

                                PEGASYSTEMS INC.
                                 101 Main Street
                               Cambridge, MA 02142




                                                               December 16, 1993



Fleet Bank of Massachusetts, N.A.
75 State Street
Boston, MA 02109

Gentlemen:

         This letter agreement will set forth certain understandings between
Pegasystems Inc., a Massachusetts corporation (the "Borrower") and Fleet Bank of
Massachusetts, N.A. (the "Bank") with respect to Revolving Loans and Term Loans
(each as hereinafter defined) which may be made by the Bank to the Borrower and
with respect to letters of credit which may hereafter be issued by the Bank for
the account of the Borrower. In consideration of the mutual promises contained
herein and in the other documents referred to below, and for other good and
valuable consideration, receipt and sufficiency of which are hereby
acknowledged, the Borrower and the Bank agree as follows:

         I.       AMOUNTS AND TERMS
                  -----------------

         1.1.    Reference to Documents. Reference is made to (i) that certain
$2,500,000 principal amount promissory note (the "Revolving Note") of even date
herewith made by the Borrower and payable to the order of the Bank, (ii) certain
term notes (the "Term Notes") in an aggregate principal amount up to $1,000,000
which are to be made by the Borrower and payable to the order of the Bank, and
(iii) that certain Security Agreement of even date herewith from the Borrower to
the Bank (the "Security Agreement").

         1.2.    The Borrowing; Revolving Note. Subject to the terms and 
conditions hereinafter set forth, the Bank will make loans ("Revolving Loans") 
to the Borrower, in such amounts as the Borrower may request, at the Principal 
Office of the Bank on any Business Day prior to the first to occur of (i) the
Expiration Date, or (ii) the earlier termination of the within-described
revolving financing arrangements pursuant to ss.5.2 or ss.6.7; provided,
however, that (1) the aggregate principal amount of Revolving Loans outstanding
shall at no time exceed the Maximum Revolving Amount (hereinafter defined) and
(2) the Aggregate Bank Liabilities (hereinafter defined) shall at no time exceed
the Borrowing Base (hereinafter defined). Within such amount, and subject to the
terms and conditions hereof, the Borrower may


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obtain Revolving Loans, repay Revolving Loans and obtain Revolving Loans again
on one or more occasions. The Revolving Loans shall be evidenced by the
Revolving Note and interest thereon shall be payable at the times and at the
rate provided in the Revolving Note. Overdue principal of the Revolving Loans
and, to the extent permitted by law, overdue interest shall bear interest at a
fluctuating rate per annum which at all times shall be equal to the sum of (i)
two (2%) percent plus (ii) the per annum rate otherwise payable under the
Revolving Note (but in no event in excess of the maximum rate from time to time
permitted by then applicable law), compounded monthly and payable on demand. The
Borrower hereby irrevocably authorizes the Bank to make or cause to be made, on
a schedule attached to the Revolving Note or on the books of the Bank, at or
following the time of making each Revolving Loan and of receiving any payment of
principal, an appropriate notation reflecting such transaction and the then
aggregate unpaid principal balance of the Revolving Loans. The amount so noted
shall constitute prima facie evidence as to the amount owed by the Borrower with
respect to principal of the Revolving Loans. Failure of the Bank to make any
such notation shall not, however, affect any obligation of the Borrower or any
right of the Bank hereunder or under the Revolving Note.

         1.3.    Repayment; Renewal of Revolving Loan Facility. The Borrower 
shall repay in full all Revolving Loans and all interest thereon upon the first 
to occur of: (i) the Expiration Date, or (ii) an acceleration under ss.5.2(a)
following an Event of Default. The Borrower may repay, at any time, without
penalty or premium, the whole or any portion of any Revolving Loan. In addition,
if at any time the Borrowing Base is in an amount which is less than the then
outstanding Aggregate Bank Liabilities will not exceed the Borrowing Base. The
Bank may, at its sole discretion, renew the revolving financing arrangements
described in this letter agreement by extending the Expiration Date in a writing
signed by the Bank and accepted by the Borrower. Neither the inclusion in this
letter agreement or elsewhere of covenants relating to periods of time after the
Expiration Date, nor any other provision hereof, nor any action (except a
written extension pursuant to the immediately preceding sentence), non-action or
course of dealing on the part of the Bank will be deemed an extension of, or
agreement on the part of the Bank to extend, the Expiration Date.

         1.4.    Term Loans; Term Notes. In addition to the foregoing, the Bank 
may make one or more loans (the "Term Loans") to the Borrower in an aggregate
principal amount up to $1,000,000. A Term Loan shall be made, no more than once
per calendar quarter (except that a Term Loan may be made more frequently in
order to finance not less than $100,000 in Qualifying Equipment acquired by the
Borrower within the 90 days preceding the request for such Term Loan), in such
amount as may be requested by the Borrower;

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provided that (i) no Term Loan will be made after June 30, 1994; (ii) the
aggregate original principal amounts of all Term Loans will not exceed
$1,000,000; and (iii) no Term Loan will be in an amount more than 80% of the
total of (x) invoiced actual costs of the tangible property constituting the
items of Qualifying Equipment with respect to which such Term Loan is made
(excluding taxes, shipping, installation charges and other "soft costs") plus
(y) the actual costs of software relating to such items of Qualifying Equipment,
provided that such software costs will not exceed 35% of the total amount of
each such Term Loan. Notwithstanding the requirement of clause (iii) of the
immediately preceding sentence, the Term Loan or Term Loans made as at the date
hereof may include the amount (not in excess of $117,500.15) necessary to repay
loans heretofore made by Shawmut Bank, N.A. to the Borrower, which loans were to
become due in December 1993, September 1994 and December 1995. Prior to the
making of each Term Loan, and as a precondition thereto, the Borrower will
provide the Bank with: (i) invoices supporting the costs of the relevant
Qualifying Equipment; (ii) such evidence as the Bank may require showing that
the Qualifying Equipment has been installed at the Premises, has become fully
operational, has been paid for by the Borrower and is owned by the Borrower free
of all liens and interests of any other Person (other than the security interest
of the Bank pursuant to the Security Agreement); (iii) evidence satisfactory to
the Bank that the Qualifying Equipment is fully insured against casualty loss,
with insurance naming the Bank as secured party and first loss payee and (iv) a
duly executed Term Note in the amount of the relevant Term Loan. Each Term Loan
will be evidenced by a Term Note, substantially in the form of item 1.4 of the
attached Disclosure Schedule; except that the Term Note representing that Term
Loan (in the principal amount of $90,000) which is to be made for the purpose of
refunding the loan by Shawmut Bank, N.A. due December 1995 will be amortized in
24 principal installments of $3,750 each. Interest on each Term Loan shall be
payable at the times and at the rate provided for in the Term Note evidencing
same. Overdue principal of any Term Loan and, to the extent permitted by law,
overdue interest shall bear interest at a fluctuating rate per annum which at
all times shall be equal to the sum of (i) two (2%) percent plus (ii) the per
annum rate otherwise payable under the related Term Note (but in no event in
excess of the maximum rate from time to time permitted by then applicable law),
compounded monthly and payable on demand. The Borrower hereby irrevocably
authorizes the Bank to make or cause to be made, on a schedule attached to the
relevant Term Note or on the books of the Bank, at or following the time of
making each Term Loan and of receiving any payment of principal, an appropriate
notation reflecting such transaction and the then aggregate unpaid principal
balance of such Term Loan. The amount so noted shall constitute prima facie
evidence as to the amount owed by the Borrower with respect to principal of such
Term Loan. Failure of the Bank to make any such notation shall not, however,

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affect any obligation of the Borrower or any right of the Bank
hereunder or under any Term Note.

         1.5.    Principal Repayment of Term Loans. The Borrower shall repay
principal of each Term Loan in 36 equal consecutive monthly installments,
commencing on the first day of the month next following the month in which such
Term Loan is made and continuing on the first day of each month thereafter. Each
such monthly installment of principal shall be in an amount equal to 1/36th of
the outstanding principal balance of such Term Loan. In any event, the then
outstanding principal balance of each Term Loan and all interest then accrued
but unpaid thereon shall be due and payable in full on the first day of the 36th
month next following the month in which such Term Loan is made. (Notwithstanding
the foregoing, the Term Loan made as at the date hereof in order to refund the
aforesaid loan from Shawmut Bank, N.A. due December 1995 will be amortized in 24
equal monthly installments commencing January 15, 1994 and ending December 15,
1995.) The Borrower may prepay, at any time or from time to time, without
premium or penalty, the whole or any portion of any Term Loan; provided that
each such principal prepayment shall be accompanied by payment of all interest
under the related Term Note accrued but unpaid to the date of payment. Any
partial prepayment of principal of a Term Loan will be applied to installments
of principal of such Term Loan thereafter coming due in inverse order of normal
maturity.

         1.6.    Advances and Payments. The proceeds of all Loans shall be 
credited by the Bank to a general deposit account maintained by the Borrower 
with the Bank. The proceeds of each Revolving Loan will be used by the Borrower 
solely for working capital purposes. The proceeds of each Term Loan will be used
by the Borrower solely to pay or reimburse acquisition costs of Qualifying 
Equipment.

         The Bank may charge any general deposit account of the Borrower at the
Bank with the amount of all payments of interest, principal and other sums when
same are due, from time to time, under this letter agreement and/or any Note
and/or with respect to any letter of credit; and will thereafter notify the
Borrower of the amount so charged. The failure of the Bank so to charge any
account or to give any such notice shall not affect the obligation of the
Borrower to pay interest, principal or other sums ad provided herein or in any
Note or with respect to any letter of credit.

         Whenever any payment to be made to the Bank hereunder or under any Note
or with respect to any letter of credit shall be stated to be due on a day which
is not a Business Day, such payment may be made on the next succeeding Business
Day, and interest payable on each such date shall include the amount thereof
which shall accrue during the period of such extension of

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time. All payments by the Borrower hereunder and/or in respect of any Note
and/or with respect to any letter of credit shall be made net of any impositions
or taxes and without deduction, set-off or counterclaim, notwithstanding any
claim which the Borrower may now or at any time hereafter have against the Bank.
All payments of interest, principal and any other sum payable hereunder and/or
under any Note and/or with respect to any letter of credit shall be made to the
Bank at its Principal Office, in immediately available funds. All payments
received by the Bank after 2:00 p.m. on any day shall be deemed received as of
the next succeeding Business Day. All monies received by the Bank shall be
applied as specified by the Borrower at the time of payment if no Event of
Default has occurred and is then continuing. If no such specification is made or
if an Event of Default has occurred and is then continuing, all monies received
hereunder will be applied first to fees, charges, costs and expenses payable to
the Bank under this letter agreement, any Note and/or any of the other Loan
Documents and/or with respect to any letter of credit, next to interest then
accrued on account of any Loans or letter of credit reimbursement obligations
and only thereafter to principal of the Loans and letter of credit reimbursement
obligations (being applied first against the letter of credit reimbursement
obligations, next against the Revolving Loans and thereafter against
installments of the Term Loans in inverse order of normal maturity). All
interest and fees payable hereunder and/or under any Note shall be calculated on
the basis of a 360-day year for the actual number of days elapsed.

         1.7.    Letters of Credit. The Bank may, from time to time, in its sole
discretion issue one or more letters of credit for the account of the Borrower;
provided that at the time of such issuance and after given effect thereto the
Aggregate Bank Liabilities will in no event exceed the lesser of (i) $2,500,000
or (ii) the then effective Borrowing Base. Any such letter of credit will be
issued for such fee and upon such terms and conditions as may be agreed to by
the Bank and the Borrower at the time of issuance. The Borrower hereby
authorizes the Bank, without further request from the Borrower, to cause the
Borrower's liability to the Bank for reimbursement of funds drawn under any such
letter of credit to be repaid from the proceeds of a Revolving Loan to be made
hereunder. The Borrower hereby irrevocably requests that such Revolving Loans be
made.

         1.8.    Conditions to Advance. Prior to the making of the initial Loan
hereunder or the issuance of any letter of credit hereunder, the Borrower shall
deliver to the Bank duly executed copies of this letter agreement, the Security
Agreement, the Revolving Note, the initial Term Note or Term Notes (if such
initial Loan is to be a Term Loan) and the documents and other items listed on
the Closing Agenda delivered herewith by the Bank to the Borrower, all of which,
as well as all legal matters

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incident to the transactions contemplated hereby, shall be satisfactory in form
and substance to the Bank and its counsel.

         Without limiting the foregoing, any Loan or letter of credit issuance
(including the initial Loan or letter of credit issuance) is subject to the
further conditions precedent that on the date on which such Loan is made or such
letter of credit is issued (and after giving effect thereto):

         (a) All statements, representations and warranties of the Borrower made
in this letter agreement and/or the Security Agreement shall continue to be
correct in all material respects as of the date of such Loan or issuance of such
letter of credit, as the case may be.

         (b) All covenants and agreements of the Borrower contained herein
and/or in any of the other Loan Documents shall have been complied with in all
material respects on and as of the date of such Loan or issuance of such letter
of credit, as the case may be.

         (c) No event which constitutes, or which with notice or lapse of time
or both would constitute, an Event of Default shall have occurred and be
continuing.

         (d) No material adverse change shall have occurred in the financial
condition of the Borrower from that disclosed in the financial statements then
most recently furnished to the Bank.

         Each request by the Borrower for any Loan or for the issuance of a
letter of credit, and each acceptance by the Borrower of the proceeds of any
Loan or delivery of a letter of credit, will be deemed a representation and
warranty by the Borrower that at the date of such Loan or letter of credit
issuance, as the case may be, and after giving effect thereto all of the
conditions set forth in the foregoing clauses (a)-(d) of this ss.1.8 will be
satisfied. Each request for a Revolving Loan or letter of credit issuance will
be accompanied by a borrowing base certificate on a form satisfactory to the
Bank, executed by the chief financial officer of the Borrower, unless such a
certificate shall have been previously furnished setting forth the Borrowing
Base as at a date not more than 15 days prior to the date of the requested
borrowing.

II.      REPRESENTATIONS AND WARRANTIES
         ------------------------------

         2.1.     Representations and Warranties.  In order to induce the
Bank to enter into this letter agreement and to make Loans
hereunder and/or issue letters of credit hereunder, the Borrower
warrants and represents to the Bank as follows:


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         (a) The Borrower is a corporation duly organized, validly existing and
in good standing under the laws of The Commonwealth of Massachusetts. The
Borrower has full corporate power to own its property and conduct its business
as now conducted and as contemplated to be conducted, to grant the security
interests contemplated by the Security Agreement and to enter into and perform
this letter agreement and the other Loan Documents. The Borrower is duly
qualified to do business and in good standing in each jurisdiction in which the
Borrower maintains any facility, sales office or warehouse and in each other
jurisdiction where the failure so to qualify could (singly or in the aggregate
with all other such failures) have a material adverse effect on the financial
condition, business or prospects of the Borrower, all such jurisdictions being
listed on item 2.1(a) of the attached Disclosure Schedule. At the date hereof,
the Borrower has no Subsidiaries. The Borrower is in the process of forming an
English Subsidiary, which will be wholly-owned by the Borrower. The Borrower is
not a member of any partnership or joint venture.

         (b) At the date of this letter agreement, all of the outstanding
capital stock of the Borrower is owned, of record and beneficially, as set forth
on item 2.1(b) of the attached Disclosure Schedule.

         (c) The execution, delivery and performance by the Borrower of this
letter agreement and each of the other Loan Documents have been duly authorized
by all necessary corporate and other action and do not and will not:

                  (i) violate any provision of, or require any filings,
         registration, consent or approval under, any law, rule, regulation,
         order, writ, judgment, injunction, decree, determination or award
         presently in effect having applicability to the Borrower;

                  (ii) violate any provision of the charter or By-laws of the
         Borrower, or result in a breach of or constitute a default or require
         any waiver or consent under any material indenture or loan or credit
         agreement or any other agreement, lease or instrument to which the
         Borrower is a party or by which the Borrower or any of its properties
         may be bound or affected or require any other consent of any Person; or

                  (iii) result in, or require, the creation or imposition of any
         lien, security interest or other encumbrance (other than in favor of
         the Bank), upon or with respect to any of the properties now owned or
         hereafter acquired by the Borrower.

         (d) This letter agreement and each of the other Loan Documents has been
duly executed and delivered by the Borrower

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and is a legal, valid and binding obligation of the Borrower, enforceable
against the Borrower in accordance with their respective terms.

         (e) Except as described in item 2.1(e) of the attached Disclosure
Schedule, there are no actions, suits, proceedings or investigations pending or,
to the knowledge of the Borrower, threatened by or against the Borrower before
any court or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, which could prevent the consummation of
the transactions contemplated hereby or call into question the validity of this
letter agreement or any of the other Loan Documents or any other instrument
provided for or contemplated by this letter agreement or any of the other Loan
Documents or any action taken or to be taken in connection with the transactions
contemplated hereby or thereby or which in any single case or in the aggregate
might result in any material adverse change in the business, prospects,
condition, affairs or operations of the Borrower.

         (f) The Borrower is not in violation of any term of its charter or
By-laws as now in effect. The Borrower is not in material violation of any term
of any mortgage, indenture or judgment, decree or order, or any other
instrument, contract or agreement to which it is a party or by which any of its
property is bound.

         (g) The Borrower has filed all federal, state and local tax returns,
reports and estimates required to be filed by the Borrower. All such filed
returns, reports and estimates are proper and accurate and the Borrower has paid
all taxes, assessments, impositions, fees and other governmental charges
required to be paid in respect of the periods covered by such returns, reports
or estimates. No deficiencies for any tax, assessment or governmental charge
have been asserted or assessed, and the Borrower knows of no material tax
liability or basis therefor.

         (h) The Borrower is in compliance with all requirements of law,
federal, state and local, and all requirements of all governmental bodies or
agencies having jurisdiction over it, the conduct of its business, the use of
its properties and assets, and all premises occupied by it, failure to comply
with which could (singly or in the aggregate with all other such failures) have
a material adverse effect upon the assets, business, financial condition or
prospects of the Borrower. Without limiting the foregoing, the Borrower has all
the franchises, licenses, leases, permits, certificates and authorizations
needed for the conduct of its business and the use of its properties and all
premises occupied by it, as now conducted, owned and used and as proposed to be
conducted, owned and used.


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         (i) The audited financial statements of the Borrower as at December 31,
1992 and the management-generated financial statements of the Borrower as at
September 30, 1993, each heretofore delivered to the Bank, are (and all
financial statements of the Borrower hereafter delivered pursuant to this letter
agreement will be) complete and accurate and fairly present the financial
condition of the Borrower as at the date thereof and for the periods covered
thereby, except that interim management-generated statements do not and will not
have footnotes. The Borrower has no liability, contingent or otherwise, not
disclosed in the aforesaid December 31, 1992 financial statements or in any
notes thereto that could materially affect the financial condition of the
Borrower. Since December 31, 1992, there has been no material adverse
development in the business or condition of the Borrower and the Borrower has
not entered into any transaction other than in the ordinary course.

         (j) The principal place of business and chief executive offices of the
Borrower are located at 101 Main Street, Cambridge, MA 02142 (the "Premises").
Except as described in item 2.1(j) of the attached Disclosure Schedule, no
assets of the Borrower are located at any other address. Said item 2.1(j) of the
attached Disclosure Schedule sets forth the names and addresses of all record
owners of the Premises.

         (k) To the best of the Borrower's knowledge, the Borrower owns or has a
valid right to use the patents, licenses, copyrights, trademarks, trademark
applications, trademark rights and trade names or trade name rights or
franchises now being used or necessary to conduct its business. To the best of
the Borrower's knowledge, the conduct of the Borrower's business as now operated
does not conflict with valid patents, licenses, copyrights, trademarks,
trademark rights and trade names and trade name rights or franchises of others
in any manner that could materially adversely affect in any manner the business
or assets or condition, financial or otherwise, of the Borrower.

         (l) None of the executive officers or key employees of the Borrower is
subject to any agreement in favor of anyone other than the Borrower which limits
or restricts that person's right to engage in the type of business activity
conducted or proposed to be conducted by the Borrower or which grants to anyone
other than the Borrower any rights in any inventions or other ideas susceptible
to legal protection developed or conceived by any such officer or key employee.

III.     AFFIRMATIVE COVENANTS AND REPORTING REQUIREMENTS
         ------------------------------------------------

         Without limitation of any covenants and agreements contained in the
Security Agreement or elsewhere, the Borrower agrees that so long as the
financing arrangements contemplated hereby are in

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effect or any Revolving Loan or any Term Loan or any of the other obligations
shall be outstanding or any letter of credit issued hereunder shall be
outstanding;

         3.1.    Legal Existence; Qualification; Compliance. The Borrower will
maintain (and will cause each Subsidiary of the Borrower to maintain) its
corporate existence and good standing in the jurisdiction of its incorporation.
The Borrower will qualify to do business and remain qualified and in good
standing (and will cause each Subsidiary of the Borrower to qualify and remain
qualified and in good standing) in each jurisdiction where it maintains any
facility, sales office or warehouse and in each other jurisdiction in which the
failure so to qualify could (singly or in the aggregate with all other such
failures) have a material adverse effect on the financial condition, business or
prospects of the Borrower or any such Subsidiary. The Borrower will comply (and
will cause each Subsidiary of the Borrower to comply) with its charter documents
and by-laws and, in all material respects, with all contractual requirements by
which it or any of its properties may be bound. The Borrower will comply with
(and will cause each Subsidiary of the Borrower to comply with) all applicable
laws, rules and regulations (including, without limitation, ERISA and those
relating to environmental protection) other than (i) laws, rules or regulations
the validity or applicability of which the Borrower or such Subsidiary shall be
contesting in good faith by proceedings which serve as a matter of law to stay
the enforcement thereof and (ii) those laws, rules and regulations the failure
to comply with any of which could not (singly or in the aggregate) reasonably be
expected to materially adversely affect the financial condition, business or
prospects of the Borrower or any such Subsidiary.

         3.2.    Maintenance of Property; Insurance. The Borrower will maintain 
and preserve (and cause each Subsidiary of the Borrower to maintain and 
preserve) all of its properties in good working order and condition, ordinary 
year and tear excepted, making all necessary repairs thereto and replacements 
thereof. The Borrower will maintain all such insurance as may be required under 
the Security Agreement and will also maintain, with financially sound and 
reputable insurers, insurance with respect to its property and business against 
such liabilities, casualties and contingencies and of such types and in such 
amountsas shall be satisfactory to the Bank from time to time and in any event 
all such insurance as may from time to time be customary for companies 
conducting a business similar to that of the Borrower in similar locales.

         3.3.     Payment of Taxes and Charges.  The Borrower will pay
and discharge (and will cause each Subsidiary of the Borrower to
pay and discharge) all taxes, assessments and governmental
charges or levies imposed upon it or upon its income or property,
including, without limitation, taxes, assessments, charges or

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levies relating to real and personal property, the Collateral, franchises,
income, unemployment, old age benefits, withholding, or sales or use, prior to
the date on which penalties would attach thereto, and all lawful claims (whether
for any of the foregoing or otherwise) which, if unpaid, might give rise to a
lien upon any property of the Borrower or any such Subsidiary, except any of the
foregoing which is being contested in good faith and by appropriate proceedings
which serve as a matter of law to stay the enforcement thereof and for which the
Borrower has established and is maintaining adequate reserves. The Borrower will
pay, and will cause each of its Subsidiaries to pay, in a timely manner, all
lease obligations, all trade debt, purchase money obligations, equipment lease
obligations and all of its other Indebtedness. The Borrower will perform and
fulfill all covenants and agreements under any leases of real estate, agreements
relating to purchase money debt, equipment leases and other material contracts.
The Borrower will maintain in full force and effect, and comply with the terms
and conditions of, all permits, permissions and licenses necessary or desirable
for its business.

         3.4.     Accounts. The Borrower will maintain its principal
depository and operating accounts with the Bank.

         3.5.     Conduct of Business.  The Borrower will conduct, in the
ordinary course, the business in which it is presently engaged.
The Borrower will not, without the prior written consent of the
Bank, directly or indirectly enter into any other lines of
business, businesses or ventures.

         3.6.     Reporting Requirements.  The Borrower will furnish to
the Bank:

                  (i) Within 120 days after the end of each fiscal year of the
         Borrower, a copy of the annual audit report for such fiscal year for
         the Borrower, including therein consolidated and consolidating balance
         sheets of the Borrower and Subsidiaries as at the end of such fiscal
         year and related consolidated and consolidating statements of income,
         stockholders' equity and cash flow for the fiscal year then ended. The
         annual consolidated financial statements shall be certified by Ernst &
         Young or by other independent public accountants selected by the
         Borrower and reasonably acceptable to the Bank, such certification to
         be in such form as is generally recognized as "unqualified".

                  (ii) Within 45 days after the end of each fiscal quarter of
         the Borrower, consolidated and consolidating balance sheets of the
         Borrower and its Subsidiaries and related consolidated and
         consolidating statements of income and stockholders, equity and cash
         flow, unaudited but complete and accurate and prepared in accordance
         with

                                       11

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         generally accepted accounting principles fairly presenting the
         financial condition of the Borrower as at the date thereof and for the
         periods covered thereby (except that such quarterly statements need not
         contain footnotes) and certified as accurate (subject to normal
         year-end audit adjustments, which shall not be material) by the chief
         financial officer of the Borrower, such balance sheets to be as at the
         end of such fiscal quarter and such statements of income and
         stockholders, equity and cash flow ta be for such fiscal quarter and
         for the year to date, in each case together with a comparison to
         budget.

                  (iii) At the time of delivery of each annual or quarterly
          statement of the Borrower, a certificate executed by the chief
          financial officer of the Borrower stating that he or she has reviewed
          this letter agreement and the other Loan Documents and has no
          knowledge of any default by the Borrower in the performance or
          observance of any of the provisions of this letter agreement or of any
          of the other Loan Documents or, if he or she has such knowledge,
          specifying each such default and the nature thereof. Each such
          certificate shall also set forth the calculations necessary to
          evidence compliance with ss.ss.3.7-3.10.

                  (iv) Monthly, within 15 days after the end of each month, (A)
         an aging report in form satisfactory to the Bank covering all
         Receivables of the Borrower outstanding as at the end of such month and
         setting forth the schedule of all installment payments scheduled to be
         paid within the next 12 months under long-term contracts, and (B) a
         certificate of the chief financial officer of the Borrower setting
         forth the Borrowing Base as at the end of such month, all in form
         reasonably satisfactory to the Bank. Notwithstanding the foregoing, the
         Borrower may omit to furnish the aging report and Borrowing Base
         certificate otherwise due with respect to any month-end if at such
         month-end there are outstanding no Revolving Loans nor any letters of
         credit issued hereunder; provided that prior to any subsequent
         borrowing of a Revolving Loan or issuance of a letter of credit
         hereunder the Borrower will furnish such report and Borrowing Base
         certificate.

                  (v) Promptly after receipt, a copy of all audits or reports
         submitted to the Borrower by independent public accountants in
         connection with any annual, special or interim audits of the books of
         the Borrower and any letter of comments directed by such accountants to
         the management of the Borrower.

                  (vi) As soon as possible and in any event within five days
         after the Borrower knows or reasonably should know of the occurrence of
         any Event of Default or any event which,

                                       12

<PAGE>



         with the giving of notice or passage of time or both, would constitute
         an Event of Default, the statement of the Borrower setting forth
         details of such Event of Default or event and the action which the
         Borrower proposes to take with respect thereto.

                  (vii) Promptly after the commencement thereof, notice of all
         actions, suits and proceedings before any court or governmental
         department, commission, board, bureau, agency or instrumentality,
         domestic or foreign, to which the Borrower or any Subsidiary of the
         Borrower is a party.

                  (viii) Promptly after the Borrower has knowledge thereof,
          written notice of any development or circumstance which may have a
          material adverse effect on the Borrower or its business, properties,
          assets, Subsidiaries or condition, financial or otherwise.

                  (ix) Promptly upon request, such other information respecting
         the financial condition, operations, Receivables, inventory, machinery
         or equipment of the Borrower or any Subsidiary as the Bank may from
         time to time reasonably request.

         3.7.    Debt to Worth. The Borrower will maintain as at the end of each
fiscal quarter of the Borrower on a consolidated basis a Leverage Ratio of not
more than 1.25 to 1. As used herein, "Leverage Ratio" means the ratio of (x)
total Indebtedness of the Borrower and Subsidiaries to (y) Tangible Net Worth of
the Borrower.

         3.8.    Net Worth. The Borrower will maintain as at the end of each 
fiscal quarter of the Borrower a consolidated Tangible Net Worth which shall not
be less than the then-effective TNW Requirement. As used herein, the "TNW
Requirement" will be deemed to have been $5,500,000 as at December 31, 1992; and
as at the last day of each fiscal quarter thereafter (beginning with March 31,
1993) the TNW Requirement will be deemed to become an amount equal to the sum
of: (i) the TNW Requirement in effect on the last day of the immediately
preceding fiscal quarter, plus (ii) 90% of the net proceeds of any equity
securities sold by the Borrower during the fiscal quarter then ended, plus (iii)
90% of the consolidated Adjusted Net Income of the Borrower and Subsidiaries
during said fiscal quarter then ended (but without giving effect to any Adjusted
Net Income which is less than zero for any fiscal quarter).

         3.9.     Quick Ratio.  The Borrower will maintain as at the end
of each fiscal quarter of the Borrower a ratio of Net Quick
Assets to Current Liabilities, which ratio shall be not less than
1.5 to 1.


                                       13

<PAGE>



         3.10.   Profitability. The BorroWer will not incur a quarterly Net Loss
in excess of $250,000 for any fiscal quarter (commencing with the results for
the fiscal quarter ended September 30, 1993). The Borrower will not incur a
quarterly Net Loss in any two consecutive fiscal quarters. The Borrower will
achieve Net Income of at least $750,000 for each fiscal year, beginning with its
fiscal year ending December 31, 1993.

         3.11.   Books and Records. The Borrower will maintain (and cause each 
of its Subsidiaries to maintain) complete and accurate books, records and 
accounts which will at all times accurately and fairly reflect all of its 
transactions in accordance with generally accepted accounting principles 
consistently applied. The Borrower will, at any reasonable time and from time 
to time upon reasonable notice and during normal business hours (and at any time
and without any necessity for notice following the occurrence and during the 
continuance of an Event of Default), permit the Bank, and any agents or 
representatives thereof, to examine and make copies of and take abstracts from 
the records and books of account of, and visit the properties of the Borrower 
and any of its Subsidiaries, and to discuss its affairs, finances and accounts 
with its managers, officers or directors and independent accountants, all of 
whom are hereby authorized and directed to cooperate with the Bank in carrying 
out the intent of this ss.3.11.

         Except as otherwise provided below, the Bank will not at any time use
(for any purpose other than in connection with monitoring the within-described
loan facilities and/or enforcing its rights hereunder and/or under the Security
Agreement) any information of any kind to which the Bank is given access or
which is provided to the Bank by the Borrower pursuant to this ss.3.11 or
pursuant to the Security Agreement (such information being hereinafter referred
to, subject to the last sentence of this ss.3.11, as the "Confidential
Information"). The Bank agrees that it will use reasonable efforts to ensure
that Confidential Information will not be disclosed to any other Person without
the Borrower's consent; provided, however, that nothing contained herein will be
deemed to preclude any such disclosure: (1) to employees, officers, directors
and/or agents of the Bank in connection with the approval of Loans, letters of
credit or other facilities or in connection with the administration of this
letter agreement, any such Loans, letters of credit and/or other facilities; (2)
to internal or independent auditors; (3) to any examiners or other officials,
employees or agents of any federal or state governmental regulatory agency,
board, commission, public corporation or similar entity; (4) if ordered by any
court or governmental agency having or claiming jurisdiction; (5) to any actual
or proposed assignee of or participant in any Loan; and/or (6) in connection
with any suit, action or other proceeding to collect any Loans or enforce any
other right under this letter agreement, the Security Agreement and/or any of
the

                                       14

<PAGE>



Notes. Notwithstanding the foregoing, it is agreed that "Confidential
Information" expressly excludes: (1) any information filed with a public agency
or otherwise within the public domain, (2) any information supplied to the Bank
by a third party under circumstances in which the recipient of such information
does not know of (and should not reasonably have known of) any confidential
relationship between such third party and the Borrower which would restrict
dissemination of such information, and (3) any information supplied by or on
behalf of the Borrower which is not labelled "confidential" or as to which the
Borrower has not otherwise indicated that disclosure is prohibited.

IV.      NEGATIVE COVENANTS.
         -------------------

         Without limitation of any covenants and agreements contained in the
Security Agreement or elsewhere, the Borrower agrees that so long as the
financing arrangements contemplated hereby are in effect or any Revolving Loan
or any Term Loan or any of the other Obligations shall be outstanding or any
letter of credit issued hereunder shall be outstanding:

         4.1.    Indebtedness. The Borrower will not create, incur,
assume or suffer to exist any Indebtedness (nor allow any of its
Subsidiaries to create, incur, assume or suffer to exist any
Indebtedness), except for:

                  (i) Indebtedness owed to the Bank, including, without
          limitation, the Indebtedness represented by the Notes and any
          Indebtedness in respect of letters of credit issued by the Bank;

                  (ii) Indebtedness of the Borrower or any Subsidiary for taxes,
          assessments and governmental charges or levies not yet due and
          payable;

                  (iii) unsecured current liabilities of the Borrower or any
         Subsidiary (other than for money borrowed or the deferred purchase
         price of property) incurred upon customary terms in the ordinary course
         of business;

                  (iv) purchase money Indebtedness (including, without
         limitation, Indebtedness in respect of capitalized equipment leases)
         owed to equipment vendors and/or lessors for equipment purchased or
         leased by the Borrower for use in the Borrower's business, provided
         that the total of Indebtedness permitted under this clause (iv) plus
         presently-existing equipment financing permitted under clause (v) of
         this ss.4.1 will not exceed $1,000,000 in the aggregate outstanding at
         any one time; and


                                       15

<PAGE>



                  (v) other Indebtedness existing at the date hereof, but only
          to the extent set forth on item 4.1 of the attached Disclosure
          Schedule.

         Real estate leases will not be deemed included in "Indebtedness" for
the purposes of this ss.4.1.

         4.2. Liens. The Borrower will not create, incur, assume or suffer to
exist (nor allow any of its Subsidiaries to create, incur, assume or suffer to
exist) any mortgage, deed of trust, pledge, lien, security interest, or other
charge or encumbrance (including the lien or retained security title of a
conditional vendor) of any nature (collectively, "Liens") upon or with respect
to any of its property or assets, now owned or hereafter acquired, except:

                  (i) Liens for taxes, assessments or governmental charges or
         levies on property of the Borrower or any of its Subsidiaries if the
         same shall not at the time be delinquent or thereafter can be paid
         without interest or penalty;

                  (ii) Liens imposed by law, such as carriers', warehousemen's
         and mechanics' liens and other similar Liens arising in the ordinary
         course of business for sums not yet due or which are being contested in
         good faith and by appropriate proceedings which serve as a matter of
         law to stay the enforcement thereof and as to which adequate reserves
         have been made;

                  (iii) pledges or deposits under workmen's compensation laws,
          unemployment insurance, social security, retirement benefits or
          similar legislation;

                  (iv) Liens in favor of the Bank;

                  (v) Liens in favor of equipment vendors and/or lessors
         securing purchase money Indebtedness to the extent permitted by clause
         (iv) of ss.4.1; provided that no such Lien will extend to any property
         of the Borrower other than the specific items of equipment financed; or

                  (vi) other Liens existing at the date hereof, but only to the
         extent and with the relative priorities set forth on item 4.2 of the
         attached Disclosure Schedule.

         The Bank agrees that it will execute and deliver such subordinations as
may from time to time be reasonably necessary to permit the purchase money
financing described in clause (v) above.

         4.3.     Guaranties. The Borrower will not, without the prior
written consent of the Bank, assume, guarantee, endorse or

                                       16

<PAGE>



otherwise become directly or contingently liable (including, without limitation,
liable by way of agreement, contingent or otherwise, to purchase, to provide
funds for payment, to supply funds to or otherwise invest in any debtor or
otherwise to assure any creditor against loss) in connection with any
indebtedness of any other Person, except (i) guaranties by endorsement for
deposit or collection in the ordinary course of business, (ii) currently
existing guaranties described on item 4.3 of the attached Disclosure Schedule,
and (iii) guaranties of Indebtedness of Subsidiaries (or of employees of
Subsidiaries) in an aggregate amount not to exceed $100,000 outstanding at any
one time.

         4.4.    Dividends. The Borrower will not, without the prior written
consent of the Bank, make any distributions to its shareholders, pay any
dividends (other than dividends payable solely in capital stock of the Borrower)
or redeem, purchase or otherwise acquire, directly or indirectly any of its
capital stock.

         4.5.    Loans and Advances. The Borrower will not make any loans or
advances to any Person, including, without limitation, the Borrower's directors,
officers and employees, except that the Borrower may make (A) advances to
directors, officers or employees with respect to expenses incurred by them in
the ordinary course of their duties and advances against salary, all of which
will not exceed, in the aggregate, $250,000 outstanding at any one time, and (B)
loans or advances to any Person for any purpose in an aggregate amount not to
exceed $100,000 outstanding at any one time.

         4.6.    Investments. The Borrower will not, without the Bank's prior
written consent (such consent not be unreasonably withheld), invest in, hold or
purchase any stock or securities of any Person (nor will the Borrower permit any
of its Subsidiaries to invest in, purchase or hold any such stock or securities)
except (i) readily marketable direct obligations of, or obligations guarantied
by, the United States of America or any agency thereof, (ii) other investment
grade debt securities, (iii) mutual funds, the assets of which are primarily
invested in items of the kind described in the foregoing clauses (i) and (ii) of
this ss.4.6, (iv) time deposits with or certificates of deposit issued by the
Bank and any other obligations of the Bank or the Bank's parent, (v) time
deposits with or certificates of deposit issued by any United States commercial
bank having more than $100,000,000 in capital, (vi) investments in any
Subsidiaries created by the Borrower pursuant to ss.4.7 below; provided that in
any event the Tangible Net Worth of the Borrower alone (exclusive of its
investment in Subsidiaries and any debt owned by any Subsidiary to the Borrower)
will not be less than 90% of the consolidated Tangible Net Worth of the Borrower
and Subsidiaries, and (vii) any other investments approved by the Borrower's
Board

                                       17

<PAGE>



of Directors, provided that the aggregate amount of all such other investments
does not exceed $100,000.

         4.7.    Subsidiaries; Acquisitions. The Borrower will not, without the
prior written consent of the Bank (such consent not to be unreasonably
withheld), form or acquire any new Subsidiary. The Bank hereby consents to the
formation by the Borrower of a Subsidiary under the laws of England. Except with
respect to Subsidiaries formed pursuant to the first two sentences of this
ss.4.7, the Borrower will not, without the prior written consent of the Bank,
make any other acquisition of the stock of any other Person or of all or
substantially all or the assets to any other Person. The Borrower will not
become a partner in any partnership.

         4.8.    Merger. The Borrower will not, without the prior written 
consent of the Bank, merge or consolidate with any Person, or sell, lease,
transfer or otherwise dispose of any material portion of its assets (whether in
one or more transactions).

         4.9.    Affiliate Transactions. The Borrower will not, without the 
prior written consent of the Bank, enter into any transaction, including, 
without limitation, the purchase, sale or exchange of any property or the 
rendering of any service, with any affiliate of the Borrower, 
except in the ordinary course of and pursuant to the reasonable 
requirements of the Borrower's business and upon fair and reasonable terms no 
less favorable to the Borrower than would be obtained in a comparable 
arms'-length transaction with any Person not an affiliate; provided that nothing
in this ss.4.9 shall be deemed to prohibit the payment of salary or other 
similar payments to any officer or director of the Borrower at a level 
consistent with the salary and other payments being paid at
the date of this letter agreement and heretofore disclosed in writing to the
Bank, nor to prevent the hiring of additional officers at a salary level
consistent with industry practice, nor to prevent reasonable periodic increases
in salary. For the purposes hereof, affiliate" means any Person which, directly
or indirectly, controls or is controlled by or is under common control with the
Borrower; any officer or director or former officer or director of the Borrower;
any Person owning of record or beneficially, directly or indirectly, 5% or more
of any class of capital stock of the Borrower or 5% or more of any class of
capital stock or other equity interest having voting power (under ordinary
circumstances) of any of the other Persons described above; and any member of
the immediate family of any of the foregoing. "Control" means possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of any Person, whether through ownership of voting
equity, by contract or otherwise.


                                       18

<PAGE>



         4.10.   Change of Address, etc. The Borrower will not change its name 
or legal structure, nor will the Borrower move its chief executive office or
principal place of business from the address described in the first sentence of
ss.2.1(j) above, nor will the Borrower keep any Collateral at any location other
than the Premises without, in each instance, giving the Bank at least 30 days'
prior written notice and providing all such financing statements, certificates
and other documentation as the Bank may request in order to maintain the
perfection and priority of the security interests granted or intended to be
granted pursuant to the Security Agreement. The Borrower will not change its
fiscal year or methods of financial reporting unless, in each instance, prior
written notice of such change is given to the Bank and prior to such change the
Borrower enters into amendments to this letter agreement in form and substance
satisfactory to the Bank in order to preserve unimpaired the rights of the Bank
and the obligations of the Borrower hereunder.

         4.11.   Hazardous Waste. Except as provided below, the Borrower will 
not dispose of or suffer or permit to exist any hazardous material or oil on any
site or vessel owned, occupied or operated by the Borrower or any Subsidiary of
the Borrower, nor shall the Borrower store (or permit any Subsidiary to store)
on any site or vessel owned, occupied or operated by the Borrower or any such
Subsidiary, or transport or arrange the transport of, any hazardous material or
oil (the terms "hazardous material" "oil", "site" and "vessel", respectively,
being used herein with the meanings given those terms in Mass. Gen. Laws, Ch.
21E or any comparable terms in any comparable statute in effect in any other
relevant jurisdiction). The Borrower shall provide the Bank with written notice
of (i) the intended storage or transport of any hazardous material or oil by the
Borrower or any Subsidiary of the Borrower, (ii) any potential or known release
or threat of release of any hazardous material or oil at or from any site or
vessel owned, occupied or operated by the Borrower or any Subsidiary of the
Borrower, and (iii) any incurrence of any expense or loss by any government or
governmental authority in connection with the assessment, containment or removal
of any hazardous material or oil for which expense or loss the Borrower or any
Subsidiary of the Borrower may be liable. Notwithstanding the foregoing, the
Borrower and its Subsidiaries may use, store and transport, and need not notify
the Bank of the use, storage or transportation of, (x) oil in reasonable
quantities, as fuel for heating of their respective facilities or for vehicles
or machinery used in the ordinary course of their respective businesses and (y)
hazardous materials that are solvents, cleaning agents or other materials used
in the ordinary course of the respective business operations of the Borrower and
its Subsidiaries, in reasonable quantities, as long as in any case the Borrower
or the Subsidiary concerned (as the case may be) has obtained and maintains in
effect any necessary governmental permits, licenses and approvals, complies with
all requirements

                                       19

<PAGE>



of applicable federal, state and local law relating to such use, storage or
transportation, follows the protective and safety procedures that a prudent
businessperson conducting a business the same as or similar to that of the
Borrower or such Subsidiary (as the case may be) would follow, and disposes of
such materials (not consumed in the ordinary course) only through licensed
providers of hazardous waste removal services.

         4.12.   No Margin Stock.  No proceeds of any Loan shall be
used directly or indirectly to purchase or carry any margin
security.

V.       DEFAULT AND REMEDIES
         --------------------

         5.1.    Events of Default.  The occurrence of  any  one  of
the following events shall constitute an Event of Default
hereunder:

         (a) The Borrower shall fail to make any payment of principal of or
interest on the Revolving Note or any Term Note on or before the date when due;
or the Borrower shall fail to pay when due any amount owed to the Bank with
respect to any letter of credit now or hereafter issued by the Bank; or

         (b) Any representation or warranty of the Borrower contained herein
shall at any time prove to have been incorrect in any material respect when made
or any representation or warranty made by the Borrower in connection with the
execution and delivery of this letter agreement or any other instrument,
document, certificate or statement executed and delivered in connection with any
Loan or letter of credit shall at any time prove to have been incorrect in any
material respect when made; or

         (c) The Borrower shall default in the performance or observance of any
agreement or obligation under any of ss.ss.3.6, 3.7, 3.8, 3.9 or 3.10 or Article
IV; or

         (d) The Borrower shall default in the performance or observance of any
agreement or obligation contained in ss.3.1 and/or ss.3.3 and such default shall
continue unremedied for 15 days after the commencement thereof; or

         (e) The Borrower shall default in the performance of any other term,
covenant or agreement Contained in this letter agreement and such default shall
continue unremedied for 30 days after notice thereof shall have been given to
the Borrower; or

         (f) Any default on the part of the Borrower or any Subsidiary of the
Borrower shall exist, and shall remain unwaived or uncured beyond the expiration
of any applicable notice and/or grace period, under any other contract,
agreement or

                                       20

<PAGE>



understanding now existing or hereafter entered into with or for
the benefit of the Bank (or any affiliate of the Bank); or

         (g) Any default shall exist and remain unwaived or uncured with respect
to any Indebtedness of the Borrower or any Subsidiary of the Borrower in excess
of $250,000 in aggregate principal amount or with respect to any instrument
evidencing, guaranteeing, securing or otherwise relating to any such
Indebtedness, or any such Indebtedness in excess of $250,000 in aggregate
principal amount shall not have been paid when due, whether by acceleration or
otherwise, or shall have been declared to be due and payable prior to its stated
maturity, or any event or circumstance shall occur which permits, or with the
lapse of time or giving of notice or both would permit, the acceleration of the
maturity of any such Indebtedness by the holder or holders thereof; or

         (h) The Borrower shall be dissolved, or the Borrower or any Subsidiary
of the Borrower shall become insolvent or bankrupt or shall cease paying its
debts as they mature or shall make an assignment for the benefit of creditors,
or a trustee, receiver or liquidator shall be appointed for the Borrower or any
Subsidiary of the Borrower or for a substantial part of the property of the
Borrower or any such Subsidiary, or bankruptcy, reorganization, arrangement,
insolvency or similar proceedings shall be instituted by or against the Borrower
or any such Subsidiary under the laws of any jurisdiction (except for an
involuntary proceeding filed against the Borrower or any Subsidiary of the
Borrower which is dismissed within sixty (60) days following the institution
thereof); or

         (i) Any attachment, execution or similar process shall be issued or
levied against any of the property of the Borrower or any Subsidiary and such
attachment, execution or similar process shall not be paid, stayed, released,
vacated or fully bonded within 10 days after its issue or levy; or

         (j) Any final uninsured judgment in excess of $250,000 shall be entered
against the Borrower or any Subsidiary of the Borrower by any court of competent
jurisdiction; or

         (k) The Borrower or any Subsidiary of the Borrower shall fail to meet
its minimum funding requirements under ERISA with respect to any employee
benefit plan (or other class of benefit which the PBGC has elected to insure) or
any such plan shall be the subject of termination proceedings (whether voluntary
or involuntary) and there shall result from such termination proceedings a
liability of the Borrower or any Subsidiary of the Borrower to the PBGC which in
the reasonable opinion of the Bank may have a material adverse effect upon the
financial condition of the Borrower or any such Subsidiary; or


                                       21

<PAGE>



         (1) The Security Agreement or any other Loan Document shall for any
reason (other than due to payment in full of all amounts secured or evidenced
thereby or due to discharge in writing by the Bank) not remain in full force and
effect; or

         (m) The security interests and liens of the Bank in and on any of the
Collateral covered or intended to be covered by the Security Agreement shall for
any reason (other than written release by the Bank) not be fully perfected first
priority liens and security interests; or

         (n) The sole stockholder of the Borrower at the date hereof shall for
any reason not hold, of record and beneficially, at least 51% of each class of
voting stock of the Borrower.

         5.2.    Rights and Remedies on Default.  Upon the occurrence of
any Event of Default, in addition to any other rights and remedies available to
the Bank hereunder or otherwise, the Bank may exercise any one or more of the
following rights and remedies (all of which shall be cumulative):

         (a) Declare the entire unpaid principal amounts of the Revolving Note
and each Term Note then outstanding, all interest accrued and unpaid thereon and
all other amounts payable under this letter agreement, and all other
Indebtedness of the Borrower to the Bank, to be forthwith due and payable,
whereupon the same shall become forthwith due and payable, without presentment,
demand, protest or notice of any kind, all of which are hereby expressly waived
by the Borrower.

         (b) Terminate the revolving financing arrangements and Term Loan
facility provided for by this letter agreement.

         (c) Exercise all rights and remedies hereunder, under the Revolving
Note, under each Term Note, under the Security Agreement and under each and any
other agreement with the Bank; and exercise all other rights and remedies which
the Bank may have under applicable law.

         5.3.    Set-off. in addition to any rights now or hereafter granted 
under applicable law and not by way of limitation of any such rights, upon the
occurrence and during the continuance of any Event of Default, the Bank is
hereby authorized at any time or from time to time, without presentment, demand,
protest or other notice of any kind to the Borrower or to any other Person, all
of which are hereby expressly waived, to set off and to appropriate and apply
any and all deposits and any other Indebtedness at any time held or owing by the
Bank or any affiliate thereof to or for the credit or the account of the
Borrower against and on account of the obligations and liabilities of the
Borrower to the Bank under this letter agreement or otherwise, irrespective of
whether or not the Bank

                                       22

<PAGE>



shall have made any demand hereunder and although said obligations, liabilities
or claims, or any of them, may then be contingent or unmatured and without
regard for the availability or adequacy of other collateral. As further security
for the Obligations, the Borrower also grants to the Bank a security interest
with respect to all its deposits and all securities or other property in the
possession of the Bank or any affiliate of the Bank from time to time, and, upon
the occurrence and during the continuance of any Event of Default, the Bank may
exercise all rights and remedies of a secured party under the Uniform Commercial
Code.

         5.4.    Letters of Credit. Without limitation of any other right or 
remedy of the Bank, (i) if an Event of Default shall have occurred and the Bank 
shall have accelerated the Revolving Loans or (ii) if this letter agreement 
and/or the revolving financing arrangements described herein shall have expired 
or shall have been earlier terminated by either the Bank or the Borrower for any
reason, the Borrower will forthwith deposit with the Bank in cash a sum equal to
the total of all then undrawn amounts of all outstanding letters of credit 
issued by the Bank for the account of the Borrower.

VI.      MISCELLANEOUS
         -------------

         6.1.    Costs and Expenses. The Borrower agrees to pay on demand all 
costs and expenses (including, without limitation, reasonable legal fees) of the
Bank in connection with the preparation, execution and delivery of this letter
agreement, the Security Agreement, the Revolving Note, any Term Note and all
other instruments and documents to be delivered in connection with any Loan or
letter of credit issued hereunder and any amendments or modifications of any of
the foregoing, as well as the costs and expenses (including, without limitation,
the reasonable fees and expenses of legal counsel) incurred by the Bank in
connection with preserving, enforcing or exercising, upon default, any rights or
remedies under this letter agreement, the Security Agreement, the Revolving
Note, any Term Note and all other instruments and documents delivered or to be
delivered hereunder or in connection herewith, all whether or not legal action
is instituted. In addition, the Borrower shall be obligated to pay any and all
stamp and other taxes payable or determined to be payable in connection with the
execution and delivery of this letter agreement, the Security Agreement, the
Revolving Note, any Term Note and all other instruments and documents to be
delivered in connection with any obligation. Any fees, expenses or other charges
which the Bank is entitled to receive from the Borrower under this Section shall
bear interest from that date which is 30 days after the date of any demand
therefor until the date when paid at a rate per annum equal to the sum of (i)
two (2%) percent plus (ii) the per annum rate

                                       23

<PAGE>



otherwise payable under the Revolving Note (but in no event in excess of the
maximum rate permitted by then applicable law).

         6.2.    Capital Adequacy. If the Bank shall have determined that the
adoption or phase-in after the date hereof of any applicable law, rule or
regulation regarding capital requirements for banks or bank holding companies,
or any change therein after the date hereof, or any change in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by the Bank with any request or directive of such entity regarding
capital adequacy (whether or not having the force of law) has or would have the
effect of reducing the return on the Bank's capital with respect to the
Revolving Loans, the Term Loans and/or the within-described revolving and term
loan facilities and/or letters of credit issued for the account of the Borrower
to a level below that which the Bank could have achieved (taking into
consideration the Bank's policies with respect to capital adequacy immediately
before such adoption, phase-in, change or compliance and assuming that the
Bank's capital was then fully utilized) but for such adoption, phase-in, change
or compliance by any amount deemed by the Bank to be material: (i) the Bank
shall promptly after its determination of such occurrence give notice thereof to
the Borrower; and (ii) the Borrower shall within 30 days following such notice
either (A) pay to the Bank as an additional fee such amount as the Bank
certifies to be the amount that will compensate it for such reduction with
respect to the Revolving Loans, the Term Loans, the within-described revolving
and term loan facilities and/or such letters of credit, or (B) terminate this
letter agreement and repay all Loans and pay all other sums due hereunder.

         A certificate of the Bank claiming compensation under this Section
shall be conclusive in the absence of manifest error. Such certificate shall set
forth the nature of the occurrence giving rise to such compensation, the
additional amount or amounts to be paid to it hereunder and the method by which
such amounts were determined. In determining such amounts, the Bank may use any
reasonable averaging and attribution methods. No failure on the part of the Bank
to demand compensation on any one occasion shall constitute a waiver of its
right to demand such compensation on any other occasion and no failure on the
part of the Bank to deliver any certificate in a timely manner shall in any way
reduce any obligation of the Borrower to the Bank under this Section.

         6.3.    Facility Fees.  With respect to the Term Loan, the
Borrower will pay to the Bank a facility fee in the amount of
$10,000, payable in four non-refundable installments of $2,500
each, the first such installment being payable on the date of
execution of this letter agreement and subsequent installments of

                                       24

<PAGE>



$2,500 each being due on each of December 31, 1993, March 31, 1994 and June 30,
1994. The Borrower will also pay to the Bank, on the date of execution of this
letter agreement and on the first day of each calendar quarter thereafter as
long as the within-described revolving loan arrangements are in effect, a
non-refundable quarterly facility fee payable in advance in the amount of
$2,343.75 per quarter (appropriately pro-rated for any partial calendar
quarter). In addition, if the financing arrangements established by this letter
agreement are terminated by the Borrower at any time or by the Bank as the
result of the Borrower's default, the Borrower shall forthwith upon such
termination pay to the Bank a sum equal to all of the fees which would have
become due pursuant to the immediately preceding two sentences from the date of
such termination through the Expiration Date. Fees described in this Section are
in addition to any balances and fees required by the Bank or any of its
affiliates in connection with any other services made available to the Borrower.

         6.4.    Other Agreements. The provisions of this letter agreement are 
not in derogation or limitation of any obligations, liabilities or duties of the
Borrower under any of the other Loan Documents or any other agreement with or
for the benefit of the Bank. No inconsistency in default provisions between this
letter agreement and any of the other Loan Documents or any such other agreement
will be deemed to create any additional grace period or otherwise derogate from
the express terms of each such default provision. No covenant, agreement or
obligation of the Borrower contained herein, nor any right or remedy of the Bank
contained herein, shall in any respect be limited by or be deemed in limitation
of any inconsistent or additional provisions contained in any of the other Loan
Documents or any such other agreement.

         6.5     Governing Law.  This letter agreement and the Notes shall be 
governed by, and construed and enforced in accordance with, the laws of The
Commonwealth of Massachusetts.

         6.6.    Addresses for Notices, etc. All notices, requests, demands and
other communications provided for hereunder shall be in writing and shall be
mailed or delivered to the applicable party at the address indicated below:

                  If to the Borrower:

                  Pegasystems Inc.
                  101 Main Street
                  Cambridge, MA  02142
                  Attention:  Ira Vishner,
                               Vice President, Corporate Services


                                       25

<PAGE>



                  If to the Bank:
                  Fleet Bank of Massachusetts, N.A.
                  High Technology Group
                  75 State Street
                  Boston, MA 02109
                  Attention:  Thomas W. Davies, Vice President

or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to the other party complying as to delivery with
the terms of this Section. All such notices, requests, demands and other
communications shall be effective two (2) days after deposit in the United
States mails, if sent postage prepaid, certified or registered mail, return
receipt requested, addressed as aforesaid. If any such notice, request, demand
or other communication is hand delivered, same shall be effective upon receipted
delivery.

         6.7.    Binding Effect; Assignment; Termination. This letter agreement
shall be binding upon the Borrower, its successors and assigns and shall inure
to the benefit of the Borrower and the Bank and their respective permitted
successors and assigns. The Borrower may not assign this letter agreement or any
rights hereunder without the express written consent of the Bank. The Bank may,
in accordance with applicable law, from time to time assign or grant
participations in this letter agreement, the Loans, the Notes and/or any letters
of credit issued hereunder; provided that the Bank will not assign this letter
agreement, the Loans, the Notes or its rights with respect to any such letters
of credit nor grant any participations in any of the foregoing without at least
30 days, prior written notice to the Borrower, except that no such notice will
be required in the case of an assignment or participation to an affiliate of the
Bank or an assignment to a Federal Reserve Bank as security. The Borrower may
terminate this Letter Agreement and the financing arrangements made herein by
giving written notice of such termination to the Bank, together with payment of
the sum described in the third sentence of ss.6-3; provided that no such
termination will release or waive any of the Bank's rights or remedies or any of
the Borrower's obligations under this letter agreement or any of the other Loan
Documents unless and until the Borrower has paid in full all Loans and all
interest thereon and all fees and charges payable in connection therewith and
all letters of credit issued hereunder have been terminated.

         6.8.    Consent to Jurisdiction. The Borrower irrevocably submits to 
the non-exclusive jurisdiction of any Massachusetts court or any federal court
sitting within The Commonwealth of Massachusetts over any suit, action or
proceeding arising out of or relating to this letter agreement and/or any Note.
The Borrower irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of venue of any such
suit, action or proceeding brought in

                                       26

<PAGE>



such a court and any claim that any such suit, action or proceeding has been
brought in an inconvenient forum. The Borrower agrees that final judgment in any
such suit, action or proceeding brought in such a court shall be enforced in any
court of proper jurisdiction by a suit upon such judgment, provided that service
of process in such action, suit or proceeding shall have been effected upon the
Borrower in one of the manners specified in the following paragraph of this
ss.6.8 or as otherwise permitted by law.

         The Borrower hereby consents to process being served in any suit,
action or proceeding of the nature referred to in the preceding paragraph of
this ss.6.8 either (i) by mailing a copy thereof by registered or certified
mail, postage prepaid, return receipt requested, to it at its address set forth
in ss.6.6 or (ii) by serving a copy thereof upon it at its address set forth in
ss.6.6.

         6.9.    Severability. In the event that any provision of this letter
agreement or the application thereof to any Person, property or circumstances
shall be held to any extent to be invalid or unenforceable, the remainder of
this letter agreement, and the application of such provision to Persons,
properties or circumstances other than those as to which it has been held
invalid and unenforceable, shall not be affected thereby, and each provision of
this letter agreement shall be valid and enforced to the fullest extent
permitted by law.

VII.     DEFINED TERMS
         -------------

         7.1.    Definitions.  In addition to terms defined elsewhere in this 
letter agreement, as used in this letter agreement, the following terms have the
following respective meanings:

                  "Adjusted Net Income" - For any period, that amount (but not
         less than zero in any event) which represents the Net Income of the
         Borrower for such period minus the increase (or plus the decrease, as
         the case may be) in the Borrower's Net Capitalized Software Costs
         during such period. As used herein, "Net Capitalized Software Costs"
         means the number properly shown for the item entitled "Software
         development costs, net" on financial statements of the Borrower
         prepared consistently with the Borrower's December 31, 1992 financial
         statements heretofore furnished to the Bank.

                  "Aggregate Bank Liabilities" - At any time, the sum of (i) the
         principal amount of all Revolving Loans then outstanding, plus (ii) all
         then undrawn amounts of letters of credit issued by the Bank for the
         account of the Borrower, plus (iii) all amounts then drawn on any such

                                       27

<PAGE>



         letter of credit which at said date shall not have been reimbursed to
         the Bank by the Borrower.

                  "Borrowing Base" - At any time, 80% of the aggregate principal
         amount of the Qualified Receivables of the Borrower then outstanding.

                  "Business Day" - Any day which is not a Saturday, nor a Sunday
         nor a public holiday under the laws of the United States of America or
         The Commonwealth of Massachusetts
         applicable to a national bank.

                  "Collateral" - All property now or hereafter owned by the
         Borrower or in which the Borrower now or hereafter has any interest
         which is described as "Collateral" in the Security Agreement.

                  "Current Assets" - All assets of any corporation or other
         entity which would, in accordance with generally accepted accounting
         principles, be classified as current assets of an entity conducting a
         business the same as or similar to that of such entity; excluding,
         however, (i) assets which have been pledged, assigned, mortgaged,
         hypothecated or otherwise encumbered to secure any Indebtedness which
         is not included in Current Liabilities and (ii) any and all amounts due
         from affiliated entities.

                  "Current Liabilities" - All liabilities of any corporation or
         other entity which would, in accordance with generally accepted
         accounting principles, be classified as current liabilities of an
         entity conducting a business the same as or similar to that of such
         entity, including, without limitation, all capitalized lease payments
         and other payments under capitalized leases and fixed prepayments of,
         and sinking fund payments with respect to, Indebtedness required to be
         made within one year from the date of determination. "Current
         Liabilities" shall also and in any event be deemed to include the
         Revolving Loans.

                  "ERISA" - The Employee Retirement Income Security Act of 1974,
         as amended.

                  "Expiration Date" - June 1, 1995, unless extended by the Bank,
         which extension may be given or withheld by the Bank in its sole
         discretion.

                  "Indebtedness" - The total of all obligations of a Person,
         whether current or long-term, senior or subordinated, which in
         accordance with generally accepted accounting principles would be
         included as liabilities upon such Person's balance sheet at the date as
         of which Indebtedness is to be determined, and shall also include

                                       28

<PAGE>



         guaranties, endorsements (other than for collection in the ordinary
         course of business) or other arrangements whereby responsibility is
         assumed for the obligations of others, whether by agreement to purchase
         or otherwise acquire the obligations of others, including any
         agreement, contingent or otherwise, to furnish funds through the
         purchase of goods, supplies or services for the purpose of payment of
         the obligations of others.

                  "Loan" - Any Revolving Loan or any Term Loan.

                  "Loan Documents" - Each of this letter agreement, the
         Revolving Note, the Term Notes, the Security Agreement and each other
         instrument, document or agreement evidencing, securing, guaranteeing or
         relating in any way to any of the Loans or to any of the letters of
         credit issued hereunder, all whether now existing or hereafter arising
         or entered into.

                  "Maximum Revolving Amount" - At any date as of which same is
         to be determined, the amount by which (x) $2,500,000 exceeds (y) the
         sum of (i) all then undrawn amounts of letters of credit issued by the
         Bank for the account of the Borrower plus (ii) all amounts then drawn
         on any such letter of credit which at said date shall not have been
         reimbursed to the Bank by the Borrower.

                  "Net Income" (or "Net Loss") - The book net income (or net
         loss, as the case may be) of a Person for any period, after all taxes
         actually paid or accrued and all expenses and other charges determined
         in accordance with generally accepted accounting principles
         consistently applied.

                  "Net Quick Assets" - Such Current Assets of the Borrower as
         consist of cash, cash-equivalents and Receivables (less an allowance
         for bad debt consistent with the Borrower's prior experience).

                  "Notes" - Collectively, the Revolving Note and each of
         the Term Notes.

                  "Obligation" - All Indebtedness, covenants, agreements,
         liabilities and obligations, now existing or hereafter arising, made by
         the Borrower with or for the benefit of the Bank or owed by the
         Borrower to the Bank in any capacity.

                  "PBGC" - The Pension Benefit Guaranty Corporation or
         any successor thereto.


                                       29

<PAGE>



                  "Person" - An individual, corporation, partnership, joint
         venture, trust, or unincorporated organization, or a government or any
         agency or political subdivision thereof.

                  "Premises" - As defined in ss.2.1(j) above.

                  "Principal Offices" - The principal place of business of the
         Bank, now located at 75 State Street, Boston, MA 02109.

                  "Qualified Receivables" - Only those Receivables of the
         Borrower which arise out of bona fide sales made to customers of the
         Borrower (which customers are unrelated to the Borrower) in the
         ordinary course of the Borrower's business and which remain unpaid no
         more than 90 days past the due date of such Receivable, the payment of
         which is not in dispute; provided, however, that in the case of
         long-term contracts between the Borrower and customers unrelated to the
         Borrower, "Qualified Receivables" will also include all installment
         payments scheduled to be paid under such contracts within the 12 months
         following the date as of which Qualified Receivables are being
         measured, so long as all of the other conditions of this definition are
         met. Unless the Bank in its sole discretion otherwise determines with
         respect to any Receivable, a Receivable which would otherwise be a
         Qualified Receivable shall be deemed not to be a Qualified Receivable
         (i) if such Receivable is not free and clear of all adverse interests
         in favor of any other Person; (ii) if such Receivable is subject to any
         deduction, off-set, contra account, counterclaim or condition; (iii) if
         a field examination made by the Bank fails to confirm that such
         Receivable exists and satisfies all of the criteria set forth herein to
         be a Qualified Receivable; (iv) if such Receivable (other than an
         installment payment described above which is not yet due and payable)
         is not invoiced within such period of time as is consistent with the
         Borrower's normal practices at the date hereof or if the relevant
         invoice contains dating terms which are materially longer than the
         dating terms customarily given by the Borrower at the date hereof; (v)
         if the customer or account debtor has disputed liability or made any
         claim with respect to the Receivable or the merchandise covered thereby
         or with respect to any other Receivable due from said customer to the
         Borrower; (vi) if the customer or account debtor has filed a petition
         for bankruptcy or any other application for relief under the Bankruptcy
         Code or effected an assignment for the benefit of creditors, or if any
         petition or any other application for relief under the Bankruptcy Code
         has been filed against said customer or account debtor, or if the
         customer or account debtor has suspended business, become insolvent,
         ceased to pay its debts as they become due, or had or suffered a
         receiver or trustee to be

                                       30

<PAGE>



         appointed for any of its assets or affairs; or (vii) if the customer or
         account debtor has failed to pay other Receivables so that an aggregate
         of 25% of the total Receivables owing to the Borrower by such customer
         or account debtor has been outstanding for more than 90 days. Without
         limitation of the foregoing, if any payment on an installment contract
         is more than 90 days past due, such payment will not be deemed a
         Qualified Receivable; and if such payment is more than 120 days past
         due, none of the remaining installment payments on that contract will
         be deemed Qualified Receivables.

                  "Qualifying Equipment" - Equipment purchased by the Borrower
         after the date of this letter agreement (or, in the case of the initial
         Term Loan, equipment purchased by the Borrower not earlier than January
         1, 1993) for use in the Borrower's business which meets all of the
         following criteria: (i) such equipment consists of one of the items
         shown on the Equipment List heretofore delivered by the Borrower to the
         Bank or has otherwise been approved by the Bank for use in supporting a
         Term Loan, (ii) each item of such equipment has been delivered to and
         installed at the Premises and has become fully operational, and (iii)
         the Borrower has paid in full for each item of such equipment and holds
         title to same, free of all interests and claims of any other Person
         (other than the security interest of the Bank).

                  "Receivables" - All of the Borrower's present and future
         accounts, accounts receivable and notes, drafts, acceptances and other
         instruments representing or evidencing a right to payment for goods
         sold or for services rendered.

                  "Subsidiary" - Any corporation or other entity of which the
         Borrower and/or any of its Subsidiaries, directly or indirectly, owns,
         or has the right to control or direct the voting of, fifty (50%)
         percent or more of the outstanding capital stock or other ownership
         interest having general voting power (under ordinary circumstances).

                  "Tangible Net Worth" - An amount equal to the total assets of
         any Person (excluding (i) the total intangible assets of such Person
         and (ii) any assets representing amounts due from any affiliate) minus
         the total liabilities of such Person. Total intangible assets shall be
         deemed to include, but shall not be limited to, the excess of cost over
         book value of acquired businesses accounted for by the purchase method,
         formulae, trademarks, trade names, patents, patent rights and deferred
         expenses (including, but not limited to, unamortized debt discount and
         expense, organizational expense, capitalized software costs and
         experimental and development expenses).

                                       31

<PAGE>




         Any defined term used in the plural preceded by the definite article
shall be taken to encompass all members of the relevant class. Any defined term
used in the singular preceded by "any" shall be taken to indicate any number of
the members of the relevant class.

         This letter agreement is executed, as an instrument under seal, as of
the day and year first above written.



                                                 Very truly yours,

                                                 PEGASYSTEMS INC.



                                                 By [Signature of Ira Vishner]
                                                   ----------------------------
                                                   Its Treasurer
Accepted and agreed:

FLEET BANK OF MASSACHUSETTS, N.A.




By [Signature of Thomas M. Davies]
  -------------------------------------
  Its VP



By [Signature of William E. Reaves Jr.]
   ------------------------------------
   Its First Vice President



                                       32

<PAGE>



                               DISCLOSURE SCHEDULE



Item 1.4                     Form of Term Note

Item 2.1(a)                  Jurisdictions in which Borrower is qualified

Item 2.1(b)                  Stock ownership

Item 2.1(e)                  Litigation

Item 2.1(j)                  Location of Assets

Item 4.1                     Existing Indebtedness

Item 4.2                     Existing Liens

Item 4.3                     Existing Guaranties




<PAGE>



                                                                       Item 1.4
                                                                       --------


                                 PROMISSORY NOTE
                                 ---------------

$
- -----------                                              Boston, Massachusetts
                                                                     , 1993
                                                          -----------

         FOR VALUE RECEIVED, the undersigned Pegasytems Inc., a Massachusetts
corporation (the "Borrower") hereby promises to pay to the order of FLEET BANK
OF MASSACHUSETTS, N.A. (the "Bank") the principal amount of [       ] 
($__________) Dollars ("Principal"), with interest, at the rate hereinafter set 
forth, on the daily balance of all unpaid Principal, from the date hereof until 
payment in full of all Principal and interest hereunder. As used herein, 
"Letter Agreement" means that certain letter agreement dated December 16, 1993 
between the Borrower and the Bank.

         Interest on all unpaid Principal shall be due and payable monthly in
arrears, on the first day of each month commencing on the first such date after
the advance of any Principal and continuing on the first day of each month
thereafter and on the date of payment of this note in full, at a fluctuating
rate per annum (computed on the basis of a year of three hundred sixty [360]
days for the actual number of days elapsed) which shall at all times be equal to
the sum of (i) one-half of one (0.5%) percent per annum plus (ii) the Prime
Rate, as in effect from time to time (but in no event in excess of the maximum
rate permitted by then applicable law). A change in the aforesaid rate of
interest will become effective on the same day on which any change in the Prime
Rate is effective. Overdue Principal and, to the extent permitted by law,
overdue interest shall bear interest at a fluctuating rate per annum which at
all times shall be equal to the sum of (i) two (2%) percent plus (ii) the per
annum rate otherwise payable under this note (but in no event in excess of the
maximum rate permitted by then applicable law), compounded monthly and payable
on demand. As used herein, "Prime Rate" means that the rate of interest per
annum announced by the Bank from time to time as its prime rate, it being
understood that such rate is merely a reference rate, not necessarily the
lowest, which serves as the basis upon which effective rates of interest are
calculated for obligations making reference thereto.

         Principal shall be repaid in thirty-five (35) equal consecutive monthly
installments (each in an amount equal to $____________ [1/36th of Principal])
commencing on [first day of month following date of note] and continuing on the
first day of each month thereafter through and including [first day of 35th
month following month in which note is executed] plus a thirty- sixty (36th) and
final payment due on [first day of 36th month following month in which note is
executed] in an amount equal to all then remaining Principal and all interest
accrued but unpaid


<PAGE>



thereon. The Borrower may at any time and from time to time, without premium or
penalty, prepay all or any portion of said Principal, each such prepayment to be
applied against Principal installments in inverse order of normal maturity.

         Payments of both Principal and interest shall be made, in immediately
available funds, at the principal office of the Bank (now located at 75 State
Street, Boston, Massachusetts 02109), or at such other address as the Bank may
from time to time designate.

         The undersigned Borrower irrevocably authorizes the Bank to make or
cause to be made, on a schedule attached to this note or on the books of the
Bank, at or following the time of making the Term Loan (as defined in the Letter
Agreement) evidenced by this note and of receiving any payment of Principal, an
appropriate notation reflecting such transaction and the then aggregate unpaid
balance of Principal. Failure of the Bank to make any such notation shall not,
however, affect any obligation of the Borrower hereunder or under the Letter
Agreement. The aggregate unpaid principal amount of the Term Loan evidenced by
this note, as recorded by the Bank from time to time on such schedule or on such
books, shall constitute prima facie evidence of such amount.

         The Borrower hereby (a) waives notice of and consents to any and all
advances, settlements, compromises, favors and indulgences (including, without
limitation, any extension or postponement of the time for payment), any and all
receipts, substitutions, additions, exchanges and releases of collateral, and
any and all additions, substitutions and releases of any person primarily or
secondarily liable, (b) waives presentment, demand, notice, protest and all
other demands and notices generally in connection with the delivery, acceptance,
performance, default or enforcement of or under this note, and (c) agrees to
pay, to the extent permitted by law, all costs and expenses, including, without
limitation, reasonable attorneys' fees, incurred or paid by the Bank in
enforcing this note and any collateral or security therefor, all whether or not
litigation is commenced.

         This note is one of the Term Notes referred to in, and is secured by
and entitled to the benefits of, the Letter Agreement and the Security Agreement
(as defined in the Letter Agreement). This note is subject to prepayment as set
forth in the Letter Agreement. The maturity of this note may be accelerated upon
the occurrence of an Event of Default, as provided in the Letter Agreement.


                                        2

<PAGE>



         Executed, as an instrument under seal, as of the day and year first
above written.

CORPORATE
  SEAL
ATTEST:

                                                         PEGASYSTEMS INC.


- ------------------------                          By:
Clerk                                                ---------------------------
                                                     Its


                                        3

<PAGE>


                               DISCLOSURE SCHEDULE


Item 2.1(a):  Jurisdictions in which Borrower is qualified
- ----------------------------------------------------------
         Massachusetts
         New York
         California

Item 2.1(b):  Stock ownership
- -----------------------------
         At the date of this letter agreement, all of the outstanding capital
stock of the Borrower is owned by Alan Trefler.

Item 2.1(e):  Litigation
- ------------------------
         None

Item 2.1(j):  Location of Assets
- --------------------------------
         With the exception of small amounts of computer equipment located in
the homes of several employees of Borrower, all assets are located in Borrower's
offices in Massachusetts, New York, and California. Addresses and landlords
follow:
         101 Main Street, Cambridge, MA  02142
         Landlord:           Riverfront Office Park Joint Venture
                             c/o Codman Management Company, Inc.
                             One Main Street
                             Cambridge, MA 02142

         3 New York Plaza, New York, NY  10004
         Landlord:           Pamela Equities Corp.
                             475 Park Avenue South
                             New York, NY 10016

         One Montgomery Street, San Francisco, CA  94104
         Landlord:           Goldfarb & Lipman
                             One Montgomery Street
                             Telesis Tower, 23rd Floor
                             San Francisco, CA 94104

Item 4.1:  Existing Indebtedness
- --------------------------------
         Loan in the amount of $230,000 payable to Alan Trefler 

         Furniture and equipment leases with Eaton Financial Corporation, First
& Main Corporation, IBM Credit Corporation, PacifiCorp Capital Inc., Phoenix
Leasing Inc., and Phoenix Leasing Cash Distribution Fund V., L.P. Aggregate
amount outstanding is less than $250,000.

Item 4.2:  Existing Liens
- -------------------------
         Liens in favor of the equipment vendors identified above.

Item 4.3:  Existing Guaranties
- ------------------------------
         None


