Document:

Exhibit 4.1

                         SECURITIES PURCHASE AGREEMENT

                           dated as of March 29, 2005

                                 by and between

                              DIRECT INSITE CORP.,

                          SIGMA OPPORTUNITY FUND, LLC

                                      AND

                     METROPOLITAN VENTURE PARTNERS II, L.P.

                       SENIOR SUBORDINATED SECURED NOTES

                                      AND

                         COMMON STOCK PURCHASE WARRANTS

<PAGE>
                               DIRECT INSITE CORP.

                          SECURITIES PURCHASE AGREEMENT

                        SENIOR SUBORDINATED SECURED NOTES

                                       and

                         COMMON STOCK PURCHASE WARRANTS

                                TABLE OF CONTENTS

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                                                                                                               Page

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1.    DEFINITIONS.................................................................................................1

2.    PURCHASE AND SALE; PURCHASE PRICE...........................................................................8

   (a)     Purchase...............................................................................................8
   (b)     Form of Payment........................................................................................8
   (c)     Closing................................................................................................8

3.    REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF THE BUYERS..................................................8

   (a)     Purchase for Investment................................................................................8
   (b)     Accredited Investor....................................................................................9
   (c)     Reoffers and Resales...................................................................................9
   (d)     Company Reliance.......................................................................................9
   (e)     Information Provided...................................................................................9
   (f)     Absence of Approvals..................................................................................10
   (g)     Securities Purchase Agreement.........................................................................10
   (h)     Buyer Status..........................................................................................10
   (i)     Short Sales...........................................................................................10

4.    REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF THE COMPANY................................................10

   (a)     Organization and Authority............................................................................10
   (b)     Qualifications........................................................................................10
   (c)     Capitalization........................................................................................11
   (d)     Concerning the Shares and the Common Stock............................................................11
   (e)     Corporate Authorization...............................................................................12
   (f)     Non-contravention.....................................................................................12
   (g)     Approvals, Filings, Etc...............................................................................13
   (h)     Information Provided..................................................................................13
   (i)     Conduct of Business...................................................................................13
   (j)     SEC Filings...........................................................................................14
   (k)     Absence of Certain Proceedings........................................................................14
   (l)     Financial Statements; Liabilities.....................................................................14
   (m)     Material Losses.......................................................................................15
   (n)     Absence of Certain Changes............................................................................15
   (o)     Intellectual Property.................................................................................15
   (p)     Internal Accounting Controls..........................................................................16

                                     - i -
<PAGE>
   (q)     Compliance with Law...................................................................................16
   (r)     Properties............................................................................................16
   (s)     Labor Relations.......................................................................................17
   (t)     Insurance.............................................................................................17
   (u)     Tax Matters...........................................................................................17
   (v)     Investment Company....................................................................................17
   (w)     Absence of Brokers, Finders, Etc......................................................................17
   (x)     No Solicitation.......................................................................................17
   (y)     ERISA Compliance......................................................................................18
   (z)     Rights Agreement; Interested Stockholder..............................................................18
   (aa)    Sarbanes-Oxley Act....................................................................................18
   (bb)    Consulting Agreements.................................................................................18

5.    CERTAIN COVENANTS..........................................................................................18

   (a)     Transfer Restrictions.................................................................................18
   (b)     Restrictive Legends...................................................................................19
   (c)     Reporting Status......................................................................................20
   (d)     Form D..................................................................................................
   (e)     State Securities Laws.................................................................................20
   (f)     Limitation on Certain Actions.........................................................................20
   (g)     Use of Proceeds.......................................................................................21
   (h)     Commercially Reasonable Efforts.......................................................................21
   (i)     Debt Obligation.......................................................................................21
   (j)     Follow-on Financing...................................................................................21
   (k)     Series A Certificate of Designation...................................................................21
   (l)     Certain Restrictions..................................................................................22

6.    CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.............................................................22

7.    CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE...........................................................22

8.    REGISTRATION RIGHTS........................................................................................24

   (a)     Mandatory Registration................................................................................24
   (b)     Obligations of the Company............................................................................25
   (c)     Obligations of the Buyers and Other Investors.........................................................28
   (d)     Rule 144..............................................................................................30
   (e)     Piggy-Back Registrations..............................................................................30

9.    INDEMNIFICATION AND CONTRIBUTION...........................................................................31

   (a)     Indemnification.......................................................................................31
   (b)     Contribution..........................................................................................32
   (c)     Other Rights..........................................................................................33

10.      MISCELLANEOUS...........................................................................................33

   (a)     Governing Law.........................................................................................33
   (b)     Headings..............................................................................................33
   (c)     Severability..........................................................................................33
   (d)     Notices...............................................................................................33
   (e)     Counterparts..........................................................................................33
   (f)     Entire Agreement; Benefit.............................................................................34
   (g)     Waiver................................................................................................34

                                     - ii -
<PAGE>

   (h)     Amendment.............................................................................................34
   (i)     Further Assurances....................................................................................35
   (j)     Assignment of Certain Rights and Obligations..........................................................35
   (k)     Expenses..............................................................................................35
   (l)     Termination...........................................................................................36
   (m)     Survival..............................................................................................36
   (n)     Public Statements, Press Releases, Etc................................................................37
   (o)     Construction..........................................................................................37

ANNEXES
-------

ANNEX I           Form of  Senior Subordinated Secured Note
ANNEX II          Form of Common Stock Purchase Warrant
ANNEX III         Form of Opinion of Beckman, Lieberman & Barandes, LLP
ANNEX IV          Form of Consent of Metropolitan Venture Partners II, LP
ANNEX V           Form of Consent of Mountain Meadow Farm
</TABLE>

                                    - iii -
<PAGE>
                         SECURITIES PURCHASE AGREEMENT

     THIS  SECURITIES  PURCHASE  AGREEMENT,  dated as of March  29,  2005  (this
"Agreement"),  by and between DIRECT INSITE CORP., a Delaware  corporation  (the
"Company"),  with headquarters  located at 80 Orville Drive,  Bohemia,  New York
11716,  SIGMA OPPORTUNITY  FUND, LLC and METROPOLITAN  VENTURE PARTNERS II, L.P.
(each a "Buyer" and together the "Buyers").

                              W I T N E S S E T H:
                              - - - - - - - - - -

     WHEREAS,  each Buyer  wishes to  purchase  from the Company and the Company
wishes to sell to each Buyer,  upon the terms and subject to the  conditions  of
this Agreement, a promissory note of the Company having the principal amount set
forth on Schedule  2(a) of this  Agreement  opposite  each  Buyer's  name in the
aggregate totaling $750,000 and in connection with which the Company shall issue
to each Buyer  warrants  to purchase a total of 750,000  shares of Common  Stock
(such  capitalized term and all other  capitalized  terms used in this Agreement
having the meanings provided in Section 1);

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

     1. DEFINITIONS

     (a) As used in this Agreement, the terms "Agreement", "Buyer", "Buyers" and
"Company"  shall  have the  respective  meanings  assigned  to such terms in the
introductory paragraph of this Agreement.

     (b) All the  agreements  or  instruments  herein  defined  shall  mean such
agreements or instruments as the same may from time to time be  supplemented  or
amended or the terms thereof waived or modified to the extent  permitted by, and
in accordance with, the terms thereof and of this Agreement.

     (c) The following terms shall have the following meanings (such meanings to
be  equally  applicable  to both the  singular  and  plural  forms of the  terms
defined):

     "Affiliate"  means,  with  respect to any  Person,  any other  Person  that
directly,  or  indirectly  through  one or  more  intermediaries,  controls,  is
controlled by or is under common control with the subject  Person.  For purposes
of this definition,  "control"  (including,  with correlative meaning, the terms
"controlled  by" and "under common control  with"),  as used with respect to any
Person,  shall mean the  possession,  directly  or  indirectly,  of the power to
direct or cause the  direction  of the  management  and policies of such Person,
whether through the ownership of voting securities or by contract or otherwise.

     "Blackout Period" means the period of up to 20 Trading Days (whether or not
consecutive)  during  any  period  of 365  consecutive  days  after the date the

<PAGE>

Company  notifies  the  Investors  that they are  required,  pursuant to Section
8(c)(4), to suspend offers and sales of Registrable Securities as a result of an
event or circumstance  described in Section 8(b)(5)(A),  during which period, by
reason  of  Section  8(b)(5)(B),  the  Company  is not  required  to  amend  the
Registration Statement or supplement the related Prospectus.

     "Business  Day"  means any day other  than a  Saturday,  Sunday or a day on
which commercial banks in The City of New York are authorized or required by law
or executive order to remain closed.

     "Claims"  means any  losses,  claims,  damages,  liabilities  or  expenses,
including,  without  limitation,  reasonable  fees and expenses of legal counsel
(joint or several), incurred by a Person.

     "Closing  Date" means 3:00 p.m.,  New York City time,  on March 29, 2005 or
such other mutually agreed to time.

     "Code"  means  the  Internal  Revenue  Code of 1986,  as  amended,  and the
regulations thereunder and published interpretations thereof.

     "Common Stock" means the Common Stock,  par value $.0001 per share,  of the
Company.

     "Common  Stock  Equivalent"  means any  warrant,  option,  subscription  or
purchase right with respect to shares of Common Stock, any security  convertible
into,  exchangeable  for, or otherwise  entitling the holder thereof to acquire,
shares of Common Stock or any warrant,  option,  subscription  or purchase right
with respect to any such convertible, exchangeable or other security.

     "Current  Fair  Market  Value"  shall have the  meaning  provided  or to be
provided in the Warrants.

     "Encumbrances"  means  all  mortgages,  deeds of  trust,  claims,  security
interests,  liens,  pledges,  leases,  subleases,   charges,  escrows,  options,
proxies,  rights of  occupancy,  rights  of first  refusal,  preemptive  rights,
covenants,   conditional   limitations,   hypothecations,   prior   assignments,
easements,  title retention agreements,  indentures,  security agreements or any
other encumbrances of any kind.

     "ERISA"  means the Employee  Retirement  Income  Security  Act of 1974,  as
amended, and the regulations thereunder and published interpretations thereof.

     "Event of Default" shall have the meaning to be provided or provided in the
Notes.

     "Follow-on  Financing"  shall mean a private  placement  consummated by the
Company  within 45 days after the  Closing  Date  pursuant to which Sigma is the

                                     - 2 -
<PAGE>

lead  investor  and Sigma  and its  Affiliates  and  appointees  invest  between
$2,500,000 and $3,500,000,  including the conversion,  if any, of the Notes into
such financing.

     "Indebtedness"  shall have the  meaning to be  provided  or provided in the
Notes.

     "Indemnified Party" means the Company,  each of its directors,  each of its
officers who signs the Registration Statement, each Person, if any, who controls
the Company within the meaning of the 1933 Act or the 1934 Act, any  underwriter
and any  other  stockholder  selling  securities  pursuant  to the  Registration
Statement or any of its  directors  or officers or any Person who controls  such
stockholder or underwriter within the meaning of the 1933 Act or the 1934 Act.

     "Indemnified   Person"  means  the  Buyers  and  each  other  Investor  who
beneficially  owns or holds  Registrable  Securities and each other Investor who
sells such Registrable  Securities in the manner permitted under this Agreement,
the  directors,  if any, of such  Investor,  the officers or persons  performing
similar functions,  if any, of the Buyers and any such Investor, each Person, if
any,  who controls a Buyer or any such  Investor  within the meaning of the 1933
Act or the 1934 Act,  any  underwriter  (as  defined in the 1933 Act)  acting on
behalf of an Investor who participates in the offering of Registrable Securities
of such Investor in accordance  with the plan of  distribution  contained in the
Prospectus, the directors, if any, of such underwriter and the officers, if any,
of such underwriter,  and each Person, if any, who controls any such underwriter
within the meaning of the 1933 Act or the 1934 Act.

     "Initial Warrant Exercise Price" means the "Purchase  Price," as defined in
the Warrants, on the Closing Date.

     "Inspector"  means any attorney,  accountant or other agent  retained by an
Investor for the purposes provided in Section 8(b)(9).

     "Interest  Shares"  means any shares of Common  Stock  issued in payment of
interest on the Notes.

     "Intellectual Property" means all franchises,  patents, trademarks, service
marks,  tradenames (whether registered or unregistered),  copyrights,  corporate
names, licenses,  trade secrets,  proprietary software or hardware,  proprietary
technology,  technical information,  discoveries,  designs and other proprietary
rights,  whether or not  patentable,  and  confidential  information  related to
Intellectual Property otherwise included in this definition (including,  without
limitation,  know-how,  processes  and  technology)  used in the  conduct of the
business  of the  Company  or any  Subsidiary,  or in which the  Company  or any
Subsidiary has an interest.

     "Investor" and "Investors"  means the Buyer or Buyers,  as the case may be,
and any  transferee or assignee who agrees to become bound by the  provisions of
Sections 5(a), 5(b), 8, 9, and 10 of this Agreement.

     "Margin Stock" shall have the meaning provided in Regulation U of the Board
of Governors of the Federal Reserve System (12 C.F.R. Part 221).

                                     - 3 -
<PAGE>

     "Market  Price"  shall have the  meaning to be  provided or provided in the
Note.

     "Maturity  Date"  shall have the  meaning to be provided or provided in the
Notes.

     "Nasdaq" means the Nasdaq National Market.

     "Nasdaq SmallCap" means the Nasdaq SmallCap Market.

     "NASD" means the National Association of Securities Dealers, Inc.

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

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

     "Next  Financing"  shall have the meaning provided or to be provided in the
Notes.

     "Notes" means the Senior  Subordinated  Secured Notes of the Company issued
to the Buyers in the form attached as Annex I.

     "Permitted  Indebtedness" shall have the meaning to be provided or provided
in the Notes.

     "Person"  means  any  natural  person,  corporation,  partnership,  limited
liability company, trust, incorporated organization,  unincorporated association
or  similar  entity  or  any  government,   governmental   agency  or  political
subdivision.

     "Prospectus"   means  the  prospectus  forming  part  of  the  Registration
Statement at the time the Registration  Statement is declared  effective and any
amendment  or  supplement   thereto  (including  any  information  or  documents
incorporated therein by reference).

     "Purchase  Price"  means  the  purchase  price  for the  Notes set forth on
Schedule 2(a) of this Agreement.

     "QIB" shall have the meaning provided or to be provided in the Notes.

     "Record"  means  all  pertinent  financial  and  other  records,  pertinent
corporate  documents and properties of the Company subject to inspection for the
purposes provided in Section 8(b)(9).

     "register,"  "registered,"  and  "registration"  refer  to  a  registration
effected by  preparing  and filing a  Registration  Statement or  Statements  in
compliance  with the 1933 Act and pursuant to Rule 415, and the  declaration  or
ordering of effectiveness of such Registration Statement by the SEC.

                                     - 4 -
<PAGE>

     "Registrable  Securities" means (1) the Shares,  (2) if the Common Stock is
changed, converted or exchanged by the Company or its successor, as the case may
be, into any other stock or other  securities on or after the date hereof,  such
other stock or other securities which are issued or issuable in respect of or in
lieu of the Shares and (3) if any other  securities are issued to holders of the
Common Stock (or such other shares or other  securities  into which or for which
the Common  Stock is so changed,  converted  or  exchanged  as  described in the
immediately preceding clause (2)) upon any reclassification,  share combination,
share subdivision,  share dividend, merger, consolidation or similar transaction
or event, such other securities which are issued or issuable in respect of or in
lieu of the Common Stock.

     "Registration  Default Period" means the period  following  August 30, 2005
during which any Registration Event occurs and is continuing.

     "Registration Event" means the occurrence of any of the following events if
the  Company is required to file a  Registration  Statement  pursuant to Section
8(a)(1):

          (i) the Company fails to file with the SEC the Registration  Statement
     on or  before  the  date by  which  the  Company  is  required  to file the
     Registration Statement pursuant to Section 8(a)(1),

          (ii) the Registration  Statement covering the Registerable  Securities
     is not  declared  effective by the date agreed upon by the Company with the
     investors in the Next Financing,  or in any case no later than December 31,
     2005,

          (iii) after the SEC Effective  Date,  sales cannot be made pursuant to
     the Registration  Statement for any reason (including without limitation by
     reason  of a stop  order of any  untrue  statement  of a  material  fact or
     omission of a material fact in the Registration Statement, or the Company's
     failure  to update  the  Registration  Statement)  but  except  as  excused
     pursuant to Section 8(b)(5),

          (iv)  the  Common  Stock  generally  or  the  Registrable   Securities
     specifically  are not listed or included for quotation on a Trading Market,
     or  trading  of the  Common  Stock  is  suspended  or  halted  for a period
     exceeding 5 days on the Trading  Market which at the time  constitutes  the
     principal market for the Common Stock, or

          (v) the Company fails,  refuses or is otherwise unable timely to issue
     Interest Shares in accordance with the terms of the Notes or Warrant Shares
     upon exercise of the Warrant in  accordance  with the terms of the Warrant,
     or certificates therefor as required under the Transaction Documents or the
     Company fails, refuses or is otherwise unable timely to transfer any Shares
     as and when required by the Transaction Documents.

     "Registration  Period" means the period from the SEC Effective  Date to the
earlier of (A) the date which is three years after the  Closing  Date (B),  such
date  after  which  each  Investor  may sell all of its  Registrable  Securities
without  registration  under  the 1933 Act  pursuant  to Rule  144,  free of any
limitation on the volume of such securities which may be sold in any period) and
(C) the date on which the Investors no longer own any Registrable Securities.

                                     - 5 -
<PAGE>

     "Registration  Statement" means a registration  statement on Form S-1, Form
SB-2, Form S-3 or such other form as may be available to the Company to be filed
with the SEC under the 1933 Act relating to the Registrable Securities and which
names the Investors as selling stockholders.

     "Regulation D" means Regulation D under the 1933 Act.

     "Repurchase Event" shall have the meaning to be provided or provided in the
Note.

     "Required   Information"   means,  with  respect  to  each  Investor,   all
information  regarding such Investor,  the  Registrable  Securities held by such
Investor or which such Investor has the right to acquire and the intended method
of disposition of the Registrable Securities held by such Investor or which such
Investor has the right to acquire as shall be required by the 1933 Act to effect
the registration of the resale by such Investor of such Registrable Securities.

     "Rule  144"  means  Rule 144  promulgated  under  the 1933 Act or any other
similar  rule or  regulation  of the SEC that may at any  time  provide  a "safe
harbor" exemption from registration  under the 1933 Act so as to permit a holder
to sell securities of the Company to the public without  registration  under the
1933 Act.

     "Rule  144A"  means  Rule  144A  under the 1933 Act or any  successor  rule
thereto.

     "SEC" means the Securities and Exchange Commission.

     "SEC Effective Date" means the date the Registration  Statement is declared
effective by the SEC.

     "SEC Filing Date" means the date the Registration  Statement is first filed
with the SEC pursuant to Section 8.

     "SEC Reports"  means the Company's (1) Annual Report on Form 10-KSB for the
year ended  December  31,  2003,  (2)  Quarterly  Reports on Form 10-QSB for the
quarters ended March 31, 2004, June 30, 2004 and September 30, 2004, (3) Current
Reports on Form 8-K filed with the SEC on April 16, 2004,  May 14, 2004, May 26,
2004,  August 24, 2004,  November  24, 2004 and  February 23, 2005,  and (4) all
other  periodic and other  reports filed by the Company with the SEC pursuant to
the 1934 Act subsequent to February 23, 2005,  and prior to the date hereof,  in
each case as filed with the SEC and  including  the  information  and  documents
(other than exhibits) incorporated therein by reference.

     "Securities" means, collectively, the Notes, the Shares and the Warrants.

     "Shares" means the Interest Shares and the Warrant Shares.

     "Sigma" shall mean Sigma Opportunity Fund, LLC.

                                     - 6 -
<PAGE>

     "Subsidiary"  means any  corporation or other entity of which a majority of
the capital stock or other ownership  interests  having ordinary voting power to
elect a majority of the board of directors or other persons  performing  similar
functions are at the time directly or indirectly owned by the Company.

     "Trading Day" means at any time a day on which any of a national securities
exchange,  Nasdaq,  Nasdaq SmallCap or such other  securities  market as at such
time  constitutes the principal  securities  market for the Common Stock is open
for general trading of securities.

     "Trading  Market" means the  Over-The-Counter  Bulletin Board, the American
Stock  Exchange,  Inc.,  the Nasdaq,  the Nasdaq  SmallCap or the New York Stock
Exchange, Inc.

     "Transaction Documents" means, collectively, this Agreement, the Securities
and the other  agreements,  instruments  and documents  contemplated  hereby and
thereby.

     "Transfer Agent" means Manhattan Transfer & Registrar Company,  as transfer
agent and registrar for the Common Stock, or its successor.

     "Violation" means:

     (i) any untrue  statement or alleged  untrue  statement of a material  fact
contained in the Registration Statement or any post-effective  amendment thereof
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,

     (ii) any untrue  statement or alleged  untrue  statement of a material fact
contained in any  Prospectus (as amended or  supplemented,  if the Company files
any  amendment  thereof or  supplement  thereto with the SEC) or the omission or
alleged  omission  to state  therein any  material  fact  necessary  to make the
statements  made  therein,  in  light  of  the  circumstances  under  which  the
statements therein were made, not misleading,

     (iii) any  violation  or alleged  violation by the Company of the 1933 Act,
the 1934 Act, any state  securities law or any rule or regulation under the 1933
Act, the 1934 Act or any state securities law, or

     (iv) any  breach or alleged  breach by any Person  other than the Buyers of
any representation,  warranty,  covenant,  agreement or other term of any of the
Transaction Documents.

     "Warrants"  means the Common Stock  Purchase  Warrants in the form attached
hereto as Annex II.

     "Warrant Shares" means the shares of Common Stock issuable upon exercise of
the Warrants.

                                     - 7 -
<PAGE>

     2. PURCHASE AND SALE; PURCHASE PRICE.

     (a)  Purchase.  Upon  the  terms  and  subject  to the  conditions  of this
Agreement,  each Buyer  hereby  agrees to  purchase  from the  Company,  and the
Company hereby agrees to sell to each Buyer,  on the Closing Date, a Note in the
principal  amount set forth on Schedule  2(a) of this  Agreement  opposite  each
Buyer's name and having the terms and conditions as set forth in the form of the
Note attached  hereto as Annex I for the Purchase  Price. In connection with the
purchase  of the Notes by the Buyers,  the Company  shall issue to each Buyer at
the closing on the Closing Date  Warrants in the form of Annex II entitling  the
holder to purchase a number of shares of Common Stock determined on the basis of
one share of Common Stock for each $1.00 principal  amount of the Note purchased
by Buyer.

     (b) Form of  Payment.  Payment by the Buyers of the  Purchase  Price to the
Company  on the  Closing  Date  shall be made by wire  transfer  of  immediately
available funds to:

                Citibank N.A.
                4175 Veterans Memorial Highway
                Ronkonkoma, NY  11779
                ABA# 021 001486

                For Credit to:
                Direct Insite Corp.
                80 Orville Drive
                Bohemia, NY  11716
                Account number:  24046773

     (c)  Closing.  The  issuance  and sale of the Notes and the issuance of the
Warrants  shall occur on the Closing Date at Moomjian & Waite,  LLP, 100 Jericho
Quadrangle,  Jericho, New York 11753. At the closing, upon the terms and subject
to the conditions of this Agreement,  (1) the Company shall issue and deliver to
the  Buyers  the Notes and the  Warrants  against  payment  by the Buyers to the
Company of an amount equal to the Purchase  Price,  and (2) the Buyers shall pay
to the Company and the Company shall have received in good funds an amount equal
to the Purchase Price against delivery by the Company to the Buyers of the Notes
and the Warrants.

     3. REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF THE BUYERS.

     Each Buyer, severally and not jointly, represents and warrants as to itself
to, and covenants and agrees with, the Company as follows:

     (a) Purchase for Investment. The Buyer is purchasing the Note and acquiring
the Warrants for its own account for  investment and not with a view towards the
public sale or  distribution  thereof within the meaning of the 1933 Act; and in
the event that the Buyer  shall  acquire any Shares  prior to the SEC  Effective

                                     - 8 -
<PAGE>

Date of a  Registration  Statement  covering  the  resale of such  Shares,  such
acquisition  by the Buyer shall be for its own account  for  investment  and not
with a view towards the public sale or  distribution  thereof within the meaning
of the 1933 Act prior to the SEC Effective  Date; and the Buyer has no intention
of making any  distribution,  within the  meaning of the 1933 Act, of the Shares
except  in  compliance  with the  registration  requirements  of the 1933 Act or
pursuant to an exemption therefrom;

     (b) Accredited Investor. The Buyer is an "accredited investor" as that term
is  defined  in Rule 501 of  Regulation  D under  the 1933 Act by reason of Rule
501(a)(3) thereof;

     (c)  Reoffers  and  Resales.  The Buyer will not,  directly or  indirectly,
offer, sell, pledge,  transfer or otherwise dispose of (or solicit any offers to
buy,  purchase or otherwise  acquire or take a pledge of) any of the  Securities
unless registered under the 1933 Act, pursuant to an exemption from registration
under the 1933 Act or in a transaction not requiring registration under the 1933
Act;

     (d)  Company  Reliance.  The Buyer  understands  that (1) the Note is being
offered  and sold and the  Warrants  are  being  issued  to the  Buyer,  (2) the
Interest  Shares,  if any,  will be issued to the Buyer and (3) upon exercise of
the Warrants, the Warrant Shares will be sold to the Buyer, in each such case in
reliance on one or more  exemptions  from the  registration  requirements of the
1933 Act, including, without limitation, Regulation D, and exemptions from state
securities  laws and that the Company is relying upon the truth and accuracy of,
and the Buyer's compliance with, the  representations,  warranties,  agreements,
acknowledgments  and  understandings  of the Buyer set forth herein, in order to
determine the  availability  of such exemptions and the eligibility of the Buyer
to acquire or receive an offer to acquire the Securities;

     (e)  Information  Provided.  The  Buyer  and its  advisors,  if  any,  have
requested,  received and  considered all  information  relating to the business,
properties, operations, condition (financial or other), results of operations or
prospects of the Company and  information  relating to the offer and sale of the
Note and the offer of the Interest Shares and the Warrant Shares deemed relevant
by them  (assuming the accuracy and  completeness  of the SEC Reports and of the
Company's  responses to the Buyer's  requests);  the Buyer and its advisors,  if
any,  have  been  afforded  the  opportunity  to ask  questions  of the  Company
concerning  the  terms  of the  offering  of the  Securities  and the  business,
properties,  operations,  condition (financial or other),  results of operations
and prospects of the Company and its Subsidiaries and have received satisfactory
answers to any such inquiries; without limiting the generality of the foregoing,
the Buyer has had the  opportunity  to obtain and to review the SEC Reports;  in
connection  with its decision to purchase the Note and to acquire the  Warrants,
the  Buyer  has  relied  solely  upon  the  SEC  Reports,  the  representations,
warranties,  covenants and agreements of the Company set forth in this Agreement
and  to be  contained  in  the  other  Transaction  Documents,  as  well  as any
investigation of the Company  completed by the Buyer or its advisors;  the Buyer
understands  that its  investment  in the  Securities  involves a high degree of
risk; and the Buyer  understands  that the offering of the Note is being made to
the Buyer as part of an offering in the aggregate  amount of $750,000  (subject,
however, to the right of the Company at any time prior to execution and delivery
of this Agreement by the Company, in its sole discretion, to accept or reject an
offer by the Buyer to purchase the Note and to acquire the Warrants);

                                     - 9 -
<PAGE>

     (f)  Absence of  Approvals.  The Buyer  understands  that no United  States
federal  or state  agency or any other  government  or  governmental  agency has
passed on or made any recommendation or endorsement of the Securities;

     (g) Securities  Purchase  Agreement.  The Buyer has all requisite power and
authority,   corporate  or  otherwise,  to  execute,  deliver  and  perform  its
obligations under this Agreement and the other agreements  executed by the Buyer
in connection  herewith and to consummate the transactions  contemplated  hereby
and  thereby;  and this  Agreement  has been duly and validly  authorized,  duly
executed and delivered by the Buyer and,  assuming due execution and delivery by
the  Company,  is a valid and  binding  agreement  of the Buyer  enforceable  in
accordance with its terms, except as the enforceability hereof may be limited by
bankruptcy,  insolvency,  reorganization,  moratorium,  fraudulent conveyance or
other  similar  laws  now  or  hereafter  in  effect  relating  to or  affecting
creditors'  rights  generally and general  principles  of equity,  regardless of
whether enforcement is considered in a proceeding in equity or at law; and

     (h) Buyer  Status.  The Buyer is not a "broker"  or "dealer" as those terms
are  defined in the 1934 Act which is  required  to be  registered  with the SEC
pursuant to Section 15 of the 1934 Act.

     (i) Short  Sales.  Neither  Buyer has an open short  position in the Common
Stock of the  Company,  and each Buyer agrees that it will not, and that it will
cause  its  Affiliates  not  to,  engage  in  any  short  sales  of  or  hedging
transactions with respect to the Common Stock.

     4. REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF THE COMPANY.

     The Company  represents and warrants to, and covenants and agrees with, the
Buyers as follows:

     (a) Organization and Authority. The Company and each of the Subsidiaries is
a corporation  duly organized,  validly  existing and in good standing under the
laws of the jurisdiction of its  incorporation,  and (i) each of the Company and
the Subsidiaries  has all requisite  corporate power and authority to own, lease
and operate its  properties and to carry on its business as described in the SEC
Reports and as  currently  conducted,  and (ii) the  Company  has all  requisite
corporate  power and authority to execute,  deliver and perform its  obligations
under this  Agreement  and the other  Transaction  Documents  to be executed and
delivered  by  the  Company  in  connection  herewith,  and  to  consummate  the
transactions  contemplated  hereby and thereby.  Except as set forth on Schedule
4(a), the Company does not have any equity  investment in any other Person other
than the Subsidiaries  listed in Schedule 4(a) hereto. The value on the books of
the Company of the  Subsidiaries  and all other Persons in which the Company has
an equity interest is listed on Schedule 4(a).

     (b)  Qualifications.  The  Company  and each of the  Subsidiaries  are duly
qualified to do business as foreign corporations and are in good standing in all
jurisdictions  where such  qualification  is necessary  and where  failure so to

                                     - 10 -
<PAGE>

qualify  could  have a  material  adverse  effect on the  business,  properties,
operations,  condition (financial or other),  results of operations or prospects
of the Company and the Subsidiaries, taken as a whole.

     (c)  Capitalization.  (1)  The  authorized  capital  stock  of the  Company
consists of (A) 50,000,000 shares of Common Stock, of which 4,507,086 shares are
issued and outstanding and (B) 2,000,000 shares of Preferred  Stock,  $.0001 par
value,  of which (i)  134,680  have  been  designated  as  Series A  Convertible
Preferred Stock,  134,680 of which are issued and  outstanding,  (ii) 1,000 have
been designated as Series B Redeemable  Preferred Stock, 974 of which are issued
and  outstanding,  (iii)  2,000  of  which  have  been  designated  as  Series C
Redeemable Preferred Stock, 2,000 of which are issued and outstanding,  and (iv)
1,500 of which have been designated as Series D Redeemable  Preferred Stock, 100
of which  are  issued  and  outstanding.  Schedule  4(c)  hereto  discloses  all
outstanding  options or warrants  for the  purchase of, or rights to purchase or
subscribe for, or securities  convertible  into,  exchangeable for, or otherwise
entitling  the holder to acquire,  Common  Stock or other  capital  stock of the
Company,  or any contracts or commitments to issue or sell Common Stock or other
capital  stock of the  Company or any such  options,  warrants,  rights or other
securities.

     (2) The Company has duly reserved from its authorized  and unissued  shares
of  Common  Stock  the full  number  of  shares  required  for (A) all  options,
warrants,  convertible securities,  exchangeable securities, and other rights to
acquire  shares of Common  Stock  which are  outstanding  and (B) all  shares of
Common  Stock and options  and other  rights to acquire  shares of Common  Stock
which may be issued or granted  under the stock  option and similar  plans which
have been adopted by the Company or any Subsidiary;  and, immediately  following
the Closing Date, after giving effect to any antidilution or similar  adjustment
arising by reason of issuance of the Notes and the Warrants, the total number of
shares of Common Stock  reserved and required to be reserved from the authorized
and unissued shares of Common Stock for purposes of all such options,  warrants,
convertible  securities,  other  rights,  and stock  option  and  similar  plans
(excluding the Notes and the Warrants) will be 9,462,806. Each outstanding class
or  series  of  securities  of the  Company  for  which  any  such  antidilution
adjustment will occur is identified on Schedule 4(c) attached  hereto,  together
with the amount of such  antidilution  adjustment for each such class or series.
The outstanding  shares of Common Stock of the Company and outstanding  options,
warrants,  rights,  and other  securities  entitling  the holders to purchase or
otherwise acquire Common Stock have been duly and validly authorized and issued.
None of the outstanding shares of Common Stock or options,  warrants, rights, or
other such  securities has been issued in violation of the preemptive  rights of
any securityholder of the Company.  To the knowledge of the Company,  the offers
and sales of the outstanding  shares of Common Stock of the Company and options,
warrants,  rights,  and  other  securities  were at all  relevant  times  either
registered  under the 1933 Act and applicable  state  securities  laws or exempt
from such  requirements.  Except  for as set  forth on  Schedule  4(c)  attached
hereto, no holder of any of the Company's  securities has any rights,  "demand,"
"piggy-back" or otherwise,  to have such securities  registered by reason of the
intention to file, filing or effectiveness of the Registration Statement.

     (d) Concerning  the Shares and the Common Stock.  The Shares have been duly
authorized  and the Interest  Shares,  when issued in payment of interest on the
Notes, and the Warrant Shares,  when issued upon exercise of the Warrants,  will

                                     - 11 -
<PAGE>

be duly and validly issued,  fully paid and  non-assessable and will not subject
the holder thereof to personal liability by reason of being such holder.  Except
as waived by  Metropolitan  Venture  Partners II, LP as  contemplated by Section
7(g) hereof, there are no preemptive or similar rights of any stockholder of the
Company or any other  Person to acquire any of the Shares or the  Warrants.  The
Company has duly  reserved  750,000  shares of Common  Stock for  issuance  upon
exercise of the  Warrants,  and such shares shall  remain so  reserved,  and the
Company shall from time to time reserve such  additional  shares of Common Stock
as shall be  required to be reserved  pursuant to the  Warrants,  so long as the
Warrants are  outstanding.  The Common  Stock is traded on the  Over-The-Counter
Bulletin  Board.  The  Company  knows  of no  reason  that  the  Shares  will be
ineligible for quotation on the Over-The-Counter Bulletin Board.

     (e)  Corporate  Authorization.  This  Agreement  and the other  Transaction
Documents  to which the Company is or will be a party have been duly and validly
authorized by the Company;  this  Agreement has been duly executed and delivered
by the Company and,  assuming  due  execution  and delivery by each Buyer,  this
Agreement  is,  and the Notes,  and the  Warrants  will be,  when  executed  and
delivered  by  the  Company,  valid  and  binding  obligations  of  the  Company
enforceable  in  accordance  with  their   respective   terms,   except  as  the
enforceability  hereof or  thereof  may be limited  by  bankruptcy,  insolvency,
reorganization,  moratorium  or other  similar  laws now or  hereafter in effect
relating to or affecting  creditors' rights generally and general  principles of
equity,  regardless  of whether  enforcement  is  considered  in a proceeding in
equity or at law.

     (f)  Non-contravention.  The  execution  and  delivery  of the  Transaction
Documents by the Company and the  consummation by the Company of the issuance of
the Securities as contemplated by this Agreement and consummation by the Company
of the other transactions  contemplated by the Transaction  Documents do not and
will not,  with or without  the giving of notice or the lapse of time,  or both,
(i) result in any  violation  of any term or  provision  of the  certificate  of
incorporation  (including  all  certificates  of  designation)  or bylaws of the
Company  or any  Subsidiary,  (ii)  except  for the  right of first  refusal  of
Metropolitan Venture Partners II, LP, which right has been waived, conflict with
or result in a breach by the  Company or any  Subsidiary  of any of the terms or
provisions of, or constitute a default under, or result in the  modification of,
or result in the creation or imposition of any lien,  security interest,  charge
or  encumbrance  upon any of the  properties  or  assets of the  Company  or any
Subsidiary  pursuant  to,  any  indenture,  mortgage,  deed of  trust  or  other
agreement or instrument to which the Company or any  Subsidiary is a party or by
which the Company or any  Subsidiary  or any of their  respective  properties or
assets are bound or affected,  in any such case which would be reasonably likely
to have a  material  adverse  effect on the  business,  properties,  operations,
condition  (financial  or other),  results of  operations  or  prospects  of the
Company  and  the   Subsidiaries,   taken  as  a  whole,   or  the  validity  or
enforceability  of, or the  ability of the  Company to perform  its  obligations
under,  the  Transaction  Documents,  (iii) violate or contravene any applicable
law,  rule or  regulation  or any  applicable  decree,  judgment or order of any
court, United States federal or state regulatory body,  administrative agency or
other  governmental body having  jurisdiction over the Company or any Subsidiary
or any of their respective properties or assets, in any such case which would be

                                     - 12 -
<PAGE>

reasonably likely to have a material adverse effect on the business, properties,
operations,  condition (financial or other),  results of operations or prospects
of the  Company  and the  Subsidiaries,  taken as a whole,  or the  validity  or
enforceability  of, or the  ability of the  Company to perform  its  obligations
under,  the Transaction  Documents,  or (iv) have any material adverse effect on
any permit, certification, registration, approval, consent, license or franchise
necessary  for the Company or any  Subsidiary to own or lease and operate any of
its  properties and to conduct any of its business or the ability of the Company
or any Subsidiary to make use thereof.

     (g) Approvals,  Filings, Etc. No authorization,  approval or consent of, or
filing with, any United States or foreign court,  governmental body,  regulatory
agency,  self-  regulatory  organization,  or stock  exchange  or  market or the
stockholders of the Company is required to be obtained or made by the Company or
any Subsidiary for (x) the execution, delivery and performance by the Company of
the  Transaction  Documents,  (y) the  issuance  and sale of the  Securities  as
contemplated  by this  Agreement and the terms of the Notes and the Warrants and
(z) the  performance  by the Company of its  obligations  under the  Transaction
Documents,  other than (1)  registration  of the resale of the Shares  under the
1933 Act as contemplated  by Section 8, (2) as may be required under  applicable
state  securities  or "blue  sky"  laws,  (3) filing of one or more Forms D with
respect to the Securities as required under  Regulation D, and (4) the filing of
a Current  Report on Form 8-K to report  the  transactions  contemplated  by the
Transaction Documents.

     (h) Information  Provided.  The SEC Reports, the Transaction  Documents and
the  instruments  delivered by the Company to the Buyers in connection  with the
closing on the  Closing  Date do not and will not on the date of  execution  and
delivery of this  Agreement,  the date of delivery  thereof to the Buyers and on
the Closing  Date  contain any untrue  statement  of a material  fact or omit to
state any material fact  necessary in order to make the statements  therein,  in
the light of the  circumstances  under which they are made, not  misleading,  it
being understood that for purposes of this Section 4(h), any statement contained
in such information shall be deemed to be modified or superseded for purposes of
this Section  4(h) to the extent that a statement  in any  document  included in
such information  which was prepared and furnished to the Buyers on a later date
or filed with the SEC on a later  date  modifies  or  replaces  such  statement,
whether or not such later prepared or filed statement so states.

     (i)  Conduct  of  Business.  Except as set forth on  Schedule  4(i),  since
September 30, 2004,  neither the Company nor any Subsidiary has (i) incurred any
material  obligation  or liability  (absolute or  contingent)  other than in the
ordinary  course of  business;  (ii)  canceled,  without  payment  in full,  any
material notes,  loans or other obligations  receivable or other debts or claims
held by it other than in the ordinary course of business;  (iii) sold, assigned,
transferred,  abandoned,  mortgaged,  pledged  or  subjected  to lien any of its
material  properties,  tangible  or  intangible,  or rights  under any  material
contract,  permit,  license,  franchise or other  agreement;  (iv) conducted its
business in a manner materially different from its business as conducted on such
date;  (v) declared,  made or paid or set aside for payment any cash or non-cash
distribution on any shares of its capital stock; or (vi) consummated, or entered
into any  agreement  with  respect  to, any  transaction  or event  which  would
constitute a Repurchase  Event. The Company and each Subsidiary owns,  possesses
or has  obtained  all  governmental,  administrative  and third party  licenses,
permits,   certificates,    registrations,   approvals,   consents   and   other
authorizations  necessary  to own or lease (as the case may be) and  operate its

                                     - 13 -
<PAGE>

properties,  whether  tangible or  intangible,  and to conduct  its  business or
operations as currently conducted, except such licenses, permits,  certificates,
registrations,  approvals,  consents and  authorizations the failure of which to
obtain would not have a material  adverse  effect on the  business,  properties,
operations,  condition (financial or other),  results of operations or prospects
of the Company and the Subsidiaries, taken as a whole.

     (j) SEC  Filings.  The Company  has filed all reports  required to be filed
under the 1934 Act and any other  material  reports or documents  required to be
filed with the SEC since  January 1, 2004.  All of such  reports  and  documents
complied, when filed, in all material respects, with all applicable requirements
of the 1933 Act and the 1934 Act.

     (k) Absence of Certain Proceedings.  There is no action, suit,  proceeding,
inquiry  or  investigation  before  or by any  court,  public  board  or body or
governmental  agency  pending  or,  to  the  knowledge  of  the  Company  or any
Subsidiary,  threatened  against or affecting the Company or any Subsidiary,  in
any such case wherein an  unfavorable  decision,  ruling or finding would have a
material  adverse  effect on the  business,  properties,  operations,  condition
(financial or other),  results of operations or prospects of the Company and the
Subsidiaries,  taken  as a  whole,  or  the  transactions  contemplated  by  the
Transaction   Documents  or  which  could  adversely   affect  the  validity  or
enforceability  of, or the  authority  or ability of the  Company to perform its
obligations under, the Transaction Documents;  the Company does not have pending
before the SEC any request for confidential treatment of information and, to the
best of the  Company's  knowledge,  no such  request will be made by the Company
prior to the SEC  Effective  Date;  and to the best of the  Company's  knowledge
there is not pending or contemplated  any, and since January 1, 2002,  there has
been no,  investigation  by the SEC  involving the Company or any current or, to
the knowledge of the Company, any former, director or officer of the Company.

     (l) Financial Statements; Liabilities. The financial statements included in
the SEC Reports present fairly the financial position, results of operations and
cash flows of the Company and the Subsidiaries, at the dates and for the periods
covered  thereby,  have been  prepared in  conformity  with  generally  accepted
accounting  principles  applied on a  consistent  basis  throughout  the periods
covered  thereby,  and  include  all  adjustments  (consisting  only  of  normal
recurring  adjustments)  necessary  to present  fairly the  financial  position,
results of operations and cash flows of the Company and the  Subsidiaries at the
dates  and  for  the  periods  covered  thereby.  Except  as and  to the  extent
disclosed,  reflected or reserved  against in the  financial  statements  of the
Company  and the notes  thereto  included  in the SEC  Reports or  reflected  in
Schedule 4(l) hereto,  neither the Company nor any Subsidiary has any liability,
debt or obligation,  whether  accrued,  absolute,  contingent or otherwise,  and
whether  due or to become  due  which,  individually  or in the  aggregate,  are
material to the Company and the  Subsidiaries,  taken as a whole.  Subsequent to
September  30,  2004,  neither the Company nor any  Subsidiary  has incurred any
liability, debt or obligation of any nature whatsoever which, individually or in
the  aggregate  are  material to the Company  and the  Subsidiaries,  taken as a
whole,  other than those  incurred in the  ordinary  course of their  respective
businesses.  A detailed  description  and the amount of the  Indebtedness of the
Company and Subsidiaries  that will be outstanding on the Closing Date appear on
Schedule 4(l) attached hereto.

                                     - 14 -
<PAGE>

     (m) Material Losses.  Since September 30, 2004, neither the Company nor any
Subsidiary  has  sustained  any  loss  or  interference  with  its  business  or
properties from fire, flood, hurricane,  accident or other calamity,  whether or
not covered by  insurance,  or from any labor  dispute or court or  governmental
action,  order or decree,  which loss or  interference  could be material to the
business,  properties,  operations,  condition (financial or other),  results of
operations or prospects of the Company and the Subsidiaries, taken as a whole.

     (n) Absence of Certain Changes. Except as set forth in Schedule 4(n), since
September 30, 2004,  there has been no material  adverse  change and no material
adverse  development  in  the  business,   properties,   operations,   condition
(financial or other),  results of operations or prospects of the Company and the
Subsidiaries, taken as a whole. The Company's relationship with its customers is
good and the Company has not received any notice that any customer intends,  and
to its knowledge no customer  intends,  to cease doing business with the Company
or decrease in any material respect the amount of business that it does with the
Company.  Since September 30, 2004, the Company has not (i) declared or paid any
dividends,  (ii) sold any assets,  individually or in the aggregate,  outside of
the ordinary course of business consistent with past practice, (iii) had capital
expenditures  outside of the ordinary  course of business  consistent  with past
practice, (iv) engaged in any transaction with any Affiliate except as set forth
in the SEC  Reports  or (v)  engaged  in any other  transaction  outside  of the
ordinary course of business  consistent with past practice.  The Company has not
taken any steps to seek  protection  pursuant to any bankruptcy law nor does the
Company have any  knowledge or reason to believe  that its  creditors  intend to
initiate involuntary bankruptcy proceedings.

     (o)  Intellectual  Property.  Except as set forth on Schedule 4(o): (1) the
Company holds all Intellectual Property,  free and clear of all Encumbrances and
restrictions on use or transfer,  whether or not recorded, and has sole title to
and  ownership of or has the full,  exclusive  right to use, for the life of the
proprietary  right all  Intellectual  Property;  (2) the use of the Intellectual
Property by the Company or any  Subsidiary  does not,  to the  knowledge  of the
Company,  violate or infringe on the rights of any other Person; (3) neither the
Company nor any Subsidiary  has received any notice of any conflict  between the
asserted  rights of others and the Company or any Subsidiary with respect to any
Intellectual  Property;  (4) all filings and other actions necessary to acquire,
maintain,  register,  renew  and  perfect  the  rights  of the  Company  and the
Subsidiaries to all Intellectual  Property used by the Company or any Subsidiary
in its  business  or in which it has an  interest  have  been  duly  made in all
jurisdictions  where  such  rights  are  used  by it;  (5) the  Company  and the
Subsidiaries are in compliance with all terms and conditions of their agreements
relating  to  the  Intellectual  Property;  (6)  neither  the  Company  nor  any
Subsidiary  is or has been a defendant  in any action,  suit,  investigation  or
proceeding  relating to infringement or  misappropriation  by the Company or any
Subsidiary  of any  Intellectual  Property;  (7)  neither  the  Company  nor any
Subsidiary  has  been  notified  of  any  alleged  claim  of   infringement   or
misappropriation by the Company or any Subsidiary of any Intellectual  Property;
(8)  the   Company  has  no   knowledge   of  any  claim  of   infringement   or
misappropriation by the Company or any Subsidiary of any Intellectual  Property;
(9) to the  knowledge of the  Company,  none of the products the Company and the
Subsidiaries are researching, developing, propose to research and develop, make,
have made, use, or sell, infringes or misappropriates any Intellectual  Property
right of any third party;  (10) none of the trademarks and service marks used by
the Company or any  Subsidiary,  to the knowledge of the Company,  infringes the

                                     - 15 -
<PAGE>

trademark or service  mark rights of any third  party;  (11) neither the Company
nor any  Subsidiary has entered into any agreement to indemnify any other person
against any charge of infringement of any  Intellectual  Property;  (12) none of
the  research  and  development  results  and  other  know-how  relating  to the
Company's or the Subsidiaries' respective businesses,  the value of which to the
Company  or  the   Subsidiaries   is   contingent   upon   maintenance   of  the
confidentiality  thereof,  has been  disclosed  to any Person other than Persons
bound by written confidentiality agreements; and (13) the Company owns directly,
or  possesses  adequate  rights to use,  all  Intellectual  Property  used in or
relating to the business of the Company as currently conducted, and none of such
Intellectual  Property  is  owned,  claimed  or  used  by,  or  subject  to  any
Encumbrance of or by, any Subsidiary.

     (p) Internal Accounting Controls.  The Company and each of its Subsidiaries
maintain  a  system  of  internal  accounting  controls  sufficient  to  provide
reasonable  assurance  that (i)  transactions  are executed in  accordance  with
management's general or specific authorizations,  (ii) transactions are recorded
as necessary to permit  preparation of financial  statements in conformity  with
generally  accepted  accounting  principles  and to maintain asset and liability
accountability, (iii) access to assets or incurrence of liabilities is permitted
only in accordance with management's general or specific  authorization and (iv)
the recorded  accountability  for assets and  liabilities  is compared  with the
existing assets and liabilities at reasonable  intervals and appropriate  action
is taken with  respect  to any  difference.  The  Company  maintains  disclosure
controls and  procedures  (as such term is defined in Rule 13a-15 under the 1934
Act) that are effective in ensuring that information required to be disclosed by
the  Company  in the  reports  that it files or  submits  under  the 1934 Act is
recorded, processed,  summarized and reported, within the time periods specified
in the rules and forms of the SEC, including,  without limitation,  controls and
procedures  designed to ensure that information  required to be disclosed by the
Company  in the  reports  that  it  files  or  submits  under  the  1934  Act is
accumulated  and  communicated  to  the  Company's  management,   including  its
principal  executive officer or officers and its principal  financial officer or
officers,   as  appropriate,   to  allow  timely  decisions  regarding  required
disclosure.

     (q)  Compliance  with Law.  Except as set forth on Schedule  4(q)  attached
hereto,  neither the Company nor any  Subsidiary  is in  violation of or has any
liability under any statute, law, rule, regulation, ordinance, decision or order
of any  governmental  agency or body or any court,  domestic or foreign,  except
where such  violation or liability  would not  individually  or in the aggregate
have  a  material  adverse  effect  on  the  business,  properties,  operations,
condition  (financial  or other),  results of  operations  or  prospects  of the
Company and the Subsidiaries,  taken as a whole; and neither the Company nor any
Subsidiary  is aware of any  pending  investigation  which would  reasonably  be
expected to lead to such a claim.

     (r) Properties.  Each of the Company and the Subsidiaries has good title to
all  property,  real and personal  (tangible and  intangible),  and other assets
owned by it, free and clear of all Encumbrances, except as set forth on Schedule
4(r). The leases,  licenses or other  contracts or  instruments  under which the
Company and each  Subsidiary  leases,  holds or is entitled to use any property,
real or personal,  which  individually  or in the  aggregate are material to the
Company  and the  Subsidiaries,  taken as a whole,  are  valid,  subsisting  and
enforceable,  or proposed to be made, by the Company or such  Subsidiary or have

                                     - 16 -
<PAGE>

expired or terminated in accordance  with their terms or have been superseded by
other classes,  contracts or agreements.  Neither the Company nor any Subsidiary
has received notice of any material violation of any applicable law,  ordinance,
regulation,  order or  requirement  relating to its owned or leased  properties.
Neither the Company nor any Subsidiary has any mortgage,  lien, pledge, security
interest  or other  charge or  encumbrance  on any of its  assets or  properties
except as listed in Schedule 4(r) attached hereto.

     (s) Labor Relations.  No material labor problem exists or, to the knowledge
of the  Company  or any  Subsidiary,  is  imminent  with  respect  to any of the
employees of the Company or any  Subsidiary.  Schedule 4(s) sets forth the names
of each of the  employees of the Company,  his or her title or position,  his or
her current salary and any additional compensation arrangements with such person
(e.g. as to raises, bonuses, etc.).

     (t) Insurance.  The Company and the Subsidiaries maintain insurance against
loss or damage by fire or other casualty and such other insurance, including but
not limited to, product liability  insurance,  in such amounts and covering such
risks as the Company believes are commercially reasonable.

     (u) Tax Matters.  Except as set forth in Schedule 4(u), each of the Company
and the Subsidiaries has filed all federal, state and local income and franchise
tax returns  required to be filed and has paid all material  taxes shown by such
returns to be due, and no tax  deficiency has been  determined  adversely to the
Company or any Subsidiary  which has had (nor does the Company or any Subsidiary
have any knowledge of any tax deficiency  which, if determined  adversely to the
Company  or any  Subsidiary,  might  have)  a  material  adverse  effect  on the
business,  properties,  operations,  condition (financial or other),  results of
operations, or prospects of the Company and the Subsidiaries, taken as a whole.

     (v)  Investment  Company.  Neither  the Company  nor any  Subsidiary  is an
"investment  company"  within  the  meaning  of such term  under the  Investment
Company  Act of 1940,  as  amended,  and the  rules and  regulations  of the SEC
thereunder.

     (w) Absence of Brokers,  Finders,  Etc. No broker, finder or similar Person
is entitled to any  commission,  fee or other  compensation  by reason of action
taken by or on  behalf  of the  Company  in  connection  with  the  transactions
contemplated  by this  Agreement,  and the Company  shall pay, and indemnify and
hold  harmless  each Buyer from,  any claim made against any Buyer by any Person
for any such commission, fee or other compensation.

     (x) No Solicitation. No form of general solicitation or general advertising
was used by the Company or, to its knowledge,  any other Person acting on behalf
of the Company, in respect of the Securities or in connection with the offer and
sale of the  Securities.  Neither the Company nor, to its knowledge,  any Person
acting on behalf of the Company  has,  either  directly or  indirectly,  sold or
offered for sale to any Person any of the  Securities  or, within the six months
prior to the date hereof,  any other similar  security of the Company  except as
contemplated  by this  Agreement  or as would not  constitute a violation of the
securities laws; and neither the Company nor any Person authorized to act on its

                                     - 17 -
<PAGE>

behalf will sell or offer for sale any  promissory  notes,  warrants,  shares of
Common  Stock or other  securities  to, or  solicit  any  offers to buy any such
security  from, any Person so as thereby to cause the issuance or sale of any of
the  Securities to be in violation of any of the  provisions of Section 5 of the
1933 Act.

     (y)  ERISA  Compliance.  Each of the  Company  and the  Subsidiaries  is in
compliance in all material respects with all presently applicable  provisions of
ERISA; no "reportable  event" (as defined in ERISA) has occurred with respect to
any "pension plan" (as defined in ERISA) for which the Company or any Subsidiary
would have any liability; neither the Company nor any Subsidiary has incurred or
expects  to  incur  liability  under  (i)  Title  IV of ERISA  with  respect  to
termination  of, or withdrawal  from, any "pension plan" or (ii) Sections 412 or
4971 of the  Code;  and  each  "pension  plan"  for  which  the  Company  or any
Subsidiary  would have any  liability  that is  intended to be  qualified  under
Section 401(a) of the Code is so qualified in all material  respects and nothing
has occurred, whether by action or by failure to act, which would cause the loss
of such qualification.

     (z) Rights Agreement;  Interested Stockholder. Except set forth on Schedule
4(z),  the  Company  has not  adopted  a  shareholder  rights  plan  or  similar
arrangement relating to accumulations of beneficial ownership of Common Stock or
a change in control of the Company.  All  necessary  and proper  action has been
taken  by the  Company  and its  Board of  Directors  such  that the  execution,
delivery and performance of the Transaction Documents and the purchase, sale and
issuance  of the  Securities  will not give rise to the  exercise  of the rights
issued  under the Rights  Agreement  referred to on  Schedule  4(z) or cause any
Buyer to become an  "interested  stockholder"  under Section 203 of the Delaware
General Corporation Law.

     (aa) Sarbanes-Oxley Act. To the knowledge of Michael J. Beecher,  the Chief
Financial  Officer  of  the  Company,  after  due  inquiry,  the  Company  is in
compliance with any and all applicable requirements of the Sarbanes-Oxley Act of
2002 that are effective as of the date hereof,  and any and all applicable rules
and  regulations  promulgated by the SEC thereunder that are effective as of the
date  hereof,  except  such as would not have a material  adverse  effect on the
business,  properties,  operations,  condition (financial or other),  results of
operations or prospects of the Company and the Subsidiaries, taken as a whole.

     (bb)  Consulting  Agreements.  Except as set forth on Schedule  4(bb),  the
Company is not party to any material consulting agreements.

     5. CERTAIN COVENANTS.

     (a) Transfer  Restrictions.  The Buyers  acknowledge and agree that (1) the
Notes  and the  Warrants  have not been and are not being  registered  under the
provisions of the 1933 Act or any state  securities laws and, except as provided
in Section 8, the Shares  have not been and are not being  registered  under the
1933 Act or any state  securities  laws, and that the Notes and the Warrants may
not be  transferred  unless the Buyer  desiring to make such transfer shall have
delivered to the Company an opinion of counsel, reasonably satisfactory in form,
scope and substance to the Company and its counsel,  to the effect that the Note
or the Warrants to be transferred may be transferred  without such  registration
or unless  transferred  in  accordance  with  Rule  144A to a QIB;  (2) no sale,
assignment or other  transfer of a Note or the Warrants or any interest  therein
may be made except in  accordance  with the terms  hereof and  thereof;  (3) the
Shares may not be resold by any Buyer  unless  the  resale  has been  registered

                                     - 18 -
<PAGE>

under the 1933 Act or is made  pursuant  to an  applicable  exemption  from such
registration and the Company shall have received the opinion of counsel provided
for in the second to last sentence of this Section 5(a);  (4) any sale of Shares
under a Registration  Statement  shall be made only in compliance with the terms
of this  Section  5(a) and Section 8  (including,  without  limitation,  Section
8(c)(5));  (5) any sale of the  Securities  made in  reliance on Rule 144 may be
made only in accordance with the terms of Rule 144 and further, if the exemption
provided  by Rule 144 is not  available,  any  resale  of the  Securities  under
circumstances in which the seller,  or the Person through whom the sale is made,
may be deemed to be an  underwriter,  as that term is used in the 1933 Act,  may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder; and (6) the Company is under no obligation to
register the Securities  (other than registration of the resale of the Shares in
accordance  with Section 8) under the 1933 Act or, except as provided in Section
5(d) and Section 8, to comply  with the terms and  conditions  of any  exemption
thereunder.  Prior to the time  particular  Shares are eligible for resale under
Rule 144(k),  no Buyer may transfer the Shares in a  transaction  which does not
constitute a transfer thereof pursuant to the applicable  Registration Statement
in  accordance  with  the  plan of  distribution  set  forth  therein  or in any
supplement to the related  Prospectus  unless the Buyer shall have  delivered to
the Company an opinion of counsel,  reasonably  satisfactory in form,  scope and
substance to the Company and its counsel, that such Shares may be so transferred
without  registration  under the 1933  Act.  Nothing  in any of the  Transaction
Documents  shall  limit the right of a holder of the  Securities  to make a bona
fide  pledge  thereof  to an  institutional  lender  and the  Company  agrees to
cooperate  with any  Investor  who seeks to effect any such pledge by  providing
such  information and making such  confirmations  as reasonably  requested.  The
Company  shall  provide  such  assistance  as  reasonably  necessary  to allow a
transfer of the Notes and Warrants.

     (b)  Restrictive  Legends.  (1) The Buyers  acknowledge  and agree that the
Notes shall bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the Notes):

     This Note has not been  registered  under the  Securities  Act of 1933,  as
     amended (the "1933 Act"), or any state  securities laws. This Note has been
     acquired for investment  only and may not be sold,  transferred or assigned
     unless (1) resale is registered under the Act, (2) the Company has received
     an opinion of counsel reasonably  satisfactory in form, scope and substance
     to the Company and its counsel  that such  registration  is not required or
     (3) sold, transferred or assigned to a QIB pursuant to Rule 144A.

     (2) The Buyers further acknowledge and agree that the Warrants shall bear a
restrictive  legend in  substantially  the following  form (and a  stop-transfer
order may be placed against transfer of the Warrants):

     This Warrant has not been  registered  under the Securities Act of 1933, as
     amended (the "Act"),  and may not be sold,  transferred or assigned  unless
     (1) the resale  hereof is  registered  under the Act,  (2) the  Company has
     received an opinion of counsel  reasonably  satisfactory in form, scope and

                                     - 19 -
<PAGE>

     substance  to the  Company and its counsel  that such  registration  is not
     required or (3) sold,  transferred  or  assigned to a QIB  pursuant to Rule
     144A.

     (3) The Buyers  further  acknowledge  and agree that until such time as the
Shares have been  registered  for resale under the 1933 Act as  contemplated  by
Section 8 or are  eligible  for resale under Rule 144(k) under the 1933 Act, the
certificates for the Shares,  may bear a restrictive legend in substantially the
following form (and a stop-transfer  order may be placed against transfer of the
certificates for the Shares):

     The securities  represented by this  certificate  have not been  registered
     under  the  Securities  Act of 1933,  as  amended  (the  "1933  Act").  The
     securities  have  been  acquired  for  investment  and may  not be  resold,
     transferred  or  assigned  in  the  absence  of an  effective  registration
     statement  for the  securities  under the 1933 Act or an opinion of counsel
     reasonably satisfactory in form, scope and substance to the Company and its
     counsel that registration is not required under the 1933 Act.

     (4) Once the  Registration  Statement  required  to be filed by the Company
pursuant  to Section 8 has been  declared  effective  or  particular  Shares are
eligible for resale  pursuant to Rule 144(k) under the 1933 Act,  thereafter (1)
upon  request  of a Buyer  the  Company  will  substitute  certificates  without
restrictive  legend for certificates for any such Shares issued prior to the SEC
Effective  Date or prior to the  time of such  eligibility,  as the case may be,
which bear such  restrictive  legend and  remove any  stop-transfer  restriction
relating thereto promptly,  but in no event later than three Business Days after
surrender of such certificates by the Buyer, and (2) the Company shall not place
any restrictive  legend on certificates for Interest Shares issued in payment of
interest  on the Notes or on any  Warrant  Shares  issued  upon  exercise of the
Warrants or impose any stop-transfer restriction thereon.

     (c) Reporting Status. During the Registration Period, the Company shall use
commercially  reasonable efforts to timely file all reports required to be filed
with the SEC  pursuant  to Section 13 or 15(d) of the 1934 Act,  and the Company
shall not terminate  its status as an issuer  required to file reports under the
1934 Act even if the 1934 Act or the  rules  and  regulations  thereunder  would
permit such termination.

     (d) Form D. The Company  agrees to file one or more Forms D with respect to
the Securities as required under Regulation D to claim the exemption provided by
Rule 506 of  Regulation D and to provide a copy  thereof to the Buyers  promptly
after such filing.

     (e) [Reserved]

     (f) Limitation on Certain Actions.  From the date of execution and delivery
of this  Agreement  by the parties  hereto to the date of issuance of the Notes,
the Company (1) shall  comply with  Article II of the Notes as if the Notes were
outstanding, (2) shall not take any action which, if the Notes were outstanding,
(A) would  constitute  an Event of Default  or, with the giving of notice or the
passage  of time or both,  would  constitute  an Event of  Default  or (B) would
constitute  a  Repurchase  Event or, with the giving of notice or the passage of
time or both, would constitute a Repurchase Event.

                                     - 20 -
<PAGE>
     (g) Use of Proceeds.  The Company  represents  and agrees that: (1) it does
not own or have any present  intention of acquiring  any Margin  Stock;  (2) the
proceeds  of sale of the Notes will be used as set forth on Schedule  5(g);  (3)
none of the proceeds from the sale of the Notes or Warrant  Shares will be used,
directly or indirectly (A) to pay any existing debt  obligations (B) to make any
loan to or  investment  in any  other  Person  or (C) for the  purpose,  whether
immediate, incidental or ultimate, of purchasing or carrying any Margin Stock or
for the purpose of maintaining,  reducing or retiring any indebtedness which was
originally  incurred to  purchase or carry any stock that is  currently a Margin
Stock  or  for  any  other  purpose  which  might  constitute  the  transactions
contemplated  by this  Agreement a "purpose  credit"  within the meaning of such
Regulation U of the Board of Governors of the Federal  Reserve  System;  and (4)
neither the  Company  nor any agent  acting on its behalf has taken or will take
any action  which might cause this  Agreement or the  transactions  contemplated
hereby to violate  Regulation  T,  Regulation U or any other  regulation  of the
Board of Governors of the Federal  Reserve System or to violate the 1934 Act, in
each case as in effect now or as the same may hereafter be in effect.

     (h)  Commercially  Reasonable  Efforts.  Each of the parties  shall use its
commercially  reasonable efforts timely to satisfy each of the conditions to the
other party's  obligations to sell and purchase the Notes set forth in Section 6
or 7, as the case may be, of this Agreement on or before the Closing Date.

     (i) Debt  Obligation.  So long as any portion of the Notes are outstanding,
the Company  shall cause its books and records to reflect the Notes as a debt of
the Company in its unpaid principal amount, shall cause its financial statements
to reflect  the Notes as a debt of the  Company in such  amount as  required  in
accordance  with  generally   accepted   accounting   principles  and,  whenever
appropriate,  as a  valid  senior  debt  obligation  of the  Company  for  money
borrowed.

     (j)  Follow-on  Financing.  For a period of 45 days after the Closing Date,
Sigma shall have the exclusive rights to lead a Follow-on  Financing on terms to
be agreed upon between Sigma and the Company.  Until the end of such period,  or
until the date Sigma notifies the Company in writing that it will not pursue the
Follow-on  Financing,  if earlier,  the Company  shall not solicit or  entertain
offers  for any other  financing  except as  specifically  approved  by Sigma in
writing.  During such period, and as part of Sigma's due diligence process,  the
Company shall notify Sigma of any payment (or series of related  payments to the
same party or its  affiliates) to be made by the Company in excess of $7,500 two
Business Days prior to any such payment  being made. In addition,  no later than
April 8, 2005, the Company shall institute  procedures requiring two signatories
on any check in excess of $5,000.  Sigma shall also receive a copy of the weekly
disbursements  of the  Company  within  two  Business  Days after the end of the
applicable week  commencing with the report  delivered for the week ending April
1, 2005. Sigma shall notify the Company promptly if it decides not to pursue the
Follow-on Financing.

     (k) Series A Certificate of Designation. The Company shall take such action
as is necessary to promptly amend the  Certificate of  Designations  of Series A
Preferred Stock, but in no event later than five Business Days after the Closing

                                     - 21 -
<PAGE>

Date,  to extend the automatic  conversion of the Series A Preferred  Stock upon
the occurrence of an Automatic  Conversion  Event (as defined in the Certificate
of Designations) from September 25, 2005 to September 25, 2008.

     (l) Certain Restrictions. From the Closing Date through the date upon which
the Follow-on Financing is consummated or, if earlier, the date upon which Sigma
notifies  the  Company in writing  that it will not proceed  with the  Follow-on
Financing,  but in no event later than May 31, 2005,  without the prior  written
consent of Sigma, the Company shall not except as set forth in Schedule 5(l):

     (i) issue any shares of Common Stock or Common Stock Equivalents other than
in  connection  with the Next  Financing or in  connection  with the exercise or
conversion of currently outstanding Common Stock Equivalents;

     (ii) provide to its directors,  officers,  or employees any increase in any
form of  compensation  received or to be by them and shall not reinstate the pay
reductions currently in effect; or

     (iii) make any payments to Jim  Cannavino,  Joe Markus,  Bob  Carberry,  or
Metropolitan  Venture  Partners II, LP or any of their  Affiliates in respect to
accrued fees and other cash obligations owing to them through March 17, 2005.

     6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.

     The Buyers  understand that the Company's  obligation to sell the Notes and
issue the Warrants to the Buyers pursuant to this Agreement is conditioned  upon
satisfaction of the following conditions precedent on or before the Closing Date
(any or all of which may be waived by the Company in its sole discretion):

     (a) On the Closing  Date,  no legal  action,  suit or  proceeding  shall be
pending or  threatened  which seeks to restrain  or  prohibit  the  transactions
contemplated by this Agreement; and

     (b) The  representations  and  warranties  of the Buyers  contained in this
Agreement  shall have been true and correct on the date of this Agreement and on
the  Closing  Date as if made on the  Closing  Date and on or before the Closing
Date the Buyers shall have  performed all covenants and agreements of the Buyers
required to be performed by the Buyers on or before the Closing Date.

     7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.

     The Company understands that each Buyer's obligation to purchase a Note and
acquire  the  Warrants  is  conditioned  upon   satisfaction  of  the  following
conditions  precedent  on or before the Closing Date (any or all of which may be
waived by each Buyer in their sole discretion):

                                     - 22 -
<PAGE>
     (a) On the Closing  Date,  no legal  action,  suit or  proceeding  shall be
pending or  threatened  which seeks to restrain  or  prohibit  the  transactions
contemplated by this Agreement;

     (b) The  representations  and  warranties of the Company  contained in this
Agreement  shall have been true and  correct on the date of this  Agreement  and
shall  be true  and  correct  on the  Closing  Date as if given on and as of the
Closing  Date (except for  representations  given as of a specific  date,  which
representations  shall be true and  correct as of such date and,  except for the
approvals  and filings  referred to in clause (2) of Section  4(g),  which shall
have been obtained or made, on or before the Closing Date), and on or before the
Closing Date the Company shall have  performed  all covenants and  agreements of
the  Company  contained  herein  or in any of the  other  Transaction  Documents
required to be performed by the Company on or before the Closing Date;

     (c) No event which, if the Note were  outstanding,  (1) would constitute an
Event of Default or which,  with the giving of notice or the passage of time, or
both, would constitute an Event of Default shall have occurred and be continuing
or (2) would constitute a Repurchase  Event or which,  with the giving of notice
or the passage of time, or both,  would constitute a Repurchase Event shall have
occurred and be continuing;

     (d) The Company shall have delivered to the Buyers a certificate, dated the
Closing Date,  duly executed by its Chief  Executive  Officer or Chief Financial
Officer,  to the effect set forth in  subparagraphs  (a),  (b),  and (c) of this
Section 7;

     (e) The Company shall have delivered to the Buyers a certificate, dated the
Closing Date, of the Secretary of the Company  certifying (1) the Certificate of
Incorporation  and By-Laws of the Company as in effect on the Closing Date,  (2)
all  resolutions  of the Board of  Directors  (and  committees  thereof)  of the
Company relating to this Agreement and the other  Transaction  Documents and the
transactions  contemplated  hereby and  thereby  and (3) such  other  matters as
reasonably requested by the Buyer;

     (f) On the  Closing  Date,  the Buyers  shall have  received  an opinion of
Beckman,  Lieberman & Barandes,  LLP, counsel for the Company, dated the Closing
Date,  addressed  to  the  Buyers,  in  form,  scope  and  substance  reasonably
satisfactory to the Buyers, substantially in the form attached as Annex III;

     (g) The Company  shall have  delivered to the Buyers the waiver and consent
of  Metropolitan  Venture  Partners  II,  L.P.,  in form,  scope  and  substance
reasonably  satisfactory to Buyers,  substantially in the form attached as Annex
IV;

     (h) The Company  shall have  delivered to the Buyers the waiver and consent
of Mountain Meadow Farm, in form, scope and substance reasonably satisfactory to
Buyers, substantially in the form attached as Annex V; and

     (i) On the Closing  Date,  (i) trading in  securities on the New York Stock
Exchange,  Inc., the American Stock Exchange, Inc. or Nasdaq shall not have been
suspended or  materially  limited and (ii) a general  moratorium  on  commercial
banking  activities  in the State of New York  shall not have been  declared  by
either federal or state authorities.

                                     - 23 -
<PAGE>
     8. REGISTRATION RIGHTS.

     (a)  Mandatory  Registration.  (1) On or  before  the  date  upon  which  a
registration  statement  is  required  to be filed in  connection  with the Next
Financing, but in no event later than August 30, 2005, the Company shall prepare
and file with the SEC a  Registration  Statement  which covers the resale by the
Buyers of (A) a number of shares of Common Stock equal to the maximum  number of
Interest  Shares  issuable  in  payment of  interest  on the Notes  through  the
Maturity Date, determined based upon the Current Fair Market Value of the Common
Stock on the SEC Filing  Date,  and (B) a number of shares of Common Stock equal
to the number of Warrant Shares  issuable upon exercise of the Warrant,  in each
such case as Registrable  Securities,  and which  Registration  Statement  shall
state that,  in  accordance  with Rule 416 under the 1933 Act, the  Registration
Statement also covers such  indeterminate  number of additional shares of Common
Stock as may become  issuable upon exercise of the Warrants to prevent  dilution
resulting from stock splits, stock dividends or similar transactions.

     (2) If the Company is required to file a Registration Statement pursuant to
subsection  (a)  above,  prior to the SEC  Effective  Date,  and during any time
subsequent to the SEC  Effective  Date when the  Registration  Statement for any
reason  is  not  available  for  use by  any  Investor  for  the  resale  of any
Registrable  Securities,  the  Company  shall  not file any  other  registration
statement  or any  amendment  thereto with the SEC under the 1933 Act or request
the  acceleration  of the  effectiveness  of any  other  registration  statement
previously filed with the SEC, other than (A) any registration statement on Form
S-8 and (B) any  registration  statement  or  amendment  which  the  Company  is
required  to  file,   or  as  to  which  the  Company  is  required  to  request
acceleration,  pursuant to any obligation in effect on the date of execution and
delivery of this Agreement  (including  without  limitation  the  obligations to
holders of Series A Preferred Stock of the Company).

     (3) If a Registration Event occurs,  then the Company will make payments to
each Buyer as partial  liquidated  damages for the minimum  amount of damages to
each Buyer by reason thereof,  and not as a penalty, at the rate of 1% per month
of the Purchase Price paid by each Buyer  pursuant to this Agreement  (excluding
the  Purchase  Price with  respect to Shares  already  sold or which may be sold
pursuant to Rule 144(k)),  for each calendar month of the  Registration  Default
Period  (pro  rated for any  period  less than 30 days) for the first two months
after the occurrence of such Registration Event and 2% per month of the Purchase
Price paid by each Buyer  pursuant to this  Agreement  (excluding  the  Purchase
Price with respect to Shares  already sold or which may be sold pursuant to Rule
144(k)),  for each calendar month of the Registration  Default Period (pro rated
for any period less than 30 days) thereafter. Each such payment shall be due and
payable  within  five  (5)  days  after  the end of each  calendar  month of the
Registration  Default Period until the termination of the  Registration  Default
Period and within five (5) days after such  termination.  Such payments shall be
in partial  compensation  to the Buyers,  and shall not  constitute  the Buyers'
exclusive  remedy  for  such  events.  The  Registration  Default  Period  shall
terminate  upon (u) the  filing  of the  Registration  Statement  in the case of
clause (i) of the definition of "Registration Event"; (v) the SEC Effective Date

                                     - 24 -
<PAGE>

in the case of clause (ii) of the definition of  "Registration  Event";  (w) the
ability of each Buyer to effect sales pursuant to the Registration  Statement in
the case of clause (iii) of the  definition  of  "Registration  Event";  (x) the
listing or inclusion and/or trading of the Common Stock on a Trading Market,  as
the case may be, in the case of clause (iv) of the  definition of  "Registration
Event";  (y) the delivery of such shares or  certificates  in the case of clause
(v) of the definition of "Registration Event"; and (z) in the case of the events
described in clauses (ii) and (iii) of the definition of  "Registration  Event",
the earlier  termination  of the  Registration  Period and in each such case any
Registration  Default  Period that commenced by reason of the occurrence of such
event shall terminate if at the time no other  Registration Event is continuing.
The amounts  payable as partial  liquidated  damages  pursuant to this paragraph
shall be  payable,  at the option of the holder,  in lawful  money of the United
States or in shares of Common  Stock valued based upon the average of the Market
Price of the Common  Stock for all of the  Trading  Days during the period of 10
consecutive  Trading Days ending on and  including  the Trading Day  immediately
preceding  the day such  liquidated  damages  are  payable.  Amounts  payable as
partial  liquidated damages hereunder shall cease when the Buyer no longer holds
the Notes, the Warrant or Registrable Securities.

     (b) Obligations of the Company.  In connection with any registration of the
Registrable Securities, the Company shall:

     (1) use its  commercially  reasonable  efforts  to cause  the  Registration
Statement  to  become  effective  as  promptly  as  possible  and  to  keep  the
Registration  Statement  effective at all times during the Registration  Period.
The  Company  shall  submit to the SEC,  within  three  Business  Days after the
Company learns that no review of the Registration  Statement will be made by the
staff of the SEC or that the  staff of the SEC has no  further  comments  on the
Registration  Statement,  as the case  may be, a  request  for  acceleration  of
effectiveness of the Registration Statement to a time and date not later than 48
hours after the submission of such request.  The Company represents and warrants
to the Investors that (a) the Registration  Statement  (including any amendments
or supplements thereto and prospectuses  contained  therein),  at the time it is
first filed with the SEC, at the time it is ordered  effective by the SEC and at
all times during which it is required to be effective  hereunder  (and each such
amendment  and  supplement at the time it is filed with the SEC and at all times
during which it is available  for use in  connection  with the offer and sale of
the Registrable Securities) shall not contain any 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  and (b) the  Prospectus,  at the
time the  Registration  Statement  is declared  effective  by the SEC and at all
times that the  Prospectus is required by this Agreement to be available for use
by any  Investor  and, in  accordance  with  Section  8(c)(4),  any  Investor is
entitled to sell Registrable  Securities  pursuant to the Prospectus,  shall not
contain any 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 in which they were made, not misleading;

     (2)  subject  to  Section  8(b)(5),  prepare  and  file  with  the SEC such
amendments  (including   post-effective   amendments)  and  supplements  to  the
Registration  Statement  and the  Prospectus  as may be  necessary  to keep  the
Registration  Statement  effective,  and the  Prospectus  current,  at all times
during the Registration  Period, and, during the Registration Period (other than

                                     - 25 -
<PAGE>

during any Blackout  Period during which the provision of Section  8(b)(5)(B) as
applicable),  comply  with the  provisions  of the 1933  Act  applicable  to the
Company in order to permit the  disposition by the Investors of all  Registrable
Securities covered by the Registration Statement;

     (3) furnish to Investors whose  Registrable  Securities are included in the
Registration  Statement and such Investors'  respective legal counsel,  promptly
after the same is  prepared  and  publicly  distributed,  filed  with the SEC or
received by the Company,  (1) five copies of the Registration  Statement and any
amendment  thereto and the Prospectus and each amendment or supplement  thereto,
(2) one copy of each letter written by or on behalf of the Company to the SEC or
the staff of the SEC and each item of  correspondence  from the SEC or the staff
of the SEC relating to the Registration Statement (other than any portion of any
thereof which contains information for which the Company has sought confidential
treatment),  each of which the  Company  hereby  determines  to be  confidential
information  and which each  investor  hereby agrees to keep  confidential  as a
confidential  Record in accordance  with Section  8(b)(9) and (3) such number of
copies of the Prospectus and all  amendments  and  supplements  thereto and such
other documents,  as such Investor may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Investor;

     (4) subject to Section 8(b)(5), use its commercially reasonable efforts (i)
to register and qualify the Registrable  Securities  covered by the Registration
Statement  under the  securities or blue sky laws of such  jurisdictions  as any
Investor who owns or holds any Registrable Securities reasonably requests,  (ii)
to  prepare  and to file  in  those  jurisdictions  such  amendments  (including
post-effective   amendments)   and   supplements  to  such   registrations   and
qualifications as may be necessary to maintain the effectiveness  thereof at all
times  during  the  Registration  Period  and  (iii) to take all  other  actions
reasonably necessary or advisable to qualify the Registrable Securities for sale
by the  Investors in such  jurisdictions;  provided,  however,  that the Company
shall not be required in connection  therewith or as a condition  thereto (I) to
qualify to do  business  in any  jurisdiction  where it would not  otherwise  be
required  to qualify but for this  Section  8(b)(4),  (II) to subject  itself to
general  taxation in any such  jurisdiction,  (III) to file a general consent to
service of process in any such  jurisdiction,  (IV) to provide any  undertakings
that cause more than nominal expense or burden to the Company or (V) to make any
change in its  charter or by-laws  which the Board of  Directors  of the Company
determines  to be  contrary  to the  best  interests  of  the  Company  and  its
stockholders;

     (5) (A) as promptly as  practicable  after  becoming aware of such event or
circumstance,   notify  each  Investor  of  the   occurrence  of  any  event  or
circumstance  of which the  Company has  knowledge  (x) as a result of which the
Prospectus,  as then in effect,  includes an untrue statement of a material fact
or omits 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 or (y) which  requires the Company to amend or supplement
the  Registration  Statement  due to the  receipt  from an Investor or any other
selling  stockholder  named in the  Prospectus of new or additional  information
about such Investor or selling  stockholder or its intended plan of distribution
of its Registrable  Securities or other securities  covered by such Registration
Statement,  and use its commercially  reasaonable  efforts promptly to prepare a

                                     - 26 -
<PAGE>

supplement or amendment to the Registration  Statement and Prospectus to correct
such untrue  statement or omission or to add any new or additional  information,
and deliver a number of copies of such  supplement or amendment to each Investor
as such Investor may reasonably request;

     (B)  notwithstanding  Section  8(b)(5)(A) above, if at any time the Company
notifies the Investors as  contemplated  by Section  8(b)(5)(A) the Company also
notifies the  Investors  that the event giving rise to such notice  relates to a
development  involving the Company which occurred subsequent to the later of (x)
the SEC Effective Date and (y) the latest date prior to such notice on which the
Company has amended or supplemented the Registration Statement, then the Company
shall  not be  required  to use  commercially  reasonable  efforts  to make such
amendment during a Blackout Period; provided, however, that in any period of 365
consecutive days the Company shall not be entitled to avail itself of its rights
under this Section  8(b)(5)(B)  with respect to more than two Blackout  Periods;
and provided further,  however, that no Blackout Period may commence sooner than
90 days after the end of an earlier Blackout Period;

     (6) as promptly as practicable  after becoming aware of such event,  notify
each Investor who holds Registrable Securities being offered or sold pursuant to
the Registration Statement of the issuance by the SEC of any stop order or other
suspension  of  effectiveness  of the  Registration  Statement  at the  earliest
possible time;

     (7) permit the Investors who hold Registrable  Securities being included in
the  Registration  Statement,  (or their  designee)  and their  counsel  at such
Investors'  sole expense to review and have a reasonable  opportunity to comment
on the  Registration  Statement and all  amendments and  supplements  thereto at
least two Business Days (or such shorter  period as may  reasonably be specified
by the Company) prior to their filing with the SEC.

     (8) [Reserved]

     (9)  make  available  for  inspection  by any  Investor  and any  Inspector
retained by such Investor, at such Investor's sole expense, all Records as shall
be  reasonably  necessary to enable such  Investor to exercise its due diligence
responsibility and cause the Company's and the Subsidiaries officers,  directors
and  employees to supply all  information  which such  Investor or Inspector may
reasonably request for purposes of such due diligence;  provided,  however, that
such Investor  shall hold in confidence and shall not make any disclosure of any
Record or other  information  which the Company  determines  in good faith to be
confidential,  and of which  determination such Investor is so notified,  unless
(i)  the  disclosure  of  such  Record  is  necessary  to  avoid  or  correct  a
misstatement  or omission in the  Registration  Statement and a reasonable  time
prior to such  disclosure  the Investor  shall have  informed the Company of the
need to so correct  such  misstatement  or omission  and the Company  shall have
failed to correct such misstatement or omission, (ii) the release of such Record
is ordered  pursuant to a subpoena  or other order from a court or  governmental
body of competent  jurisdiction or (iii) the information in such Record has been
made generally  available to the public other than by disclosure in violation of
this or any other  agreement.  The Company shall not be required to disclose any
confidential  information in such Records to any Inspector until and unless such
Inspector shall have entered into a  confidentiality  agreement with the Company
with respect thereto,  substantially in the form of this Section 8(b)(9),  which
agreement  shall permit such  Inspector to disclose  Records to the Investor who

                                     - 27 -
<PAGE>

has retained such Inspector.  Each Investor agrees that it shall,  upon learning
that disclosure of such Records is sought in or by a court or governmental  body
of competent  jurisdiction  or through  other means,  give prompt  notice to the
Company  and  allow  the  Company,   at  the  Company's  expense,  to  undertake
appropriate  action to prevent  disclosure  of, or to obtain a protective  order
for, the Records deemed  confidential.  The Company shall hold in confidence and
shall not make any disclosure of information  concerning an Investor provided to
the  Company  pursuant  to this  Agreement  unless  (i) the  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 the  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 an Investor is sought in
or by a court or  governmental  body of competent  jurisdiction or through other
means,  give prompt  notice to such  Investor and allow such  Investor,  at such
Investor's expense, to undertake appropriate action to prevent disclosure of, or
to obtain a protective order for, such information;

     (10) use its commercially  reasonable  efforts to cause all the Registrable
Securities covered by the Registration Statement as of the SEC Effective Date to
be listed or quoted on the principal  securities  market on which  securities of
the same class or series issued by the Company are then listed or traded;

     (11) provide a transfer agent and registrar,  which may be a single entity,
for the Registrable Securities at all times;

     (12) cooperate  with the Investors who hold  Registrable  Securities  being
offered  pursuant  to  the  Registration  Statement  to  facilitate  the  timely
preparation and delivery of certificates  (not bearing any restrictive  legends)
representing  Registrable  Securities to be offered pursuant to the Registration
Statement and enable such certificates to be in such denominations or amounts as
the  Investors  may  reasonably  request  and  registered  in such  names as the
Investors may request;

     (13)  during the  Registration  Period,  the  Company  shall not bid for or
purchase  any Common  Stock or any right to purchase  Common Stock or attempt to
induce any Person to purchase any such  security or right if such bid,  purchase
or attempt would in any way limit the right of the Investors to sell Registrable
Securities by reason of the limitations set forth in Regulation M under the 1934
Act; and

     (14) take all other reasonable actions necessary to expedite and facilitate
disposition  by the  Investors  of the  Registrable  Securities  pursuant to the
Registration Statement relating thereto.

     (c) Obligations of the Buyers and Other  Investors.  In connection with the
registration  of the  Registrable  Securities,  the  Investors  shall  have  the
following obligations:

                                     - 28 -
<PAGE>
     (1) It shall be a condition  precedent to the obligations of the Company to
complete  the  registration  pursuant  to this  Agreement  with  respect  to the
Registrable Securities of a particular Investor that such Investor shall furnish
to the Company the Required  Information  and shall  execute  such  documents in
connection with such registration as the Company may reasonably request.

     (2)  Each  Investor  by  such  Investor's  acceptance  of  the  Registrable
Securities  agrees to cooperate with the Company as reasonably  requested by the
Company  in  connection  with the  preparation  and  filing of the  Registration
Statement  hereunder,  unless such  Investor  has  notified  the Company of such
Investor's  election to exclude all of such  Investor's  Registrable  Securities
from the Registration Statement;

     (3) Each  Investor  agrees that it will not effect any  disposition  of the
Registrable  Securities except as contemplated in the Registration  Statement or
as otherwise is in compliance with  applicable  securities laws and that it will
promptly notify the Company of any material changes in the information set forth
in  the  Registration   Statement   regarding  such  Investor  or  its  plan  of
distribution;  each Investor  agrees (a) to notify the Company in writing in the
event that such Investor  enters into any material  agreement with a broker or a
dealer for the sale of the Registrable Securities through a block trade, special
offering,  exchange  distribution or a purchase by a broker or dealer and (b) in
connection  with such  agreement,  to  provide to the  Company  in  writing  the
information  necessary to prepare any supplemental  prospectus  pursuant to Rule
424(c) under the 1933 Act which is required with respect to such transaction;

     (4) Each  Investor  acknowledges  that there may  occasionally  be times as
specified in Section 8(b)(5) or 8(b)(6) when the Company must suspend the use of
the Prospectus until such time as an amendment to the Registration Statement has
been filed by the Company and  declared  effective  by the SEC,  the Company has
prepared a supplement to the  Prospectus or the Company has filed an appropriate
report with the SEC pursuant to the 1934 Act.  Each  Investor  hereby  covenants
that it will not sell any  Registrable  Securities  pursuant  to the  Prospectus
during  the  period  commencing  at the time at which  the  Company  gives  such
Investor  notice of the  suspension  of the use of the  Prospectus in accordance
with  Section  8(b)(5) or 8(b)(6) and ending at the time the Company  gives such
Investor  notice that such Investor may thereafter  effect sales pursuant to the
Prospectus, or until the Company delivers to such Investor or files with the SEC
an amended or supplemented Prospectus; and

     (5) In connection with any sale of Registrable  Securities which is made by
an Investor  pursuant  to the  Registration  Statement  (A) if such sale is made
through a broker,  such  Investor  shall  instruct  such  broker to deliver  the
Prospectus to the purchaser or purchasers (or the broker or brokers therefor) in
connection with such sale,  shall supply copies of the Prospectus to such broker
or brokers and shall instruct such broker or brokers to deliver such  Prospectus
to the purchaser in such sale or such  purchaser's  broker;  (B) if such sale is
made in a transaction  directly with a purchaser and not through the  facilities
of any securities  exchange or market,  such Investor shall deliver, or cause to
be delivered,  the Prospectus to such purchaser; and (C) if such sale is made by
any means other than those  described in the immediately  preceding  clauses (A)
and (B), such Investor shall otherwise use its commercially  reasonable  efforts
to comply with the prospectus  delivery  requirements of the 1933 Act applicable
to such sale.

                                     - 29 -
<PAGE>
     (d) Rule 144. With a view to making available to each Investor the benefits
of Rule 144, the Company agrees:

     (1) so long as any Investor  owns  Registrable  Securities,  promptly  upon
request of such Investor, to furnish to such Investor such information as may be
necessary to permit such  Investor to sell  Registrable  Securities  pursuant to
Rule 144 without  registration  and otherwise  reasonably to cooperate with such
Investor and

     (2) if at any time the Company is not required to file reports with the SEC
pursuant  to  Section  13 or  15(d)  of the 1934  Act,  to use its  commercially
reasonable efforts,  upon the request of an Investor, to make publicly available
other  information so long as is necessary to permit  publication by brokers and
dealers  of  quotations  for the  Common  Stock  and  sales  of the  Registrable
Securities in accordance with Rule 15c2-11 under the 1934 Act.

     (e) Piggy-Back Registrations. If at any time the Company shall determine to
prepare and file with the SEC 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 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 Investor who is entitled to registration  rights under this Section
8(e)  written  notice of such  determination  and, if within ten (10) days after
receipt of such notice,  such Investor shall so request in writing,  the Company
shall include in such Registration  Statement all or any part of the Registrable
Securities  such  Investor  requests  to  be  registered,  except  that  if,  in
connection with any underwritten  public offering for the account of the Company
the managing  underwriter(s)  thereof shall impose a limitation on the number of
shares of Common  Stock  which may be  included  in the  Registration  Statement
because,  in such  underwriter(s)'  judgment,  such  limitation  is necessary to
effect an orderly  public  distribution,  then the Company shall be obligated to
include  in  such  Registration  Statement  only  such  limited  portion  of the
Registrable  Securities  with  respect  to which  such  Investor  has  requested
inclusion hereunder.  Any exclusion of Registrable  Securities shall be made pro
rata  among  the  Investors  seeking  to  include  Registrable  Securities,   in
proportion to the number of Registrable Securities sought to be included by such
Investors; provided, however, that the Company shall not exclude any Registrable
Securities unless the Company has first excluded all outstanding  securities the
holders of which are not entitled by right to inclusion  of  securities  in such
Registration Statement; and provided further, however, that, after giving effect
to the immediately  preceding proviso,  any exclusion of Registrable  Securities
shall be made pro rata with  holders  of other  securities  having  the right to
include such securities in the  Registration  Statement,  based on the number of
securities  for which  registration  is requested  except to the extent such pro
rata  exclusion  of such  other  securities  is  prohibited  under  any  written
agreement  entered into by the Company with the holder of such other  securities
prior to the date of this Agreement,  in which case such other  securities shall
be excluded, if at all, in accordance with the terms of such agreement. No right

                                     - 30 -
<PAGE>

to  registration  of  Registrable  Securities  under this  Section 8(e) shall be
construed  to  limit  any  registration  required  under  Section  8(a)  hereof.
Notwithstanding  any other  provision  of this  Agreement,  if any  Registration
Statement  required to be filed pursuant to Section 8(a) of this Agreement shall
have been ordered effective by the SEC and the Company shall have maintained the
effectiveness of such  Registration  Statement as required by this Agreement and
if the Company shall  otherwise have complied in all material  respects with its
obligations  under this  Agreement,  then the Company  shall not be obligated to
register any Registrable  Securities on such Registration  Statement referred to
in this Section 8(e).

     9. INDEMNIFICATION AND CONTRIBUTION.

     (a)  Indemnification.  (1) To the extent not prohibited by applicable  law,
the Company will indemnify and hold harmless each Indemnified Person against any
Claims,  except  Claims for  punitive  damages,  to which any of them may become
subject  under the 1933 Act, the 1934 Act or  otherwise,  insofar as such Claims
(or actions or proceedings, whether commenced or threatened, in respect thereof)
arise  out  of or are  based  upon  any  Violation  or  any of the  transactions
contemplated by this Agreement. Subject to the restrictions set forth in Section
9(a)(3) with respect to the number of legal counsel, the Company shall reimburse
the Investors and each such  controlling  Person,  promptly as such expenses are
incurred and are due and payable,  for any documented  reasonable  legal fees or
other  documented and reasonable  expenses  incurred by them in connection  with
investigating  or  defending  any such  Claim.  Notwithstanding  anything to the
contrary  contained  herein,  the  indemnification  agreement  contained in this
Section  9(a)(1)  shall not apply to: (I) a Claim arising out of or based upon a
Violation  which  occurs in reliance  upon and in  conformity  with  information
relating to an  Indemnified  Person  furnished in writing to the Company by such
Indemnified  Person or an underwriter for such Indemnified  Person expressly for
use in connection with the preparation of any Registration Statement or any such
amendment thereof or supplement thereto;  (II) any Claim arising out of or based
on any statement or omission in any Prospectus,  which statement or omission was
corrected in any  subsequent  Prospectus  that was delivered to the  Indemnified
Person prior to the pertinent  sale or sales of  Registrable  Securities by such
Indemnified  Person;  and (III)  amounts paid in settlement of any Claim if such
settlement is effected  without the prior written  consent of the Company.  Such
indemnity shall remain in full force and effect  regardless of any investigation
made by or on behalf of the Indemnified Person and shall survive the transfer of
the Registrable Securities by the Investors.

     (2) In connection with the Registration Statement,  each Investor agrees to
indemnify and hold harmless, to the same extent and in the same manner set forth
in Section 9(a)(1),  each Indemnified Party against any Claim, except Claims for
punitive damages,  to which any of them may become subject,  under the 1933 Act,
the 1934 Act or otherwise,  insofar as such Claim arises out of or is based upon
any  Violation,  in each case to the extent (and only to the  extent)  that such
Violation  occurs in reliance  upon and in conformity  with written  information
furnished to the Company by such Investor  expressly for use in connection  with
such Registration  Statement or any amendment thereof or supplement thereto; and
such Investor will reimburse any legal or other expenses  reasonably incurred by
them in connection  with  investigating  or defending any such Claim;  provided,
however,  that the indemnity  agreement  contained in this Section 9(a)(2) shall
not apply to  amounts  paid in  settlement  of any Claim if such  settlement  is
effected without the prior written consent of such Investor;  provided, further,
however,  that the Investor shall be liable under this Section  9(a)(2) for only

                                     - 31 -
<PAGE>

that  amount of all  Claims in the  aggregate  as does not  exceed the amount by
which the  proceeds  to such  Investor  as a result  of the sale of  Registrable
Securities  pursuant to such  Registration  Statement exceeds the amount paid by
such Investor for such  Registrable  Securities.  Such indemnity shall remain in
full force and effect  regardless of any  investigation  made by or on behalf of
such  Indemnified  Party and  shall  survive  the  transfer  of the  Registrable
Securities by the Investors.  Notwithstanding anything to the contrary contained
herein,  the  indemnification  agreement  contained in this Section 9(a)(2) with
respect  to any  preliminary  prospectus  shall not inure to the  benefit of any
Indemnified Party if the untrue statement or omission of material fact contained
in such  preliminary  prospectus  was corrected on a timely basis in the related
Prospectus, as then amended or supplemented.

     (3) Promptly  after receipt by an Indemnified  Person or Indemnified  Party
under this Section 9(a) of notice of the  commencement of any action  (including
any governmental action), such Indemnified Person or Indemnified Party shall, if
a Claim in respect  thereof is to be made against any  indemnifying  party under
this  Section  9(a),   deliver  to  the  indemnifying  party  a  notice  of  the
commencement  thereof  and the  indemnifying  party  shall  have  the  right  to
participate in, and, to the extent the  indemnifying  party so desires,  jointly
with any other indemnifying  party similarly  noticed,  to assume control of the
defense thereof with counsel  reasonably  satisfactory to the Indemnified Person
or the  Indemnified  Party,  as the  case  may be;  provided,  however,  that an
Indemnified  Person or Indemnified  Party shall have the right to retain its own
counsel with the fees and expenses to be paid by the indemnifying  party, if, in
the  reasonable  opinion of counsel  retained  by the  indemnifying  party,  the
representation  by such counsel of the Indemnified  Person or Indemnified  Party
and the  indemnifying  party would be  inappropriate  due to actual or potential
conflicting  interests between such Indemnified  Person or Indemnified Party and
any other party  represented by such counsel in such  proceeding,  in which case
the indemnifying  party shall not be responsible for more than one such separate
counsel,  and one  local  counsel  in each  jurisdiction  in which an  Action is
pending, for all Indemnified Persons or Indemnified Parties, as the case may be.
The failure to deliver notice to the indemnifying party within a reasonable time
of the commencement of any such action shall not relieve such indemnifying party
of any  liability  to the  Indemnified  Person or  Indemnified  Party under this
Section 9(a), except to the extent that the indemnifying  party is prejudiced in
its ability to defend such action. The indemnification  required by this Section
9(a) shall be made by periodic  payments of the amount thereof during the course
of the investigation or defense,  as such expense,  loss, damage or liability is
incurred and is due and payable.

     (b)  Contribution.  To the extent any  indemnification  by an  indemnifying
party as set  forth in  Section  9(a)  above is  applicable  by its terms but is
prohibited or limited by law, the indemnifying  party agrees to make the maximum
contribution  with respect to any amounts for which it would otherwise be liable
under Section 9(a) to the fullest extent  permitted by law. In  determining  the
amount of contribution to which the respective parties are entitled, there shall
be considered the relative fault of each party, the parties' relative  knowledge
of and access to  information  concerning  the matter with  respect to which the
claim was  asserted,  the  opportunity  to correct and prevent any  statement or
omission  and  any  other  equitable   considerations   appropriate   under  the
circumstances;  provided,  however, that (a) no contribution shall be made under
circumstances  where the maker  would not have been  liable for  indemnification
under the fault  standards  set forth in Section  9(a),  (b) no Person guilty of
fraudulent  misrepresentation  (within the meaning of Section  11(f) of the 1933
Act) shall be entitled to contribution  from any other Person who was not guilty

                                     - 32 -
<PAGE>

of such fraudulent  misrepresentation and (c) the aggregate  contribution by any
seller of  Registrable  Securities  shall be  limited to the amount by which the
proceeds  received by such seller from the sale of such  Registrable  Securities
exceeds the amount paid by such Investor for such Registrable Securities.

     (c) Other Rights.  The  indemnification  and contribution  provided in this
Section  shall be in addition to any other rights and remedies  available at law
or in equity.

     10. MISCELLANEOUS.

     (a) Governing Law. THIS AGREEMENT  SHALL BE GOVERNED BY AND  INTERPRETED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

     (b) Headings. The headings,  captions and footers of this Agreement are for
convenience   of   reference   and  shall  not  form  part  of,  or  affect  the
interpretation of, this Agreement.

     (c)  Severability.  If any provision of this Agreement  shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or  enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.

     (d) Notices.  Any notices required or permitted to be given under the terms
of this  Agreement  shall be in  writing  and  shall  be sent by mail,  personal
delivery,  telephone  line  facsimile  transmission,  the  receipt  of  which is
electronically  confirmed,  or courier  and shall be  effective  five days after
being placed in the mail, if mailed, or upon receipt,  if delivered  personally,
by telephone line facsimile  transmission or by courier,  in each case addressed
to a party at such party's  address (or telephone  line  facsimile  transmission
number) shown in the  introductory  paragraph or on the  signature  page of this
Agreement  or such other  address  (or  telephone  line  facsimile  transmission
number)  as a party  shall  have  provided  by  notice  to the  other  party  in
accordance with this provision.  In the case of any notice to the Company,  such
notice  shall  be  addressed  to  the  Company  at  its  address  shown  in  the
introductory  paragraph of this Agreement,  Attention:  Chief Financial  Officer
(telephone  line  facsimile  number  (631) 563- 8085),  and a copy shall also be
given to:  Beckman,  Lieberman & Barandes,  LLP, 116 John Street,  New York, New
York  10038,   Attention:   Robert  Barandes,  Esq.  (telephone  line  facsimile
transmission  number  (212)  608-9687),  and in the  case of any  notice  to the
Buyers, a copy shall be given to: Moomjian & Waite, LLP, 100 Jericho Quadrangle,
Jericho,  New York 11753  (telephone  line facsimile  transmission  number (516)
937-5050).

     (e) Counterparts. This Agreement may be executed in counterparts and by the
parties hereto on separate counterparts,  each of which shall be deemed to be an
original and all of which together shall constitute one and the same instrument.
A telephone line facsimile transmission of this Agreement bearing a signature on
behalf of a party hereto shall be legal and binding on such party. Although this
Agreement  is dated as of the date first set forth  above,  the  actual  date of
execution  and  delivery of this  Agreement  by each party is the date set forth
below such party's signature on the signature page hereof. Any reference in this
Agreement  or in any of the  documents  executed  and  delivered  by the parties

                                     - 33 -
<PAGE>

hereto in connection  herewith to (1) the date of execution and delivery of this
Agreement by a Buyer shall be deemed a reference to the date set forth below the
Buyer's  signature on the signature  page hereof,  (2) the date of execution and
delivery of this  Agreement  by the Company  shall be deemed a reference  to the
date set forth below the Company's  signature on the  signature  page hereof and
(3) the  date of  execution  and  delivery  of this  Agreement,  or the  date of
execution and delivery of this Agreement by the Buyers and the Company, shall be
deemed a reference to the later of the dates set forth below the  signatures  of
the parties on the signature page hereof.

     (f) Entire Agreement;  Benefit.  This Agreement,  including the Annexes and
Schedules  hereto,  constitutes the entire agreement  between the parties hereto
with respect to the subject matter hereof. There are no restrictions,  promises,
warranties,  or  undertakings,  other than those set forth or referred to herein
with  respect to the  subject  matter  hereof.  This  Agreement,  including  the
Annexes, supersedes all prior agreements and understandings,  whether written or
oral, between the parties hereto with respect to the subject matter hereof. This
Agreement and the terms and  provisions  hereof are for the sole benefit of only
the Company, the Buyers and their respective successors and permitted assigns.

     (g) Waiver. Failure of any party to exercise any right or remedy under this
Agreement or otherwise,  or delay by a party in exercising such right or remedy,
or any course of dealing  between  the  parties,  shall not  operate as a waiver
thereof or an amendment hereof,  nor shall any single or partial exercise of any
such right or power,  or any abandonment or  discontinuance  of steps to enforce
such a right or  power,  preclude  any  other or  further  exercise  thereof  or
exercise of any other right or power.

     (h)  Amendment.  (1)  No  amendment,  modification,  waiver,  discharge  or
termination  of any provision of this  Agreement on or prior to the Closing Date
nor consent to any  departure by the Buyer or the Company  therefrom on or prior
to the Closing Date shall in any event be effective  unless the same shall be in
writing and signed by all parties,  and in any such case shall be effective only
in the specific instance and for the purpose for which given.

     (2) No amendment,  modification,  waiver,  discharge or  termination of any
provision of this Agreement  after the Closing Date nor consent to any departure
by the Company  therefrom after the Closing Date shall in any event be effective
unless the same shall be in writing and signed (x) by the Company if the Company
is to be charged with enforcement or (y) by a majority in interest of the Buyers
(which must include  Metropolitan  Venture Partners II, L.P., except in the case
where  the  rights  of  Metropolitan  Venture  Partners  II,  L.P.  would not be
materially  adversely  affected by a waiver,  in which case their prior  written
consent shall not be required) if the Buyers are to be charged with enforcement,
based upon the aggregate principal amount of the Notes then outstanding,  and in
any such case  shall be  effective  only in the  specific  instance  and for the
purpose for which given. Any such amendment,  modification, waiver, discharge or
termination shall affect the Investors proportionally.

                                     - 34 -
<PAGE>

     (3) No course of dealing  between the parties  hereto  shall  operate as an
amendment of this Agreement.

     (i) Further  Assurances.  Each party to this Agreement will perform any and
all acts and execute any and all  documents as may be necessary and proper under
the  circumstances  in order to  accomplish  the  intents  and  purposes of this
Agreement and to carry out its provisions.

     (j) Assignment of Certain Rights and Obligations. The rights of an Investor
under Sections 5(a), 5(b), 8, 9, and 10 of this Agreement shall be automatically
assigned  by such  Investor  to any  transferee  of all or any  portion  of such
Investor's  Registrable  Securities  (or all or any  portion of the Notes or the
Warrants) only if: (1) such Investor  agrees in writing with such  transferee to
assign such  rights,  and a copy of such  agreement  is furnished to the Company
within a reasonable  time after such  assignment,  (2) the Company is,  within a
reasonable  time after such transfer,  furnished with notice of (A) the name and
address of such  transferee  and (B) the  securities  with respect to which such
rights and obligations  are being  transferred,  (3) immediately  following such
transfer or assignment the further disposition of Registrable  Securities by the
transferee or assignee is  restricted  under the 1933 Act and  applicable  state
securities  laws, and (4) at or before the time the Company  received the notice
contemplated  by clause (2) of this  sentence the  transferee  agrees in writing
with the  Company to be bound by all of the  provisions  contained  in  Sections
5(a),  5(b), 8, 9, and 10 hereof.  Upon any such transfer,  the Company shall be
obligated to such  transferee  to perform all of its  covenants  under  Sections
5(a), 5(b), 8, 9, and 10 of this Agreement as if such transferee were the Buyer.
In  connection  with any such transfer the Company  shall,  at its sole cost and
expense,  promptly  after such transfer take such actions as shall be reasonably
acceptable to the  transferring  Investor and such transferee to assure that the
Registration  Statement  and  related  Prospectus  for  which  the  transferring
Investor is a selling  stockholder  are available for use by such transferee for
sales of the  Registrable  Securities  in  respect  of  which  such  rights  and
obligations  have been so transferred.  Transfer of the Note shall be limited as
provided  therein  and  transfer  of the  Warrants  shall be limited as provided
therein.

     (k) Expenses. The Company shall be responsible for its expenses (including,
without limitation, the legal fees and expenses of its counsel),  incurred by it
in connection  with the  negotiation  and execution of, and closing  under,  and
performance of, this Agreement.  Whether or not the closing occurs,  the Company
shall be  obligated to pay the legal fees and  expenses  and  out-of-pocket  due
diligence  expenses of Sigma,  not in excess of $40,000.00,  and of Metropolitan
Venture  Partners  II,  LP, not in excess of  $15,000,  in  connection  with the
negotiation  and execution of, and closing under,  this  Agreement.  At closing,
Sigma shall withhold  $40,000.00 and Metropolitan  Venture Partners II, LP shall
withhold $15,000 from the Purchase Price payable to the Company.  Within 30 days
after closing,  Sigma and  Metropolitan  Venture Partners II, LP shall provide a
detailed  accounting  of their  fees and  expenses  for  which  the  Company  is
responsible  hereunder,  and shall pay to the Company any difference between the
amount  withheld and the actual fees and  expenses  incurred.  In addition,  the
Company shall  reimburse up to $10,000 of fees and expenses  incurred by Persons
(not to exceed  $5,000 per  Person) to whom a portion of the Notes and  Warrants
purchased  by  Sigma  may be  assigned.  All  reasonable  expenses  incurred  in
connection with  registrations,  filings or qualifications  pursuant to Sections
5(d),  5(e),  5(g)  and 8 of  this  Agreement  shall  be  paid  by the  Company,
including,  without  limitation,  all registration,  listing and  qualifications

                                     - 35 -
<PAGE>

fees, printers and accounting fees and the fees and disbursements of counsel for
the Company and the  Investors but excluding (a) fees and expenses of investment
bankers retained by any Investor and (b) brokerage  commissions  incurred by any
Investor.  The Company  shall pay on demand all expenses  incurred by the Buyers
after the Closing Date, including reasonable  attorneys' fees and expenses, as a
consequence  of,  or in  connection  with (1) the  negotiation,  preparation  or
execution of any  amendment,  modification  or waiver of any of the  Transaction
Documents,  (2) any default or breach of any of the  Company's  obligations  set
forth  in  any  of  the  Transaction  Documents,  and  (3)  the  enforcement  or
restructuring of any right of, including the collection of any payments due, the
Buyers  under  any  of  the  Transaction  Documents,  including  any  action  or
proceeding  relating  to such  enforcement  or any  order,  injunction  or other
process  seeking to restrain  the Company from paying any amount due the Buyers.
Except as otherwise  provided in this Section 10(k), each of the Company and the
Buyers shall bear their own expenses in connection  with this  Agreement and the
transactions contemplated hereby.

     (l)  Termination.  (1) Each Buyer  shall have the right to  terminate  this
Agreement by giving notice to the Company at any time at or prior to the Closing
Date if:

          (A) the Company shall have failed, refused, or been unable at or prior
     to the date of such  termination  of this  Agreement  to perform any of its
     obligations  hereunder  required to be performed  prior to the time of such
     termination;

          (B)  any  condition  to  such  Buyer's  obligations  hereunder  is not
     fulfilled  at or  prior  to the  time  such  condition  is  required  to be
     satisfied; or

          (C) the closing shall not have occurred on a Closing Date on or before
     March 31, 2005,  other than solely by reason of a breach of this  Agreement
     by such Buyer.

Any such  termination  shall be effective  upon the giving of notice  thereof by
such Buyer. Upon such termination,  such Buyer shall have no further  obligation
to the Company  hereunder  and the Company shall remain liable for any breach of
this Agreement or the other documents  contemplated  hereby which occurred on or
prior to the date of such termination.

     (2) The Company shall have the right to terminate  this Agreement by giving
notice to the Buyers at any times at or prior to the Closing Date if the closing
shall not have  occurred on a Closing Date on or before  March 31,  2005,  other
than solely by reason of a breach of this  Agreement by the Company,  so long as
the Company is not in breach of this Agreement at the time it gives such notice.
Any such termination shall be effective upon the giving of notice thereof by the
Company.  Upon such  termination,  neither the Company nor the Buyers shall have
any  further  obligation  to one  another  hereunder,  except for the  Company's
liability for the Buyers' expenses as provided in Section 10(k).

     (m) Survival.  The respective  representations,  warranties,  covenants and
agreements  of the Company and the Buyers  contained in this  Agreement  and the
documents  delivered  in  connection  with  this  Agreement  shall  survive  the
execution and delivery of this Agreement and the other Transaction Documents and
the closing  hereunder and delivery of and payment for the Notes and issuance of

                                     - 36 -
<PAGE>

the  Warrants,  and shall  remain in full  force and  effect  regardless  of any
investigation  made by or on behalf of the Buyers or any Person  controlling  or
acting on behalf of the Buyers or by the  Company or any Person  controlling  or
acting on behalf of the  Company  for a period  ending on the earlier of (x) the
date which is four years  after the  Closing  Date and (y) the date which is two
years after the Company shall have paid in full all amounts due from the Company
under the  Transaction  Documents and  performed in full all of its  obligations
under the Transaction Documents.

     (n) Public  Statements,  Press  Releases,  Etc.  The Company and the Buyers
shall have the right to approve before  issuance any press releases or any other
public  statements  with  respect  to  the  transactions   contemplated  hereby;
provided, that the Buyers shall use good faith efforts to provide such approval;
and provided,  further, however, that the Company shall be entitled, without the
prior  approval  of the  Buyers,  to make any  press  release  or  other  public
disclosure with respect to such transactions as is required by applicable law or
applicable  requirements of any stock market on which  securities of the Company
are listed for trading (although the Buyers shall be consulted by the Company in
connection with any such press release or other public  disclosure  prior to its
release and shall be provided with a copy thereof).

     (o) Construction.  The language used in this Agreement will be deemed to be
the language chosen by the parties to express their mutual intent,  and no rules
of strict construction will be applied against any party.

               [Remainder of This Page Intentionally Left Blank]

                                     - 37 -
<PAGE>

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
duly executed by their respective  officers or other  representatives  thereunto
duly authorized on the respective dates set forth below their signatures hereto.

                        SIGMA OPPORTUNITY FUND, LLC

                        By:  SIGMA CAPITAL ADVISORS, LLC

                        By:/s/Thom Waye
                           ------------------------------------------
                           Name:  Thom Waye
                           Title:  Manager

                        Date:  March 29, 2005

                        Address:
                                c/o Sigma Capital Advisors, LLC
                                800 Third Avenue
                                Suite 1701
                                New York, New York 10022

                        Facsimile No.:  (212) 937-3558

                        METROPOLITAN VENTURE PARTNERS
                        II, L.P.

                        By:  METROPOLITAN VENTURE
                        PARTNERS (Advisors), L.P., as general partner

                        By:  METROPOLITAN VENTURE
                        PARTNERS CORP., as general partner

                        By:/s/Michael Levin
                           ------------------------------------------
                           Name:  Michael Levin
                           Title: Managing Director

                        Date:  March 29, 2005

                        Address:
                        257 Park Avenue South
                        15th Floor
                        New York, NY 10010
                        Facsimile No.:  (212) 844-3699

                                     - 38 -
<PAGE>

                        DIRECT INSITE CORP.

                        By:/s/Michael J. Beecher
                           ------------------------------------------
                           Name:  Michael J. Beecher
                           Title: Chief Financial Officer

                        Date: March 29, 2005

                        Address:
                        80 Orville Drive
                        Bohemia, New York 11716
                        Facsimile No.: (631) 563-8085

                                     - 39 -
<PAGE>

The  disclosure  of any  matter  in  these  schedules  shall be  deemed  to be a
disclosure  for all  purposes of the  Agreement  to which the  relevance of such
matter is reasonably apparent on its face.

                                 Schedule 2(a)
                                 -------------

<TABLE>
<CAPTION>
                                              Purchase Price/             Warrant Shares Initially Issuable
           Name and Address              Principal Amount of Note              Upon Exercise of Warrants
           ----------------              ------------------------         ---------------------------------
<S>                                               <C>                                    <C>
Sigma Opportunity Fund, LLC                       $650,000                               650,000
c/o Sigma Capital Advisors, LLC
800 Third Avenue
Suite 1701
New York, New York 10022

Metropolitan Venture Partners II, LP              $100,000                               100,000
257 Park Avenue South
15th Floor
New York, NY 10010
</TABLE>

                                     - 40 -Exhibit 4.2

THIS NOTE HAS NOT BEEN  REGISTERED  UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "1933 ACT").  PURSUANT TO THE SECURITIES PURCHASE AGREEMENT,  THIS NOTE HAS
BEEN ACQUIRED FOR INVESTMENT  ONLY AND MAY NOT BE SOLD,  TRANSFERRED OR ASSIGNED
IN THE ABSENCE OF  REGISTRATION  OF THE RESALE  THEREOF UNDER THE 1933 ACT OR AN
OPINION OF COUNSEL  REASONABLY  SATISFACTORY IN FORM, SCOPE AND SUBSTANCE TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

                              DIRECT INSITE CORP.

                        SENIOR SUBORDINATED SECURED NOTE

No. ___                                                         $__________

Bohemia, New York
March 29, 2005

     FOR  VALUE   RECEIVED,   DIRECT  INSITE  CORP.,   a  Delaware   corporation
(hereinafter    called   the    "Company"),    hereby   promises   to   pay   to
------------------------------------------------------------------------------
or  registered  assigns  (the  "Holder"),   or  order,  the  sum  of  __________
($__________), on the Maturity Date, and to pay interest on the unpaid principal
balance hereof at the Applicable Rate  commencing June 28, 2005,  until the same
becomes  due  and  payable,  whether  at  maturity  or upon  acceleration  or by
repurchase  in  accordance  with the terms  hereof  or  otherwise.  Any  amount,
including,  without  limitation,  principal  of or  interest on this Note or the
Optional  Redemption Price or the Repurchase  Price,  that is payable under this
Note and that is not paid when due shall bear  interest at the Default Rate from
the due date thereof  until the same is paid  ("Default  Interest").  No regular
interest shall be due with respect to the period from March 29, 2005 to June 28,
2005.  Regular  interest  shall be payable in arrears on each  Interest  Payment
Date, commencing on October 1, 2005, on the principal amount outstanding on such
date.  Regular interest on this Note shall be computed on the basis of a 360-day
year of twelve 30-day months and actual days elapsed.  No regular interest shall
be payable on an Interest Payment Date on any portion of the principal amount of
this Note which shall have been redeemed prior to such Interest  Payment Date so
long as the  Company  shall  have  complied  in full with its  obligations  with
respect to such redemption.

     All  payments of  principal of and  premium,  if any,  interest,  and other
amounts  on this Note  shall be made in  lawful  money of the  United  States of
America,  or, at the option of the Holder and subject to the  provisions of this
Note,  interest  payable on any Interest Payment Date may be paid in whole or in
part in fully paid and  nonassessable  shares of Common Stock. All cash payments
shall be made by wire transfer of immediately available funds to such account as
the Holder may from time to time designate by written notice in accordance  with
the  provisions  of this Note.  Whenever  any amount  expressed to be due by the
terms of this Note is due on any day which is not a Business Day, the same shall
instead be due on the next  succeeding  day which is a Business  Day and, in the
case of any  Interest  Payment  Date which is not the date on which this Note is
paid in full,  the  extension  of the due date  thereof  shall not be taken into
account for  purposes of  determining  the amount of interest  due on such date.
Certain capitalized terms used in this Note are defined in Article VI.

<PAGE>

     The  obligations  of the  Company  under  this Note  shall rank in right of
payment  junior to the existing  bank lines with JP Morgan Chase Bank,  Sterling
National  Bank,  Silicon  Valley  Bank,  and DIRI Rec Fund LLC and senior to all
other  obligations  of the Company for  indebtedness  for borrowed  money or the
purchase  price of  property.  This Note is issued  pursuant  to the  Securities
Purchase  Agreement and the Holder of this Note and this Note are subject to the
terms and entitled to the benefits of the Securities Purchase Agreement.

     The following terms shall apply to this Note:

                                   ARTICLE I

                     PAYMENT OF CERTAIN INTEREST IN COMMON
                           STOCK; OPTIONAL REDEMPTION

     1.1 Issuance of Common Stock in Lieu of Cash Interest.

     (a) (1) The Holder may  exercise  its right to elect to receive  payment of
interest on this Note wholly or partly in Common Stock (herein  sometimes called
the "Share Interest  Payment  Option") with respect to any Interest Payment Date
only by giving  notice of such  election  to the Company not less than 5 or more
than 10 Trading Days prior to such  Interest  Payment  Date,  which notice shall
state the percentage of the interest payable on such Interest Payment Date which
is to be paid in  Interest  Payment  Shares,  and which  payment of  interest in
Common  Stock shall be subject to the  approval of the  Company.  If the Company
does not  approve the  issuance of share of Common  Stock in payment of interest
with respect to any Interest  Payment Date,  the Company shall pay such interest
in cash;  provided,  however,  if the  Company  does  not pay  such  cash by the
Interest Payment Date, such interest shall be paid in shares of Common Stock. If
the Holder elects the Share Interest Payment Option with respect to a particular
Interest  Payment Date and the Company  approves such issuance or is required to
issue shares of Common  Stock,  the Company shall issue to the Holder in respect
of such  Interest  Payment Date the  aggregate  number of whole shares of Common
Stock  determined by dividing the per share  Interest  Share Price of the Common
Stock on the applicable  Interest Payment Date into an amount equal to the total
amount of lawful  money of the United  States of America  which the Holder would
receive if the aggregate  amount of interest on this Note which is being paid in
Common Stock were being paid in such lawful money.  Notwithstanding  anything to
the  contrary  herein,  if the  Interest  Share Price on a  particular  Interest
Payment Date is greater than 120% of the Market Price of the Common Stock on the
date the Holder  gives the Company  notice  that it has elected to exercise  the
Share Interest  Payment  Option with respect to such Interest  Payment Date (the
"Share  Interest  Notice  Date"),  the Holder may,  at its  option,  require the
Company to make such payment of interest on such Interest Payment Date in cash.

     (2) If the Holder elects the Share Interest  Payment Option with respect to
an Interest  Payment Date and the Company  approves such issuance or is required
to issue shares of Common Stock,  the Interest  Payment Shares for such Interest

                                       2
<PAGE>

Payment Date shall become issuable on such Interest Payment Date and the Company
shall deliver,  or cause to be delivered,  the  appropriate  number of shares of
Common  Stock to the  Holder  within  five  Trading  Days  after the  applicable
Interest Payment Date. If in any case the Company shall fail to deliver or cause
to be delivered  such number of shares of Common Stock to the Holder within such
period of five  Trading  Days,  then in  addition to any other  liabilities  the
Company may have hereunder and under applicable law (1) the Company shall pay or
reimburse  the  Holder on demand  for all out-  of-pocket  expenses,  including,
without limitation,  reasonable fees and expenses of legal counsel,  incurred by
the Holder as a result of such failure, and (2) the Holder may by written notice
(which  may be  given by mail,  courier,  personal  service  or  telephone  line
facsimile transmission) or oral notice (promptly confirmed in writing), given at
any time prior to delivery to the Holder of the shares of Common Stock  issuable
in connection with such exercise of the Share Interest  Payment Option,  require
payment in cash of the  interest  in respect of which the Holder  exercised  the
Share Interest  Payment Option,  in which case the amount of such interest shall
be  immediately  due  and  payable,  with  Default  Interest  thereon  from  the
applicable Interest Payment Date until paid in full and the Company shall not be
obligated or entitled to issue such Interest  Payment  Shares in respect of such
Interest  Payment  Date.  The Holder  shall notify the Company in writing (or by
telephone  conversation,  confirmed  in  writing)  as  promptly  as  practicable
following the third  Trading Day after such Interest  Payment Date if the Holder
becomes  aware that shares of Common Stock so issuable have not been received as
provided  herein  but any  failure  to give such  notice  shall not  affect  the
Holder's  rights under this Note or otherwise.  No  fractional  shares of Common
Stock shall be issued in payment of interest on this Note. In lieu thereof,  the
Company  may,  at its  option,  issue a number of shares of Common  Stock  which
reflects a rounding up to the next whole  number or may pay lawful  money of the
United States of America in lieu of issuance of such fractional share.

     (b) If the Holder elects the Share Interest  Payment Option with respect to
a payment of interest on this Note with respect to a particular Interest Payment
Date and the Company  approves  such  issuance or is required to issue shares of
Common Stock,  the Company shall deliver to the Holder,  on or prior to the date
on which  Interest  Payment Shares for such payment of interest on this Note are
to be received by the Holder, a Company  Certificate setting forth (i) the total
amount of the cash  interest  payment to which the Holder is entitled,  (ii) the
portion of such interest  payment being made in Interest  Payment Shares and the
amount  which is 100%  thereof,  (iii) the  number of  Interest  Payment  Shares
allocable to such payment,  as calculated pursuant to this Section 1.1, (iv) any
rounding  adjustment to such number or any payment necessary to be made pursuant
to Section 1.1(a), (v) a brief statement of the facts requiring such adjustment,
and (vi) a brief statement that all of the requirements of this Section 1.1 have
been met.  The Interest  Payment  Shares shall be duly issued in the name of the
Holder or its nominee.  Such Company Certificate shall be conclusive evidence of
the  correctness  of the  calculation  of the number of Interest  Payment Shares
allocable to the payments to which such Company  Certificate  relates and of any
adjustments  to such number made  pursuant to this Section 1.1 in the absence of
manifest  error.  On or before the  pertinent  payment  date,  the Company shall
issue,  or cause the  transfer  agent for the Common Stock to prepare and issue,
the  Interest  Payment  Shares in the name of the Holder or its  nominee  before
being so delivered by the Company on the payment date.

                                       3
<PAGE>

     (c) The Interest Payment Shares,  when issued pursuant to and in compliance
with this  Section 1.1,  shall be, and for all  purposes  shall be deemed to be,
validly  issued,  fully  paid and  nonassessable  shares  of Common  Stock;  the
issuance and  delivery  thereof is in all respects  hereby  authorized;  and the
issuance thereof, together with lawful money of the United States of America, if
any,  paid in lieu of fractional  shares of Common  Stock,  will be, and for all
purposes  shall be deemed  to be,  in full  discharge  and  satisfaction  of the
Company's  obligation  to pay the  interest on this Note to which such  Interest
Payment Shares relate.

     1.2  Optional  Redemption.  The  following  right  of  redemption  must  be
exercised on a proportionate  basis, in accordance with outstanding  amount due,
among  this  Note and the  Other  Notes.  (a) At any time  during  the  Optional
Redemption  Period,  the Company  shall have the right to redeem at any one time
all or from time to time any part of the  outstanding  principal  amount of this
Note at the  Optional  Redemption  Price  pursuant  to this  Section  1.2 on any
Optional  Redemption  Date. In order to exercise its right of  redemption  under
this Section 1.2, the Company  shall give an Optional  Redemption  Notice to the
Holder  not  less  than 5 days  or  more  than 10  days  prior  to the  Optional
Redemption  Date stating that: (1) the Company is exercising its right to redeem
a specified  portion  (which may be all, if so specified by the Company) of this
Note in accordance with this Section 1.2, (2) the principal  amount of this Note
to be  redeemed,  (3) the  Optional  Redemption  Price,  and  (4)  the  Optional
Redemption Date. On the applicable  Optional Redemption Date (or such later date
as the Holder  surrenders  this Note to the Company) the Company shall pay to or
upon the order of the Holder, by wire transfer of immediately available funds to
such account as shall be  specified  for such purpose by the Holder at least one
Business  Day prior to the  Optional  Redemption  Date,  an amount  equal to the
Optional  Redemption  Price of the portion (which may be all) of this Note to be
redeemed.  In each such case the aggregate principal amount of this Note and the
Other  Notes  to be so  redeemed  shall be at least  $50,000.00  or such  lesser
aggregate  principal  amount of this Note and the  Other  Notes as shall  remain
outstanding at the time an Optional Redemption Notice is given.

     1.3 No  Prepayment.  Except as  specifically  provided in Section 1.2, this
Note may not be prepaid,  redeemed or  repurchased  at the option of the Company
prior to the Maturity Date.

                                   ARTICLE II

                               CERTAIN COVENANTS

     So long as the Company shall have any obligation under this Note:

     2.1 Limitations on Certain  Indebtedness.  The Company will not itself, and
will not permit any Subsidiary to, create,  assume, incur, suffer to exist or in
any manner become liable in respect of, including, without limitation, by reason
of any business combination  transaction (all of which are referred to herein as
"incurring"), any Indebtedness other than Permitted Indebtedness.

                                       4
<PAGE>

     2.2 Payment of  Obligations.  The Company will pay and discharge,  and will
cause each Significant Subsidiary to pay and discharge, subject to the terms and
conditions of the Securities Purchase  Agreement,  all their respective material
obligations  and  liabilities,  except  where the same may be  contested in good
faith by appropriate proceedings and the Company shall have established adequate
reserves therefor on its books.

     2.3 Maintenance of Property; Insurance. (a) The Company will keep, and will
cause each Significant Subsidiary to keep, all property which, in the reasonable
business  judgment of the  Company,  is useful and  necessary in its business in
good working order and condition, ordinary wear and tear excepted.

     (b) The Company will maintain,  and will cause each Significant  Subsidiary
to  maintain,  with  financially  sound  and  responsible  insurance  companies,
insurance,  in at least such  amounts  and against  such risks as is  reasonably
adequate for the conduct of their  respective  businesses and the value of their
respective properties.

     2.4 Conduct of Business  and  Maintenance  of  Existence.  The Company will
continue,  and will cause each Significant  Subsidiary to continue, to engage in
business of the same  general type as now  conducted  by the  Company,  and will
preserve,  renew  and  keep in full  force  and  effect,  and  will  cause  each
Significant  Subsidiary  to  preserve,  renew and keep in full  force and effect
their respective corporate existence and their respective rights, privileges and
franchises  necessary or  desirable  in the normal  conduct of business and such
matter other than maintenance of the Company's corporate existence, except where
the  failure  to do so  would  not have a  material  adverse  effect  on (i) the
business,  properties,  operations,  condition (financial or other),  results of
operation or prospects of the Company and the Subsidiaries, taken as a whole or,
(ii) the ability of the Company to pay and  perform  its  obligations  under the
Transaction Documents.

     2.5  Compliance  with Laws.  The Company will  comply,  and will cause each
Significant  Subsidiary to comply,  in all material respects with all applicable
laws,  ordinances,  rules,  regulations,  decisions,  orders and requirements of
governmental   authorities   and   courts   (including,    without   limitation,
environmental  laws) except (i) where compliance  therewith is contested in good
faith by appropriate  proceedings or (ii) where  non-compliance  therewith could
not  reasonably be expected to have a material  adverse  effect on the business,
condition  (financial  or  otherwise),  operations,  performance,  properties or
prospects of the Company and the Subsidiaries, taken as a whole.

     2.6  Investment  Company Act. The Company will not be or become an open-end
investment trust, unit investment trust or face-amount  certificate company that
is or is required to be registered under Section 8 of the Investment Company Act
of 1940, as amended.

     2.7 Limitations on Asset Sales,  Liquidations,  Etc.; Certain Matters.  The
Company shall not

                                       5
<PAGE>

     (a) sell,  convey or otherwise  dispose of all or substantially  all of the
assets of the Company as an entirety or substantially as an entirety in a single
transaction or in a series of related transactions; or

     (b) liquidate, dissolve or otherwise wind up the affairs of the Company.

     2.8 Limitation on Certain Issuances.  The Company shall not (A) offer, sell
or issue, or enter into any agreement,  arrangement or  understanding  to offer,
sell or issue,  any  Common  Stock  Equivalent  for which the price at which the
holder of such Common Stock  Equivalent is entitled to acquire  shares of Common
Stock varies based on the market or trading  price of the Common  Stock,  or (B)
offer, sell or issue, or enter into any agreement,  arrangement or understanding
to offer,  sell or issue,  any Common Stock or Common Stock  Equivalent on terms
which  provide for  adjustment  or repricing of the purchase  price or number of
shares or other units of such Common  Stock or Common  Stock  Equivalents  other
than pursuant to customary  anti-dilution  provisions;  provided,  however, that
nothing in this Section 2.8 shall  prohibit  the Company from issuing  shares of
Common Stock for cash for the account of the Company (x) in an offering  that is
underwritten  on a firm  commitment  basis and registered with the SEC under the
1933 Act,  or (y) an offering of Common  Stock that is a private  investment  in
publicly-traded equity (commonly known as a PIPE).

     2.9 Limitations on Liens. The Company will not itself,  and will not permit
any Subsidiary to, create, assume or suffer to exist any mortgage, lien, pledge,
security interest or other charge or encumbrance (including, without limitation,
the lien or retained security title of a conditional  vendor),  all of which are
referred  to below as  "liens",  upon  all or any  part of its  property  of any
character, whether owned at the date hereof or thereafter acquired, except:

     (a) liens upon any property of any Subsidiary or  Subsidiaries  as security
for indebtedness owing by such Subsidiary to the Company;

     (b) liens securing this Note and the Other Notes ratably;

     (c) liens for taxes or assessments or governmental charges or levies on its
property if such taxes or assessments or charges or levies shall not at the time
be due and payable or if the amount, applicability, or validity of any such tax,
assessment,  charge  or levy  shall  currently  be  contested  in good  faith by
appropriate  proceedings  or  necessary  preliminary  steps are  being  taken to
contest,   compromise  or  settle  the  amount   thereof  or  to  determine  the
applicability or validity thereof and if the Company or such Subsidiary,  as the
case may be,  shall  have set aside on its  books  reserves  (segregated  to the
extent required by sound accounting practice) deemed by it adequate with respect
thereto;  deposits  or  pledges  to secure  payment  of  worker's  compensation,
unemployment insurance,  old age pensions or other social security;  deposits or
pledges to secure performance of bids, tenders,  contracts (other than contracts
for the  payment  of money  borrowed  or  credit  extended),  leases,  public or
statutory obligations,  surety or appeal bonds, or other deposits or pledges for
purposes of like general nature in the ordinary course of business;  mechanics',
carriers',  workers',  repairmen's  or other like liens  arising in the ordinary

                                       6
<PAGE>

course of business securing obligations which are not overdue for a period of 60
days, or which are in good faith being  contested or  litigated,  or deposits to
obtain the  release  of such  liens;  liens  created  by or  resulting  from any
litigation or legal  proceedings or proceedings being contested in good faith by
appropriate proceedings,  provided any execution levied thereon shall be stayed;
leases  made,  or existing  on  property  acquired,  in the  ordinary  course of
business;  landlords'  liens under leases to which the Company or any Subsidiary
is a party; and zoning restrictions,  easements, licenses or restrictions on the
use of real property or minor irregularities in title thereto; provided that all
such liens described in this subsection (d) do not, in the aggregate, materially
impair the use of such property in the operations of the business of the Company
or any  Subsidiary  or the  value  of  such  property  for the  purpose  of such
business;

     (d) liens  existing on the Issuance Date and listed in Schedule 4(r) to the
Securities Purchase Agreement; and

     (e)  liens  upon  raw  materials,  works in  progress  and  finished  goods
inventory and accounts  receivable  granted to a bank,  finance company or other
institutional lender providing receivables and inventory financings.

     2.10 Transactions  with Affiliates.  The Company will not pay, and will not
permit any Subsidiary,  directly or indirectly,  to pay, any funds to or for the
account  of,  make  any   investment   (whether  by   acquisition  of  stock  or
Indebtedness,  by  loan,  advance,  transfer  of  property,  guarantee  or other
agreement to pay, purchase or service, directly or indirectly, any Indebtedness,
or otherwise)  in,  lease,  sell,  transfer or otherwise  dispose of any assets,
tangible or  intangible,  to, or  participate  in, or effect any  transaction in
connection  with,  any joint  enterprise or other joint  arrangement  with,  any
Affiliate of the Company,  except, on terms to the Company or such Subsidiary no
less  favorable  than  terms  that  could be  obtained  by the  Company  or such
Subsidiary from a Person that is not an Affiliate of the Company,  as determined
in good faith by the Board of Directors.

     2.11 Rule 144A  Information  Requirement.  Within the  period  prior to the
expiration  of the holding  period  applicable to sales hereof under Rule 144(k)
under the 1933 Act (or any successor  provision),  the Company shall, during any
period in which it is not  subject to  Section  13 or 15(d)  under the 1934 Act,
make available to the Holder and any prospective purchaser of this Note from the
Holder, the information  required pursuant to Rule 144A(d)(4) under the 1933 Act
upon the  request  of the  Holder  and it will take such  further  action as the
Holder may reasonably  request,  all to the extent required from time to time to
enable  the  Holder to sell this Note  without  registration  under the 1933 Act
within the limitations of the exemption  provided by Rule 144A, as Rule 144A may
be amended from time to time.  Upon the request of the Holder,  the Company will
deliver to the Holder a written  statement  as to whether it has  complied  with
such requirements.

     2.12 Notice of Defaults.  The Company shall notify the Holder promptly, but
in any event not later than five days  after the  Company  becomes  aware of the
fact, of any failure by the Company to comply with this Article II.

     2.13 Security  Agreement.  No later than 30 days after the date hereof, the
Company  shall  execute  and  deliver to the Holder and the holders of the Other
Notes a Security Agreement, in form, scope and substance reasonably satisfactory
to a majority in interest of the Holder and such other holders,  taken together,

                                       7
<PAGE>

based  upon the  aggregate  principal  amount of Notes  outstanding,  granting a
security interest in all of the assets of the Company excluding only Receivables
as such term is defined in the Silicon Valley Bank Accounts  Receivable Purchase
Agreement dated October 10, 2001 (the "Collateral") to secure the obligations of
the Company under this Note. Such security  interest shall be junior only to the
existing bank lines with JP Morgan Chase Bank,  Sterling National Bank,  Silicon
Valley  Bank and DIRI Rec Fund  LLC.  The  Company  shall  use its  commercially
reasonable  efforts to obtain any  necessary  consents  to the  granting of such
security interest to the Holder and the holders of the Other Notes.

                                  ARTICLE III

                               EVENTS OF DEFAULT

     3.1 If any of the following events of default (each, an "Event of Default")
shall occur:

     (a) Failure to Pay Principal,  Interest,  Etc. The Company fails (1) to pay
the principal, the Optional Redemption Price or the Repurchase Price hereof when
due, whether at maturity, upon acceleration or otherwise, as applicable,  or (2)
to pay any  installment  of  interest  hereon  when due and, in the case of this
clause (2) of this Section 3.1(a) only,  such failure  continues for a period of
ten Business Days after notice from the Holder to the Company thereof; or

     (b) Breach of Certain  Covenants.  The Company fails to comply with Section
2.1, 2.7 or 2.8; or

     (c) Breach of Other Covenants.  The Company fails to comply in any material
respect with any other  provision of Article II of this Note (other than Section
2.1, 2.7 or 2.8) or breaches any other material  covenant or other material term
or condition of this Note or any of the other Transaction  Documents (other than
as  specifically  provided in clauses (a) and (b) of this Section 3.1), and such
breach  continues  for a period of 15 days after written  notice  thereof to the
Company from the Holder; or

     (d)  Breach  of  Representations  and  Warranties.  Any  representation  or
warranty  of  the  Company  made  herein  or  in  any  agreement,  statement  or
certificate  given in writing  pursuant  hereto (or pursuant to any  Transaction
Documents) shall be false or misleading in any material respect when made; or

     (e) Certain  Voluntary  Proceedings.  The Company or any  Subsidiary  shall
commence   a   voluntary   case  or  other   proceeding   seeking   liquidation,
reorganization  or other  relief  with  respect to itself or its debts under any
bankruptcy,  insolvency  or other  similar  law now or  hereafter  in  effect or
seeking the appointment of a trustee, receiver,  liquidator,  custodian or other
similar official of it or any substantial part of its property, or shall consent
to any such relief or to the  appointment  of or taking  possession  by any such
official in an involuntary  case or other  proceeding  commenced  against it, or

                                       8
<PAGE>

shall make a general  assignment  for the  benefit of  creditors,  or shall fail
generally  to pay its debts as they  become due or shall  admit in  writing  its
inability generally to pay its debts as they become due; or

     (f)  Certain  Involuntary   Proceedings.   An  involuntary  case  or  other
proceeding  shall be  commenced  against the Company or any  Subsidiary  seeking
liquidation,  reorganization  or other  relief  with  respect to it or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in effect
or seeking the  appointment  of a trustee,  receiver,  liquidator,  custodian or
other similar official of it or any substantial  part of its property,  and such
involuntary case or other proceeding shall remain undismissed and unstayed for a
period of 60 consecutive days; or

     (g) Judgments and Governmental Actions. Any court of competent jurisdiction
or any  governmental  authority  shall enter one or more  judgments  against the
Company or any Subsidiary or any of their respective properties or other assets,
or find the Company or any Subsidiary  liable for any damages or past due unpaid
liabilities,  including  in respect of any unpaid  taxes,  including  federal or
state income,  sales,  use or other taxes,  in an aggregate  amount in excess of
$50,000; or

     (h) Default Under Other Agreements. (a) The Company or any Subsidiary shall
(i) default in any payment with respect to any  Indebtedness  for borrowed money
(other than this Note) which Indebtedness has an outstanding principal amount in
excess of $75,000  individually  or in the aggregate for all such  Indebtedness,
beyond the period of grace,  if any,  provided in the  instrument  or  agreement
under  which  such  Indebtedness  was  created or (ii)  default in any  material
respect in the observance or performance of any agreement, covenant or condition
relating to any such  Indebtedness  or contained in any  instrument or agreement
evidencing,  securing  or  relating  thereto,  or any other event shall occur or
condition  exist,  the effect of which default or other event or condition is to
cause, or to permit the holder or holders of such  Indebtedness (or a trustee or
agent on behalf of such holder or holders) to cause,  any such  Indebtedness  to
become due prior to its stated maturity and such default or event shall continue
beyond the period of grace,  if any,  provided in the  instrument  or  agreement
under which such Indebtedness was created (after giving effect to any consent or
waiver  obtained and then in effect  thereunder) and such default shall continue
for five days (or to such earlier  date as the holder of any other  Indebtedness
shall  declare  the same due and payable by reason of such  default;  or (b) any
Indebtedness of the Company or any Subsidiary which has an outstanding principal
amount in excess of the $75,000  individually  or in the  aggregate for all such
Indebtedness  shall,  in  accordance  with its terms,  be declared to be due and
payable,  or  required  to be prepaid  other than by a  regularly  scheduled  or
required payment prior to the stated maturity thereof; or

     (i) Failure to Provide Security Interest.  The Company does not provide the
Holder and the holders of Other Notes with a perfected  security interest in the
Collateral to secure the  obligations  of the Company under the Notes by May 13,
2005, junior only to the existing bank lines with JP Morgan Chase Bank, Sterling
National Bank, Silicon Valley Bank and DIRI Rec Fund LLC; then,

                                       9
<PAGE>

     (1) upon the occurrence and during the continuation of any Event of Default
specified  in clause (a),  (b), or (d) of this Section 3.1, at the option of the
Holder, and upon the occurrence of any Event of Default specified in clause (e),
(f) or (i) of this  Section  3.1:  (X) the  Company  shall pay to the  Holder an
amount equal to the outstanding  principal  amount of this Note plus accrued and
unpaid interest on such principal amount to the date of payment plus accrued and
unpaid Default  Interest,  if any,  thereon at the rate provided in this Note to
the date of payment, (Y) all other amounts payable hereunder or under any of the
other  Transaction  Documents  shall  immediately  become due and  payable,  all
without demand, presentment or notice, all of which hereby are expressly waived,
together with all costs,  including,  without limitation,  reasonable legal fees
and expenses of collection, and (Z) the Holder shall be entitled to exercise all
other rights and remedies available at law or in equity; and

     (2) upon the occurrence and during the continuation of any Event of Default
specified  in clause (c),  (g) or (h) of this  Section  3.1: (A) if any Event of
Default  continues  during  the  period of 30  consecutive  days  following  the
occurrence  of such Event of Default,  then  thereafter  so long as any Event of
Default is continuing,  at the option of the Holder (i) the Company shall pay to
the Holder an amount equal to the outstanding principal amount of this Note plus
accrued and unpaid interest on such principal amount to the date of payment plus
accrued and unpaid  Default  Interest,  if any,  thereon at the rate provided in
this Note to the date of payment,  and (ii) all other amounts payable  hereunder
shall  immediately  become due and payable,  all without demand,  presentment or
notice,  all of which  hereby are  expressly  waived,  together  with all costs,
including,   without  limitation,   reasonable  legal  fees  and  expenses,   of
collection,  and (B) the Holder  shall be entitled  to  exercise  all rights and
remedies  available  at law or in  equity  other  than  those  set  forth in the
immediately preceding clause (A).

                                   ARTICLE IV

                       REPURCHASE UPON A REPURCHASE EVENT

     4.1 Repurchase  Right Upon Repurchase  Event. If a Repurchase Event occurs,
in addition to any other right of the Holder,  the Holder  shall have the right,
at the Holder's  option,  to require the Company to repurchase all of this Note,
or any portion  hereof on the  repurchase  date that is five Business Days after
the date of the Holder Notice  delivered with respect to such Repurchase  Event;
provided that any such repurchase shall be made proportionally  among the Holder
and the holders of Other Notes who have elected to have their Notes  repurchased
due to such  Repurchase  Event.  The Holder  shall have the right to require the
Company to repurchase all or any such portion of this Note if a Repurchase Event
occurs at any time  while any  portion of the  principal  amount of this Note is
outstanding at a price equal to the Repurchase Price.

                                       10
<PAGE>

     4.2 Notices;  Method of Exercising Repurchase Rights, Etc. (a) On or before
the fifth Business Day after the occurrence of a Repurchase  Event,  the Company
shall give to the Holder a Company  Notice of the  occurrence of the  Repurchase
Event and of the repurchase  right set forth herein arising as a result thereof.
Such Company Notice shall set forth:

     (i) the date by which the repurchase right must be exercised, and

     (ii) a description  of the procedure  (set forth in this Section 4.2) which
the Holder must follow to exercise the repurchase right.

No failure of the Company to give a Company Notice or defect therein shall limit
the Holder's  right to exercise the  repurchase  right or affect the validity of
the proceedings for the repurchase of this Note or portion hereof.

     (b) To exercise  the  repurchase  right,  the Holder  shall  deliver to the
Company on or before the 30th day after a Company  Notice (or if no such Company
Notice  has been  given,  within 40 days after the  Holder  first  learns of the
Repurchase  Event) (i) a Holder Notice  setting forth the name of the Holder and
the principal  amount of this Note to be  repurchased,  and (ii) this Note, duly
endorsed for transfer to the Company of the portion of the outstanding principal
amount of this Note to be  repurchased.  A Holder  Notice  may be revoked by the
Holder at any time prior to the time the Company pays the applicable  Repurchase
Price to the Holder.

     (c) If the Holder shall have given a Holder Notice,  then on the date which
is five  Business Days after the date such Holder Notice is given (or such later
date as the Holder  surrenders  this  Note) the  Company  shall make  payment in
immediately  available funds of the applicable  Repurchase Price to such account
as  specified  by the Holder in writing to the Company at least one Business Day
prior to the applicable repurchase date.

     4.3 Other.  A Holder  Notice  given by the  Holder  shall be deemed for all
purposes  to be in proper form unless the  Company  notifies  the Holder  within
three  Business Days after such Holder Notice has been given (which notice shall
specify all defects in such Holder Notice), and any Holder Notice containing any
such  defect  shall  nonetheless  be  effective  on the date given if the Holder
promptly  undertakes to correct all such defects.  No such claim of defect shall
limit or delay performance of the Company's obligation to repurchase any portion
of this Note, the repurchase of which is not in dispute.

                                   ARTICLE V

                                   CONVERSION

     5.1 Conversion Into Next  Financing.  (a) The Holder may convert all or any
part of the  principal  and accrued  interest  on this Note into the  securities
issued in a Future Financing;  provided that any partial  conversion shall be in
an amount at least equal to the minimum  subscription  allowable pursuant to the
terms of the Future  Financing.  This Note may be converted  into the number and
type of securities as could be purchased in the Future  Financing for a purchase
price equal to the  principal  amount and accrued  interest,  including  Default
Interest, if any, on this Note being converted.

                                       11
<PAGE>

     (b) In the event the Company  contemplates a Future Financing,  the Company
shall provide written notice thereof to the Holder, which notice shall set forth
in  reasonable  detail the terms of the Future  Financing and include the final,
definitive  purchase  agreement  and  related  documentation.  To  exercise  its
conversion  right, the Holder shall provide written notice to the Company within
five  Business  Days  after  receipt  of such  notice  from the  Company  of the
principal  and  accrued  interest  it wishes to  convert.  In the event that the
Company fails to deliver notice of the consummation of the Future Financing, the
Holder shall have the right to convert this Note into the same securities on the
same terms as those  issued in the Future  Financing by notice to the Company no
later  than  thirty  days  after it learns  of the  consummation  of the  Future
Financing.

                                   ARTICLE VI

                                  DEFINITIONS

     6.1 Certain  Defined Terms.  (a) All the  agreements or instruments  herein
defined shall mean such  agreements or  instruments as the same may from time to
time be  supplemented  or amended or the terms thereof waived or modified to the
extent permitted by, and in accordance with, the terms thereof and of this Note.

     (b) The following terms shall have the following meanings (such meanings to
be  equally  applicable  to both the  singular  and  plural  forms of the  terms
defined):

     "Affiliate"  means,  with  respect to any  Person,  any other  Person  that
directly,  or  indirectly  through  one or  more  intermediaries,  controls,  is
controlled by or is under common control with the subject  Person.  For purposes
of this definition,  "control"  (including,  with correlative meaning, the terms
"controlled  by" and "under common control  with"),  as used with respect to any
Person,  shall mean the  possession,  directly  or  indirectly,  of the power to
direct or cause the  direction  of the  management  and policies of such Person,
whether through the ownership of voting securities or by contract or otherwise.

     "AMEX" means the American Stock Exchange, Inc.

     "Applicable  Rate"  means 5 percent  per  annum or, if an Event of  Default
shall occur, then so long as any Event of Default shall continue, 12 percent per
annum (or in either case such lesser rate as shall be the highest rate permitted
by applicable law).

     "Board of Directors" means the Board of Directors of the Company.

     "Board Resolution" means a copy of a resolution  certified by the Secretary
or an Assistant  Secretary of the Company to have been duly adopted by the Board

                                       12
<PAGE>

of Directors,  or duly authorized  committee thereof (to the extent permitted by
applicable  law),  and to be in  full  force  and  effect  on the  date  of such
certification, and delivered to the Holder.

     "Business  Day"  means any day other  than a  Saturday,  Sunday or a day on
which commercial banks in The City of New York are authorized or required by law
or executive order to remain closed.

     "Common Stock" means the Common Stock,  par value $.0001 per share,  or any
shares of capital  stock of the Company  into which such shares shall be changed
or reclassified after the Issuance Date.

     "Common  Stock  Equivalent"  means any  warrant,  option,  subscription  or
purchase right with respect to shares of Common Stock, any security  convertible
into,  exchangeable  for, or otherwise  entitling the holder thereof to acquire,
shares of Common Stock or any warrant,  option,  subscription  or purchase right
with respect to any such convertible, exchangeable or other security.

     "Company"  shall have the meaning  provided in the first  paragraph of this
Note.

     "Company  Certificate"  means a  certificate  of the  Company  signed by an
Officer.

     "Company  Notice"  means a Company  Notice in the form  attached  hereto as
Exhibit B.

     "Default  Interest" shall have the meaning  provided in the first paragraph
of this Note.

     "Default Rate" means 12 percent per annum.

     "Eligible Bank" means a corporation organized or existing under the laws of
the United States or any other state,  having combined capital and surplus of at
least $100 million and subject to supervision by federal or state  authority and
which has a branch located in New York, New York.

     "Event of Default" shall have the meaning provided in Section 3.1.

     "Fundamental Change" means

     (a) Any  consolidation  or merger of the Company or any Subsidiary  with or
into another entity (other than a merger or  consolidation  of a Subsidiary into
the Company or a wholly-owned  Subsidiary) where the stockholders of the Company
immediately  prior to such  transaction do not  collectively own at least 51% of
the  outstanding  voting  securities  of  the  surviving   corporation  of  such
consolidation or merger immediately  following such transaction;  or the sale of
all or substantially  all of the assets of the Company and the Subsidiaries in a
single transaction or a series of related transactions; or

                                       13
<PAGE>

     (b) The occurrence of any transaction or event in connection with which all
or  substantially  all the Common Stock shall be exchanged for,  converted into,
acquired for or constitute the right to receive consideration  (whether by means
of  an  exchange  offer,  liquidation,  tender  offer,  consolidation,   merger,
combination,  reclassification,  recapitalization or otherwise) which is not all
or  substantially  all common stock which is (or will,  upon  consummation of or
immediately  following such transaction or event,  will be) listed on a national
securities  exchange or approved for  quotation on Nasdaq or any similar  United
States system of automated  dissemination of transaction reporting of securities
prices; or

     (c) The  acquisition  by a Person or entity or group of Persons or entities
acting in concert as a partnership, limited partnership,  syndicate or group, as
a result  of a tender  or  exchange  offer,  open  market  purchases,  privately
negotiated purchases or otherwise,  of beneficial ownership of securities of the
Company  representing  25% or  more  of  the(i)  combined  voting  power  of the
outstanding  voting securities of the Company  ordinarily (and apart from rights
accruing in special  circumstances)  having the right to vote in the election of
directors or (ii) fully diluted shares of Common Stock.

     "Future  Financing"  means a  private  placement  financing,  or  series of
related  private  placement  financings,  by the Company  after the Closing Date
pursuant to which gross proceeds of at least $1,500,000 are raised

     "Generally  Accepted  Accounting  Principles"  for  any  Person  means  the
generally  accepted  accounting  principles and practices applied by such Person
from time to time in the preparation of its audited financial statements.

     "Holder"  shall have the meaning  provided in the first  paragraph  of this
Note.

     "Holder  Notice"  means a Holder  Notice  in the form  attached  hereto  as
Exhibit C.

     "Indebtedness" as used in reference to any Person means all indebtedness of
such Person for borrowed money, the deferred  purchase price of property,  goods
and services and  obligations  under leases which are required to be capitalized
in accordance with Generally  Accepted  Accounting  Principles and shall include
all such  indebtedness  guaranteed  in any  manner  by such  Person or in effect
guaranteed  by such Person  through a  contingent  agreement to purchase and all
indebtedness  for the payment or purchase of which such Person has  contingently
agreed to advance or supply  funds and all  indebtedness  secured by mortgage or
other lien upon  property  owned by such  Person,  although  such Person has not
assumed or become  liable for the  payment of such  indebtedness,  and,  for all
purposes  hereof,  such  indebtedness  shall be  treated  as  though it has been
assumed by such Person.

     "Interest Payment Date" means each July 1, October 1, January 1 and April 1
and the Maturity Date.

                                       14
<PAGE>

     "Interest  Payment  Shares"  means the shares of Common  Stock  issuable in
payment of interest on this Note in accordance with Section 1.1.

     "Interest  Share Price" for any Interest  Payment Date means the average of
the Market  Price of the Common  Stock for all of the  Trading  Days  during the
period of 10  consecutive  Trading Days ending on and  including the Trading Day
immediately preceding such Interest Payment Date.

     "Issuance Date" means March 29, 2005.

     "Market  Price"  with  respect  to any  security  on any day shall mean the
closing price of such security on such day on the Nasdaq,  the NYSE or the AMEX,
as applicable,  or, if such security is not listed or admitted to trading on the
Nasdaq, the NYSE or the AMEX, on the principal national  securities  exchange or
quotation  system on which  such  security  is quoted or listed or  admitted  to
trading,  in any such case as reported  by  Bloomberg,  L.P.  (or if such source
ceases to be available,  comparable source selected by the Holder and acceptable
to the  Company  in its  reasonable  judgment)  or,  if not  quoted or listed or
admitted to trading on any national securities exchange or quotation system, the
closing  price of such security on the  over-the-  counter  market on the day in
question,  as reported  by the  National  Quotation  Bureau  Incorporated,  or a
similar generally accepted reporting  service,  or if not so available,  in such
manner as  furnished by any NYSE member firm  selected  from time to time by the
Board of Directors for that purpose,  or a price determined in good faith by the
Board of Directors,  whose  determination shall be conclusive and described in a
Board Resolution.

     "Maturity  Date" means the earlier to occur of (i) September 29, 2006, (ii)
the date on which demand for payment of the loan payable to JPMorgan  Chase Bank
is made, and (iii)  commencing May 13, 2005, the due date of the loan payable to
JPMorgan  Chase Bank pursuant to the Grid Demand  Promissory  Note,  dated as of
June 27, 2003,  including if due on demand and whether or not demand for payment
is actually made, as such due date may be extended.

     "Nasdaq" means the Nasdaq National Market.

     "Nasdaq SmallCap" means the Nasdaq SmallCap Market.

     "Next Financing" means the next private placement  financing,  or series of
related  private  placement  financings,  by the Company  after the Closing Date
pursuant to which gross proceeds of at least $1,500,000 are raised.

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

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

     "Note" means this instrument as originally executed, or if later amended or
supplemented in accordance with its terms, then as so amended or supplemented.

     "NYSE" means the New York Stock Exchange, Inc.

                                       15
<PAGE>

     "Officer" means the Chairman of the Board, the Chief Executive Officer, the
President or the Chief Financial Officer of the Company.

     "Optional Redemption Date" means each Business Day on which this Note is to
be redeemed in whole or in part pursuant to Section 1.2.

     "Optional  Redemption  Notice" means an Optional  Redemption  Notice in the
form attached hereto as Exhibit A.

     "Optional  Redemption  Period" means the period which commences on the date
that is thirty days after closing of the Next Financing and ends on the Maturity
Date.

     "Optional Redemption Price" means an amount in cash equal to the sum of (1)
100% of the outstanding  principal  amount of this Note specified in an Optional
Redemption  Notice as being  redeemed by the Company plus (2) accrued and unpaid
interest on such principal  amount to the applicable  Optional  Redemption  Date
plus (3) accrued and unpaid Default Interest,  if any, on the amount referred to
in the immediately preceding clause (2) at the rate provided in this Note to the
Optional Redemption Date.

     "Other  Notes" means the Senior  Subordinated  Secured  Notes issued by the
Company pursuant to the Securities Purchase Agreement other than this Note.

     "Permitted Indebtedness" means

     (1) Indebtedness outstanding on the Issuance Date prior to issuance of this
Note and listed on Schedule 4(l) to the Securities Purchase Agreement; and

     (2) Indebtedness evidenced by the Note and the Other Notes;

     (3)  Indebtedness  incurred  after the  Issuance  Date which is  unsecured,
subordinated  to the Notes as to  payment on terms  approved  in advance of such
incurrence by a majority in interest of the Holders of the Notes, based upon the
outstanding  principal amounts thereof,  as evidenced by the written approval of
such Holders given prior to the incurrence of such  Indebtedness,  and for which
no payment of principal of such Indebtedness is scheduled to be due prior to the
date that is six months after the latest scheduled Maturity Date;

     (4)  endorsements  for  collection  or  deposit in the  ordinary  course of
business;

     (5) in the case of any Subsidiary,  Indebtedness owed by such Subsidiary to
the Company;

     (6) Accrued expenses and trade payables  incurred in the ordinary course of
business of the Company;

                                       16
<PAGE>

     (7)  Indebtedness  incurred after the Issuance Date in an aggregate  amount
not to  exceed  $250,000  at any  one  time  outstanding  so  long  as (x)  such
Indebtedness is incurred for the purpose of acquiring equipment owned or used or
to be owned or used by the  Company or any  Subsidiaries  (or for the purpose of
acquiring the capital stock or similar equity  interests of a Subsidiary that is
formed for the limited purpose of owning same and does not own or hold any other
material  assets)  and does not  exceed  the  purchase  price of the  equipment,
capital stock or other equity interest so acquired plus  reasonable  transaction
expenses  and (y) such  Indebtedness,  if  secured,  is  secured  solely  by the
interest of the Company or one of its  Subsidiaries in the equipment so acquired
and rights related thereto; and

     (8)  Indebtedness  incurred after the Issuance Date not to exceed  $250,000
that is unsecured or subordinate to the Holder;

so long as at the time of  incurrence of such  Indebtedness  no Event of Default
has occurred and is continuing or would result from such incurrence and no event
which, with notice or passage of time, or both, would become an Event of Default
has occurred and is continuing or would result from such  incurrence and so long
as in the case of such  Indebtedness  referred to in the preceding  clauses (2),
(3), (7) and (8),  such  Indebtedness  shall have been  approved by the Board of
Directors prior to the incurrence thereof.

     "Person"  means  any  natural  person,  corporation,  partnership,  limited
liability company, trust, incorporated organization,  unincorporated association
or  similar  entity  or  any  government,   governmental   agency  or  political
subdivision.

     "QIB" means a "qualified institutional buyer" as defined in Rule 144A.

     "Registration  Statement" means the Registration  Statement  required to be
filed by the Company with the SEC pursuant to Section  8(a)(1) of the Securities
Purchase Agreement.

     "Repurchase Event" means the occurrence of any one or more of the following
events:

     (a) Any Fundamental Change;

     (b) The consummation of the Next Financing;

     (c) The occurrence of any Event of Default specified in Article III of this
Note; or

     (d) The  failure of the  Company to deliver to the Holder  copies of fully-
executed contracts with the customers listed on Exhibit D,  substantially  final
drafts of which have been previously delivered to Holder or, with respect to GSX
and Lenovo,  contracts  or proof of ongoing  payments  substantially  equivalent
thereto.

     "Repurchase  Price"  means  with  respect  to any  repurchase  pursuant  to
Sections  4.1 and 4.2 an  amount  in cash  equal  to the sum of (1)  100% of the

                                       17
<PAGE>

outstanding  principal  amount of this Note plus (2) accrued and unpaid interest
on such  principal  amount to the date of such  repurchase  plus (3) accrued and
unpaid Default  Interest,  if any,  thereon at the rate provided in this Note to
the date of such repurchase.

     "Rule  144A"  means  Rule  144A as  promulgated  under  the 1933 Act or any
successor rule thereto.

     "SEC" means the Securities and Exchange Commission.

     "SEC  Effective  Date" means the date the  Registration  Statement is first
declared effective by the SEC.

     "Securities  Purchase  Agreement" means the Securities  Purchase Agreement,
dated as of March 29,  2005,  by and between the Company,  Metropolitan  Venture
Partners II, L.P. and Sigma Opportunity Fund, LLC.

     "Share  Interest  Notice  Date" shall have the meaning  provided in Section
1.1(a).

     "Share Interest  Payment Option" shall have the meaning provided in Section
1.1(a).

     "Significant  Subsidiary" shall have the meaning provided in Regulation S-X
of the SEC, except that a Subsidiary shall not be a Significant  Subsidiary only
if such Subsidiary,  when consolidated for financial reporting purposes with all
other Subsidiaries which are not Significant Subsidiaries,  would not constitute
a Significant Subsidiary.

     "Subsidiary"  means any  corporation or other entity of which a majority of
the capital stock or other ownership  interests  having ordinary voting power to
elect a majority of the board of directors or other Persons  performing  similar
functions are at the time directly or indirectly owned by the Company.

     "Trading Day" means at any time a day on which any of a national securities
exchange,  Nasdaq,  the OTC Bulletin Board or such other securities market as at
such time  constitutes the principal  securities  market for the Common Stock is
open for general trading of securities.

     "Transaction Documents" means this Note, the Securities Purchase Agreement,
and  the  Warrants  and  the  other   agreements,   instruments   and  documents
contemplated hereby and thereby.

     "Transfer  Agent"  means  Manhattan  Transfer & Registrar  Company,  or its
successor as transfer agent and registrar for the Common Stock.

     "Warrants"  means Common Stock  Purchase  Warrants of the Company issued to
the original Holder of this Note pursuant to the Securities Purchase Agreement.

                                       18
<PAGE>

                                   ARTICLE VII

                                 MISCELLANEOUS

     7.1 Failure or  Indulgency  Not Waiver.  No failure or delay on the part of
the Holder in the  exercise of any power,  right or  privilege  hereunder  shall
operate as a waiver  thereof,  nor shall any single or partial  exercise  of any
such power,  right or privilege preclude other or further exercise thereof or of
any other right, power or privileges. All rights and remedies existing hereunder
are  cumulative  to, and not  exclusive  of, any  rights or  remedies  otherwise
available.

     7.2 Notices.  Except as otherwise  specifically provided herein, any notice
herein  required  or  permitted  to be  given  shall  be in  writing  and may be
personally served, sent by telephone line facsimile transmission, the receipt of
which is  electronically  confirmed,  or  delivered by courier or sent by United
States  mail and shall be deemed to have been given upon  receipt if  personally
served,  sent by telephone  line  facsimile  transmission  or sent by courier or
three days after being  deposited in the  facilities of the United States Postal
Service,  certified,  with postage pre-paid and properly  addressed,  if sent by
mail.  For the purposes  hereof,  the address and  facsimile  line  transmission
number of the Holder  shall be as  furnished  by the Holder for such purpose and
shown on the records of the Company;  and the address of the Company shall be 80
Orville Drive,  Bohemia,  New York 11716,  Attention:  Chief  Financial  Officer
(telephone line facsimile transmission number (631) 563-8085). The Holder or the
Company may change its  address  for notice by service of written  notice to the
other as herein provided.

     7.3 Amendment,  Waiver,  Etc. Neither this Note nor any terms hereof may be
changed, waived,  discharged or terminated unless such change, waiver, discharge
or termination is in writing signed by the Company and a majority in interest of
the Holders of Notes and Other Notes  (which must include  Metropolitan  Venture
Partners II, L.P.,  except in the case where the rights of Metropolitan  Venture
Partners II, L.P.  would not be materially  adversely  affected by a waiver,  in
which case their prior written  consent shall not be required),  taken together,
based  upon the  aggregate  principal  amount of the Notes and Other  Notes then
outstanding Any such amendment,  modification,  waiver, discharge or termination
shall affect all Holders proportionally.

     7.4  Assignability.  This Note shall be binding  upon the  Company  and its
successors, and shall inure to the benefit of and be binding upon the Holder and
its successors and permitted  assigns.  The Company may not assign its rights or
obligations under this Note.

     7.5 Certain Expenses. The Company shall pay on demand all expenses incurred
by  the  Holder,  including  reasonable  attorneys'  fees  and  expenses,  as  a
consequence  of, or in connection  with (x) any amendment or waiver of this Note
or any  other  Transaction  Document,  (y) any  default  or breach of any of the
Company's  obligations  set  forth  in the  Transaction  Documents  and  (z) the
enforcement or  restructuring  of any right of,  including the collection of any

                                       19
<PAGE>

payments due, the Holder under the Transaction  Documents,  including any action
or proceeding  relating to such  enforcement  or any order,  injunction or other
process seeking to restrain the Company from paying any amount due the Holder.

     7.6 Governing  Law. This Note shall be governed by the internal laws of the
State of New York, without regard to the principles of conflict of laws.

     7.7 Transfer of Note and Noteholder Payment Amount.  This Note has not been
and is not being  registered  under the  provisions of the 1933 Act or any state
securities  laws and this Note may not be  transferred  unless the Holder  shall
have delivered to the Company an opinion of counsel,  reasonably satisfactory in
form,  scope and  substance to the Company,  to the effect that this Note may be
sold or transferred  without  registration under the 1933 Act. Prior to any such
transfer,  such transferee shall have represented in writing to the Company that
such  transferee  has requested  and received  from the Company all  information
relating  to the  business,  properties,  operations,  condition  (financial  or
other),  results of operations or prospects of the Company and the  Subsidiaries
deemed relevant by such  transferee;  that such transferee has been afforded the
opportunity to ask questions of the Company concerning the foregoing and has had
the  opportunity  to  obtain  and  review  the  reports  and  other  information
concerning the Company which at the time of such transfer have been filed by the
Company with the SEC  pursuant to the 1934 Act. If such  transfer is intended to
assign  the  rights  and  obligations  under  5(a),  5(b),  8,  9 and  10 of the
Securities  Purchase  Agreement,  such  transfer  shall  otherwise  be  made  in
compliance with Article V of the Securities Purchase  Agreement.  The Holder may
not transfer a portion of this Note to any Person if such transfer  would result
in an increase in the  aggregate  number of  registered  holders of this Note of
more than four such holders  without the prior  written  consent of the Company,
which consent will not be unreasonably  withheld. Any instrument issued upon any
such  transfer of a portion of this Note which  results in such  increase of one
holder  shall bear a legend  that the holder  thereof  shall not be  entitled to
transfer such instrument in a manner which would further  increase the aggregate
number of registered  holders of this Note without the prior written  consent of
the  Company,  which  consent  shall  not be  unreasonably  withheld;  provided,
however,  that any remaining right of the Holder to transfer all or a portion of
this Note may be transferred  to the transferee by agreement  between the Holder
and the  transferee.  The Company  shall  provide such  assistance as reasonably
necessary to allow a transfer of this Note.

     7.8 Enforceable Obligation. The Company represents and warrants that at the
time of the original  issuance of this Note it received the full purchase  price
payable  pursuant to the  Securities  Purchase  Agreement  in an amount at least
equal to the original  principal  amount of this Note,  and that this Note is an
enforceable  obligation  of the  Company  which is not  subject  to any  offset,
reduction, counterclaim or disallowance of any sort.

     7.9 Note  Register;  Replacement  of Notes.  The Company  shall  maintain a
register  showing the names,  addresses and telephone line facsimile  numbers of
the Holder and the registered holders of the Other Notes. The Company shall also
maintain a facility for the registration of transfers of this Note and the Other
Notes and at which this Note and the Other Notes may be surrendered for split up
into instruments of smaller denominations or for combination into instruments of
larger  denominations.  Upon  receipt  by the  Company  of  evidence  reasonably

                                       20
<PAGE>

satisfactory  to it of the  ownership  of and the loss,  theft,  destruction  or
mutilation of this Note and (a) in the case of loss,  theft or  destruction,  of
indemnity from the Holder  reasonably  satisfactory  in form to the Company (and
without the  requirement to post any bond or other  security) or (b) in the case
of mutilation,  upon surrender and  cancellation  of this Note, the Company will
execute and deliver to the Holder a new Note of like tenor without charge to the
Holder.

     7.10 Payment of Note on  Redemption  or  Repurchase;  Deposit of Redemption
Price or Repurchase  Price, Etc. (a) If this Note or any portion of this Note is
to be redeemed as provided in Section 1.2 or repurchased as provided in Sections
4.1 and 4.2 and any notice  required  in  connection  therewith  shall have been
given as provided therein and the Company shall have otherwise complied with the
requirements of this Note with respect thereto, then this Note or the portion of
this Note to be so redeemed or  repurchased  and with  respect to which any such
notice has been given  shall  become due and  payable on the date stated in such
notice at the applicable  Optional  Redemption Price or Repurchase Price. On and
after the Optional  Redemption Date or repurchase date so stated in such notice,
provided that the Company shall have deposited with an Eligible Bank on or prior
to such Optional Redemption Date or repurchase date, an amount sufficient to pay
the applicable Optional  Redemption Price or Repurchase Price,  interest on this
Note or the portion of this Note to be so redeemed or repurchased shall cease to
accrue,  and  this  Note  or such  portion  hereof  shall  be  deemed  not to be
outstanding  and shall not be entitled to any benefit  with respect to principal
of or interest on the portion to be so redeemed or repurchased except to receive
payment of the applicable  Optional  Redemption  Price or Repurchase  Price.  On
presentation and surrender of this Note or such portion hereof, this Note or the
specified  portion  hereof  shall be paid and  redeemed  or  repurchased  at the
applicable  Optional  Redemption Price or Repurchase Price. If a portion of this
Note is to be  redeemed  or  repurchased,  upon  surrender  of this  Note to the
Company in  accordance  with the terms  hereof,  the Company  shall  execute and
deliver to the Holder without  service charge,  a new Note or Notes,  having the
same  date  hereof  and  containing  identical  terms  and  conditions,  in such
denomination or denominations as requested by the Holder in aggregate  principal
amount equal to, and in exchange for, the unredeemed or unrepurchased portion of
the principal amount of this Note so surrendered.

     (b) Upon the  payment in full of all amounts  payable by the Company  under
this Note or the deposit thereof as provided in Section 7.10(a),  thereafter the
obligations of the Company under this Note shall be as set forth in this Article
VII, and, in the case of such deposit,  to pay the Optional  Redemption Price or
Repurchase  Price,  as the case may be, from the funds so  deposited.  Upon such
payment or deposit, any Event of Default which occurred prior to such payment or
deposit by reason of one or more  provisions of this Note with which the Company
thereafter is no longer obligated to comply, then shall no longer exist.

                  [Remainder of Page Intentionally Left Blank]

                                       21
<PAGE>

     IN WITNESS  WHEREOF,  the  Company has caused this Note to be signed in its
name by its duly  authorized  officer as of the day and in the year first  above
written.

                                                DIRECT INSITE CORP.

                                                By:
                                                Name:
                                                Title:
<PAGE>

                                   ASSIGNMENT

     For value received  _________________________ hereby sell(s), assign(s) and
transfer(s)  unto  _________________________  (Please insert social  security or
other       Taxpayer        Identification       Number       of       assignee:
______________________________)   the  within  Note,   and  hereby   irrevocably
constitutes and appoints _________________________ attorney to transfer the said
Note  on  the  books  of  Direct  Insite  Corp.,  a  Delaware  corporation  (the
"Company"), with full power of substitution in the premises.

     In connection  with any transfer of the Note within the period prior to the
expiration of the holding  period  applicable to sales thereof under Rule 144(k)
under  the 1933  Act (or any  successor  provision)  (other  than  any  transfer
pursuant to a registration  statement that has been declared effective under the
1933 Act), the undersigned confirms that such Note is being transferred:

[  ]  To the Company or a subsidiary thereof; or

[  ]  To a QIB pursuant to and in compliance with Rule 144A; or

[  ]  To an "accredited investor" pursuant to and in compliance with
the 1933 Act; or

[  ]  Pursuant to and in compliance with Rule 144 under the 1933
Act;

and unless the box below is  checked,  the  undersigned  confirms  that,  to the
knowledge  of  the  undersigned,  such  Note  is  not  being  transferred  to an
"affiliate"  of the  Company  as  defined  in Rule  144  under  the 1933 Act (an
"Affiliate").

[  ]  The transferee is an Affiliate of the Company.

     Capitalized  terms  used  in  this  Assignment  and  not  defined  in  this
Assignment shall have the respective meanings provided in the Note.

Dated:                                  NAME:

                                        Signature(s)

<PAGE>

                                                                Exhibit A

                              DIRECT INSITE CORP.

                           OPTIONAL REDEMPTION NOTICE
               (Section 1.2 of Senior Subordinated Secured Note)

TO:
        (Name of Holder)

     (1)  Pursuant  to the terms of the Senior  Subordinated  Secured  Note (the
"Note"),  Direct Insite Corp., a Delaware  corporation (the  "Company"),  hereby
notifies  the  above-named  Holder that the Company is  exercising  its right to
redeem the Note in accordance with Section 1.2 of the Note as set forth below:

     (i) The principal amount of the Note to be redeemed is $ .

     (ii) The Optional Redemption Price is $ .

     (iii) The Optional Redemption Date is .

     (2) Capitalized terms used herein and not otherwise defined herein have the
respective meanings provided in the Note.

Date _________________________                  DIRECT INSITE CORP.

                                                By:
                                                Title:

                                      A-1

<PAGE>

                                                                Exhibit B

                              DIRECT INSITE CORP.

                                 COMPANY NOTICE
              (Section 4.2(a) of Senior Subordinated Secured Note)

TO:
        (Name of Holder)

     (1) A Repurchase  Event described in the Senior  Subordinated  Secured Note
(the "Note") of Direct Insite Corp.,  a Delaware  corporation  (the  "Company"),
occurred on , 200 . As a result of such Repurchase Event, the Holder is entitled
to exercise its repurchase rights pursuant to Section 4.2 of the Note.

     (2) The Holder's repurchase right must be exercised on or before , 200 .

     (3) At or before the date set forth in the  preceding  paragraph  (2),  the
Holder must deliver to the Company:

     (a) a Holder Notice, in the form attached as Exhibit C to the Note; and

     (b) the Note,  duly  endorsed for transfer to the Company of the portion of
the principal amount to be repurchased.

     (4) Capitalized terms used herein and not otherwise defined herein have the
respective meanings provided in the Note.

Date _________________________          DIRECT INSITE CORP.

                                        By:
                                        Title:

                                      B-1

<PAGE>

                                                                Exhibit C

                              DIRECT INSITE CORP.

                                 HOLDER NOTICE
              (Section 4.2(b) of Senior Subordinated Secured Note)

TO:     DIRECT INSITE CORP.

     (1)  Pursuant  to the terms of the Senior  Subordinated  Secured  Note (the
"Note"),  the undersigned  Holder hereby elects to exercise its right to require
repurchase  by the Company  pursuant  to Sections  4.2(a) and 4.2(b) of $ of the
Note,  equal to the sum of $  principal  amount of the Note,  $ of  accrued  and
unpaid  interest  on such  principal  amount and $ of Default  Interest  on such
interest at the Repurchase Price provided in the Note.

     (2) Capitalized terms used herein and not otherwise defined herein have the
respective meanings provided in the Note.

Date:                                   NAME OF HOLDER:

                                        By:______________________________
                                        Signature of Registered Holder
                                        (Must be signed exactly as name
                                        appears in the Note.)

                                      C-1

<PAGE>

                                                                Exhibit D

GXS
Lenovo
IBM
EDS

                                       D-1

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