract Period, upon the written request of Borrowers, Letters of Credit for
the account of Borrowers. Such Letters of Credit shall be in form and content
acceptable to Bank.

               6.2  Conditions to Issuance. Bank shall have no obligation to
                    ----------------------
issue any Letter of Credit if:

                    (a)  the conditions set forth in Sections 16 and 17 have not
                                                     ------------------
been satisfied;

                                      23
<PAGE>

                    (b)  issuance of such Letter of Credit would violate the
terms of any contract, agreement or other document binding upon Bank or any
Borrower;

                    (c)  any order, judgment or decree of any court, arbitrator
or other governmental authority shall purport by its terms to enjoin or restrain
issuance of the Letter of Credit;

                    (d)  any law, rule, regulation or directive shall prohibit
issuance of the Letter of Credit or result in any liability of Bank as a result
of such issuance; or

                    (e)  Bank shall not have received the required issuance fee
set forth in Section 8.5.
             -----------

               6.3  Tenor. Each Standby Letter of Credit shall have a term not
                    -----
to exceed the earlier to occur of: (a) twelve (12) months, or (b) the expiration
date of the Contract Period. Each Merchandise Letter of Credit shall have a term
not to exceed the earlier to occur of: (a) ninety (90) days, or (b) the
expiration date of the Contract Period.

               6.4  Sublimits. Bank shall have no obligation (a) to issue any
                    ---------
Letters of Credit, if the aggregate outstanding undrawn amount of all Letters of
Credit would exceed $500,000.00; (b) to issue any Letter of Credit, if a Default
or Event of Default has occurred; or (c) to issue any Letter of Credit if the
Revolving Credit Facility Usage plus the amount of such new Letter of Credit to
be issued exceeds (i) the Borrowing Base (as reduced by all Reserves), or (ii)
the Maximum Revolving Credit Facility Amount.

               6.5  Procedure and Documentation. Each request for issuance of a
                    ---------------------------
Letter of Credit must be received at least three (3) Business Days prior to the
requested issuance and shall be accompanied by a duly executed letter of credit
application in the form required by Bank. Each application shall have noted
therein that the application is entered into in accordance with the terms of
this Agreement. Borrowers will execute and deliver to Bank such other documents
and agreements as may be reasonably required by Bank in connection with the
issuance of any Letter of Credit.

               6.6  Reduction of Availability. Availability under the Revolving
                    -------------------------
Credit Facility will be reduced by the total outstanding undrawn amount of all
Letters of Credit.

               6.7  Draws. If Bank receives a request for a draw under any
                    -----
Letter of Credit, Borrowers agree to pay to Bank on the day on which Bank shall
honor such draw request, the amount of such draw request (the "Draw Amount") in
immediately available funds. Unless Bank receives the Draw Amount in immediately
available funds on or before the day on which Bank honors such draw request, the
amount advanced by Bank to pay such draw shall be deemed to be a Base Rate Loan
under the Revolving

                                      24
<PAGE>

Credit Facility, without any requirement that Borrowers request such Loan or
otherwise comply with the Loan Request provisions set forth in this Agreement.

               6.8  Cash Collateral. In the event that the Revolving Credit
                    ---------------
Facility is terminated for any reason, the Contract Period expires or an Event
of Default occurs, Borrower will deposit with Bank immediately available funds
in an amount equal to 105% of the outstanding undrawn amount of all Letters of
Credit. Such funds and any proceeds of Collateral or other payments received by
Bank with respect to the Obligations after any such Event of Default, may be
held by Bank as cash collateral for the Obligations, including without
limitation, the Obligations of Borrowers to Bank related to the Letters of
Credit.

               6.9  Indemnification. Obligors hereby agree to indemnify, save,
                    ---------------
defend, and hold Bank harmless from any loss, cost, expense, or liability,
including payments made by Bank, expenses, and attorney's fees incurred by Bank
arising out of or in connection with any Letter of Credit, provided that,
                                                           -------------
Obligors shall not be obligated to indemnify Bank for any loss, cost, expense or
liability resulting from Bank's gross negligence or wilful misconduct. Obligors
understand and agree that Bank shall not be liable for any error, negligence, or
mistake, whether of omission or commission, in following any Borrower's
instructions or those contained in the Letter of Credit or any modifications,
amendments, or supplements thereto.

               6.10 Obligations Irrevocable. The obligations of Borrowers to
                    -----------------------
make payments to Bank of each Draw Amount shall be irrevocable and shall not be
subject to any qualification or exception whatsoever, including, without
limitation, any of the following circumstances:

                    (a)  any lack of validity or enforceability of any Letter of
Credit, any documents collateral to any Letter of Credit, this Agreement or any
of the other Loan Documents;

                    (b)  the existence of any claim, set-off, defense, or other
right which any Obligor may have at any time against a beneficiary named in a
Letter of Credit or any transferee of any Letter of Credit (or any Person for
whom any such beneficiary or transferee may be acting), Bank, or any other
Person, whether in connection with this Agreement, any Letter of Credit, the
transactions contemplated herein or any unrelated transactions (including any
underlying transactions between any Obligor or any other Person and the
beneficiary named in any Letter of Credit);

                    (c)  any draft, certificate, or any other document presented
under the Letter of Credit proving to be forged, fraudulent, invalid, or
insufficient in any respect or any statement therein being untrue or inaccurate
in any respect;

                    (d)  the surrender or impairment of any security for the
performance or observance of any of the terms of any of the Loan Documents;

                                      25
<PAGE>

                    (e)  the occurrence of any Default or Event of Default;

                    (f)  any amendment, modification, waiver, consent, or any
substitution, exchange or release of or failure to perfect any interest in
collateral or security, with respect to or under any Letter of Credit or any
documents collateral thereto;

                    (g)  payment by Bank to the beneficiary under any Letter of
Credit against presentation of documents which do not comply with the terms of
such Letter of Credit, including failure of any documents to bear any reference
or adequate reference to such Letter of Credit;

                    (h)  any failure, omission, delay or lack on the part of
Bank to enforce, assert or exercise any right, power or remedy conferred upon
Bank under this Agreement, any of the other Loan Documents, any of the Letter of
Credit or any documents collateral thereto or any other acts or omissions on the
part of Bank; or

                    (i)  any other event or circumstance that would, in the
absence of this Section 6.10, result in the release or discharge by operation of
                ------------
law or otherwise of any Obligor or any Person from the performance or observance
of any obligation, covenant or agreement contained herein.

No setoff, counterclaim, reduction or diminution of any obligation or any
defense of any kind or nature which any Obligor has or may have against the
beneficiary of any Letter of Credit shall be available hereunder to any Obligor
against Bank.

               6.11 Risk Under Letters of Credit.
                    ----------------------------

                    (a)  In the administration and handling of Letters of Credit
and any security therefor, or any documents or instruments given in connection
therewith, Bank shall have the sole right, in its discretion, to take or refrain
from taking any and all actions under or upon the Letters of Credit.

                    (b)  Subject to other terms and conditions of this
Agreement, Bank shall issue the Letters of Credit and shall hold the documents
related thereto in its own name and shall make all collections thereunder and
otherwise administer the Letters of Credit in accordance with Bank's regularly
established practices and procedures and Bank will have no further obligation
with respect thereto. In the administration of Letters of Credit, Bank shall not
be liable for any action taken or omitted in good faith reliance on the advice
of counsel, accountants, appraiser or other experts selected by Bank and Bank
may rely upon any notice, communication, certificate or other statement from the
Borrower, beneficiaries of Letters of Credit, or any other Person which Bank
believes to be authentic.

                                      26
<PAGE>

                    (c)  In connection with the issuance and administration of
Letters of Credit and the assignments hereunder, Bank makes no representation
and shall have no responsibility with respect to (i) the obligations of any
Obligor or any other Person or the validity, sufficiency or enforceability of
any document or instrument given in connection therewith, or the taking of any
action with respect to same, (ii) the financial condition of, any
representations made by, or any act or omission of, any Obligor, or any other
Person, or (iii) any failure or delay in exercising any rights or powers
possessed by Bank in its capacity as issuer of Letters of Credit in the absence
of its gross negligence or willful misconduct.

          7.   INTEREST RATE.
               -------------

               7.1  Interest Rate Options for the Revolving Credit Facility.
                    -------------------------------------------------------

                    (a)  General. The principal balance of the Revolving Credit
                         -------
Facility will accrue interest at the Borrowers' option (subject to the
limitations and conditions set forth herein) at (a) the Base Rate plus
Applicable Margin, or (b) the LIBOR Rate plus Applicable Margin. Borrowers may
request to have one or more portions of the outstanding balance of the Revolving
Credit Facility as hereinafter permitted, accrue interest, at a LIBOR Rate plus
Applicable Margin by giving Bank three (3) Business Days prior written notice in
the form of a Request for LIBOR Rate Loan (for new Advances) or a LIBOR Rate
Notification (for existing advances).

                    (b)  Certain Provisions Regarding Interest Rates. Borrowers
                         -------------------------------------------
understand and agree:

                         (i)    that subject to the provisions of this
Agreement, the Base Rate plus Applicable Margin and the LIBOR Rate plus
Applicable Margin may apply simultaneously to different parts of the outstanding
principal balance of the Revolving Credit Facility;

                         (ii)   that the LIBOR Rate plus Applicable Margin may
apply simultaneously to various portions of the outstanding principal balance of
the Revolving Credit Facility for various Rate Periods;

                         (iii)  that the LIBOR Rate plus Applicable Margin
applicable to one portion of the outstanding principal balance of the Revolving
Credit Facility or the Term Loan may be different from the LIBOR Rate plus
Applicable Margin applicable to a different portion of the outstanding principal
balance of the Revolving Credit Facility or the Term Loan;

                         (iv)   that LIBOR Rate Loans must be in minimum amounts
of $500,000 each and in increments of $100,000 above such minimum; and

                                      27
<PAGE>

                         (v)    that no more than an aggregate of four (4)
separate LIBOR Rate Loans under the Revolving Credit Facility and the Term Loan
shall be permitted to be outstanding at any one time.

                    (c)  Certain Limitations. The right of the Borrowers to
                         -------------------
elect a LIBOR Rate plus Applicable Margin shall be limited as follows:

                         (i)    Borrowers may not elect to borrow at or to
convert to LIBOR Rate plus Applicable Margin if at the time of such conversion
or election there shall exist a Default or an Event of Default.

                         (ii)   if a LIBOR Rate plus Applicable Margin is
elected, such interest rate shall remain in effect for the Rate Period selected
and such interest rate shall not otherwise be converted to another interest rate
prior to the expiration of the Rate Period except as otherwise required by this
Agreement.

                         (iii)  any Loan accruing interest at a LIBOR Rate plus
the Applicable Margin shall, commencing on the last day of the applicable Rate
Period, bear interest at the Base Rate plus Applicable Margin unless prior
thereto Bank shall have received a timely notice pursuant to this Section 7.1
                                                                  -----------
that an elective rate based on the LIBOR Rate plus Applicable Margin shall be
effective commencing on such date with respect to any or all of such principal.

                         (iv)   Borrowers may not elect a LIBOR Rate plus
Applicable Margin for any Rate Period if the effect of such election, (as could
reasonably be determined by Borrowers at the time of such election) would be to
require Borrowers to make a repayment or prepayment of a LIBOR Rate Loan prior
to the end of the relevant Rate Period. Without limiting the generality of the
foregoing, no Rate Period may be elected that would end later than the
expiration of the Contract Period.

               7.2  Interest Rate Options for the Term Loan.
                    ---------------------------------------

                    (a)  General. The entire outstanding principal balance of
                         -------
the Term Loan will accrue interest at the Borrowers' option (subject to the
limitations and conditions set forth below) at (a) the Base Rate plus Applicable
Margin, or (b) the LIBOR Rate plus Applicable Margin. Borrowers may request to
have one or more portions of the outstanding balance of the Term Loan accrue
interest, at a LIBOR Rate plus Applicable Margin by giving Bank three (3)
Business Days prior written notice in the form of a LIBOR Rate Notification.

                    (b)  Certain Provisions Regarding Interest Rates. Borrowers
                         -------------------------------------------
understand and agree:

                                      28
<PAGE>

                         (i)   that subject to the provisions of this Agreement,
the Base Rate plus Applicable Margin and the LIBOR Rate plus Applicable Margin
may apply simultaneously to different parts of the outstanding principal balance
of the Term Loan;

                         (ii)  that the LIBOR Rate plus Applicable Margin may
apply simultaneously to various portions of the outstanding principal balance of
the Term Loan for various Rate Periods;

                         (iii) that the LIBOR Rate plus Applicable Margin
applicable to one portion of the outstanding principal balance of the Revolving
Credit Facility or the Term Loan may be different from the LIBOR Rate plus
Applicable Margin applicable to a different portion of the outstanding principal
balance of the Revolving Credit Facility or the Term Loan;

                         (iv)  that LIBOR Rate Loans must be in minimum amounts
of $500,000 each and in increments of $100,000 above such minimum; and

                         (v)   that no more than an aggregate of four (4)
separate LIBOR Rate Loans under the Term Loan and the Revolving Credit Facility
shall be permitted to be outstanding at any one time.

                    (c)  Certain Limitations. The right of the Borrowers to
                         -------------------
elect a LIBOR Rate plus Applicable Margin shall be limited as follows:

                         (i)   Borrowers may not elect to borrow at or convert
to a LIBOR Rate plus Applicable Margin if at the time of such election there
shall exist a Default or an Event of Default.

                         (ii)  if a LIBOR Rate plus Applicable Margin is
elected, such interest rate shall remain in effect for Rate Period and such
interest rate shall not otherwise be converted to another interest rate prior to
the expiration of such Rate Period except as otherwise required by this
Agreement.

                         (iii) the portion of the Term Loan accruing interest at
a LIBOR Rate plus the Applicable Margin shall, commencing on the last day of the
applicable Rate Period, bear interest at the Base Rate unless prior thereto the
Bank shall have received a timely notice pursuant to this Section 7.2 that an
                                                          -----------
elective rate based on the LIBOR Rate plus Applicable Margin shall be effective
commencing on such date with respect to such portion.

                         (iv)  Borrowers may not elect a LIBOR Rate plus
Applicable Margin for any Rate Period if the effect of such election, (as could
reasonably be determined by Borrowers

                                      29
<PAGE>

at the time of such election) would be to require Borrowers to make a repayment
or prepayment of a LIBOR Rate Loan prior to the end of the relevant Rate Period.
Without limiting the generality of the foregoing, no Rate Period may be elected
that would end later than the expiration of the Term Loan Maturity Date.

          7.3  Base Rate Fall Back. With respect to any principal amount of the
               -------------------
Revolving Credit Facility or the Term Loan (whether an Advance of new funds or
an already outstanding amount), if Borrowers fail to request that the LIBOR Rate
plus Applicable Margin option be applicable by giving Bank a timely LIBOR Rate
Notification or a Request for LIBOR Rate Loan (including a request at the
expiration of any applicable Rate Period), such principal amount shall be deemed
to accrue interest at the Base Rate plus Applicable Margin.

          7.4  LIBOR Rate Unascertainable or Unavailable. If, at any time, Bank
               -----------------------------------------
shall determine (which determination shall be conclusive) that the LIBOR Rate is
unavailable or adequate means for ascertaining the LIBOR Rate do not exist, Bank
shall promptly notify Borrowers of such determination. Upon such determination,
the right of Borrowers to select and/or maintain Advances based upon the LIBOR
Rate plus Applicable Margin shall be suspended until notice from Bank to
Borrowers that the LIBOR Rate is again available or ascertainable and, until
such time, the outstanding balance of the Revolving Credit Facility and the Term
Loan shall accrue interest at the Base Rate plus Applicable Margin.

          7.5  LIBOR Unlawful. In the event that, as a result of any change in
               --------------
any applicable law or regulation or the interpretation thereof, it becomes
unlawful for Bank to maintain any advance under the Revolving Credit Facility or
the Term Loan at the LIBOR Rate plus Applicable Margin, then Bank shall notify
Borrowers thereof and Bank's obligation to make or maintain any Advance under
the Revolving Credit Facility or the Term Loan at the LIBOR Rate plus Applicable
Margin shall be suspended until such time as Bank may again cause the LIBOR Rate
plus Applicable Margin to be applicable and, until such time, such Advances
under the Revolving Credit Facility and the Term Loan shall accrue interest at
the Base Rate plus Applicable Margin. Promptly after becoming aware that it is
no longer unlawful for Bank to maintain Advances under the Revolving Credit
Facility and the Term Loan at the LIBOR Rate plus Applicable Margin, Bank shall
notify Borrowers and such suspension shall cease to exist.

          7.6  Indemnification. Obligors agree to indemnify Bank against any
               ---------------
loss, cost or expense (including, without limitation, loss of margin) which Bank
has sustained or incurred as a consequence of: (i) any payment of any LIBOR Rate
Loan on a day other than the last day of the corresponding Rate Period, whether
or not any such payment is made pursuant to acceleration, upon or after an Event
of Default, by reason of an application of proceeds incident to an insured loss
or condemnation of property, or for any other reason, and whether or not any
such payment is consented to by Bank (unless Bank shall have expressly waived
such indemnity in writing); (ii) any attempt by Borrowers to revoke, in whole or
part, any LIBOR Rate Notification or Request for LIBOR Rate Loan given pursuant
to this Agreement; (iii) any attempt by Borrowers to convert or renew any
principal amount accruing

                                      30
<PAGE>

interest at the LIBOR Rate plus Applicable Margin on a day other than the last
day of the corresponding Rate Period (whether or not such conversion or renewal
is consented to by Bank, unless Bank shall have expressly waived such indemnity
in writing); (iv) any conversion of any amount earning interest at the LIBOR
Rate plus Applicable Margin on a day other than the last day of the
corresponding Rate Period; or (v) any Event of Default.

          7.7  Determinations. In making the determinations contemplated by
               --------------
Section 7.6, Bank may make such estimates, assumptions, allocations and the
-----------
like that Bank determines to be appropriate, and Bank's selection thereof in
accordance with Section 7.6 and the determinations made by the Bank on the basis
                -----------
thereof, shall be final, binding and conclusive upon Borrowers, absent manifest
error.

          7.8  Default Rate. Interest will accrue on the principal balance of
               ------------
the Revolving Credit Facility and the Term Loan (including any principal balance
previously accruing interest at a LIBOR Rate plus Applicable Margin) after the
occurrence of an Event of Default or expiration of the Contract Period at a rate
of two percent (2%) in excess of the otherwise applicable non-default rate of
interest (the "Default Rate"). Obligors acknowledge and agree that the Default
Rate is reasonable in light of the increased risk of collection of the sums due
under the Revolving Credit Facility and the Term Loan after occurrence of an
Event of Default and the costs and expenses of Bank related thereto.

          7.9  Post Judgment Interest. Any judgment obtained for sums due
               ----------------------
hereunder or under the Loan Documents will accrue interest at the applicable
Default Rate set forth above until paid.

          7.10 Calculations.
               ------------

               (a)  Interest will be computed on the basis of a year of 360 days
and paid for the actual number of days elapsed.

               (b)  In the event that the actual average monthly principal
balance outstanding under the Revolving Credit Facility for any month is less
than $5,000,000.00, interest on the Revolving Credit Facility balance shall be
calculated based on an assumed average monthly loan balance of $5,000,000.00,
with the difference between $5,000,000.00 and the actual average monthly loan
balance bearing interest as if it were a Base Rate Loan.

          7.11 Limitation of Interest to Maximum Lawful Rate. In no event will
               ---------------------------------------------
the rate of interest payable hereunder exceed the maximum rate of interest
permitted to be charged by applicable law (including the choice of law rules)
and any interest paid in excess of the permitted rate will be refunded to
Borrowers. Such refund will be made by application of the excessive amount of
interest paid against any sums outstanding hereunder and will be applied in such
order as Bank may determine. If the excessive amount of interest paid exceeds
the sums outstanding, the portion exceeding the sums

                                      31
<PAGE>

outstanding will be refunded in cash by Bank. Any such crediting or refunding
will not cure or waive any Event of Default. Borrowers agree that in determining
whether or not any interest payable hereunder exceeds the highest rate permitted
by law, any nonprincipal payment, including without limitation prepayment fees
and late charges, will be deemed to the extent permitted by law to be an
expense, fee, premium or penalty rather than interest.

          8.   PAYMENTS AND FEES.
               -----------------

               8.1  Interest Payments on the Revolving Credit Facility.
                    --------------------------------------------------
Borrowers agree to pay to Bank interest on the principal balance of Base Rate
Loans under the Revolving Credit Facility on the first day of each calendar
month, commencing on the first day of the first calendar month following the
date hereof, and on the expiration of the Contract Period. Borrowers agree to
pay to Bank interest on the principal balance of LIBOR Rate Loans under the
Revolving Credit Facility on the last day of each Rate Period, provided that,
                                                               -------- ----
for any Rate Period with a duration of more than three months, interest will
also be payable every ninetieth (90/th/) day after the commencement of such Rate
Period. Bank may, at its option, establish a Reserve for interest accruing on
any LIBOR Rate Loans with a Rate Period in excess of one month.

               8.2  Principal Payments on the Revolving Credit Facility. Funds
                    ---------------------------------------------------
received by Bank in the Cash Collateral Account will be applied by Bank toward
repayment of the outstanding principal balance of the Revolving Credit Facility
or may be held as cash collateral by Bank. Provided that no Event of Default has
occurred, such funds will be applied by Bank to repay the outstanding principal
balance of the Revolving Credit Facility, with such payments to be applied first
                                                                           -----
to repay all Loans which are Base Rate Loans, and second to repay all Loans
                                                  ------
which are LIBOR Rate Loans. To the extent that any sums are applied to repay
LIBOR Rate Loans, they shall be applied to LIBOR Rate Loans in the chronological
order in which the Rate Periods for such LIBOR Rate Loans expire. Upon the
occurrence of an Event of Default, Bank may discontinue such arrangement and may
apply such funds to costs, indemnities, fees, interest and principal,
constituting Obligations in such order as Bank, in its discretion elects.

          Provided that no Event of Default has occurred, if all Advances under
the Revolving Credit Facility and all other Obligations then due and payable
(not including contingent obligations under undrawn Letters of Credit) have been
paid in full, and thereafter funds are received by Bank in the Cash Collateral
Account, Bank will permit the transfer of such funds to Borrowers' operating
account maintained with Bank.

          Notwithstanding the foregoing, Borrowers agree to pay the outstanding
principal balance of the Revolving Credit Facility, together with any accrued
and unpaid interest thereon, and any other sums due pursuant to the terms hereof
on the earlier to occur of (a) the expiration of the Contract Period, or (b) ON
DEMAND after the occurrence of an Event of Default. If any Out-Of-Formula
Advance arises or

                                      32
<PAGE>

exists under the Revolving Credit Facility for any reason whatsoever, including
without limitation inventory or accounts becoming ineligible or any new or
increased Reserves, Borrowers agree to repay such Out-Of-Formula Advance
immediately upon the earlier to occur of (i) notice or demand by Bank, or (ii)
any Borrower has knowledge of such Out-of-Formula Advance.

               8.3  Interest Payments on the Term Loan. Borrowers agree to pay
                    ----------------------------------
to Bank interest on the principal balance of Base Rate Loans under the Term Loan
on the first day of each calendar month, commencing on the first day of the
first calendar month following the date hereof, and on the Term Loan Maturity
Date. Borrowers agree to pay to Bank interest on the principal balance of LIBOR
Rate Loans under the Term Loan on the last day of each Rate Period, provided
                                                                    --------
that, for any Rate Period with a duration of more than three months, interest
----
will also be payable every ninetieth (90/th/) day after the commencement of such
Rate Period. Bank may, at its option, establish a Reserve for interest accruing
on any LIBOR Rate Loans with a Rate Period in excess of one month.

               8.4  Principal Payments on Term Loan. Borrowers agree to pay to
                    -------------------------------
Bank the principal balance of the Term Loan in equal and consecutive monthly
installments of $55,555.56 each, on the first (1/st/) day of each calendar
month, commencing on December 1, 2000, and in one final payment of the remaining
principal balance plus all accrued and unpaid interest thereon on the Term Loan
Maturity Date.

               8.5  Letter of Credit Fees. For each issuance or renewal of a
                    ---------------------
Merchandise Letter of Credit, Borrowers agree to pay to Bank an issuance or
renewal fee in an amount equal to 0.625% of the face amount of such Merchandise
Letter of Credit, payable coincident with and as a condition of the issuance or
renewal of such Merchandise Letter of Credit. For each issuance or renewal of a
Standby Letter of Credit hereunder, Borrowers agree to pay to Bank an issuance
or renewal fee in an amount equal to 2.5% per annum of the face amount of such
Standby Letter of Credit, payable coincident with and as a condition of the
issuance or renewal of such Standby Letter of Credit. In addition, Borrowers
agree to pay to Bank such other fees and charges in connection with the
issuance, amendment, negotiation or cancellation of each Merchandise Letter of
Credit and Standby Letter of Credit as may be customarily charged by Bank. Upon
the occurrence of an Event of Default, at Bank's option, the fees provided for
in this Section shall be increased by two percent (2%) for each Merchandise
Letter of Credit and each Standby Letter of Credit, as applicable. All of such
fees shall be computed on the basis of a year of 360 days.

               8.6  Facility Fee. Borrowers agree to pay to Bank a loan facility
                    ------------
fee of $42,500.00 which was fully earned by issuance of the commitment letter to
Borrowers by Bank dated July 11, 2000. The $5,000.00 commitment fee which was
fully earned by issuance of a revised commitment letter to Borrowers by Bank
dated September 19, 2000 will be applied towards costs and expenses of Bank in
connection with this transaction. The entire loan facility fee is non-refundable
in whole or in part.

                                      33
<PAGE>

               8.7  Collateral Management Fee. So long as the Revolving Credit
                    -------------------------
Facility has not been terminated pursuant to the terms hereof and the
Obligations have not been satisfied in full, Borrowers agree unconditionally pay
to Bank a non-refundable monthly collateral management fee of Two Thousand
Dollars ($2,000.00) payable monthly in advance.

               8.8  Unused Facility Fee. Borrowers agree to pay to Bank an
                    -------------------
unused facility fee in an amount equal to 0.25% per annum times the Average
Unused Portion of Maximum Revolving Credit Facility Amount. Such fee will be
payable monthly in arrears on the first day of each month, pro-rated for the
actual number of days in any partial month.

               8.9  Late Charge. In the event that Borrowers fail to pay any
                    -----------
principal, interest or other fees or expenses payable hereunder for a period of
at least fifteen (15) days, in addition to paying such sums, Borrowers will pay
to Bank a late charge equal to five percent (5%) of such past due payment as
compensation for the expenses incident to such past due payment.

               8.10 Termination of Revolving Credit Facility and Termination
                    --------------------------------------------------------
Fee. Borrowers may terminate the Revolving Credit Facility upon ninety (90) days
---
written notice to Bank, which notice, once given shall be irrevocable. In the
event that (a) the Revolving Credit Facility is terminated by Borrowers for any
reason, including without limitation prepayment or refinancing of the Revolving
Credit Facility with another lender, or (b) Borrowers default under the
Revolving Credit Facility and the Revolving Credit Facility is terminated,
Borrowers shall pay to Bank a termination fee calculated as follows:

                    (a)  If the termination occurs on or prior to October 24,
2001, the termination fee will be equal to 3% of the Maximum Revolving Credit
Amount;

                    (b)  If the termination occurs after October 24, 2001, but
on or before October 24, 2002, the termination fee will be equal to 2% of the
Maximum Revolving Credit Amount; and

                    (c)  If the termination occurs after October 24, 2002, but
on or before October 23, 2003, the termination fee will be equal to 1% of the
Maximum Revolving Credit Amount.

          In the event the Revolving Credit Facility is terminated as a result
of an Event of Default, Bank shall be entitled to receive the termination fee
required to be paid under the prior paragraphs. In the event the Revolving
Credit Facility is terminated as a result of an Event of Default, expiration of
the Contract Period, or otherwise, the outstanding balance of the Revolving
Credit Facility and the Term Loan, together with any accrued and unpaid interest
thereon and any other sums due pursuant to the terms hereof shall be due and
payable immediately.

          The termination fee shall be presumed to be the amount of damages
sustained by Bank as a result of such early termination and Borrowers agree that
it is reasonable under the circumstances

                                      34
<PAGE>

currently existing. The termination fee provided for in this Section 8.10 shall
                                                             ------------
be deemed included in the Obligations and shall be secured by the Collateral.

               8.11 Prepayment of Term Loan. Borrowers may prepay all or any
                    -----------------------
part of the principal balance of the Term Loan at any time, following delivery
of not less than ninety (90) days prior written notice to Bank and upon payment
of the applicable fee set forth below. All prepayments will be applied to the
regularly scheduled payments in the inverse order in which they are due. The
following prepayment fee shall be applicable with respect to the Term Loan.

                    (a)  For each prepayment made on or prior to October 24,
2001, the prepayment fee will be equal to three percent (3%) of the principal
amount prepaid;

                    (b)  For each prepayment made after October 24, 2001 but on
or before October 24, 2002, the prepayment fee will be equal to two percent (2%)
of the principal amount prepaid;

                    (c)  For each prepayment made after October 24, 2002 but on
or before October 23, 2003, the prepayment fee will be equal to one percent (1%)
of the principal amount prepaid.

          In the event Bank exercises its right to accelerate payments under the
Term Loan following an Event of Default or otherwise, any tender of payment of
the amount necessary to repay all or part of the Term Loan made thereafter at
any time by any Obligor, its successors or assigns or by anyone on behalf of
Borrowers and any receipt by Bank of proceeds of Collateral in payment of the
Term Loan shall be deemed to be a voluntary prepayment and in connection
therewith Bank shall be entitled to receive the fee required to be paid under
the foregoing prepayment restrictions.

          The prepayment fee shall be presumed to be the amount of damages
sustained by Bank as a result of such prepayment and Borrowers agree that it is
reasonable under the circumstances currently existing. The prepayment fee
provided for in this Section 8.11 shall be deemed included in the Obligations
                     ------------
and shall be secured by the Collateral.

               8.12 Interest and Breakage Costs on LIBOR Rate Loans. Borrowers
                    -----------------------------------------------
shall, concurrently with any prepayment of any LIBOR Rate Loans, pay the full
amount of all interest accrued on such LIBOR Rate Loans and, if on a day other
than the last day of the applicable Rate Period, pay such amounts as are
required by Section 7.6.
            -----------

               8.13 Payment Method and Application.
                    ------------------------------

                    (a)  Cash Collateral Account. All funds and items received
                         -----------------------
or deposited into the Cash Collateral Account will be credited as payments of
the principal balance of the Revolving Credit Facility on the next Business Day
after which such items are deposited into the Cash

                                      35
<PAGE>

Collateral Account. Borrowers will reimburse Bank on demand for the amount of
any items credited as provided above and subsequently returned unpaid. Bank may
terminate the foregoing arrangement upon notice to Borrowers, in which event
funds and items received or deposited into the Cash Collateral Account will be
credited as payments of the principal balance for the Revolving Credit Facility
when such funds or items are available to Bank as collected funds.

                    (b)  Operating Account. Borrowers irrevocably authorize Bank
                         -----------------
to debit from any account maintained by any Borrower with Bank on the applicable
due date, all interest payments on the Revolving Credit Facility and all
principal and interest payments on the Term Loan. Borrowers also irrevocably
authorize Bank to debit from such accounts all Bank Expenses and other
Obligations.

                    (c)  Other. Bank at its option may make the payments
                         -----
described in subsections (a) and (b) above by advancing such sums to itself as a
             -----------------------
Base Rate Loan under the Revolving Credit Facility, without any requirement that
Borrowers request such Advance or otherwise comply with the borrowing procedures
set forth in this Agreement. If (i) there are insufficient funds in such
accounts, (ii) Bank for any reason does not debit such accounts, or (iii) Bank
for any reason does not make an Advance under the Revolving Credit Facility to
make any such payments, then Borrowers will make such payments directly to Bank.

                    (d)  Immediately Available Funds. All payments are to be
                         ---------------------------
made in immediately available funds. If Bank accepts payment in any other form,
such payment shall not be deemed to have been made until the funds comprising
such payment have actually been received by or made available to Bank.

                    (e)  Event of Default. Upon the occurrence of an Event of
                         ----------------
Default, Bank may apply funds in the Cash Collateral Account and may debit any
operating account or other deposit account maintained by any Borrower with Bank
to pay costs, indemnities, fees, interest and principal, constituting
Obligations, in such order as Bank, in its discretion elects.

               8.14 Reinstatement of Obligations. If any Obligor makes a payment
                    ----------------------------
or payments and such payment or payments, or any part thereof, are subsequently
invalidated, declared to be fraudulent or preferential, set aside or are
required to be repaid to a trustee, receiver, or any other person under any
bankruptcy act, state or federal law, common law or equitable cause, then to the
extent of such payment or payments, the obligations or part thereof hereunder
intended to be satisfied shall be revived and continued in full force and effect
as if said payment or payments had not been made.

               8.15 Maintenance of Loan Account; Statements of Obligations. Bank
                    ------------------------------------------------------
shall maintain an account on its books in the name of Borrowers (the "Loan
Account") on which Borrowers will be charged with all Advances and Loans made by
Bank to Borrowers or for Borrowers' account,

                                      36
<PAGE>

including, accrued interest, the Bank Expenses, and any other payment
Obligations of Borrowers. Bank shall render monthly statements regarding the
Loan Account to Borrowers, including principal, interest, fees, and including an
itemization of all charges and expenses constituting the Bank Expenses owing,
and such statements shall be conclusively presumed to be correct and accurate,
and shall constitute an account stated between Borrowers and Bank unless, within
thirty (30) days after receipt thereof by Borrowers, Borrowers shall deliver to
Bank written objection thereto describing the error or errors contained in any
such statements.

               8.16 Indemnity. Borrowers agree to indemnify Bank against any
                    ---------
loss or expense which Bank sustains or incurs as a consequence of an Event of
Default, including, without limitation, any failure of Borrowers to pay when due
(at maturity, by acceleration or otherwise) any principal, interest, fee or any
other amount due under this Agreement or the other Loan Documents. If Bank
sustains or incurs any such loss or expense it will notify Borrowers in writing
of the amount determined in good faith by Bank to be necessary to indemnify it
for the loss or expense. Such amount will be due and payable by Borrowers to
Bank within ten (10) days after presentation by Bank of a statement setting
forth a brief explanation of and its calculation of such amount, which statement
shall be conclusively deemed correct absent manifest error. Any amount payable
by Borrowers under this Section will bear interest at the Default Rate from the
due date until paid, both before and after judgment.

               8.17 Loss of Margin. In the event that any present or future law,
                    --------------
rule, regulation, treaty or official directive or the interpretation or
application thereof by any central bank, monetary authority or governmental
authority, or the compliance with any guideline or request of any central bank,
monetary authority or governmental authority (whether or not having the force of
law):

                    (a)  subjects Bank to any tax with respect to any amounts
payable under this Agreement or the other Loan Documents by Borrowers or
otherwise with respect to the transactions contemplated under this Agreement or
the other Loan Documents (except for taxes on the overall net income of Bank
imposed by the U.S. or any political subdivision thereof); or

                    (b)  imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit, capital maintenance, capital adequacy, or
similar requirement against assets held by, or deposits in or for the account
of, or loans or advances or commitment to make loans or advances by, or letters
of credit issued or commitment to issue letters of credit by Bank; or

                    (c)  imposes upon Bank any other condition with respect to
advances or extensions of credit or the commitment to make advances or
extensions of credit under this Agreement,

and the result of any of the foregoing is to increase the costs of Bank, reduce
the income receivable by or return on equity of Bank or impose any expense upon
Bank in each case related to any Advances or extensions of credit made by Bank
or commitments by Bank to make Advances or extensions of credit

                                      37
<PAGE>

under this Agreement, Bank shall so notify Borrowers in writing. Borrowers agree
to pay Bank the amount of such increase in cost, reduction in income, reduced
return on equity or capital, or additional expense within ten (10) days after
presentation by Bank of a statement concerning such increase in cost, reduction
in income, reduced return on equity or capital, or additional expense. Such
statement shall set forth a brief explanation of the amount and Bank's
calculation of the amount (in determining such amount Bank may use any
reasonable averaging and attribution methods), which statement shall be
conclusively deemed correct absent manifest error. If the amount set forth in
such statement is not paid within ten (10) days after such presentation of such
statement, interest will be payable on the unpaid amount at the Default Rate
from the due date until paid, both before and after judgment.

               8.18 Savings Clause. Anything contained in this Agreement or any
                    --------------
other Loan Documents to the contrary notwithstanding, the obligations of each
Obligor with respect to the repayment of the outstanding principal balance of
the Loans shall be limited to a maximum aggregate amount equal to the greater of
(a) the loan proceeds and the value of all other consideration and benefits
received by or for the benefit of such Obligor in connection with the financing
transactions contemplated hereunder, or (b) the largest amount that would not
render its obligations with respect thereto subject to avoidance as a fraudulent
transfer or conveyance under Section 548 of Title 11 of the United States Code
or any applicable provisions of comparable state, federal, provincial or other
applicable law of any jurisdiction (collectively, the "Fraudulent Transfer
Laws"), if and to the extent such Obligor (or trustee on its behalf) has
properly invoked the protections of the Fraudulent Transfer Laws. In making such
determination, all rights of subrogation and contribution of any Obligor with
respect to such obligations shall be deemed to be an asset of such Obligor.

          9.   TAXES.
               -----

               9.1  Any and all payments by Borrowers to or for the account of
Bank hereunder or under any other Loan Document shall be made free and clear of,
and without deduction for, any and all present or future taxes, duties, levies,
imposts, deductions, charges or withholdings, and all liabilities with respect
thereto, excluding, in the case of Bank, taxes imposed on its income, and
         ---------
franchise taxes imposed on it, by the jurisdiction under the laws of which Bank
is organized or any political subdivision thereof (all such non-excluded taxes,
duties, levies, imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to as "Taxes"). If Borrowers shall be required by law to
deduct any Taxes from or in respect of any sum payable under this Agreement or
any other Loan Document to Bank, (i) the sum payable shall be increased as
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section 9.1) Bank receives an
                                                 -----------
amount equal to the sum it would have received had no such deductions been made,
(ii) Borrowers shall make such deductions, (iii) Borrowers shall pay the full
amount deducted to the relevant taxation authority or other authority in
accordance with Applicable Law, and (iv) Borrowers shall furnish to Bank the
original or a certified copy of the receipt evidencing payment thereof.

                                      38
<PAGE>

               9.2  In addition, Borrowers agree to pay any and all present or
future stamp or documentary taxes and any other excise or property taxes or
charges or similar levies which arise from any payment made under this Agreement
or any other Loan Document or from the execution or delivery of, or otherwise
with respect to, this Agreement or any other Loan Document (hereinafter referred
to as "Other Taxes").

               9.3  BORROWERS AGREE TO INDEMNIFY BANK FOR THE FULL AMOUNT OF
TAXES AND OTHER TAXES (INCLUDING, WITHOUT LIMITATION, ANY TAXES OR OTHER TAXES
IMPOSED OR ASSERTED BY ANY JURISDICTION ON AMOUNTS PAYABLE UNDER THIS SECTION 9
                                                                      ---------
PAID BY BANK AND ANY LIABILITY (INCLUDING PENALTIES, INTEREST AND EXPENSES)
ARISING THEREFROM OR WITH RESPECT THERETO. For purposes of this Section 9.3,
                                                                -----------
Taxes and Other Taxes shall not include taxes imposed on the income of Bank
resulting from payments made to Bank under the Loan Documents.

               9.4  Within thirty (30) days after the date of any payment of
Taxes or Other Taxes, Borrowers shall furnish to Bank the original or a
certified copy of the receipt evidencing such payment.

               9.5  Without prejudice to the survival of any other agreement of
Borrowers hereunder, the agreements and obligations of Borrowers contained in
this Section 9 shall survive the termination of this Agreement and the payment
     ---------
in full of the Obligations.

          10   SECURITY; COLLECTION OF RECEIVABLES AND PROCEEDS OF COLLATERAL.
               --------------------------------------------------------------

               10.1 Personal Property. As security for the full and timely
                    -----------------
payment and performance of all Obligations, each Obligor hereby grants to Bank a
first priority perfected security interest in all personal property of such
Obligor, wherever located, now owned or hereafter acquired, including without
limitation the following:

                    (a)  All present and future Accounts, contract rights,
chattel paper, instruments and documents and all other rights to the payment of
money whether or not yet earned, for services rendered or goods sold, consigned,
leased or furnished or otherwise, in all cases together with (i) all goods
(including any returned, rejected, repossessed or consigned goods), the sale,
consignment, lease or other furnishings of which shall give or may give rise to
any of the foregoing, (ii) all rights as a consignor, consignee, unpaid vendor
or other lien or in connection therewith, including stoppage in transit, set-
off, detinue, replevin and reclamation, (iii) all General Intangibles related
thereto, (iv) all credit insurance, guaranties, mortgages, security interests,
assignments, and other encumbrances on real or personal property, leases and
other agreements or property securing or relating to any of the foregoing, (v)

                                      39
<PAGE>

choses-in-action, claims and judgments related to or arising out of any of the
foregoing, and (vi) any return or unearned premiums, which may be due upon
cancellation of any insurance policies.

                    (b)  All present and future Inventory (including but not
limited to goods held for sale or lease or furnished or to be furnished under
contracts for service), and all documents of title covering any of such goods or
Inventory.

                    (c)  All present and future General Intangibles.

                    (d)  All present and future Equipment, all documents of
title covering any of such Equipment and all manuals of operation, maintenance
or repair.

                    (e)  All present and future rights in all proceeds of all
licenses, permits, approvals, license rights, agreements and General Intangibles
with respect to which there are valid and enforceable legal or contractual
restrictions prohibiting the collateral assignment or granting of a security
interest (the "Non-Assignable Contracts"), including without limitation all
proceeds from the sale, transfer or liquidation of such Non-Assignable Contracts
and the value allocable to such Non-Assignable Contracts in any sale of business
or assets.

                    (f)  All present and future general ledger sheets, files,
records, customer lists, books of account, invoices, bills, certificates or
documents of ownership, bills of sale, business papers, correspondence, credit
files, tapes, cards, computer runs and all other data and data storage systems
whether in the possession of any party to this Agreement or any service bureau.

                    (g)  All letters of credit and letter of credit rights,
including the right to receive payment thereunder and all documentation related
thereto, and all documents of title, negotiable and non-negotiable bills of
lading, electronic bills of lading, shipper's rights, rights accruing under the
law of agency or estoppel, warranties, claims and insurance proceeds related
thereto or associated therewith.

                    (h)  Those certain securities described on Schedule
                                                               --------
10.1(h) hereto, all additional securities pledged to Bank from time to time,
-------
together with all cash, stock or other dividends paid upon such securities; all
securities received in addition to or in exchange for such securities; all
subscription rights incident to such securities; any other distribution in
respect of such securities in any form; and the proceeds thereof. All of such
securities shall be freely assignable and transferable to Bank, and shall be
accompanied by such stock pledge agreements and blank stock powers with
signatures guaranteed as Bank may require.

                    (i)  All documents of title, negotiable and non-negotiable
bills of lading, electronic bills of lading, shipper's rights, rights accruing
under the law of agency or estoppel, documents, agreements, instruments,
warranties and claims now existing or hereafter issued or arising in connection
with

                                      40
<PAGE>

any Merchandise Letter of Credit now or hereafter issued under this Agreement,
and all insurance claims or proceeds related thereto.

                    (j)  All deposits, funds, notes, drafts, instruments
(including promissory notes), documents, policies, evidences and certificates of
insurance, securities, personal property leases and chattel paper and other
assets, now or at any time hereafter on deposit with or in the possession or
control of Bank or owing by Bank or in transit by mail or carrier to Bank or in
the possession of any other Person acting on Bank's behalf, without regard to
whether Bank received the same in pledge, for safekeeping, as agent for
collection or otherwise, or whether Bank has conditionally released the same,
and in all assets in which Bank now has or may at any time hereafter obtain a
lien, mortgage, or security interest for any reason.

                    (k)  All deposit accounts maintained by such Obligor with
any depository institution.

                    (l)  All Investment Property.

                    (m)  All Financial Assets.

                    (n)  All domain names and domain name registration rights,
including without limitation, the domain names described on Schedule 11.18.
                                                            --------------

                    (o)  All products and proceeds of the foregoing.

              10.2  Collateral Assignment of Licenses. As further security for
                    ---------------------------------
the Obligations, Obligors shall cause to be executed and delivered to Bank, a
collateral assignment of all Licenses owned by them which are not subject to
enforceable legal or contractual restrictions prohibiting such collateral
assignment.

              10.3  Management Support and Validity Agreements. As further
                    ------------------------------------------
security for the Obligations, Borrowers shall cause to be executed and delivered
to Bank, management support and validity agreements from the following officers
of Borrowers (a) Jugal K. Taneja, (b) William L. LaGamba, (c) Stephen M.
Watters, and (d) Ronald J. Patrick, all in form and content as satisfactory to
the Bank.

              10.4  Negotiable Collateral. In the event that any Collateral,
                    ---------------------
including proceeds, is evidenced by or consists of Negotiable Collateral, the
applicable Obligor, shall immediately endorse and deliver physical possession of
such Negotiable Collateral to Bank, together with any stock powers executed in
blank as may be required by Bank.

                                      41
<PAGE>

              10.5  Surety. As further security for the Obligations, Borrowers
                    ------
shall cause to be executed and delivered to Bank, the absolute, unconditional,
unlimited surety agreement (the "Surety Agreements") of each Guarantor. Such
Surety Agreements will secure all Obligations and shall be in form and content
acceptable to Bank.

              10.6  Stock Pledges. As further security for the Obligations,
                    -------------
DrugMax shall deliver to Bank a Pledge Agreement granting to Bank a first
priority Lien against all Capital Stock now or hereafter owned by DrugMax of
each Guarantor and all other Subsidiaries of DrugMax, together with executed
blank stock powers with signatures guaranteed.

              10.7  General. The collateral described above in Sections 10.1,
                    -------                                    --------------
10.2, 10.3, 10.4, 10.5 and 10.6 is collectively referred to herein as the
-------------------------------
"Collateral". The above-described security interests, assignments, Liens and
guarantees shall not be rendered void by the fact that no Obligations exist as
of any particular date, but shall continue in full force and effect until the
Obligations have been repaid, Bank has no agreement or commitment outstanding
under the Loan Documents pursuant to which Bank may extend credit to or on
behalf of any Obligor and Bank has executed termination statements or releases
with respect thereto. Bank agrees to execute and deliver to Obligors, at
Obligors' expense, termination statements and releases with respect to all Liens
in favor of Bank encumbering the Collateral with reasonable promptness after all
Obligations have been fully and finally paid and Bank has no agreement or
commitment outstanding to extend credit to or on behalf of any Obligor. IT IS
THE EXPRESS INTENT OF THE OBLIGORS THAT ALL OF THE COLLATERAL SHALL SECURE NOT
ONLY THE OBLIGATIONS UNDER THE LOAN DOCUMENTS, BUT ALSO ALL OTHER PRESENT AND
FUTURE OBLIGATIONS OF ANY OBLIGOR TO BANK.

              10.8  Collection of Accounts; Proceeds of Collateral.
                    ----------------------------------------------

                    (a)  General. Obligors will collect their Accounts only in
                         -------
the ordinary course of their business.

                    (b)  Lockbox. Borrowers will notify all of their Account
                         -------
Debtors to forward all Accounts collections owed to Borrowers to the lockbox
maintained by Bank, and will execute such lockbox agreements as may be required
by Bank and will pay to Bank all customary fees in connection with such lockbox
arrangements. Immediately upon receipt, Borrowers will forward to Bank all other
checks, drafts and other monies received by Borrowers which are proceeds of the
Collateral to the lockbox maintained by Bank. Notwithstanding the foregoing,
certain Accounts collections owed to Borrowers may be deposited in certain
accounts maintained by Borrower with a financial institution acceptable to Bank
(the "Blocked Account"), provided that such Blocked Account is subject to a
blocked account agreement satisfactory to Bank which will restrict disbursements
from such Blocked Account only to Bank.

                                      42
<PAGE>

                    (c)  Cash Collateral Account. All Accounts collections of
                         -----------------------
Borrowers and all checks, drafts and other monies received by Borrowers which
are proceeds of the Collateral will be deposited in a noninterest bearing cash
collateral account maintained at Bank (the "Cash Collateral Account"). Bank will
have sole dominion and control over all items and funds in the Cash Collateral
Account and such items and funds may be withdrawn only by Bank. Bank will have
the right to apply all or any part of such funds towards payment of any of the
Obligations, as set forth in Section 8.2.
                             -----------

                    (d)  Credit for Collections. Solely for purposes of
                         ----------------------
calculating interest on the balance of the Revolving Credit Facility, and
subject to the provisions of Section 8.13 regarding application of payments, all
                             ------------
items deposited into the Cash Collateral Account will be credited by Bank absent
an Event of Default as payments of the principal balance of the Revolving Credit
Facility. As compensation for the arrangement set forth in this Section 10.8(d),
                                                                ---------------
Borrowers will pay to Bank a sum equal to one (1) days interest on all such
deposits at the interest rate applicable for Base Rate Loans under the Revolving
Credit Facility. Borrowers agree to reimburse Bank on demand for the amount of
any items credited as provided above and subsequently returned unpaid. Bank may
terminate the foregoing arrangement upon notice to Borrowers.

                    (e)  Items Held In Trust; Endorsements. Borrowers agree that
                         ---------------------------------
all monies, checks, notes, instruments, drafts, chattel paper or other payments
relating to or constituting proceeds of any Accounts or other Collateral owned
by Borrowers which come into the possession or under the control of any Borrower
or any employees, agents or other Persons acting for or in concert with any
Borrower shall be received and held in trust for Bank and such items shall be
the sole and exclusive property of Bank. Immediately upon receipt of any such
notes, instruments or chattel paper, Borrowers and such other Persons shall
remit the same or cause the same to be remitted, in kind, to Bank. Borrowers
shall deliver or cause to be delivered to Bank, with appropriate endorsement and
assignment to Bank with full recourse to Borrowers all instruments, notes and
chattel paper constituting an Account or proceeds thereof or of other
Collateral. Bank is hereby authorized, after the occurrence of an Event of
Default, to open all mail addressed to any Obligor and endorse all checks,
drafts or other items for payment on behalf of any Obligor. Bank (and Bank's
officers, employees and agents) is granted a power of attorney by Obligors with
full power of substitution to execute, after the occurrence of an Event of
Default, on behalf of any Obligor and in their name or to endorse their name on
any check, draft, instrument, note or other item of payment or to take any other
action or sign any document in order to effectuate the foregoing.

               11.  REPRESENTATIONS AND WARRANTIES. In order to induce Bank to
                    ------------------------------
enter into this Agreement, the Obligors, jointly and severally, make the
following representations and warranties which shall be true, correct, and
complete in all respects as of the date hereof, and shall be true, correct, and
complete in all respects as of the Closing Date, and at and as of the date of
the making or entering into each Advance or Letter of Credit thereafter, as
though made on and as of the date of such Advance or Letter of Credit (except to
the extent that such representations and warranties relate solely to an earlier
date) and such representations and warranties shall survive the execution and
delivery of this Agreement.

                                      43
<PAGE>

               11.1 Valid Organization, Good Standing and Qualification. Each
                    ---------------------------------------------------
Obligor is a corporation duly incorporated, validly existing and in good
standing under the laws of the applicable state described on Schedule 11.1, has
                                                             -------------
full power and authority to execute, deliver and comply with the Loan Documents,
and to carry on its business as it is now being conducted and is duly licensed
or qualified as a foreign corporation in good standing under the laws of each
other jurisdiction described on Schedule 11.1 and in which the character or
                                -------------
location of the properties owned by it or the business transacted by it requires
such licensing or qualification.

               11.2 Licenses. Each Obligor and their employees, servants and
                    --------
agents have or are in the process of obtaining all licenses, registrations,
approvals and other authority as may be necessary to enable them to own and
operate the Business and to sell their Inventory in all applicable
jurisdictions. DrugMax does not sell or distribute Controlled Substances.
Borrowers are currently selling Inventory only in those jurisdictions in which
they are registered, licensed or hold permits as a wholesale distributor of
pharmaceuticals, prescription drugs or dangerous drugs, or in which such
registration, license or permit is not required by applicable law.

               11.3 Ownership Interests. The ownership of all Capital Stock,
                    -------------------
debentures, options, warrants, bonds and other securities (debt and equity) of
the Obligors and all pledges, proxies, voting trusts, powers of attorney and
other agreements affecting the ownership or voting rights of said interests is
as set forth on Schedule 11.3.
                -------------

               11.4 Subsidiaries. Except as set forth on Schedule 11.4, the
                    ------------                         -------------
Obligors do not own any Capital Stock in any Person, directly or indirectly (by
any Subsidiary or otherwise). All of the outstanding Capital Stock of each
Obligor has been validly issued and is fully paid and non-assessable. No Capital
Stock of any direct or indirect Subsidiary of DrugMax is subject to the issuance
of any security, instrument, warrant, option, purchase right, conversion or
exchange right, call, commitment or claim of any right, title, or interest
therein or thereto. A Florida corporation named "DrugMax.com, Inc." was formed
for DrugMax. The name of that Florida corporation has been changed to "DrugMax,
Inc." No stock was ever issued for such corporation. Such Florida corporation
owns no assets and conducts no business and will not own any assets or conduct
any business. Discount Rx, Inc and HealthSeek.com, Inc. are wholly owned
subsidiaries of DrugMax. Such corporations own no material assets and conduct no
business operations.

                    11.5 Financial Statements. Obligors have furnished to Bank
                         --------------------
the audited financial statements of DrugMax and its Subsidiaries certified
without qualification by independent public accountants as of March 31, 2000 and
all management and comment letters from such accountants in connection
therewith, and the internally prepared interim financial statements of Valley as
of March 31, 2000. Such financial statements of Borrowers (together with the
related notes and comments), are correct and complete, fairly present in all
material respects the financial condition and the assets and liabilities of

                                      44
<PAGE>

Borrowers at such dates, and have been prepared in accordance with GAAP. With
respect to the interim statements, such statements are subject to year-end
adjustment and any accompanying footnotes.

          11.6  No Material Adverse Change in Financial Condition. There has
                -------------------------------------------------
been no Material Adverse Change in the financial condition of any Obligor since
March 31, 2000.

          11.7  Pending Litigation or Proceedings. Except as set forth on
                ---------------------------------
Schedule 11.7, there are no judgments outstanding or actions, suits or
-------------
proceedings pending or, to the best of each Obligor's knowledge, threatened
against or affecting any Obligor, at law or in equity or before or by any
federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign.

          11.8  Due Authorization; No Legal Restrictions.  The execution and
                ----------------------------------------
delivery by the Obligors of the Loan Documents, the consummation of the
transactions contemplated by the Loan Documents and the fulfillment and
compliance with the respective terms, conditions and provisions of the Loan
Documents: (a) have been duly authorized by all requisite corporate action of
each of the Obligors, (b) will not conflict with or result in a breach of, or
constitute a default (or are not reasonably likely, upon the passage of time or
the giving of notice or both to constitute a default) under, any of the terms,
conditions or provisions of any Applicable Law or any Obligor's Governing
Documents or any lease, indenture, mortgage, loan or credit agreement or
instrument to which any Obligor is a party or by which any of them may be bound
or affected, or any judgment or order of any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, (c)
will not result in the creation or imposition of any Lien of any nature
whatsoever upon any of the property or assets of any Obligor under the terms or
provisions of any such agreement or instrument, except Liens in favor of Bank,
and (d) do not require any consent or approval of the stockholders of any
Obligor or any other Person, except such consents and approvals which have been
properly obtained and are in full force and effect.

          11.9  Enforceability. The Loan Documents have been duly executed by
                --------------
the Obligors and delivered to Bank and constitute legal, valid and binding
obligations of the Obligors, enforceable in accordance with their terms.

          11.10 No Default Under Other Obligations, Orders or Governmental
                ----------------------------------------------------------
Regulations. The Obligors are not in violation of their Governing Documents or
-----------
in default in the performance or observance of any of their obligations,
covenants or conditions contained in any indenture or other agreement creating,
evidencing or securing any Indebtedness or pursuant to which any such
Indebtedness is issued. The Obligors are not in violation of or in default under
any other agreement or instrument or any judgment or Applicable Law.

          11.11 Governmental Consents. Other than the filing of appropriate
                ---------------------
financing statements, no consent, approval or authorization of or designation,
declaration or filing with or notice to

                                      45
<PAGE>

any Governmental Authority on the part of any Obligor is required in connection
with the execution, delivery or performance by the Obligors of the Loan
Documents or the consummation of the transactions contemplated thereby.

          11.12 Taxes. The Obligors have filed all tax returns which they are
                -----
required to file and have paid, or made provision for the payment of, all taxes
which have become due pursuant to such returns or pursuant to any assessment
received by them. Such tax returns are complete and accurate in all material
respects. The Obligors do not know of any proposed additional assessment or
basis for any assessment of additional material taxes.

          11.13 Title to Collateral. The Obligors have rights in and the power
                -------------------
to transfer the Collateral. The Collateral is and will be owned by the Obligors
free and clear of all Liens of any kind, excepting only Liens in favor of Bank
and those Liens permitted under Section 13.8. The Obligors will defend the
                                ------------
Collateral against any claims of all Persons or entities other than Bank.

          11.14 Names; Addresses and State of Formation.  During the past five
                ---------------------------------------
(5) years, the Obligors have not been known by any names (including trade names)
other than those set forth in Schedule 11.14 and have not been located at any
                              --------------
addresses other than those set forth on Schedule 11.24(d). The portions of the
                                        -----------------
Collateral which are tangible property and the Obligors' Books will at all times
be located at the addresses set forth on Schedule 11.24(d); or such other
                                         -----------------
location determined by the Obligors after prior notice to Bank and delivery to
Bank of any items requested by Bank to maintain perfection and priority of
Bank's Lien against and access to the Obligors' Books and records. Schedule
                                                                   --------
11.24(d) identifies the chief executive offices of the Obligors. No Obligor
--------
currently has any assets located in Texas. DrugMax currently has a sales office
in Louisiana. No Inventory is stored at such location.

          11.15 Current Compliance. The Obligors are currently in compliance
                ------------------
with all of the terms and conditions of the Loan Documents.

          11.16 United States Pension and Benefit Plans. Except as disclosed on
                ---------------------------------------
Schedule 11.16, (a) the Obligors have no obligations with respect to any Plan,
--------------
(b) no ERISA Events, including, without limitation, any "Reportable Event" or
"Prohibited Transaction" (as those terms are defined under ERISA), have occurred
in connection with any Plan of any Obligor which might constitute grounds for
the termination of any such Plan by the PBGC or for the appointment by any U.S.
District Court of a trustee to administer any such Plan, (c) all of the
Obligors' Plans meet with the minimum funding standards of Section 302 of ERISA,
and (d) the Obligors have no existing liability to the PBGC. The Obligors are
not subject to or bound to make contributions to any Multi-Employer Plan.

       The present value of the aggregate benefit liabilities under any of the
Plans, determined as of the end of such Plan's most recently ended plan year on
the basis of the actuarial assumptions specified

                                      46
<PAGE>

for funding purposes in such Plan's most recent actuarial valuation report, did
not exceed the aggregate current value of the assets of such Plan allocable to
such benefit liabilities. The term "benefits liabilities" has the meaning
specified in Section 4001 of ERISA and the terms "current value" and "present
value" have the meanings specified in Section 3 of ERISA. Neither any Obligor
nor any ERISA Affiliates have incurred withdrawal liabilities (and are not
subject to contingent withdrawal liabilities) under Section 4201 or 4204 of
ERISA.

          11.17 Leases and Contracts.  The Obligors have complied in all
                --------------------
material respects with the provisions of all material leases, contracts or
commitments of any kind (such as employment agreements, collective bargaining
agreements, powers of attorney, distribution agreements, license agreements,
contracts for future purchase or delivery of goods or rendering of services,
bonus, pension and retirement plans or accrued vacation pay, insurance and
welfare agreements) to which any Obligor is a party and are not in default
thereunder. To the best of each Obligor's knowledge, no other party is in
default under any such leases, contracts, licenses or other commitments and no
event has occurred which, but for the giving of notice or the passage of time or
both, would constitute an event of default thereunder. Schedule 11.17 sets forth
                                                       --------------
an accurate list of all material leases, contracts and commitments to which any
Obligor is a party or by which any of them are bound, including, without
limitation, any real or personal property leases to which any Obligor is a
party.

          11.18 Intellectual Property.  Each Obligor owns or possesses the
                ---------------------
irrevocable right to use all of the patents, trademarks, service marks, trade
names, copyrights, licenses, franchises and permits and rights with respect to
the foregoing necessary to own and operate such Obligor's business and to carry
on their business as presently conducted and presently planned to be conducted
without conflict with the rights of others. Schedule 11.18 sets forth an
                                            --------------
accurate list and description of each such patent, trademark, service mark,
trade name, copyright, license, franchise and permit and right with respect to
the foregoing, together with all registration or application numbers or
information with respect thereto.

          11.19 Eligible Accounts. With respect to all Accounts from time to
                -----------------
time scheduled, listed or referred to as Eligible Accounts in any certificate,
statement or report prepared by or for Borrowers and delivered to Bank upon
which Borrowers are basing Availability under the Revolving Credit Facility,
Borrowers warrant and represent that such Accounts meet the definition of
Eligible Accounts, set forth in this Agreement. If any Accounts previously
scheduled, listed or referred to in any certificate, statement or report
prepared by or for Borrowers and delivered to Bank and upon which Borrowers are
at that time basing Availability under the Revolving Credit Facility are
thereafter discovered not to have complied with such definition on the date such
certificate, statement or report was prepared or certified, the Borrowers will
promptly (a) notify Bank upon obtaining knowledge thereof, (b) amend any
certificate, statement or report previously prepared by or for Borrowers and
delivered to Bank stating that such Account constituted an Eligible Account to
reflect the fact that such Account is not eligible, and (c) pay to Bank any Out-
Of-Formula Advance which may occur as a result of such Account no longer being
eligible.

                                      47
<PAGE>

          11.20 Eligible Inventory. With respect to any Inventory from time to
                ------------------
time scheduled, listed or referred to as Eligible Inventory in any certificate,
statement or report prepared by or for Borrowers and delivered to Bank and upon
which Borrowers are basing Availability under the Revolving Credit Facility,
Borrowers warrant and represent that such Inventory meets the definition of
Eligible Inventory set forth in this Agreement. Borrower further warrants and
represents that any Eligible Inventory subject to an Eligible Inventory Buy-Back
Agreement is segregated and is separately identifiable from other Eligible
Inventory. If any Inventory previously scheduled, listed or referred to as
Eligible Inventory in any certificate, statement or report prepared by or for
Borrowers and delivered to Bank and upon which Borrowers are at that time basing
Availability under the Revolving Credit Facility is thereafter discovered not to
have complied with the definition of Eligible Inventory on the date such
certificate, statement or report was prepared or certified, Borrowers will
promptly (a) notify Bank upon obtaining knowledge that such Inventory is not
Eligible Inventory, (b) amend any certificate, statement or report previously
prepared by or for Borrowers and delivered to Bank stating that such Inventory
constituted Eligible Inventory to reflect the fact that such Inventory is not
Eligible Inventory, and (c) pay to Bank any Out-Of-Formula Advance which may
occur as a result of such Inventory no longer being Eligible Inventory.

          11.21 Business Interruptions. Within five (5) years prior to the date
                ----------------------
hereof, neither the Business, Collateral nor operations of any Obligor has been
materially and adversely affected in any way by any casualty, strike, lockout,
combination of workers, order of the United States, or any state or local
government, or any political subdivision or agency thereof, directed against any
Obligor. There are no pending or threatened material labor disputes, strikes,
lockouts or similar occurrences or grievances against the business being
operated by any Obligor.

          11.22 Business.  The Obligors are engaged solely in the Business.
                --------

          11.23 Affiliate Transactions.  Schedule 11.23 sets forth an accurate
                ----------------------   --------------
list of all transactions of any Obligor, with any Affiliate of any Obligor.

          11.24 Property of Obligors.
                --------------------

                (a) Property. Each Obligor is the owner or lessee of all
                    --------
Property and holds or is in the process of acquiring all Licenses necessary to
conduct operations of the business owned or operated by it, in each case in
conformity in all respects with all Applicable Laws.

                (b) Licenses.  There is set forth in Schedule 11.24(b) a
                    --------                         -----------------
description of all Licenses which have been issued or assigned to any Obligor.
All of such Licenses are in full force and effect and have been duly issued in
the name of, or validly assigned to, the applicable Obligor, no default or
breach exists thereunder.

                                      48
<PAGE>

                (c) Operating Agreements.  There is set forth in Schedule
                    --------------------                         --------
11.24(c) a description of all material Operating Agreements relating to the
--------
operation of the business of each Obligor. Each such Operating Agreement is in
full force and effect and no event has occurred which is reasonably likely to
result in the cancellation or termination of any such Operating Agreement or the
imposition thereunder of any liability upon any Obligor.

                (d) Facility Sites. There is set forth in Schedule 11.24(d)
                    --------------                        -----------------
locations of the chief executive office of each Obligor, the locations of all of
each Obligor's Property, the places where each Obligor's Books are kept and the
locations of all Equipment and offices used in the operation of each Obligor's
business.

                (e) Leases.  There is set forth in Schedule 11.24(e) a list of
                    ------                         -----------------
all material Leases, together with a complete and accurate address and legal
description of each parcel of Leasehold Property subject to such Leases and the
name and address of the landlord under each such Lease. Each Lease is in full
force and effect, there has been no default in the performance of any of its
material terms or conditions by any Obligor, to the best of each Obligor's
knowledge, any other party thereto, and no claims of default have been asserted
with respect thereto. The present and contemplated use of the Leasehold Property
is in compliance with all applicable zoning ordinances and regulations and other
Applicable Laws.

                (f) Operation and Maintenance of Equipment.  All of the
                    --------------------------------------
Equipment and other tangible personal property owned by each Obligor is in good
operating condition and repair (subject to normal wear and tear) and has been
used, operated and maintained in compliance in all material respects with all
Applicable Laws.

          11.25 Inventory Records.  The Obligors keep correct and accurate
                -----------------
Inventory records itemizing and describing the kind, type, quality, and quantity
of the Inventory, and each Obligor's cost therefor.

          11.26 FEIN.  The FEIN of each Obligor is:
                ----

          DrugMax           -        34-1755390
          Valley            -        34-0737238
          Desktop           -        59-3658393
          VetMall           -        59-3654162

          11.27 Solvency.  Each Obligor is Solvent.  No transfer of property is
                --------
being made by any Obligor and no obligation is being incurred by any Obligor in
connection with the transactions contemplated by this Agreement or the other
Loan Documents with the intent to hinder, delay, or defraud either present or
future creditors of any Obligor.

                                      49
<PAGE>

          11.28 Subordinated Indebtedness.  Schedule 11.28 sets forth an
                -------------------------   --------------
accurate list of all Subordinated Indebtedness currently owed by Obligors,
identifying the payor, the payee, the outstanding principal balance, the
applicable interest rate, the payment terms and all collateral or guaranties
securing such Subordinated Indebtedness.

          11.29 Inventory Locations.
                -------------------

                (a) All Inventory. All of each Obligor's Inventory is currently
                    -------------
located at one of the locations set forth on Schedule 11.29(a). Schedule
                                             -----------------  --------
11.29(a) sets forth the street address and the name of the
--------
owner/lessor/warehouseman, as applicable, for such location.

                (b) Eligible Inventory Locations.  Schedule 11.29(b) sets forth
                    ----------------------------   -----------------
all Eligible Inventory Locations.

               (c)  Additions to Eligible Inventory Locations.  Borrowers and
                    -----------------------------------------
Bank may modify Schedule 11.29(b) to add new Eligible Inventory Locations by
                -----------------
executing a written amendment to this Agreement in form and content acceptable
to Bank, provided that Borrowers comply with all of the following conditions:
         -------- ----

                    (i)   Borrowers execute and deliver to Bank such UCC-1
financing statements or other security documents covering all Inventory and
related assets to be located at such new location(s) as may be required by Bank
to perfect Bank's Lien in such Inventory and related assets.

                    (ii)  Bank receives written confirmation that such new UCC-1
financing statements or other security documents have been filed or registered
in the appropriate offices required to perfect or publish Bank's Lien at such
new location(s).

                    (iii) Bank receives a search report from a reputable search
company confirming that there are no other Liens encumbering any of the assets
at such new location(s), except the Lien in favor of Bank.

                    (iv)  Bank receives a copy of the lease, sub-lease,
warehouse agreement or similar agreement entered into by the applicable Borrower
with the owner, lessor or operator of the new location(s).

                    (v)   Bank receives evidence satisfactory to Bank that all
assets at such new location(s) are covered by the insurance coverage required
under Section 12.6(a).
      ---------------

                                      50
<PAGE>

                    (vi)  If the new location is leased by a Borrower or is a
warehouse location, Bank receives a Collateral Access Agreement from the
owner/lessor or warehouseman of the new location in form and content acceptable
to Bank.

          11.30 Investment Company Act; Public Utility Holding Company Act.  No
                ----------------------------------------------------------
Obligor is an "investment company" or a company "controlled" by an "investment
company" (as each of the quoted terms is defined or used in the Investment
Company Act of 1940, as amended). No Obligor is a "holding company" or a
"subsidiary company" of a "holding company" or an "affiliate" of a "holding
company" or a "public utility" within the meaning of the Public Utility Holding
Company Act of 1935, as amended.

          11.31 Employee Relations.  Each Obligor has an adequate workforce in
                ------------------
place and is not, except as set forth on Schedule 11.31, party to any collective
                                         --------------
bargaining agreement nor has any labor union been recognized as the
representative of any Obligor's employees.

          11.32 Investment Property.  Schedule 11.32 sets forth a correct and
                -------------------   --------------
complete list of all Investment Property, including any Financial Assets, owned
by each Obligor. Each Obligor is the legal and beneficial owner of such
Investment Property, including any Financial Assets, as so reflected, free and
clear of any Lien (except for Liens in favor of Bank), and has not sold, granted
any option with respect to, assigned or transferred or otherwise disposed of any
of its rights or interest therein.

          11.33 Common Enterprise.  The successful operation and condition of
                -----------------
Borrowers is dependent on the continued successful performance of the functions
of the Borrowers as a whole and the successful operation of each Borrower is
dependent on the successful performance and operation of the other Borrower.
Each Borrower expects to derive benefit (and its board of directors has
determined that it may reasonably be expected to derive benefit), directly and
indirectly, from successful operations of its Subsidiaries. Each Obligor (other
than Borrowers) expects to derive benefit (and the boards of directors or other
governing body of each such Obligor has determined that it may reasonably be
expected to derive benefit), directly and indirectly, from the credit extended
by Bank hereunder, both in their separate capacities and as members with the
other Obligors of an interrelated group of companies. Each Obligor has
determined that execution, delivery and performance of this Agreement and any
other Loan Documents to be executed by such Obligor is within its corporate
purpose, will be of direct and indirect benefit to such Obligor and is in its
best interest.

          11.34 Insurance.  No notice of cancellation has been received with
                ---------
respect to any insurance policies required pursuant to Section 12.6 and each
                                                       ------------
Obligor is in compliance with all conditions contained in such policies.

          11.35 Web Sites.  Schedule 11.35 sets forth a correct and complete
                ---------   --------------
description of all material information regarding all websites currently
operated or maintained by or for each Obligor.

                                      51
<PAGE>

          11.36 Accuracy of Representations and Warranties.  No representation
                ------------------------------------------
or warranty by any Obligor contained herein or in any certificate or other
document furnished by any Obligor pursuant hereto or in connection herewith
fails to contain any statement of material fact necessary to make such
representation or warranty not misleading in light of the circumstances under
which it was made. There is no fact which any Obligor knows or should know and
has not disclosed to Bank, which does or may materially and adversely affect any
Obligor or any of their operations.

     12.  AFFIRMATIVE COVENANTS. The Obligors, jointly and severally, covenant
          ---------------------
and agree that, so long as this Agreement has not been terminated and until full
and final payment of the Obligations, and unless Bank shall otherwise consent in
writing, each Obligor shall comply with the following:

          12.1  Payment of Principal, Interest and Other Amounts Due. The
                ----------------------------------------------------
Obligors will pay when due all Obligations without setoff, deduction or
counterclaim and without deduction or withholding for or on account of any
federal, state or local taxes.

          12.2  Claims for Labor and Materials. The Obligors will pay or cause
                ------------------------------
to be paid when due all claims for labor, materials and supplies which, if
unpaid, might become a Lien upon any of their properties or assets.

          12.3  Existence; Approvals; Qualification; Compliance with Laws. Each
                ---------------------------------------------------------
of the Obligors (a) will obtain, preserve and keep in full force and effect its
separate corporate existence and all rights, licenses, registrations and
franchises necessary to the proper conduct of its business or affairs; (b) will
qualify and remain qualified as a foreign corporation in each jurisdiction in
which the character or location of the properties owned by it or the business
transacted by it requires such qualification; (c) will comply in all material
respects with the requirements of all Applicable Laws; and (d) diligently pursue
obtaining the licenses described as "pending" on Schedule 11.24(b).
                                                 -----------------
          12.4  Maintenance of Properties.  The Obligors will maintain,
                -------------------------
preserve, protect and keep or cause to be maintained, preserved, protected and
kept their Property used or useful in the conduct of their business in good
working order and condition, reasonable wear and tear excepted, and will pay and
discharge when due the cost of repairs to and maintenance of the same.

          12.5  Intellectual Property.  With respect to any and all tradenames,
                ---------------------
domain names, trademarks, registrations, copyrights, patents, patent rights and
applications for any of the foregoing, the Obligors shall maintain and protect
the same to the extent reasonably required for the operation of the Obligors'
business and shall take and assert any and all remedies reasonably available to
any Obligor to prevent any other Person from infringing upon or claiming any
interest in any such material trademarks, registrations, copyrights, patents,
patent rights or application for any of the foregoing.

                                      52
<PAGE>

     The Obligors will notify Bank promptly of (a) the filing of any patent or
trademark application by any Obligor; (b) the grant of any patent or trademark
to any Obligor; or (c) any Obligor's intent to abandon a patent or trademark.

     The Obligors will, if requested by Bank, (i) execute and deliver to Bank
assignments, financing statements, patent mortgages or such other documents, in
form and substance reasonably acceptable to Bank, necessary to perfect and
maintain Bank's security interest in all existing and future patents, patent
applications, trademarks, trademark applications, and other General Intangibles
owned by any Obligor; and (ii) furnish Bank with evidence satisfactory to Bank
that all actions necessary to maintain and protect each trademark and patent
owned by any Obligor or its employees have been taken in a timely manner.

          12.6  Insurance.
                ---------

                (a) Collateral. The Obligors, at their expense, shall keep the
                    ----------
Collateral insured against loss or damage by fire, theft, explosion, sprinklers,
and all other hazards and risks, as are ordinarily insured against by other
owners in similar businesses, in amounts acceptable to Bank, but in any event in
amounts sufficient to cover the value of all of each Obligor's Equipment and
Inventory and in amounts sufficient to prevent any Obligor from becoming a co-
insurer under such policies. The Obligors also shall maintain business
interruption, public liability, product liability, and property damage insurance
relating to any Obligor's ownership and use of the Collateral, as well as
insurance against larceny, embezzlement, and criminal misappropriation.

                (b) Endorsements, Cancellation or Modification. The Obligors
                    ------------------------------------------
shall cause Bank to be named as loss payee (with a lender's loss payable
endorsement) with respect to all Collateral, and additional insured with respect
to all liability insurance, as its interests may appear. Every policy of
insurance referred to in this Section shall contain an agreement by the insurer
that thirty (30) days' written notice will be given Bank by the insurer prior to
cancellation or material modification of such insurance coverage. Any
modification of any insurance policy or coverage involving any decrease in the
amount or scope of coverage, must be approved by Bank in writing prior to the
effective date of such modification.

                (c) General.  All such policies of insurance shall be in such
                    -------
form, with such companies, and in such amounts as may be reasonably satisfactory
to Bank. Every policy of insurance referred to in this Section shall contain an
agreement by the insurer that any loss payable thereunder shall be payable
notwithstanding any act or negligence of any Obligor or the Bank which might,
absent such agreement, result in a forfeiture of all or a part of such insurance
payment.

                                      53
<PAGE>

                (d) Policies and Evidence of Insurance.  The Obligors shall
                    ----------------------------------
cause to be delivered to Bank the insurance policies and all endorsements
thereto and evidence of insurance utilizing a current ACORD 27 Evidence of
Property Insurance and at least thirty (30) days prior to the expiration of any
such insurance, additional policies or duplicates thereof and evidence of
insurance utilizing a current ACORD 27 Evidence of Property Insurance confirming
the renewal of such insurance and payment of the premiums therefor.

                (e) Losses; Payments. The Obligors shall direct all insurers
                    ----------------
that in the event of any loss thereunder or the cancellation of any insurance
policy, the insurers shall make payments for such loss and pay all return or
unearned premiums directly to Bank and not to Obligors and Bank jointly. In the
event of any loss, the Obligors will give Bank prompt notice thereof and Bank
may make proof of loss whether the same is done by Obligors. Bank is hereby
granted a power of attorney by the Obligors with full power of substitution to
file any proof of loss in any Obligor's or Bank's name, to endorse any Obligor's
name on any check, draft or other instrument evidencing insurance proceeds, and
to take any action or sign any document to pursue any insurance loss claim.

     In the event of any loss, Bank, at its option, may (a) retain and apply all
or any part of the insurance proceeds to repay or secure the Obligations, in
such order and amounts as Bank may elect, or (b) disburse all or any part of
such insurance proceeds to or for the benefit of the applicable Obligor for the
purpose of repairing or replacing Collateral after receiving proof satisfactory
to Bank of such repair or replacement, in either case without waiving or
impairing the Obligations or any provision of this Agreement. Any deficiency
thereon shall be paid by Obligors to Bank upon demand. Obligors shall bear the
full risk of loss from any loss of any nature whatsoever with respect to the
Collateral.

                (f) Credit Insurance.  In the event any Obligor obtains credit
                    ----------------
insurance, such Obligor shall cause all proceeds payable under such insurance
policies to be paid to Bank to be applied on account of the Obligations.

          12.7  Inspections; Examinations. The Obligors hereby irrevocably
                -------------------------
authorize all accountants and auditors employed by any Obligor at any time to
exhibit and deliver to Bank copies of any and all of such Obligor's financial
statements, trial balances or other accounting records of any sort in the
accountant's or auditor's possession and copies of all reports submitted to the
Obligors by such accountants or auditors, including management letters,
"comment" letters and audit reports, and to disclose to Bank any information
they may have concerning any Obligor's financial status and business operations.
The Obligors further authorize all federal, state and municipal authorities to
furnish to Bank copies of reports or examinations relating to any Obligor,
whether made by any Obligor or otherwise.

     The officers or employees of Bank, or such Persons as Bank may designate,
may visit and inspect any of the properties of any Obligor, examine (either by
Bank's employees or by independent accountants) any of the Collateral or other
assets of the Obligors, including the Books of the Obligors, and

                                      54
<PAGE>

discuss the affairs, finances and accounts of the Obligors with their officers
and with their independent accountants, at such times as Bank may desire. Bank
may conduct at any time and from time to time, and the Obligors will fully
cooperate with, field examinations of the Inventory, Accounts and business
affairs of the Obligors.

     Obligors agree to pay all costs and expenses of Bank related to such
visits, inspections and field examination at a per man per day rate of $600, but
not to exceed $15,000.00 during any one-year period, plus out-of-pocket
expenses, provided that, after the occurrence of an Event of Default, Obligors
          -------- ----
agree to pay any and all costs and expenses of Bank related to such visits,
inspections and field examination, without limitation.

          12.8  Pension Plans. The Obligors will (a) keep in full force and
                -------------
effect any and all Plans which are presently in existence or may, from time to
time, come into existence under ERISA, unless such Plans can be terminated
without material liability to any Obligor in connection with such termination
(as distinguished from any continuing funding obligation); (b) make
contributions to all of their Plans in a timely manner and in a sufficient
amount to comply with the requirements of ERISA or other applicable pension
laws; (c) comply with all material requirements of ERISA or other applicable
pension laws which relate to such Plans so as to preclude the occurrence of any
Reportable Event, Prohibited Transaction or material "accumulated funding
deficiency" as such term is defined in ERISA; and (d) notify Bank promptly upon
receipt by any Obligor of any notice of the institution of any proceeding or
other action which is likely to result in the termination of any Plan.

          12.9  Bank Accounts. Borrowers will maintain a lockbox with Bank and
                -------------
their operating accounts, main disbursement accounts, investment accounts and
deposit accounts with Bank, unless otherwise agreed by Bank in writing. The
Obligors will notify Bank in writing and on a continuing basis, of all deposit
accounts, investment accounts and certificates of deposit (including the numbers
thereof) maintained with or purchased from any other depository institutions.

          12.10 Maintenance of Management. The Obligors will cause their
                -------------------------
business to be continuously managed by the following persons in the positions
described below or such other persons (serving in such positions) as may be
reasonably satisfactory to the Bank:

     Person                            Position
     ------                            --------

     Jugal K. Taneja           Consultant to DrugMax
                               Chairman of the Board of DrugMax
                               Chairman of the Board of Desktop

     William L. LaGamba        Chief Executive Officer of DrugMax

                                      55
<PAGE>

                                       Chief Executive Officer of Desktop
                                       Chief Executive Officer of Vetmall

                 Stephen M. Watters    Consultant to DrugMax
                                       Vice Chairman of the board of Directors
                                       of DrugMax

                 Ronald J. Patrick     Chief Financial Officer and Vice
                                       President - Finance of  DrugMax
                                       Chief Financial Officer and Vice
                                       President - Finance  of Valley
                                       Chief Financial Officer and Vice
                                       President - Finance of Desktop
                                       Chief Financial Officer and Vice
                                       President - Finance of VetMall

          12.11 Transactions with Affiliates. Borrowers will cause all of their
                ----------------------------
Indebtedness at any time owed to any Guarantor, Subsidiary, Affiliate,
shareholder, director and officer to be subordinated in all respects to all
Obligations and will not make any payments thereon, except as approved by Bank
in writing.

          12.12 Additional Documents and Future Actions. The Obligors will, at
                ---------------------------------------
their sole cost, take such actions and provide Bank from time to time with such
agreements, financing statements and additional instruments, documents or
information as the Bank may in its reasonable discretion deem necessary or
advisable to perfect, protect, maintain or enforce its Lien in the Collateral,
to permit Bank to protect or enforce its Lien in the Collateral, or to carry out
the terms of the Loan Documents. The Obligors hereby authorize and appoint Bank
as their attorney-in-fact, with full power of substitution, to take such actions
as Bank may deem advisable to protect the Collateral and its interests thereon
and its rights hereunder, to execute on any Obligor's behalf (if necessary) and
to file at the Obligors' expense financing statements or applications for
registration and amendments thereto, in those public offices deemed necessary or
appropriate by Bank to establish, maintain and protect a continuously perfected
or published Lien in the Collateral, and to execute on any Obligor's behalf such
other documents and notices as Bank may deem advisable to protect the Collateral
and its interests therein and its rights hereunder. Such power being coupled
with an interest is irrevocable, the Obligors irrevocably authorize the filing
of financing statements or applications for registration by Bank describing the
Collateral, the filing of initial financing statements in the jurisdiction of
any Obligor's legal formation and existence, the filing of a carbon,
photographic or other copy of this Agreement, or of a financing statement, as a
financing statement and agree that such filing is sufficient as a financing
statement.

                                      56
<PAGE>

          12.13  Title to Equipment. The Obligors will promptly have Bank's
                 ------------------
Lien noted on any and all evidences of ownership of, certificates of title, or
applications for title to any items of Equipment, and will promptly deliver to
Bank the originals thereof.

          12.14  Taxes. The Obligors will cause all assessments and taxes,
                 -----
whether real, personal, or otherwise, due or payable by, or imposed, levied, or
assessed against any Obligor or any of their property to be paid in full, before
delinquency or before the expiration of any extension period. The Obligors shall
make due and timely payment or deposit of all such federal, state, and local
taxes, assessments, or contributions required of it by law, and will execute and
deliver to Bank, on demand, appropriate certificates attesting to the payment
thereof or deposit with respect thereto. The Obligors will make timely payment
or deposit of all tax payments and withholding taxes required of it by
applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state
disability, and local, state, and federal income taxes, and will, upon request,
furnish Bank with proof satisfactory to Bank indicating that the Obligors have
made such payments or deposits.

          12.15  Leases. The Obligors will pay when due all rents and other
                 ------
amounts payable under any leases to which any Obligor is a party or by which any
Obligor's properties and assets are bound. To the extent that any Obligor fails
timely to make payment of such rents and other amounts payable when due under
its leases, Bank shall be entitled, in its discretion, to reserve an amount
equal to such unpaid amounts against the Availability.

          12.16  Notices.  Obligors will promptly notify Bank of (a) any
                 --------
action or proceeding brought against any Obligor wherein such action or
proceeding would, if determined adversely to such Obligor result in liability of
the Obligors in excess of $50,000 individually, or $100,000 in the aggregate for
all Obligors, (b) the occurrence of any Event of Default, (c) any fact,
condition or event which, with the giving of notice or the passage of time or
both, could become an Event of Default, (d) the failure of the Obligors to
observe any of their undertakings under the Loan Documents, (e) the occurrence
of any Material Adverse Change, (f) any new locations to be added as an
additional Eligible Inventory Location; (g) the creation of any new inventions
or other events related to the intellectual property of any Obligor; (h) the
occurrence of any casualty loss related to the Collateral: (i) the receipt of
any notice of the institution or proceeding or other action which may result in
the termination of any Plan; (j) any change in the management roles of (k) Jugal
K. Taneja, (2) William L. LaGamba, (3) Stephen M. Watters, (4) Ronald J. Patrick
as described in Section 12.10 or any change in any other senior management
                -------------
employees of Obligors; and (l) the receipt of any licenses described as
"pending" on Schedule 11.24(b) or the rejection of any license applications
             -----------------
described as "pending" on Schedule 11.24(b).
                          -----------------

          12.17  Assignment of Claims Act.  Each Obligor shall promptly
                 ------------------------
execute any documents or instruments and shall take such steps or actions
reasonably required by Bank so that all monies due or to become due under any
contract with the U.S., the District of Columbia or any other Governmental
Authority, will be assigned to Bank and notice given thereof in accordance with
the

                                      57
<PAGE>

requirements of the Assignment of Claims Act of 1940, as amended, or any other
laws, rules or regulations relating to the assignment of any such contract and
monies due to or to become due.

          12.18  Additional Guarantors. In the event that any Obligor shall form
                 ---------------------
or acquire any new Subsidiary after the date hereof or any existing Subsidiary
shall acquire any assets or engage in any business activities, the applicable
Obligors will cause such Subsidiary to become a "Guarantor" hereunder pursuant
to an Assumption Agreement in the form and content as required by Bank (an
"Assumption Agreement") pursuant to which such Subsidiary shall agree to be
bound as a "Guarantor" by all provisions of this Agreement and the other Loan
Documents and the applicable Obligors shall cause such Subsidiary to execute a
Surety Agreement similar in form to the Surety Agreements executed by the other
Guarantors. Together with the Assumption Agreement for each Subsidiary, the
applicable Obligor shall deliver such proof of corporate action, incumbency of
officers, opinions of counsel, UCC-1 financing statements, a Pledge Agreement in
favor of Bank, blank stock powers, original Capital Stock certificates and other
documents as the Bank shall request. The applicable Obligor hereby agrees to
immediately pledge to the Bank under a Pledge Agreement and thereby grant a
security interest to Bank in any and all of its ownership interests of any
Subsidiary which becomes a "Guarantor" hereunder pursuant to this Section.

          12.19  Instruments; Promissory Notes. The Obligors will cause any
                 -----------------------------
instruments or notes received by or payable to such Obligor to be delivered to
Bank appropriately endorsed to the order of Bank.

          12.20  Future Leases.  The Obligors will deliver to Bank, promptly
                 --------------
after the execution by an Obligor, as lessee, of any Lease, an executed copy
thereof.

          12.21  Web Sites.  With respect to each website operated or
                 ----------
maintained by any Obligor, such Obligor agrees as follows:

                 (a)  To maintain and operate each website to meet the security
and performance standards set forth on Schedule 11.35. Obligors warrant and
                                       ---------------
covenant that they will maintain their websites in continuous operation
providing at least its current level of functionality with respect to Obligors
business operations. Obligors further warrant and covenant that they shall not
obtain a license for use in connection with the use of their websites of any
software, data, service mark, trademark or copyright unless (i) such license
allows the use of the right licensed for the use intended by Obligors; or (ii)
either (A) such license is a mass-market license readily obtainable through
retail establishments for a one time payment of less than $500 USD or (B) the
license provides that the Obligors may grant Bank a security interest in and to
the license rights, the Bank may receive an assignment of the license rights,
and the Bank may assign such rights to a third party in connection with a
disposition of the Collateral.

                                      58
<PAGE>

                 (b)  Not to move the location of any servers servicing any
website from the locations described on Schedule 11.35 unless Obligors comply
                                        --------------
with the provisions of Section 13.14. Obligors agree to furnish to the Bank, if
                       --------------
requested, a website hosting service waiver and recognition of rights with
respect to any collateral that is or may be located on equipment in the
possession of a website hosting service, such waiver and recognition of rights
to be in such form and upon such terms as are acceptable to Bank.

                 (c)  Not to change the method used by any Obligor of hosting
any website from the method described on Schedule 11.35, unless such change has
                                         --------------
been approved by Bank in writing.

                 (d)  To permit Bank, its employees and any consultants retained
by Bank to review and inspect all website components, including without
limitations all computer hardware and all intellectual property interests or, at
the request of the Bank, provide Bank with a complete "mirror" image of the
website accessible to Bank at all times.

                  (e)  To maintain in full force and effect, to comply with and
to cause all other parties to comply with all operating agreements, maintenance
agreements, equipment leases, hosting contracts, line connection leases or
agreements, content or software licenses and all other agreements related to the
ownership, operation and maintenance of any website by an Obligor (collectively,
the "Website Agreements").

                   (f)  To deliver to Bank fully executed estoppel, waiver and
consent agreements from all hosting services, equipment lessors and maintenance
providers, in form and content acceptable to Bank.

                   (g)  To notify Bank immediately of any defaults by any party
to any Website Agreement.

                   (h)  Obligors shall maintain for the benefit of Bank, if
requested, a back-up copy of all data comprising their website with a third-
party escrow agent acceptable to Bank and execute and deliver a data escrow
agreement with such third-party escrow agent in such form and upon such terms as
are acceptable to Bank.

          13.  NEGATIVE COVENANTS.  The Obligors, jointly and severally,
               ------------------
covenant and agree that, so long as this Agreement has not been terminated and
until full and final payment of the Obligations, and unless Bank shall otherwise
consent in writing, each Obligor shall comply with the following:

                                      59
<PAGE>

          13.1  Limitation on Sale and Leaseback. The Obligors will not enter
                ---------------------------------
into any arrangement whereby any of them will sell or transfer any real property
or improvements thereon or other fixed assets owned by any of them and then or
thereafter rent or lease as lessee such property, improvements or assets or any
part thereof which any of them shall intend to use for substantially the same
purposes as the property sold or transferred.

          13.2  Limitation on Indebtedness. The Obligors will not have at any
                --------------------------
time outstanding to any Person other than Bank, any Indebtedness for borrowed
money, Capitalized Lease Obligations, or any outstanding letters of credit,
except:

                (a)  Existing Indebtedness for borrowed money and Capitalized
Lease Obligations described on Schedule 13.2;
                               -------------

                (b)  Future purchase money Indebtedness and Capitalized Lease
Obligations not to exceed $100,000 in the aggregate principal amount during any
fiscal year, incurred to finance Capital Expenditures permitted under Section
                                                                      -------
14.5, provided that, Bank shall have the right of first refusal to provide such
----  -------- ----
financing on reasonably competitive terms; and

                 (c) Indebtedness for borrowed money in an amount not to exceed
$100,000 outstanding at any time in the aggregate which is subordinated in right
of payment and in right to exercise all remedies to all Obligations, pursuant to
a Subordination Agreement in form and content acceptable to Bank.

          Any of such existing permitted Indebtedness may not be refinanced or
replaced without the consent of the Bank. Notwithstanding anything herein or
elsewhere to the contrary neither Borrower may make any loans to the other
Borrower, to any other Obligor or to any Affiliate of any Obligor.

          13.3  Loans.  The Obligors will not make or have outstanding any
                -----
loans or advances in the nature of loans to any Person including, without
limitation, any officer, shareholder, director, employee or Affiliate of such
Obligor, except (a) advances made to the Obligors' employees in the ordinary
course of any Obligor's business and other loans to the Obligors' employees in
an aggregate outstanding amount not to exceed $50,000 at any time, and (b) loans
described on Schedule 13.3. Notwithstanding anything here or elsewhere to the
             -------------
contrary neither Borrower may make any loans to the other Borrower, to any other
Obligor or any Affiliate of any Obligor.

          13.4  Investments.  Obligors will not have or make any investments
                -----------
in all or any portion of the capital stock or securities of any Person, or any
loans, advances or extensions of credit to any Person, except investments listed
on Schedule 13.4 attached hereto.
   -------------

                                      60
<PAGE>

          13.5  Guaranties. The Obligors will not directly or indirectly
                -----------
guarantee, endorse (other than for collection or deposit in the ordinary course
of business), discount, sell with recourse or for less than the face value or
agree (contingently or otherwise) to purchase or repurchase or otherwise
acquire, or otherwise become directly or indirectly liable for, or agree
(contingently or otherwise) to supply or advance funds (whether by loan, stock
purchase, capital contribution or otherwise) in respect of, any Indebtedness,
obligations or liabilities of any Person, except in connection with the Surety
Agreements.

          13.6  Disposition of Assets. The Obligors will not sell, lease,
                ----------------------
transfer, or otherwise dispose any of their Property, except for (a) sales of
Inventory to customers in the ordinary course of business, (b) disposition of
assets by any Obligor to another Obligor, or (c) the disposition of obsolete
Equipment with a "book" value of up to $25,000 each and $50,000 in the aggregate
in any one fiscal year.

          13.7  Merger; Consolidation; Business Acquisitions; Subsidiaries. The
                ----------------------------------------------------------
Obligors will not (a) merge into or consolidate with any Person, except for the
merger of one Borrower into another Borrower, (b) acquire any portion of the
Capital Stock of any person or a material portion of assets or business of any
Person, or the operating business or division of any Person, or any Property not
used or useful in the operation of the Business, (c) permit any Person to merge
into any of them, except for the merger of one Borrower into another Borrower,
(d) form any Subsidiaries, without complying with Section 12.18, (e) change any
                                                  -------------
of their respective states of formation or incorporation, (f) materially change
the principal nature of their business or engage in any business other than the
Business, (g) permit any Subsidiary to engage in any business activity, acquire
any assets or, acquire any ownership or investment interests in any Person,
without the prior written consent of Bank, or (h) purchase or permit any
Subsidiary to purchase the assets or stock of Penner & Welsch, Inc. without the
Bank's prior written consent.

          13.8  Liens. The Obligors will not create, incur or permit to exist
                ------
any Lien of any kind on their property or assets, whether now owned or hereafter
acquired, or upon any income, profits or proceeds therefrom, except:

                (a)  Liens held by Bank;

                (b)  Deposits made in the ordinary course of business (i) in
connection with worker's compensation, unemployment insurance, social security
and other like laws or (ii) to secure the performance of statutory obligations,
not incurred in connection with either (A) the borrowing of money or (B) the
deferred purchase price of goods or Inventory;

                (c)  Encumbrances consisting of zoning restrictions, easements,
reservations, servitudes, restrictions on the use of real property or minor
irregularities of title thereto, none of which impairs the use of such property
by any Obligor in the operation of their business;

                                      61
<PAGE>

                (d)  Liens listed on Schedule 13.8 attached hereto;
                                     -------------

                (e)  Purchase money Liens or Capitalized Leases, provided that:
                                                                 -------- ----

                     (i)   the property subject to any of the foregoing is
acquired or leased by such Obligor in the ordinary course of its business and
the Lien on any such property is created contemporaneously with such
acquisition;

                     (ii)  the purchase money Indebtedness or principal portion
of the Capitalized Lease Obligations so created shall not exceed 100% of the
lesser of cost or fair market value as of the time of acquisition or lease of
the property covered thereby;

                     (iii) the purchase money Indebtedness or Capitalized Lease
Obligations shall only be secured by the property so acquired or leased;

                     (iv)  the purchase money Indebtedness or Capitalized Lease
Obligations are permitted by the provisions of Sections 13.2 and 14.5; and
                                               ----------------------

                     (v)   no Default or Event of Default then exist.

     The Obligors shall not enter into any agreement with any other Person which
shall prohibit the Obligors from granting, creating or suffering to exist, or
otherwise restrict in any way (whether by covenant, by identifying such event as
a default under such agreement or otherwise) the ability of the Obligors to
grant, create or suffer to exist, any lien, security interest or other charge or
encumbrance upon or with respect to any of their assets in favor of the Bank.

          13.9   Letters of Credit. The Obligors will not apply for or obtain
                 -----------------
any letters of credit, except Merchandise Letters of Credit or standby letters
of credit issued by Bank.

          13.10  Insurance.  The Obligors shall not take out separate insurance
                 ----------
concurrent in form or contributing in the event of casualty loss with that
required to be maintained under Section 12.6 unless Bank is named as loss payee
                                ------------
(with a lender's loss payable endorsement). The Obligors shall promptly notify
Bank whenever such separate insurance is taken out, specifying the insurer
thereunder and full particulars as to the policies evidencing the same, and
originals of such policies shall be provided promptly to Bank.

          13.11  Default Under Other Indebtedness. The Obligors will not permit
                 ---------------------------------
any of their Indebtedness to be in default. If any Indebtedness of the Obligors
is declared or becomes due and payable before its expressed maturity by reason
of default or otherwise or to the knowledge of any Obligor, the holder of any
such Indebtedness shall have the right (or upon the giving of notice or the
passage of time,

                                      62
<PAGE>

or both, shall have the right) to declare such Indebtedness to be so due and
payable, the Obligors will promptly give Bank written notice of such
declaration, acceleration or right of declaration.

          13.12  Transactions with Affiliates. Except for the transactions
                 ----------------------------
described on Schedule 11.23, the Obligors will not enter into or conduct any
             --------------
transaction with any Affiliate without the prior written consent of Bank.
Obligors will only enter into or conduct transactions with Affiliates on terms
which are reasonable and customary for arms-length transactions between parties
who are not affiliated. Borrowers will not sell Inventory to each other for a
purchase price in excess of their cost.

          13.13  Name or Chief Executive Address Change. The Obligors will not
                 --------------------------------------
change their names, FEIN numbers, or chief executive addresses except upon
thirty (30) days prior written notice to Bank and delivery to Bank of any items
requested by Bank to maintain perfection and priority of Bank's first priority
Lien in the Obligors' Accounts, General Intangibles and similar assets and
access to the Obligors' Books, including without limitation, new UCC-1 financing
statements and Collateral Access Agreements.

          13.14  Change in Location of Collateral. Obligors will not change
                 --------------------------------
the location at which any of their inventory, equipment or other personal
property is located except upon thirty (30) days prior written notice to Bank
and, provided that Obligors comply with all of the following conditions:
     -------- ----

                 (a)  The applicable Obligor executes and delivers to Bank such
UCC-1 financing statements covering all Inventory and related assets of the
applicable Obligor to be located at such new location(s) as may be required by
Bank to perfect Bank's Lien in such inventory and related assets.

                 (b)  Bank receives written confirmation that such new UCC-1
financing statements have been filed in the appropriate offices required to
perfect Bank's Lien at such new location(s).

                 (c)  Bank receives a search report from a reputable search
company confirming that there are no other Liens encumbering any of such
applicable Obligor's assets at such new location(s), except the Lien in favor of
Bank.

                 (d)  Bank receives a copy of the lease, sub-lease, warehouse
agreement or similar agreement entered into by the applicable Obligor with the
owner, lessor or operator of the new location(s).

                 (e)  Bank receives evidence satisfactory to Bank that all
assets of the applicable Obligor at such new location(s) are covered by the
insurance coverage required under Section 12.6.
                                  ------------

                                      63
<PAGE>

                 (f)  Bank receives a Collateral Access Agreement from the
owner/lessor of the new location in form and content acceptable to Bank.

          13.15  Material Adverse Contracts. The Obligors will not become or
                 ---------------------------
be a party to any contract or agreement which has a materially adverse impact on
any Obligor's ability to perform under this Agreement or any other Loan
Document.

          13.16  Restrictions on Use of Proceeds. Borrowers will not carry or
                 -------------------------------
purchase with the proceeds of the Revolving Credit Facility or the Term Loan any
"margin security" within the meaning of Regulations U, T or X of the Board of
Governors of the Federal Reserve System.

          13.17  Subordinated Indebtedness. Borrower (a) will not make any
                 -------------------------
payments on the Subordinated Indebtedness except as permitted under the
Subordination Agreements, and (b) will not breach any of the terms of any
Subordination Agreements.

          13.18  Prepayments; Amendments and License Agreements. The Obligors
                 -----------------------------------------------
will not:

                 (a)  Prepay, redeem, retire, defease, purchase, or otherwise
acquire any Indebtedness for borrowed money owing to any third Person, other
than the Obligations in accordance with this Agreement;

                 (b)  Directly or indirectly, amend, modify, alter, increase, or
change any of the terms or conditions of any agreement, instrument, document,
indenture, or other writing evidencing or concerning any Indebtedness for
borrowed money to make such terms or conditions more onerous or expensive for
the Obligors;

                 (c)  Amend, modify or waive any material term or provision of
their respective Governing Documents in a manner materially adverse to the
Obligors or Bank; or

                 (d)  Amend, modify or waive any term or provision of any of
Licenses.

          13.19  Distributions; Stock Redemptions. The Obligors will not make
                 --------------------------------
any distribution or declare or pay any dividends (in cash or other property,
other than Capital Stock) on, or purchase, acquire, redeem, or retire any of
such Obligor's Capital Stock, of any class, whether now or hereafter
outstanding.

          13.20  Issuance of Capital Stock. No Subsidiary of DrugMax will issue
                 --------------------------
any Capital Stock unless all of such Capital Stock is pledged to Bank pursuant
to a Pledge Agreement substantially identical to the Pledge Agreements and the
original certificates evidencing such pledged Capital

                                      64
<PAGE>

Stock are delivered to Bank together with executed blank stock powers. Obligors
will not issue any Capital Stock which would result in any Change in Control.

          13.21  Prohibited Transactions Under ERISA.  The Obligors will not
                 -----------------------------------
directly or indirectly:

                 (a)  engage, or permit any Subsidiary of DrugMax to engage, in
any prohibited transaction which is reasonably likely to result in a civil
penalty or excise tax described in Section 406 of ERISA or 4975 of the IRC for
which a statutory or class exemption is not available or a private exemption has
not been previously obtained from the Department of Labor;

                 (b)  permit to exist with respect to any Benefit Plan any
accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of
the IRC), whether or not waived;

                 (c)  fail, or permit any Subsidiary of DrugMax to fail, to pay
timely required contributions or annual installments due with respect to any
waived funding deficiency to any Benefit Plan;

                 (d)  terminate, or permit any Subsidiary of DrugMax to
terminate, any Benefit Plan where such event would result in any liability of
any Obligor, any Subsidiary of DrugMax or any ERISA Affiliate under Title IV of
ERISA;

                 (e)  fail, or permit any Subsidiary of DrugMax to fail, to make
any required contribution or payment to any Multiemployer Plan;

                 (f)  fail, or permit any Subsidiary of DrugMax to fail, to pay
any required installment or any other payment required under Section 412 of the
IRC on or before the due date for such installment or other payment;

                 (g)  amend, or permit any Subsidiary of DrugMax to amend, a
Plan resulting in an increase in current liability for the plan year such that
any Obligor, any Subsidiary of DrugMax or any ERISA Affiliate is required to
provide security to such Plan under Section 401(a)(29) of the IRC; or

                 (h)  withdraw, or permit any Subsidiary of DrugMax to withdraw,
from any Multiemployer Plan where such withdrawal is reasonably likely to result
in any liability of any such entity under Title IV of ERISA.

                                      65
<PAGE>

               13.22  Licenses.  No Obligor will enter into any license,
                      --------
royalty or similar agreements regarding any patents, trademarks, tradenames,
copyrights or other General Intangibles owned by such Obligor, which grants any
exclusive rights to use such General Intangibles to any Person.

               13.23  Consignments. Obligors will not (a) consign any Inventory
                      ------------
for sale, (b) sell any Inventory on sale or return, sale on approval, or other
conditional terms of sale or (c) reflect any Inventory held by them on
consignment for another Person as Inventory owned by an Obligor.

               13.24  Trademark and Tradename Licenses. No Obligor will enter
                      --------------------------------
into any license or similar right to use or royalty agreement with respect to
any trademark or tradename owned by such Obligor without the prior written
consent of Bank.

               13.25  Equipment Becoming Fixture. Obligors will not permit any
                      --------------------------
item of equipment owned by such Obligor to become a fixture to real estate or an
accession to other property, except for equipment which may become a trade
fixture to premises leased by such Obligor but with respect to which the
landlord has waived any right of ownership or security interest.

          14.  FINANCIAL COVENANTS.  Except with the prior written consent of
               -------------------
Bank, Borrowers will comply with the following:

               14.1  Net Income. Borrowers will have Net Income, determined on a
                     ----------
consolidated basis with respect to the two (2) Borrowers only and not including
any Guarantor or other Subsidiary, of not less than the following amounts for
the following periods (if a loss is indicated, the loss will not be greater than
the specified amount):

            Amount                         Period
            ------                         ------

         ($670,000)           Fiscal quarter ending June 30, 2000

         ($300,000)           Fiscal quarter ending September 30, 2000

           $25,000            Fiscal quarter ending December 31, 2000

          $445,000            Fiscal quarter ending March 31, 2001

         ($500,000)           Fiscal year ending March 31, 2001

           $70,000            Fiscal quarter ending June 30, 2001

           $90,000            Fiscal quarter ending September 30, 2001

           $70,000            Fiscal quarter ending December 31, 2001

          $545,000            Fiscal quarter ending March 31, 2002

                                      66
<PAGE>

         $  775,000      Fiscal year ending March 31, 2002

         $   75,000      Fiscal quarter ending June 30, 2002

         $   85,000      Fiscal quarter ending September 30, 2002

         $  105,000      Fiscal quarter ending December30, 2002

         $  570,000      Fiscal quarter ending March 31, 2003

         $  835,000      Fiscal year ending March 31, 2003

         $  180,000      Fiscal quarter ending June 30, 2003 and for
                         each fiscal quarter thereafter

         $1,000,000      Fiscal quarter ending March 31, 2004
                         each fiscal quarter thereafter

                    14.2  Stand-Alone Net Income.  Each Borrower, on a
                          ----------------------
stand-alone basis and not consolidated with any Guarantor or other Subsidiary,
will have Net Income of not less than the following amounts for the following
periods (if a loss is indicated, the loss will not be greater than the specified
amount):

                  Amount                               Period
                  ------                               ------

          DrugMax        Valley
          -------        ------
         ($850,000)      $155,000     Fiscal quarter ending June 30, 2000

         ($650,000)      $150,000     Fiscal quarter ending September 30, 2000

         ($300,000)      $100,000     Fiscal quarter ending December 31, 2000

         $ 150,000       $100,000     Fiscal quarter ending March 31, 2000

         ($200,000)      $100,000     Fiscal quarter ending June 30, 2001

         ($200,000)      $100,000     Fiscal quarter ending September 30, 2001

         ($200,000)      $100,000     Fiscal quarter ending December 31, 2001

          $300,000       $100,000     Fiscal quarter ending March 31, 2002

         ($100,000)      $ 75,000     Fiscal quarter ending June 30, 2002

         ($100,000)      $ 75,000     Fiscal quarter ending September 30, 2002

         ($100,000)      $ 75,000     Fiscal quarter ending December 31, 2002

                                      67
<PAGE>

         $350,000        $100,000     Fiscal quarter ending March 31, 2003

         $      0        $ 75,000     Each of the first three (3) fiscal
                                      quarters in each fiscal year thereafter

         $400,000        $ 75,000     Each of the fourth fiscal quarters in
                                      each fiscal quarter thereafter

               14.3 Net Worth.  Borrowers will maintain Net Worth, determined
                    ---------
on a consolidated basis with respect to the two (2) Borrowers only and not
including any Guarantor or other Subsidiary, of not less than the following
amounts for the following periods:

           Amount                       Period
           ------                       ------

         $33,554,000     As of June 30, 2000

         $33,254,000     As of September 30, 2000 and all times thereafter
                         through December 30, 2000

         $33,279,000     As of December 31, 2000 and all times thereafter
                         through March 30, 2001

         $33,724,000     As of March 31, 2000 and all times thereafter
                         through June 29, 2001

         $33,794,000     As of June 30, 2001 and all times thereafter
                         through September 29, 2001

         $33,884,000     As of September 30, 2001 and all times thereafter
                         through December 29, 2001

         $33,954,000     As of December 30, 2001 and all times thereafter
                         March 30, 2002

         $34,499,000     As of March 31, 2002 and all times thereafter
                         through March 30, 2002

         $34,574,000     As of June 30, 2002 and all times thereafter
                         through September 29, 2002

         $34,659,000     As of September 30, 2002 and all times thereafter
                         through December 29, 2002

                                      68

<PAGE>

            Amount                           Period
            ------                           ------

         $34,764,000     As of December 31, 2002 and all times thereafter
                         through March 30, 2003

         $35,334,000     As of March 31, 2003 and all times thereafter
                         through March 30, 2004

         $36,334,000     As of March 31, 2004 and all times thereafter
                         through March 30, 2004

          As of the end of each fiscal year commencing with the fiscal year
ending March 31, 2005 and continuing throughout the next fiscal year until but
not including the next fiscal year end, the minimum Net Worth requirement will
be increased by $1,000,000 per year.

             14.4   Current Ratio.  Borrowers will maintain a Current Ratio,
                    -------------
determined on a consolidated basis with respect to the two (2) Borrowers only
and not including any Guarantor or other Subsidiary, of not less than 1.25 to
1.0 as of the Closing Date and at all times thereafter.

             14.5   Capital Expenditures.  Borrowers will not cause, suffer or
                    --------------------
permit their aggregate Capital Expenditures, determined on a consolidated basis,
to exceed the following amount for the following periods:

                  Amount                          Period
                  ------                          ------

                  $300,000         Fiscal year ending March 31, 2001

                  $300,000         Fiscal year ending March 31, 2002 and
                                   for each fiscal year end thereafter

          Such permitted Capital Expenditures are on a non-cumulative basis as
to any unused portions in any fiscal year.

             14.6   Cash on Deposit.  As a condition of closing and at all
                    ---------------
times thereafter, Borrowers shall maintain Bank as their sole bank of account
(except for certain payroll accounts as permitted by Bank) and shall deposit
with Bank in separate segregated accounts all cash-on-hand of Borrowers. In
addition, Borrowers will at all times maintain on deposit with Bank in a
separate segregated account a minimum of $2,000,000 in cash. The minimum cash
deposit amount shall be reduced in accordance with the following schedule:

                                      69
<PAGE>

                                                   Amount        Minimum
                                                     of           Cash
              Trigger Event                       Reduction      Deposit
              -------------                       ---------      -------

Receipt by Bank of the consolidated               $500,000.00    $1,500,000.00
and consolidating annual audited
financial statements of Borrowers and
the compliance certificate for the
fiscal year ended March 31, 2001

Receipt by Bank of the consolidated               $500,000.00    $1,000,000.00
and consolidating internally prepared
quarterly financial statements of
Borrowers and the compliance certificate
for the quarter ended September 30, 2001

Receipt by Bank of the consolidated               $500,000.00    $  500,000.00
and consolidating internally
prepared quarterly financial statements
of Borrowers and the compliance
certificate for the quarter ended
December 31, 2001

Receipt by Bank of the consolidated               $500,000.00    $           0
and consolidating annual audited financial
statements of Borrowers and the compliance
certificate for the fiscal year ended
March 31, 2002

Notwithstanding the foregoing, there shall be no reductions in the minimum cash
deposit amount unless (i) no Default or Event of Default has occurred and
Borrowers are then in compliance with all of the terms of the Loan Documents,
and (ii) Borrowers have averaged at least $1,000,000 of Excess Availability
under the Revolving Credit Facility for the thirty (30) days preceding the date
scheduled for any reduction and as of the date of such reduction.

          14.7 Changes to Financial Covenants. Bank may condition extension of
               ------------------------------
the Revolving Credit Facility after the Contract Period upon revision of the
foregoing financial covenants, as Bank in its sole discretion may require.

          14.7 Most Favored Lender. Borrowers agree promptly to notify Bank of
               -------------------
any agreement for Indebtedness for borrowed money to which any Borrower is a
party or under which it is

                                      70
<PAGE>

obligated and to provide Bank with a copy of such agreement. If such agreement
contains or at any time is amended to contain financial covenants more
restrictive than those contained in this Section 14, upon Bank's request,
                                         ----------
Borrowers agree to amend this Agreement accordingly so that the covenants
contained herein are substantially the same as those contained in such other
agreements for Indebtedness for borrowed money.

     15.  ACCOUNTING RECORDS, REPORTS AND FINANCIAL STATEMENTS. The Obligors
          ----------------------------------------------------
will maintain books of record and account in which full, correct and current
entries in accordance with GAAP will be made of all of their dealings, business
and affairs, and the Obligors will deliver to Bank the following:

          15.1 Annual Statements.  As soon as available and in any event within
               -----------------
one hundred thirty-five (135) days after the end of each fiscal year of
Borrowers:

               (a)  the audited, consolidated and consolidating income and
retained earnings statements of Borrowers and their Subsidiaries for such fiscal
year,

               (b)  the audited, consolidated and consolidating balance sheet of
Borrowers and their Subsidiaries as at the end of such fiscal year, and

               (c)  the audited, consolidated and consolidating statement of
cash flow of Borrowers and their Subsidiaries for such fiscal year,

setting forth in comparative form the corresponding figures as at the end of the
previous fiscal year, all in reasonable detail. The foregoing statements and
balance sheets shall be prepared in accordance with GAAP and the consolidated
statements shall be audited by independent certified public accountants of
recognized standing acceptable to Bank in the reasonable exercise of its
discretion with respect to which such accountants shall deliver their
unqualified opinion which shall not include any "going-concern" opinion.
Borrowers shall deliver to Bank drafts of the above-described annual statement
within ninety (90) days after the end of each fiscal year of Borrowers.

          15.2 Projections and Cash Flow. As soon as available and in any event
               -------------------------
within sixty (60) days prior to the end of each fiscal year of Borrowers,
projections of profit and loss statements, cash flows and balance sheets and
Availability of Borrowers and their Subsidiaries prepared on a month-by-month
basis for the next succeeding twelve (12) months, prepared by the chief
financial officer of Borrowers. Borrowers have furnished to Bank initial
projections dated as of the date hereof containing the information required by
this Section. Borrowers represent and covenant that (a) the initial projections
required by this Section have been prepared by the chief financial officer of
Borrowers and represent the best available good faith estimate of Borrowers
regarding the course of Borrowers' businesses for the periods covered thereby;
(b) all future projections required by this Section shall be prepared by or
under

                                      71
<PAGE>

the direction of the chief financial officer of Borrowers and shall represent
the best available good faith estimate of Borrowers regarding the course of
Borrowers' business for the periods covered thereby; (c) the assumptions set
forth in the initial projections are and the assumptions set forth in the future
projections delivered hereafter shall be reasonable and realistic based on then
current economic conditions; (d) Borrowers know of no reason why Borrowers
should not be able to achieve the performance levels set forth in the initial
projections and Borrowers shall have no knowledge at the time of delivery of
future projections of any reason why Borrowers shall not be able to meet the
performance levels set forth in said projections; and (e) Borrowers have
sufficient capital as may be required for their ongoing business and to pay
their existing and anticipated debts as they mature.

          15.3 Monthly Statements.  As soon as available and in any event
               ------------------
within thirty (30) days after the close of each calendar month;

               (a)  the consolidated and consolidating income and retained
earnings statements of Borrowers and their Subsidiaries for such month,

               (b)  the consolidated and consolidating balance sheet of
Borrowers and their Subsidiaries as of the end of such month, and

               (c)  the consolidated and consolidating statement of cash flow of
Borrowers and their Subsidiaries for such month,

setting forth in comparative form the corresponding figures as of the end of the
corresponding month of the previous fiscal year (if applicable) and the
projected figures based upon the projections required under Section 15.2, all in
                                                            ------------
reasonable detail, subject to year end adjustments and certified by the chief
financial officer of Borrowers to be, to the best of his knowledge, accurate in
all material respects and to have been prepared in accordance with GAAP.

          15.4 Collateral Reporting.  Each Borrower on a stand-alone basis
               --------------------
shall provide the Bank with the following documents at the following times in
form satisfactory to the Bank:

               (a)  with each request for an Advance under the Revolving Credit
Facility, but no less frequently than on a weekly basis, or more frequently if
requested by the Bank, a report of:

                    (i)  the Borrower's sales, credits and collections since the
last such report, and

                    (ii) Borrowing Base Certificate.

                                      72
<PAGE>

               (b)  by the 15/th/ day of each month (with respect to the
previous month), or more frequently if requested by Bank:

                    (i)   an aging of the Borrower's accounts;

                    (ii)  an aging of the Borrower's accounts payable.

                    (iii) a reconciliation to the previous month's aging of the
Borrower's accounts and to the Borrower's general ledger; and

                    (iv)  a calculation of ineligible Accounts with supporting
detail sufficient for Bank to verify all calculations.

               (c)  with each request for an Advance under the Revolving Credit
Facility, but no less frequently than on a weekly basis, or more frequently if
requested by the Bank, a report of:

                    (i)  Inventory by category and location, with additional
detail showing additions to and deletions from Inventory; and

                    (ii) Inventory subject to Eligible Inventory Buy-Back
Agreements.

               (d)  by the 15/th/ day of each month (with respect to the
previous month), or more frequently if requested by Bank:

                    (i)  an Inventory reconciliation to:

                         (A) the previous month's report of the Borrower's
                              Inventory;

                         (B)  the Borrower's general ledger;

                         (C)  the perpetual inventory system;

                    (ii)  a calculation of ineligible Inventory; and

                    (iii) a reconciliation of the perpetual inventory system
values to the general ledger values.

               (e)  upon request, copies of invoices in connection with the
Borrower's Accounts, customer statements, credit memos, remittance advices and
reports, deposit slips, shipping and

                                      73
<PAGE>

delivery documents in connection with the Borrower's Accounts and for inventory
acquired by the Borrowers, purchase orders and invoices.

                (f)   upon request, a statement of the balance of each of the
intercompany Accounts.

                (g)   other reports as to the Collateral of the Borrower as
the Bank shall reasonably request from time to time.

                (h)   with the delivery of each of the foregoing, a
certificate of the Borrower executed by an officer thereof certifying as to the
accuracy and completeness of the foregoing. If any of the Borrower's records or
reports of the Collateral are prepared by an accounting service or other agent,
the Borrower hereby authorizes such service or agent to deliver such records,
reports, and related documents to the Bank.

          15.5  Tax Returns. Copies of each Obligor's federal income tax
                -----------
returns, and any amendments thereto, within thirty (30) days of the filing
thereof with the Internal Revenue Service.

          15.6  SEC Reporting. Borrowers' Form 10-Q Quarterly Reports, Form 10-K
                -------------
Annual Reports, and Form 8-K Current Reports, and any other filings made by
Borrowers with the Securities and Exchange Commission, if any, as soon as the
same are filed, or any other information that is provided by Borrowers to their
shareholders.

          15.7  Audit Reports.  Promptly upon receipt thereof, one copy of each
                -------------
other report submitted to any Obligor, by independent accountants, including
management letters, "comment" letters, in connection with any annual, interim or
special audit report made by them of the Books of any Obligor.

          15.8  Reports to Governmental Agencies and Other Creditors. With
                ----------------------------------------------------
reasonable promptness, copies of all such financial reports, statements and
returns which Borrowers or any guarantor shall file with any federal or state
department, commission, board, bureau, agency or instrumentality and any report
or statement delivered by Borrowers or any Guarantor to any supplier or other
creditor in connection with any payment restructuring.

          15.9  Requested Information. With reasonable promptness, all such
                ---------------------
other data and information in respect of the condition, operation and affairs of
any Obligor as Bank may reasonably request from time to time.

          15.10 Compliance Certificates. Within the periods provided in
                -----------------------
Sections 15.1 and 15.3 above, a certificate of the chief financial officer of
----------------------
Borrowers (a) stating that Borrowers have observed, performed and complied with
each and every undertaking contained herein, (b) setting forth the

                                      74
<PAGE>

information and computations (in sufficient detail) required in order to
establish whether Borrowers were operating in compliance with the financial
covenants in Section 14 of this Agreement, (c) certifying that as of the date of
             ----------
such certification, there does not exist any Default or Event of Default, and
(d) certifying as to the state of incorporation or formation of each Obligor.
Such certificate will be in the form of Exhibit A attached hereto.
                                        ---------

               15.11  Accountant's Certificate.  Simultaneously with the
                      ------------------------
delivery of certified financial statements required by Section 15.1, copies of a
                                                       ------------
certificate of the accountants who audited such statements stating that (a) they
have checked the computations delivered by the Obligors in compliance with
Section 15.1, and (b) in making the examination necessary for their audit or
------------
review of such financial statements for such year, nothing came to their
attention of a financial or accounting nature that caused them to believe that
(i) any Obligor was not in compliance with the terms, covenants, provisions or
conditions of any of the Loan Documents, or (ii) there shall have occurred any
condition or event which would constitute an Event of Default, or, if so,
specifying in such certificate all such instances of non-compliance and the
nature and status thereof. Such certificate shall be unqualified and shall not
include any "going-concern" opinion of the accountants.

           16. CONDITIONS PRECEDENT TO THE INITIAL ADVANCE OR LETTER OF CREDIT.
               ---------------------------------------------------------------
The obligation of (a) Bank to make the initial Advance or (b) Bank to issue the
initial Letter of Credit is subject to the fulfillment, to the satisfaction of
Bank, of each of the following conditions on or before the Closing Date. All of
such agreements, documents and other items must be in form, content and all
other respects satisfactory to Bank.

               16.1    Searches.  Bank shall have received copies of record
                       --------
searches (including UCC searches, patent searches, trademark searches,
copyright searches and judgments, suits, bankruptcy, litigation, tax and other
lien searches) against each Obligor.

               16.2    UCC-1 Filings.  Bank shall have received confirmation
                       -------------
from a service organization retained by Bank to file financing statements and
fixture filings that such filings have been made in all relevant jurisdictions.

               16.3.   Executed Loan Documents.  Bank shall have received
                       -----------------------
each of the following documents, duly executed, and each such document shall be
in full force and effect:

                       (a)  the Notes;

                       (b)  the Disbursement Letter;

                                      75
<PAGE>

                         (c)  the Pay-Off Letter, together with UCC termination
statements, canceled notes and other documentation evidencing the termination by
any lenders or other secured parties of Liens in and to the properties and
assets of any Obligor;

                         (d) each Pledge Agreement accompanied by original stock
certificates and stock powers;

                         (e)  each of the Surety Agreements;

                         (f)  each of the Subordination Agreements;

                         (g)  the Environmental Agreement; and

                         (h)  any and all other Loan Documents.

               16.4      Authorizing Resolutions.  Bank shall have received a
                         -----------------------
certificate from the Secretary of each Obligor attesting to the resolutions of
each Obligor's Board of Directors authorizing its execution, delivery, and
performance of this Agreement and the other Loan Documents to which each
Obligor, respectively, is a party and authorizing specific officers of such
Obligor to execute the same.

               16.5      Governing Documents.  Bank shall have received copies
                         -------------------
of each Obligor's Governing Documents, as amended, modified, or supplemented to
the Closing Date, certified by the Secretary of such Obligor.

               16.6      Material Agreements.  Bank shall have received copies
                         -------------------
of all material agreements, leases and other documents related to the Obligors.

               16.7      Good Standing Certificates.  Bank shall have received
                         --------------------------
certificates of status with respect to each Obligor, each dated within 15 days
of the Closing Date, such certificates to be issued by the appropriate officer
of each jurisdiction in which such Obligor is required to be qualified or
licensed which certificates shall indicate that such Obligor is in good standing
in such jurisdictions.

               16.8      Insurance. Bank shall have received loss payee
                         ---------
endorsements as well as the relevant policies and evidence of insurance,
together with the endorsements thereto, as are required by Section 12.6.
                                                           ------------

               16.9      Collateral Access Agreements.  Bank shall have
                         ----------------------------
received such Collateral Access Agreements from lessors, warehousemen, bailees,
and other third persons as Bank may require with respect to all Eligible
Inventory Locations.

                                      76
<PAGE>

                  16.10    Opinions of Counsel. Bank shall have received
                           -------------------
opinions of the Obligors' general and local counsels.

                  16.11    Tax Returns. Bank shall have received satisfactory
                           -----------
evidence that all tax returns required to be filed by Borrowers have been timely
filed and all taxes upon Borrowers or their properties, assets, income, and
franchises (including real property taxes and payroll taxes) have been paid
prior to delinquency.

                  16.12    March 31, 2000 Financial Statements. Borrowers shall
                           -----------------------------------
have delivered to Bank the audited year end financial statements of Borrowers
and their Subsidiaries (including VetMall and Desktop) prepared in accordance
with GAAP and in a form satisfactory to the Bank for the fiscal year ending
March 31, 2000, which financial statements shall be on a consolidated and
consolidating basis and which shall (a) show a consolidated net loss for
Borrowers and their Subsidiaries of not more than $2,000,000, (b) show a
consolidated net loss for the Borrowers only (not including any of the
Subsidiaries) of not more than $2,000,000, (c) show a Net Worth for Borrowers
and their Subsidiaries on a consolidated basis of not less than $31,900,000, and
(d) be substantially in accordance with the unaudited draft statements
previously submitted to Bank by Borrowers.

                  16.13    July 31, 2000 and August 31, 2000 Financial
                           -------------------------------------------
Statements. Borrowers shall have delivered to Bank internally prepared financial
----------
statements of Borrowers prepared in accordance with GAAP and in a form
satisfactory to the Bank for the calendar months ended July 31, 2000 and August
31, 2000, which financial statements shall be on a consolidated and
consolidating basis and shall show a consolidated EBITDA for the two (2)
Borrowers only and not including any other Persons, of not less than $220,000 in
the aggregate for both months and that the Borrowers have substantially achieved
the results anticipated by their business plan for such months as previously
furnished to Bank.

                  16.14    Licenses, Approvals, Etc. Bank shall have received
                           -------------------------
copies of all licenses, approvals, consents, authorizations and filings of
Obligors required or necessary for the operation of their business.

                  16.15    Excess Availability. At the time of funding and after
                           -------------------
considering closing costs and all other then current expenditures (including
after payment of past due trade creditors), Borrowers shall have Excess
Availability under the Revolving Credit Facility, plus available cash on hand on
deposit with Bank (excluding any previously pledged cash) of a minimum aggregate
amount of $5,500,000.

                  16.16    No Material Adverse Change. Bank shall have received
                           --------------------------
evidence that no Material Adverse Change nor any material change in the value of
the Collateral shall have occurred from the date of financial information and
projections originally provided to Bank;

                                      77
<PAGE>

               16.17     Fees. All fees and expenses payable under the Loan
                         ----
Documents on the Closing Date and as of the funding of the Loans or issuing such
Letter of Credit shall have been paid.

               16.18     SEC Reporting. Bank shall have received copies of any
                         -------------
and all 10-K, 10-Q or other reports filed or required to be filed with the
Securities Exchange Commission or other regulatory agency by DrugMax.

               16.19     Reference Checks. Bank shall have received satisfactory
                         ----------------
reference checks on management, equity investors, and each of the Obligors.

               16.20     Subordination. Bank shall have received evidence that
                         -------------
all shareholder and Affiliate debt owed by Borrowers is subordinated to all
Obligations on terms and conditions acceptable to the Bank.

               16.21     Equipment Leases. Bank shall have received copies of
                         ----------------
all equipment leases of Borrowers.

               16.22     Releases. UCC-3 terminations and such other releases
                         --------
of all prior Liens, as have been requested by Bank, shall be delivered to Bank
on the Closing Date in appropriate form with all signatures and other
information needed for recordation.

               16.23     Merger. Bank shall have received satisfactory evidence
                         ------
that (a) Becan Distributors, Inc. has been merged into DrugMax, (b) Desktop
Corporation has been merged into Desktop, and (c) such mergers have not resulted
in any Material Adverse Change to such entities.

               16.24     Other Documents. All other documents and legal matters
                         ---------------
in connection with the transactions contemplated by this Agreement shall have
been delivered, executed, or recorded.

       By completing the closing hereunder, or by making advances hereunder,
Bank does not thereby waive a breach of any warranty or representation made by
the Obligors hereunder or any agreement, document, or instrument delivered to
Bank or otherwise referred to herein, and any claims and rights of Bank
resulting from any breach or misrepresentation by any Obligor are specifically
reserved by Bank.

       17.     CONDITIONS PRECEDENT TO ALL ADVANCES AND LETTERS OF CREDIT. In
               ----------------------------------------------------------
addition to, but not in limitation of, any other conditions set forth in this
Agreement, the obligation of (a) Bank to make any Advance, or (b) Bank to issue
any Letter of Credit is subject to the fulfillment, to the satisfaction of Bank,
of each of the following conditions:

               17.1      Representations and Warranties. The representations and
                         ------------------------------
warranties contained in this Agreement and the other Loan Documents shall be
true and correct in all material respects

                                      78
<PAGE>

on and as of the date of such extension of credit, as though made on and as of
such date (except to the extent that such representations and warranties relate
solely to an earlier date);

               17.2      No Default or Event of Default. No Default or Event of
                         ------------------------------
Default shall have occurred and be continuing on the date of such extension of
credit, nor shall either result from the making thereof;

               17.3      No Injunction or Order. No injunction, writ,
                         ----------------------
restraining order, or other order of any nature prohibiting, directly or
indirectly, the extending of such credit shall have been issued and remain in
force by any governmental authority against any Obligor, Bank, or any of their
Affiliates; and

               17.4      No Bankruptcy. No proceeding under any bankruptcy,
                         -------------
reorganization, arrangement of debt, insolvency, readjustment of debt, or
receivership law shall have been filed by or against any Obligor.

         18.   DEFAULT AND REMEDIES.
               --------------------

               18.1      Events of Default. The occurrence of any one or more of
                         -----------------
the following events shall constitute an Event or Events of Default hereunder:

                         (a)   The failure of Borrowers to pay when due and
payable or when declared due and payable, any portion of the Obligations,
whether of principal, interest (including any interest which, but for the
provisions of the Bankruptcy Code, would have accrued on such amounts), fees,
costs, indemnities, or other amounts constituting Obligations;

                         (b)   The failure of any Obligor to perform, keep, or
observe any term, provision, condition, covenant, or agreement contained in this
Agreement, in any of the Loan Documents, or in any other present or future
agreement between any Obligor and Bank;

                        (c)    The failure of any Obligor to pay any
Indebtedness for borrowed money due to any third Person or Capitalized Lease
Obligations or the existence of any other event of default under any loan,
security agreement, mortgage, Capitalized Lease or other agreement pertaining
thereto binding any Obligor, after the expiration of any notice and/or grace
periods permitted in such documents;

                        (d)    The failure of any Obligor to pay or perform any
other obligation to Bank under any other agreement or note or otherwise arising,
whether or not related to this Agreement, after the expiration of any notice
and/or grace periods permitted in such documents;

                         (e)   The adjudication of any Obligor as a bankrupt or
insolvent, or the entry of an Order for Relief against any Obligor or the entry
of an order appointing a receiver or trustee for any

                                      79
<PAGE>

Obligor of any of their property or approving a petition seeking reorganization
or other similar relief under the Bankruptcy Code or other similar laws of the
U.S. or any state or any other competent jurisdiction;

                        (f)   A proceeding under any bankruptcy, reorganization,
arrangement of debt, insolvency, readjustment of debt, debt moratorium or
receivership law is filed by or against any Obligor, or any Obligor makes an
assignment for the benefit of creditors, or any Obligor takes any action to
authorize any of the foregoing;

                        (g)   The suspension of the operation of any Obligor's
Business;

                        (h)   Any Obligor becomes unable to meet its debts as
they mature or fall due, or the admission in writing by any Obligor to such
effect, or any Obligor calling any meeting of all or any material portion of
their creditors for the purpose of debt restructure or moratorium;

                        (i)   All, or any part of the Collateral or the assets
of any Obligor are attached, seized, subjected to a writ or distress warrant, or
levied upon, or come within the possession or control of any, receiver, trustee,
custodian or assignee for the benefit of creditors or become subject to any Lien
which is not otherwise permitted under Section 13.8;
                                       ------------

                        (j)   The entry of a final judgment for the payment of
money against any Obligor in excess of $50,000 which, within ten (10) days after
such entry, shall not have been discharged or execution thereof stayed pending
appeal or shall not have been discharged within five (5) days after the
expiration of any such stay;

                        (k)   Any representation or warranty of in any of the
Loan Documents is discovered to be untrue in any material respect or any
statement, certificate or data furnished by any Obligor pursuant hereto is
discovered to be untrue in any material respect as of the date as of which the
facts therein set forth are stated or certified;

                        (l)   Any Obligor voluntarily or involuntarily dissolves
or is dissolved, terminates or is terminated;

                        (m)   Any Obligor is enjoined, restrained, or in any way
prevented by the order of any court or any administrative or regulatory agency,
the effect of which order restricts any Obligor from conducting all or any
material part of their business;

                        (n)   A material breach by any Obligor occurs under any
material agreement, document or instrument, whether heretofore, now or hereafter
existing between any Obligor and any other Person;

                                      80
<PAGE>

                        (o)   A Material Adverse Change occurs;

                        (p)   A Change in Control occurs;

                        (q)   Any material uninsured damage to, or loss, theft,
or destruction of, any of the Collateral occurs;

                        (r)   Any strike, lockout, labor dispute, embargo,
condemnation, act of God or public enemy, or other casualty loss occurs
resulting in the cessation or substantial curtailment of production or other
revenue producing activities at any facility of any Obligor for more than thirty
(30) consecutive days;

                        (s)   The loss, suspension, revocation or failure to
renew any license or permit now held or hereafter acquired by any Obligor, which
loss, suspension, revocation or failure to renew is likely to result in a
Material Adverse Change;

                        (t)   Any projection delivered to Bank pursuant hereto
indicates that Borrower will not be able to comply with the financial covenants
set forth in Section 14;
             ----------

                        (u)   Any breach by any Obligor under any of the
Subordination Agreements;

                        (v)   The validity or enforceability of this Agreement,
or any of the Loan Documents, is contested by any Obligor, or any Obligor denies
that they have any or any further liability or obligation hereunder or
thereunder;

                        (w)   The indictment or threatened indictment of any
Obligor under any criminal statute, or the commencement or threatened
commencement of criminal or civil proceedings against any Obligor pursuant to
which statute or proceedings the penalties or remedies sought or available
include forfeiture of any property of any Obligor, or any Obligor engages or
participates in any "check kiting" activity regardless of whether a criminal
investigation has been commenced; or

                        (x)   Any breach by any Obligor under any of the Website
Agreements.

                18.2    Remedies. Upon the occurrence of an Event of Default, or
                        --------
at any time thereafter, Bank may, at its election, without notice of its
election and without demand, do any one or more of the following, all of which
are authorized by the Obligors:

                        (a)   Declare the entire unpaid principal of the
Revolving Credit Facility, the Term Loan, all other Obligations (including
without limitations all contingent reimbursement obligations under any Letters
of Credit, or any part thereof), all interest accrued thereon, all fees due
hereunder and all other

                                      81
<PAGE>

obligations of Borrowers to Bank hereunder or under any other Loan Document
otherwise arising immediately due and payable;

                      (b)   Cease advancing money or extending credit to or for
the benefit of Borrowers under this Agreement, under any of the Loan Documents,
or under any other agreement between any Obligor and Bank;

                      (c)   Cease issuing Letters of Credit;

                      (d)   Convert any Loans earning interest at LIBOR Rate
plus Applicable Margin to Loans earning interest at the Base Rate plus
Applicable Margin and require Borrower to indemnify Bank against any loss, cost
or expense which Bank has sustained or incurred as a consequence of such
conversion in accordance with Section;

                      (e)   Terminate this Agreement and any of the other Loan
Documents as to any future liability or obligation of the Bank, but without
affecting the Bank's rights and security interests in the Collateral and without
affecting the Obligations;

                      (f)   Reduce the amount of the Revolving Credit Facility
or the advance rates for the calculation of Availability under the formula set
forth in Section 8.12, or require additional Reserves;
         ------------

                      (g)   Increase the applicable interest rates up to the
Default Rate;

                      (h)   Hold, as cash collateral, any and all balances and
deposits of the Obligors held by Bank, and any amounts received in the Cash
Collateral Account, to secure the full and final repayment of all of the
Obligations;

                      (i)   Enter the premises occupied by the Obligors and take
possession of the Collateral and any records relating thereto; and/or

                      (j)   Exercise each and every right and remedy granted to
it under the Loan Documents, under the Uniform Commercial Code and under any
other applicable law or at equity.

       If an Event of Default occurs under Sections 18.1(e) or 18.1(f), all of
                                           ---------------------------
the Obligations shall become immediately due and payable.

                18.3  Application of Proceeds. All proceeds from each sale of,
                      -----------------------
or other realization upon, all or any part of the Collateral following an Event
of Default shall be applied or paid over as follows:

                                      82
<PAGE>

                       (a)     First: to the payment of all costs and expenses
                               -----
incurred in connection with such sale or other realization, including attorneys'
fees; and

                       (b)     Second: to the payment of the Obligations (with
                               ------
the Obligors remaining liable for any deficiency) as Bank may elect; and

                       (c)     Third: the balance (if any) of such proceeds
                               -----
shall be paid, subject to any duty imposed by law, or otherwise to whomsoever
shall be entitled thereto.

               18.4    Sale or Other Disposition of Collateral. The sale, lease
                       ---------------------------------------
or other disposition of the Collateral, or any part thereof, by Bank after an
Event of Default may be for cash, credit or any combination thereof, and Bank
may purchase all or any part of the Collateral at public or, if permitted by
law, private sale, and in lieu of actual payment of such purchase price, may
set-off the amount of such purchase price against the Obligations then owing.
Any sales of the Collateral may be adjourned from time to time with or without
notice. Bank may cause the Collateral to remain on any Obligor's premises or
otherwise or to be removed and stored at premises owned by other persons, at
Borrowers' expense, pending sale or other disposition of the Collateral. Any
Obligor at Bank's request, shall assemble the Collateral consisting of Inventory
and tangible assets and make such assets available to Bank at a place to be
designated by Bank. Bank shall have the right to conduct such sales on any
Obligor's premises, at the Obligors' expense, or elsewhere, on such occasion or
occasions as Bank may see fit. With respect to any Obligors' owned or leased
premises, the Obligors hereby grant Bank a license, effective upon the
occurrence of an Event of Default, and to the extent not prohibited by the terms
of any applicable lease, to enter into possession of such premises and to occupy
the same, without charge, in order to exercise any of Bank's rights or remedies
provided herein, at law, in equity, or otherwise.

               Any notice required to be given by Bank of a sale, lease or other
disposition or other intended action by Bank with respect to any of the
Collateral which is given pursuant to Section 20 below, at least five (5)
                                      ----------
Business Days prior to such proposed action, shall constitute fair and
reasonable notice to the Obligors of any such action.

               The net proceeds realized by Bank upon any such sale or other
disposition, after deduction for the expenses of retaking, holding, storing,
transporting, preparing for sale, selling or otherwise disposing of the
Collateral incurred by Bank in connection therewith and all other costs and
expenses related thereto including attorney fees, shall be applied in such order
as Bank, in its discretion, elects, toward satisfaction of the Obligations. Bank
shall account to the Obligors for any surplus realized upon such sale or other
disposition, and the Obligors shall remain liable for any deficiency. The
commencement of any action, legal or equitable, or the rendering of any judgment
or decree for any deficiency shall not affect Bank's Lien in the Collateral. The
Obligors agree that Bank has no obligation to preserve rights to the Collateral
against any other parties or to clean-up or otherwise prepare any of the
Collateral for sale.

                                      83
<PAGE>

       If Bank sells any of the Collateral upon credit, the Obligors will be
credited only with payments actually made by or on behalf of the purchaser,
received by Bask and applied to the indebtedness owed by such purchaser to Bank.
If the purchaser fails to pay for any of the Collateral, Bank may resell the
Collateral.

       Bank will not be considered to have offered to retain the Collateral in
satisfaction of the Obligations, unless Bank has entered into a written
agreement with the Obligors to that effect.

       Bank is hereby granted a license or other right to use, after an Event of
Default, without charge, any Obligor's labels, General Intangibles, intellectual
property, Equipment, real estate, patents, copyrights, rights of use of any
name, trade secrets, trade names, trademarks, service marks and advertising
matter, or any property of a similar nature, as it pertains to the Collateral,
in completing production of, advertising for sale and selling any Inventory or
other Collateral and any Obligor's rights under all contracts, licenses,
approvals, permits, leases and franchise agreements, to the extent assignable,
shall inure to Bank's benefit.

       Bank shall be under no obligation to marshall any assets in favor of any
Obligor or any other party or against or in payment of any or all of the
Obligations.

         18.5   Actions With Respect to Accounts. The Obligors hereby
                --------------------------------
irrevocably make, constitute, and appoint Bank (and any of Bank's designated
officers, employees or agents) as their true and lawful attorney-in-fact, with
full power of substitution, with power to sign their name and to take any of the
following actions, in their name or the name of Bank, as Bank may determine,
without notice to any Obligor and at the Obligors' expense:

                (a)  Verify the validity and amount of or any other matter
relating to the Collateral by mail, telephone, telecopy or otherwise;

                (b)  Notify all Account Debtors that the Obligors' Accounts have
been assigned to Bank (for the pro rata benefit of Bank's) and that Bank has a
Lien therein;

                (c)  Direct all Account Debtors to make payment of all the
Obligors' Accounts directly to Bank and forward invoices directly to such
Account Debtors;

                (d)  Take control in any manner of any cash or non-cash items of
payment or proceeds of such Accounts;

                (e)  After the occurrence of an Event of Default, notify the
U.S. Postal Service to change the address for delivery of mail addressed to any
Obligor to such address as Bank may designate:

                                      84
<PAGE>

                (f)   After the occurrence of an Event of Default, have access
to any lockbox or postal boxes into which any Obligor's mail is deposited and
receive, open and dispose of all mail addressed to any Obligor (any sums
received pursuant to the exercise of the rights provided in the Loan Documents
may, at Bank's option, be deposited in the Cash Collateral Account);

                (g)   After the occurrence of an Event of Default, take control
in any manner of any rejected, returned, stopped in transit or repossessed goods
relating to any Accounts;

                (h)   After the occurrence of an Event of Default, enforce
payment of and collect any Accounts, by legal proceedings or otherwise, and for
such purpose Bank may:

                      (i)    Demand payment of any Accounts or direct any
Account Debtors to make payment of Accounts directly to Bank;

                      (ii)   Receive and collect all monies due or to become due
to any Obligor;

                      (iii)  Exercise all of any Obligor's rights and remedies
with respect to the collection of Accounts,

                      (iv)   Settle, adjust, compromise, extend, renew,
discharge or release the Accounts;

                      (v)    Sell or assign the Accounts on such terms, for such
amount and at such times as Bank deems advisable;

                      (vi)   Prepare, file and sign any Obligor's name or names
on any Proof of Claim or similar document in any proceeding filed under federal
or state bankruptcy, insolvency, reorganization or other similar law as to any
Account Debtor;

                      (vii)  Prepare, file and sign any Obligor's name or names
on any Notice of Lien, Claim of Mechanic's Lien, Assignment or Satisfaction of
Lien or Mechanic's Lien or similar document in connection with the Collateral;

                      (viii) Endorse the name of any Obligor upon any chattel
papers, documents, instruments, invoices, freight bills, bills of lading or
similar documents or agreements relating to the Accounts or goods pertaining
thereto or upon any checks or other media of payment or evidences of a security
interest that may come into Bank's possession;

                      (ix)   Sign the name of any Obligor to verifications of
Accounts and notices thereof sent by Account Debtors to such Obligor; or

                                      85
<PAGE>

                      (x)   Take all other actions necessary or desirable to
protect any Obligor's or Bank's interest in the Accounts.

The Obligors ratify and approve all acts of said attorneys and agree that said
attorneys shall not be liable for any acts of commission or omission, nor for
any error of judgment or mistake of fact or law, except such attorneys' gross
negligence or willful misconduct. The Obligors agree to assist Bank in the
collection and enforcement of their Accounts and not to hinder, delay or impede
Bank in its collection or enforcement of said Accounts.

         18.6      Actions With Respect to Web Sites. Each Obligor hereby
                   ---------------------------------
irrevocably makes, constitutes and appoints Bank (and any of Bank's designated
officers, employees or agents) as their true and lawful attorney-in-fact, with
full power of substitution, with power to sign its name and to take any of the
following actions, in its name or the name of Bank, as Bank may determine,
without notice to any Obligor and at the Obligors' expense, after the occurrence
of any Event of Default:

                   (a) Take control of and exercise any rights of any Obligor
under any or all of the Website Agreements;

                   (b) Take any action to maintain and recover any website
related information and to insure that any website is properly maintained;

                   (c) Amend, modify, alter, delete or otherwise take any action
with respect to the content contained on any website;

                   (d) Enter into any agreements which Bank deems advisable to
continue the operation and maintenance of any website, with all of the costs,
expenses and fees related to such new agreements to be paid by the Obligors and
to constitute Obligations under this Agreement; and

                   (e) Take all other actions necessary or desirable in Bank's
discretion to protect any Obligor's or Bank's interest in any assets comprising
or related to any website.

      The Obligors ratify and approve all acts of said attorneys' and agree
that said attorney shall not be liable for any acts of commission or omission,
nor for any error of judgment or mistake of fact or law, except such attorneys'
gross negligence or willful misconduct. This power, being coupled with an
interest, is irrevocable. The Obligors agree to assist Bank in the exercise of
all rights and remedies to enable the Bank to operate and maintain any such
website.

         18.7      Set-Off. Without limiting the rights of Bank under Applicable
                   -------
Law, the Obligors grant to Bank and agree that Bank may, unless prohibited by
applicable law, without notice to any Obligor

                                      86
<PAGE>

(such notice being expressly waived), and without constituting a retention of
any Collateral in satisfaction of any Obligations (within the meaning of Section
9-505 of the UCC) exercise a right of set-off, a lien against and a security
interest in all property of the Obligors now or at any time in Bank's possession
in any capacity whatsoever, including but not limited to any balance of any
deposit, trust or agency account, or any other account with Bank as security for
the Obligations. At any time and from time to time following the occurrence of
an Event of Default or Default, Bank may without notice or demand, set off and
apply any and all deposits (general or special, time or demand, provisional or
final) at any time held and other indebtedness at any time owing by Bank to or
for the credit of any Obligor against any or all of the Obligations.

         18.8  Turnover of Property Held by Bank. The Obligors irrevocably
               ---------------------------------
authorize any Affiliate of Bank, unless prohibited by Applicable Law, upon and
following the occurrence of an Event of Default or a Default, at the request of
Bank and without further notice, to turn over to Bank any property of any
Obligor held by such Affiliate, including without limitation, funds and
securities for any Obligor's account and to debit, for the benefit of Bank, any
deposit account maintained by any Obligor with such Affiliate (even if such
deposit account is not then due or there results a loss or reduction of interest
or the imposition of a penalty in accordance with Applicable Law to the early
withdrawal of time deposits), in the amount requested by Bank up to the amount
of the Obligations, and to pay or transfer such amount or property to Bank for
application to the Obligations.

         18.9  Delay or Omission Not Waiver. Neither the failure nor any delay
               ----------------------------
on the part of Bank to exercise any right, remedy, power or privilege under the
Loan Documents upon the occurrence of any Event of Default or otherwise shall
operate as a waiver thereof or impair any such right, remedy, power or
privilege. No waiver of any Event of Default shall affect any later Event of
Default or shall impair any rights of Bank. No single, partial or full exercise
of any rights, remedies, powers and privileges by the Bank shall preclude
further or other exercise thereof. No course of dealing between Bank and any
Obligor shall operate as or be deemed to constitute a waiver of Bank's rights
under the Loan Documents or affect the duties or obligations of the Obligors.

         18.10 Remedies Cumulative. The rights, remedies, powers and privileges
               -------------------
provided for herein shall not be deemed exclusive, but shall be cumulative and
shall be in addition to all other rights, remedies, powers and privileges in
Bank's favor at law or in equity.

         18.11 Consents, Approvals and Discretion. Whenever the Bank's consent
               ----------------------------------
or approval is required or permitted or any documents are required to be
acceptable to Bank, consent, approval or acceptability shall be at the sole and
absolute discretion of Bank. Except as otherwise specifically provided herein,
whenever any determination or act is at Bank's discretion, such determination or
act shall be at Bank's sole and absolute discretion.

                                      87
<PAGE>

     18.12     Certain Fees, Costs, Expense Expenditures. The Obligors agree to
               -----------------------------------------
pay on demand all cost and expenses of Bank (the "Bank Expenses"), including
without limitation:

               (a)  all costs, expenses and fees (including attorneys' fees and
other legal costs, expenses and charges) incurred or paid by Bank in connection
with (i) advising, structuring, drafting, preparing, reviewing, negotiating,
administering the Loan Documents or any waivers, consents, amendments,
extensions, modifications or restatements related thereto; (ii) interpreting,
enforcing, protecting, preserving, defending or terminating any of the Loan
Documents or any of Bank's rights and remedies related thereto, irrespective of
whether suit is brought (including without limitation, all costs and expenses
and attorneys' fees related to any "workout," "restructuring," insolvency or
similar proceeding involving any Obligor); (iii) legal advice relating to the
rights and responsibilities of Bank; (iv) the preparation for negotiations
regarding, consultations concerning or the defense or prosecution of any legal
proceedings involving, any claim (including third-party claims) made or
threatened against Bank related to or involving the Loan Documents, the
transactions contemplated under the Loan Documents, Bank's relationship with the
Obligors, or any actions taken pursuant to the Loan Documents by Bank;

               (b)  all costs, expenses and fees incurred or paid by Bank for
photocopying; notarization; couriers; messengers; telecommunications; public
record searches (including without limitation, real estate, tax lien,
litigation, UCC, bankruptcy, patent, trademark or copyright searches); filing;
recording; publication; appraisals (including without limitation personal
property, real estate, trademark, tradename, and inventory appraisals or
reappraisals); real estate surveys or updates; real estate title insurance
reports or bring-downs, commitments, policies and endorsements; environmental
audits, surveys or updates; and accounting or other professional advisors;

               (c)  all costs, expenses and fees incurred or paid by Bank in
connection with the disbursement of funds under the Loan Documents (by wire
transfer or otherwise); the dishonoring of checks, drafts or other items of
payment; correction or cure of any Default or Event of Default or enforcement of
the Loan Documents; gaining possession of, maintaining, handling, preserving,
storing, shipping, selling, preparing for sale or advertising to sell any of the
Collateral (regardless of whether the sale is consummated); or exercising any
rights or remedies under the Loan Documents; and

               (d)  all costs, expenses and other payments incurred or made by
Bank to any warehouseman, landlord, lessor or owner of any property at which any
of the Collateral is located to enable Bank to obtain access, store, warehouse,
ship, sell or otherwise preserve, protect and dispose of such Collateral
(including without limitation all lease payments, access charges, utility
charges and safety and security charges).

  In the event any Obligor shall fail to pay taxes, insurance, assessments,
fees, costs or expenses which it is required to pay hereunder, or fails to keep
the Collateral free from Liens (except as expressly permitted herein), or fails
to maintain or repair the Collateral as required hereby, or otherwise breaches
any

                                      88
<PAGE>

obligations under the Loan Documents, Bank in its discretion, may make
expenditures for such purposes and the amount so expended (including reasonable
attorney's fees and expenses, filing fees and other charges) shall be payable by
the Obligors on demand and shall constitute part of the Obligations.

     With respect to any amount required to be paid by Obligors under this
Section, in the event Obligors fail to pay such amount within five (5) days
after demand, at Bank's option, all of said amounts required to be paid by
Obligors, may be charged by Bank as a Base Rate Loan under the Revolving Credit
Facility and Borrowers shall also pay to Bank interest thereon at the Default
Rate.

     19. INDEMNIFICATION. The Obligors agree to indemnify and hold harmless,
         ---------------
Bank, its parents and Affiliates and their officers, directors, shareholders,
employees and agents (collectively, the "Indemnified Parties"), from and against
any and all claims, liabilities, losses, damages, costs and expenses (whether or
not such Indemnified Party is a party to any litigation), including without
limitation attorney's fees and costs and costs of investigation, document
production, attendance at depositions or other discovery, incurred by any
Indemnified Party with respect to, arising out of or as a consequence of (a)
this Agreement or any of the other Loan Documents, including without limitation,
any failure of any Obligor to pay when due (at maturity, by acceleration or
otherwise) any principal, interest, fee or any other amount due under this
Agreement or the other Loan Documents, or any other Event of Default; (b) the
use by Borrower of any proceeds advanced hereunder; (c) the transactions
contemplated hereunder; or (d) any claim, demand, action or cause of action
being asserted against any Indemnified Party by any other Person in connection
with the transactions contemplated hereunder. Notwithstanding anything herein or
elsewhere to the contrary, the Obligors shall not be obligated to indemnify or
hold harmless any Indemnified Party from any liability, loss or damage resulting
from the gross negligence, wilful misconduct or unlawful actions of such
Indemnified Party or any violations by such Indemnified Party or Bank of any
securities laws or other laws and regulations concerning financial institutions.
Any amount payable to Bank under this Section will bear interest at the Default
Rate from the due date until paid.

     The Obligors' obligations under this Section shall survive termination of
this Agreement and repayment of the Obligations.

     20. COMMUNICATIONS AND NOTICES. All notices, requests and other
         --------------------------
communications made or given in connection with the Loan Documents shall be in
writing and, unless receipt is stated herein to be required, shall be deemed to
have been validly given if delivered personally to the individual or division or
department to whose attention notices to a party are to be addressed, or by
private carrier, or registered or certified mail, return receipt requested, or
by telecopy with the original forwarded by first-class mail, in all cases, with
charges prepaid, addressed as follows, until some other address (or individual
or division or department for attention) shall have been designated by notice
given by one party to the other:

                                      89
<PAGE>

          To Obligors:

                   12505 Starkey Road, Suite A
                   Largo, FL 33773
                   Attention:  William L. LaGamba

          With a copy of any notice of an Event of Default to be given for
information purposes and not for notice purposes to:

                   Shumaker, Loop & Kendrick, LLP
                   2800 Bank of America Plaza
                   101 East Kennedy Boulevard
                   Tampa, FL 33602
                   Attention:  Gregory C. Yadley, Esquire

          To Bank:

                   Mellon Bank, N.A.
                   1735 Market Street, 6th Floor
                   Philadelphia, PA 19101-7899
                   Attention:  Stephen A. Caffrey, Vice President

ALL "PAYMENT IN FULL" CHECKS OR OTHER MEDIA OF PAYMENT MUST BE SENT TO BANK ONLY
TO THE ABOVE ADDRESS.

     21. WAIVERS.

          21.1 Waivers. In connection with any proceedings under the Loan
               -------
Documents, including without limitation any action by Bank in replevin,
foreclosure or other court process or in connection with any other action
related to the Loan Documents or the transactions contemplated hereunder, the
Obligors waive, to the extent permitted by applicable law:

               (a)  all errors, defects and imperfections of a procedural nature
in such proceedings;

               (b)  all benefits under any present or future laws exempting any
property, real or personal, or any part of any proceeds thereof from attachment,
levy or sale under execution, or providing for any stay of execution to be
issued on any judgment recovered under

                                      90
<PAGE>

any of the Loan Documents or in any replevin or foreclosure proceeding, or
otherwise providing for any valuation, appraisal or exemption;

               (c)  presentment for payment, demand, notice of demand, notice of
nonpayment, protest and notice of protest of any of the Loan Documents,
including the Notes;

               (d)  any requirement for bonds, security or sureties required by
statute, court rule or otherwise;

               (e)  any demand for possession of Collateral prior to
commencement of any suit;

               (f)  all rights to claim or recover attorney's fees and costs in
the event that any Obligor is successful in any action to remove, suspend or
prevent the enforcement of a judgment entered by confession; and

               (g)  any right to require Bank to pursue any third Person for
payment of the Obligations or payment with respect to any of the Collateral.

        21.2   Forbearance.  Bank may release, compromise, forbear with respect
               -----------
to, waive, suspend, extend or renew any of the terms of the Loan Documents,
without notice to or consent of any Obligor, other than Borrowers.

        21.3   Limitation on Liability.  The Obligors shall be responsible for
               -----------------------
and Bank is hereby released from any claim or liability in connection with:

               (a)  Safekeeping any Collateral;

               (b)  Any loss or damage to any Collateral;

               (c)  Any diminution in value of the Collateral; or

               (d)  Any act or default of another Person.

     Bank shall only be liable for any act or omission on their part
constituting gross negligence or wilful misconduct. In the event any Obligor
brings suit against Bank in connection with the transactions contemplated
hereunder and Bank is found not to be liable, the Obligors will indemnify and
hold Bank harmless from all costs and expenses, including attorney's fees,
incurred by Bank in connection with such suit. This Agreement is not intended to
obligate Bank to take any action with respect to the Collateral or

                                      91
<PAGE>

to incur expenses or perform any obligation or duty of any Obligor. Obligors'
obligations under this Section shall survive termination of this Agreement and
repayment of the Obligations.

          21.4 Waiver of Subrogation. The Obligors hereby waive any right to
               ---------------------
subrogation, reimbursement, contribution or indemnity from any Obligor in
connection with any Obligor's obligations under the Loan Documents.

     22.  SUBMISSION TO JURISDICTION. The Obligors hereby consent to the
          --------------------------
jurisdiction of any state or federal court located within the Commonwealth of
Pennsylvania, and irrevocably agree that, subject to the Bank's election, all
actions or proceedings relating to the Loan Documents or the transactions
contemplated hereunder shall be litigated in such courts, and the Obligors waive
any objection which they may have based on lack of personal jurisdiction,
improper venue or forum non conveniens to the conduct of any proceeding in any
                  --------------------
such court and waive personal service of any and all process upon them and
consent that all such service of process be made by mail or messenger directed
to them at the address set forth in Section 20. Nothing contained in this
                                    ----------
Section shall affect the right of Bank to serve legal process in any other
manner permitted by law or affect the right of Bank to bring any action or
proceeding against any Obligor or their property in the courts of any other
jurisdiction.

     23.  MISCELLANEOUS.
          --------------

          23.1 Brokers. The transaction contemplated hereunder was brought about
               -------
and entered into by Bank and the Obligors acting as principals and without any
brokers, agents or finders being the effective procuring cause hereof. The
Obligors represent to Bank that the Obligors have not committed Bank to the
payment of any brokerage fee or commission in connection with this transaction.
If any such claim is made against Bank by any broker, finder or agent or any
other Person, the Obligors agree to indemnify, defend and hold Bank harmless
against any such claim, at the Obligors' own cost and expense, including Bank's
attorneys' fees. The Obligors further agree that until any such claim or demand
is adjudicated in Bank's favor, the amount claimed and/or demanded shall be
deemed part of the Obligations secured by the Collateral.

          23.2 Use of Bank's Name.  The Obligors shall not use the name of Bank
               ------------------
or the name of any Affiliate of Bank in connection with any of their business or
activities except as may otherwise be required by the rules and regulations of
the Securities and Exchange Commission or any like regulatory body and except as
may be required in their dealings with any governmental agency.

          23.3 No Joint Venture. Nothing contained herein is intended to permit
               ----------------
or authorize any Obligor to make any contract on behalf of Bank, nor shall this
Agreement be construed as creating a partnership, joint venture or making Bank
an investor in any Obligor.

                                      92
<PAGE>

          23.4  Survival. All covenants, agreements, representations and
                --------
warranties made by the Obligors in the Loan Documents or made by or on their
behalf in connection with the transactions contemplated herein shall be true at
all times this Agreement is in effect and shall survive the execution and
delivery of the Loan Documents, any investigation at any time made by Bank or on
their behalf and the making by Bank of the loans or advances to Borrowers. All
statements contained in any certificate, statement or other document delivered
by or on behalf of the Obligors pursuant hereto or in connection with the
transactions contemplated hereunder shall be deemed representations and
warranties by the Obligors.

          23.5  No Assignment. The Obligors may not assign any of their rights
                -------------
hereunder without the prior written consent of Bank shall not be required to
lend hereunder except to Borrowers as they presently exist.

          23.6  Assignment or Sale by Bank. Bank may sell, assign or
                ---------------------------
participate all or a portion of its interest in the Loan Documents and in
connection therewith may make available to any prospective purchaser, assignee
or participant any information relative to Obligors in its possession. In the
event that Bank sells or assigns any portion of the Loans, Obligors shall (a)
execute and deliver to Bank and/or to the applicable purchaser or assignee, such
substitute or replacement Notes, Surety Agreements or other Loan Documents, and
(b) execute and deliver to Bank such amendments to the Loan Documents as Bank
may request to reflect such sale or assignment.

          23.7  Publicity. Obligors agree that Bank may disclose the fact of the
                ---------
financing under this Agreement in the form of a "tombstone" announcement in the
print media, whether individually or part of a general advertisement.

          23.8  Injunctive Relief. Each of the Obligors expressly acknowledges
                -----------------
and agrees that an action for damages for any breach of the requirements of
Section 10.8 shall not be an adequate remedy at law. In the event of any such
------------
breach, each of the Obligors agrees to the fullest extent allowed by law that
Bank shall be entitled to injunctive relief to restrain such breach and require
compliance with such requirements.

          23.9  Time is of the Essence.  Time is of the essence in the Obligors'
                ----------------------
performance of their  obligations under the Loan Documents.

          23.10 All Powers Coupled With Interest. All powers of attorney and
                --------------------------------
other authorizations granted to Bank and any Persons designated by Bank pursuant
to any provisions of this Agreement or any of the other Loan Documents shall be
deemed coupled with an interest and shall be irrevocable so long as any of the
Obligations remain unpaid or unsatisfied.

                                      93
<PAGE>

          23.11 Disclosure and Disclaimer Regarding Power of Attorney. Obligors
                -----------------------------------------------------
acknowledge and certify as follows:

                (a)  The Loan Documents contain provisions authorizing Bank to
act as Obligors' attorney-in-fact or agent (collectively such powers are herein
after referred to as the "Power of Attorney").

                (b)  The purpose of the Power of Attorney is to give Bank broad
powers to execute documents, handle or sell property and otherwise act in the
name of the Obligors.

                (c)  The Power of Attorney is coupled with an interest and, as
such, Bank, in exercising any of its rights under the Power of Attorney is not a
fiduciary of the Obligors. Bank may exercise any of its rights under the Power
of Attorney for the sole benefit of Bank, without regard to the interests of the
Obligors.

                (d)  The Loan Agreement and the other Loan Documents are being
executed in connection with a commercial loan or other financial transaction for
business purposes and not primarily for personal, family or household purposes.

                (e)  Any rights the Obligors may have to the specific provisions
set forth in 20 Pa. C.S. 5601 et seq., as amended (specifically including Act 39
of 1999) are hereby forever waived and relinquished.

                (f)  The Obligors have read and understand the Power of Attorney
and this subsection regarding disclosure and disclaimer regarding the Power of
Attorney.

                (g)  The Obligors have consulted with legal counsel regarding
the Power of Attorney and this subsection regarding disclosure and disclaimer
regarding the Power of Attorney.

          23.12 Binding Effect. This Agreement and all rights and powers
                --------------
granted hereby will bind and inure to the benefit of the parties hereto and
their respective permitted successors and assigns and shall bind all Persons who
become bound as a borrower, guarantor or other obligor under this Agreement.

          23.13 Severability.  The provisions of this Agreement and all other
                ------------
Loan Documents are  deemed to be severable, and the invalidity or
unenforceability of any provision shall not affect or impair the remaining
provisions which shall continue in full force and effect.

          23.14 No Third Party Beneficiaries. The rights and benefits of this
                ----------------------------
Agreement and the Loan Documents shall not inure to the benefit of any third
party.

                                      94
<PAGE>

          23.15 Modifications.  Any modification or amendment of this
                -------------
Agreement or any of the Loan Documents shall be in writing signed by the parties
hereto.

          23.16 Holidays. If the day provided herein for the payment of any
                --------
amount or the taking of any action falls on a Saturday, Sunday or public holiday
at the place for payment or action, then the due date for such payment or action
will be the next succeeding Business Day.

          23.17 Law Governing. This Agreement has been made, executed and
                -------------
delivered in the Commonwealth of Pennsylvania and will be construed in
accordance with and governed by the laws of such Commonwealth, without regard to
any rules or principles regarding conflicts of law or any rule or canon of
construction which interprets agreements against the draftsman.

          23.18 Integration. The Loan Documents shall be construed as integrated
                -----------
and complementary of each other, and as augmenting and not restricting Bank's
rights, powers, remedies and security. The Loan Documents contain the entire
understanding of the parties thereto with respect to the matters contained
therein and supersede all prior agreements and understandings between the
parties with respect to the subject matter thereof and do not require parol or
extrinsic evidence in order to reflect the intent of the parties. In the event
of any inconsistency between the terms of this Agreement and the terms of the
other Loan Documents, the terms of this Agreement shall prevail.

          23.19 Exhibits and Schedules. All exhibits and schedules attached
                ----------------------
hereto are hereby made a part of this Agreement.

          23.20 Headings. The headings of the Articles, Sections, paragraphs and
                --------
clauses of this Agreement are inserted for convenience only and shall not be
deemed to constitute a part of this Agreement.

          23.21 Counterparts; Facsimile Signatures. The Loan Documents and any
                ----------------------------------
notice or communication under the Loan Documents may be executed in one or more
counterparts, each of which shall constitute an original, but all of which
together shall constitute one and the same instrument. Delivery of a photocopy
or telecopy of an executed counterpart of a signature page to any Loan Document
shall be effective as delivery of a manually executed counterpart of such Loan
Document.

          23.22 Joint and Several.  The obligations of the Obligors under this
                -----------------
Agreement shall be joint and several obligations.

          23.23 Limitation on Damages. The Obligors and Bank agree that, in any
                ---------------------
action, suit or proceeding, in respect of or arising out of this Agreement, the
Loan Documents or the transactions contemplated hereunder, each mutually waives
to the fullest extent permitted by law, any claim for consequential, punitive or
special damages.

                                      95
<PAGE>

          23.24 Waiver of Right to Trial by Jury. THE OBLIGORS AND BANK WAIVE
                --------------------------------
ANY RIGHT TO TRIAL BY JURY ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (a)
ARISING UNDER ANY OF THE LOAN DOCUMENTS OR (b) IN ANY WAY CONNECTED WITH OR
RELATED OR INCIDENTAL TO THE DEALINGS OF THE OBLIGORS OR BANK WITH RESPECT TO
ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH
CASE WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. THE OBLIGORS AND BANK
AGREE AND CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL
BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT
MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS
WRITTEN EVIDENCE OF THE CONSENT OF THE OBLIGORS AND BANK TO THE WAIVER OF THEIR
RIGHT TO TRIAL BY JURY. THE OBLIGORS ACKNOWLEDGE THAT THEY HAVE HAD THE
OPPORTUNITY TO CONSULT WITH COUNSEL REGARDING THIS SECTION, THAT THEY FULLY
UNDERSTAND ITS TERMS, CONTENT AND EFFECT, AND THAT THEY VOLUNTARILY AND
KNOWINGLY AGREE TO THE TERMS OF THIS SECTION.

                                      96
<PAGE>

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.

                              BORROWERS:
                              ---------

                              DRUGMAX.COM,INC

                              By:___________________________________________
                                 Ronald J. Patrick, Vice President - Finance

                              VALLEY DRUG COMPANY

                              By: ___________________________________________
                                  Ronald J. Patrick, Vice President - Finance

                              GUARANTORS
                              ----------

                              DESKTOP MEDIA GROUP, INC.

                              By: ___________________________________________
                                  Ronald J. Patrick, Vice President - Finance

                              VETMALL, INC.

                              By: ___________________________________________
                                  Ronald J. Patrick, Vice President - Finance

                                      97
<PAGE>

                              BANK:
                              ----

                              MELLON BANK, N.A.

                              By:_______________________________
                              Name/Title:_______________________

                                      98
<PAGE>

                                   EXHIBITS
                                   --------

Exhibit A         - Form of Covenant Compliance Certificate

Exhibit B         - Form of LIBOR Rate Notification

Exhibit C         - Form of Base Rate Loan Request

Exhibit D         - Form of LIBOR Rate Loan Request

Exhibit E         - Form of Borrowing Base Certificate
<PAGE>

                                   SCHEDULES
                                   ---------

Schedule 10.1(h)         -      Pledged Securities

Schedule 11.1            -      States of Formation

Schedule 11.3            -      Ownership Interests

Schedule 11.4            -      Subsidiaries

Schedule 11.7            -      Litigation

Schedule 11.14           -      Names and States of Formation

Schedule 11.16           -      Pension and Benefit Plans

Schedule 11.17           -      Leases and Contracts

Schedule 11.18           -      Intellectual Property

Schedule 11.23           -      Affiliate Transactions

Schedule 11.24(b)        -      Licenses

Schedule 11.24(c)        -      Operating Agreements

Schedule 11.24(d)        -      Facility Sites

Schedule 11.24(e)        -      Leases

Schedule 11.28           -      Subordinated Indebtedness

Schedule 11.29(a)        -      All Inventory Locations

Schedule 11.29(b)        -      Eligible Inventory Locations

Schedule 11.31           -      Collective Bargaining Agreements

Schedule 11.32           -      Investment Property

Schedule 11.35           -      Web Sites
<PAGE>

Schedule 13.2            -      Permitted Indebtedness

Schedule 13.3            -      Permitted Loans

Schedule 13.4            -      Permitted Investments

Schedule 13.8            -      Permitted Liens================================================================================

                    CONVERTIBLE DEBENTURE PURCHASE AGREEMENT

                                      Among

                            DIRECT INSITE CORPORATION

                                       and

                         THE INVESTORS SIGNATORY HERETO

                         Dated as of September 27, 2000

================================================================================
<PAGE>

     CONVERTIBLE  DEBENTURE PURCHASE AGREEMENT (this  "Agreement"),  dated as of
September 27, 2000,  among Direct  Insite  Corporation,  a Delaware  corporation
(formerly known as Computer  Concepts Corp.) (the "Company"),  and the investors
signatory  hereto (each such  investor is a "Purchaser"  and all such  investors
are, collectively, the "Purchasers").

     WHEREAS,  subject to the terms and  conditions  set forth in this Agreement
and  pursuant to Section  4(2) of the  Securities  Act of 1933 (the  "Securities
Act"),  as amended,  the Company desires to issue and sell to the Purchasers and
the  Purchasers,  severally  and not  jointly,  desire,  over the period of time
described  herein,  to purchase from the Company,  up to an aggregate  principal
amount of $3,000,000 of the Company's 6% Convertible  Debentures,  due September
27, 2002, which shall be in the form of Exhibit A (the "Debentures"),  which are
convertible  into shares of the  Company's  common  stock,  $.0001 par value per
share (the "Common Stock").

     NOW, THEREFORE,  IN CONSIDERATION of the mutual covenants contained in this
Agreement,  and for  other  good and  valuable  consideration  the  receipt  and
adequacy of which are hereby acknowledged,  the Company and the Purchasers agree
as follows:

                                    ARTICLE I
                                PURCHASE AND SALE

     1.1  The Closing

          (a) The Closing.  (i) Subject to the terms and conditions set forth in
this  Agreement,  the  Company  shall issue and sell to the  Purchasers  and the
Purchasers shall,  severally,  and not jointly,  purchase from the Company, over
the period of time described  herein,  the Debentures for an aggregate  purchase
price of $3,000,000. The closing of the purchase and sale of the Debentures (the
"Closing") shall take place at the offices of Robinson Silverman Pearce Aronsohn
& Berman LLP ("Robinson Silverman"),  1290 Avenue of the Americas, New York, New
York 10104, immediately following the execution hereof or such later date as the
parties shall agree.  The date of the Closing is hereinafter  referred to as the
"Closing Date."

               (ii) On the  Closing  Date,  the parties  shall  deliver or shall
cause to be  delivered  the  following:  (A) the Company  shall  deliver to each
Purchaser:  (1)  Debentures  registered  in the  name of such  Purchaser  in the
aggregate  principal  amount of 2/3 of the purchase price  indicated  below such
Purchaser's name on the signature page to this Agreement,  (2) the legal opinion
of Blau, Kramer,  Wactlar & Lieberman,  P.C., outside counsel to the Company, in
the form of Exhibit C, (3) an executed Registration Rights Agreement,  dated the
date hereof, among the Company and the Purchasers, in the form of Exhibit B (the
"Registration  Rights Agreement"),  and (5) Transfer Agent Instructions,  in the
form of Exhibit D, delivered to and acknowledged by the Company's transfer agent
(the "Transfer Agent Instructions"), and (B) each Purchaser shall deliver to the
Company:  (1) 2/3 of the purchase price indicated below such Purchaser's name on
the signature  page to this  Agreement in United States  dollars in  immediately
available  funds by wire  transfer  to an account  designated  in writing by the
Company for such purpose, and (2) an executed Registration Rights Agreement.
<PAGE>
               (iii) On the 30th day  following  the Closing  Date or such other
date as the  parties  may agree (such 30th day,  the "First  Additional  Funding
Date"),  if each of the conditions listed in Section 3.14 hereof shall have been
either  satisfied  by the  Company or waived by the  Purchasers,  then:  (A) the
Company  will,  against  delivery of the amounts set forth in clause (B) in this
paragraph,  deliver to each  Purchaser,  Debentures in the  aggregate  principal
amount of 1/6 of the purchase price indicated below such Purchaser's name on the
signature page to this Agreement,  registered in the name of such Purchaser (the
"First  Additional  Debentures" which shall be included within the definition of
"Debentures")  , and (B) each Purchaser will deliver to the Company,  1/6 of the
purchase price  indicated below such  Purchaser's  name on the signature page to
this Agreement in United States dollars in immediately  available  funds by wire
transfer to an account designated in writing by the Company for such purpose.

               (iv) On the  earlier to occur of (x) the 60th day  following  the
Closing  Date  and (y) the  second  Trading  Day  following  the  date  that the
Underlying Shares  Registration  Statement (as defined herein) is filed with the
Securities and Exchange  Commission (the "Commission") or such other date as the
parties may agree (such earlier date, the "Second  Additional Funding Date"), if
each of the  conditions  listed in Section  3.15  hereof  shall have been either
satisfied  by the  Company or waived by the  Purchasers,  then:  (A) the Company
will, against delivery of the amounts set forth in clause (B) in this paragraph,
deliver to each Purchaser,  Debentures in the aggregate  principal amount of 1/6
of the purchase price  indicated  below such  Purchaser's  name on the signature
page to this  Agreement,  registered in the name of such  Purchaser (the "Second
Additional  Debentures"  which  shall  be  included  within  the  definition  of
"Debentures")  , and (B) each Purchaser will deliver to the Company,  1/6 of the
purchase price  indicated below such  Purchaser's  name on the signature page to
this Agreement in United States dollars in immediately  available  funds by wire
transfer to an account designated in writing by the Company for such purpose.

          1.2 Certain Defined Terms. For purposes of this Agreement, "Conversion
Price,"  "Original  Issue Date" and  "Trading  Day" shall have the  meanings set
forth in the  Debentures;  "Business  Day" shall  mean any day except  Saturday,
Sunday  and any day which  shall be a federal  legal  holiday  or a day on which
banking  institutions in the State of New York are authorized or required by law
or other  governmental  action to  close;  A  "Person"  means an  individual  or
corporation,  partnership,  trust,  incorporated or unincorporated  association,
joint venture, limited liability company, joint stock company, government (or an
agency or subdivision thereof) or other entity of any kind.

                                   ARTICLE II
                         REPRESENTATIONS AND WARRANTIES

     2.1 Representations and Warranties of the Company. The Company hereby makes
the following representations and warranties to the Purchasers:
<PAGE>
          (a) Organization and Qualification.  The Company is a corporation duly
incorporated,  validly existing and in good standing under the laws of the State
of Delaware with the requisite  corporate power and authority to own and use its
properties and assets and to carry on its business as currently  conducted.  The
Company  has  no  subsidiaries  other  than  as set  forth  in  Schedule  2.1(a)
(collectively the  "Subsidiaries").  Each of the Subsidiaries is an entity, duly
incorporated or otherwise organized, validly existing and in good standing under
the  laws  of  the  jurisdiction  of  its   incorporation  or  organization  (as
applicable),  with  the  requisite  power  and  authority  to own  and  use  its
properties and assets and to carry on its business as currently conducted.  Each
of the Company and the  Subsidiaries  is duly qualified to do business and is in
good standing as a foreign  corporation or other entity in each  jurisdiction in
which the nature of the business  conducted  or property  owned by it makes such
qualification necessary,  except where the failure to be so qualified or in good
standing, as the case may be, could not,  individually or in the aggregate,  (x)
adversely affect the legality,  validity or enforceability of the Securities (as
defined below) or any of this Agreement,  the Registration Rights Agreement,  or
the Transfer Agent Instructions (collectively, the "Transaction Documents"), (y)
have or result  in a  material  adverse  effect on the  results  of  operations,
assets,  prospects, or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole, or (z) adversely impair the Company's ability to
perform  fully on a timely basis its  obligations  under any of the  Transaction
Documents (any of (x), (y) or (z), a "Material Adverse Effect").

          (b)  Authorization;   Enforcement.   The  Company  has  the  requisite
corporate  power and authority to enter into and to consummate the  transactions
contemplated by each of the Transaction Documents and otherwise to carry out its
obligations  thereunder.  The execution and delivery of each of the  Transaction
Documents  by  the  Company  and  the  consummation  by it of  the  transactions
contemplated  thereby have been duly  authorized by all necessary  action on the
part of the Company and no further  action is required by the  Company.  Each of
the  Transaction  Documents  has been duly  executed  by the Company  and,  when
delivered in accordance  with the terms hereof,  will  constitute  the valid and
binding obligation of the Company  enforceable against the Company in accordance
with its terms. Neither the Company nor any Subsidiary is in violation of any of
the  provisions  of its  respective  certificate  or articles of  incorporation,
by-laws or other organizational or charter documents.

          (c) Capitalization.  The number of authorized,  issued and outstanding
capital  stock  of the  Company  is set  forth in  Schedule  2.1(c).  Except  as
disclosed in Schedule 2.1(c),  the Company owns all of the capital stock of each
Subsidiary.  No shares of Common  Stock are  entitled to  preemptive  or similar
rights, nor is any holder of securities of the Company entitled to preemptive or
similar rights arising out of any agreement or understanding with the Company by
virtue of any of the Transaction  Documents.  Except as a result of the purchase
and sale of the Debentures and except as disclosed in Schedule 2.1(c), there are
no  outstanding  options,  warrants,  script  rights to  subscribe  to, calls or
commitments of any character  whatsoever  relating to, or securities,  rights or
obligations convertible into or exchangeable for, or giving any Person any right
to  subscribe  for or  acquire,  any  shares  of  Common  Stock,  or  contracts,
commitments,  understandings,  or  arrangements  by  which  the  Company  or any
Subsidiary is or may become bound to issue additional shares of Common Stock, or
securities or rights convertible or exchangeable into shares of Common Stock.
 The  issue  and  sale of the  Debentures,  Warrant  or  Underlying  Shares  (as
hereinafter  defined)  will not  obligate  the Company to issue shares of Common
Stock or other  securities  to any Person other than the  Purchaser and will not
result in a right of any holder of Company  securities to adjust the exercise or
conversion or reset price under such securities.
<PAGE>
          (d) Issuance of the  Debentures.  The Company will have (and will,  at
all times while the Debentures are outstanding, maintain) an adequate reserve of
duly authorized shares of Common Stock,  reserved for issuance to the holders of
such  Debentures,  to enable it to perform its conversion and other  obligations
under this Agreement and the  Debentures.  Such number of reserved and available
shares of Common  Stock  shall not be less than the sum of  4,384,000  shares of
Common Stock for  issuance  upon  conversion  of the  Debentures  and payment of
interest  thereon in shares of Common Stock ( the "Initial  Minimum").  All such
authorized  shares of Common  Stock shall be duly  reserved  for issuance to the
holders of the  Debentures.  The shares of Common Stock issuable upon conversion
of the  Debentures  are  collectively  referred  to  herein  as the  "Underlying
Shares." The Debentures and the Underlying  Shares are collectively  referred to
herein as, the  "Securities."  When issued in accordance with the Debentures and
the Underlying  Shares will be duly authorized,  validly issued,  fully paid and
nonassessable.

          (e) No  Conflicts.  The  execution,  delivery and  performance  of the
Transaction  Documents by the Company and the consummation by the Company of the
transactions  contemplated  thereby  do not and  will not (i)  conflict  with or
violate any  provision  of the  Company's  or any  Subsidiary's  certificate  or
articles of  incorporation,  bylaws or other charter  documents (each as amended
through the date hereof),  or (ii) subject to obtaining  the Required  Approvals
(as defined  below),  conflict  with, or constitute a default (or an event which
with notice or lapse of time or both would become a default)  under,  or give to
others any rights of termination,  amendment, acceleration or cancellation (with
or without notice,  lapse of time or both) of, any agreement,  credit  facility,
debt or other instrument  (evidencing a Company or Subsidiary debt or otherwise)
or other  understanding  to which the Company or any Subsidiary is a party or by
which  any  property  or  asset of the  Company  or any  Subsidiary  is bound or
affected,  or (iii) result in a violation of any law, rule,  regulation,  order,
judgment,  injunction,  decree or other restriction of any court or governmental
authority to which the Company or a Subsidiary is subject (including federal and
state securities laws and regulations), or by which any property or asset of the
Company  or a  Subsidiary  is bound or  affected;  except in the case of each of
clauses (ii) and (iii), as could not, individually or in the aggregate,  have or
result in a Material  Adverse  Effect.  The business of the Company is not being
conducted in violation of any law,  ordinance or regulation of any  governmental
authority,  except for violations which, individually or in the aggregate, could
not have or result in a Material Adverse Effect.

          (f)  Filings,  Consents  and  Approvals.  Neither  the Company nor any
Subsidiary is required to obtain any consent, waiver, authorization or order of,
give any notice to, or make any filing or registration  with, any court or other
federal,  state,  local or other  governmental  authority  or  other  Person  in
connection  with the execution,  delivery and  performance by the Company of the
Transaction  Documents,  other than (i) the filings required pursuant to Section
3.10,  (ii) the filing with the Commission of a registration  statement  meeting
the requirements set forth in the Registration Rights Agreement and covering the
resale  of the  Underlying  Shares by the  Purchasers  (the  "Underlying  Shares
Registration Statement"), (iii) the application(s) to the Nasdaq Smallcap Market
("NASDAQ")  for the listing of the  Underlying  Shares for trading on the NASDAQ
(and with any other national  securities  exchange or market on which the Common
Stock is then listed) in the time and manner required  thereby,  (iv) applicable
Blue Sky  filings,  and (v) in all other  cases where the failure to obtain such
consent,  waiver,  authorization  or order,  or to give such notice or make such
filing  or  registration  could not have or result  in,  individually  or in the
aggregate, a Material Adverse Effect (collectively, the "Required Approvals").
<PAGE>
          (g) Litigation; Proceedings. There is no action, suit, inquiry, notice
of violation,  proceeding or  investigation  pending or, to the knowledge of the
Company,  threatened against or affecting the Company or any of its Subsidiaries
or any of  their  respective  properties  before  or by any  court,  arbitrator,
governmental or administrative  agency or regulatory authority (federal,  state,
county,  local or  foreign)  (collectively,  an  "Action")  which (i)  adversely
affects or challenges  the legality,  validity or  enforceability  of any of the
Transaction  Documents or the Securities or (ii) except as disclosed in Schedule
2.1(g),  could,  if there were an unfavorable  decision,  individually or in the
aggregate,  have or result in a Material Adverse Effect. Neither the Company nor
any Subsidiary,  nor any director or officer thereof, is or has been the subject
of any Action  involving a claim of violation of or liability  under  federal or
state  securities  laws or a claim of breach of fiduciary duty. The Company does
not have pending before the Commission any request for confidential treatment of
information  and the Company has no knowledge of any expected  such request that
would be made prior to the  Effectiveness  Date (as defined in the  Registration
Rights  Agreement).  There  has  not  been,  and to the  best  of the  Company's
knowledge  there  is not  pending  or  contemplated,  any  investigation  by the
Commission involving the Company or any current or former director or officer of
the Company.

          (h) No Default or  Violation.  Neither the Company nor any  Subsidiary
(i) is in default under or in violation of (and no event has occurred  which has
not been waived which,  with notice or lapse of time or both,  would result in a
default by the  Company or any  Subsidiary  under),  nor has the  Company or any
Subsidiary  received notice of a claim that it is in default under or that it is
in violation of, any indenture,  loan or credit agreement or any other agreement
or instrument to which it is a party or by which it or any of its  properties is
bound, (ii) is in violation of any judgment or order of any court, arbitrator or
governmental  body, or (iii) is in violation of any statute,  rule or regulation
of any governmental authority, in each case of clauses (i), (ii) or (iii) above,
except  as could  not  individually  or in the  aggregate,  have or  result in a
Material Adverse Effect.

          (i) Private Offering. Assuming the accuracy of the representations and
warranties  of the  Purchasers  set forth in  Sections  2.2(b)-(g),  the  offer,
issuance and sale of the Securities to the Purchasers as contemplated hereby are
exempt from the  registration  requirements of the Securities  Act.  Neither the
Company nor any Person acting on its behalf has taken or is, to the knowledge of
the Company,  contemplating  taking any action which could subject the offering,
issuance  or sale of the  Securities  to the  registration  requirements  of the
Securities  Act including  soliciting any offer to buy or sell the Securities by
means of any form of general solicitation or advertising.

          (j) SEC  Reports;  Financial  Statements.  The  Company  has filed all
reports required to be filed by it under the Securities Exchange Act of 1934, as
amended  (the  "Exchange  Act"),  including,  without  limitation,  all  filings
required  pursuant  to  Sections  13(a)  and  15(d)  thereof,  for the one  year
preceding the date hereof (or such shorter period as the Company was required by
law to file such material) (the foregoing materials being collectively  referred
to  herein  as the  "SEC  Reports"  and,  together  with the  Schedules  to this
Agreement, the "Disclosure Materials") on a timely basis or has received a valid
extension of such time of filing and has filed any such SEC Reports prior to the
expiration of any such extension.  As of their respective dates, the SEC Reports
complied in all material  respects with the  requirements  of the Securities Act
<PAGE>
and the Exchange Act and the rules and regulations of the Commission promulgated
thereunder,  and none of the SEC  Reports,  when  filed,  contained  any  untrue
statement of a material  fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the  circumstances  under which they were made,  not  misleading.  All  material
agreements to which the Company is a party or to which the property or assets of
the  Company  are  subject  have been filed as  exhibits  to the SEC  Reports as
required  under the  Exchange  Act.  The  financial  statements  of the  Company
included in the SEC Reports  comply in all  material  respects  with  applicable
accounting  requirements  and the rules and  regulations of the Commission  with
respect  thereto as in effect at the time of filing.  Such financial  statements
have been prepared in accordance with generally accepted  accounting  principles
applied on a consistent  basis during the periods involved  ("GAAP"),  except as
may be otherwise  specified in such  financial  statements or the notes thereto,
and fairly  present in all  material  respects  the  financial  position  of the
Company and its  consolidated  subsidiaries  as of and for the dates thereof and
the results of operations and cash flows for the periods then ended, subject, in
the  case  of  unaudited  statements,  to  normal,  immaterial,  year-end  audit
adjustments.  Since June 30, 2000 except as  specifically  disclosed  in the SEC
Reports, (a) there has been no event, occurrence or development that has or that
could result in a Material Adverse Effect,  (b) the Company has not incurred any
liabilities (contingent or otherwise) other than (x) liabilities incurred in the
ordinary  course of business  consistent  with past practice and (y) liabilities
not required to be reflected in the Company's  financial  statements pursuant to
GAAP or required to be disclosed in filings  made with the  Commission,  (c) the
Company has not altered its method of accounting or the identity of its auditors
and (d) the Company has not declared or made any payment or distribution of cash
or other property to its  stockholders  or officers or directors  (other than in
compliance with existing Company stock option plans) with respect to its capital
stock, or purchased, redeemed (or made any agreements to purchase or redeem) any
shares of its capital stock.

          (k)  Investment  Company.  The Company is not, and is not an Affiliate
(as defined in Rule 405 under the Securities  Act) of, an  "investment  company"
within the meaning of the Investment Company Act of 1940, as amended.

          (l)  Certain  Fees.  Except for  certain  consultant  fees  payable to
Spinneret  Financial Systems Ltd. by the Company, no fees or commissions will be
payable by the Company to any broker,  financial advisor or consultant,  finder,
placement  agent,  investment  banker,  bank or other Person with respect to the
transactions  contemplated  by this  Agreement.  The  Purchasers  shall  have no
obligation  with respect to any fees or with respect to any claims made by or on
behalf of other Persons for fees of a type contemplated in this Section that may
be due in connection with the transactions  contemplated by this Agreement.  The
Company  shall  indemnify  and hold harmless the  Purchasers,  their  employees,
officers, directors, agents, and partners, and their respective Affiliates, from
and  against  all  claims,  losses,  damages,  costs  (including  the  costs  of
preparation  and attorney's  fees) and expenses  suffered in respect of any such
claimed or existing fees, as such fees and expenses are incurred.
<PAGE>
     (m)  Solicitation  Materials.  Neither the Company nor any Person acting on
the Company's  behalf has  solicited any offer to buy or sell the  Securities by
means of any form of general solicitation or advertising.

     (n) Form S-3  Eligibility.  The Company is eligible to register  securities
for resale under Form S-3 promulgated under the Securities Act.

     (o)  Exclusivity.  The Company  shall not issue and sell  Debentures to any
Person other than the Purchasers  without the specific prior written  consent of
the Purchasers, which consent shall not be unreasonably withheld.

     (p) Seniority.  Except as disclosed in Schedule 2.1(p),  no indebtedness of
the  Company  is senior to the  Debentures  in right of  payment,  whether  with
respect to interest or upon liquidation or dissolution, or otherwise.

     (q) Listing and Maintenance Requirements Compliance. Except as set forth in
the SEC  Reports,  the  Company  has not,  in the two years  preceding  the date
hereof,  received notice (written or oral) from the NASDAQ,  any stock exchange,
market or trading  facility on which the Common  Stock is or has been listed (or
on which it has been quoted) to the effect that the Company is not in compliance
with the listing or maintenance requirements of such exchange, market or trading
facility. Except for the price maintenance requirement,  the Company is, and has
no reason to believe that it will not in the foreseeable  future continue to be,
in compliance with all such listing and maintenance requirements.

     (r) Patents and Trademarks.  The Company and its Subsidiaries have, or have
rights  to  use,  all  patents,  patent  applications,   trademarks,   trademark
applications,  service marks, trade names, copyrights, licenses and rights which
are necessary or material for use in connection with their respective businesses
as  described  in the SEC  Reports and which the failure to so have would have a
Material Adverse Effect  (collectively,  the  "Intellectual  Property  Rights").
Neither the Company nor any  Subsidiary  has received a written  notice that the
Intellectual Property Rights used by the Company or its Subsidiaries violates or
infringes  upon the rights of any Person.  To the best knowledge of the Company,
all such  Intellectual  Property Rights are enforceable and there is no existing
infringement by another Person of any of the Intellectual Property Rights.

     (s) Registration  Rights;  Rights of Participation.  Except as set forth on
Schedule 6(b) to the Registration Rights Agreement,  the Company has not granted
or agreed to grant to any Person any rights (including "piggy-back" registration
rights) to have any securities of the Company  registered with the Commission or
any other  governmental  authority which has not been  satisfied.  Except as set
forth on Schedule 6(b) to the Registration  Rights Agreement,  no Person has any
right of first refusal, preemptive right, right of participation, or any similar
right  to  participate  in the  transactions  contemplated  by  the  Transaction
Documents.

     (t)  Regulatory  Permits.  The  Company  and its  Subsidiaries  possess all
certificates,  authorizations  and permits  issued by the  appropriate  federal,
state or foreign  regulatory  authorities  necessary to conduct their respective
businesses as described in the SEC Reports,  except where the failure to possess
such permits could not,  individually  or in the aggregate,  have or result in a
Material Adverse Effect  ("Material  Permits"),  and neither the Company nor any
such  Subsidiary  has  received  any  notice  of  proceedings  relating  to  the
revocation or modification of any Material Permit.
<PAGE>
     (u) Title. The Company and the Subsidiaries  have good and marketable title
in fee  simple  to all real  property  owned by them  which is  material  to the
business of the Company and its  Subsidiaries  and good and marketable  title in
all  personal  property  owned by them which is material to the  business of the
Company and its Subsidiaries,  in each case free and clear of all Liens,  except
for Liens as do not  materially  affect  the value of such  property  and do not
interfere  with the use made and  proposed  to be made of such  property  by the
Company and its Subsidiaries.  Any real property and facilities held under lease
by the Company and its Subsidiaries are held by them under valid, subsisting and
enforceable  leases of which the Company and its  Subsidiaries are in compliance
and do not interfere  with the use made and proposed to be made of such property
and buildings by the Company and its Subsidiaries.

     (v) Labor Relations.  No material labor problem exists or, to the knowledge
of the Company, is imminent with respect to any of the employees of the Company.

     (w) Disclosure.  The Company  confirms that neither it nor any other Person
acting on its behalf has provided any of the Purchasers or its agents or counsel
with any information that constitutes or might  constitute  material  non-public
information.  The Company  understands and confirms that the Purchasers shall be
relying on the foregoing representations in effecting transactions in securities
of the Company. All disclosure provided to the Purchasers regarding the Company,
its business and the transactions  contemplated hereby,  including the Schedules
to this Agreement, furnished by or on behalf of the Company are true and correct
and do not contain any untrue  statement of a material fact or omit to state any
material fact necessary in order to make the statements  made therein,  in light
of the circumstances under which they were made, not misleading.

     2.2 Representations and Warranties of the Purchasers. Each Purchaser hereby
for itself and for no other Purchaser  represents and warrants to the Company as
follows:

     (a)  Organization;  Authority.  Such Purchaser is an entity duly organized,
validly  existing and in good standing under the laws of the jurisdiction of its
organization with the requisite  corporate or partnership power and authority to
enter into and to consummate the  transactions  contemplated  by the Transaction
Documents and otherwise to carry out its obligations thereunder. The purchase by
such  Purchaser of the  Securities  hereunder  has been duly  authorized  by all
necessary  action on the part of such Purchaser.  Each of this Agreement and the
Registration Rights Agreement has been duly executed by such Purchaser, and when
delivered by such Purchaser in accordance with the terms hereof, will constitute
the valid and legally binding obligation of such Purchaser,  enforceable against
it in accordance with its terms.

     (b)  Investment  Intent.  Such  Purchaser is acquiring  the  Securities  as
principal for its own account for  investment  purposes only and not with a view
to or for distributing or reselling such Securities or any part thereof, without
prejudice, however, to such Purchaser's right, subject to the provisions of this
Agreement, the Registration Rights Agreement and the Debentures, at all times to
sell or otherwise  dispose of all or any part of such Securities  pursuant to an
effective  registration statement under the Securities Act or under an exemption
<PAGE>
from such  registration  and in  compliance  with  applicable  federal and state
securities laws.  Nothing  contained herein shall be deemed a representation  or
warranty by such Purchaser to hold the  Securities for any period of time.  Such
Purchaser is acquiring the  Securities  hereunder in the ordinary  course of its
business. Such Purchaser does not have any agreement or understanding,  directly
or indirectly, with any Person to distribute the Securities.

     (c)  Purchaser   Status.  At  the  time  such  Purchaser  was  offered  the
Securities,  it was,  and at the date hereof it is an  "accredited  investor" as
defined in Rule 501(a)(8) under the Securities Act.

     (d) Experience of such Purchaser. Such Purchaser,  either alone or together
with its representatives,  has such knowledge,  sophistication and experience in
business and financial  matters so as to be capable of evaluating the merits and
risks of the prospective investment in the Securities,  and has so evaluated the
merits and risks of such investment.

     (e) Ability of such Purchaser to Bear Risk of Investment. Such Purchaser is
able to bear the economic risk of an investment  in the  Securities  and, at the
present time, is able to afford a complete loss of such investment.

     (f) Access to Information. Such Purchaser acknowledges that it has reviewed
the Disclosure  Materials and has been afforded (i) the  opportunity to ask such
questions  as  it  has  deemed  necessary  of,  and  to  receive  answers  from,
representatives  of the  Company  concerning  the  terms and  conditions  of the
offering  of the  Securities  and the  merits  and  risks  of  investing  in the
Securities;  (ii) access to  information  about the  Company  and the  Company's
financial condition, results of operations, business, properties, management and
prospects  sufficient  to enable it to evaluate  its  investment;  and (iii) the
opportunity to obtain such additional information which the Company possesses or
can acquire without  unreasonable effort or expense that is necessary to make an
informed  investment  decision with respect to the  investment and to verify the
accuracy  and  completeness  of the  information  contained  in  the  Disclosure
Materials. Neither such inquiries nor any other investigation conducted by or on
behalf of such Purchaser or its  representatives or counsel shall modify,  amend
or affect such Purchaser's right to rely on the truth, accuracy and completeness
of the  Disclosure  Materials and the Company's  representations  and warranties
contained in the Transaction Documents.

     (g) General  Solicitation.  Such Purchaser is not purchasing the Securities
as a result of or  subsequent  to any  advertisement,  article,  notice or other
communication  regarding the Securities published in any newspaper,  magazine or
similar media or broadcast over  television or radio or presented at any seminar
or any other general solicitation or general advertisement.

     (h) Reliance.  Such Purchaser  understands  and  acknowledges  that (i) the
Securities  are being  offered  and sold to it  without  registration  under the
Securities  Act in a  private  placement  that is exempt  from the  registration
provisions of the Securities Act and (ii) the  availability  of such  exemption,
depends in part on, and the Company will rely upon the accuracy and truthfulness
of, the foregoing  representations  and such Purchaser  hereby  consents to such
reliance.
<PAGE>
     The Company acknowledges and agrees that no Purchaser makes or has made any
representations  or  warranties  with respect to the  transactions  contemplated
hereby other than those specifically set forth in this Section 2.2.

                                   ARTICLE III
                         OTHER AGREEMENTS OF THE PARTIES

     3.1  Transfer  Restrictions.  (a) The  Securities  may only be  disposed of
pursuant to an effective  registration  statement  under the  Securities  Act or
pursuant to an available  exemption from or in a transaction  not subject to the
registration  requirements  of the  Securities  Act, and in compliance  with any
applicable federal and state securities laws. In connection with any transfer of
Securities other than pursuant to an effective  registration statement or to the
Company,  except as  otherwise  set forth  herein,  the  Company may require the
transferor  thereof to provide to the Company an opinion of counsel  selected by
the  transferor,  the form and  substance of which  opinion  shall be reasonably
satisfactory  to the Company,  to the effect that such transfer does not require
registration of such  transferred  Securities under the Securities Act. Any such
transferee shall agree in writing to be bound by the terms of this Agreement and
shall have the rights of a Purchaser  under this Agreement and the  Registration
Rights Agreement.

          (b) The Purchasers agree to the imprinting,  so long as is required by
this Section 3.1(b), of the following legend on the Securities:

               NEITHER  THESE  SECURITIES  NOR THE  SECURITIES  INTO WHICH THESE
     SECURITIES ARE  CONVERTIBLE  HAVE BEEN  REGISTERED  WITH THE SECURITIES AND
     EXCHANGE  COMMISSION OR THE SECURITIES  COMMISSION OF ANY STATE IN RELIANCE
     UPON AN EXEMPTION  FROM  REGISTRATION  UNDER THE SECURITIES ACT OF 1933, AS
     AMENDED (THE "SECURITIES  ACT"),  AND,  ACCORDINGLY,  MAY NOT BE OFFERED OR
     SOLD  EXCEPT  PURSUANT TO AN  EFFECTIVE  REGISTRATION  STATEMENT  UNDER THE
     SECURITIES  ACT  OR  PURSUANT  TO  AN  AVAILABLE  EXEMPTION  FROM,  OR IN A
     TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
     ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.

          The Underlying Shares shall not contain the legend set forth above nor
any other legend if the  conversion  of  Debentures  occurs at any time while an
Underlying Shares  Registration  Statement is effective under the Securities Act
or if the holder is relying on Rule 144  promulgated  under the  Securities  Act
("Rule 144") in connection with the resale of such Underlying  Shares, or in the
event there is not an effective  Underlying Shares Registration  Statement,  and
Rule 144 is not then available for resale of the Underlying Shares, at such time
as such legend is not required under  applicable  requirements of the Securities
Act (including judicial  interpretations and pronouncements  issued by the staff
of the  Commission).  The  Company  shall  cause its  counsel to issue the legal
opinion  included in the Transfer Agent  Instructions to the Company's  transfer
agent on the date that an Underlying Shares  Registration  Statement is declared
effective by the  Commission  (such date,  the  "Effective  Date").  The Company
<PAGE>
agrees that  following the  Effective  Date, it will, no later than five Trading
Days  following the delivery by a Purchaser to the Company of a  certificate  or
certificates  representing  Underlying Shares issued with a restrictive  legend,
deliver to such Purchaser certificates representing such Underlying Shares which
shall be free from all restrictive  and other legends.  The Company may not make
any notation on its records or give  instructions  to any transfer  agent of the
Company which enlarge the restrictions of transfer set forth in this Section.

     3.2 Acknowledgment of Dilution.  The Company acknowledges that the issuance
of  Underlying  Shares  upon the  conversion  of the  Debentures  will result in
dilution  of the  outstanding  shares of Common  Stock,  which  dilution  may be
substantial under certain market  conditions.  The Company further  acknowledges
that its obligation to issue Underlying Shares upon conversion of the Debentures
is  unconditional  and  absolute,  subject to the  limitations  set forth in the
Debentures regardless of the effect of any such dilution.

     3.3 Furnishing of  Information.  As long as the Purchasers own  Securities,
the Company  covenants to timely file (or obtain  extensions in respect  thereof
and file within the applicable grace period) all reports required to be filed by
the  Company  after the date hereof  pursuant  to Section  13(a) or 15(d) of the
Exchange Act. As long as the  Purchasers own  Securities,  if the Company is not
required to file reports pursuant to such sections,  it will prepare and furnish
to the  Purchasers  and make publicly  available in accordance  with Rule 144(c)
promulgated  under the  Securities  Act such  information as is required for the
Purchasers  to  sell  the  Securities  under  Rule  144  promulgated  under  the
Securities  Act. The Company  further  covenants  that it will take such further
action as any holder of Securities  may  reasonably  request,  all to the extent
required  from time to time to enable  such  Person  to sell  Underlying  Shares
without  registration  under the  Securities  Act within the  limitation  of the
exemptions  provided by Rule 144 promulgated under the Securities Act, including
causing its attorneys to render and deliver any legal opinion  required in order
to permit a  Purchaser  to receive  Underlying  Shares  free of all  restrictive
legends and to subsequently  sell Underlying  Shares under Rule 144 upon receipt
of a notice of an  intention  to sell or other  form of notice  having a similar
effect.  Upon the request of any such Person,  the Company shall deliver to such
Person a written certification of a duly authorized officer as to whether it has
complied with such requirements.

     3.4  Integration.  The Company shall not, and shall use its best efforts to
ensure that, no Affiliate of the Company shall,  sell, offer for sale or solicit
offers to buy or  otherwise  negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or sale
of the  Securities  in a manner that would  require the  registration  under the
Securities Act of the sale of the Securities to the Purchasers.

     3.5 Reservation and Listing of Underlying Shares. (a) The Company shall (i)
in the time and manner  required by any national  securities  exchange,  market,
trading or quotation facility on which the Common Stock is then traded,  prepare
and file with such national securities  exchange,  market,  trading or quotation
facility on which the Common Stock is then traded an additional  shares  listing
application  covering a number of shares of Common  Stock which is not less than
the  Initial  Minimum,  (ii) take all steps  necessary  to cause such  shares of
<PAGE>
Common  Stock  to be  approved  for  listing  on any  such  national  securities
exchange,  market or trading or quotation  facility on which the Common Stock is
then listed as soon as possible thereafter,  and (iii) provide to the Purchasers
evidence of such  listing,  and the Company  shall  maintain  the listing of its
Common Stock thereon.

     3.6 Conversion  Procedures.  The Transfer Agent Instructions and Conversion
Notice (as defined in the  Debentures)  set forth the totality of the procedures
with respect to the  conversion of the  Debentures,  including the form of legal
opinion,  if necessary,  that shall be rendered to the Company's  transfer agent
and such other  information and  instructions as may be reasonably  necessary to
enable the Purchasers to convert their Debentures.

     3.7  Conversion  Obligations  of  the  Company.  The  Company  shall  honor
conversions of the Debentures and shall deliver  Underlying Shares in accordance
with  the  respective  terms,  conditions  and  time  periods  set  forth in the
Debentures.

     3.8  Subsequent Financing; Limitation on Registrations.

          (a)  Subject to  Section  3.8(c),  the  Company  shall not,  until the
expiration  of the first to occur of (1) the date on which no principal  amount,
interest or liquidated  damages remain outstanding or owing under the Debentures
and (2) the 360th day after the Closing  Date,  directly or  indirectly,  offer,
sell,  grant any option to purchase,  or  otherwise  dispose of (or announce any
offer,  sale,  grant or any option to purchase or other  disposition) any of its
equity or  equity-equivalent  securities or securities of any of its  Affiliates
that are  exchangeable  or convertible  (directly or  indirectly)  for shares of
Common Stock, including the issuance of any debt or other instrument at any time
over  the  life  thereof  convertible  into or  exchangeable  for  Common  Stock
(collectively, a "Subsequent Placement") at a purchase price per share of Common
Stock  which is equal to or lower than the  closing  sales  price at the time of
such  offering  or  issuance,  unless (A) the  Company  delivers  to each of the
Purchasers a written notice (the "Subsequent Placement Notice") of its intention
to effect such Subsequent  Placement,  which  Subsequent  Placement Notice shall
describe in reasonable  detail the proposed terms of such Subsequent  Placement,
the amount of proceeds  intended to be raised  thereunder,  the Person with whom
such Subsequent  Placement  shall be effected,  and attached to which shall be a
term sheet or similar document relating thereto and (B) such Purchaser shall not
have notified the Company by 6:30 p.m. (New York City time) on the tenth Trading
Day after its receipt of the Subsequent  Placement  Notice of its willingness to
provide (or to cause its sole  designee to provide),  subject to  completion  of
mutually  acceptable  documentation,  financing to the Company on the same terms
set forth in the Subsequent  Placement  Notice.  If the Purchasers shall fail to
notify the Company of their  intention  to enter into such  negotiations  within
such time period, the Company may effect the Subsequent Placement  substantially
upon the terms and to the Persons (or  Affiliates  of such Persons) set forth in
the Subsequent  Placement Notice;  provided,  that the Company shall provide the
Purchasers with a second Subsequent  Placement Notice,  and the Purchasers shall
again have the right of first refusal set forth above in this  paragraph (a), if
the Subsequent  Placement  subject to the initial  Subsequent  Placement  Notice
shall not have been  consummated  for any  reason on the terms set forth in such
Subsequent  Placement  Notice  within thirty (30) Trading Days after the date of
the initial Subsequent Placement Notice with the Person (or an Affiliate of such
<PAGE>
Person)  identified in the Subsequent  Placement Notice. If the Purchasers shall
indicate a willingness to provide financing in excess of the amount set forth in
the  Subsequent  Placement  Notice,  then each  Purchaser  shall be  entitled to
provide financing  pursuant to such Subsequent  Placement Notice up to an amount
equal to such Purchaser's  pro-rata portion of the aggregate principal amount of
Debentures  purchased by such Purchaser  under this  Agreement,  but the Company
shall not be required to accept  financing  from the  Purchasers in an amount in
excess of the amount set forth in the Subsequent Placement Notice.

          (b)  Except  for  (x)  Underlying   Shares,   (y)  other  "Registrable
Securities" (as such term is defined in the Registration Rights Agreement) to be
registered,  and securities of the Company permitted pursuant to Section 6(c) of
the  Registration  Rights Agreement to be registered,  in the Underlying  Shares
Registration Statement in accordance with the Registration Rights Agreement, and
(z) Common Stock permitted to be issued pursuant to Section 3.8 (c), the Company
shall not,  for a period of not less than  ninety  (90)  Trading  Days after the
Effective Date, without the prior written consent of the Purchasers (i) issue or
sell  any  of  its  or any of  its  Affiliates'  equity  or  equity-  equivalent
securities  pursuant to Regulation S promulgated  under the  Securities  Act, or
(ii) register any  securities of the Company.  Any days after the Effective Date
that a Purchaser is unable to sell Underlying Shares under the Underlying Shares
Registration Statement shall be added to such ninety (90) Trading Day period.

          (c) With  respect to Section  3.8(a)  and  3.8(b),  the 360 day and 90
Trading Day periods shall be extended for the number of Trading Days during such
period (A) in which  trading in the Common Stock is suspended by any  securities
exchange or market or quotation system on which the Common Stock is then listed,
or (B) after the  Effectiveness  Date (as  defined  in the  Registration  Rights
Agreement),  during  such  period in which the  Underlying  Shares  Registration
Statement is not effective,  or (C) during which the prospectus  included in the
Underlying Shares Registration  Statement may not be used by the holders thereof
for the resale of Underlying Shares.  The restrictions  contained in Section 3.8
shall not apply to the granting of options or warrants to  employees,  officers,
directors or consultants  of the Company,  and the issuance of Common Stock upon
exercise  of such  options  or  warrants  granted  under any stock  option  plan
heretofore or hereinafter duly adopted by the Company.

     3.9 Transfer of Intellectual Property Rights. Except in connection with the
sale of all or  substantially  all of the  assets of the  Company  or  licensing
arrangements in the ordinary course of the Company's business, the Company shall
not transfer,  sell or otherwise dispose of any Intellectual Property Rights, or
allow any of the Intellectual Property Rights to become subject to any Liens, or
fail to renew  such  Intellectual  Property  Rights (if  renewable  and it would
otherwise  lapse  if not  renewed),without  the  prior  written  consent  of the
Purchasers.

     3.10 Certain Securities Laws Disclosures; Publicity. The Company shall: (i)
at its  discretion,  on the  Closing  Date,  issue  a press  release  reasonably
acceptable to the Purchasers  disclosing the transactions  contemplated  hereby,
(ii) at its discretion, file with the Commission a Report on Form 8-K disclosing
the transactions  contemplated hereby within ten Business Days after the Closing
Date, and (iii) timely file with the  Commission a Form D promulgated  under the
Securities  Act. The Company shall,  no less than two Business Days prior to the
filing of any  disclosure  required by clauses (ii) and (iii)  above,  provide a
copy thereof to the Purchasers for their review.  To the extent  permitted under
applicable law, the Company and the Purchasers  shall consult with each other in
<PAGE>
issuing any other press  releases  or  otherwise  making  public  statements  or
filings and other communications with the Commission or any regulatory agency or
stock market or trading facility with respect to the  transactions  contemplated
hereby and neither  party shall issue any such press  release or otherwise  make
any such public  statement,  filings or other  communications  without the prior
written consent of the other,  except that if such disclosure is required by law
or stock  market  regulations,  in which such case the  disclosing  party  shall
promptly  provide  the other party with prior  notice of such public  statement,
filing or other communication.  Notwithstanding the foregoing, the Company shall
not publicly  disclose the names of the Purchasers,  or include the names of the
Purchasers in any filing with the Commission,  or any regulatory agency, trading
facility or stock market  without the prior written  consent of the  Purchasers,
except  to  the  extent  such  disclosure  (but  not  any  disclosure  as to the
controlling Persons thereof) is required by law or stock market regulations,  in
which case the Company  shall provide the  Purchasers  with prior notice of such
disclosure.

     3.11 Use of Proceeds.  The Company shall use the net proceeds from the sale
of the  Securities  hereunder  for  working  capital  purposes  and  not for the
satisfaction  of any portion of the Company's  debt (other than payment of trade
payables in the ordinary course of the Company's  business and prior practices),
to redeem any Company  equity or  equity-equivalent  securities or to settle any
outstanding litigation.

     3.12  Reimbursement.  If any Purchaser  becomes involved in any capacity in
any  action,  proceeding  or  investigation  brought by or against  any  Person,
including  stockholders  of the  Company,  solely as a result of  acquiring  the
Securities  under this Agreement,  the Company will reimburse such Purchaser for
its  reasonable   legal  and  other  expenses   (including,   the  cost  of  any
investigation,  preparation  and travel in  connection  therewith)  incurred  in
connection  therewith,   as  such  expenses  are  incurred.   The  reimbursement
obligations  of the  Company  under this  paragraph  shall be in addition to any
liability which the Company may otherwise have, shall extend upon the same terms
and  conditions to any  Affiliates of the  Purchasers  who are actually named in
such action,  proceeding  or  investigation,  and partners,  directors,  agents,
employees  and  controlling  persons  (if  any),  as the  case  may  be,  of the
Purchasers  and any such  Affiliate,  and shall be binding upon and inure to the
benefit of any successors,  assigns,  heirs and personal  representatives of the
Company,  the Purchasers and any such Affiliate and any such Person. The Company
also  agrees that  neither the  Purchasers  nor any such  Affiliates,  partners,
directors,  agents, employees or controlling persons shall have any liability to
the  Company  or any  Person  asserting  claims  on behalf of or in right of the
Company solely as a result of acquiring the Securities under this Agreement.

     3.14 Conditions  precedent to the purchase of First Additional  Debentures.
Notwithstanding  anything  to the  contrary  contained  in this  Agreement,  the
commitment of a Purchaser to purchase First Additional  Debentures is subject to
the satisfaction or waiver by such Purchaser of each of the following conditions
as of the First Additional Funding Date:

     (i) Closing of Initial Debentures. The Closing shall have occurred;
<PAGE>
     (ii)  Accuracy  of  the  Company's  Representations  and  Warranties.   The
representations and warranties of the Company contained herein shall be true and
correct as of the date when made and as of the First Additional  Funding Date as
though  made  on  and  as of the  First  Additional  Funding  Date  (other  than
representations and warranties which relate to a specific date, (which shall not
include  representations and warranties relating to the "date hereof"(which need
only be true and correct on the date made));

     (iii)  Performance  by the  Company.  The  Company  shall  have  performed,
satisfied and complied with all covenants, agreements and conditions required by
the  Transaction  Documents to be  performed,  satisfied or complied with by the
Company  between the Closing Date and the First  Additional  Funding Date and no
Event (as defined in the  Registration  Rights  Agreement ) shall have  occurred
which has not been cured to the satisfaction of the Purchasers;

     (iv) No Injunction.  Since the Closing Date, no statute,  rule, regulation,
executive order, decree, ruling or injunction shall have been enacted,  entered,
promulgated,  amended,  modified  or  endorsed  by  any  court  of  governmental
authority of competent jurisdiction or governmental  authority,  stock market or
trading  facility  which  prohibits or makes  impracticable  the purchase of the
First Additional Debentures;

     (v) Adverse  Changes.  Since the Closing Date, no event or series of events
which  reasonably  would be  expected  to have or result in a  Material  Adverse
Effect shall have occurred;

     (vi) No Suspensions  of Trading in Common Stock.  The trading in the Common
Stock shall not have been  suspended by the  Commission  or on the NASDAQ at any
time since the Closing Date and the Company  shall not have  received any notice
of threatened or pending proceedings for delisting the Common Stock from NASDAQ;

     (vii) Shareholder  Approval. No approval of the shareholders of the Company
shall be  required  under the rules of the  Nasdaq  Stock  Market or such  other
exchange or trading  facility or which the Common  Stock is the traded or listed
for trading in order to issue a number of shares of Common  Stock which is equal
to 19.999% of the Company's shares of Common Stock;

     (viii)  Shares of Common  Stock.  The Company  shall have duly reserved the
number of shares of Common Stock as required by the Transaction  Documents to be
reserved for issuance upon conversion of the Debentures;

     (ix) Performance of Conversion  Obligations.  The Company shall have timely
complied with its conversion and delivery requirements under the Debentures.

     3.15 Conditions precedent to the purchase of Second Additional  Debentures.
Notwithstanding  anything  to the  contrary  contained  in this  Agreement,  the
commitment of a Purchaser to purchase Second Additional Debentures is subject to
the satisfaction or waiver by such Purchaser of each of the following conditions
as of the Second Additional Funding Date:
<PAGE>
     (i) Closing of Initial Debentures.  The Closing shall have occurred and the
Company  shall  have  satisfied  each  condition  precedent,  which has not been
waived, to the purchase of First Additional Debentures;

     (ii)  Accuracy  of  the  Company's  Representations  and  Warranties.   The
representations and warranties of the Company contained herein shall be true and
correct as of the date when made and as of the Second Additional Funding Date as
though  made  on  and as of the  Second  Additional  Funding  Date  (other  than
representations  and warranties which relate to a specific date (which shall not
include representations and warranties relating to the "date hereof" (which need
only be true and correct on the date made));

     (iii)  Performance  by the  Company.  The  Company  shall  have  performed,
satisfied and complied with all covenants, agreements and conditions required by
the  Transaction  Documents to be  performed,  satisfied or complied with by the
Company between the Closing Date and the Second  Additional  Funding Date and no
Event (as defined in the  Registration  Rights  Agreement ) shall have  occurred
which has not been cured to the satisfaction of the Purchasers;

     (iv) No Injunction.  Since the Closing Date, no statute,  rule, regulation,
executive order, decree, ruling or injunction shall have been enacted,  entered,
promulgated,  amended,  modified  or  endorsed  by  any  court  of  governmental
authority of competent jurisdiction or governmental  authority,  stock market or
trading  facility  which  prohibits or makes  impracticable  the purchase of the
Second Additional Debentures;

     (v) Adverse  Changes.  Since the Closing Date, no event or series of events
which  reasonably  would be  expected  to have or result in a  Material  Adverse
Effect shall have occurred;

     (vi) No Suspensions  of Trading in Common Stock.  The trading in the Common
Stock shall not have been  suspended by the  Commission  or on the NASDAQ at any
time since the Closing Date and the Company  shall not have  received any notice
of threatened or pending proceedings for delisting the Common Stock from NASDAQ;

     (vii) Shareholder  Approval. No approval of the shareholders of the Company
shall be  required  under the rules of the  Nasdaq  Stock  Market or such  other
exchange or trading  facility on which the Common  Stock is the traded or listed
for trading in order to issue a number of shares of Common  Stock which is equal
to 19.999% of the Company's shares of Common Stock;

     (viii)  Shares of Common  Stock.  The Company  shall have duly reserved the
number of shares of Common Stock as required by the Transaction  Documents to be
reserved for issuance upon conversion of the Debentures;

     (ix) Performance of Conversion  Obligations.  The Company shall have timely
complied with its conversion and delivery requirements under the Debentures.
<PAGE>
                                   ARTICLE IV
                                  MISCELLANEOUS

          4.1 Fees and Expenses. At the Closing, the Company shall reimburse the
Purchasers  for their legal fees and expenses  incurred in  connection  with the
preparation and  negotiation of the Transaction  Documents by paying to Robinson
Silverman  $25,000  for  the  preparation  and  negotiation  of the  Transaction
Documents.  The amount contemplated by the immediately  preceding sentence shall
be retained by the  Purchasers  and shall not be delivered to the Company at the
Closing.  Other than the amount contemplated herein, and except as otherwise set
forth in the Registration  Rights  Agreement,  each party shall pay the fees and
expenses of its advisers,  counsel,  accountants and other experts,  if any, and
all  other  expenses  incurred  by  such  party  incident  to  the  negotiation,
preparation,  execution, delivery and performance of this Agreement. The Company
shall pay all stamp and other  taxes and duties  levied in  connection  with the
issuance of the Securities

          4.2 Entire Agreement;  Amendments. The Transaction Documents, together
with the Exhibits and  Schedules  thereto and the Transfer  Agent  Instructions,
contain  the entire  understanding  of the parties  with  respect to the subject
matter hereof and supersede all prior  agreements  and  understandings,  oral or
written,  with respect to such matters,  which the parties acknowledge have been
merged into such documents, exhibits and schedules.

          4.3 Notices. Any and all notices or other communications or deliveries
required or permitted to be provided  hereunder shall be in writing and shall be
deemed given and effective on the earliest of (i) the date of  transmission,  if
such  notice or  communication  is  delivered  via  facsimile  at the  facsimile
telephone  number  specified in this Section  prior to 6:30 p.m.  (New York City
time) on a Business Day,  (ii) the Business Day after the date of  transmission,
if such notice or  communication  is delivered  via  facsimile at the  facsimile
telephone number specified in this Agreement later than 6:30 p.m. (New York City
time) on any date and earlier than 11:59 p.m. (New York City time) on such date,
(iii) the Business Day  following  the date of mailing,  if sent by.  nationally
recognized  overnight courier service,  or (iv) upon actual receipt by the party
to whom such notice is required  to be given.  The address for such  notices and
communications shall be as follows:
<PAGE>

     If to the Company:      Direct Insite Corporation
                             80 Orville Drive, Bohemia
                             New York, 11716
                             Facsimile No.: (631) 563-8085
                             Attn: Chief Financial Officer

     With a Copy to:         Blau, Kramer, Wactlar & Lieberman, P.C.
                             100 Jericho Quadrangle
                             Jericho, New York 11753
                             Attn: David Lieberman

     If to a  Purchaser:     To the  address set forth under such  Purchaser's
                             name on the signature pages hereto.

or such other  address as may be designated  in writing  hereafter,  in the same
manner, by such Person.

     4.4  Amendments;  Waivers.  No provision of this Agreement may be waived or
amended except in a written instrument  signed, in the case of an amendment,  by
the Company and each of the Purchasers or, in the case of a waiver, by the party
against whom enforcement of any such waiver is sought.  No waiver of any default
with respect to any provision,  condition or requirement of this Agreement shall
be  deemed  to be a  continuing  waiver  in the  future or a waiver of any other
provision,  condition or requirement  hereof, nor shall any delay or omission of
either party to exercise any right  hereunder in any manner  impair the exercise
of any such right accruing to it thereafter.

     4.5  Headings.  The  headings  herein  are  for  convenience  only,  do not
constitute a part of this  Agreement  and shall not be deemed to limit or affect
any of the provisions hereof.

     4.6 Successors and Assigns.  This Agreement shall be binding upon and inure
to the benefit of the parties and their  successors and permitted  assigns.  The
Company may not assign this  Agreement  or any rights or  obligations  hereunder
without  the prior  written  consent of the  Purchasers.  Except as set forth in
Section  3.1(a),  the  Purchasers  may not assign this  Agreement  or any of the
rights or  obligations  hereunder  without  the  consent  of the  Company.  This
provision  shall not limit  any  Purchaser's  right to  transfer  securities  or
transfer or assign rights under the Registration Rights Agreement.

     4.7 No  Third-Party  Beneficiaries.  This  Agreement  is  intended  for the
benefit of the parties  hereto and their  respective  successors  and  permitted
assigns and is not for the benefit of, nor may any provision  hereof be enforced
by, any other Person.

     4.8 Governing  Law. All questions  concerning the  construction,  validity,
enforcement  and  interpretation  of this  Agreement  shall be  governed  by and
construed  and enforced in  accordance  with the  internal  laws of the State of
Delaware,  without  regard to the  principles of conflicts of law thereof.  Each
party hereby irrevocably submits to the exclusive  jurisdiction of the state and
federal  courts sitting in the City of New York,  borough of Manhattan,  for the
adjudication  of any dispute  hereunder  or in  connection  herewith or with any
transaction  contemplated  hereby or discussed herein (including with respect to
the enforcement of the any of the Transaction Documents), and hereby irrevocably
waives,  and agrees not to assert in any suit,  action or proceeding,  any claim
that it is not personally  subject to the  jurisdiction of any such court,  that
such suit,  action or  proceeding  is improper.  Each party  hereby  irrevocably
<PAGE>
waives  personal  service of process and consents to process being served in any
such suit,  action or  proceeding  by mailing a copy thereof via  registered  or
certified  mail or overnight  delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this  Agreement and agrees that
such service shall constitute good and sufficient  service of process and notice
thereof.  Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.

          4.9  Survival.   The  representations,   warranties,   agreements  and
covenants contained herein shall survive the Closing and the delivery,  exercise
and conversion, (as the case may be) of the Debentures.

          4.10  Execution.  This  Agreement  may be  executed  in  two  or  more
counterparts,  all of which when taken  together shall be considered one and the
same agreement and shall become effective when  counterparts have been signed by
each party and  delivered  to the other  party,  it being  understood  that both
parties need not sign the same  counterpart.  In the event that any signature is
delivered by facsimile  transmission,  such  signature  shall create a valid and
binding  obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.

          4.11  Severability.  In case any one or more of the provisions of this
Agreement  shall be invalid or  unenforceable  in any respect,  the validity and
enforceability of the remaining terms and provisions of this Agreement shall not
in any way be  affecting  or impaired  thereby and the parties  will  attempt to
agree  upon a valid  and  enforceable  provision  which  shall  be a  reasonable
substitute  therefor,  and upon so agreeing,  shall  incorporate such substitute
provision in this Agreement.

          4.12  Remedies.  In addition to being  entitled to exercise all rights
provided herein or granted by law,  including  recovery of damages,  each of the
Purchasers  will be entitled to specific  performance of the  obligations of the
Company under the Transaction Documents.  The parties hereto agree that monetary
damages may not be adequate  compensation for any loss incurred by reason of any
breach of obligations  described in the foregoing  sentence and hereby agrees to
waive in any action for specific  performance of any such obligation the defense
that a remedy at law would be adequate.

          4.13  Independent  Nature of Purchasers'  Obligations and Rights.  The
obligations of each Purchaser under any Transaction  Document is several and not
joint with the  obligations  of any other  Purchaser  and no Purchaser  shall be
responsible  in any way for the  performance  of the  obligations  of any  other
Purchaser under any Transaction  Document.  Nothing  contained  herein or in any
Transaction  Document,  and no action taken by any Purchaser  pursuant  thereto,
shall be deemed to constitute the Purchasers as a partnership, an association, a
joint  venture  or any other kind of entity,  or create a  presumption  that the
Purchasers are in any way acting in concert with respect to such  obligations or
the transactions  contemplated by the Transaction Document. Each Purchaser shall
<PAGE>
be entitled to independently  protect and enforce its rights,  including without
limitation  the  rights  arising  out of  this  Agreement  or  out of the  other
Transaction Documents,  and it shall not be necessary for any other Purchaser to
be joined as an additional party in any proceeding for such purpose.

                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                            SIGNATURE PAGES FOLLOWS]
<PAGE>

          IN WITNESS  WHEREOF,  the parties hereto have caused this  Convertible
Debenture Purchase Agreement to be duly executed by their respective  authorized
signatories as of the date first indicated above.

                          DIRECT INSITE CORPORATION

                          By:_____________________________________
                             Name:
                             Title:

                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                      SIGNATURE PAGE FOR PURCHASER FOLLOWS]

<PAGE>

                           GREENWOOD COURT LLC

                           By:_____________________________________
                              Name:
                              Title:

                           Purchase Price:         $3,000,000

                           Address for Notice:

                           Corporate Center
                           Windward One
                           West Bay Road
                           P.O. Box 31106 SMB
                           Grand Cayman, Cayman Islands

                           With copies to:

                           Robinson Silverman Pearce Aronsohn &  Berman LLP
                           1290 Avenue of the Americas
                           New York, NY  10104
                           Facsimile No.:  (212) 541-4630 and (212) 541-1432
                           Attn: Eric L. Cohen, Esq.

<PAGE>
                          REGISTRATION RIGHTS AGREEMENT

          This  Registration  Rights  Agreement  (this  "Agreement") is made and
entered into as of September 27, 2000, among Direct Insite Corporation (formerly
known as Computer Concepts Corp.), a Delaware  corporation (the "Company"),  and
the investors signatory hereto (each such investor is a "Purchaser" and all such
investors are, collectively, the "Purchasers").

          This Agreement is made pursuant to the Convertible  Debenture Purchase
Agreement, dated as of the date hereof among the Company and the Purchasers (the
"Purchase Agreement").

          The Company and the Purchasers hereby agree as follows:

     1.   Definitions

          Capitalized  terms  used and not  otherwise  defined  herein  that are
defined in the Purchase  Agreement  shall have the meanings  given such terms in
the Purchase  Agreement.  As used in this  Agreement,  the following terms shall
have the following meanings:

          "Affiliate"  means, with respect to any Person,  any other Person that
directly or indirectly controls or is controlled by or under common control with
such Person.  For the  purposes of this  definition,  "control,"  when used with
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the  direction  of the  management  and policies of such Person,
whether  through the ownership of voting  securities,  by contract or otherwise;
and the terms of  "affiliated,"  "controlling"  and  "controlled"  have meanings
correlative to the foregoing.

          "Business Day" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking  institutions in the State of
New York are authorized or required by law or other government actions to close.

          "Closing  Date"  shall  have the  meaning  set  forth in the  Purchase
Agreement.

          "Commission" means the Securities and Exchange Commission.

          "Common Stock" means the Company's common stock,  $.0001 par value, or
such securities in to which that such stock shall hereafter be reclassified.

          "Debentures"  means the Convertible  Debentures  issued or issuable to
the Purchasers in accordance with the Purchase Agreement.

          "Effectiveness Date" means with respect to the Registration  Statement
required to be filed hereunder, the 150th day following the Closing Date.

          "Effectiveness  Period"  shall have the  meaning  set forth in Section
2(a).

          "Exchange Act" means the Securities Exchange Act of 1934, as amended.
<PAGE>

          "Filing Date" means, with respect to the Registration  Statement to be
filed following the Closing Date, November 30, 2000.

          "Holder" or "Holders" means the holder or holders, as the case may be,
from time to time of Registrable Securities.

          "Indemnified Party" shall have the meaning set forth in Section 5(c).

          "Indemnifying Party" shall have the meaning set forth in Section 5(c).

          "Losses" shall have the meaning set forth in Section 5(a).

          "Person"  means an individual or a  corporation,  partnership,  trust,
incorporated or  unincorporated  association,  joint venture,  limited liability
company, joint stock company,  government (or an agency or political subdivision
thereof) or other entity of any kind.

          "Proceeding" means an action, claim, suit, investigation or proceeding
(including,  without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.

          "Prospectus"  means  the  prospectus   included  in  the  Registration
Statement  (including,  without  limitation,  a  prospectus  that  includes  any
information  previously  omitted from a prospectus filed as part of an effective
registration  statement  in  reliance  upon  Rule  430A  promulgated  under  the
Securities Act), as amended or supplemented by any prospectus  supplement,  with
respect  to  the  terms  of  the  offering  of any  portion  of the  Registrable
Securities covered by the Registration  Statement,  and all other amendments and
supplements to the  Prospectus,  including  post-effective  amendments,  and all
material  incorporated by reference or deemed to be incorporated by reference in
such Prospectus.

          "Registrable Securities" (i) means the shares of Common Stock issuable
upon conversion in full of the Debentures whether now outstanding or hereinafter
issued.

          "Registration  Statement"  means the  registration  statement  and any
additional  registration  statements contemplated by Section 3(c), including (in
each case) the  Prospectus,  amendments  and  supplements  to such  registration
statement or  Prospectus,  including  pre- and  post-effective  amendments,  all
exhibits  thereto,  and all material  incorporated  by reference or deemed to be
incorporated by reference in such registration statement.

          "Rule 144" means Rule 144  promulgated by the  Commission  pursuant to
the  Securities  Act,  as such Rule may be  amended  from  time to time,  or any
similar  rule  or  regulation   hereafter   adopted  by  the  Commission  having
substantially the same effect as such Rule.

          "Rule 415" means Rule 415  promulgated by the  Commission  pursuant to
the  Securities  Act,  as such Rule may be  amended  from  time to time,  or any
similar  rule  or  regulation   hereafter   adopted  by  the  Commission  having
substantially the same effect as such Rule.
<PAGE>

          "Rule 424" means Rule 424  promulgated by the  Commission  pursuant to
the  Securities  Act,  as such Rule may be  amended  from  time to time,  or any
similar  rule  or  regulation   hereafter   adopted  by  the  Commission  having
substantially the same effect as such Rule.

          "Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.

          "Special Counsel" means one special counsel to the Holders,  for which
the Holders will be reimbursed by the Company pursuant to Section 4.

     2.   Registration

          (a) On or prior to the Filing Date, the Company shall prepare and file
with  the  Commission  a  Registration  Statement  covering  the  resale  of all
Registrable Securities for an offering to be made on a continuous basis pursuant
to Rule 415.  The  Registration  Statement  shall be on Form S-3  (except if the
Company is not then eligible to register for resale the  Registrable  Securities
on Form S-3,  in which case such  registration  shall be on another  appropriate
form and shall contain  (except if otherwise  directed by the Holders) the "Plan
of Distribution" attached hereto as Annex A.
 The Company shall use its best efforts to cause the  Registration  Statement to
be declared effective under the Securities Act as promptly as possible after the
filing thereof,  but in any event prior to the Effectiveness Date, and shall use
its best  efforts to keep such  Registration  Statement  continuously  effective
under the  Securities  Act until the date which is two years after the date that
such  Registration  Statement is declared  effective by the  Commission  or such
earlier  date  when all  Registrable  Securities  covered  by such  Registration
Statement have been sold or may be sold without volume restrictions  pursuant to
Rule 144(k) (the "Effectiveness Period").

          (b) The  Registration  Statement to be filed  hereunder  shall include
4,384,000  shares of Common  Stock for  resale by the  Holders in respect of the
Debentures.

          (c) If (a)  the  Company  files  the  Registration  Statement  without
affording  the  Holder  the  opportunity  to review  and  comment on the same as
required  by Section  3(a)  hereof,  or (b) the  Company  fails to file with the
Commission a request for  acceleration  in accordance  with Rule 461 promulgated
under the  Securities  Act,  within  five days of the date that the  Company  is
notified (orally or in writing, whichever is earlier) by the Commission that the
Registration Statement will not be "reviewed," or not subject to further review,
or (c) the Registration  Statement filed hereunder is not declared  effective by
the  Commission  on or  prior  to  its  Effectiveness  Date,  or (d)  after  the
Registration  Statement is filed with and declared  effective by the Commission,
such  Registration  Statement  ceases  to be  effective  as to  all  Registrable
Securities to which it is required to relate at any time prior to the expiration
of the Effectiveness  Period without being succeeded within ten Business Days by
an amendment  to the  Registration  Statement  or by a  subsequent  Registration
Statement filed with and declared effective by the Commission, or (e) the Common

<PAGE>

Stock shall be delisted or suspended from trading on the Nasdaq  SmallCap Market
("NASDAQ")  or the New York Stock  Exchange,  American  Stock  Exchange,  or the
Nasdaq National Market (each, a "Subsequent Market") for more than three Trading
Days (which need not be consecutive  Trading Days), or (f) the conversion rights
of the Holders  pursuant to the Debentures are suspended for any reason,  or (g)
an amendment to the Registration  Statement is not filed by the Company with the
Commission  within ten Business Days of the  Commission's  notifying the Company
that such  amendment is required in order for the  Registration  Statement to be
declared  effective (any such failure or breach being referred to as an "Event,"
and for  purposes  of  clauses  (a),  (c) and (f) the date on which  such  Event
occurs,  or for purposes of clause (b) the date on which such five day period is
exceeded,  or for  purposes  of  clauses  (d) and (g) the  date  which  such ten
Business Day-period is exceeded, or for purposes of clause (e) the date on which
such three Trading  Day-period is exceeded,  being referred to as "Event Date"),
then,  on (i) the Event Date,  the Company shall pay to each Holder an amount in
cash, as liquidated damages and not as penalty, equal to 3.0% of the outstanding
principal amount of the Debentures at such Event Date, and (ii) if the Event has
not been cured by the first monthly anniversary of the Event Date, on such first
monthly  anniversary of the Event Date and each monthly  anniversary  thereafter
until the  Event at issue is  cured,  the  Company  shall pay to each  Holder an
amount in cash, as liquidated  damages and not as penalty,  equal to 3.0% of the
outstanding principal amount of the Debentures at each such monthly anniversary.
If the Company fails to pay any liquidated  damages  pursuant to this Section in
full within  seven days after the date  payable,  the Company  will pay interest
thereon  at a rate of 18% per  annum  (or such  lesser  maximum  amount  that is
permitted to be paid by applicable  law) to the Holder,  accruing daily from the
date such liquidated damages are due until such amounts,  plus all such interest
thereon,  are paid in full. The liquidated  damages pursuant to the terms hereof
shall apply on a pro-rata  basis for any portion of a month prior to the cure of
an Event.

     3.   Registration Procedures

          In connection with the Company's  registration  obligations hereunder,
the Company shall:

          (a) Not less  than  five  Business  Days  prior to the  filing  of the
Registration  Statement or any related Prospectus or any amendment or supplement
thereto  (including  any  document  that would be  incorporated  or deemed to be
incorporated  therein by  reference),  the  Company  shall,  (i)  furnish to the
Holders and their Special  Counsel copies of all such  documents  proposed to be
filed,   which  documents  (other  than  those  incorporated  or  deemed  to  be
incorporated  by  reference)  will be subject to the review of such  Holders and
their Special  Counsel,  and (ii) cause its officers and directors,  counsel and
independent  certified public  accountants to respond to such inquiries as shall
be  necessary,  in the  reasonable  opinion of  respective  counsel to conduct a
reasonable  investigation  within the meaning of the Securities Act. The Company
shall  not  file  the  Registration  Statement  or any  such  Prospectus  or any
amendments  or  supplements  thereto to which the  Holders of a majority  of the
Registrable  Securities  and their  Special  Counsel  shall  reasonably  object,
provided,  the Company is notified  of such  objection  no later than 3 Business
Days after the Holders have been so furnished copies of such documents.

          (b)  (i)  Prepare  and  file  with  the  Commission  such  amendments,
including  post-effective  amendments,  to the  Registration  Statement  and the
Prospectus  used  in  connection  therewith  as may be  necessary  to  keep  the
Registration  Statement  continuously effective as to the applicable Registrable
Securities for the Effectiveness Period; (ii) cause the related Prospectus to be
amended  or  supplemented  by  any  required  Prospectus  supplement,  and as so

<PAGE>

supplemented  or  amended to be filed  pursuant  to Rule 424;  (iii)  respond as
promptly as reasonably  possible,  and in any event within ten Business Days, to
any comments  received  from the  Commission  with  respect to the  Registration
Statement  or any  amendment  thereto  and as promptly  as  reasonably  possible
provide the Holders true and complete copies of all  correspondence  from and to
the Commission  relating to the Registration  Statement;  and (iv) comply in all
material respects with the provisions of the Securities Act and the Exchange Act
with respect to the  disposition of all  Registrable  Securities  covered by the
Registration  Statement  during the  applicable  period in  accordance  with the
intended  methods  of  disposition  by the  Holders  thereof  set  forth  in the
Registration Statement as so amended or in such Prospectus as so supplemented.

     (c)  Notify  the  Holders of  Registrable  Securities  to be sold and their
Special  Counsel as promptly as reasonably  possible (and, in the case of (i)(A)
below,  not less than five Business Days prior to such filing) and (if requested
by any such  Person)  confirm  such notice in writing no later than one Business
Day following the day (i)(A) when a Prospectus or any  Prospectus  supplement or
post-effective  amendment to the Registration Statement is proposed to be filed;
(B) when the Commission notifies the Company whether there will be a "review" of
such Registration  Statement and whenever the Commission  comments in writing on
such Registration  Statement (the Company shall provide true and complete copies
thereof and all written responses thereto to each of the Holders);  and (C) with
respect to the Registration Statement or any post-effective  amendment, when the
same has become  effective;  (ii) of any request by the  Commission or any other
Federal or state  governmental  authority for  amendments or  supplements to the
Registration Statement or Prospectus or for additional information; (iii) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration  Statement covering any or all of the Registrable Securities or the
initiation of any Proceedings  for that purpose;  (iv) if at any time any of the
representations  and  warranties  of the  Company  contained  in  any  agreement
contemplated hereby ceases to be true and correct in all material respects;  (v)
of the receipt by the Company of any notification with respect to the suspension
of the  qualification or exemption from  qualification of any of the Registrable
Securities for sale in any jurisdiction, or the initiation or threatening of any
Proceeding for such purpose;  and (vi) of the occurrence of any event or passage
of time  that  makes  the  financial  statements  included  in the  Registration
Statement  ineligible  for  inclusion  therein  or  any  statement  made  in the
Registration  Statement or Prospectus or any document  incorporated or deemed to
be  incorporated  therein by reference  untrue in any  material  respect or that
requires  any  revisions  to the  Registration  Statement,  Prospectus  or other
documents so that, in the case of the Registration  Statement or the Prospectus,
as the case may be, it will not contain any untrue  statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.

          (d) Promptly deliver to each Holder and their Special Counsel, without
charge, as many copies of the Prospectus or Prospectuses (including each form of
prospectus)  and each  amendment  or  supplement  thereto  as such  Persons  may
reasonably  request.  The Company hereby  consents to the use of such Prospectus
and each  amendment  or  supplement  thereto by each of the  selling  Holders in
connection with the offering and sale of the Registrable  Securities  covered by
such Prospectus and any amendment or supplement thereto.
<PAGE>

     (e) Prior to any public  offering of Registrable  Securities,  use its best
efforts to register or qualify or cooperate  with the selling  Holders and their
Special  Counsel  in  connection  with the  registration  or  qualification  (or
exemption  from  such   registration  or   qualification)  of  such  Registrable
Securities  for offer and sale  under  the  securities  or Blue Sky laws of such
jurisdictions  within the United  States as any Holder  requests in writing,  to
keep each such registration or qualification (or exemption  therefrom) effective
during  the  Effectiveness  Period  and to do any and all  other  acts or things
necessary or advisable to enable the  disposition in such  jurisdictions  of the
Registrable Securities covered by a Registration  Statement;  provided, that the
Company  shall not be  required  to  qualify  generally  to do  business  in any
jurisdiction  where it is not then so  qualified  or subject  the Company to any
material tax in any such jurisdiction where it is not then so subject.

     (f) Cooperate  with the Holders to facilitate  the timely  preparation  and
delivery of certificates  representing Registrable Securities to be delivered to
a transferee pursuant to a Registration  Statement,  which certificates shall be
free,  to  the  extent  permitted  by  the  Purchase  Agreement  and  applicable
securities  laws, of all  restrictive  legends,  and to enable such  Registrable
Securities to be in such  denominations and registered in such names as any such
Holders may request.

     (g) Upon the occurrence of any event  contemplated by Section 3(d)(vi),  as
promptly as reasonably possible, prepare a supplement or amendment,  including a
post-effective  amendment,  to the Registration Statement or a supplement to the
related  Prospectus or any document  incorporated  or deemed to be  incorporated
therein  by  reference,  and file  any  other  required  document  so  that,  as
thereafter  delivered,  neither the  Registration  Statement nor such Prospectus
will contain an untrue  statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements  therein,
in light of the circumstances under which they were made, not misleading.

     (h) Comply with all applicable rules and regulations of the Commission.

     4. Registration Expenses. All fees and expenses incident to the performance
of or  compliance  with  this  Agreement  by the  Company  shall be borne by the
Company  whether or not any  Registrable  Securities  are sold  pursuant  to the
Registration  Statement.  The fees and  expenses  referred  to in the  foregoing
sentence shall include, without limitation, (i) all registration and filing fees
(including,  without  limitation,  fees and expenses (A) with respect to filings
required  to be made  with the  NASDAQ  and any  Subsequent  Market on which the
Common Stock is then listed for trading,  and (B) in compliance  with applicable
state  securities  or Blue Sky laws  (including,  without  limitation,  fees and
disbursements   of  counsel  for  the  Company  in  connection   with  Blue  Sky
qualifications or exemptions of the Registrable  Securities and determination of
the eligibility of the Registrable  Securities for investment  under the laws of
such  jurisdictions  as  requested  by the  Holders)),  (ii)  printing  expenses
(including,   without   limitation,   expenses  of  printing   certificates  for
Registrable  Securities and of printing prospectuses  requested by the Holders),
(iii) messenger,  tele phone and delivery expenses,  (iv) fees and disbursements
of counsel for the Company and up to $5,000 of the fees and  expenses of Special
Counsel for the Holders and (v) fees and expenses of all other Persons  retained
by  the  Company  in  connection  with  the  consummation  of  the  transactions
contemplated by this Agreement.
<PAGE>

     5.   Indemnification

     (a) Indemnification by the Company. The Company shall,  notwithstanding any
termination  of this  Agreement,  indemnify and hold  harmless each Holder,  the
officers,  directors,  agents,  brokers  (including  brokers  who offer and sell
Registrable  Securities  as  principal as a result of a pledge or any failure to
perform under a margin call of Common Stock),  investment advisors and employees
of each of them, each Person who controls any such Holder (within the meaning of
Section 15 of the  Securities  Act or Section  20 of the  Exchange  Act) and the
officers,  directors,  agents and employees of each such controlling  Person, to
the fullest  extent  permitted by  applicable  law, from and against any and all
losses,  claims,  damages,  liabilities,  costs (including,  without limitation,
costs of preparation and reasonable attorneys' fees) and expenses (collectively,
"Losses"),  as  incurred,  arising  out of or  relating to any untrue or alleged
untrue statement of a material fact contained in the Registration Statement, any
Prospectus or any form of  prospectus or in any amendment or supplement  thereto
or in any preliminary prospectus,  or arising out of or relating to any omission
or  alleged  omission  of a  material  fact  required  to be stated  therein  or
necessary to make the statements  therein (in the case of any Prospectus or form
of prospectus or supplement  thereto,  in light of the circumstances under which
they were made) not  misleading,  except to the extent,  but only to the extent,
that (1) such untrue  statements or omissions are based solely upon  information
regarding  such  Holder  furnished  in  writing to the  Company  by such  Holder
expressly  for use therein,  or to the extent that such  information  relates to
such Holder or such Holder's  proposed  method of  distribution  of  Registrable
Securities  and was  reviewed and  expressly  approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such form of
Prospectus or in any  amendment or  supplement  thereto or (2) in the case of an
occurrence of an event of the type specified in Section  3(d)(ii)-(vi),  the use
by such  Holder of an  outdated or  defective  Prospectus  after the Company has
notified such Holder in writing that the Prospectus is outdated or defective and
prior to the receipt by such Holder of the Advice  contemplated in Section 6(e).
The Company  shall  notify the Holders  promptly of the  institution,  threat or
assertion of any Proceeding of which the Company is aware in connection with the
transactions contemplated by this Agreement.

     (b)  Indemnification  by Holders.  Each  Holder  shall,  severally  and not
jointly,  indemnify  and hold  harmless the Company,  its  directors,  officers,
agents and employees,  each Person who controls the Company  (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors,  officers,  agents or employees of such controlling  Persons,  to the
fullest  extent  permitted by  applicable  law,  from and against all Losses (as
determined by a court of competent  jurisdiction in a final judgment not subject
to appeal or  review)  arising  solely  out of or based  solely  upon any untrue
statement  of a material  fact  contained  in any  Registration  Statement,  any
Prospectus,  or any  form  of  prospectus,  or in any  amendment  or  supplement
thereto,  or  arising  solely  out of or based  solely  upon any  omission  of a
material fact required to be stated  therein or necessary to make the statements
therein not misleading to the extent,  but only to the extent,  that such untrue
statement or omission is contained in any information so furnished in writing by
such Holder to the  Company  specifically  for  inclusion  in such  Registration
Statement or such Prospectus or to the extent that (1) such untrue statements or
omissions are based solely upon  information  regarding such Holder furnished in
writing to the  Company by such  Holder  expressly  for use  therein,  or to the
extent that such  information  relates to such Holder or such Holder's  proposed
method of distribution of Registrable  Securities and was reviewed and expressly
approved  in  writing  by such  Holder  expressly  for  use in the  Registration

<PAGE>

Statement,  such  Prospectus  or such form of  Prospectus or in any amendment or
supplement  thereto or (2) in the case of an  occurrence of an event of the type
specified  in Section  3(d)(ii)-(vi),  the use by such  Holder of an outdated or
defective  Prospectus after the Company has notified such Holder in writing that
the  Prospectus is outdated or defective and prior to the receipt by such Holder
of the Advice  contemplated  in Section 6(e). In no event shall the liability of
any selling Holder  hereunder be greater in amount than the dollar amount of the
net proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.

          (c) Conduct of Indemnification Proceedings. If any Proceeding shall be
brought or asserted  against  any Person  entitled to  indemnity  hereunder  (an
"Indemnified  Party"),  such Indemnified  Party shall promptly notify the Person
from whom  indemnity is sought (the  "Indemnifying  Party") in writing,  and the
Indemnifying Party shall assume the defense thereof, including the employment of
counsel reasonably  satisfactory to the Indemnified Party and the payment of all
fees and expenses  incurred in connection with defense thereof;  provided,  that
the failure of any  Indemnified  Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this Agreement,
except (and only) to the extent that it shall be finally  determined  by a court
of  competent  jurisdiction  (which  determination  is not  subject to appeal or
further  review)  that  such  failure  shall  have  proximately  and  materially
adversely prejudiced the Indemnifying Party.

          An Indemnified  Party shall have the right to employ separate  counsel
in any such Proceeding and to participate in the defense  thereof,  but the fees
and expenses of such counsel shall be at the expense of such  Indemnified  Party
or Parties unless:  (1) the Indemnifying Party has agreed in writing to pay such
fees and expenses;  or (2) the Indemnifying  Party shall have failed promptly to
assume  the  defense  of  such  Proceeding  and  to  employ  counsel  reasonably
satisfactory to such Indemnified Party in any such Proceeding;  or (3) the named
parties to any such Proceeding  (including any impleaded  parties)  include both
such Indemnified  Party and the Indemnifying  Party, and such Indemnified  Party
shall have been  advised by counsel  that a conflict  of  interest  is likely to
exist if the same  counsel  were to  represent  such  Indemnified  Party and the
Indemnifying  Party (in which  case,  if such  Indemnified  Party  notifies  the
Indemnifying  Party in writing that it elects to employ separate  counsel at the
expense of the Indemnifying  Party,  the  Indemnifying  Party shall not have the
right to assume the defense thereof and the reasonable fees and expenses of such
counsel shall be at the expense of the  Indemnifying  Party).  The  Indemnifying
Party shall not be liable for any  settlement  of any such  Proceeding  effected
without its written consent,  which consent shall not be unreasonably  withheld.
No  Indemnifying  Party  shall,   without  the  prior  written  consent  of  the
Indemnified Party, effect any settlement of any pending Proceeding in respect of
which any  Indemnified  Party is a party,  unless  such  settlement  includes an
unconditional  release of such  Indemnified  Party from all  liability on claims
that are the subject matter of such Proceeding.

          All reasonable fees and expenses of the Indemnified  Party  (including
reasonable  fees  and  expenses  to  the  extent  incurred  in  connection  with
investigating   or  preparing  to  defend  such   Proceeding  in  a  manner  not
inconsistent  with this  Section)  shall be paid to the  Indemnified  Party,  as
incurred, within ten Business Days of written notice thereof to the Indemnifying
Party  (regardless  of whether it is ultimately  determined  that an Indemnified
Party  is  not  entitled  to  indemnification  hereunder;   provided,  that  the
Indemnifying  Party may require such Indemnified Party to undertake to reimburse
all such fees and  expenses  to the extent it is finally  judicially  determined
that such Indemnified Party is not entitled to indemnification hereunder).
<PAGE>

     (d) Contribution. If a claim for indemnification under Section 5(a) or 5(b)
is  unavailable  to  an  Indemnified  Party  (by  reason  of  public  policy  or
otherwise),   then  each  Indemnifying  Party,  in  lieu  of  indemnifying  such
Indemnified  Party,  shall  contribute  to the  amount  paid or  payable by such
Indemnified  Party  as a  result  of  such  Losses,  in  such  proportion  as is
appropriate  to  reflect  the  relative  fault  of the  Indemnifying  Party  and
Indemnified  Party in connection with the actions,  statements or omissions that
resulted in such Losses as well as any other relevant equitable  considerations.
The relative fault of such  Indemnifying  Party and  Indemnified  Party shall be
determined by reference to, among other things,  whether any action in question,
including any untrue or alleged untrue  statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information  supplied by, such Indemnifying  Party or Indemnified Party, and the
parties'  relative intent,  knowledge,  access to information and opportunity to
correct or prevent  such  action,  statement  or  omission.  The amount  paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 5(c), any reasonable attorneys' or other
reasonable  fees or  expenses  incurred  by such  party in  connection  with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the  indemnification  provided for in this Section was  available to
such party in accordance with its terms.

     The  parties  hereto  agree  that it  would  not be just and  equitable  if
contribution  pursuant  to  this  Section  5(d)  were  determined  by  pro  rata
allocation or by any other method of allocation  that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5(d), no Holder shall be required
to contribute, in the aggregate, any amount in excess of the amount by which the
proceeds  actually  received  by such  Holder  from the sale of the  Registrable
Securities subject to the Proceeding exceeds the amount of any damages that such
Holder has  otherwise  been  required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission.

     The indemnity and contribution  agreements contained in this Section are in
addition  to any  liability  that  the  Indemnifying  Parties  may  have  to the
Indemnified Parties.

     6. Miscellaneous

     (a) Amendments and Waivers. The provisions of this Agreement, including the
provisions of this sentence, may not be amended,  modified or supplemented,  and
waivers or consents to departures  from the provisions  hereof may not be given,
unless the same shall be in writing and signed by the Company and the Holders of
at  least   two-thirds   of  the  then   outstanding   Registrable   Securities.
Notwithstanding the foregoing, a waiver or consent to depart from the provisions
hereof  with  respect  to a matter  that  relates  exclusively  to the rights of
Holders  and that does not  directly  or  indirectly  affect the rights of other
Holders  may be  given by  Holders  of at least a  majority  of the  Registrable
Securities to which such waiver or consent relates; provided,  however, that the
provisions of this sentence may not be amended, modified, or supplemented except
in accordance with the provisions of the immediately preceding sentence.
<PAGE>

          (b) No  Inconsistent  Agreements.  Neither  the Company nor any of its
subsidiaries has entered, as of the date hereof, nor shall the Company or any of
its  subsidiaries,  on or  after  the  date of this  Agreement,  enter  into any
agreement with respect to its securities that would have the effect of impairing
the rights granted to the Holders in this Agreement or otherwise  conflicts with
the provisions  hereof.  Except as and to the extent  specified in Schedule 6(b)
hereto,  neither the Company nor any of its subsidiaries has previously  entered
into any agreement  granting any registration  rights with respect to any of its
securities to any Person that have not been satisfied in full.

          (c) No  Piggyback  on  Registrations.  Except  as  and  to the  extent
specified in Schedule  6(b) hereto,  neither the Company nor any of its security
holders  (other than the Holders in such capacity  pursuant  hereto) may include
securities  of  the  Company  in  the  Registration  Statement  other  than  the
Registrable  Securities,  and the Company  shall not after the date hereof enter
into any agreement providing any such right to any of its security holders.

          (d) Compliance.  Each Holder  covenants and agrees that it will comply
with the prospectus delivery requirements of the Securities Act as applicable to
it  in  connection  with  sales  of  Registrable   Securities  pursuant  to  the
Registration Statement.

          (e) Discontinued Disposition. Each Holder agrees by its acquisition of
such  Registrable  Securities that, upon receipt of a notice from the Company of
the  occurrence  of any  event  of the  kind  described  in  Sections  3(d)(ii),
3(d)(iii), 3(d)(iv), 3(d)(v) or 3(d)(vi), such Holder will forthwith discontinue
disposition of such  Registrable  Securities  under the  Registration  Statement
until such Holder's receipt of the copies of the supplemented  Prospectus and/or
amended  Registration  Statement  contemplated  by Section  3(h), or until it is
advised in writing (the  "Advice") by the Company that the use of the applicable
Prospectus  may be resumed,  and, in either  case,  has  received  copies of any
additional  or  supplemental  filings  that are  incorporated  or  deemed  to be
incorporated  by reference in such  Prospectus or  Registration  Statement.  The
Company may provide  appropriate  stop orders to enforce the  provisions of this
paragraph.

          (f) Piggy-Back Registrations.  If at any time during the Effectiveness
Period  there is not an  effective  Registration  Statement  covering all of the
Registrable  Securities and the Company shall determine to prepare and file with
the  Commission  a  registration  statement  relating to an offering for its own
account or the account of others under the  Securities  Act of any of its equity
securities,  other than on Form S-4 or Form S-8 (each as  promulgated  under the
Securities Act) or their then  equivalents  relating to equity  securities to be
issued solely in connection  with any  acquisition  of any entity or business or
equity  securities  issuable in connection  with stock option or other  employee
benefit plans, then the Company shall send to each Holder written notice of such
determination and, if within fifteen days after receipt of such notice, any such
Holder  shall  so  request  in  writing,  the  Company  shall  include  in  such
registration  statement  all or any  part of such  Registrable  Securities  such
holder requests to be registered.
<PAGE>
          (g) Notices. Any and all notices or other communications or deliveries
required or permitted to be provided  hereunder shall be in writing and shall be
deemed given and effective on the earliest of (i) the date of  transmission,  if
such  notice or  communication  is  delivered  via  facsimile  at the  facsimile
telephone  number  specified in this Section  prior to 6:30 p.m.  (New York City
time) on a Business Day,  (ii) the Business Day after the date of  transmission,
if such notice or  communication  is delivered  via  facsimile at the  facsimile
telephone number specified in this Agreement later than 6:30 p.m. (New York City
time) on any date and earlier than 11:59 p.m. (New York City time) on such date,
(iii) the  Business Day  following  the date of mailing,  if sent by  nationally
recognized  overnight courier service,  or (iv) upon actual receipt by the party
to whom such notice is required  to be given.  The address for such  notices and
communications shall be as follows:

     If to the Company:    Direct Insite Corporation
                           80 Orville Drive
                           Bohemia, NY 11716
                           Facsimile No.: (631) 563-8085
                           Attn: Chief Financial Officer

     With a Copy to:       Blau, Kramer, Wactlar & Lieberman, P.C.
                           100 Jericho Quadrangle
                           Jericho, New York 11753
                           Attn: David Lieberman

     If to a  Purchaser:   To the  address set forth
                           under such  Purchaser's name on the signature pages
                           hereto.

     If to any other Person who is then the registered Holder:

                           To  the  address of  such Holder as it appears in the
                           stock transfer books of the Company

or such other  address as may be designated  in writing  hereafter,  in the same
manner, by such Person.

          (h) Successors and Assigns.  This Agreement shall inure to the benefit
of and be  binding  upon the  successors  and  permitted  assigns of each of the
parties  and shall  inure to the  benefit of each  Holder.  The  Company may not
assign its rights or obligations  hereunder without the prior written consent of
each Holder.  Each Holder may assign their  respective  rights  hereunder in the
manner and to the Persons as permitted under the Purchase Agreement.

          (i)  Counterparts.  This  Agreement  may be  executed in any number of
counterparts,  each of which when so executed  shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement. In
the event that any  signature  is  delivered  by  facsimile  transmission,  such
signature shall create a valid binding  obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.
<PAGE>

     (j) Governing  Law. All questions  concerning the  construction,  validity,
enforcement  and  interpretation  of this  Agreement  shall be  governed  by and
construed and enforced in accordance  with the internal laws of the State of New
York,  without regard to the principles of conflicts of law thereof.  Each party
hereby  irrevocably  submits  to the  exclusive  jurisdiction  of the  state and
federal  courts sitting in the City of New York,  borough of Manhattan,  for the
adjudication  of any dispute  hereunder  or in  connection  herewith or with any
transaction  contemplated  hereby or discussed  herein,  and hereby  irrevocably
waives,  and agrees not to assert in any suit,  action or proceeding,  any claim
that it is not personally  subject to the  jurisdiction of any such court,  that
such suit,  action or  proceeding  is improper.  Each party  hereby  irrevocably
waives  personal  service of process and consents to process being served in any
such suit,  action or  proceeding by mailing a copy thereof to such party at the
address in effect for  notices to it under this  Agreement  and agrees that such
service  shall  constitute  good and  sufficient  service of process  and notice
thereof.  Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.

     (k) Cumulative  Remedies.  The remedies  provided herein are cumulative and
not exclusive of any remedies provided by law.

     (l) Severability.  If any term, provision,  covenant or restriction of this
Agreement is held by a court of competent  jurisdiction to be invalid,  illegal,
void or  unenforceable,  the remainder of the terms,  provisions,  covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected,  impaired or  invalidated,  and the parties hereto shall use
their reasonable  efforts to find and employ an alternative means to achieve the
same or  substantially  the  same  result  as that  contemplated  by such  term,
provision,  covenant or restriction.  It is hereby stipulated and declared to be
the intention of the parties that they would have executed the remaining  terms,
provisions, covenants and restrictions without including any of such that may be
hereafter declared invalid, illegal, void or unenforceable.

     (m)  Headings.  The  headings  in this  Agreement  are for  convenience  of
reference only and shall not limit or otherwise affect the meaning hereof.

     (n)  Independent   Nature  of  Purchasers'   Obligations  and  Rights.  The
obligations  of each  Purchaser  hereunder  is  several  and not joint  with the
obligations  of any  other  Purchaser  hereunder,  and  no  Purchaser  shall  be
responsible  in any way for the  performance  of the  obligations  of any  other
Purchaser  hereunder.  Nothing  contained  herein or in any other  agreement  or
document delivered at any closing, and no action taken by any Purchaser pursuant
hereto  or  thereto,   shall  be  deemed  to  constitute  the  Purchasers  as  a
partnership,  an  association,  a joint venture or any other kind of entity,  or
create a presumption  that the  Purchasers are in any way acting in concert with
respect to such obligations or the transactions  contemplated by this Agreement.
Each  Purchaser  shall be entitled to protect and enforce its rights,  including
without limitation the rights arising out of this Agreement, and it shall not be
necessary  for any other  Purchaser to be joined as an  additional  party in any
proceeding for such purpose.

                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                           SIGNATURE PAGES TO FOLLOW]

<PAGE>

          IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.

                         DIRECT INSITE CORPORATION

                         By:_____________________________________
                            Name:
                            Title:

                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                     SIGNATURE PAGES OF PURCHASER TO FOLLOW]

<PAGE>

                     GREENWOOD COURT LLC

                     By:_____________________________________
                         Name:
                         Title:

                    Address for Notice:

                    Corporate Center
                    Windward One
                    West Bay Road
                    P.O. Box 31106 SMB
                    Grand Cayman, Cayman Islands

                    With copies to:

                    Robinson Silverman Pearce Aronsohn & Berman LLP
                    1290 Avenue of the Americas
                    New York, NY  10104
                    Facsimile No.:  (212) 541-4630 and (212) 541-1432
                    Attn: Eric L. Cohen, Esq.

<PAGE>

                                                                        Annex
                                                              A

                              Plan of Distribution

  The  Selling   Stockholders   and  any  of  their   pledgees,   assignees  and
successors-in-interest  may, from time to time,  sell any or all of their shares
of Common Stock on any stock exchange,  market or trading  facility on which the
shares  are traded or in private  transactions.  These  sales may be at fixed or
negotiated  prices.  The  Selling  Stockholders  may  use any one or more of the
following methods when selling shares:

--   ordinary brokerage transactions and transactions in which the broker-dealer
     solicits purchasers;

--   block trades in which the broker-dealer  will attempt to sell the shares as
     agent but may  position  and resell a portion of the block as  principal to
     facilitate the transaction;

--   purchases by a broker-dealer  as principal and resale by the  broker-dealer
     for its account;

--   an exchange  distribution  in accordance  with the rules of the  applicable
     exchange;

--   privately negotiated transactions;

--   broker-dealers may agree with the Selling  Stockholders to sell a specified
     number of such shares at a stipulated price per share;

--   a combination of any such methods of sale; and

--   any other method permitted pursuant to applicable law.

     The  Selling  Stockholders  may also sell  shares  under Rule 144 under the
Securities Act, if available, rather than under this prospectus.

     The Selling Stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a Selling Stockholder defaults on a
margin  loan,  the broker  may,  from time to time,  offer and sell the  pledged
shares.  The Selling  Stockholders  have  advised the Company that they have not
entered  into  any  agreements,   understandings   or   arrangements   with  any
underwriters  or  broker-dealers  regarding  the sale of their shares other than
ordinary  course  brokerage  arrangements,   nor  is  there  an  underwriter  or
coordinating broker acting in connection with the proposed sale of shares by the
Selling Stockholders.

     Broker-dealers  engaged by the Selling  Stockholders  may arrange for other
brokers-dealers to participate in sales.  Broker-dealers may receive commissions
or discounts from the Selling  Stockholders  (or, if any  broker-dealer  acts as
agent  for the  purchaser  of  shares,  from the  purchaser)  in  amounts  to be
negotiated.  The  Selling  Stockholders  do not  expect  these  commissions  and
discounts to exceed what is customary in the types of transactions involved.
<PAGE>

     The Selling Stockholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be  "underwriters"  within the meaning of
the Securities Act in connection with such sales. In such event, any commissions
received  by such  broker-dealers  or agents and any profit on the resale of the
shares  purchased  by them  may be  deemed  to be  underwriting  commissions  or
discounts under the Securities Act.

     The  Company  is  required  to pay all fees and  expenses  incident  to the
registration of the shares,  including fees and  disbursements of counsel to the
Selling   Stockholders.   The  Company  has  agreed  to  indemnify  the  Selling
Stockholders against certain losses, claims, damages and liabilities,  including
liabilities under the Securities Act.

<PAGE>
NEITHER  THIS  DEBENTURE  NOR  THE  SECURITIES  INTO  WHICH  THIS  DEBENTURE  IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE  COMMISSION OR
THE  SECURITIES  COMMISSION  OF ANY STATE IN  RELIANCE  UPON AN  EXEMPTION  FROM
REGISTRATION  UNDER THE  SECURITIES  ACT OF 1933,  AS AMENDED  (THE  "SECURITIES
ACT"),  AND,  ACCORDINGLY,  MAY NOT BE OFFERED  OR SOLD  EXCEPT  PURSUANT  TO AN
EFFECTIVE  REGISTRATION  STATEMENT  UNDER THE  SECURITIES  ACT OR PURSUANT TO AN
AVAILABLE  EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE  REGISTRATION
REQUIREMENTS  OF THE  SECURITIES  ACT AND IN ACCORDANCE  WITH  APPLICABLE  STATE
SECURITIES LAWS.

No. 1                                                                 $2,000,000

                            DIRECT INSITE CORPORATION
                            6% CONVERTIBLE DEBENTURE
                             DUE SEPTEMBER 27, 2002

     THIS DEBENTURE is one of a series of duly authorized and issued  debentures
of Direct Insite  Corporation  (formerly known as Computer  Concepts  Corp.),  a
Delaware corporation,  having a principal place of business at 80 Orville Drive,
Bohemia,  New York  11716  (the  "Company"),  designated  as its 6%  Convertible
Debentures,  due September 27, 2002, in the aggregate  principal amount of Three
Million Dollars ($3,000,000) (the "Debentures").

     FOR VALUE RECEIVED,  the Company  promises to pay to Greenwood Court LLC or
its registered assigns (the "Holder"),  the principal sum of Two Million Dollars
($2,000,000),  on September 27, 2002 or such earlier date as the  Debentures are
required or permitted to be repaid as provided  hereunder (the "Maturity  Date")
and to pay  interest  to  the  Holder  on the  aggregate  unconverted  and  then
outstanding  principal  amount of this  Debenture  at the rate of 6% per  annum,
payable on each  Conversion Date (as defined herein) and on the Maturity Date in
cash or shares of Common  Stock (as defined in Section 6).  Subject to the terms
and conditions  herein, the decision whether to pay interest hereunder in shares
of Common Stock or cash shall be at the discretion of the Company. Not less than
ten Trading Days (as defined in Section 6) prior to each  Conversion  Date,  the
Company  shall  provide the Holder with  written  notice of its  election to pay
interest hereunder in cash or in shares of Common Stock pursuant to the terms of
Section  4(a)(i)  (the  Company may  indicate  in such notice that the  election
contained  in such notice  shall  continue  for later  periods  until  revised).
Failure to timely provide such written notice shall be deemed an election by the
Company to pay the  interest on such  Conversion  Date in shares of Common Stock
pursuant to the terms of Section 4(a)(i).  If interest is paid by the Company in
shares of its Common Stock,  then the number of shares of Common Stock  issuable
on account of such interest shall equal the cash amount of such interest on such
Conversion Date divided by the Conversion Price (as defined below) on such date.
Interest  shall be  calculated  on the basis on a 360-day  year and shall accrue
daily  commencing  on the  Original  Issue Date (as  defined in Section 6) until

<PAGE>

payment in full of the  principal  sum,  together  with all  accrued  and unpaid
interest  and other  amounts  which may  become  due  hereunder,  has been made.
Interest hereunder will be paid to the Person (as defined in Section 6) in whose
name this  Debenture  is  registered  on the  records of the  Company  regarding
registration and transfers of Debentures (the "Debenture Register"). All overdue
accrued and unpaid interest to be paid in cash hereunder shall entail a late fee
at the rate of 18% per annum (or such lower maximum amount of interest permitted
to be charged under applicable law) ("Late Fee") (to accrue daily, from the date
such  interest is due  hereunder  through and  including  the date of  payment),
payable in cash. If such Late Fee is paid by the Company in shares of its Common
Stock,  then the number of shares of Common  Stock  issuable  on account of such
Late Fee shall  equal the cash  amount of such Late Fee on such Late Fee payment
date divided by the Conversion Price on such date.

     This Debenture is subject to the following additional provisions:

     Section 1. This Debenture is exchangeable for an equal aggregate  principal
amount of Debentures of different authorized denominations,  as requested by the
Holder  surrendering  the  same.  No  service  charge  will  be  made  for  such
registration of transfer or exchange.

     Section 2. This  Debenture  has been issued  subject to certain  investment
representations  of the original Holder set forth in the Purchase  Agreement (as
defined in Section 6) and may be  transferred  or exchanged  only in  compliance
with  the  Purchase  Agreement.  Prior to due  presentment  to the  Company  for
transfer of this  Debenture,  the Company and any agent of the Company may treat
the Person (as  defined  in  Section  6) in whose  name this  Debenture  is duly
registered  on the  Debenture  Register  as the owner  hereof for the purpose of
receiving payment as herein provided and for all other purposes,  whether or not
this  Debenture is overdue,  and neither the Company nor any such agent shall be
affected by notice to the contrary.

     Section 3.     Events of Default.

          (a) "Event of Default",  wherever  used  herein,  means any one of the
following  events  (whatever  the reason and  whether it shall be  voluntary  or
involuntary or effected by operation of law or pursuant to any judgment,  decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):

                    (i) any default in the payment of the principal of, interest
     on or liquidated  damages in respect of, any Debentures,  free of any claim
     of  subordination,  as and when  the  same  shall  become  due and  payable
     (whether on a Conversion  Date or the Maturity Date or by  acceleration  or
     otherwise);

                    (ii) the Company  shall fail to observe or perform any other
     covenant,  agreement  or warranty  contained  in, or  otherwise  commit any
     breach of any of the  Transaction  Documents (as defined in Section 6), and
     such failure or breach shall not have been remedied  within five days after
     the date on which written  notice of such failure or breach shall have been
     given to the Company;
<PAGE>

                    (iii) the Company or any of its subsidiaries shall commence,
     or there shall be  commenced  against the Company or any such  subsidiary a
     case under any applicable bankruptcy or insolvency laws as now or hereafter
     in effect or any  successor  thereto,  or the Company  commences  any other
     proceeding  under  any  reorganization,  arrangement,  adjustment  of debt,
     relief of debtors, dissolution, insolvency or liquidation or similar law of
     any jurisdiction whether now or hereafter in effect relating to the Company
     or any subsidiary  thereof or there is commenced against the Company or any
     subsidiary  thereof any such  bankruptcy,  insolvency  or other  proceeding
     which  remains  undismissed  for a period of 60 days; or the Company or any
     subsidiary  thereof is adjudicated  insolvent or bankrupt;  or any order of
     relief or other order approving any such case or proceeding is entered;  or
     the  Company or any  subsidiary  thereof  suffers  any  appointment  of any
     custodian or the like for it or any substantial  part of its property which
     continues  undischarged or unstayed for a period of 60 days; or the Company
     or any  subsidiary  thereof makes a general  assignment  for the benefit of
     creditors;  or the  Company  shall fail to pay,  or shall  state that it is
     unable  to pay,  or shall be unable to pay,  its  debts  generally  as they
     become due; or the Company or any  subsidiary  thereof shall call a meeting
     of its  creditors  with a view to arranging a  composition,  adjustment  or
     restructuring of its debts; or the Company or any subsidiary  thereof shall
     by any act or failure to act expressly indicate its consent to, approval of
     or acquiescence  in any of the foregoing;  or any corporate or other action
     is taken by the  Company  or any  subsidiary  thereof  for the  purpose  of
     effecting any of the foregoing;

                    (iv) the  Company  shall  default in any of its  obligations
     under  any other  Debenture  or any  mortgage,  credit  agreement  or other
     facility,  indenture  agreement,  factoring  agreement or other  instrument
     under  which  there may be  issued,  or by which  there may be  secured  or
     evidenced any  indebtedness  for borrowed money or money due under any long
     term leasing or factoring arrangement of the Company in an amount exceeding
     $100,000,  whether  such  indebtedness  now  exists or shall  hereafter  be
     created and such  default  shall  result in such  indebtedness  becoming or
     being  declared  due and  payable  prior  to the  date on  which  it  would
     otherwise become due and payable;

                    (v) the Common  Stock shall fail to be quoted for trading on
     the Nasdaq SmallCap Market ("NASDAQ') or listed for trading on the New York
     Stock  Exchange,  American  Stock  Exchange or the Nasdaq  National  Market
     (each,  a  "Subsequent  Market")  for an aggregate of ten (10) Trading Days
     (which need not be consecutive Trading Days);

                    (vi) the  Company  shall be a party to any Change of Control
     Transaction  (as defined in Section 6),  shall agree to sell or dispose all
     or in excess of 33% of its assets in one or more  transactions  (whether or
     not such sale would constitute a Change of Control  Transaction),  or shall
     redeem  or  repurchase  more than a de  minimis  number of shares of Common
     Stock or other equity  securities of the Company (other than redemptions of
     Underlying Shares (as defined in Section 6));
<PAGE>

                    (vii)  an  Underlying  Shares  Registration   Statement  (as
     defined  in  Section  6) shall  not have  been  declared  effective  by the
     Commission (as defined in Section 6) on or prior to the 210th day after the
     Original Issue Date;

                    (viii) if,  during the  Effectiveness  Period (as defined in
     the  Registration   Rights  Agreement  (as  defined  in  Section  6)),  the
     effectiveness of the Underlying  Shares  Registration  Statement lapses for
     any  reason or the  Holder  shall not be  permitted  to resell  Registrable
     Securities  (as defined in the  Registration  Rights  Agreement)  under the
     Underlying  Shares  Registration  Statement,  in either case, for more than
     five consecutive  Trading Days or an aggregate of eight Trading Days (which
     need not be consecutive Trading Days);

                    (ix)  an  Event  (as  defined  in  the  Registration  Rights
     Agreement)  shall not have been  cured to the  satisfaction  of the  Holder
     prior to the  expiration  of thirty days from the Event Date (as defined in
     the Registration  Rights  Agreement)  relating thereto (other than an Event
     resulting from a failure of an Underlying Shares Registration  Statement to
     be declared  effective by the Commission on or prior to the 210th day after
     the Original Issue Date, which shall be covered by Section 3(a)(vii));

                    (x) the  Company  shall  fail  for  any  reason  to  deliver
     certificates  to a Holder prior to the fifth Trading Day after a Conversion
     Date pursuant to and in  accordance  with Section 4(b) or the Company shall
     provide notice to the Holder,  including by way of public announcement,  at
     any time, of its intention not to comply with requests for  conversions  of
     any Debentures in accordance with the terms hereof;

                    (xi) the  Company  shall fail for any reason to deliver  the
     payment in cash pursuant to a Buy-In (as defined  herein)  within five days
     after written notice is deemed delivered hereunder to the Company.

          (b) If any  Event  of  Default  occurs  and is  continuing,  the  full
principal  amount of this  Debenture  (and,  at the Holder's  option,  all other
Debentures  then held by such Holder),  together with interest and other amounts
owing in  respect  thereof,  to the date of  acceleration  shall  become  at the
Holder's election,  immediately due and payable in cash, provided however,  that
if the  Company  fails to pay the amounts due as a result of an Event of Default
by the seventh  Trading Day following the  declaration of an Event of Default in
cash,  the Holder may request  payment of such amounts in stock,  determined  by
reference to the Conversion Price then in effect. The number of shares of Common
Stock issuable in payment  thereof shall be determined by dividing the aggregate
amount due to the Holder by the Conversion  Price.  The aggregate amount payable
upon an  Event  of  Default  shall  be  equal  to the  sum of (i) the  Mandatory
Prepayment  Amount (as  defined  in Section 6) plus (ii) the  product of (A) the
number of Underlying  Shares issued in respect of conversions  hereunder  within
thirty days of the date of a declaration of an Event of Default and then held by
the  Holder  and (B) the  Closing  Price (as  defined  in Section 6) on the date

<PAGE>

prepayment is due or the date the full  prepayment  price is paid,  whichever is
greater.  Interest  shall accrue on the  prepayment  amount  hereunder  from the
seventh  day after such  amount is due  (being the date of an Event of  Default)
through the date of  prepayment in full thereof at the rate of 18% per annum (or
such lesser maximum  amount that is permitted to be paid by applicable  law), to
accrue daily from the date such payment is due  hereunder  through and including
the date of payment.  All Debentures  and  Underlying  Shares for which the full
prepayment  price  hereunder  shall have been paid in accordance  herewith shall
promptly be  surrendered  to or as directed by the Company.  The Holder need not
provide and the Company hereby waives any presentment,  demand, protest or other
notice of any kind, and the Holder may immediately and without expiration of any
grace period  enforce any and all of its rights and remedies  hereunder  and all
other remedies  available to it under  applicable  law. Such  declaration may be
rescinded and annulled by Holder at any time prior to payment hereunder. No such
rescission or annulment  shall affect any subsequent  Event of Default or impair
any right consequent thereon.

     Section 4.     Conversion.

          (a) (i)  Conversion  at Option of Holder.  Beginning  on the 151st day
after the Original Issue Date, this Debenture  shall be convertible  into shares
of Common Stock at the option of the Holder, in whole or in part at any time and
from time to time,  provided,  that a Holder may not convert in excess of 16.66%
of the  Debentures  issued to it on the  Original  Issue Date during each 15 day
period  commencing  151 days after such  Original  Issue  Date,  (subject to the
limitations  on conversion  set forth in Section  4(a)(iv)  hereof).  The Holder
shall effect  conversions at its option by delivering to the Company the form of
conversion  notice  attached  hereto  as  Exhibit  A  (a  "Conversion  Notice"),
specifying  therein the  principal  amount of Debentures to be converted and the
date on which such conversion is to be effected,  which date may not be prior to
the date such  Conversion  Notice is deemed to have been delivered  hereunder (a
"Conversion Date") and shall contain a schedule in the form of Schedule 1 to the
Conversion   Notice  (as  amended  on  each  Conversion  Date,  the  "Conversion
Schedule")  reflecting the remaining  principal amount of this Debenture and all
accrued and unpaid interest thereon subsequent to the conversion at issue. If no
Conversion Date is specified in a Conversion  Notice,  the Conversion Date shall
be the date that such Conversion Notice is deemed delivered  hereunder.  Subject
to Section 4(b), each Conversion Notice,  once given,  shall be irrevocable.  To
effect  conversions  hereunder,  the Holder shall not be required to  physically
surrender this Debenture to the Company unless the aggregate principal amount of
this Debenture is so converted.  Conversions  hereunder shall have the effect of
lowering the outstanding principal amount of this Debenture plus all accrued and
unpaid interest thereon in an amount equal to the applicable  conversion,  which
shall be evidenced by entries set forth in the Conversion  Schedule.  The Holder
and the Company shall maintain  records showing the principal  amount  converted
and the date of such  conversions.  In the event of any dispute or  discrepancy,
the records of the Holder shall be controlling and  determinative in the absence
of manifest error. The Holder and any assignee, by acceptance of this Debenture,
acknowledge  and agree  that,  by reason of the  provisions  of this  paragraph,
following conversion of a portion of this Debenture,  the unpaid and unconverted
principal  amount of this  Debenture  may be less than the amount  stated on the
face hereof.
<PAGE>

               (B) Notwithstanding anything to the contrary contained herein, if
on any Conversion Date:

          (1) after the  Interest  Effectiveness  Date (as defined in Section 6)
     such shares of Common Stock (x) are not registered  for resale  pursuant to
     an effective  Underlying Shares  Registration  Statement and (y) may not be
     sold without volume restrictions  pursuant to Rule 144(k) promulgated under
     the Securities Act (as defined in Section 6);

          (2) the  Common  Stock is not  listed or quoted on the  NASDAQ or on a
     Subsequent Market;

          (3)  the  Company  has  failed  to  timely   satisfy  its   conversion
     obligations hereunder; or

          (4) the  issuance  of such shares of Common  Stock  would  result in a
     violation of Section 4(a)(ii),

               then,  at the  option  of the  Holder,  the  Company,  in lieu of
delivering  shares of Common  Stock  pursuant to Section  4(a)(i)(A)(ii),  shall
deliver, within three Trading Days of each applicable Conversion Date, an amount
in cash equal to the  product  of (a) the  outstanding  principal  amount of the
Debentures  to be converted on such  Conversion  Date and (b) the product of (x)
the  quotient  obtained  by  dividing  .06 by 360 and (y) the number of days for
which such principal amount was outstanding.

          (ii) Number of Underlying Shares Issuable Upon Conversion.

          The  number  of  shares of Common  Stock  issuable  upon a  conversion
hereunder shall be determined by adding the sum of (i) the quotient  obtained by
dividing (x) the outstanding  principal amount of this Debenture to be converted
and (y) the Conversion Price (as defined  herein),  and (ii) the amount equal to
(I) the product of (x) the outstanding  principal amount of this Debenture to be
converted  and (y) the product of (1) the  quotient  obtained by dividing .06 by
360 and (2) the number of days for which such principal  amount was outstanding,
divided by (II) the Conversion Price on the Conversion Date,  provided,  that if
the Company  shall have elected and is  permitted  hereunder to pay the interest
due on a Conversion  Date in cash pursuant to the terms hereof,  subsection (ii)
shall not be used in the  calculation  of the  number of shares of Common  Stock
issuable upon a conversion hereunder.
<PAGE>

          (iii) Certain Conversion Restrictions.

                    (A) A Holder may not convert Debentures or receive shares of
Common Stock as payment of interest  hereunder to the extent such  conversion or
receipt of such interest  payment would result in the Holder,  together with any
affiliate thereof, beneficially owning (as determined in accordance with Section
13(d) of the Exchange  Act and the rules  promulgated  thereunder)  in excess of
4.999% of the then  issued and  outstanding  shares of Common  Stock,  including
shares  issuable upon  conversion of, and payment of interest on, the Debentures
held by such Holder after application of this Section. Since the Holder will not
be  obligated  to report to the Company the number of shares of Common  Stock it
may hold at the time of a conversion  hereunder,  unless the conversion at issue
would  result in the  issuance of shares of Common  Stock in excess of 4.999% of
the then  outstanding  shares of Common Stock without regard to any other shares
which may be  beneficially  owned by the  Holder or an  affiliate  thereof,  the
Holder  shall  have the  authority  and  obligation  to  determine  whether  the
restriction  contained  in this  Section  will limit any  particular  conversion
hereunder  and to the extent  that the  Holder  determines  that the  limitation
contained in this Section  applies,  the  determination  of which portion of the
principal amount of Debentures are convertible shall be the  responsibility  and
obligation of the Holder.  If the Holder has delivered a Conversion Notice for a
principal amount of Debentures that, without regard to any other shares that the
Holder or its affiliates may  beneficially  own, would result in the issuance in
excess of the permitted amount hereunder, the Company shall notify the Holder of
this fact and shall  honor  the  conversion  for the  maximum  principal  amount
permitted to be converted on such Conversion Date in accordance with the periods
described  in Section 4(b) and, at the option of the Holder,  either  retain any
principal  amount  tendered for  conversion  in excess of the  permitted  amount
hereunder for future  conversions or return such excess  principal amount to the
Holder. The provisions of this Section may be waived by a Holder (but only as to
itself and not to any other  Holder)  upon not less than 61 days prior notice to
the Company. Other Holders shall be unaffected by any such waiver.

                    (B) A Holder may not convert Debentures or receive shares of
Common Stock as payment of interest  hereunder to the extent such  conversion or
receipt of such interest  payment would result in the Holder,  together with any
affiliate thereof, beneficially owning (as determined in accordance with Section
13(d) of the Exchange  Act and the rules  promulgated  thereunder)  in excess of
9.999% of the then  issued and  outstanding  shares of Common  Stock,  including
shares  issuable upon  conversion of, and payment of interest on, the Debentures
held by such Holder after application of this Section. Since the Holder will not
be  obligated  to report to the Company the number of shares of Common  Stock it
may hold at the time of a conversion  hereunder,  unless the conversion at issue
would  result in the  issuance of shares of Common  Stock in excess of 9.999% of
the then  outstanding  shares of Common Stock without regard to any other shares
which may be  beneficially  owned by the  Holder or an  affiliate  thereof,  the
Holder  shall  have the  authority  and  obligation  to  determine  whether  the
restriction  contained  in this  Section  will limit any  particular  conversion
hereunder  and to the extent  that the  Holder  determines  that the  limitation
contained in this Section  applies,  the  determination  of which portion of the
principal amount of Debentures are convertible shall be the  responsibility  and
obligation of the Holder.  If the Holder has delivered a Conversion Notice for a
principal amount of Debentures that, without regard to any other shares that the
Holder or its affiliates may  beneficially  own, would result in the issuance in

<PAGE>

excess of the permitted amount hereunder, the Company shall notify the Holder of
this fact and shall  honor  the  conversion  for the  maximum  principal  amount
permitted to be converted on such Conversion Date in accordance with the periods
described  in Section 4(b) and, at the option of the Holder,  either  retain any
principal  amount  tendered for  conversion  in excess of the  permitted  amount
hereunder for future  conversions or return such excess  principal amount to the
Holder. The provisions of this Section may be waived by a Holder (but only as to
itself and not to any other  Holder)  upon not less than 61 days prior notice to
the Company. Other Holders shall be unaffected by any such waiver.

               (C) If the Common  Stock is then listed for trading on the NASDAQ
or the Nasdaq  National  Market and the Company has not obtained the Shareholder
Approval  (as  defined  below),  then the  Company may not issue in excess of an
aggregate of  4,384,000  shares of Common  Stock  (which  equals  19.999% of the
number of shares of Common  Stock  outstanding  on the Trading  Day  immediately
preceding the Original  Closing Date) upon  conversions  of the  Debentures at a
price  per  share  that is less  than  the  Closing  Price  on the  Trading  Day
immediately  preceding  the  Original  Issue  Date (such  number of shares,  the
"Issuable Maximum").  Each Holder shall be entitled to a portion of the Issuable
Maximum equal to the quotient  obtained by dividing (x) the aggregate  principal
amount of the  Debentures  issued and sold to such Holder on the Original  Issue
Date by (y) the number of the  Debenture  issued and sold by the  Company on the
Original Issue Date. If any Holder shall no longer hold the Debenture, then such
Holder's  remaining portion of the Issuable Maximum shall be allocated  pro-rata
among the remaining Holders.  If on any Conversion Date (A) the shares of Common
Stock are listed for trading on the NASDAQ or Nasdaq  National  Market,  (B) the
Conversion  Price then in effect is such that the aggregate  number of shares of
Common  Stock that would then be issuable  upon  conversion  in full of all then
outstanding  Debentures,  together  with any shares of Common  Stock  previously
issued upon conversion of the Debenture would exceed the Issuable  Maximum,  and
(C) the Company shall not have previously obtained the vote of shareholders (the
"Shareholder Approval"),  if any, as may be required by the applicable rules and
regulations  of the NASDAQ (or any successor  entity)  applicable to approve the
issuance of shares of Common Stock in excess of the Issuable Maximum pursuant to
the terms  hereof,  then the  Company  shall  issue to the Holder  requesting  a
conversion  a number of shares of Common Stock equal to such  Holder's  pro-rata
portion (which shall be calculated pursuant to the terms hereof) of the Issuable
Maximum and, with respect to the remainder of the aggregate  principal amount of
the  Debentures  then held by such Holder for which a conversion  in  accordance
with the Conversion  Price would result in an issuance of shares of Common Stock
in excess of such Holder's pro-rata portion (which shall be calculated  pursuant
to the terms  hereof) of the  Issuable  Maximum (the  "Excess  Principal"),  the
Company shall,  within five Business Days of such Conversion  Date,  redeem such
Excess  Principal at a price equal to the Mandatory  Prepayment  Amount.  If the
Company  fails to pay such  amount  in full  within  seven  days  after the date
payable,  the Company  will pay  interest  thereon at a rate of 18% per annum or
such lesser  maximum  amount that is permitted to be paid by applicable  law, to
the  converting  Holder,  accruing  daily  from the  Conversion  Date until such
amount, plus all such interest thereon, is paid in full.
<PAGE>

          (b) (i) Not later than five  Trading Days after any  Conversion  Date,
the Company will deliver to the Holder (i) a certificate or  certificates  which
shall be free of restrictive legends and trading  restrictions (other than those
required by Section 3.1(b) of the Purchase Agreement) representing the number of
shares of Common Stock being acquired upon the  conversion of  Debentures,  (ii)
Debentures in a principal amount equal to the principal amount of Debentures not
converted,  and (iii) a bank check for cash in the amount of accrued  and unpaid
interest  for the  principal  amount of  Debentures  converted  pursuant  to the
Conversion  Notice (if the  Company  has timely  elected or is  required  to pay
accrued  interest in cash).  The Company shall,  upon request of the Holder,  if
available,  use its best  efforts to deliver  any  certificate  or  certificates
required  to be  delivered  by the  Company  under this  Section  electronically
through  the  Depository  Trust  Corporation  or  another  established  clearing
corporation  performing  similar  functions.  If in the  case of any  Conversion
Notice such  certificate or certificates  are not delivered to or as directed by
the  applicable  Holder by the fifth  Trading Day after a Conversion  Date,  the
Holder  shall be  entitled  by written  notice to the  Company at any time on or
before its receipt of such  certificate or certificates  thereafter,  to rescind
such  conversion,  in which  event the  Company  shall  immediately  return  the
certificates  representing  the  principal  amount of  Debentures  tendered  for
conversion.

                    (ii) If the  Company  fails to deliver  to the  Holder  such
certificate or certificates pursuant to Section 4(b)(i) by the fifth Trading Day
after the  Conversion  Date,  the Company shall pay to such Holder,  in cash, as
liquidated damages and not as a penalty, 1% of the aggregate principal amount of
the Debentures converted (plus accrued interest) for each Trading Day after such
fifth Trading Day until such  certificates  are delivered.  Nothing herein shall
limit a Holder's  right to pursue actual  damages or declare an Event of Default
pursuant to Section 3 herein for the Company's  failure to deliver  certificates
representing  shares of Common Stock upon conversion within the period specified
herein and such Holder shall have the right to pursue all remedies  available to
it at law or in equity  including,  without  limitation,  a decree  of  specific
performance  and/or injunctive relief. The exercise of any such rights shall not
prohibit  the  Holders  from  seeking to enforce  damages  pursuant to any other
Section hereof or under applicable law.  Further,  if the Company shall not have
delivered any cash due in respect of  conversions of Debentures or as payment of
interest  thereon by the fifth Trading Day after the Conversion Date, the Holder
may, by notice to the  Company,  require  the Company to issue  shares of Common
Stock  pursuant to Section  4(c),  except that for such  purpose the  Conversion
Price  applicable  thereto  shall be the lesser of the  Conversion  Price on the
Conversion Date and the Conversion Price on the date of such Holder demand.  Any
such shares will be subject to the provision of this Section.

                    (iii) In  addition  to any  other  rights  available  to the
Holder,  if the  Company  fails to  deliver to the Holder  such  certificate  or
certificates  pursuant  to Section  4(b)(i) by the fifth  Trading  Day after the
Conversion Date, and if after such fifth Trading Day the Holder purchases (in an
open market transaction or otherwise) Common Stock to deliver in satisfaction of
a sale by such  Holder of the  Underlying  Shares  which the Holder  anticipated
receiving upon such  conversion (a "Buy-In"),  then the Company shall (A) pay in
cash to the Holder (in addition to any  remedies  available to or elected by the
Holder) the amount by which (x) the Holder's  total  purchase  price  (including
brokerage commissions, if any) for the Common Stock so purchased exceeds (y) the
product of (1) the  aggregate  number of shares of Common Stock that such Holder
anticipated  receiving from the conversion at issue multiplied by (2) the market
price of the Common  Stock at the time of the sale giving rise to such  purchase

<PAGE>

obligation  and (B) at the option of the Holder,  either  reissue  Debentures in
principal  amount equal to the principal  amount of the attempted  conversion or
deliver to the Holder the number of shares of Common  Stock that would have been
issued had the Company  timely  complied  with its delivery  requirements  under
Section  4(b)(i).  For example,  if the Holder  purchases  Common Stock having a
total  purchase  price of $11,000 to cover a Buy-In with respect to an attempted
conversion  of  Debentures  with  respect  to  which  the  market  price  of the
Underlying  Shares on the date of conversion was a total of $10,000 under clause
(A) of the immediately preceding sentence,  the Company shall be required to pay
the  Holder  $1,000.  The  Holder  shall  provide  the  Company  written  notice
indicating  the  amounts  payable  to the  Holder  in  respect  of  the  Buy-In.
Notwithstanding  anything contained herein to the contrary, if a Holder requires
the  Company to make  payment  in respect of a Buy-In for the  failure to timely
deliver certificates hereunder and the Company timely pays in full such payment,
the Company  shall not be required to pay such Holder  liquidated  damages under
Section 4(b)(ii) in respect of the certificates resulting in such Buy-In.

          (c) (i) The conversion price (the "Conversion Price") in effect on any
Conversion  Date  shall be the  lesser of (1)  $0.90  (the  "Initial  Conversion
Price"),  and (2) 82% of the average of the Per Share Market Values for the five
Trading  Days  (which need not occur on  consecutive  Trading  Days)  during the
twenty Trading Days immediately  preceding the applicable Conversion Date (which
may include Trading Days prior to the Original Issue Date), provided,  that such
twenty  Trading Day period shall,  at the option of the Holder,  be extended for
the number of Trading Days during such period in which (A) trading in the Common
Stock is suspended  by, or not traded on, the NASDAQ or a  Subsequent  Market on
which the Common Stock is then listed, or (B) after the date declared  effective
by the Commission,  the Underlying Shares  Registration  Statement is either not
effective  or the  Prospectus  included in the  Underlying  Shares  Registration
Statement may not be used by the Holder for the resale of Underlying Shares.

                    (ii) If the Company, at any time while any Debentures are
outstanding,  (a) shall pay a stock dividend or otherwise make a distribution or
distributions  on  shares  of its  Common  Stock or any  other  equity or equity
equivalent   securities  payable  in  shares  of  Common  Stock,  (b)  subdivide
outstanding  shares of Common Stock into a larger number of shares,  (c) combine
(including  by way of reverse  stock split)  outstanding  shares of Common Stock
into a smaller number of shares, or (d) issue by  reclassification  of shares of
the Common Stock any shares of capital  stock of the  Company,  then the Initial
Conversion  Price shall be multiplied by a fraction of which the numerator shall
be the number of shares of Common  Stock  (excluding  treasury  shares,  if any)
outstanding  before such event and of which the denominator  shall be the number
of shares of Common Stock  outstanding  after such event.  Any  adjustment  made
pursuant to this Section  shall become  effective  immediately  after the record
date for the determination of stockholders  entitled to receive such dividend or
distribution and shall become effective  immediately after the effective date in
the case of a subdivision, combination or re-classification.

                    (iii) If the Company,  at any time while any  Debentures are
outstanding,  shall issue  rights,  options or warrants to all holders of Common
Stock (and not to Holders) entitling them to subscribe for or purchase shares of
Common  Stock at a price per share less than the Per Share  Market  Value at the
record date mentioned below,  then the Conversion Price shall be multiplied by a

<PAGE>

fraction,  of which the denominator  shall be the number of shares of the Common
Stock (excluding treasury shares, if any) outstanding on the date of issuance of
such rights or warrants  plus the number of  additional  shares of Common  Stock
offered for  subscription  or purchase,  and of which the numerator shall be the
number  of  shares of the  Common  Stock  (excluding  treasury  shares,  if any)
outstanding  on the date of issuance of such rights or warrants  plus the number
of shares which the  aggregate  offering  price of the total number of shares so
offered would purchase at such Per Share Market Value.  Such adjustment shall be
made  whenever  such rights or warrants are issued,  and shall become  effective
immediately after the record date for the determination of stockholders entitled
to receive such rights, options or warrants. However, upon the expiration of any
such  right,  option or  warrant  to  purchase  shares of the  Common  Stock the
issuance of which resulted in an adjustment in the Conversion  Price pursuant to
this  Section,  if any such right,  option or warrant shall expire and shall not
have been exercised, the Conversion Price shall immediately upon such expiration
be recomputed and effective immediately upon such expiration be increased to the
price  which it would have been (but  reflecting  any other  adjustments  in the
Conversion  Price made  pursuant to the  provisions  of this  Section  after the
issuance of such rights or warrants) had the adjustment of the Conversion  Price
made upon the  issuance of such  rights,  options or  warrants  been made on the
basis of offering for subscription or purchase only that number of shares of the
Common Stock  actually  purchased  upon the exercise of such rights,  options or
warrants actually exercised.

                    (iv) If the Company or any subsidiary thereof, as applicable
with respect to Common Stock  Equivalents (as defined below),  at any time while
Debentures  are  outstanding,  shall  issue  shares of Common  Stock or  rights,
warrants (including those issued under the Purchase Agreement), options or other
securities or debt that is convertible into or exchangeable for shares of Common
Stock  ("Common  Stock  Equivalents")  entitling any Person to acquire shares of
Common Stock, at a price per share less than the Conversion Price (if the holder
of the Common  Stock or Common  Stock  Equivalent  so issued  shall at any time,
whether by operation of purchase price adjustments,  reset provisions,  floating
conversion,  exercise  or  exchange  prices or  otherwise,  or due to  warrants,
options or rights  issued in  connection  with such  issuance,  be  entitled  to
receive shares of Common Stock at a price less than the Conversion  Price,  such
issuance shall be deemed to have occurred for less than the  Conversion  Price),
then, at the option of the Holder,  the Conversion  Price shall be replaced with
the conversion, exchange or purchase price for such Common Stock or Common Stock
Equivalents   (including  any  reset  provisions  thereof)  for  all  subsequent
conversions  of  Debentures  or such  conversions  as shall be  indicated by the
Holder on its Conversion  Notice.  Such  adjustment  shall be made whenever such
Common Stock or Common Stock  Equivalents  are issued.  The Company shall notify
the Holder and the  Escrow  Agent in  writing,  no later  than the  Trading  Day
following the issuance of any Common Stock or Common Stock Equivalent subject to
this section, indicating therein the applicable issuance price, or of applicable
reset  price,  exchange  price,   conversion  price  and  other  pricing  terms.
Notwithstanding  the  foregoing  no  adjustment  will be made under this Section
4(c)(iv)  as a  result  of the  granting  of  stock  options  to  employees  and
consultants  in the Company,  or the issuance of shares of Common Stock upon the
exercise  of such  stock  options,  pursuant  to  option  plans in effect on the
Original Issue Date or thereafter adopted by the Company.
<PAGE>

                    (v) If  the  Company,  at  any  time  while  Debentures  are
outstanding,  shall  distribute  to all  holders  of  Common  Stock  (and not to
Holders)  evidences  of its  indebtedness  or assets or  rights or  warrants  to
subscribe  for or purchase any security,  then in each such case the  Conversion
Price at which Debentures shall thereafter be convertible shall be determined by
multiplying the Conversion Price in effect  immediately prior to the record date
fixed for determination of stockholders entitled to receive such distribution by
a  fraction  of which  the  denominator  shall  be the Per  Share  Market  Value
determined  as of the record date  mentioned  above,  and of which the numerator
shall be such Per  Share  Market  Value on such  record  date less the then fair
market  value at such  record  date of the portion of such assets or evidence of
indebtedness so distributed  applicable to one  outstanding  share of the Common
Stock as determined by the Board of Directors in good faith.  In either case the
adjustments  shall be  described  in a statement  provided to the Holders of the
portion  of  assets  or  evidences  of   indebtedness  so  distributed  or  such
subscription  rights  applicable to one share of Common Stock.  Such  adjustment
shall be made whenever any such  distribution is made and shall become effective
immediately after the record date mentioned above.

                    (vi) In case of any  reclassification of the Common Stock or
any compulsory  share  exchange  pursuant to which the Common Stock is converted
into  other  securities,  cash or  property,  the  Holders  shall have the right
thereafter  to, at their  option,  (A)  convert the then  outstanding  principal
amount, together with all accrued but unpaid interest and any other amounts then
owing  hereunder in respect of this  Debenture only into the shares of stock and
other  securities,  cash and  property  receivable  upon or deemed to be held by
holders of the Common Stock following such  reclassification  or share exchange,
and the Holders of the  Debentures  shall be entitled upon such event to receive
such amount of securities, cash or property as the shares of the Common Stock of
the Company into which the then outstanding principal amount,  together with all
accrued  but unpaid  interest  and any other  amounts  then owing  hereunder  in
respect of this Debenture  could have been converted  immediately  prior to such
reclassification  or share  exchange would have been entitled or (B) require the
Company  to  prepay  the  aggregate  of  its  outstanding  principal  amount  of
Debentures,  plus all interest and other amounts due and payable  thereon,  at a
price  determined in accordance with Section 3(b). The entire  prepayment  price
shall  be paid in cash.  This  provision  shall  similarly  apply to  successive
reclassifications or share exchanges.

                    (vii) All calculations under this Section 4 shall be made to
the  nearest  cent or the  nearest  1/100th  of a share,  as the case may be. No
adjustments in either the Conversion Price or the Initial Conversion Price shall
be required if such adjustment is less than $0.01,  provided,  however, that any
adjustments which by reason of this Section are not required to be made shall be
carried forward and taken into account in any subsequent adjustment.

                    (viii) Whenever either the Initial  Conversion  Price or the
Conversion  Price is  adjusted  pursuant to any of Section  4(c)(ii) - (v),  the
Company shall  promptly  mail to each Holder a notice  setting forth the Initial
Conversion Price or Conversion  Price (as applicable)  after such adjustment and
setting forth a brief statement of the facts requiring such adjustment.
<PAGE>

                    (ix) If (A) the  Company  shall  declare a dividend  (or any
other distribution) on the Common Stock; (B) the Company shall declare a special
nonrecurring  cash  dividend on or a  redemption  of the Common  Stock;  (C) the
Company  shall  authorize the granting to all holders of the Common Stock rights
or warrants to  subscribe  for or  purchase  any shares of capital  stock of any
class or of any  rights;  (D) the  approval of any  stockholders  of the Company
shall be required in connection with any  reclassification  of the Common Stock,
any  consolidation  or  merger  to which  the  Company  is a party,  any sale or
transfer  of all or  substantially  all of the  assets  of the  Company,  of any
compulsory  share  exchange  whereby the Common  Stock is  converted  into other
securities,  cash or property;  (E) the Company shall authorize the voluntary or
involuntary  dissolution,  liquidation  or  winding  up of  the  affairs  of the
Company;  then, in each case, the Company shall cause to be filed at each office
or agency maintained for the purpose of conversion of the Debentures,  and shall
cause to be mailed to the Holders at their last  addresses  as they shall appear
upon the stock  books of the  Company,  at least 20  calendar  days prior to the
applicable record or effective date hereinafter  specified, a notice stating (x)
the date on which a record  is to be taken  for the  purpose  of such  dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of the Common Stock of record to be entitled to
such  dividend,  distributions,   redemption,  rights  or  warrants  are  to  be
determined  or (y)  the  date on  which  such  reclassification,  consolidation,
merger,  sale,  transfer or share  exchange is expected to become  effective  or
close,  and the date as of which it is expected that holders of the Common Stock
of record  shall be entitled to exchange  their  shares of the Common  Stock for
securities,  cash or other  property  deliverable  upon  such  reclassification,
consolidation,  merger,  sale,  transfer or share exchange,  provided,  that the
failure to mail such  notice or any defect  therein  or in the  mailing  thereof
shall not affect the validity of the corporate  action  required to be specified
in such  notice.  Holders are entitled to convert  Debentures  during the 20-day
period  commencing  the date of such notice to the  effective  date of the event
triggering such notice.

                    (x) In  case  of any  (1)  merger  or  consolidation  of the
Company  with or into  another  Person,  or (2) sale by the Company of more than
one-half of the assets of the Company (on an as valued basis) in one or a series
of related transactions, a Holder shall have the right to (A) if permitted under
Section 3(b) hereof,  exercise its rights of prepayment  under Section 3(b) with
respect to such event, (B) convert its aggregate  principal amount of Debentures
then  outstanding  into the  shares  of stock  and  other  securities,  cash and
property  receivable  upon or  deemed  to be held by  holders  of  Common  Stock
following such merger,  consolidation or sale, and such Holder shall be entitled
upon  such  event or  series  of  related  events  to  receive  such  amount  of
securities,  cash and  property  as the  shares of Common  Stock into which such
aggregate  principal amount of Debentures could have been converted  immediately
prior to such merger, consolidation or sales would have been entitled, or (C) in
the case of a merger or consolidation, (x) require the surviving entity to issue
convertible  debentures in an aggregate  principal amount equal to the aggregate
principal  amount of Debentures  then held by such Holder,  plus all accrued and
unpaid interest and other amounts owing thereon,  which newly issued convertible

<PAGE>

debentures shall have terms identical  (including with respect to conversion) to
the terms of this  Debenture  and shall be  entitled  to all of the  rights  and
privileges  of a Holder  of  Debentures  set  forth  herein  and the  agreements
pursuant to which the Debentures were issued (including,  without limitation, as
such rights relate to the acquisition, transferability, registration and listing
of such shares of stock other securities issuable upon conversion thereof),  and
(y) simultaneously with the issuance of such convertible debentures,  shall have
the  right to  convert  such  instrument  only  into  shares  of stock and other
securities, cash and property receivable upon or deemed to be held by holders of
Common Stock following such merger or consolidation.  In the case of clause (C),
the  conversion  price  applicable for the newly issued  convertible  debentures
shall be based upon the amount of securities,  cash and property that each share
of Common Stock would receive in such  transaction  and the Conversion  Price in
effect  immediately  prior  to  the  effectiveness  or  closing  date  for  such
transaction.  The terms of any such merger,  sale or consolidation shall include
such  terms so as to  continue  to give the  Holders  the right to  receive  the
securities,  cash and property set forth in this Section upon any  conversion or
redemption  following  such  event.  This  provision  shall  similarly  apply to
successive such events.

          (d) Upon a conversion  hereunder  the Company shall not be required to
issue stock certificates  representing  fractions of shares of the Common Stock,
but may if  otherwise  permitted,  make a cash  payment  in respect of any final
fraction of a share  based on the Per Share  Market  Value at such time.  If the
Company elects not, or is unable, to make such a cash payment,  the Holder shall
be  entitled  to receive,  in lieu of the final  fraction of a share,  one whole
share of Common Stock.

          (e) The  issuance of  certificates  for shares of the Common  Stock on
conversion of the Debentures shall be made without charge to the Holders thereof
for any documentary stamp or similar taxes that may be payable in respect of the
issue or delivery of such  certificate,  provided  that the Company shall not be
required to pay any tax that may be payable in respect of any transfer  involved
in the issuance and delivery of any such  certificate  upon conversion in a name
other than that of the Holder of such  Debentures  so converted  and the Company
shall not be required to issue or deliver such certificates  unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the  amount of such tax or shall have  established  to the  satisfaction  of the
Company that such tax has been paid.

          (f) Any and all notices or other  communications  or  deliveries to be
provided by the Holders hereunder, including, without limitation, any Conversion
Notice, shall be in writing and delivered  personally,  by facsimile,  sent by a
nationally  recognized  overnight  courier  service  or  sent  by  certified  or
registered mail, postage prepaid, addressed to the Company, at 88 Orville Drive,
Bohemia,  New York,  11716,  Facsimile  No.:  (631)  563-8085,  attention  Chief
Financial Officer,  or such other address or facsimile number as the Company may
specify for such purposes by notice to the Holders  delivered in accordance with
this Section.  Any and all notices or other  communications  or deliveries to be
provided by the Company hereunder shall be in writing and delivered  personally,
by facsimile,  sent by a nationally recognized overnight courier service or sent
by certified or registered mail,  postage  prepaid,  addressed to each Holder at
the facsimile  telephone number or address of such Holder appearing on the books
of the Company,  or if no such facsimile telephone number or address appears, at
the principal place of business of the Holder. Any notice or other communication
or deliveries  hereunder  shall be deemed given and effective on the earliest of
(i) the date of  transmission,  if such notice or communication is delivered via
facsimile at the facsimile  telephone  number specified in this Section prior to
6:30 p.m. (New York City time), (ii) the date after the date of transmission, if
such  notice or  communication  is  delivered  via  facsimile  at the  facsimile
telephone  number  specified in this Section later than 6:30 p.m. (New York City

<PAGE>

time) on any date and earlier than 11:59 p.m. (New York City time) on such date,
(iii) four days after deposit in the United  States mail,  (iv) the Business Day
following  the  date of  mailing,  if sent by  nationally  recognized  overnight
courier service,  or (v) upon actual receipt by the party to whom such notice is
required to be given.

     Section 5.     Optional Prepayment.

          (a) The Company shall have the right, exercisable at any time and from
time to time after the  Original  Issue Date and upon five  Trading  Days' prior
written notice to the affected  Holders (an "Optional  Prepayment  Notice"),  to
prepay all or any portion of the outstanding  principal amount of the Debentures
for which Conversion Notices have not previously been delivered.  The prepayment
price  applicable  to  prepayments  under  this  Section  5(a)  shall  equal the
Mandatory Prepayment Amount and shall be paid in cash on the seventh Trading Day
following  the date that the Company  first  delivered  the Optional  Prepayment
Notice (the "Optional  Prepayment  Date").  Any such prepayment shall be free of
any claim of subordination.

          (b) If any portion of the  Prepayment  Amount shall not be paid by the
Company by the expiration of the Optional  Prepayment  Date, the Company may not
again  exercise any right of  prepayment  under this Section.  In addition,  the
Mandatory  Prepayment Amount shall be increased by 18% per annum (or such lesser
maximum  amount that is permitted to be paid by applicable  law) to accrue daily
from the date such interest is due  hereunder  through and including the date of
payment (which amount shall be paid as liquidated damages and not as a penalty).
In addition,  if any portion of the Mandatory  Prepayment  Amount remains unpaid
through the  expiration of the Optional  Prepayment  Date, the Holder subject to
such  prepayment may elect by written notice to the Company to either (x) demand
conversion in accordance with the formula and the time period therefor set forth
in Section 4 of any portion of the principal  amount of Debentures for which the
Mandatory  Prepayment  Amount,  plus  accrued  liquidated  damages  and  accrued
interest thereon,  has not been paid in full (the "Unpaid  Prepayment  Principal
Amount"),  in which event the  applicable  Per Share  Market  Value shall be the
lower of the Per Share Market Value  calculated on the Optional  Prepayment Date
and the Per Share Market Value as of the Holder's written demand for conversion,
or (y) invalidate ab initio such optional prepayment,  notwithstanding  anything
herein  contained to the contrary.  If the Holder  elects option (x) above,  the
Company shall,  within five Trading Days after such election is deemed delivered
hereunder,  deliver  to the  Holder the  shares of Common  Stock  issuable  upon
conversion of the Unpaid Prepayment  Principal Amount subject to such conversion
demand and otherwise perform its obligations hereunder with respect thereto.

     Section 6 Definitions.  For the purposes hereof,  the following terms shall
have the following meanings:

          "Business Day" means any day except Saturday, Sunday and any day which
shall be a federal  legal holiday in the United States or a day on which banking
institutions in the State of New York are authorized or required by law or other
government action to close.
<PAGE>
          "Change of Control  Transaction" means the occurrence of any of (i) an
acquisition  after the date hereof by an  individual  or legal entity or "group"
(as  described  in Rule  13d-5(b)(1)  promulgated  under  the  Exchange  Act) of
effective  control  (whether  through legal or  beneficial  ownership of capital
stock of the  Company,  by  contract  or  otherwise)  of in excess of 33% of the
voting securities of the Company, (ii) a replacement at one time or over time of
more than one-half of the members of the Company's  board of directors  which is
not approved by a majority of those  individuals who are members of the board of
directors on the date hereof (or by those individuals who are serving as members
of the board of directors on any date whose nomination to the board of directors
was  approved  by a majority of the  members of the board of  directors  who are
members  on the date  hereof),  (iii)  the  merger of the  Company  with or into
another entity that is not wholly-owned by the Company, consolidation or sale of
50% or  more  of the  assets  of the  Company  in  one or a  series  of  related
transactions,  or (iv) the execution by the Company of an agreement to which the
Company is a party or by which it is bound,  providing for any of the events set
forth above in (i), (ii) or (iii).

          "Closing  Price" means on any  particular  date (a) the closing  sales
price per share of Common  Stock on such date on the  NASDAQ or such  Subsequent
Market on which the  shares of Common  Stock are then  listed or  quoted,  or if
there is no such price on such date,  then the closing sales price on the NASDAQ
or such Subsequent Market on the date nearest preceding such date, or (b) if the
shares of  Common  Stock  are not then  listed  or quoted on the  NASDAQ or such
Subsequent  Market,  the closing  sales price for a share of Common Stock in the
Nasdaq Stock Market, as reported by the National  Quotation Bureau  Incorporated
or similar  organization  or agency  succeeding  to its  functions  of reporting
prices) at the close of  business  on such date,  or (c) if the shares of Common
Stock are not then reported by the National  Quotation  Bureau  Incorporated (or
similar organization or agency succeeding to its functions of reporting prices),
then the average of the "Pink Sheet" quotes for the relevant  conversion period,
as determined in good faith by the Holder,  or (d) if the shares of Common Stock
are not then publicly traded the fair market value of a share of Common Stock as
determined  by an Appraiser  selected in good faith by the Holders of a majority
in interest of the principal amount of Debentures then outstanding.

          "Commission" means the Securities and Exchange Commission.

          "Common Stock" means the common stock,  $.0001 par value per share, of
the Company  and stock of any other  class into which such shares may  hereafter
have been reclassified or changed.

          "Exchange Act" means the Securities Exchange Act of 1934, as amended.

          "Mandatory  Prepayment  Amount" for any Debentures shall equal the sum
of (i)130% of the principal amount of Debentures to be prepaid, plus all accrued
and unpaid interest  thereon,  and (ii) all other amounts,  costs,  expenses and
liquidated damages due in respect of such Debentures.
<PAGE>

          "Original Issue Date" shall mean the date of the first issuance of the
Debentures regardless of the number of transfers of any Debenture and regardless
of the number of instruments which may be issued to evidence such Debenture.

          "Per Share Market Value" means on any particular  date (a) the closing
bid  price  per  share of  Common  Stock on such  date on the  NASDAQ or on such
Subsequent Market on which the shares of Common Stock are then listed or quoted,
or if there is no such price on such  date,  then the  closing  bid price on the
NASDAQ or on such Subsequent  Market on the date nearest preceding such date, or
(b) if the shares of Common Stock are not then listed or quoted on the NASDAQ or
a  Subsequent  Market,  the closing bid price for a share of Common Stock in the
over-the-counter   market,   as  reported  by  the  National   Quotation  Bureau
Incorporated or similar  organization  or agency  succeeding to its functions of
reporting prices) at the close of business on such date, or (c) if the shares of
Common Stock are not then reported by the National Quotation Bureau Incorporated
(or similar  organization  or agency  succeeding  to its  functions of reporting
prices), then the average of the "Pink Sheet" quotes for the relevant conversion
period,  as  determined  in good  faith by the  Holder,  or (d) if the shares of
Common  Stock are not then  publicly  traded the fair market value of a share of
Common Stock as determined by an Appraiser selected in good faith by the Holders
of a majority in interest of the principal amount of Notes then outstanding.

          "Person"  means  a  corporation,   an   association,   a  partnership,
organization,  a business, an individual,  a government or political subdivision
thereof or a governmental agency.

          "Purchase   Agreement"  means  the  Convertible   Debenture   Purchase
Agreement, dated as of September 27, 2000, to which the Company and the original
Holder are parties,  as amended,  modified or supplemented  from time to time in
accordance with its terms.

          "Registration   Rights   Agreement"  means  the  Registration   Rights
Agreement, dated as of September 27, 2000, to which the Company and the original
Holder are parties,  as amended,  modified or supplemented  from time to time in
accordance with its terms.

          "Securities Act" means the Securities Act of 1933, as amended.

          "Trading  Day" means (a) a day on which the shares of Common Stock are
traded on the NASDAQ or on such Subsequent  Market on which the shares of Common
Stock are then  listed or quoted,  or (b) if the shares of Common  Stock are not
listed on the NASDAQ or a Subsequent Market, a day on which the shares of Common
Stock are traded in the over-the-counter market, as reported by the OTC Bulletin
Board,  or (c) if the shares of Common  Stock are not quoted on the OTC Bulletin
Board,   a  day  on  which  the  shares  of  Common  Stock  are  quoted  in  the
over-the-counter   market  as  reported  by  the   National   Quotation   Bureau
Incorporated (or any similar  organization or agency succeeding its functions of
reporting prices);  provided,  that in the event that the shares of Common Stock
are not listed or quoted as set forth in (a),  (b) and (c) hereof,  then Trading
Day shall mean any day except a Business Day.
<PAGE>

          "Transaction  Documents"  shall  have  the  meaning  set  forth in the
Purchase Agreement.

          "Underlying  Shares"  means the shares of Common Stock  issuable  upon
conversion of Debentures or as payment of interest in accordance  with the terms
hereof.

          "Underlying  Shares  Registration   Statement"  means  a  registration
statement  meeting  the  requirements  set  forth  in  the  Registration  Rights
Agreement,  covering among other things the resale of the Underlying  Shares and
naming the Holder as a "selling stockholder" thereunder.

     Section 7.  Except as  expressly  provided  herein,  no  provision  of this
Debenture shall alter or impair the obligation of the Company, which is absolute
and unconditional,  to pay the principal of, interest and liquidated damages (if
any) on,  this  Debenture  at the  time,  place,  and  rate,  and in the coin or
currency,  herein  prescribed.  This  Debenture  is a direct  obligation  of the
Company.  This  Debenture  ranks  pari passu  with all other  Debentures  now or
hereafter  issued  under  the  terms  set  forth  herein.  As long as there  are
Debentures  outstanding,  the Company shall not and shall cause it  subsidiaries
not to,  without  the  consent  of the  Holders,  (i) amend its  certificate  of
incorporation,  bylaws or other charter  documents so as to adversely affect any
rights of the Holders; (ii) repay,  repurchase or offer to repay,  repurchase or
otherwise  acquire shares of its Common Stock or other equity  securities  other
than as to the Underlying  Shares to the extent  permitted or required under the
Transaction Documents;  or (iii) enter into any agreement with respect to any of
the foregoing.

     Section 8. This Debenture shall not entitle the Holder to any of the rights
of a stockholder  of the Company,  including  without  limitation,  the right to
vote, to receive dividends and other distributions, or to receive any notice of,
or to attend,  meetings of stockholders or any other proceedings of the Company,
unless and to the extent  converted  into shares of Common  Stock in  accordance
with the terms hereof.

     Section 9. If this Debenture shall be mutilated, lost, stolen or destroyed,
the Company shall execute and deliver, in exchange and substitution for and upon
cancellation of a mutilated  Debenture,  or in lieu of or in substitution  for a
lost, stolen or destroyed debenture, a new Debenture for the principal amount of
this Debenture so mutilated,  lost, stolen or destroyed but only upon receipt of
evidence  of such  loss,  theft or  destruction  of such  Debenture,  and of the
ownership hereof, and indemnity,  if requested,  all reasonably  satisfactory to
the Company.

     Section 10. No  indebtedness  of the Company is senior to this Debenture in
right of payment, whether with respect to interest,  damages or upon liquidation
or dissolution or otherwise. The Company will not and will not permit any of its
subsidiaries to, directly or indirectly,  enter into, create,  incur,  assume or
suffer to exist any  indebtedness  of any kind, on or with respect to any of its
property or assets now owned or hereafter  acquired or any  interest  therein or
any income or profits  therefrom  that is senior in any respect to the Company's
obligations under the Debentures.

     Section 11. This Debenture shall be governed by and construed in accordance
with the laws of the State of New York,  without  giving  effect to conflicts of
laws  thereof.  The Company  and the Holder  hereby  irrevocably  submits to the
exclusive  jurisdiction  of the state and federal  courts sitting in the City of

<PAGE>

New York, Borough of Manhattan, for the adjudication of any dispute hereunder or
in connection herewith or with any transaction  contemplated hereby or discussed
herein,  and hereby  irrevocably  waives,  and agrees not to assert in any suit,
action  or  proceeding,  any  claim  that it is not  personally  subject  to the
jurisdiction  of any such  court,  or that such suit,  action or  proceeding  is
improper.  Each of the Company and the Holder hereby irrevocably waives personal
service of process and consents to process being served in any such suit, action
or  proceeding by receiving a copy thereof sent to the Company at the address in
effect for  notices to it under this  instrument  and agrees  that such  service
shall  constitute  good and  sufficient  service of process and notice  thereof.
Nothing  contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law.

     Section  12.  Any  waiver by the  Company  or the Holder of a breach of any
provision of this Debenture  shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of
this  Debenture.  The failure of the Company or the Holder to insist upon strict
adherence to any term of this  Debenture on one or more  occasions  shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict  adherence to that term or any other term of this  Debenture.  Any waiver
must be in writing.

     Section 13. If any  provision  of this  Debenture  is  invalid,  illegal or
unenforceable,  the balance of this Debenture shall remain in effect, and if any
provision is inapplicable to any person or circumstance,  it shall  nevertheless
remain applicable to all other persons and  circumstances.  If it shall be found
that any interest or other amount deemed  interest due  hereunder  shall violate
applicable laws governing  usury,  the applicable rate of interest due hereunder
shall  automatically be lowered to equal the maximum permitted rate of interest.
The Company  covenants  (to the extent that it may lawfully do so) that it shall
not at any time insist upon,  plead, or in any manner  whatsoever  claim or take
the benefit or advantage of, any stay, extension or usury law or other law which
would  prohibit  or forgive  the  Company  from paying all or any portion of the
principal of or interest on the  Debentures  as  contemplated  herein,  wherever
enacted,  now or at any time  hereafter  in  force,  or  which  may  affect  the
covenants or the performance of this  indenture,  and the Company (to the extent
it may lawfully do so) hereby  expressly waives all benefits or advantage of any
such law,  and  covenants  that it will not, by resort to any such law,  hinder,
delay or impeded the  execution of any power herein  granted to the Holder,  but
will  suffer and permit  the  execution  of every such as though no such law has
been enacted.

     Section 14. Whenever any payment or other obligation hereunder shall be due
on a day other  than a  Business  Day,  such  payment  shall be made on the next
succeeding Business Day.

                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                             SIGNATURE PAGE FOLLOWS]

<PAGE>

          IN WITNESS WHEREOF, the Company has caused this Convertible  Debenture
to be duly  executed  by a duly  authorized  officer as of the date first  above
indicated.

                         DIRECT INSITE CORPORATION

                         By:
                            ------------------------------------
                           Name:
                           Title:

<PAGE>

                                    EXHIBIT A

                              NOTICE OF CONVERSION

The undersigned  hereby elects to convert the attached  Debenture into shares of
common stock,  $.0001 par value per share (the "Common Stock"), of Direct Insite
Corporation (the "Company")  according to the conditions  hereof, as of the date
written below. If shares are to be issued in the name of a person other than the
undersigned,  the  undersigned  will pay all transfer taxes payable with respect
thereto and is delivering  herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith.  No fee will be charged to the
holder for any conversion, except for such transfer taxes, if any.

Conversion calculations:

                         _______________________________________________________
                         Date to Effect Conversion

                         _______________________________________________________
                         Principal Amount of Debentures to be Converted

                         _______________________________________________________
                         Number of shares of Common Stock to be Issued

                         Payment of Interest in Kind     [ ]  Yes  [ ]  No
                             If yes, $ _______ of Interest Accrued on Account of
                             Conversion at Issue

                         _______________________________________________________
                         Applicable Conversion Price

                         _______________________________________________________
                         Signature

                         _______________________________________________________
                         Name

                         _______________________________________________________
                         Address

<PAGE>

                                   Schedule 1

                               CONVERSION SCHEDULE

 6%  Convertible  Debentures,  due in the  aggregate  principal  amount of up to
$3,000,000  issued  by  Direct  Insite  Corporation.  This  Conversion  Schedule
reflects  conversions  made  under  Section  4(a)(i)  of  the  above  referenced
Debentures.

                             Dated:

                             Amount of        Aggregate
Date of Conversion           Conversion       Principal
                                              Amount
                                              Remaining
                                              Subsequent to
                                              Conversion
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