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                                                                    EXHIBIT 10.4

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION 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.

July 20, 2000

341,185 shares                                                Warrant No. 2000-3

                              LEVEL 8 SYSTEMS, INC.
                             STOCK PURCHASE WARRANT

Registered Owner: Seneca Capital International, Ltd.

         This certifies that, for value received, Level 8 Systems, Inc., a
Delaware corporation, the ("Company") grants the following rights to the
Registered Owner, or assigns, of this Warrant:

         1.       ISSUE. Upon tender (as defined in Section 5) to the Company,
the Company, within three (3) Business Days of the date thereof, shall issue to
the Registered Owner, or assigns, up to the number of shares specified in
Section 2 of fully paid and nonassessable shares of Common Stock that the
Registered Owner, or assigns, is otherwise entitled to purchase.

         2.       NUMBER OF SHARES. The total number of shares of Common Stock
that the Registered Owner, or assigns, of this Warrant is entitled to receive
upon exercise of this Warrant (the "Warrant Shares") is 341,185 shares, subject
to adjustment from time to time as set forth in Section 6. The Company shall at
all times reserve and hold available sufficient shares of Common Stock to
satisfy all conversion and purchase rights represented by outstanding
convertible securities, options and warrants, including this Warrant. The
Company covenants and agrees that all shares of Common Stock that may be issued
upon the exercise of this Warrant shall, upon issuance, be duly and validly
issued, fully paid and nonassessable, free from all taxes, liens and charges
with respect to the purchase and the issuance of the shares, and shall not have
any legend or restrictions on resale, except as required by Section 3.2(b) of
the Purchase Agreement.

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         3.       EXERCISE PRICE. The initial per share exercise price of this
Warrant, representing the price per share at which the shares of stock issuable
upon exercise of this Warrant may be purchased, is Twenty Five and One Sixteenth
Dollars ($25.0625) (the "Exercise Price").

         4.       EXERCISE PERIOD. This Warrant may be exercised from the
Closing Date (as defined in the Purchase Agreement) up to and including July
___, 2005 (the "Exercise Period"). If not exercised in compliance with Section 5
during this period, this Warrant and all rights granted under this Warrant shall
expire and lapse.

         5.       TENDER; ISSUANCE OF CERTIFICATES.

                  a.       This Warrant may be exercised, in whole or in part,
         by (i) actual delivery of (a) the Exercise Price in cash, (b) a duly
         executed Warrant Exercise Form, a copy of which is attached to this
         Warrant as Exhibit A, properly executed by the Registered
         Owner, or assigns, of this Warrant, and (c) by surrender of this
         Warrant, or (ii) if the resale of the Warrant Shares by the Registered
         Owner is not then registered pursuant to an effective registration
         statement under the Securities Act, delivery to the Company of (i) the
         Warrant and (ii) a written notice of an election to effect a "Cashless
         Exercise" (as defined below) for the Warrant Shares
         specified in the Warrant Exercise Form. The Warrant Shares so purchased
         shall be deemed to be issued to the Registered Owner as of the close of
         business on the Business Day on which this Warrant shall have been
         surrendered, the completed Warrant Exercise Form shall have been
         delivered and payment shall have been made for such shares as set forth
         above. Unless otherwise directed in writing by the Company, the
         payment, Warrant and Warrant Exercise Form must be delivered to the
         principal office of the Company either in person or as set for in
         Section 14.

                  b.       Commencing ninety (90) days from the Filing Date (as
         defined in the Registration Rights Agreement), if, and only if, at the
         time of exercise of this Warrant, the Warrant Shares are not saleable
         pursuant to an effective registration statement, then in addition to
         the exercise of all or a part of this Warrant by payment of the
         Exercise Price in cash as provided above, and in lieu of such payment,
         the Registered Owner shall have the right to effect a cashless exercise
         (a "Cashless Exercise"). In the event of a Cashless
         Exercise, the Registered Owner may exercise this Warrant in whole or in
         part by surrendering this Warrant, together with a duly executed
         Warrant Exercise Form, in exchange for the number of shares of Common
         Stock equal to the product of (x) the number of shares as to which this
         Warrant is being exercised multiplied by (y) a fraction, the numerator
         of which is the Per Share Market Value of the Common Stock less the
         Exercise Price then in effect and the denominator of which is the Per
         Share Market Value (in each case adjusted for fractional shares as
         herein provided).

                  c.       In lieu of physical delivery of the Warrant Shares,
         provided the Company's transfer agent is participating in the
         Depositary Trust Company ("DTC") Fast Automated Securities Transfer
         ("FAST") program, upon request of the Registered Owner and in
         compliance with the provisions hereof, the Company shall use its best
         efforts to cause its transfer agent to electronically transmit the
         Warrant Shares to the Registered Owner by crediting the account of the
         Registered Owner's Prime Broker with DTC

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         through its Deposit Withdrawal Agent Commission system. The time period
         for delivery described herein shall apply to the electronic
         transmittals described herein. The Company and its transfer agent shall
         be entitled to rely in good faith on the instructions which reasonably
         appear on their face to be issued on behalf of the Holder, and will
         have no liability with respect to any misdelivery of Warrant Shares if
         such instructions are followed.

                  d.       Certificates for the Warrant Shares so purchased,
         representing the aggregate number of shares specified in the Warrant
         Exercise Form, shall be delivered to the Registered Owner within a
         reasonable time, not exceeding three (3) Business Days, after this
         Warrant shall have been so exercised. The certificates so delivered
         shall be in such denominations as may be reasonably requested by the
         Registered Owner and shall be registered in the name of the Registered
         Owner or such other name as shall be designated by such Registered
         Owner. If this Warrant shall have been exercised only in part, then,
         unless this Warrant has expired, the Company shall, at its expense, at
         the time of delivery of such certificates, deliver to the Registered
         Owner a new Warrant representing the number of shares with respect to
         which this Warrant shall not then have been exercised.

         6.       ADJUSTMENT OF EXERCISE PRICE.

                  a.       Common Stock Dividends; Common Stock Splits; Reverse
         Common Stock Splits. If the Company, at any time while this Warrant is
         outstanding, (a) shall pay a stock dividend on its Common Stock, (b)
         subdivide outstanding shares of Common Stock into a larger number of
         shares, (c) combine outstanding shares of Common Stock into a smaller
         number of shares or (d) issue by reclassification of shares of Common
         Stock any shares of capital stock of the Company, then the Exercise
         Price thereafter shall be determined by multiplying the Exercise Price
         by a fraction the numerator of which shall be the number of shares of
         Common Stock (excluding treasury shares, if any) outstanding before
         such event and the denominator of which shall be the number of shares
         of Common Stock outstanding after such event. Any adjustment made
         pursuant to this paragraph (6)(a) shall become effective on the
         effective date of any dividend, distribution, subdivision, combination
         or re-classification.

         b.       Rights; Warrants. If the Company, at any time while this
         Warrant is outstanding, shall issue rights or warrants to all of the
         holders of Common Stock entitling them to subscribe for or purchase
         shares of Common Stock at a price per share less than the Exercise
         Price and similar rights are not concurrently distributed to the
         Registered Holder, the Exercise Price shall thereafter be determined by
         multiplying the Exercise Price by a fraction, the denominator of which
         shall be the number of shares of 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 the numerator of which shall be the
         number of shares of 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 the Exercise Price. Such
         adjustment shall be made whenever such rights or warrants are issued,
         and shall become

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         effective immediately after the record date for the determination of
         shareholders entitled to receive such rights or warrants.

                  c.       Subscription Rights. If the Company, at any time
         while this Warrant is outstanding, shall distribute to all of the
         holders of Common Stock evidence of its indebtedness or assets or
         rights or warrants to subscribe for or purchase any security (excluding
         those referred to in paragraphs 6(a) and (b) above) and similar rights
         are not concurrently distributed to the Registered Owner, then in each
         such case the Exercise Price at which the Warrant shall thereafter be
         exercisable shall be determined by multiplying the Exercise Price in
         effect immediately prior to the record date fixed for determination of
         shareholders entitled to receive such distribution by a fraction, the
         denominator of which shall be the Per Share Market Value of Common
         Stock determined as of the record date mentioned above, and the
         numerator of which shall be such Per Share Market Value of the Common
         Stock 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 Common Stock as
         determined by the Board of Directors in good faith; provided, however,
         that in the event of a distribution exceeding ten percent (10%) of the
         net assets of the Company, such fair market value shall be determined
         by one Appraiser selected in good faith by the Registered Owner of the
         Warrant; and provided, further, that the Company, after receipt of the
         determination by such Appraiser shall have the right to select in good
         faith an additional Appraiser meeting similar qualifications in which
         case the fair market value shall be equal to the average of the
         determinations by each such Appraiser. Such adjustment shall be made
         whenever any such distribution is made and shall become effective
         immediately after the record date mentioned above.

                  d.       Rounding. All calculations under this Section 6 shall
         be made to the nearest cent or the nearest l/l00th of a share, as the
         case may be.

                  e.       Notice of Adjustment. Whenever the Exercise Price is
         adjusted pursuant to paragraphs 6(a), (b) or (c), the Company shall
         promptly deliver to the Registered Owner a notice setting forth the
         Exercise Price after such adjustment and setting forth a brief
         statement of the facts requiring such adjustment.

                  f.       Events Triggering Redemption. The following are
         "Redemption Events" under this Section 6.(f): (A) any reclassification
         of the Common Stock which would have a material adverse affect on the
         rights of holders of the securities into which the Warrant is
         exercisable, (B) any suspension from listing or delisting of the Common
         Stock such that the Common Stock is not listed on Nasdaq or any
         Subsequent Market for a period of ten consecutive Trading Days, or (C)
         a breach by the Company of its obligations under this Warrant, but only
         if such breach continues for a period of at least 10 Trading Days after
         the Company is notified by any Holder of such breach.

         On and after notice of the occurrence of a Redemption Event, the Holder
shall have the option to require the Company to redeem (the "Redemption Right")
in cash and subject to the terms of payment provisions set forth in Section 5,
from funds legally available therefor at the time of such redemption, the
Holder's shares of Common Stock immediately theretofore

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acquirable and receivable upon the exercise of such Holder's Warrant at a price
per share equal to the product of (i) the difference between (A) Average Price
immediately preceding the effective date, the date of the closing, date of
occurrence or the date of the announcement, as the case may be, of the
Redemption Event triggering such Redemption Right and (B) the Exercise Price,
and (ii) the number of shares of Common Stock that would have been issued upon
the exercise of the Warrant immediately prior to such Redemption Event.

                  g.       Notice of Certain Events. If:

                           (i)      the Company shall declare a dividend (or any
                  other distribution) on its Common Stock; or

                           (ii)     the Company shall declare a special
                  nonrecurring cash dividend on or a redemption of its Common
                  Stock; or

                           (iii)    the Company shall authorize the granting to
                  the 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; or

                           (iv)     the approval of any shareholders of the
                  Company shall be required in connection with any
                  reclassification of the Common Stock of the Company, 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, or any compulsory share exchange whereby the
                  Common Stock is converted into other securities, cash or
                  property; or

                           (v)      the Company shall authorize the voluntary or
                  involuntary dissolution, liquidation or winding up of the
                  affairs of the Company;

         then the Company shall cause to be filed at each office or agency
         maintained for the purpose of exercise of this Warrant, and shall cause
         to be delivered to the Registered Owner, at least 10 Business 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
         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 Common Stock of record shall
         be entitled to exchange their shares of Common Stock for securities,
         cash or other property deliverable upon such reclassification,
         consolidation, merger, sale, transfer or share exchange; provided,
         however, 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.

                  h.       Adjustment to Exercise Price. If the Company, at any
         time while this Warrant is outstanding, takes any of the actions
         described in this Section 6, then, in order

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to prevent dilution of the rights granted under this Warrant, the Exercise Price
will be subject to adjustment from time to time as provided in this Section 6.

                  (i)      Adjustment of Exercise Price upon Issuance of Common
         Stock. If at any time while this Warrant is outstanding the Company
         issues or sells, or is deemed to have issued or sold, any shares of
         Common Stock (other than (1) the Underlying Shares or other shares of
         Common Stock issued to any Holder or shares of Common Stock deemed to
         have been issued by the Company in connection with an Approved Stock
         Plan, (2) the shares of Common Stock issuable upon the exercise of any
         options or warrants outstanding on the date hereof and listed in
         Schedule 2.1(c) of the Purchase Agreement, (3) the securities to be
         issued in the transactions set forth on such Schedule 2.1(c), (4) share
         of Common Stock issuable upon conversion of the Series A Preferred
         Stock, (5) the shares of Common Stock issuable upon an Underwritten
         Offer (as defined in the Registration Rights Agreement) occurring
         before December 31, 2001, or (6) the shares of Common Stock issued or
         deemed to have been issued as consideration for an acquisition by the
         Company of a division, assets or business (or stock constituting any
         portion thereof) from another person) for a consideration per share
         less than the Exercise Price in effect immediately prior to such
         issuance or sale, then immediately after such issue or sale, the
         Exercise Price then in effect shall be reduced to an amount equal to
         the lesser of: (1) the Adjusted Price in such issuance or sale or (2)
         the Average Price on the date of such issuance or sale. For the purpose
         of determining the adjusted Exercise Price under this Section 6(h)(i),
         the following shall be applicable:

                  (A)      Issuance of Options. If at any time while this
         Warrant is outstanding the Company in any manner grants any rights or
         options to subscribe for or to purchase Common Stock or any stock or
         other securities convertible into or exchangeable for Common Stock
         (other than (1) the Underlying Shares or shares of Common Stock deemed
         to have been issued by the Company in connection with an Approved Stock
         Plan, (2) the shares of Common Stock issuable upon the exercise of any
         options or warrants outstanding on the date hereof and listed in
         Schedule 2.1(c) of the Purchase Agreement, (3) the securities to be
         issued in the transactions set forth on such Schedule 2.1(c), (4) share
         of Common Stock issuable upon conversion of the Series A Preferred
         Stock, (5) the shares of Common Stock issuable upon an Underwritten
         Offer (as defined in the Registration Rights Agreement) occurring
         before December 31, 2001, or (6) the shares of Common Stock issued or
         deemed to have been issued as consideration for an acquisition by the
         Company of a division, assets or business (or stock constituting any
         portion thereof) from another person) (such rights or options being
         herein called "Options" and such convertible or exchangeable stock or
         securities being herein called "Convertible Securities") and the price
         per share for which Common Stock is issuable upon the exercise of such
         Options or upon conversion or exchange of such Convertible Securities
         is less than the Exercise Price in effect immediately prior to such
         grant, then the Exercise Price shall be adjusted to equal to the lesser
         of: (1) the Adjusted Price upon the exercise of such

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         Options or upon the conversion or exchange of such Convertible
         Securities or (2) the Average Price on the date of such grant. No
         adjustment of the Exercise Price shall be made upon the actual issuance
         of such Common Stock or of such Convertible Securities upon the
         exercise of such Options or upon the actual issuance of such Common
         Stock upon conversion or exchange of such Convertible Securities.

                  (B)      Issuance of Convertible Securities. If at any time
         while this Warrant is outstanding the Company in any manner issues or
         sells any Convertible Securities (other than the Underlying Shares or
         shares of Common Stock deemed to have been issued by the Company in
         connection with an Approved Stock Plan, shares of Common Stock issuable
         upon the exercise of any options or warrants outstanding on the date
         hereof and listed in Schedule 2.1(c) of the Purchase Agreement, or the
         securities to be issued in the transactions set forth on such Schedule
         2.1(c) or any securities to be issued in an Underwritten Offering (as
         defined in the Registration Rights Agreement) before December 31, 2001
         or shares of Common Stock issued or deemed to have been issued as
         consideration for an acquisition by the Company of a division, assets
         or business (or stock constituting any portion thereof) from another
         person) and the price per share for which Common Stock is issuable upon
         such conversion or exchange is less than the Exercise Price in effect
         immediately prior to issuance or sale, then the Exercise Price shall be
         adjusted to equal to the lesser of: (1) the Adjusted Price issuable
         upon the conversion or exchange of such Convertible Securities or (2)
         the Average Price on the date of such issuance or sale.

                  (C)      Change in Option Price or Rate of Conversion. If
         there is a change at any time in (i) the purchase price provided for in
         any Options, (ii) the additional consideration, if any, payable upon
         the issuance, conversion or exchange of any Convertible Securities or
         (iii) the rate at which any Convertible Securities are convertible into
         or exchangeable for Common Stock, then the Exercise Price in effect at
         the time of such change shall be readjusted to the lesser of (1) the
         Exercise Price which would have been in effect at such time had such
         Options or Convertible Securities still outstanding provided for such
         changed purchase price, additional consideration or changed conversion
         rate, as the case may be, at the time initially granted, issued or sold
         or (2) the Average Price on the date of such change; provided that no
         adjustment shall be made if such adjustment would result in an increase
         of the Exercise Price then in effect.

                  (D)      Effect on Exercise Price of Certain Events. For
         purposes of determining the adjusted Exercise Price under this Section
         6, the following shall be applicable:

                           (I) Calculation of Consideration Received. If any
                  Common Stock, Options or Convertible Securities are issued or
                  sold or deemed to have been issued or sold for cash, the
                  consideration received therefor will be deemed to be the net
                  amount received by the Company therefor. In case any Common
                  Stock, Options or Convertible Securities are issued or

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                  sold for a consideration other than cash, the amount of the
                  consideration other than cash received by the Company will be
                  the fair value of such consideration, except where such
                  consideration consists of securities, in which case the amount
                  of consideration received by the Company will be the Average
                  Price of such security on Trading Day immediately preceding
                  the date of receipt thereof. In case any Common Stock, Options
                  or Convertible Securities are issued to the owners of the
                  non-surviving entity in connection with any merger in which
                  the Company is the surviving entity the amount of
                  consideration therefor will be deemed to be the fair value of
                  such portion of the net assets and business of the
                  non-surviving entity as is attributable to such Common Stock,
                  Options or Convertible Securities, as the case may be. The
                  fair value of any consideration other than cash or securities
                  will be determined jointly by the Company and the registered
                  owners of a majority of the Underlying Shares of Warrants then
                  outstanding. If such parties are unable to reach agreement
                  within ten (10) days after the occurrence of an event
                  requiring valuation (the "Valuation Event"), the fair value of
                  such consideration will be determined within forty-eight (48)
                  hours of the tenth (10th) day following the Valuation Event by
                  an Appraiser selected in good faith by the Company and agreed
                  upon in good faith by the holders of a majority of the
                  Warrants then outstanding. The determination of such Appraiser
                  shall be binding upon all parties absent manifest error.

                           (II)     Integrated Transactions. In case any Option
                  is issued in connection with the issue or sale of other
                  securities of the Company, together comprising one integrated
                  transaction in which no specific consideration is allocated to
                  such Options by the parties thereto, the Options will be
                  deemed to have been issued for an aggregate consideration of
                  $.001.

                           (III)    Treasury Shares. The number of shares of
                  Common Stock outstanding at any given time does not include
                  shares owned or held by or for the account of the Company, and
                  the disposition of any shares so owned or held will be
                  considered an issue or sale of Common Stock.

                           (IV)     Record Date. If the Company takes a record
                  of the holders of Common Stock for the purpose of entitling
                  them (1) to receive a dividend or other distribution payable
                  in Common Stock, Options or in Convertible Securities or (2)
                  to subscribe for or purchase Common Stock, Options or
                  Convertible Securities, then such record date will be deemed
                  to be the date of the issue or sale of the shares of Common
                  Stock deemed to have been issued or sold upon the declaration
                  of such dividend or the making of such other distribution or
                  the date of the granting of such right of subscription or
                  purchase, as the case may be.

                           (V)      Certain Events. If any event occurs of the
                  type contemplated by the provisions of this Section 6(h)(i)
                  (subject to the

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                  exceptions stated therein) but not expressly provided for by
                  such provisions (including, without limitation, the granting
                  of stock appreciation rights, phantom stock rights or other
                  rights with equity features), then the Company's Board of
                  Directors will make an appropriate adjustment in the Exercise
                  Price so as to protect the rights of the Registered Owner, or
                  assigns, of this Warrant; provided, however, that no such
                  adjustment will increase the Exercise Price as otherwise
                  determined pursuant to this Section 6(h).

                           (VI)     "Common Stock Deemed Outstanding" means, at
                  any given time, the number of shares of Common Stock issued
                  and outstanding at such time, plus the number of shares of
                  Common Stock deemed to be outstanding pursuant to Sections
                  7.1(g)(ii)(A) and 7(g)(ii)(B) hereof regardless of whether the
                  Options or Convertible Securities are actually exercisable at
                  such time, but excluding any shares of Common Stock issuable
                  upon exercise of the Warrants

         Notwithstanding the foregoing, in no event shall any provision in this
Section 6 cause the Exercise Price to be greater than the Exercise Price on the
date of issuance of this Warrant.

                  i.       Adjustment of Number of Shares. Upon each adjustment
         of the Exercise Price as a result of the calculations made in this
         Section 6, this Warrant shall thereafter evidence the right to receive,
         at the adjusted Exercise Price, that number of shares of Common Stock
         (calculated to the nearest one-hundredth) obtained by dividing (i) the
         product of the aggregate number of shares covered by this Warrant
         immediately prior to such adjustment and the Exercise Price in effect
         immediately prior to such adjustment of the Exercise Price by (ii) the
         Exercise Price in effect immediately after such adjustment of the
         Exercise Price.

         7.       OPTIONAL REDEMPTION.

                  a.       Optional Redemption. This Warrant is redeemable in
         whole or in part at the option of the Company at any time, subject to
         the conditions herein, (the "Optional Redemption"):

                           (i)      Commencing on the First Business Day
                  immediately after the first anniversary of the Closing Date,
                  provided that the closing price of the Company's Common Stock
                  is greater than Fifty and One Eighth Dollars ($50.125) for
                  twenty (20) consecutive Trading Days and subject to the other
                  conditions set forth herein.

                           (ii)     After the Original Issue Date, if the
                  Warrants outstanding represent less than 5% of the Warrant
                  Shares to be issued upon exercise of the Warrants issued on
                  the Original Issue Date remain unexercised, excluding from
                  such calculation any Warrants held by Affiliate of the Company
                  as of such date (other that any Holder or transferees or
                  successors or assigns thereof if such Holder is deemed to be
                  an Affiliate solely by reason of its holding of Preferred
                  Stock and Warrants)

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                  b.       Redemption Notice. Subject to the conditions set
         forth in Section 7(a), so long as (i) any Registration Statement
         required to be filed and be effective pursuant to the Registration
         Rights Agreement is then in effect and has been in effect and sales of
         all of the Registrable Securities can be made thereunder for at least
         twenty (20) days prior to the Redemption Notice Date (as defined below)
         and (ii) the Company has a sufficient number of authorized shares of
         Common Stock reserved for issuance upon full exercise of the
         outstanding Warrants, upon ten (10) Business Days' prior written notice
         to the Registered Owner (a "Redemption Notice"), the Warrant may be
         redeemed by the Company, in whole or in part, at a redemption price
         equal to $.001 per Warrant (the "Redemption Price").

                  c.       Mechanics of Redemption. The Company shall exercise
         its right to redeem by delivering its Redemption Notice by facsimile
         and overnight courier to each Registered Owner (such date that the
         Redemption Notice is given on the "Redemption Notice Date"). Such
         Redemption Notice shall indicate (A) the Redemption Price, (B) each
         Registered Owner's pro rata allocation of such maximum amount, and (C)
         a confirmation of the date that the Company shall effect the redemption
         (the "Redemption Date"). The Redemption Date shall be not less than ten
         (10) Business Days and not more than sixty (60) calendar days after the
         Redemption Notice Date. Notwithstanding anything in this Section 7(c),
         the Company shall convert any Warrant pursuant to Section 5 if the
         Warrant Exercise Form for a Warrant submitted for exercise is (i)
         received by the Company, together with the Exercise Price in cash and
         the Warrant, before the Redemption Date, (ii) for an Exercise Price
         greater than or equal to the Redemption Price (appropriately adjusted
         in accordance with the terms hereof) and (iii) in excess of such
         Registered Owner's pro rata allocation of the maximum Redemption Price
         indicated in its Redemption Notice.

                  d.       Payment of Redemption Price. The Company shall pay
         the applicable Redemption Price to the Registered Owner of the Warrants
         being redeemed in cash on the Redemption Date (or, if later, the
         Business Day following the Business Day upon which the Company receives
         the Warrant). If the Company shall fail to pay the applicable
         Redemption Price to such Registered Owner on the Redemption Date, in
         addition to any remedy such Registered Owner may have under this
         Warrant and the Purchase Agreement, such unpaid amount shall bear
         interest at the rate of 2.0% per month until paid in full.

         8.       NASDAQ LIMITATION. If on any date (the "Determination Date")
(a) the Common Stock is listed for trading on Nasdaq, (b) the Exercise Price
then in effect is such that the aggregate number of shares of Common Stock that
would then be issuable upon exercise in full of the then outstanding Warrants as
if all such Warrants were exercised on such Determination Date (without regard
to any limitations on exercises) and as payment of interest thereon, as would
equal or exceed 20% of the number of shares of the Common Stock outstanding
immediately prior to the "Closing Date" (the "Issuable Maximum"), and (c) the
Company shall not have previously obtained the vote of the shareholders of the
Company (the "Shareholder Approval"), if any, as may be required by the
applicable rules and regulations of Nasdaq (or any successor entity) to approve
the issuance of shares of Common Stock in excess of the Issuable

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Maximum in a private placement whereby shares of Common Stock are deemed to have
been issued at a price that is less than the greater of book value or fair
market value of the Common Stock, then with respect to the aggregate number of
Warrants then held by the Holders for which an exercise in accordance with the
Exercise Price would result in an issuance of shares of Common Stock in excess
of such Holder's pro rata allocation (as described below) of the Issuable
Maximum (the "Excess Amount"), the Company may elect to pay cash to the Holders
in an amount equal to the product of the Average Price on the Determination Date
multiplied by the number of shares of Common Stock that would be issued upon the
exercise of the Warrants resulting in the Excess Amount (the "Prepayment
Amount"). Any such election by the Company must be made in writing to the
Holders within five (5) Trading Days after the first such Determination Date and
the payment of such Prepayment Amount applicable to such prepayment must be made
in full to the Holders with ten (10) Business Days after the date such notice is
delivered. If the Company does not deliver timely a notice of its election to
prepay under this Section or shall, if it shall have delivered such a notice,
fail to pay the Prepayment Amount hereunder within ten (10) Business Days
thereafter, then each Holder shall have the option by written notice to the
Company, to, if applicable, declare any such notice given by the Company, if
given, to be null and void and require the Company to either: (i) use its best
efforts to obtain the Shareholder Approval applicable to such issuance as soon
as is possible, but in any event not later than the 60th day after such request
unless the Company has previously used its best efforts to, but has failed to,
obtain such approval (provided, that if the Company shall fail to obtain the
Shareholder Approval during such 60-day period, the Holder may demand the cash
payment set forth in Section 8(ii) herein) or (ii) pay cash to such Holder,
within five (5) Business Days of such Holder's notice, in an amount equal to the
Prepayment Amount for such Holder's portion of the Excess Amount. The payment of
the Prepayment Amount to each Holder pursuant to this Section shall be
determined on a pro rata basis upon the number of shares of Common Stock
issuable upon the exercise of the Warrants held by such Holder on the
Determination Date which is in excess of the pro rata allocation of the Issuable
Maximum. If the Company fails to pay the Prepayment Amount in full pursuant to
this Section within five (5) Business Days after the date payable, the Company
will pay interest thereon at a rate of 20% per annum to the converting Holder,
accruing interest daily from the date of conversion until such amount, plus all
such interest thereon, if any, is paid in full. Until the Company has received
the Shareholder Approval no Holder shall be issued, upon exercise of a Warrant ,
shares of Common Stock in an amount greater than such Holder's allocated portion
of the Issuable Maximum pursuant to Section 8.

         9.       [INTENTIONALLY OMITTED.]

         10.      OFFICER'S CERTIFICATE. Whenever the number of shares
purchasable upon exercise shall be adjusted as required by the provisions of
Section 6, the Company shall forthwith file in the custody of its Secretary or
an Assistant Secretary at its principal office and with its stock transfer
agent, if any, an officer's certificate showing the adjusted number of shares
determined as herein provided, setting forth in reasonable detail the facts
requiring such adjustment and the manner of computing such adjustment. Each such
officer's certificate shall be signed by the chairman, president or chief
financial officer of the Company and by the secretary or any assistant secretary
of the Company. Each such officer's certificate shall be made available at all
reasonable times for inspection by any Registered Owner of the Warrants and the
Company

                                       11
<PAGE>   12

shall, forthwith after each such adjustment, deliver a copy of such certificate
to the each of the Registered Owners.

         11.      DEFINITIONS. Capitalized terms used herein and not otherwise
defined herein shall have the meanings given to such terms in the Purchase
Agreement. As used in this Warrant, the following terms have the following
meanings:

         "Adjusted Price" means the product of (x) the Exercise Price in effect
immediately prior to such issuance or sale or grant multiplied by (y) the
quotient determined by dividing (1) the sum of (I) the product of (A) the
Exercise Price in effect immediately before the issuance or sale or grant
multiplied by (B) the number of shares of Common Stock Deemed Outstanding (as
defined below) immediately prior to such issuance or sale or grant, plus (II)
the consideration, if any, received by the Company upon such issue or sale, by
(2) the product of (I) the Exercise Price in effect immediately before the
issuance or sale or grant, multiplied by (II) number of shares of Common Stock
Deemed Outstanding (as defined below) immediately after such issue or sale or
grant.

         "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.

         "Appraiser" shall mean a nationally recognized or major regional
investment banking firm or firm of independent certified public accountants of
recognized standing.

         "Approved Stock Plan" shall mean any contract, plan or agreement which
has been approved by the Board of Directors of the Company, pursuant to which
the Company's securities may be issued to any employee, officer, director or
consultant.

         "Average Price" has the meaning set forth in the Certificate of
Designation.

         "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 generally are authorized or required by law or other government actions
to close.

         "Certificate of Designation" has the meaning assigned to it in Section
6(f).

         "Closing" has the meaning set forth in Section 1.2(a) of the Purchase
Agreement.

         "Closing Date" has the meaning set forth in the Certificate of
Designation.

         "Common Stock" means the shares of the Company's Common Stock, par
value $0.001 per share.

         "Common Stock Deemed Outstanding" has the meaning assigned to it in
Section (h)(i)(D)(VI).

                                       12
<PAGE>   13

         "Company" means Level 8 Systems, Inc., a New York corporation.

         "Convertible Securities" has the meaning assigned to it in Section
6(h)(i)(A).

         "Determination Date" has the meaning assigned to it in Section 8.

         "Distribution Date" has the meaning assigned to it in Section 22.

         "Exercise Period" has the meaning assigned to it the Section 4.

         "Exercise Price" has the meaning assigned to it in Section 3.

         "Excess Amount" has the meaning assigned to it in Section 8.

         "Issuable Maximum" has the meaning assigned to it in Section 8.

         "Options" has the meaning assigned to it in Section 6(h)(i)(A).

         "Per Share Market Value" means on any particular date (i) the closing
bid price per share of the Common Stock on such date on the Nasdaq National
Market or other registered national stock exchange on which the Common Stock is
then listed or if there is no such price on such date, then the closing bid
price on such exchange or quotation system on the date nearest preceding such
date, or (ii) if the Common Stock is not listed then on the Nasdaq National
Market or the Nasdaq SmallCap Market or any registered national stock exchange,
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 (iii) if the Common Stock is 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 holder of this Warrant; provided,
however, that the Company, after receipt of the determination by such Appraiser,
shall have the right to select, in good faith, an additional Appraiser, in which
case the fair market value shall be equal to the average of the determinations
by each such Appraiser; and provided, further that all determinations of the Per
Share Market Value shall be appropriately adjusted for any stock dividends,
stock splits or other similar transactions during such period.

         "Preferred Stock" means the shares of the Series B 4% convertible
preferred stock issued pursuant to the Company's Certificate of Designation and
sold pursuant to the Purchase Agreement.

         "Prepayment Amount" has the meaning assigned to it in Section 8.

         "Purchase Agreement" means that certain Securities Purchase Agreement,
dated July 20, 2000, among the Company and the Purchasers.

         "Purchaser" has the meaning set forth in the Purchase Agreement.

         "Redemption Date" has the meaning assigned to it in Section 7(c).

                                       13
<PAGE>   14

         "Redemption Event" has the meaning assigned to it in Section 6(f).

         "Redemption Notice" has the meaning assigned to it in Section 7(b).

         "Registered Owner" means the person identified on the face of this
Warrant as the registered owner hereof or such other person as shown on the
records of the Company as being the registered owner of this Warrant.

         "Redemption Price" has the meaning assigned to it in Section 7(b)
hereof.

         "Registrable Securities" has the meaning assigned to it in the
Registration Rights Agreement.

         "Registration Rights Agreement" means that certain Registration Rights
Agreement, dated July 20, 2000, among the Company and the Purchasers.

         "Rights" has the meaning assigned to it in Section 22.

         "Shareholder Approval" has the meaning assigned to it in Section 8.

         "Trading Day(s)" means any day on which the primary market on which
shares of Common Stock are listed is open for trading.

         "Underlying Shares" has the meaning assigned to it in Section 2.1(d) of
the Purchase Agreement.

         "Warrant(s)" means the warrants issuable at the Closing.

         12.      REGISTRATION RIGHTS. The Company will undertake the
registration of the Common Stock into which such Warrants are exercisable at
such times and upon such terms pursuant to the provisions of the Registration
Rights Agreement.

         13.      NOTICES. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be deemed to have
been received (a) upon hand delivery (receipt acknowledged) or delivery by telex
(with correct answer back received), telecopy or facsimile (with transmission
confirmation report) at the address or number designated below (if received by
8:00 p.m. EST where such notice is to be received), or the first Business Day
following such delivery (if received after 8:00 p.m. EST where such notice is to
be received) or (b) on the second Business Day following the date of mailing by
express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications are (i) if to the Company to Level 8 Systems, Inc., 9000
Regency Parkway, Cary, North Carolina 27571, Telephone: (919) 380-5005,
Facsimile: (919) 461-2690, Attention: Dennis McKinnie, with copies to Powell,
Goldstein, Frazer & Murphy LLP, 16th Floor, 191 Peachtree Street, Atlanta, GA
30303, Attention: Scott D. Smith, Esq., Facsimile: (404) 572-6999 and (ii) if to
the Registered Owner to the address set forth on Schedule II to the Purchase
Agreement with copies to the addressees set forth on Schedule II to the
Registration Rights Agreement or such other address as may be designated in
writing hereafter, in the same manner, by such person.

                                       14
<PAGE>   15

         14.      COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. The Company
covenants that if any shares of Common Stock required to be reserved for
purposes of exercise of Warrants hereunder require registration with or approval
of any governmental authority under any Federal or state law, or any national
securities exchange, before such shares may be issued upon exercise, the Company
will use its best efforts to cause such shares to be duly registered or
approved, as the case may be.

         15.      FRACTIONAL SHARES. Upon any exercise 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 Registered Owner shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.

         16.      PAYMENT OF TAX UPON ISSUE OF TRANSFER. The issuance of
certificates for shares of the Common Stock upon exercise of the Warrants shall
be made without charge to the Registered Owners 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 exercise in a name other than that of the
Registered Owner of such Warrant 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.

         17.      WARRANTS OWNED BY COMPANY DEEMED NOT OUTSTANDING. In
determining whether the holders of the outstanding Warrants have concurred in
any direction, consent or waiver under this Warrant, Warrants which are owned by
the Company or any other obligor on the Warrants or by any person directly or
indirectly controlling or controlled by or under direct or indirect common
control with the Company or any other obligor on the Warrants shall be
disregarded and deemed not to be outstanding for the purpose of any such
determination; provided that any Warrants owned by the Purchasers (as defined in
the Purchase Agreement) shall be deemed outstanding for purposes of making such
a determination. Warrants so owned which have been pledged in good faith may be
regarded as outstanding if the pledgee establishes to the satisfaction of the
Company the pledgee's right so to act with respect to such Warrants and that the
pledgee is not the Company or any other obligor upon the Warrants or any person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the Company or any other obligor on the Warrants.

         18.      EFFECT OF HEADINGS; REFERENCES. The section headings herein
are for convenience only and shall not affect the construction hereof.
References herein to Sections are to Sections of this Warrant, unless otherwise
expressly provided.

         19.      NO RIGHTS AS STOCKHOLDER. This Warrant shall not entitle the
Registered Owner to any rights as a stockholder of the Company, including
without limitation, the right to vote, to receive dividends and other
distributions, or to receive notice of, or to attend, meetings of

                                       15
<PAGE>   16

stockholders or any other proceedings of the Company, unless and to the extent
exercised for shares of Common Stock in accordance with the terms hereof.

         20.      CERTAIN ACTIONS PROHIBITED. The Company will not, by amendment
of its charter or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. Without limiting the generality of the foregoing, the Company (i)
will not increase the par value of any shares of Common Stock receivable upon
the exercise of this Warrant above the Exercise Price then in effect, and (ii)
will take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.

         21.      SHAREHOLDER RIGHTS PLAN. Notwithstanding the foregoing, in the
event that the Company shall distribute "poison pill" rights pursuant to a
"poison pill" shareholder rights plan (the "Rights"), the Company shall, in lieu
of making any adjustment pursuant to Section 6, make proper provision so that
each Registered Owner who exercises a Warrant after the record date for such
distribution and prior to the expiration or redemption of the Rights shall be
entitled to receive upon such exercise, in addition to the shares of Common
Stock issuable upon such exercise, a number of Rights to be determined as
follows: (i) if such exercise occurs on or prior to the date for the
distribution to the holders of Rights of separate certificates evidencing such
Rights (the "Distribution Date"), the same number of Rights to which a holder of
a number of shares of Common Stock equal to the number of shares of Common Stock
issuable upon such exercise at the time of such exercise would be entitled in
accordance with the terms and provisions of and applicable to the Rights; and
(ii) if such exercise occurs after the Distribution Date, the same number of
Rights to which a holder of the number of shares into which the Warrant to
exercised was exercisable immediately prior to the Distribution Date would have
been entitled on the Distribution Date in accordance with the terms and
provisions of and applicable to the Rights, and in each case subject to the
terms and conditions of the Rights.

         22.      SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon and
inure to the benefit of the Registered Owners and its assigns, and shall be
binding upon any entity succeeding to the Company by merger or acquisition of
all or substantially all the assets of the Company. The Company may not assign
this Warrant or any rights or obligations hereunder without the prior written
consent of the Registered Owner. The Registered Owner may assign this Warrant,
in compliance with applicable law, without the prior written consent of the
Company.

         23.      GOVERNING LAW. This Warrant 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 nonexclusive 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

                                       16
<PAGE>   17

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 for such notices to it under this Warrant 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. EACH PARTY HEREBY
IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY
TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR
ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

         IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its duly authorized officer as of the date first set forth above.

                                    LEVEL 8 SYSTEMS, INC.

                                    By: /s/ Dennis McKinnie
                                        ---------------------------------------
                                    Name: Dennis McKinnie
                                          -------------------------------------
                                    Title: Senior Vice President, Chief Legal
                                          -------------------------------------
                                           and Administrative Officer and
                                           Corporate Secretary

                                       17
<PAGE>   18

                                    EXHIBIT A

                              Warrant Exercise Form

TO:      LEVEL 8 SYSTEMS, INC.

         The undersigned hereby: (1) irrevocably subscribes for and offers to
purchase _______ shares of Common Stock of Level 8 Systems, Inc., pursuant to
Warrant No. ___ heretofore issued to ___________________ on ____________, 2000;
(2) encloses a payment of $__________ for these shares at a price of $____ per
share (as adjusted pursuant to the provisions of the Warrant); and (3) requests
that a certificate for the shares be issued in the name of the undersigned and
delivered to the undersigned at the address specified below.

         ____ The undersigned hereby certifies that the Common Stock issuable
pursuant to this Conversion Notice has been sold pursuant to a registration
statement under the Securities Act of 1933 which identifies the Holder as a
selling security holder. THIS MUST BE CHECKED FOR SHARES FREE OF RESTRICTIVE
LEGENDS TO BE ISSUED.

                  Date:                          ------------------------------

                  Investor Name:                 ------------------------------

                  Taxpayer Identification        ------------------------------

                  Number:                        ------------------------------

                  By:                            ------------------------------

                  Printed Name:                  ------------------------------

                  Title:                         ------------------------------

                  Address:                       ------------------------------

                                                 ------------------------------

                                                 ------------------------------

                  Note: The above signature should correspond exactly with the
                  name on the face of this Warrant Certificate or with the name
                  of assignee appearing in assignment form below.

AND, if said number of shares shall not be all the shares purchasable under the
within Warrant, a new Warrant Certificate is to be issued in the name of said
undersigned for the balance remaining of the shares purchasable thereunder less
any fraction of a share paid in cash and delivered to the address stated above.

                                       18
<PAGE>   19

TO:      The TRANSFER AGENT

         The issuance of the shares of Common Stock set forth above is hereby
authorized and directed by the Company.

                                    LEVEL 8 SYSTEMS INC.

                                    By:
                                        ---------------------------------------
                                    Name:
                                          -------------------------------------
                                    Title:
                                           ------------------------------------

                                       19<PAGE>   1

                                                                    EXHIBIT 10.5

                          REGISTRATION RIGHTS AGREEMENT

                  This Registration Rights Agreement (this "Agreement") is made
and entered into as of July 20, 2000, among Level 8 Systems, Inc., a Delaware
corporation (the "Company"), and the parties who have executed this Agreement
and whose names appear on Schedule I hereto (each party listed on Schedule I
hereto is sometimes individually referred to herein as a "Purchaser" and all
such parties are sometimes collectively referred to herein as the "Purchasers").

                  This Agreement is made pursuant to the Securities 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 shall
have the meanings given such terms in the Purchase Agreement. As used in this
Agreement, the following terms shall have the following meanings:

                  "Advice" has meaning set forth in Section 3(o).

                  "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 "affiliated," "controlling" and "controlled" have
meanings correlative to the foregoing.

                  "Aggregate Price" has the meaning set forth in Section 2(d).

                  "AMEX" has the meaning set forth in Section 2(d).

                  "Average Price" has the meaning set forth in the Certificate
of Designations.

                  "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 generally are authorized or required by law or other
government actions to close.

                  "Certificate of Designations" has the meaning set forth in the
Purchase Agreement.

                  "Closing Date" shall mean the Closing Date as such term is
defined in the Purchase Agreement.

                                       1
<PAGE>   2

                  "Commission" means the Securities and Exchange Commission.

                  "Common Stock" means the Company's Common Stock, par value
$0.001 per share.

                  "Effectiveness Date" means the earlier of (i) the 120th day
following the Closing Date if filing on Form S-3 is available or, if filing on
Form S-3 is unavailable, the 135th day following the Closing Date, or (ii) the
fifth day after the Company has received notice (written or oral) from the
Commission that the Commission Staff will not be reviewing the Registration
Statement or has no further comments on the Registration Statement, unless the
Required Holders consent in writing to a longer period, such consent not to be
unreasonably withheld.

                  "Effectiveness Period" has the meaning set forth in Section
2(a).

                  "Exchange Act" means the Securities Exchange Act of 1934, as
amended.

                  "Event" has the meaning set forth in Section 2(d).

                  "Filing Date" means as soon as practicable but in no event (i)
later than the 30th day following the Closing Date if filing on Form S-3 is
available or (ii) if filing on Form S-3 is unavailable, no later than the 45th
day following the Closing Date.

                  "Holder" or "Holders" means the holder or holders, as the case
may be, from time to time of Registrable Securities.

                  "Indemnified Party" has the meaning set forth in Section 5(c).

                  "Indemnifying Party" has the meaning set forth in Section
5(c).

                  "Initial Registration Statement" has the meaning set forth in
Section 2(a).

                  "Losses" has the meaning set forth in Section 5(a).

                  "Nasdaq" has the meaning set forth in Section 2(d).

                  "NYSE" has the meaning set forth in Section 2(d).

                  "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.

                  "Preferred Stock" means the Company's Series B 4% Convertible
Preferred Stock issuable at the Closing (as defined in the Purchase Agreement)
pursuant to the Purchase Agreement.

                                       2
<PAGE>   3

                  "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 in such Prospectus.

                  "Registrable Securities" means the shares of Common Stock
issued or issuable upon (i) conversion of or with respect to the Preferred
Stock, (ii) payment of dividends or any other payments in respect of the
Preferred Stock, (iii) exercise of Warrants for an aggregate 1,047,382 shares of
Common Stock, and (iv) any shares of the Company's capital stock issued with
respect to (i), (ii) or (iii) as a result of any stock split, stock dividend,
recapitalization, exchange or similar event or otherwise.

                  "Registration Delay Payment" has the meaning set forth in
Section 2(d).

                  "Registration Statement" means the Initial Registration
Statement and any additional registration statements contemplated by Sections
2(a), 2(b) and 7(d), 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 in such registration statement.

                  "Required Holders" has the meaning set forth in the
Certificates of Designation.

                  "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 158" means Rule 158 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.

                  "Securities Act" means the Securities Act of 1933, as amended.

                  "Special Counsel" means one special counsel to the Holders,
for which the Holders will be reimbursed by the Company pursuant to Section 4.

                                       3
<PAGE>   4

                  "Standstill Notice" has the meaning set forth in Section 2(e).

                  "Standstill Period" has the meaning set forth in Section 2(e).

                  "Trading Day" means a day on which Nasdaq (or such other
securities market on which the Common Stock is listed) is open for trading.

                  "Underlying Shares" means the shares of Common Stock issuable
upon conversion of the Preferred Stock and exercise of the Warrants.

                  "Underwritten Registration or Underwritten Offering" means a
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.

                  "Warrants" means the warrants issuable pursuant to the
Purchase Agreement.

         2.       Registration Requirements

                  (a)      On or prior to the Filing Date, the Company shall
prepare and file with the Commission a Registration Statement (the "Initial
Registration Statement") which shall cover all Registrable Securities for an
offering to be made on a continuous basis pursuant to a "Shelf" registration
statement under Rule 415. The Initial Registration Statement shall be on Form
S-3 or any successor form (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 in accordance herewith,
subject to the reasonable consent of the original Holders of the Registrable
Securities). The Company shall use its best efforts to cause the Initial
Registration Statement to be declared effective under the Securities Act as
promptly as possible after the filing thereof, but in any event on or prior to
the Effectiveness Date, and to keep such Initial Registration Statement
continuously effective under the Securities Act until the date which is four
years after the date that such Initial Registration Statement is declared
effective by the Commission or such earlier date when all Registrable Securities
covered by such Initial Registration Statement have been sold or may be sold
without volume restrictions pursuant to Rule 144 as determined by counsel to the
Company pursuant to a written opinion letter, addressed to the Holders and the
Company's transfer agent to such effect (the "Effectiveness Period"). The number
of shares of Common Stock initially included in the Initial Registration
Statement shall be no less than 100% of the aggregate number of shares of Common
Stock that are then issuable upon conversion of the Preferred Stock (based on
the Conversion Price (as defined in the Preferred Stock ) as would then be in
effect at such time) and the exercise of the Warrants, without regard to any
limitation on the Investor's ability to convert the Preferred Stock or exercise
the Warrants.

                  (b)      In addition to the Initial Registration Statement,
if the Holders of a majority of the Registrable Securities covered by a
Registration Statement so elect on or after September 30, 2000, an offering of
Registrable Securities pursuant to such Registration Statement may be effected
on no more than two (2) occasions in the form of an Underwritten Offering of at
least one million shares of Common Stock. In such event, and if the managing

                                       4
<PAGE>   5

underwriters advise the Company and such Holders in writing that in their
opinion the amount of Registrable Securities proposed to be sold in such
Underwritten Offering exceeds the amount of Registrable Securities which can be
sold in such Underwritten Offering, there shall be included in such Underwritten
Offering the amount of such Registrable Securities which in the opinion of such
managing underwriters can be sold, and such amount shall be allocated pro rata
among all selling security holders proposing to sell securities of the Company
in such Underwritten Offering.

                  (c)      If any of the Registrable Securities are to be sold
in an Underwritten Offering, the investment banker in interest that will
administer the offering will be selected by the Holders of a majority of the
Registrable Securities included in such offering, subject to the consent of the
Company, which will not be unreasonably withheld. No Holder may participate in
any Underwritten Offering hereunder unless such Holder (i) agrees to sell its
Registrable Securities on the basis provided in any underwriting agreements
approved by the Persons entitled hereunder to approve such arrangements and (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of such
arrangements.

                  (d)      If (i) the Initial Registration Statement covering
all the applicable Registrable Securities and required to be filed by the
Company pursuant to this Agreement is not (A) filed with the Commission on or
before the Filing Date or (B) declared effective by the Commission on or before
the applicable Effectiveness Date, (ii) on any day after the Registration
Statement has been declared effective by the Commission (A) sales of all the
Registrable Securities required to be included on a Registration Statement
cannot be made pursuant to the Registration Statement (including, without
limitation, because of a failure to keep the Registration Statement effective,
to disclose such information as is necessary for sales to be made pursuant to
the Registration Statement, or to register sufficient shares of Common Stock) or
(B) the Common Stock is not listed or included for quotation on either the
Nasdaq SmallCap Market or the Nasdaq National Market of the Nasdaq Stock Market
("Nasdaq"), the New York Stock Exchange ("NYSE") or the American Stock Exchange
(the "AMEX") or (iii) the Company shall otherwise fail to file a Registration
Statement required by Section 2(a), (each such event specified in (i), (ii) and
(iii) above, an "Event"), then, as partial relief for the damages to any Holder
by reason of any such delay in or reduction of its ability to sell the
Registrable Securities (which remedy shall not be exclusive of any other
equitable remedies), after a 60-day period commencing on the date of the Event,
the Company shall pay to each Holder an amount in cash (a "Registration Delay
Payment") equal to the purchase price of Preferred Stock as set forth in
Schedule I the Purchase Agreement (the "Aggregate Price") multiplied by .015
times the sum of: (i) the number of months (rounded upwards to the nearest 30
day increment for partial months) after the end of the Effectiveness Date and
prior to the date the Registration Statement is declared effective by the
Commission, provided, however, that there shall be excluded from such period any
delays which are primarily attributable to changes required by the Purchasers in
the Registration Statement with respect to information relating to the
Purchasers, or to the failure of the Purchasers to conduct their review of the
Registration Statement pursuant to Section 3(a); (ii) the number of months
(rounded upwards to the nearest 30 day increment for partial months) that sales
cannot be made pursuant to the Registration Statement after the Registration
Statement has been declared effective (including, without limitation, when sales
cannot be made by reason of the Company's failure to properly supplement or
amend the Prospectus in accordance with the terms

                                       5
<PAGE>   6

of this Agreement, or otherwise, but excluding when such sales cannot be made
solely by reason of any act or omission primarily attributable to the
Purchasers); and (iii) the number of months (rounded upwards to the nearest 30
day increment for partial months) that the Common Stock is not listed or
included for quotation on the Nasdaq, NYSE or AMEX or that trading thereon is
halted after the Registration Statement has been declared effective. The Company
shall pay any Required Registration Delay Payments to each Holder in cash on the
last Business Day of each month during which an Event has occurred and is
continuing. In the event the Company fails to make a Registration Delay Payment
in a timely manner, such Registration Delay Payment shall bear interest at the
rate of 1.5% per month (rounded upwards to the nearest 30 day increment for
partial months) until paid in full. No Standstill Period (as defined in
paragraph (e)) shall be included in the period an Event is deemed to be
continuing pursuant to this Section 2(d). Notwithstanding anything in this
Agreement to the contrary, in lieu of cash payment described above during the
sixty (60) day period described below, if the Event is the Company's failure to
file the Initial Registration Statement on or before the Filing Date, the
Company shall issue to the Holders Warrants to purchase additional 59,850 shares
of Common Stock for each 30-day period that passes following the Filing Date up
to a maximum of two such 30-day periods, if the Event is the failure to have the
Registration Statement declared effective on or before the Effectiveness Date,
the Company shall issue to the Holders Warrants to purchase an additional 59,850
shares of Common Stock for each 30-day period that passes following the
Effectiveness Date up to a maximum of two such 30-day periods. The Warrant
issued to each Holder shall be to purchase a portion of the aggregate number of
shares of Common Stock on a pro rata basis equal to its percentage ownership of
the then outstanding number of shares of Preferred Stock. In the case of an
occurrence on an Event specified in (ii)(B) above, the Holders shall be
obligated to elect to receive the Registration Delay Payments set forth in this
paragraph or, alternatively, the redemption or dividend adjustment set forth in
Section 7.1(f) of the Certificate of Designation and the adjustment set forth in
Section 6(f) in the Warrant. Such election shall be made by the holders of a
majority of the outstanding Preferred Stock (excluding Preferred Stock held by
Affiliates of the Company, other than persons who are Affiliates solely as a
result of the Preferred Stock and Warrants held by such person) and the Company
shall not be obligated to effect such payment or adjustment until such election
is made. The Company shall have no liability to any Holder for actions taken in
accordance with such election by the holders of a majority of the Preferred
Stock.

         (e)      Notwithstanding anything to the contrary herein, the Company
may delay preparing, filing any Registration Statement, and may withhold efforts
to cause the Registration Statement to become effective, and may delay the
filing of any supplement or amendment if the Company determines in good faith
that such supplement or amendment might, in the reasonable judgment of the
Company (i) interfere with or affect the negotiation or completion of a
transaction that is being contemplated by the Company (whether or not a final
decision has been made to undertake such transaction) or (ii) involve initial or
continuing disclosure obligations that are not in the best interests of the
Company's stockholders at such time; provided however, that (x) the Company will
give notice (a "Standstill Notice") of any such delay no less than five (5)
Business Days prior to such delay (other than an Event specified in Section
2(d)(ii)(B)), (y) such delay shall not extend for a period of more than fifteen
(15) Trading Days without the written consent of the Holder and (z) the Company
may utilize such delay no more than an aggregate of thirty (30) Trading Days in
each calendar year (each a "Standstill Period"). Each Holder agrees, upon
receipt of a Standstill Notice, forthwith to cease making offers and sales of

                                       6
<PAGE>   7

the Shares pursuant to any Registration Statement that is effective or
deliveries of the prospectus contained therein and to return to the Company, for
modification and exchange, the copies of such prospectus not theretofore
delivered by such Holder; provided that the Company shall forthwith prepare and
deliver to such Holder after such delay a reasonable number of copies of any
supplement to or amendment of such prospectus that may be necessary so that such
prospectus does not include 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 not misleading in light of the circumstances then existing.
No Registration Delay Payments shall be payable nor any Warrants issued pursuant
to Section 2(d) hereof with respect to any Standstill Period.

                  (f)      Although the Company does not currently meet the
registrant eligibility and transaction requirements for the use of Form S-3 for
the registration of the sale of Registrable Securities by the Purchasers and any
other Holders, the Company represents and warrants that it has taken, and will
take, all actions necessary and will use its best efforts to reestablish such
eligibility and, thereafter, the Company shall file all reports required to be
filed by the Company with the Commission in a timely manner so as to maintain
such eligibility for the use of Form S-3.

                  3.       Registration Procedures

                  In connection with the Company's registration obligations
hereunder, the Company shall:

                  (a)      Subject to Section 2(e), prepare and file with the
Commission on or prior to the Filing Date a Registration Statement on Form S-3
or its successor form (or if the Company is not then eligible to register for
resale the Registrable Securities on Form S-3 such registration shall be on
another appropriate form in accordance herewith (which shall include a Plan of
Distribution substantially in the form of Exhibit A annexed hereto, unless in
connection with an Underwritten Offering) or in connection with an Underwritten
Offering hereunder, such other form agreed to by the Company and by a
majority-in-interest of Holders of Registrable Securities to be covered by such
Registration Statement) (except if otherwise directed by the Holders), and use
its best efforts to cause the Registration Statement to become effective and
remain effective as provided herein; provided, however, that not less than three
(3) 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 therein by reference), the Company shall, if
reasonably practicable (i) furnish to the Holders, their Special Counsel and any
managing underwriters, copies of all such documents proposed to be filed
(including documents incorporated by reference), which documents will be subject
to the review of such Holders, their Special Counsel and such managing
underwriters, and (ii) use its best efforts to 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 such Holders and such underwriters, 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, their
Special Counsel or any managing underwriters shall reasonably object, and will
not request acceleration of such Registration Statement without prior notice to
such counsel and in either event no Registration Delay Payment shall be payable
nor

                                       7
<PAGE>   8

any Warrants issued pursuant to Section 2(d) hereof. The sections of such
Registration Statement covering information with respect to the Holders, the
Holder's beneficial ownership of securities of the Company or the Holders
intended method of disposition of Registrable Securities shall conform to the
information provided to the Company by each of the Holders.

                  (b)      (i) Prepare and file with the Commission such
amendments, including post-effective amendments, to the Registration Statement
as may be necessary to keep the Registration Statement continuously effective
for the Effectiveness Period and prepare and file with the Commission such
additional Registration Statements in order to register for resale under the
Securities Act all of the Registrable Securities; (ii) cause the related
Prospectus to be amended or supplemented by any required Prospectus supplement,
and as so supplemented or amended to be filed pursuant to Rule 424 (or any
similar provisions then in force) promulgated under the Securities Act; (iii)
respond as promptly as possible to any comments received from the Commission
with respect to the Registration Statement or any amendment thereto and as
promptly as 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. In the event the number of shares available under
a Registration Statement filed pursuant to this Agreement is insufficient to
cover 100% of the Registrable Securities issued or issuable upon conversion of
the Preferred Stock and exercise of the Warrants, the Company shall amend the
Registration Statement, or file a new Registration Statement (on the short form
available therefore, if applicable), or both, so as to cover 100% of the
Registrable Securities, in each case, as soon as practicable, but in any event
within twenty (20) Business Days after the necessity therefor arises (based on
the Conversion Price of the Preferred Stock and other relevant factors on which
the Company reasonably elects to rely). The Company shall use its best efforts
to cause such amendment and/or new Registration Statement to become effective as
soon as practicable following the filing thereof. The provisions of Section 2(d)
above shall be applicable with respect to such obligation, with the time periods
specified therein running from the day after the date on which the Company
reasonably first determines (or reasonably should have determined) the need
therefor.

                  (c)      Notify the Holders of Registrable Securities to be
sold, their Special Counsel and any managing underwriters as promptly as
possible (and, in the case of (i)(A) below, not less than three (3) Business
Days prior to such filing and, in the case of (i)(C) below, not later than the
first Business Day after effectiveness) and (if requested by any such Person)
confirm such notice in writing no later than two (2) Business Days 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 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

                                       8
<PAGE>   9

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) 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 (v) of the occurrence of any event that makes 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)      Use its best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of (i) any order suspending the effectiveness of
the Registration Statement or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.

                  (e)      If requested by any managing underwriter or the
Holders of a majority in interest of the Registrable Securities to be sold in
connection with an Underwritten Offering, (i) promptly incorporate in a
Prospectus supplement or post-effective amendment to the Registration Statement
such information as the Company reasonably agrees should be included therein
under applicable law and (ii) make all required filings of such Prospectus
supplement or such post-effective amendment as soon as practicable after the
Company has received notification of the matters to be incorporated in such
Prospectus supplement or post-effective amendment; provided, however, that the
Company shall not be required to take any action pursuant to this Section 3(e)
that would, in the opinion of counsel for the Company, violate applicable law.

                  (f)      Furnish to each Holder, their Special Counsel, and
any managing underwriters, upon request and without charge, at least one
conformed copy of each Registration Statement and each amendment thereto,
including financial statements and schedules, all documents incorporated or
deemed to be incorporated therein by reference, and all exhibits to the extent
requested by such Person (including those previously furnished or incorporated
by reference) promptly after the filing of such documents with the Commission.

                  (g)      Promptly deliver to each Holder, their Special
Counsel, and any underwriters, 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; and the Company hereby consents to the use
of such Prospectus and each amendment or supplement thereto by each of the
selling Holders and any underwriters in connection with the offering and sale of
the Registrable Securities covered by such Prospectus and any amendment or
supplement thereto; unless the Company notifies the Holders on any event
described in Sections 3(c)(ii) through 3(c)(v).

                                       9
<PAGE>   10

                  (h)      Prior to any public offering of Registrable
Securities, use its best efforts to register or qualify to the extent required
or to cooperate with the selling Holders or any underwriters 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 or underwriter 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, however, that the
Company shall not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or to take any action that would
subject it to general service of process in any such jurisdiction where it is
not then so subject or subject the Company to any material tax in any such
jurisdiction where it is not then so subject.

                  (i)      Cooperate with the Holders and any managing
underwriters to facilitate the timely preparation and delivery of certificates
representing Registrable Securities to be sold pursuant to a Registration
Statement, which certificates shall be free, to the extent permitted by
applicable law and the Purchase Agreement, of all restrictive legends, and to
enable such Registrable Securities to be in such denominations and registered in
such names as any such managing underwriters or Holders may request at least two
(2) Business Days prior to any sale of Registrable Securities.

                  (j)      Upon the occurrence of any event contemplated by
Section 3(c)(v), as promptly as 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.

                  (k)      Use its best efforts to cause all Registrable
Securities relating to such Registration Statement to be listed on Nasdaq and
any other securities exchange, quotation system, market or over-the-counter
bulletin board, if any, on which similar securities issued by the Company are
then listed as and when required pursuant to the Purchase Agreement.

                  (l)      In the case of an Underwritten Offering (i) enter
into such agreements (including an underwriting agreement in form, scope and
substance as is customary in Underwritten Offerings) and take all such other
actions in connection therewith (including those reasonably requested by any
managing underwriters and the Holders of a majority of the Registrable
Securities being sold) in order to expedite or facilitate the Underwritten
Offering of such Registrable Securities, (ii) make such representations and
warranties to such Holders and such underwriters as are customarily made by
issuers to underwriters in underwritten public offerings, and confirm the same
if and when requested; (iii) obtain and deliver copies thereof to the managing
underwriters, if any, or in the case of non-Underwritten Offerings, if
reasonably requested by the selling Holders, to use its best efforts to obtain
and deliver copies thereof to

                                       10
<PAGE>   11

such selling Holders, of opinions of counsel to the Company and updates thereof
addressed to each such underwriter, in form, scope and substance reasonably
satisfactory to any such managing underwriters and Special Counsel to the
selling Holders covering the matters customarily covered in opinions requested
in Underwritten Offerings and such other matters as may be reasonably requested
by such Special Counsel and underwriters; (iv) immediately prior to the
effectiveness of the Registration Statement, at the time of delivery of any
Registrable Securities sold pursuant thereto, and, in the case of
non-Underwritten Offerings, at such time as the selling Holders may reasonably
request, to use its best efforts to obtain and deliver copies to the Holders and
the managing underwriters, if any, of "cold comfort" letters and updates thereof
from the independent certified public accountants of the Company (and, if
required, any other independent certified public accountants of any subsidiary
of the Company or of any business acquired by the Company for which financial
statements and financial data is, or is required to be, included in the
Registration Statement), addressed to each of the underwriters, if any, in form
and substance as are customary in connection with Underwritten Offerings; (v) if
an underwriting agreement is entered into, the same shall contain
indemnification provisions and procedures no less favorable to the selling
Holders and the underwriters, if any, than those set forth in Section 5 (or such
other provisions and procedures acceptable to the managing underwriters, if any,
and holders of a majority of Registrable Securities participating in such
Underwritten Offering; and (vi) deliver such documents and certificates as may
be reasonably requested by the Holders of a majority of the Registrable
Securities being sold, their Special Counsel and any managing underwriters to
evidence the continued validity of the representations and warranties made
pursuant to clause 3(1)(ii) above and to evidence compliance with any customary
conditions contained in the underwriting agreement or other agreement entered
into by the Company.

                  (m)      Make available for inspection by the selling
Holders, any representative of such Holders, any underwriter participating in
any disposition of Registrable Securities, and no more than two (2) law firms
and one accounting firm retained by such selling Holders or underwriters, at the
offices where normally kept, during reasonable business hours, all financial and
other records, pertinent corporate documents and properties of the Company and
its subsidiaries, and cause the officers, directors, agents and employees of the
Company and its subsidiaries to supply all information in each case reasonably
requested by any such Holder, representative, underwriter, attorney or
accountant in connection with the Registration Statement; provided, however,
that if any information is determined in good faith by the Company in writing to
be of a confidential nature at the time of delivery of such information, then
prior to delivery of such information, the Company and the Holders shall enter
into a confidentiality agreement reasonably acceptable to the Company and the
Holders providing that such information shall be kept confidential, unless (i)
disclosure of such information is required by court or administrative order or
is necessary to respond to inquiries of regulatory authorities (provided,
however, that the Company shall be given notice of any such pending disclosure
so that the Company may seek a protective order); (ii) disclosure of such
information, in the opinion of counsel to such Person, is required by law; (iii)
such information becomes generally available to the public other than as a
result of a disclosure or failure to safeguard by such Person; or (iv) such
information becomes available to such Person from a source other than the
Company and such source is not known by such Person to be bound by a
confidentiality agreement with the Company.

                                       11
<PAGE>   12

                  (n)      Use its best efforts to comply in all material
respects with all applicable rules and regulations of the Commission and make
generally available to its securityholders earning statements satisfying the
provisions of Section 11(a) of the Securities Act and Rule 158 not later than 45
days after the end of any 12-month period (or 90 days after the end of any
12-month period if such period is a fiscal year) (i) commencing at the end of
any fiscal quarter in which Registrable Securities are sold to underwriters in a
firm commitment or best efforts Underwritten Offering and (ii) if not sold to
underwriters in such an offering, commencing on the first day of the first
fiscal quarter of the Company after the effective date of the Registration
Statement, which statement shall conform to the requirements of Rule 158.

                  (o)      Each selling Holder shall furnish to the Company
information regarding such Holder and the distribution of such Registrable
Securities as is required by law to be disclosed in the Registration Statement,
and the Company may exclude from such registration the Registrable Securities of
any such Holder who fails to furnish such information within a reasonable time
after receiving such request. Each selling Holder shall also use its best
efforts to cooperate with the Company in connection with the preparation and
filing of any Registration Statement including Registrable Securities.

                  The Company shall hold in confidence and not make any
disclosure of information concerning a Holder provided to the Company unless (i)
disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other order
from a court or governmental body of competent jurisdiction, or (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement. The Company agrees that
it shall, upon learning that disclosure of such information concerning a Holder
is sought in or by a court or governmental body of competent jurisdiction or
through other means, give prompt notice to such Holder prior to making such
disclosure, and allow the Holder, at its expense, to undertake appropriate
action to prevent disclosure of, or to obtain a protective order for, such
information.

                  If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder shall
have the right to require (if such reference to such Holder by name or otherwise
is not required by the Securities Act or any similar Federal statute then in
force) the deletion of the reference to such Holder in any amendment or
supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be required.

                  Each Holder covenants and agrees that (i) it will not sell any
Registrable Securities under the Registration Statement until it has received
copies of the Prospectus as then amended or supplemented as contemplated in
Section 3(g) and notice from the Company that such Registration Statement and
any post-effective amendments thereto have become effective as contemplated by
Section 3(c) and (ii) it and its officers, directors or Affiliates, if any, will
comply with the prospectus delivery requirements of the Securities Act as
applicable to them in connection with sales of Registrable Securities pursuant
to the Registration Statement.

                                       12
<PAGE>   13

                  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 Section 3(c)(ii), 3(c)(iii), 3(c)(iv) or
3(c)(v), such Holder will forthwith discontinue offers and dispositions 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(j), 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. Notwithstanding anything
to the contrary, the Company shall cause its transfer agent to deliver
unlegended shares of Common Stock to a bona fide transferee of a Holder in
accordance with the terms of the Securities Purchase Agreement in connection
with any sale of Registrable Securities with respect to which an Holder has
entered into a contract for sale in good faith prior to the Holder's receipt of
a notice from the Company of the happening of any event of the kind described in
Section 3(c)(ii), 3(c)(iii), 3(c)(iv) or 3(c)(v) and for which the Holder has
not yet settled.

                  (p)      The Company agrees to respond fully and completely
to any and all comments on a Registration Statement received from the Commission
staff as promptly as possible but, for non-Underwritten Offerings, in no event
later than ten (10) Business Days of the receipt of such comments, regardless of
whether such comments are in oral or written form.

                  (q)      Within two (2) Business Days after a Registration
Statement which covers applicable Registrable Securities is ordered effective by
the Commission, the Company shall deliver, and shall cause legal counsel for the
Company to deliver, to the transfer agent for such Registrable Securities (with
copies to the Holders whose Registrable Securities are included in such
Registration Statement) confirmation that such Registration Statement has been
declared effective by the Commission in the form attached hereto as Exhibit B.

                  4.       Registration Expenses

                           All fees and expenses of the Company incident to the
performance of or compliance with this Agreement by the Company shall be borne
by the Company, whether or not pursuant to an Underwritten Offering and whether
or not the Registration Statement is filed or becomes effective and 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 Nasdaq and each other securities exchange or market on which Registrable
Securities are required hereunder to be listed and (B) in compliance with state
securities or Blue Sky laws (including, without limitation, reasonable fees and
disbursements of counsel for the Holders in connection with Blue Sky
qualifications of the Registrable Securities and determination of the
eligibility of the Registrable Securities for investment under the laws of such
jurisdictions as the managing underwriters, if any, or the Holders of a majority
of Registrable Securities may designate)), (ii) printing expenses (including,
without limitation, expenses of printing certificates for Registrable Securities
and of printing prospectuses if the printing of prospectuses is requested by the
managing underwriters, if any, or

                                       13
<PAGE>   14

by the holders of a majority of the Registrable Securities included in the
Registration Statement), (iii) messenger, telephone and delivery expenses, (iv)
fees and disbursements of counsel for the Company, (v) Securities Act liability
insurance, if the Company so desires such insurance, and (vi) fees and expenses
of all other Persons retained by the Company in connection with the consummation
of the transactions contemplated by this Agreement. In addition, the Company
shall be responsible for all of its internal expenses incurred in connection
with the consummation of the transactions contemplated by this Agreement
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit, and the fees and expenses incurred in connection with the listing of the
Registrable Securities on any securities exchange as required hereunder. The
Holder shall pay all underwriting discounts and fees and commissions, brokerage
fees and commissions, any fees and expenses of counsel to the Holders and
Holders' out of pocket expense.

                  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 (including any underwriters
retained by such Holder in connection with the offer and sale of Registrable
Securities), 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 joint or
several losses, claims, damages, liabilities, costs (including, without
limitation, costs of preparation and attorneys' fees) and expenses
(collectively, together with actions, proceedings or inquiries by any regulatory
or self-regulatory organization, whether commenced or threatened, "Losses"), as
incurred, arising out of or relating to (i) 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 (in the case of any Prospectus or form of
prospectus or supplement thereto, in light of the circumstances under which they
were made), except to the extent, but only to the extent, that such untrue
statements or omissions are based solely upon and in conformity with information
regarding a Holder furnished in writing to the Company by a Holder expressly for
use therein, which information was reasonably relied on by the Company 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 (provided that the Company amended any
disclosure with respect to the method of distribution upon written notice from
the Holders that such section of the Prospectus should be revised in any way) or
(ii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any other law, including, without limitation, any state
securities law, or any rule or regulation thereunder relating to the offer or
sale of

                                       14
<PAGE>   15

Registrable Securities. The Company shall not, however, be liable for any Losses
to any Holder with respect to any untrue or alleged untrue statement of material
fact or omission or alleged omission of material fact if such statement or
omission was made in a preliminary Prospectus or form of prospectus which has
subsequently been amended or supplemented and such Holder did receive a copy of
the final Prospectus (or any amendment or supplement thereto) at or prior to the
confirmation of the sale of the Registrable Securities in any case where such
delivery is required by the Securities Act and the untrue or alleged untrue
statement of material fact or omission or alleged omission of material fact
contained in such preliminary Prospectus was corrected in the final Prospectus
(or any amendment or supplement thereto), unless the failure to deliver such
final Prospectus (as amended or supplemented) was a result of noncompliance by
the Company with Section 3(g) of this Agreement. 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, the
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 incurred, arising solely out of or based solely upon any
untrue statement of a material fact contained in the Registration Statement, any
Prospectus, or any form of prospectus, 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 the Registration Statement or such Prospectus and that such information was
reasonably relied upon by the Company for use in the Registration Statement,
such Prospectus or such form of prospectus or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was furnished by such Holder or,
reviewed and expressly approved in writing by such Holder expressly for use in
the Registration Statement, such Prospectus or such form of prospectus;
provided, however, that the indemnity agreement contained in this Section 5(b)
shall not apply to amounts paid in settlement of any Losses if such settlement
is effected without the prior written consent of such Holder, which consent
shall not be unreasonably withheld. 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; unless such Holder withholds
consent to a settlement offered at a lower amount.

                  (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 promptly shall 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 reasonable fees and expenses incurred in connection with defense
thereof; provided, however, 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

                                       15
<PAGE>   16

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 the Indemnifying Party shall bear the fees
and expenses for one such counsel for all of the Indemnified Parties). 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 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 thirty (30) 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).

                  (d)      Contribution. If a claim for indemnification under
Section 5(a) or 5(b) is unavailable to an Indemnified Party because of a failure
or refusal of a court of competent jurisdiction to enforce such indemnification
in accordance with its terms (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

                                       16
<PAGE>   17

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. In no event shall any selling Holder be required to
contribute an amount under this Section 5(d) in excess of the net proceeds
received by such Holder upon sale of the Registrable Securities pursuant to the
Registration Statement giving rise to such contribution obligation.

                  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. No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.

                  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.       Rule 144

                  As long as any Holder owns Registrable 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 and to promptly furnish the Holders with true and complete copies of all
such filings. As long as any Holder owns Registrable Securities, if the Company
is not required to file reports pursuant to Section 13(a) or 15(d) of the
Exchange Act, it will prepare and furnish to the Holders and make publicly
available in accordance with Rule 144(c) promulgated under the Securities Act
annual and quarterly financial statements, together with a discussion and
analysis of such financial statements in form and substance substantially
similar to those that would otherwise be required to be included in reports
required by Section 13(a) or 15(d) of the Exchange Act, as well as any other
information required thereby, in the time period that such filings would have
been required to have been made under the Exchange Act. Upon the request of any
Holder, the Company shall deliver to such Holder a written certification of a
duly authorized officer as to whether it has complied with such requirements.
The Company further covenants that it will take such further action as any
Holder 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.

                  7.       Miscellaneous

                  (a)      Remedies. In the event of a breach by the Company or
by a Holder of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement,

                                       17
<PAGE>   18

including recovery of damages, will be entitled to specific performance of its
rights under this Agreement. The Company and each Holder agree that monetary
damages would not provide adequate compensation for any losses incurred by
reason of a breach by it of any of the provisions of this Agreement and hereby
further agrees that, in the event of any action for specific performance in
respect of such breach, it shall waive the defense that a remedy at law would be
adequate.

                  (b)      No Inconsistent Agreements. Neither the Company nor
any of its subsidiaries has, 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 is inconsistent with the rights
granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof. Except as disclosed in Schedule 2.1(c) of the Purchase
Agreement, 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. Without limiting the generality of the
foregoing, without the written consent of the Holders of a majority of the then
outstanding Registrable Securities, the Company shall not grant to any Person
the right to request the Company to register any securities of the Company under
the Securities Act unless the rights so granted are subordinated in all respects
to the rights in full of the Holders set forth in Section 2 herein, and are not
otherwise in conflict or inconsistent with the provisions of this Agreement.
This Agreement, together with the Purchase Agreement, 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.

                  (c)      No Piggyback on Registrations. Except as disclosed on
Schedule 2.1(c) of the Purchase Agreement, neither the Company nor any of its
securityholders (other than the Holders in such capacity pursuant hereto) may
include securities of the Company in the Registration Statements and the Company
shall not after the date hereof enter into any agreement providing such right to
any of its securityholders, unless the right so granted is on parity with or
subordinated in all respects to the rights in full of the Holders set forth
herein, and is not otherwise in conflict or inconsistent with the provisions of
this Agreement.

                  (d)      Piggy-Back Registrations. Except as provided herein
if, at any time when there is not an effective Registration Statement covering
the Registrable Securities, 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, the Company shall send to each Holder of Registrable Securities
written notice of such determination and, if within ten (10) days after receipt
of such notice, any such Holder shall so request in writing, (which request
shall specify the Registrable Securities intended to be disposed of by the
Purchasers), the Company will use reasonable efforts to effect the registration
under the Securities Act of all Registrable Securities which the Company has
been so requested to register by the Holder, to the extent requisite to permit
the disposition of the Registrable Securities so to be registered, provided that
if at any time after giving written notice of its intention to register any
securities and prior to the effective date of the registration

                                       18
<PAGE>   19

statement filed in connection with such registration, the Company shall
determine for any reason not to register or to delay registration of such
securities, the Company may, at its election, give written notice of such
determination to such Holder and, thereupon, (i) in the case of a determination
not to register, shall be relieved of its obligation to register any Registrable
Securities in connection with such registration (but not from its obligation to
pay expenses in accordance with Section 4), and (ii) in the case of a
determination to delay registering, shall be permitted to delay registering any
Registrable Securities being registered pursuant to this Section 7(d) for the
same period as the delay in registering such other securities. The Company shall
include in such registration statement all or any part of such Registrable
Securities such Holder requests to be registered; provided, however, that the
Company shall not be required to register any Registrable Securities pursuant to
this Section 7(d) that are eligible for sale pursuant to Rule 144(k) of the
Securities Act. In the case of an underwritten public offering, if the Company
after consultation with the Underwriter's representative should reasonably
determine that the inclusion of such Registrable Securities would materially
adversely affect the offering contemplated in such registration statement, and
based on such determination recommends inclusion in such registration statement
of fewer Registrable Securities then proposed to be sold by the Holders, then
(x) the number of Registrable Securities of the Holders included in such
registration statement shall be reduced pro rata among such Holders (based upon
the number of Registrable Securities requested to be included in the
registration) or (y) none of the Registrable Securities of the Holders shall be
included in such registration statement if the Company, after consultation with
the underwriter(s), recommends the inclusion of none of such Registrable
Securities; provided, however, that if securities are being offered for the
account of other persons or entities as well as the Company, such reduction
shall not represent a greater fraction of the number of Registrable Securities
intended to be offered by the Holders than the fraction of similar reductions
imposed on such other persons or entities (other than the Company).
Notwithstanding the foregoing, the Company shall not file any registration
statement under the Securities Act (other than on Form S-4, Form S-8, Form S-3
or Form S-1 for resale of private placement securities and proposed Underwritten
Offerings registered on the available form) relating to the offer and sale of
any equity securities of the Company, or offer or sell any equity securities of
the Company in a transaction exempt from registration pursuant to Regulation S
under the Securities Act other than pursuant to an Underwritten Offering, until
such time as the Initial Registration Statement has been effective for a period
of sixty (60) Trading Days, which period shall be tolled if the effectiveness of
the Initial Registration Statement is suspended for any reason whatsoever. In
connection with any underwritten offering of securities proposed by the Company
(other than pursuant to an employee benefit plan, pursuant to a merger, exchange
offer or a transaction described in Rule 145 under the Securities Act or
pursuant to a "shelf registration"), each Holder of Registrable Securities
agrees that it shall not effect any sale or distribution of any Registrable
Securities similar to the securities offered in such underwritten offering, or
convertible into or exchangeable for such securities, during the 10-day period
prior to, and during a period beginning on the effective date of such
registration and not to exceed 90 days, and hereby agrees to execute a "lock-up
letter" in form and substance customary for transactions of such type if so
requested by the managing underwriter for such underwritten offering.

                  (e)      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

                                       19
<PAGE>   20

writing and signed by the Company and the Holders of at least two thirds of the
then outstanding Registrable Securities; provided, however, that for the
purposes of this sentence, Registrable Securities that are owned, directly or
indirectly, by the Company, or an Affiliate of the Company are not deemed
outstanding. 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.

                  (f)      Notices. Any notice or other communication required
or permitted to be given hereunder shall be in writing and shall be deemed to
have been received (a) upon hand delivery (receipt acknowledged) or delivery by
telex (with correct answer back received), telecopy or facsimile (with
transmission confirmation report) at the address or number designated below (if
received by 5:00 p.m. eastern time where such notice is to be received), or the
first Business Day following such delivery (if received after 5:00 p.m. eastern
time where such notice is to be received) or (b) on the second Business Day
following the date of mailing by express courier service, fully prepaid,
addressed to such address, or upon actual receipt of such mailing, whichever
shall first occur. The addresses for such communications are (i) if to the
Company to Level 8 Systems, Inc., 9000 Regency Parkway, Cary, North Carolina
27571, Telephone: (919) 380-5005, Facsimile: (919) 461-2690, Attention: Dennis
McKinnie, with copies to Powell, Goldstein, Frazer & Murphy LLP, 16th Floor, 191
Peachtree Street, Atlanta, GA 30303, Attention: Scott D. Smith, Esq., Facsimile:
(404) 572-6999 and (ii) if to any Purchaser to the address set forth on Schedule
I hereto with copies to the addressees set forth on Schedule II hereto or such
other address as may be designated in writing hereafter, in the same manner, by
such Person.

                  (g)      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 its rights hereunder in the
manner and to the Persons as permitted under the Purchase Agreement. In
addition, the rights of each Holder hereunder, including the right to have the
Company register for resale Registrable Securities in accordance with the terms
of this Agreement, shall be automatically assignable by each Holder if: (i) the
Holder agrees in writing with the transferee or assignee to assign such rights,
and a copy of such agreement is furnished to the Company within a reasonable
time after such assignment, (ii) the Company is, within a reasonable time after
such transfer or assignment, furnished with written notice of (a) the name and
address of such transferee or assignee, and (b) the securities with respect to
which such registration rights are being transferred or assigned, (iii)
following such transfer or assignment the further disposition of such securities
by the transferee or assignees is restricted under the Securities Act and
applicable state securities laws, (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this Section, the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions of this Agreement, and (v) such transfer shall have been made in
accordance with the applicable requirements of the Purchase Agreement and
applicable law. The rights to assignment shall apply to the Holders (and to
subsequent) successors and assigns.

                                       20
<PAGE>   21

                  (h)      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 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 were the original
thereof.

                  (i)      Governing Law. The corporate laws of the State of
Delaware shall govern all issues concerning the relative rights of the Company
and the Purchasers as its stockholders. All other questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by and construed in accordance with the laws of the State of New
York, without regard to principles of conflicts of law. 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 consent to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address for such 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.

                  (j)      Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.

                  (k)      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.

                  (l)      Headings; References. The headings in this Agreement
are for convenience of reference only and shall not limit or otherwise affect
the meaning hereof. References in this Agreement to Sections are to Sections of
this Agreement, unless otherwise expressly provided.

                  (m)      Shares Held by The Company and its Affiliates.
Whenever the consent or approval of Holders of a specified percentage of
Registrable Securities is required hereunder, Registrable Securities held by the
Company or its Affiliates (other than any Holder or transferees or successors or
assigns thereof if such Holder is deemed to be an Affiliate solely by reason of
its

                                       21
<PAGE>   22

holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.

                  (n)      Revision of SEC Position on Warrants. In the event
the rules and regulations of the Commission or the policies of the staff of the
Commission are modified and as a result thereof the Company determines in good
faith that it may be practicable and in the interests of the Company and the
Holders to register the exercise of the Warrants so that the Warrant Shares may
be freely resold without maintaining an effective registration statement under
the Securities Act for resales, the Company and the Holders agree to cooperate
in good faith to effect such amendments to this Agreement as may be appropriate
to provide that the Company may fulfill its obligations hereunder with respect
to the Warrants and the Warrant Shares by maintaining an effective registration
statement under the Securities Act covering the exercise of the Warrants rather
than the resale of the Warrant Shares.

                                       22
<PAGE>   23

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

                         LEVEL 8 SYSTEMS, INC.

                         By: /s/ Steven Dmiszewicki
                             ---------------------------------
                         Name: Steven Dmiszewicki
                         Title: President

                         BROWN SIMPSON PARTNERS I, LTD.

                         By: /s/ Peter D. Greene
                             ---------------------------------
                         Name: Peter D. Greene
                         Title: Attorney-in-Fact

                         SENECA CAPITAL, L.P.

                         By: Seneca Capital Advisors, LLC, its general partner

                         By: /s/ Doug Hirsch
                             ---------------------------------
                         Name: Doug Hirsch
                         Title: Managing Partner

                         SENECA CAPITAL INTERNATIONAL, LTD.

                         By: /s/ Doug Hirsch
                             ---------------------------------
                         Name: Doug Hirsch
                         Title: Managing Partner

                                       23
<PAGE>   24

                                   SCHEDULE I

Company

LEVEL 8 SYSTEMS, INC.
8000 Regency Parkway
Cary, North Carolina 27511
Attention: Dennis McKinnie
Facsimile: (919) 461-2690

Purchasers:

BROWN SIMPSON PARTNERS I, LTD.
152 West 57th Street, 40th Floor
New York, New York 10019
Attn: Peter Greene
Fax: (212) 247-1329

SENECA CAPITAL, L.P.
c/o Seneca Capital Advisors, LLC
527 Madison Avenue, 11th Floor
New York, New York 10022
Attention: Mr. Davis Parr

SENECA CAPITAL INTERNATIONAL, LTD.
c/o Seneca Capital Advisors, LLC
527 Madison Avenue, 11th Floor
New York, New York 10022
Attention: Mr. Davis Parr

                                       24
<PAGE>   25

                                   SCHEDULE II

Purchasers:

In the case of notice to Brown Simpson Partners I, Ltd., with a copy to:

                  Akin, Gump, Strauss, Hauer & Feld, L.L.P.
                  590 Madison Avenue
                  New York, New York  10022
                  Attention: James Kaye
                  Facsimile: (212) 872-1002

In the case of notice to Seneca Capital, L.P. or Seneca Capital International,
Ltd., with a copy to:

                  Kramer Levin Naftalis & Frankel LLP
                  919 Third Avenue
                  New York, New York 10022-3852
                  Attention: Thomas T. Janover, Esq.
                  Facsimile: (212) 715-8000

                                       25
<PAGE>   26

                                    EXHIBIT A

                              PLAN OF DISTRIBUTION

                  Our company is registering the shares of common stock on
behalf of the selling stockholders. All costs, expenses and fees in connection
with the registration of the shares offered by this prospectus will be borne by
the Company, other than brokerage commissions and similar selling expenses, if
any, attributable to the sale of shares which will be borne by the selling
stockholders. Sales of shares may be effected by selling stockholders from time
to time in one or more types of transactions (which may include block
transactions) on the Nasdaq National Market, in the over-the-counter market, in
negotiated transactions, through put or call options transactions relating to
the shares, through short sales of shares, or a combination of such methods of
sale, at market prices prevailing at the time of sale, or at negotiated prices.
Such transactions may or may not involve brokers or dealers. The selling
stockholders have advised our company that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their securities, nor is there an
underwriter or coordinated broker acting in connection with the proposed sale of
shares by the selling stockholders.

                  The selling stockholders may enter into hedging transactions
with broker-dealers or other financial institutions. In connection with such
transactions, broker-dealers or other financial institutions may engage in short
sales of the shares or of securities convertible into or exchangeable for the
shares in the course of hedging positions they assume with selling stockholders.
The selling stockholders may also enter into options or other transactions with
broker-dealers or other financial institutions which require the delivery to
such broker-dealers or other financial institutions of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as amended or supplemented to reflect such
transaction).

                  The selling stockholders may make these transactions by
selling shares directly to purchasers or to or through broker-dealers, which may
act as agents or principals. Such broker-dealers may receive compensation in the
form of discounts, concessions or commissions from selling stockholders and/or
the purchasers of shares for whom such broker-dealers may act as agents or to
whom they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions).

                  The selling stockholders and any broker-dealers that act in
connection with the sale of shares are "underwriters" within the meaning of
Section 2(11) of the Securities Act, and any commissions received by such
broker-dealers or any profit on the resale of the shares sold by them while
acting as principals might be deemed to be underwriting discounts or commissions
under the Securities Act. The selling stockholders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the shares against certain liabilities, including liabilities arising under
the Securities Act.

                  Because selling stockholders are "underwriters" within the
meaning of Section 2(11) of the Securities Act, the selling stockholders will be
subject to the prospectus delivery

                                       26
<PAGE>   27

requirements of the Securities Act. Our company has informed the selling
stockholders that the anti-manipulative provisions of Regulation M promulgated
under the Exchange Act may apply to their sales in the market.

                  Selling stockholders also may resell all or a portion of the
shares in open market transactions in reliance upon Rule 144 under the
Securities Act, provided they meet the criteria and conform to the requirements
of Rule 144.

                  Upon our company being notified by a selling stockholder that
any material arrangement has been entered into with a broker-dealer for the sale
of shares through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing:

                  -        the name of each such selling stockholder and of the
                           participating broker-dealer(s);

                  -        the number of shares involved;

                  -        the initial price at which such shares were sold;

                  -        the commissions paid or discounts or concessions
                           allowed to such broker-dealer(s), where applicable;

                  -        that such broker-dealer(s) did not conduct any
                           investigation to verify the information set out or
                           incorporated by reference in this prospectus; and

                  -        other facts material to the transactions.

In addition, upon our company being notified by a selling stockholder that a
donee or pledgee intends to sell more than 500 shares, a supplement to this
prospectus will be filed.

                                       27
<PAGE>   28

                                    EXHIBIT B

                         FORM OF NOTICE OF EFFECTIVENESS
                            OF REGISTRATION STATEMENT

[TRANSFER AGENT]
Attn.:

                  Re:      Level 8 Systems, Inc.

Ladies and Gentlemen:

         We are counsel to Level 8 Systems, a New York corporation (the
"Company"), and have represented the Company in connection with that certain
Securities Purchase Agreement (the "Purchase Agreement") entered into by and
among the Company and the buyers named therein (collectively, the "Holders")
pursuant to which the Company issued to the Holders its Series B 4% convertible
preferred stock, par value $0.001 per share (the "Preferred Stock"), convertible
into shares of the Company's common stock, par value $0.01 per share (the
"Common Stock"), and Warrants (the "the Warrants") to acquire shares of Common
Stock. Pursuant to the Purchase Agreement, the Company also has entered into a
Registration Rights Agreement with the Holders (the "Registration Rights
Agreement") pursuant to which the Company agreed, among other things, to
register the Registrable Securities (as defined in the Registration Rights
Agreement), including the shares of Common Stock issuable upon conversion of the
Preferred Stock and exercise of the Warrants, under the Securities Act of 1933,
as amended (the "1933 Act"). In connection with the Company's obligations under
the Registration Rights Agreement, on _______________, 2000, the Company filed a
Registration Statement on [Form S-3] (File No. 333-_____________) (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") relating to the Registrable Securities which names each of the Holders as
a selling stockholder thereunder.

         In connection with the foregoing, we advise you that a member of the
SEC's staff has advised us by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge,
after telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.

                                Very truly yours,

                                [ISSUER'S COUNSEL]

CC: [LIST NAMES OF HOLDERS]

                                       28
<PAGE>   29
                                                                    EXHIBIT 10.1

===============================================================================

                          SECURITIES PURCHASE AGREEMENT

                                      Among

                              LEVEL 8 SYSTEMS, INC.

                                       and

                       THE PURCHASERS LISTED ON SCHEDULE I

                           Dated as of July ___, 2000

===============================================================================

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