Document:

PLEDGE AND ESCROW AGREEMENT

      THIS PLEDGE AND ESCROW  AGREEMENT (the  "Agreement") is made and entered
into  as of  ________________,  2005  (the  "Effective  Date")  by  and  among
COMPLIANCE  SYSTEMS  CORPORATION,  a corporation  organized and existing under
the  laws  of  the  State  of  Delaware  (the  "Pledgor"),  MONTGOMERY  EQUITY
PARTNERS,  LTD., (the  "Pledgee"),  and DAVID GONZALEZ,  ESQ., as escrow agent
("Escrow Agent").

                                  RECITALS:

      WHEREAS,  in  order to  secure  the full  and  prompt  payment  when due
(whether at the stated  maturity,  by acceleration or otherwise) of all of the
Company's  obligations (the  "Obligations") to the Pledgee or any successor to
the Pledgee under this Agreement,  the Securities  Purchase  Agreement of even
date herewith between the Pledgor and the Pledgee (the  "Securities  Purchase
Agreement"),  the Convertible Debentures (the "Convertible Debentures") issued
or to be issued by the  Company to the  Pledgee,  either now or in the future,
up to a total  of One  Million  Dollars($1,000,000)  of  principal,  plus  any
interest,  costs, fees, and other amounts owed to the Pledgee thereunder,  the
Security  Agreement of even date herewith  between the Pledgor and the Pledgee
(the "Security  Agreement"),  and all other contracts entered into between the
parties hereto (collectively,  the "Transaction  Documents"),  the Pledgor has
agreed to irrevocably  pledge to the Pledgee  ____________  (________)  shares
(the "Pledged Shares") of the Pledgor's common stock.

      NOW,  THEREFORE,  for  and in  consideration  of the  mutual  covenants,
agreements,  warranties,  and representations herein contained,  and for other
good and  valuable  consideration,  the  receipt and  sufficiency  of which is
hereby acknowledged, the parties hereto agree as follows:

                             TERMS AND CONDITIONS

      1.    Pledge and Transfer of Pledged Shares.

            1.1.  The Pledgor hereby grants to Pledgee a security  interest in
all  Pledged   Shares  as  security  for  Pledgor's   obligations   under  the
Convertible  Debentures.  Simultaneously with the execution of the Transaction
Documents,  the Pledgor shall  deliver to the Escrow Agent stock  certificates
representing  the Pledged Shares,  together with duly executed stock powers or
other  appropriate  transfer  documents  executed in blank by the Pledgor (the
"Transfer  Documents"),  and such stock  certificates  and Transfer  Documents
shall be held by the Escrow  Agent  until the full  payment of all amounts due
to the Pledgee  under the  Convertible  Debentures  and through  repayment  in
accordance  with the terms of the Convertible  Debentures,  or the termination
or expiration of this Agreement.

      2.    Rights  Relating  to Pledged  Shares.  Upon the  occurrence  of an
Event of Default (as defined  herein),  the Pledgee  shall be entitled to vote
the Pledged Shares, to receive dividends and other distributions  thereon, and
to enjoy all other  rights and  privileges  incident to the  ownership  of the
Pledged Shares.

<PAGE>

      3.    Release of Pledged  Shares  from  Pledge.  Upon the payment of all
amounts due to the Pledgee  under the  Convertible  Debentures by repayment in
accordance  with the terms of the Note,  the parties  hereto  shall notify the
Escrow Agent to such effect in writing.  Upon  receipt of such written  notice
for  payment  of  the  amounts  due  to  the  Pledgee  under  the  Convertible
Debentures,  the  Escrow  Agent  shall  return  to the  Pledgor  the  Transfer
Documents and the certificates representing the Pledged Shares,  (collectively
the  "Pledged  Materials"),  whereupon  any and all  rights of  Pledgee in the
Pledged  Materials  shall  be  terminated.  Notwithstanding  anything  to  the
contrary  contained  herein,  upon  full  payment  of all  amounts  due to the
Pledgee under the Convertible Debentures,  by repayment in accordance with the
terms of the Note, this Agreement and Pledgee's  security  interest and rights
in and to the Pledged Shares shall terminate.

      4.    Event of Default.  An "Event of  Default"  shall be deemed to have
occurred under this  Agreement upon an Event of Default under the  Transaction
Documents.

      5.    Remedies.  Upon and anytime  after the  occurrence  of an Event of
Default,  the Pledgee shall have the right to provide  written  notice of such
Event of Default (the "Default  Notice") to the Escrow  Agent,  with a copy to
the Pledgor.  As soon as practicable after receipt of the Default Notice,  the
Escrow  Agent  shall  deliver to Pledgee  the  Pledged  Materials  held by the
Escrow Agent  hereunder.  Upon receipt of the Pledged  Materials,  the Pledgee
shall have the right to (i) sell the Pledged  Shares and to apply the proceeds
of such sales, net of any selling commissions,  to the Obligations owed to the
Pledgee by the Pledgor under the  Transaction  Documents,  including,  without
limitation,  outstanding  principal,  interest,  legal  fees,  and  any  other
amounts  owed to the  Pledgee,  and exercise all other rights and (ii) any and
all  remedies  of a secured  party  with  respect to such  property  as may be
available  under the Uniform  Commercial Code as in effect in the State of New
Jersey.  To the extent  that the net  proceeds  received  by the  Pledgee  are
insufficient  to  satisfy  the  Obligations  in  full,  the  Pledgee  shall be
entitled to a deficiency  judgment  against the Pledgor for such  amount.  The
Pledgee  shall  have the  absolute  right to sell or  dispose  of the  Pledged
Shares in any manner it sees fit and shall have no  liability  to the  Pledgor
or any other party for selling or  disposing  of such  Pledged  Shares even if
other  methods of sales or  dispositions  would or  allegedly  would result in
greater  proceeds than the method  actually  used. The Escrow Agent shall have
the absolute  right to disburse  the Pledged  Shares to the Pledgee in batches
not to exceed 9.9% of the outstanding  capital of the Pledgor (which limit may
be waived  by the  Pledgee  providing  not less  than 65 days'  prior  written
notice to the Escrow  Agent).  The Pledgee  shall  return any  Pledged  Shares
released to it and  remaining  after the Pledgee has applied the net  proceeds
to all amounts owed to the Pledgee.

            5.1.  Each right,  power and remedy of the Pledgee provided for in
this  Agreement or any other  Transaction  Document  shall be  cumulative  and
concurrent  and shall be in  addition  to every  other  such  right,  power or
remedy.  The  exercise or  beginning of the exercise by the Pledgee of any one
or more of the rights,  powers or remedies  provided for in this  Agreement or
any other  Transaction  Document  or now or  hereafter  existing  at law or in
equity or by statute or  otherwise  shall not  preclude  the  simultaneous  or
later  exercise by the Pledgee of all such other  rights,  powers or remedies,
and no  failure  or delay  on the part of the  Pledgee  to  exercise  any such
right,  power or remedy  shall  operate as a waiver  thereof.  No notice to or
demand on the  Pledgor  in any case  shall  entitle it to any other or further
notice or demand in similar or other  circumstances  or constitute a waiver of
any  of  the  rights  of  the  Pledgee  to any  other  further  action  in any
circumstances  without demand or notice. The Pledgee shall have the full power
to enforce or to assign or contract is rights under this  Agreement to a third
party.

                                       2
<PAGE>

            5.2.  Demand  Registration   Rights.  In  addition  to  all  other
remedies  available  to the  Pledgee,  upon an Event of  Default,  the Pledgor
shall  promptly,  but in no event more than thirty (30) days after the date of
the  Default  Notice,  file a  registration  statement  to  register  with the
Securities  and Exchange  Commission  the Pledged Shares for the resale by the
Pledgee.  The Pledgor  shall  cause the  registration  statement  to remain in
effect until all of the Pledged Shares have been sold by the Pledgee.

      6.    Concerning the Escrow Agent.

            6.1.  The Escrow Agent  undertakes  to perform only such duties as
are expressly set forth herein and no implied duties or  obligations  shall be
read into this Agreement against the Escrow Agent.

            6.2.  The Escrow  Agent may act in  reliance  upon any  writing or
instrument or signature which it, in good faith,  believes to be genuine,  may
assume the validity and  accuracy of any  statement or assertion  contained in
such a writing or  instrument,  and may assume that any person  purporting  to
give any  writing,  notice,  advice or  instructions  in  connection  with the
provisions  hereof has been duly  authorized  to do so. The Escrow Agent shall
not be liable in any manner for the  sufficiency  or  correctness  as to form,
manner,  and  execution,  or  validity  of any  instrument  deposited  in this
escrow,  nor as to the identity,  authority,  or right of any person executing
the same;  and its duties  hereunder  shall be limited to the  safekeeping  of
such certificates,  monies,  instruments,  or other document received by it as
such escrow holder,  and for the  disposition  of the same in accordance  with
the written instruments accepted by it in the escrow.

            6.3.  Pledgee  and  the  Pledgor  hereby  agree,   to  defend  and
indemnify  the  Escrow  Agent and hold it  harmless  from any and all  claims,
liabilities,  losses,  actions,  suits, or proceedings at law or in equity, or
any other  expenses,  fees, or charges of any character or nature which it may
incur or with  which it may be  threatened  by reason of its  acting as Escrow
Agent under this  Agreement;  and in  connection  therewith,  to indemnify the
Escrow  Agent  against any and all  expenses,  including  attorneys'  fees and
costs of defending  any action,  suit,  or  proceeding  or resisting any claim
(and any costs  incurred by the Escrow  Agent  pursuant to Sections 6.4 or 6.5
hereof).  The  Escrow  Agent  shall  be  vested  with a lien  on all  property
deposited  hereunder,  for  indemnification of attorneys' fees and court costs
regarding any suit, proceeding or otherwise,  or any other expenses,  fees, or
charges of any character or nature,  which may be incurred by the Escrow Agent
by reason of  disputes  arising  between  the makers of this  escrow as to the
correct  interpretation of this Agreement and instructions given to the Escrow
Agent hereunder, or otherwise,  with the right of the Escrow Agent, regardless
of the  instructions  aforesaid,  to hold said property  until and unless said
additional  expenses,  fees,  and charges  shall be fully  paid.  Any fees and
costs charged by the Escrow Agent for serving  hereunder  shall be paid by the
Pledgor.

            6.4.  If any of the  parties  shall be in  disagreement  about the
interpretation of this Agreement, or about the rights and obligations,  or the
propriety  of any action  contemplated  by the  Escrow  Agent  hereunder,  the
Escrow Agent may, at its sole  discretion  deposit the Pledged  Materials with
the Clerk of the  United  States  District  Court of New  Jersey,  sitting  in
Newark, New Jersey,  and, upon notifying all parties concerned of such action,
all  liability  on  the  part  of the  Escrow  Agent  shall  fully  cease  and
terminate.  The Escrow Agent shall be indemnified by the Pledgor,  the Company
and Pledgee for all costs,  including reasonable attorneys' fees in connection
with the aforesaid proceeding,  and shall be fully protected in suspending all
or a part of its  activities  under this  Agreement  until a final decision or
other settlement in the proceeding is received.

                                       3
<PAGE>

            6.5.  The Escrow  Agent may consult with counsel of its own choice
(and the costs of such  counsel  shall be paid by the Pledgor and Pledgee) and
shall  have full and  complete  authorization  and  protection  for any action
taken or suffered by it  hereunder  in good faith and in  accordance  with the
opinion  of such  counsel.  The  Escrow  Agent  shall  not be  liable  for any
mistakes of fact or error of judgment,  or for any actions or omissions of any
kind, unless caused by its willful misconduct or gross negligence.

            6.6.  The  Escrow  Agent may resign  upon ten (10)  days'  written
notice to the parties in this  Agreement.  If a successor  Escrow Agent is not
appointed  within this ten (10) day period,  the Escrow  Agent may  petition a
court of competent jurisdiction to name a successor.

            6.7   Conflict Waiver.  The Pledgor hereby  acknowledges  that the
Escrow  Agent is general  counsel  to the  Pledgee,  a partner in the  general
partner of the  Pledgee,  and  counsel to the Pledgee in  connection  with the
transactions  contemplated  and referred  herein.  The Pledgor  agrees that in
the  event of any  dispute  arising  in  connection  with  this  Agreement  or
otherwise in connection  with any  transaction or agreement  contemplated  and
referred herein,  the Escrow Agent shall be permitted to continue to represent
the Pledgee  and the  Pledgor  will not seek to  disqualify  such  counsel and
waives  any  objection  Pledgor  might have with  respect to the Escrow  Agent
acting as the Escrow Agent pursuant to this Agreement.

            6.8   Notices.  Unless  otherwise  provided  herein,  all demands,
notices,  consents,  service of  process,  requests  and other  communications
hereunder  shall  be in  writing  and  shall  be  delivered  in  person  or by
overnight  courier  service,  or  mailed by  certified  mail,  return  receipt
requested, addressed:

If to the Pledgor, to:          Compliance Systems Corporation
                                90 Pratt Oval
                                Glen Cove, NY 11542
                                Attention:  Dean Garfinkel
                                Telephone:  (516) 656-5155
                                Facsimile:  (516) 676-2420

With a copy to:                 Kirkpatrick & Lockhart Nicholson Graham, LLP
                                201 South Biscayne Boulevard, Suite 2000
                                Miami, Florida 33131
                                Attention:  Clayton E. Parker, Esq.
                                Telephone:  (305) 539-3306
                                Facsimile:  (305) 328-7095

                                       4
<PAGE>

If to the Pledgee:              Montgomery Equity Partners, Ltd.
                                101 Hudson Street, Suite 3700
                                Jersey City, NJ 07302
                                Attention:  Mark A. Angelo
                                Telephone:  (201) 985-8300
                                Facsimile:  (201) 985-8744

With copy to:                   David Gonzalez, Esq.
                                101 Hudson Street, Suite 3700
                                Jersey City, NJ 07302
                                Telephone:  (201) 985-8300
                                Facsimile:  (201) 985-1964

Any such notice shall be effective  (a) when  delivered,  if delivered by hand
delivery or overnight  courier service,  or (b) five (5) days after deposit in
the United States mail, as applicable.

      7.    Binding  Effect.  All of the covenants and  obligations  contained
herein shall be binding upon and shall inure to the benefit of the  respective
parties, their successors and assigns.

      8.    Governing   Law;   Venue;   Service  of  Process.   The  validity,
interpretation  and  performance  of this  Agreement  shall be  determined  in
accordance  with the laws of the State of New Jersey  applicable  to contracts
made and to be  performed  wholly  within that state except to the extent that
Federal law  applies.  The parties  hereto  agree that any  disputes,  claims,
disagreements,  lawsuits,  actions  or  controversies  of any  type or  nature
whatsoever  that,  directly  or  indirectly,  arise  from  or  relate  to this
Agreement,  including, without limitation,  claims relating to the inducement,
construction,  performance or termination of this Agreement,  shall be brought
in the state superior  courts located in Hudson County,  New Jersey or Federal
district  courts located in Newark,  New Jersey,  and the parties hereto agree
not to challenge  the selection of that venue in any such  proceeding  for any
reason,  including,  without limitation,  on the grounds that such venue is an
inconvenient  forum.  The parties  hereto  specifically  agree that service of
process may be made,  and such service of process  shall be effective if made,
pursuant to Section 8 hereto.

      9.    Enforcement  Costs.  If any legal  action or other  proceeding  is
brought  for the  enforcement  of this  Agreement,  or  because  of an alleged
dispute,   breach,   default  or  misrepresentation  in  connection  with  any
provisions of this  Agreement,  the successful or prevailing  party or parties
shall be entitled to recover  reasonable  attorneys' fees, court costs and all
expenses even if not taxable as court costs  (including,  without  limitation,
all such fees,  costs and  expenses  incident  to  appeals),  incurred in that
action or  proceeding,  in addition to any other relief to which such party or
parties may be entitled.

      10.   Remedies  Cumulative.  No remedy herein  conferred  upon any party
is  intended  to be  exclusive  of any other  remedy,  and each and every such
remedy  shall be  cumulative  and shall be in addition  to every other  remedy
given  hereunder or now or hereafter  existing at law, in equity,  by statute,
or otherwise.  No single or partial exercise by any party of any right,  power
or remedy hereunder shall preclude any other or further exercise thereof.

                                       5
<PAGE>

      11.   Counterparts.  This  Agreement  may be  executed  in  one or  more
counterparts,  each of which  shall be  deemed an  original,  but all of which
together shall constitute the same instrument.

      12.   No   Penalties.   No  provision   of  this   Agreement  is  to  be
interpreted as a penalty upon any party to this Agreement.

      13.   JURY  TRIAL.   EACH  OF  THE   PLEDGEE  AND  THE  PLEDGOR   HEREBY
KNOWINGLY,  VOLUNTARILY AND  INTENTIONALLY  WAIVES THE RIGHT WHICH IT MAY HAVE
TO A TRIAL BY JURY OF ANY  CLAIM,  DEMAND,  ACTION  OR CAUSE OF  ACTION  BASED
HEREON,  OR ARISING OUT OF,  UNDER OR IN ANY WAY  CONNECTED  WITH THE DEALINGS
BETWEEN PLEDGEE AND PLEDGOR,  THIS PLEDGE AND ESCROW AGREEMENT OR ANY DOCUMENT
EXECUTED IN CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT,  COURSE OF DEALING,
STATEMENTS  (WHETHER  ORAL OR  WRITTEN)  OR  ACTIONS  OF ANY  PARTY  HERETO OR
THERETO IN EACH CASE WHETHER NOW EXISTING OR  HEREAFTER  ARISING,  AND WHETHER
IN CONTRACT, TORT, EQUITY OR OTHERWISE.

        [SIGNATURE PAGE FOLLOWS; REMAINDER OF PAGE INTENTIONALLY BLANK]

                                       7
<PAGE>

      IN WITNESS  WHEREOF,  the parties  hereto have duly executed this Pledge
and Escrow Agreement as of the date first above written.

                              MONTGOMERY EQUITY PARTNERS, LTD.

                              By:   Yorkville Advisors, LLC
                              Its:  General Partner

                              By:
                                 ---------------------------
                              Name: Mark Angelo
                              Title:      Portfolio Manager

                              COMPLIANCE SYSTEMS CORPORATION

                              By:
                                 ---------------------------
                              Name: Dean Garfinkel
                              Title:      Chairman

                              ESCROW AGENT

                              By:
                                 ---------------------------
                              Name: David Gonzalez, Esq.SECURITY AGREEMENT

      THIS  SECURITY  AGREEMENT  (the  "Agreement"),  is entered into and made
effective  as  of  November  30,  2005,  by  and  between  COMPLIANCE  SYSTEMS
CORPORATION,  a Delaware  corporation  with its  principal  place of  business
located  at 90 Pratt  Oval,  Glen  Cove,  NY 11542  (the  "Company"),  and the
BUYER(S)  listed on Schedule I attached to the Securities  Purchase  Agreement
dated the date hereof (the "Secured Party").

                                  RECITALS:

      WHEREAS,  the  Company  shall issue and sell to the  Secured  Party,  as
provided in the Securities  Purchase  Agreement of even date herewith  between
the Company and the Secured Party (the "Securities Purchase  Agreement"),  and
the Secured Party shall  purchase up to One Million  Dollars  ($1,000,000)  of
secured convertible debentures (the "Convertible Debentures"),  which shall be
convertible  into shares of the Company's  common stock, par value $0.001 (the
"Common  Stock") (as  converted,  the  "Conversion  Shares") in the respective
amounts set forth  opposite each  Buyer(s) name on Schedule I  attached to the
Securities Purchase Agreement;

      WHEREAS,  to induce  the  Secured  Party to enter  into the  transaction
contemplated   by  the  Securities   Purchase   Agreement,   the   Convertible
Debentures,  the Investor  Registration Rights Agreement of even date herewith
between the Company and the Secured Party (the "Investor  Registration Rights
Agreement"),  the Pledge and Escrow  Agreement of even date herewith among the
Company, the Secured Party and David Gonzalez,  Esq. (the "Pledge Agreement"),
the Escrow  Agreement of even date  herewith  among the  Company,  the Secured
Party, and David Gonzalez, Esq. (the "Escrow Agreement"),  and the Irrevocable
Transfer Agent  Instructions among the Company,  the Secured Party,  Worldwide
Stock  Transfer,   LLC,  and  David  Gonzalez,  Esq.  (the  "Transfer  Agent
Instructions")  (collectively referred to as the "Transaction Documents"), the
Company  hereby grants to the Secured Party a security  interest in and to the
pledged property identified on Exhibit A hereto  (collectively  referred to as
the "Pledged Property") until the satisfaction of the Obligations,  as defined
herein below.

      NOW, THEREFORE,  for and in consideration of the promises and the mutual
covenants  herein  contained,  and for other good and valuable  consideration,
the adequacy and receipt of which are hereby acknowledged,  the parties hereto
hereby agree as follows:

                                  ARTICLE 1.

                       DEFINITIONS AND INTERPRETATIONS

      Section 1.1.      Recitals.

      The above recitals are true and correct and are incorporated  herein, in
their entirety, by this reference.

<PAGE>

      Section 1.2.      Interpretations.

      Nothing  herein  expressed  or implied is intended or shall be construed
to confer upon any person  other than the Secured  Party any right,  remedy or
claim under or by reason hereof.

      Section 1.3.      Obligations Secured.

      The  obligations  secured  hereby  are any and  all  obligations  of the
Company now existing or  hereinafter  incurred to the Secured  Party,  whether
oral or  written  and  whether  arising  before,  on or after the date  hereof
including,  without  limitation,  those  obligations  of  the  Company  to the
Secured Party under this Agreement,  the Transaction Documents,  and any other
amounts now or hereafter  owed to the Secured Party by the Company  thereunder
or hereunder (collectively, the "Obligations").

                                  ARTICLE 2.

               PLEDGED PROPERTY, ADMINISTRATION OF COLLATERAL
                     AND TERMINATION OF SECURITY INTEREST

      Section 2.1.      Pledged Property.

            (a)   Company hereby pledges to the Secured Party,  and creates in
the Secured  Party for its  benefit,  a security  interest for such time until
the  Obligations  are  paid  in  full,  in and to all of the  property  of the
Company as set forth in Exhibit "A"  attached hereto and the products  thereof
and the proceeds of all such items (collectively, the "Pledged Property"):

            (b)   Simultaneously  with  the  execution  and  delivery  of this
Agreement,  the Company shall make,  execute,  acknowledge,  file,  record and
deliver  to the  Secured  Party  any  documents  reasonably  requested  by the
Secured  Party to perfect  its  security  interest  in the  Pledged  Property.
Simultaneously with the execution and delivery of this Agreement,  the Company
shall  make,  execute,  acknowledge  and  deliver  to the  Secured  Party such
documents  and   instruments,   including,   without   limitation,   financing
statements, certificates,  affidavits and forms as may, in the Secured Party's
reasonable  judgment,  be necessary to effectuate,  complete or perfect, or to
continue  and  preserve,  the  security  interest of the Secured  Party in the
Pledged  Property,  and the  Secured  Party  shall  hold  such  documents  and
instruments  as secured party,  subject to the terms and conditions  contained
herein.

      Section 2.2.      Rights; Interests; Etc.

            (a)   So  long   as  no   Event   of   Default   (as   hereinafter
defined) shall have occurred and be continuing:

                  (i)   the Company  shall be entitled to exercise any and all
rights  pertaining to the Pledged Property or any part thereof for any purpose
not inconsistent with the terms hereof; and

                  (ii)  the  Company  shall be  entitled to receive and retain
any and all payments paid or made in respect of the Pledged Property.

                                       2
<PAGE>

            (b)   Upon the occurrence  and during the  continuance of an Event
of Default:

                  (i)   All  rights of the  Company  to  exercise  the  rights
which   it   would   otherwise   be   entitled   to   exercise   pursuant   to
Section 2.2(a)(i) hereof  and to receive  payments which it would otherwise be
authorized to receive and retain pursuant to  Section 2.2(a)(ii) hereof  shall
be  suspended,  and all such  rights  shall  thereupon  become  vested  in the
Secured Party who shall  thereupon have the sole right to exercise such rights
and to receive and hold as Pledged Property such payments;  provided, however,
that if the Secured  Party shall  become  entitled and shall elect to exercise
its right to realize on the Pledged  Property  pursuant to  Article 5  hereof,
then all cash sums received by the Secured  Party,  or held by Company for the
benefit    of   the    Secured    Party    and   paid   over    pursuant    to
Section 2.2(b)(ii) hereof,   shall  be   applied   against   any   outstanding
Obligations; and

                  (ii)  All  interest,  dividends,  income and other  payments
and  distributions   which  are  received  by  the  Company  contrary  to  the
provisions  of  Section 2.2(b)(i) hereof  shall be  received  in trust for the
benefit of the Secured Party,  shall be segregated  from other property of the
Company and shall be forthwith paid over to the Secured Party; or

                  (iii) The  Secured  Party  in its sole  discretion  shall be
authorized  to sell any or all of the  Pledged  Property  at public or private
sale  in  order  to  recoup  all of the  outstanding  principal  plus  accrued
interest owed pursuant to the Convertible Debenture as described herein

            (c)   An "Event  of  Default"  shall be  deemed  to have  occurred
under  this  Agreement  upon  an  Event  of  Default  under  the   Convertible
Debentures.

                                  ARTICLE 3.

                        ATTORNEY-IN-FACT; PERFORMANCE

      Section 3.1.      Secured Party Appointed Attorney-In-Fact.

      Upon the occurrence of an Event of Default,  the Company hereby appoints
the Secured Party as its  attorney-in-fact,  with full  authority in the place
and stead of the  Company and in the name of the  Company or  otherwise,  from
time to time in the  Secured  Party's  discretion  to take any  action  and to
execute any instrument  which the Secured Party may reasonably  deem necessary
to accomplish the purposes of this Agreement,  including,  without limitation,
to  receive  and  collect  all   instruments   made  payable  to  the  Company
representing  any  payments  in respect of the  Pledged  Property  or any part
thereof  and to give  full  discharge  for the  same.  The  Secured  Party may
demand, collect, receipt for, settle, compromise,  adjust, sue for, foreclose,
or  realize  on the  Pledged  Property  as and  when  the  Secured  Party  may
determine.  To facilitate  collection,  the Secured  Party may notify  account
debtors and obligors on any Pledged Property to make payments  directly to the
Secured Party.

      Section 3.2.      Secured Party May Perform.

      If the Company  fails to perform any  agreement  contained  herein,  the
Secured Party,  at its option,  may itself perform,  or cause  performance of,
such  agreement,  and the expenses of the Secured Party incurred in connection
therewith shall be included in the  Obligations  secured hereby and payable by
the Company under Section 8.3.

                                       3
<PAGE>

                                  ARTICLE 4.

                        REPRESENTATIONS AND WARRANTIES

      Section 4.1.      Authorization; Enforceability.

      Each of the parties  hereto  represents  and warrants  that it has taken
all action  necessary to authorize the execution,  delivery and performance of
this Agreement and the transactions  contemplated  hereby;  and upon execution
and delivery,  this Agreement shall constitute a valid and binding  obligation
of  the  respective  party,  subject  to  applicable  bankruptcy,  insolvency,
reorganization,  moratorium and similar laws affecting creditors' rights or by
the principles governing the availability of equitable remedies.

      Section 4.2.      Ownership of Pledged Property.

      Except as otherwise  indicated in the Disclose  Schedule attached hereto
as Schedule A, the Company  warrants and  represents  that it is the legal and
beneficial owner of the Pledged Property free and clear of any lien,  security
interest,  option  or other  charge or  encumbrance  except  for the  security
interest created by this Agreement.

                                  ARTICLE 5.

                   DEFAULT; REMEDIES; SUBSTITUTE COLLATERAL
      Section 5.1.      Default and Remedies.

            (a)   If an Event of  Default  occurs,  then in each such case the
Secured Party may declare the  Obligations to be due and payable  immediately,
by a notice in  writing to the  Company,  and upon any such  declaration,  the
Obligations shall become immediately due and payable.

            (b)   Upon the  occurrence  of an Event of  Default,  the  Secured
Party shall:  (i) be entitled to receive all distributions with respect to the
Pledged  Property,  (ii) to cause the Pledged  Property to be transferred into
the name of the Secured Party or its nominee,  (iii) to dispose of the Pledged
Property,  and (iv) to realize upon any and all rights in the Pledged Property
then held by the Secured Party.

      Section 5.2.      Method of Realizing Upon the Pledged Property: Other
                  Remedies.

      Upon the  occurrence  of an Event of Default,  in addition to any rights
and remedies  available at law or in equity,  the following  provisions  shall
govern the Secured Party's right to realize upon the Pledged Property:

            (a)   Any  item of the  Pledged  Property  may be sold for cash or
other value in any number of lots at brokers board,  public auction or private
sale and may be sold without demand,  advertisement or notice (except that the
Secured Party shall give the Company  ten (10) days'  prior written  notice of

                                       4
<PAGE>

the time and place or of the time after which a private  sale may be made (the
"Sale  Notice")),  which  notice  period is hereby  agreed to be  commercially
reasonable.  At any sale or sales of the  Pledged  Property,  the  Company may
bid for and purchase the whole or any part of the Pledged  Property  and, upon
compliance  with the terms of such sale, may hold,  exploit and dispose of the
same without  further  accountability  to the Secured Party.  The Company will
execute and deliver, or cause to be executed and delivered,  such instruments,
documents,  assignments,  waivers,  certificates, and affidavits and supply or
cause to be supplied such further  information and take such further action as
the Secured Party reasonably shall require in connection with any such sale.

            (b)   Any  cash  being  held  by  the  Secured  Party  as  Pledged
Property and all cash  proceeds  received by the Secured  Party in respect of,
sale of,  collection  from, or other  realization  upon all or any part of the
Pledged Property shall be applied as follows:

                  (i)   to the payment of all  amounts  due the Secured  Party
for the  expenses  reimbursable  to it  hereunder  or owed to it  pursuant  to
Section 8.3 hereof;

                  (ii)  to the payment of the Obligations then due and unpaid.

                  (iii) the  balance,   if  any,  to  the  person  or  persons
entitled thereto, including, without limitation, the Company.

            (c)   In  addition  to all of the  rights and  remedies  which the
Secured  Party may have  pursuant to this  Agreement,  the Secured Party shall
have all of the  rights  and  remedies  provided  by law,  including,  without
limitation, those under the Uniform Commercial Code.

                  (i)   If the Company  fails to pay such amounts due upon the
occurrence of an Event of Default which is continuing,  then the Secured Party
may institute a judicial  proceeding for the collection of the sums so due and
unpaid,  may  prosecute  such  proceeding  to judgment or final decree and may
enforce the same  against  the  Company  and  collect  the monies  adjudged or
decreed to be payable in the manner  provided  by law out of the  property  of
Company, wherever situated.

                  (ii)  The  Company  agrees  that it shall be liable  for any
reasonable  fees,  expenses  and  costs  incurred  by  the  Secured  Party  in
connection with  enforcement,  collection and  preservation of the Transaction
Documents, including, without limitation,  reasonable legal fees and expenses,
and such amounts shall be deemed  included as  Obligations  secured hereby and
payable as set forth in Section 8.3 hereof.

      Section 5.3.      Proofs of Claim.

            In  case  of  the  pendency  of  any   receivership,   insolvency,
liquidation, bankruptcy, reorganization,  arrangement, adjustment, composition
or other  judicial  proceeding  relating to the Company or the property of the
Company  or of  such  other  obligor  or  its  creditors,  the  Secured  Party
(irrespective  of whether  the  Obligations  shall then be due and  payable as
therein  expressed or by declaration or otherwise and  irrespective of whether
the  Secured  Party  shall have made any demand on the Company for the payment
of the  Obligations),  subject to the  rights of  Previous  Security  Holders,
shall be  entitled  and  empowered,  by  intervention  in such  proceeding  or
otherwise:

                                       5
<PAGE>

                  (i)   to file and prove a claim for the whole  amount of the
Obligations  and to file such other papers or documents as may be necessary or
advisable  in order to have the claims of the  Secured  Party  (including  any
claim for the  reasonable  legal fees and expenses and other  expenses paid or
incurred by the Secured  Party  permitted  hereunder  and of the Secured Party
allowed in such judicial proceeding), and

                  (ii)  to collect and  receive  any monies or other  property
payable or  deliverable on any such claims and to distribute the same; and any
custodian,  receiver,  assignee,  trustee,  liquidator,  sequestrator or other
similar official in any such judicial  proceeding is hereby  authorized by the
Secured  Party to make such  payments to the  Secured  Party and, in the event
that the Secured Party shall  consent to the making of such payments  directed
to the Secured  Party,  to pay to the Secured  Party any amounts for  expenses
due it hereunder.

      Section 5.4.      Duties Regarding Pledged Property.

      The Secured Party shall have no duty as to the  collection or protection
of the Pledged  Property or any income  thereon or as to the  preservation  of
any rights pertaining thereto,  beyond the safe custody and reasonable care of
any of the Pledged Property actually in the Secured Party's possession.

                                  ARTICLE 6.

                            AFFIRMATIVE COVENANTS

      The Company  covenants  and agrees that,  from the date hereof and until
the Obligations  have been fully paid and satisfied,  unless the Secured Party
shall consent otherwise in writing (as provided in Section 8.4 hereof):

      Section 6.1.      Existence, Properties, Etc.

            (a)   The Company  shall do, or cause to be done,  all things,  or
proceed with due diligence with any actions or courses of action,  that may be
reasonably  necessary  (i) to  maintain  Company's  due  organization,   valid
existence and good standing under the laws of its state of incorporation,  and
(ii) to  preserve  and  keep in full  force  and  effect  all  qualifications,
licenses and  registrations in those  jurisdictions in which the failure to do
so could have a  Material  Adverse  Effect (as  defined  below);  and  (b) the
Company  shall not do, or cause to be done,  any act  impairing  the Company's
corporate  power or authority  (i) to carry on the  Company's  business as now
conducted,  and  (ii) to  execute  or  deliver  this  Agreement  or any  other
document delivered in connection herewith,  including, without limitation, any
UCC-1  Financing  Statements  required by the Secured  Party to which it is or
will be a party,  or perform any of its  obligations  hereunder or thereunder.
For purpose of this Agreement,  the term "Material  Adverse Effect" shall mean
any material and adverse  affect as  determined  by Secured  Party in its sole
discretion,  whether individually or in the aggregate,  upon (a) the Company's
assets,   business,   operations,   properties  or  condition,   financial  or
otherwise;  (b) the  Company's  to make  payment as and when due of all or any
part of the Obligations; or (c) the Pledged Property.

                                       6
<PAGE>

      Section 6.2.      Financial Statements and Reports.

      The Company shall furnish to the Secured Party within a reasonable  time
(which for quarterly or monthly  financial  information shall mean at least 60
days  after the close of such  period  and for  annual  financial  information
shall  mean at  least  90 days  after  the  close  of the  fiscal  year)  such
financial  data  as the  Secured  Party  may  reasonably  request,  including,
without limitation, the following:

            (a)   The  balance  sheet of the  Company  as of the close of each
fiscal year,  the  statement of earnings and retained  earnings of the Company
as of the close of such  fiscal  year,  and  statement  of cash  flows for the
Company  for  such  fiscal  year,  all  in  reasonable  detail,   prepared  in
accordance  with  generally  accepted   accounting   principles   consistently
applied,  certified by the chief executive and chief financial officers of the
Company as being true and  correct and  accompanied  by a  certificate  of the
chief executive and chief financial officers of the Company,  stating that the
Company has kept,  observed,  performed and fulfilled each covenant,  term and
condition  of this  Agreement  during  such  fiscal  year and that no Event of
Default  hereunder has occurred and is  continuing,  or if an Event of Default
has occurred and is  continuing,  specifying the nature of same, the period of
existence  of same and the action the Company  proposes to take in  connection
therewith;

            (b)   A  balance  sheet  of the  Company  as of the  close of each
month,  and  statement of earnings and retained  earnings of the Company as of
the close of such month, all in reasonable detail, and prepared  substantially
in accordance  with  generally  accepted  accounting  principles  consistently
applied,  certified by the chief executive and chief financial officers of the
Company as being true and correct; and

            (c)   Copies  of  all   accountants'   reports  and   accompanying
financial  reports  submitted  to the Company by  independent  accountants  in
connection with each annual examination of the Company.

      Section 6.3.      Accounts and Reports.

      The  Company  shall   maintain  a  standard   system  of  accounting  in
accordance with generally accepted accounting principles  consistently applied
and provide, at its sole expense, to the Secured Party the following:

            (a)   as  soon  as  available,  a copy  of  any  notice  or  other
communication  alleging any nonpayment or other material breach or default, or
any foreclosure or other action  respecting any material portion of its assets
and properties,  received respecting any of the indebtedness of the Company in
excess  of  $25,000  (other  than the  Obligations),  or any  demand  or other
request for payment  under any  guaranty,  assumption,  purchase  agreement or
similar  agreement or arrangement  respecting the  indebtedness or obligations
of others in excess of $25,000,  including any received from any person acting
on behalf of the Secured Party or beneficiary thereof; and

            (b)   within   fifteen   (15) days   after  the   making  of  each
submission or filing,  a copy of any report,  financial  statement,  notice or
other document,  whether periodic or otherwise,  submitted to the shareholders
of the Company,  or submitted to or filed by the Company with any governmental
authority  involving or  affecting  (i) the Company that could have a Material
Adverse Effect; (ii) the Obligations;  (iii) any part of the Pledged Property;
or (iv) any of the  transactions  contemplated  in this  Agreement or the Loan
Instruments.

                                       7
<PAGE>

      Section 6.4.      Maintenance of Books and Records; Inspection.
                        --------------------------------------------

      The  Company  shall   maintain  its  books,   accounts  and  records  in
accordance  with  generally  accepted   accounting   principles   consistently
applied,  and permit the Secured  Party,  its officers and  employees  and any
professionals  designated  by the  Secured  Party in  writing,  at any time to
visit and  inspect  any of its  properties  (including  but not limited to the
collateral  security  described in the Transaction  Documents  and/or the Loan
Instruments),  corporate  books and  financial  records,  and to  discuss  its
accounts, affairs and finances with any employee, officer or director thereof.

      Section 6.5.      Maintenance and Insurance.
                        -------------------------

            (a)   The Company  shall  maintain or cause to be  maintained,  at
its own expense,  all of its assets and  properties  in good working order and
condition,  making all necessary repairs thereto and renewals and replacements
thereof.

            (b)   The Company  shall  maintain or cause to be  maintained,  at
its  own  expense,   insurance  in  form,  substance  and  amounts  (including
deductibles),  which the Company deems  reasonably  necessary to the Company's
business,  (i) adequate  to insure all assets and  properties  of the Company,
which  assets and  properties  are of a character  usually  insured by persons
engaged in the same or similar  business against loss or damage resulting from
fire or other  risks  included in an extended  coverage  policy;  (ii) against
public  liability  and other tort claims that may be incurred by the  Company;
(iii) as may be required by the Transaction  Documents  and/or  applicable law
and (iv) as may be reasonably  requested by Secured Party,  all with adequate,
financially sound and reputable insurers.

      Section 6.6.      Contracts and Other Collateral.
                        ------------------------------

      The Company shall perform all of its  obligations  under or with respect
to each instrument,  receivable, contract and other intangible included in the
Pledged  Property to which the Company is now or hereafter  will be party on a
timely  basis  and  in  the  manner  therein  required,   including,   without
limitation, this Agreement.

      Section 6.7.      Defense of Collateral, Etc.

      The Company  shall  defend and enforce its right,  title and interest in
and to any part of: (a) the Pledged  Property;  and (b) if not included within
the Pledged  Property,  those  assets and  properties  whose loss could have a
Material  Adverse Effect,  the Company shall defend the Secured Party's right,
title and  interest  in and to each and every  part of the  Pledged  Property,
each  against all manner of claims and  demands on a timely  basis to the full
extent permitted by applicable law.

                                       8
<PAGE>

      Section 6.8.      Payment of Debts, Taxes, Etc.

      The Company shall pay, or cause to be paid, all of its  indebtedness and
other  liabilities  and  perform,  or  cause  to  be  performed,  all  of  its
obligations  in accordance  with the  respective  terms  thereof,  and pay and
discharge,  or cause to be paid or  discharged,  all  taxes,  assessments  and
other governmental  charges and levies imposed upon it, upon any of its assets
and  properties  on or  before  the  last  day on  which  the same may be paid
without  penalty,  as  well  as pay  all  other  lawful  claims  (whether  for
services, labor, materials, supplies or otherwise) as and when due

      Section 6.9.      Taxes and Assessments; Tax Indemnity.

      The Company  shall  (a) file all tax returns and  appropriate  schedules
thereto that are required to be filed under  applicable law, prior to the date
of delinquency,  (b) pay and discharge all taxes, assessments and governmental
charges or levies  imposed  upon the  Company,  upon its income and profits or
upon any  properties  belonging  to it,  prior to the date on which  penalties
attach thereto,  and (c) pay all taxes,  assessments and governmental  charges
or levies  that,  if  unpaid,  might  become a lien or charge  upon any of its
properties;  provided, however, that the Company in good faith may contest any
such tax,  assessment,  governmental charge or levy described in the foregoing
clauses  (b) and  (c) so long as  appropriate  reserves  are  maintained  with
respect thereto.

      Section 6.10.     Compliance with Law and Other Agreements.

      The Company shall  maintain its business  operations  and property owned
or  used  in  connection  therewith  in  compliance  with  (a) all  applicable
federal,  state and local laws,  regulations  and  ordinances  governing  such
business  operations and the use and ownership of such  property,  and (b) all
agreements,  licenses,  franchises,  indentures  and  mortgages  to which  the
Company  is a party  or by  which  the  Company  or any of its  properties  is
bound.  Without  limiting  the  foregoing,  the  Company  shall pay all of its
indebtedness promptly in accordance with the terms thereof.

      Section 6.11.     Notice of Default.

      The  Company  shall  give  written  notice to the  Secured  Party of the
occurrence  of any  default or Event of  Default  under  this  Agreement,  the
Transaction  Documents or any other Loan  Instrument or any other agreement of
Company for the payment of money, promptly upon the occurrence thereof.

      Section 6.12.     Notice of Litigation.

      The  Company  shall give  notice,  in writing,  to the Secured  Party of
(a) any  actions,  suits or  proceedings  wherein  the  amount  at issue is in
excess  of  $50,000,  instituted  by  any  persons  against  the  Company,  or
affecting any of the assets of the Company,  and (b) any dispute, not resolved
within fifteen (15) days of the commencement  thereof,  between the Company on
the one hand and any  governmental or regulatory body on the other hand, which
might  reasonably  be  expected  to  have a  Material  Adverse  Effect  on the
business operations or financial condition of the Company.

                                       9
<PAGE>

                                  ARTICLE 7.

                              NEGATIVE COVENANTS

      The Company  covenants  and agrees that,  from the date hereof until the
Obligations have been fully paid and satisfied,  the Company shall not, unless
the Secured Party shall consent otherwise in writing:

      Section 7.1.      Liens and Encumbrances.

      The  Company  shall not  directly or  indirectly  make,  create,  incur,
assume  or  permit  to  exist  any  assignment,  transfer,  pledge,  mortgage,
security  interest  or other  lien or  encumbrance  of any  nature  in,  to or
against any part of the Pledged  Property or of the Company's  capital  stock,
or offer or agree to do so, or own or acquire  or agree to  acquire  any asset
or  property of any  character  subject to any of the  foregoing  encumbrances
(including any conditional sale contract or other title retention  agreement),
or assign,  pledge or in any way transfer or encumber its right to receive any
income  or  other  distribution  or  proceeds  from  any  part of the  Pledged
Property or the  Company's  capital  stock;  or enter into any  sale-leaseback
financing  respecting any part of the Pledged Property as lessee,  or cause or
assist  the  inception  or  continuation  of any of the  foregoing,  except in
connection with the Company leasing or purchasing office  equipment,  computer
and  networking  equipment,  co-location  equipment  and other  equipment  and
supplies in the  ordinary  course of the  Company's  business,  provided  such
equipment  and  supplies  do not,  in the  aggregate,  exceed  fifty  thousand
dollars ($50,000.00) per annum.

      Section 7.2.      Certificate of Incorporation, By-Laws, Mergers,
                        Consolidations, Acquisitions and Sales.

      Without the prior  express  written  consent of the Secured  Party,  the
Company shall not:  (a) Amend its  Certificate  of  Incorporation  or By-Laws;
(b) issue or sell its stock,  stock options,  bonds,  notes or other corporate
securities  or  obligations;  (c) be a party to any merger,  consolidation  or
corporate   reorganization,   (d) purchase   or   otherwise   acquire  all  or
substantially  all of the  assets  or stock of,  or any  partnership  or joint
venture  interest in, any other person,  firm or entity,  (e) sell,  transfer,
convey,  grant a security  interest in or lease all or any substantial part of
its assets,  nor (f) create any  subsidiaries  nor convey any of its assets to
any subsidiary.

      Section 7.3.      Management, Ownership.

      The Company shall not materially  change its ownership,  executive staff
or management  without the prior  written  consent of the Secured  Party.  The
ownership,  executive staff and management of the Company are material factors
in the  Secured  Party's  willingness  to  institute  and  maintain  a lending
relationship with the Company.

      Section 7.4.      Dividends, Etc.

      The Company  shall not declare or pay any dividend of any kind,  in cash
or in  property,  on any class of its capital  stock,  nor  purchase,  redeem,
retire or otherwise  acquire for value any shares of such stock,  nor make any
distribution  of any kind in respect  thereof,  nor make any return of capital
to  shareholders,  nor make any  payments  in respect of any  pension,  profit
sharing,  retirement,  stock option,  stock bonus,  incentive  compensation or
similar plan (except as required or  permitted  hereunder),  without the prior
written consent of the Secured Party.

                                       10
<PAGE>

      Section 7.5.      Guaranties; Loans.

      The Company  shall not  guarantee  nor be liable in any manner,  whether
directly or indirectly,  or become  contingently liable after the date of this
Agreement in connection  with the obligations or indebtedness of any person or
persons,  except  for (i) the  indebtedness  currently  secured  by the  liens
identified  on the Pledged  Property  identified  on Exhibit A hereto and (ii)
the endorsement of negotiable  instruments  payable to the Company for deposit
or collection in the ordinary  course of business.  The Company shall not make
any loan,  advance  or  extension  of credit to any  person  other than in the
normal course of its business.

      Section 7.6.      Debt.

      The  Company  shall  not  create,  incur,  assume or suffer to exist any
additional  indebtedness of any description  whatsoever in an aggregate amount
in excess of  $100,000  (excluding  any  indebtedness  of the  Company  to the
Secured Party,  trade accounts  payable and accrued  expenses  incurred in the
ordinary  course of business and the  endorsement  of  negotiable  instruments
payable  to  the  Company,  respectively  for  deposit  or  collection  in the
ordinary course of business).

      Section 7.7.      Conduct of Business.

      The Company  will  continue to engage,  in an efficient  and  economical
manner,  in a business of the same general type as conducted by it on the date
of this Agreement.

      Section 7.8.      Places of Business.

      The location of the Company's  chief place of business is 90 Pratt Oval,
Glen Cove,  NY 11542.  The Company  shall not change the location of its chief
place of business,  chief executive office or any place of business  disclosed
to the  Secured  Party or move any of the  Pledged  Property  from its current
location  without  thirty (30) days' prior written notice to the Secured Party
in each instance.

                                  ARTICLE 8.

                                MISCELLANEOUS

      Section 8.1.      Notices.

      All notices or other  communications  required or  permitted to be given
pursuant  to this  Agreement  shall be in writing and shall be  considered  as
duly  given  on:  (a) the  date  of  delivery,  if  delivered  in  person,  by
nationally  recognized overnight delivery service or  (b) five (5) days  after
mailing if mailed  from  within the  continental  United  States by  certified
mail, return receipt requested to the party entitled to receive the same:

                                       11
<PAGE>

If to the Secured Party:     Montgomery Equity Partners, Ltd.
                             101 Hudson Street - Suite 3700
                             Jersey City, New Jersey 07302
                             Attention:  Mark Angelo
                                         Portfolio Manager
                             Telephone:  (201) 986-8300
                             Facsimile:  (201) 985-8266

With a copy to:              David Gonzalez, Esq.
                             101 Hudson Street, Suite 3700
                             Jersey City, NJ 07302
                             Telephone:  (201) 985-8300
                             Facsimile:  (201) 985-8266

And if to the Company:       Compliance Systems Corporation
                             90 Pratt Oval
                             Glen Cove, NY 11542
                             Attention:  Dean Garfinkel
                             Telephone:  (516) 656-5155
                             Facsimile:  (516) 676-2420

With a copy to:              Kirkpatrick & Lockhart Nicholson Graham, LLP
                             201 South Biscayne Boulevard, Suite 2000
                             Miami, Florida 33131
                             Attention:  Clayton E. Parker, Esq.
                             Telephone:  (305) 539-3306
                             Facsimile:  (305) 328-7095

      Any party may change its  address  by giving  notice to the other  party
stating its new address.  Commencing on the tenth  (10th) day after the giving
of such notice,  such newly  designated  address shall be such party's address
for the purpose of all notices or other  communications  required or permitted
to be given pursuant to this Agreement.

      Section 8.2.      Severability.

      If  any   provision  of  this   Agreement   shall  be  held  invalid  or
unenforceable,  such invalidity or unenforceability  shall attach only to such
provision  and  shall  not  in  any  manner   affect  or  render   invalid  or
unenforceable  any  other  severable  provision  of this  Agreement,  and this
Agreement  shall  be  carried  out as if any  such  invalid  or  unenforceable
provision were not contained herein.

      Section 8.3.      Expenses.

      In the  event  of an  Event  of  Default,  the  Company  will pay to the
Secured  Party the amount of any and all  reasonable  expenses,  including the
reasonable  fees and  expenses of its  counsel,  which the  Secured  Party may
incur in connection  with:  (i) the custody or  preservation  of, or the sale,
collection  from,  or other  realization  upon,  any of the Pledged  Property;
(ii) the  exercise or  enforcement  of any of the rights of the Secured  Party
hereunder  or  (iii) the  failure by the  Company to perform or observe any of
the provisions hereof.

                                       12
<PAGE>

      Section 8.4.      Waivers, Amendments, Etc.

      The Secured  Party's delay or failure at any time or times  hereafter to
require  strict  performance  by Company of any  undertakings,  agreements  or
covenants  shall not  waiver,  affect,  or  diminish  any right of the Secured
Party  under  this  Agreement  to demand  strict  compliance  and  performance
herewith.  Any waiver by the Secured  Party of any Event of Default  shall not
waive or affect any other Event of Default,  whether  such Event of Default is
prior or  subsequent  thereto  and  whether of the same or a  different  type.
None of the  undertakings,  agreements and covenants of the Company  contained
in this  Agreement,  and no Event of  Default,  shall be  deemed  to have been
waived by the Secured  Party,  nor may this  Agreement be amended,  changed or
modified, unless such waiver,  amendment,  change or modification is evidenced
by an  instrument  in writing  specifying  such waiver,  amendment,  change or
modification and signed by the Secured Party.

      Section 8.5.      Continuing Security Interest.

      This  Agreement  shall  create a  continuing  security  interest  in the
Pledged Property and shall:  (i) remain in full force and effect until payment
in full of the  Obligations;  and  (ii) be  binding  upon the  Company and its
successors  and heirs and  (iii) inure to the benefit of the Secured Party and
its successors and assigns.  Upon the payment or  satisfaction  in full of the
Obligations,  the Company shall be entitled to the return, at its expense,  of
such of the Pledged  Property as shall not have been sold in  accordance  with
Section 5.2 hereof or otherwise applied pursuant to the terms hereof.

      Section 8.6.      Independent Representation.

      Each party  hereto  acknowledges  and agrees that it has received or has
had the  opportunity  to receive  independent  legal counsel of its own choice
and that it has been sufficiently  apprised of its rights and responsibilities
with regard to the substance of this Agreement.

      Section 8.7.      Applicable Law:  Jurisdiction.

      This Agreement  shall be governed by and  interpreted in accordance with
the laws of the  State of New  Jersey  without  regard  to the  principles  of
conflict  of laws.  The parties  further  agree that any action  between  them
shall be heard in Hudson  County,  New Jersey,  and  expressly  consent to the
jurisdiction and venue of the Superior Court of New Jersey,  sitting in Hudson
County and the United  States  District  Court for the  District of New Jersey
sitting  in  Newark,  New  Jersey  for the  adjudication  of any civil  action
asserted pursuant to this Paragraph.

      Section 8.8.      Waiver of Jury Trial.

      AS A  FURTHER  INDUCEMENT  FOR THE  SECURED  PARTY  TO ENTER  INTO  THIS
AGREEMENT  AND TO  MAKE  THE  FINANCIAL  ACCOMMODATIONS  TO THE  COMPANY,  THE
COMPANY  HEREBY  WAIVES  ANY  RIGHT TO TRIAL BY JURY IN ANY  LEGAL  PROCEEDING
RELATED  IN ANY WAY TO THIS  AGREEMENT  AND/OR  ANY  AND ALL  OTHER  DOCUMENTS
RELATED TO THIS TRANSACTION.

                                       13
<PAGE>

      Section 8.9.      Entire Agreement.

      This Agreement  constitutes  the entire  agreement among the parties and
supersedes  any prior  agreement or  understanding  among them with respect to
the subject matter hereof.

        [SIGNATURE PAGE FOLLOWS; REMAINDER OF PAGE INTENTIONALLY BLANK]

                                       14
<PAGE>

      IN WITNESS  WHEREOF,  the parties  hereto have  executed  this  Security
Agreement as of the date first above written.

                                        COMPANY:
                                        COMPLIANCE SYSTEMS CORPORATION

                                        By:
                                           -----------------------------
                                        Name: Dean Garfinkel
                                        Title:      Chairman

                                        SECURED PARTY:
                                        MONTGOMERY EQUITY PARTNERS, LTD.

                                        By:   Yorkville Advisors, LLC
                                        Its:  General Partner

                                        By:
                                           -----------------------------
                                        Name: Mark Angelo
                                        Title:      Portfolio Manager

                                       15
<PAGE>

                                  EXHIBIT A
                        DEFINITION OF PLEDGED PROPERTY

      For the purpose of securing prompt and complete  payment and performance
by the  Company of all of the  Obligations,  the Company  unconditionally  and
irrevocably hereby grants to the Secured Party a continuing  security interest
in and to, and lien upon, the following Pledged Property of the Company:

            (a)   all goods of the  Company,  including,  without  limitation,
machinery, equipment, furniture, furnishings,  fixtures, signs, lights, tools,
parts,  supplies  and motor  vehicles  of every kind and  description,  now or
hereafter  owned  by the  Company  or in  which  the  Company  may have or may
hereafter acquire any interest, and all replacements,  additions,  accessions,
substitutions  and  proceeds  thereof,  arising  from the sale or  disposition
thereof,  and where  applicable,  the  proceeds of  insurance  and of any tort
claims involving any of the foregoing;

            (b)   all  inventory  of the Company,  including,  but not limited
to, all goods, wares, merchandise,  parts, supplies,  finished products, other
tangible personal property,  including such inventory as is temporarily out of
Company's  custody or  possession  and including any returns upon any accounts
or other proceeds,  including insurance  proceeds,  resulting from the sale or
disposition of any of the foregoing;

            (c)   all contract rights and general  intangibles of the Company,
including,  without  limitation,  goodwill,  trademarks,  trade styles,  trade
names,  leasehold interests,  partnership or joint venture interests,  patents
and patent  applications,  copyrights,  deposit  accounts whether now owned or
hereafter created;

            (d)   all documents,  warehouse receipts,  instruments and chattel
paper of the Company whether now owned or hereafter created;

            (e)   all accounts  and other  receivables,  instruments  or other
forms  of   obligations   and  rights  to  payment  of  the  Company   (herein
collectively  referred to as "Accounts"),  together with the proceeds thereof,
all  goods  represented  by such  Accounts  and all  such  goods  that  may be
returned  by the  Company's  customers,  and  all  proceeds  of any  insurance
thereon,  and all guarantees,  securities and liens which the Company may hold
for the  payment  of any such  Accounts  including,  without  limitation,  all
rights of stoppage  in  transit,  replevin  and  reclamation  and as an unpaid
vendor and/or  lienor,  all of which the Company  represents and warrants will
be bona fide and existing  obligations  of its respective  customers,  arising
out of the sale of goods by the Company in the ordinary course of business;

            (f)   to the extent assignable,  all of the Company's rights under
all  present  and future  authorizations,  permits,  licenses  and  franchises
issued or granted in connection with the operations of any of its facilities;

            (g)   all products and proceeds  (including,  without  limitation,
insurance proceeds) from the above-described Pledged Property.

                                      A-1
<PAGE>

                                  SCHEDULE A

                             DISCLOSURE SCHEDULE

      The following is a list of liens, security interests,  options and other
charges or encumbrances on the Pledged Property as of the date hereof:

                                                                      Balance
                                                                      ----------

Secured Debt (UCC's Filed):
  Notes Payable - Robert Lippe                                         30,000.00

  Capitalized Leases Payable:
   Dell Financial Services                                              8,795.00
   Bank of the West                                                    32,849.00
   GE Capital                                                          27,756.00
   Axis Capital Inc.                                                   17,900.00
   M&T Credit Services LLC                                             18,080.00
   Netbank Business Finance (formerly Republic Leasing)                30,620.00
   US Bancorp                                                          35,615.00
                                                                      ----------
  Total Leases Payable                                                171,615.00

  Secured Lease - Ford Credit                                          10,400.00

Total Secured Debt                                                    212,015.00
                                                                      ----------

                                      A-2

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