<PAGE>



                        NON-NEGOTIABLE, NON-TRANSFERABLE

                   SUBORDINATED, CONVERTIBLE PROMISSORY NOTE


$2,500,000                                                   November 25, 1998


         FOR VALUE RECEIVED, DUALSTAR TECHNOLOGIES CORPORATION, a Delaware
corporation (the "Company") promises to pay to TECHNOLOGY INVESTORS GROUP, LLC,
a Delaware Limited Liability Company ("Holder" or "TIG"), at 25 Coligni Avenue,
New Rochelle, N.Y. 10801 or at such other place as the Holder may in writing
designate, the principal sum of Two and One-Half Million Dollars ($2,500,000)
with interest (computed on the basis of a 360 day year and the actual number of
days elapsed) at the rate of 7.5% per annum on the balance of the principal
from time to time remaining unpaid, all on the terms and conditions set forth
herein (the "Note" or "Convertible Note"). This Note will be subordinated to
the payment of principal and interest on the debt (the "Senior Debt") of the
Company to any bank, commercial lender or other financial institution (an
"Institutional Lender") incurred subsequent to the date hereof (the "Original
Issue Date"), provided however, that the Company will not incur any Senior Debt
that (i) prevents the exercise or modifies the terms of Holder's conversion
rights hereunder or (ii) by its terms prevents the Company from paying
principal and interest in cash hereunder, except to the extent that the Company
has committed a default on such Senior Debt that permits the Institutional
Lender to accelerate the payment of such debt.

1. Maturity, Interest and Amortization. Unless accelerated pursuant to the
terms of this Note or converted to shares of common stock of the Company (the
"Common Stock") as provided for in Sections 5 and 6 below, the unpaid principal
balance of this Note together with all unpaid interest accrued thereon shall be
due and payable on May 25, 2001 (the "Term"). Interest on the Note shall be
payable semi-annually in arrears in cash or (prior to the final stated maturity
or any accelerated maturity of the Note) in kind, at the option of the Company,
on each May 25th and November 25th with the first payment to be made on May 25,
1999. In the event that the Company elects not to make any semi-annual interest
payment in cash at the time it is due, the principal amount of this Convertible
Note will be increased by the amount of such payment, and interest will accrue
from the due date onwards on the increased principal amount of the Note (the
principal amount of the Convertible Note in effect from time to time plus all
accrued and unpaid interest thereon is hereinafter referred to as the
"Convertible Note Amount"). If the Company shall elect to pay any semi-annual
interest payment to become due hereon in kind rather than in cash, it shall
give written notice thereof to Holder not more than 10 nor less than five New
York City business days in advance of the due date of such interest payment,
which notice shall set forth the revised principal amount of the Convertible
Note. Other than the payment of interest in kind, principal and interest are
payable in lawful money of the United States. All payments received by Holder
under this Note shall be credited first to any charges or other expenses for
which 

                                       
<PAGE>


Holder is entitled to payment hereunder, next to accrued but unpaid interest,
and third to unpaid principal. The Company shall not have the right to prepay
any portion of the outstanding principal of this Convertible Note.

2. Event of Default/Remedies.

         (a) Any of the following events shall constitute an Event of Default:

           (i) (A) any failure to pay when due (whether at stated maturity, by
reason of acceleration of the maturity hereof or otherwise) any principal
hereof or (subject to the Company's right to pay interest hereon in kind prior
to the original stated maturity date, or any accelerated maturity date, of this
Note) any interest hereon, or (B) any breach by the Company of any of its other
obligations or covenants under this Note, provided that Borrower shall have 48
hours from the date of receipt of notice to cure a failure to pay money due
hereunder and ten (10) days from the date of receipt of any notice of its
failure to perform any of its other obligations or covenants under this Note
not involving the payment of money to Holder within which to cure said failure
(in which event it shall not be an Event of Default, provided further that if
such breach is not capable of a cure, an Event of Default will be deemed to
have occurred immediately without the necessity of notice to the Company; or

           (ii) the Company (A) becomes insolvent or admits in writing its
inability to pay its debts as they mature, (B) makes any assignment for the
benefit of creditors, or (C) applies for or consents to the appointment of a
receiver or trustee for the Company or for a substantial part of the Company's
property or business, or a receiver or trustee otherwise is appointed and is
not discharged within sixty (60) days after such appointment (for purposes of
this subsection, the Company shall be deemed "insolvent" if, as of the
Company's most recent balance sheet, the sum of its debts exceed the sum of its
assets, at a fair valuation, or it is unable to pay its debts as they come
due); or

           (iii) any bankruptcy, insolvency, reorganization or liquidation
proceeding or other proceeding for relief under any bankruptcy law or any law
for the relief of debtors is instituted by or against the Company, and if
against the Company, such proceeding is not vacated within sixty (60) days; or

           (iv) any money judgment, lien, writ or warrant of attachment, or
similar process is entered or filed against the Company or any of the assets of
the Company and remains unvacated, unbonded, unstayed, undismissed or
undischarged for a period of thirty (30) days or in any event later than five
(5) days before the date of any proposed sale thereunder, provided that a lien
(singly or, if more than one, cumulatively) of less than $250,000 arising in
the normal course of the Company's business, even if it remains unbonded,
unstayed or undismissed for thirty (30) days, shall not be deemed an Event of
Default if the Company has been advised by counsel and thus believes in good
faith that it has a valid defense to the claim giving rise to such lien and
promptly so advises Holder in writing and timely contests such claim; or



                                       2
<PAGE>

           (v) the Company (A) defaults on or breaches in any material respect
any contract with or obligation when due to a third party which default or
breach could reasonably be expected, singly or in the aggregate, to have a
material adverse affect on the Company's business or finances or (B) defaults
in the performance of any material obligation to a third party or Holder
incurred for money borrowed, including without limitation, the Company's
obligations to Holder under that certain Secured Promissory Note, as amended by
that certain amendment of even date hereof (the "Term Note"), in the principal
amount of $1,000,000; or

           (vi) the Common Stock is delisted from the NASDAQ National Market
System ("NASDAQ"), unless such delisting occurs in connection with the Common
Stock being traded on either the American Stock Exchange or the New York Stock
Exchange; or

           (vii) any representation made in the Note Purchase Agreement, of
even date, by and between Holder and the Company, proves materially false, or
if of a continuing nature, becomes materially false (unless made as of a
specified date).

           b. Remedies. Upon the occurrence and during the continuance of an
Event of Default described in subsections 2(a)(ii) or 2(a)(iii) above, all
indebtedness under this Note and the Term Note shall automatically be
immediately due and payable. In addition, Holder, at its option, and without
notice to the Company (other than such notice as is required by law), may take
one or more of the actions described below. Upon the occurrence and during the
continuance of any other Event of Default, Holder at its option and, unless
otherwise specified below, upon no less than one business day's written notice
to the Company (or such other notice as is required by law), may do any one or
more of the following:

           (i) declare all indebtedness under this Convertible Note and the
Term Note immediately due and payable and credit any sums received thereafter
to such indebtedness in whatever priority it shall elect; provided, however,
that such application of sums so received shall not serve to waive or cure any
default existing under this Note nor to invalidate any notice of default or any
act done pursuant to such notice and shall not prejudice any rights of Holder;
and

           (ii) exercise any or all rights provided or permitted by law or
granted pursuant to this Convertible Note, the Term Note or that certain
Security Agreement, dated July 24, 1998, by and between the Company and TIG
(the "Security Agreement"), in such order and in such manner as Holder may, in
its sole judgment, determine, including without limitation its right to convert
this Note to Common Stock pursuant to Section 5 hereof; provided that, upon
conversion in accordance with the terms hereof, Holder shall not have or
exercise any other rights or remedies hereunder, other than with respect to
claims relating to the calculation or payment of interest or costs and expenses
of collection pursuant to Section 11 hereof, that have arisen up to the time of
or in connection with conversion.

                                       3
<PAGE>

3. Default Rate. Any amounts not paid when due shall thereafter bear interest
at a rate per annum equal to the 7.5% interest rate set forth above, plus five
percent (5%). If such default rate would but for this sentence, exceed the
maximum lawful rate, the effective interest rate under this Note shall be the
maximum lawful rate, and any amount received by Holder in excess of such rate
shall be applied to principal and then to fees and expenses, or, if no such
amounts are owing, returned to the Company.

4. Waiver. Upon an Event of Default, the Company hereby waives any right of
offset it may now or hereafter have against Holder, and the Company hereby also
waives diligence, presentment, protest and demand, notice of protest, dishonor
and nonpayment of this Note and expressly agrees that, without in any way
affecting the liability of the Company hereunder, Holder may in its sole
discretion extend any maturity date or the time for payment of any installment
due hereunder, accept security, release any party liable hereunder and release
any security hereafter securing this Note. The Company further waives, to the
full extent permitted by law, the right to plead any and all statutes of
limitations as a defense to any demand on this Note, or on any deed of trust,
security agreement, lease assignment, guaranty or other agreement hereafter
securing this Note.

5. Conversion Rights of Holder. The Holder shall have the following right to
convert the Convertible Note into shares of Common Stock:

         (a) Optional Conversions. Subject to and in compliance with the
provisions of this Section 5, during or at the conclusion of the Term, the
Convertible Note may, at the option of the Holder, be converted at any time
into fully-paid and nonassessable shares of Common Stock. The number of shares
of Common Stock to which the Holder shall be entitled to at any time upon
conversion of the Note (the "Issuable Shares") shall be based on the Applicable
Conversion Rate (as defined in Section 5(b)) then in effect and shall be
subject to the Conversion Cap (defined in Section 5(d) below). The Holder's
right to convert the Note shall apply with respect to the entire Convertible
Note Amount (but not less than the entire Convertible Note Amount).

         (b) Applicable Conversion Rate. The conversion rate in effect at any
time for the conversion of this Note into Common Stock (the "Applicable
Conversion Rate") shall be the quotient obtained by dividing the Convertible
Note Amount by the Conversion Price (as defined in Section 5(c) below) pursuant
to the procedure described in Section 5(d) below.

         (c) Conversion Price. The initial Conversion Price for the Convertible
Note shall be $1.40 (the "Initial Conversion Price"), and thereafter shall be
subject to adjustment pursuant to Sections 5(g), 5(h) and 5(l) hereof. The
Conversion Price shall be equal to the Initial Conversion Price until the first
Reset Date (as defined in subsection 5(d)), and shall then be reset from time
to time as described in Section 5(d) hereof, and subject to adjustment from
time to time in accordance with this Section 5. All references to the Initial
Conversion Price or the Conversion Price herein shall mean the Initial
Conversion Price or the Conversion Price as most recently reset or adjusted.

                                       4
<PAGE>

         (d) Reset Conversion Price. The Applicable Conversion Rate shall be
subject to adjustment on the 180th day following the Original Issue Date and
every 90 days thereafter (each such day being a "Reset Date"), as set forth in
this subsection 5(d). The Conversion Price to be used in determining the
Applicable Conversion Rate, commencing with the first Reset Date and for each
subsequent Reset Date, shall be determined as follows: (i) if the average
closing price of the Common Stock quoted on NASDAQ (or such other exchange or
system on which the Common Stock is traded) on the 20 trading days immediately
preceding the Reset Date (the "Reset Conversion Price") is less than the
Initial Conversion Price, the Reset Conversion Price shall be used to determine
the Applicable Conversion Rate or (ii) if the Reset Conversion Price equals or
exceeds the Initial Conversion Price, then the Initial Conversion Price shall
be used to determine the Applicable Conversion Rate. Notwithstanding anything
herein to the contrary: (i) in the event that Holder exercises its conversion
right after a Common Stock split or dividend described in Section 5(g) or 5(h)
hereof and prior to the Reset Date next following such split or dividend, the
Conversion Price for such conversion shall be the Reset Conversion Price in
effect on the Reset Date that immediately preceded such conversion (or the
Initial Conversion Price, if no Reset Date has yet occurred), adjusted
according to the provisions of Section 5(g) or 5(h) hereof and (ii) the number
of shares of Common Stock issued upon the conversion of the Convertible Note
shall in no event exceed 19.9% of the Company's outstanding shares on the
Original Issue Date (1,791,000 shares), except to the extent that such figure
is adjusted pursuant to Section 5(g) or 5(h) hereof (the "Conversion Cap").

         (e) Conversion Deficit. If as of the Conversion Notification Date (as
defined in Section 5(f) hereof), the product of the Issuable Shares times the
Conversion Price, is less than the Convertible Note Amount, the difference
shall be payable within five business days of such notification by the Company
to Holder in the form of cash or a term loan (at the election of the Company),
secured by Company assets having a fair market value, net of any encumbrances
on such assets, equal to at least one hundred and fifty percent (150%) of the
principal amount of such term loan, with a maturity not in excess of one year
and bearing an interest rate equal to the lesser of 12.5% or the maximum rate
permitted by law.

         (f) Mechanics of Conversion. If Holder desires to convert the Note
into shares of Common Stock pursuant to this Section 5, it shall surrender the
original Note at the office of the Company and shall give written notice to the
Company at such office that Holder elects to convert the same. Such notice
shall state the name in which said holder wishes the certificate or
certificates for shares of Common Stock to be issued, provided that the only
parties that may be named in such certificate are TIG or any
successor-in-interest of TIG created through a change in the legal form of TIG,
its state of formation or incorporation or similar modification not affecting
the beneficial ownership of TIG. Thereupon, the Company shall within 15 days
issue and deliver at such office to Holder a certificate or certificates for
the number of shares of Common Stock to which it is entitled. Such conversion
shall be deemed to have been made at the close of business on the date written
notice of Holder's desire to convert is received by the Company (the
"Conversion Notification Date"). The party named in such certificate shall be
treated for all purposes as the record holder of such shares of 


                                       5
<PAGE>

Common Stock from and after the Conversion Notification Date.

         (g) Adjustment for Stock Splits and Combinations. If the Company shall
at any time or from time to time after the Original Issue Date effect a
subdivision of the outstanding Common Stock, the Conversion Cap in effect
immediately before that subdivision shall be proportionately increased and the
Initial Conversion Price and the then existing Reset Conversion Price (if a
Reset Date has occurred) proportionately decreased. If the Company shall at any
time or from time to time after the Original Issue Date combine the outstanding
shares of Common Stock into a smaller number of shares, the Conversion Cap in
effect immediately before the combination shall be proportionately decreased
and the then existing Initial Conversion Price and the then existing Reset
Conversion Price (if a Reset Date has occurred) proportionately increased. Any
adjustment under this Section 5(g) shall become effective at the close of
business on the date the subdivision or combination becomes effective.

          (h) Adjustment for Common Stock Dividends and Distributions. If the
Company at any time or from time to time after the Original Issue Date makes a
dividend or other distribution payable in additional shares of Common Stock, in
each such event: (A) the then existing Conversion Cap shall be increased as of
the time of such issuance by multiplying the Conversion Cap then in effect by a
fraction (the "Dividend Fraction") (1) the numerator of which is the total
number of shares of Common Stock issued and outstanding immediately prior to
the time of such issuance plus the number of shares of Common Stock issuable in
payment of such dividend or distribution and (2) the denominator of which is
the total number of shares of Common Stock issued and outstanding immediately
prior to the time of such issuance and (B) the then existing Initial Conversion
Price and the then existing Reset Conversion Price (if a Reset Date has
occurred) shall be decreased as of the time of such issuance by multiplying the
Initial Conversion Price by the reciprocal of the Dividend Fraction.

         (i) Adjustments for Other Dividends and Distributions. If the Company
at any time or from time to time after the Original Issue Date makes, or fixes
a record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in securities of the Company
other than shares of Common Stock, in each such event provision shall be made
so that the Holder of the Convertible Note shall receive upon conversion
thereof, in addition to the number of shares of Common Stock receivable
thereupon, the amount of other securities of the Company which it would have
received had the Convertible Note been converted into Common Stock on the date
of such event and had Holder thereafter, during the period from the date of
such event to and including the conversion date, retained such securities
receivable by it as aforesaid during such period, subject to all other
adjustments called for during such period under this Section 5 with respect to
the rights of the Holder of the Convertible Note or with respect to such other
securities by their terms.

         (j) Adjustment for Reclassification, Exchange and Substitution.
Subject to the Conversion Cap, if at any time or from time to time after the
Original Issue Date, the Common Stock is changed into the same or a different
number of shares of any class or classes of stock, whether by recapitalization,
reclassification or otherwise (other than a 


                                       6
<PAGE>

subdivision or combination of shares or stock dividend or a reorganization,
merger, consolidation or sale of assets provided for elsewhere in this Section
5), in any such event the Holder of the Convertible Note shall have the right
thereafter to convert such Note into the kind and amount of stock and other
securities and property receivable upon such recapitalization, reclassification
or other change by holders of the Common Stock into which the Note could have
been converted immediately prior to such recapitalization, reclassification or
change, all subject to further adjustment as provided herein or with respect to
such other securities or property by the terms thereof.

         (k) Reorganizations, Mergers, Consolidations or Sales of Assets. If at
any time or from time to time after the Original Issue Date, there is a capital
reorganization of the Common Stock (other than a recapitalization, subdivision,
combination, reclassification, exchange or substitution of shares provided for
elsewhere in this Section 5), as a part of such capital reorganization,
provision shall be made so that the Holder of the Convertible Note shall
thereafter be entitled to receive upon conversion of such Note the number of
shares of stock or other securities or property of the Company to which a
holder of the number of shares of Common Stock deliverable upon conversion
would have been entitled on such capital reorganization, subject to adjustment
in respect of such stock or securities by the terms thereof. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 5 with respect to the rights of the Holder of the Convertible Note
after the capital reorganization to the end that the provisions of this Section
5 (including adjustment of the Conversion Price then in effect and the number
of Issuable Shares) shall be applicable after that event and be as nearly
equivalent as practicable.

         (l)      Sale of Shares Below Fair Market Value.

                  (1) If at any time or from time to time after the Original
         Issue Date, the Company issues or sells, or is deemed by the express
         provisions of this subsection (l) to have issued or sold, Additional
         Shares of Common Stock (as hereinafter defined), other than as a
         dividend or other distribution on any class of stock as provided in
         Section 5(h) above or a subdivision or combination of shares of Common
         Stock as provided in Section 5(g) above, for an Effective Price (as
         defined in subsection 5(l)(4) below) less than the "fair market value"
         (defined as the greater of book or market value in accordance with the
         rules and regulations of the NASDAQ National Market System) of such
         Additional Shares of Common Stock, then and in each such case the then
         existing Initial Conversion Price and Reset Conversion Price shall be
         reduced, as of the opening of business on the date of such issue or
         sale, and for all subsequent calculations under this Note to a price
         determined by multiplying the Initial Conversion Price and the Reset
         Conversion Price by a fraction (i) the numerator of which shall be (A)
         the number of shares of Common Stock deemed outstanding (as defined in
         the following sentence) immediately prior to such issue or sale, plus
         (B) the number of shares of Common Stock which the "aggregate
         consideration received" (computed in accordance with subsection
         5(l)(2)) by the Company for the total number of Additional Shares of
         Common Stock so issued would purchase at such Conversion Price, and
         (ii) the denominator of which shall be the number of 


                                       7
<PAGE>

         shares of Common Stock deemed outstanding (as defined in the
         following sentence) immediately prior to such issue or sale plus the
         total Additional Shares of Common Stock so issued. For the purposes
         of the preceding sentence, all outstanding shares of Common Stock and
         all shares of Common Stock issuable upon conversion of the
         Convertible Note that are outstanding as of the close of business on
         the day next preceding the date of issue or sale of Additional Shares
         of Common Stock shall be deemed outstanding.

         (2) For the purpose of making any adjustment required under this
         Section 5(l), the "aggregate consideration received" by the Company
         for any issue or sale of Additional Shares of Common Stock shall (A)
         to the extent it consists of cash, be computed at the net amount of
         cash received by the Company after deduction of any underwriting or
         similar commissions, compensation or concessions paid or allowed by
         the Company in connection with such issue or sale but without
         deduction of any expenses payable by the Company, (B) to the extent it
         consists of property other than cash, be computed at the fair value of
         that property as determined in good faith by the Board of Directors,
         and (C) if Additional Shares of Common Stock, Convertible Securities
         (as herein defined) or rights or options to purchase either Additional
         Shares of Common Stock or Convertible Securities are issued or sold
         together with other stock or securities or other assets of the Company
         for a consideration which covers both, be computed as the portion of
         the consideration so received that may be reasonably determined in
         good faith by the Board of Directors to be allocable to such
         Additional Shares of Common Stock, Convertible Securities or rights or
         options.

         (3) For the purpose of the adjustment required under this Section
         5(l), if the Company issues or sells any rights or options for the
         purchase of, or stock or other securities convertible into, Additional
         Shares of Common Stock (such convertible stock or securities being
         herein referred to as "Convertible Securities") and if the Effective
         Price of such Additional Shares of Common Stock is less than the fair
         market value of such Additional Shares of Common Stock, in each case
         the Company shall be deemed to have issued at the time of the issuance
         of such rights or options or Convertible Securities the maximum number
         of Additional Shares of Common Stock issuable upon exercise or
         conversion thereof and to have received as consideration for the
         issuance of such shares an amount equal to the total amount of the
         consideration, if any, received by the Company for the issuance of
         such rights or options or Convertible Securities, plus, in the case of
         such rights or options, the minimum amounts of consideration, if any,
         payable to the Company upon the exercise of such rights or options,
         plus, in the case of Convertible Securities, the minimum amounts of
         consideration, if any, payable to the Company (other than by
         cancellation of liabilities or obligations evidenced by such
         Convertible Securities) upon the conversion thereof; provided that if,
         in the case of Convertible Securities, the minimum amounts of such
         consideration cannot be ascertained but are a function of antidilution
         or similar protective clauses, the Company shall be deemed to have
         received the minimum amounts of consideration without reference to
         such clauses; provided further that if the minimum amount of
         consideration payable to 

                                       8
<PAGE>

         the Company upon the exercise or conversion of rights, options or
         Convertible Securities is reduced over time or on the occurrence or
         nonoccurrence of specified events other than by reason of
         antidilution adjustments, the Effective Price shall be recalculated
         using the figure to which such minimum amount of consideration is
         reduced; provided further that if the minimum amount of consideration
         payable to the Company upon the exercise or conversion of such
         rights, options or Convertible Securities is subsequently increased,
         the Effective Price shall be again recalculated using the increased
         minimum amount of consideration payable to the Company upon the
         exercise or conversion of such rights, options or Convertible
         Securities. No further adjustment of the Conversion Price, as
         adjusted upon the issuance of such rights, options or Convertible
         Securities, shall be made as a result of the actual issuance of
         Additional Shares of Common Stock on the exercise of any such rights
         or options or the conversion of any such Convertible Securities. If
         any such rights or options or the conversion privilege represented by
         any such Convertible Securities shall expire without having been
         exercised, the Conversion Price as adjusted upon the issuance of such
         rights, options or Convertible Securities shall be readjusted to the
         Conversion Price which would have been in effect had an adjustment
         been made on the basis that the only Additional Shares of Common
         Stock so issued were the Additional Shares of Common Stock, if any,
         actually issued or sold on the exercise of such rights or options or
         rights of conversion of such Convertible Securities, and such
         Additional Shares of Common Stock, if any, were issued or sold for
         the consideration actually received by the Company upon such
         exercise, plus the consideration, if any, actually received by the
         Company for the granting of all such rights or options, whether or
         not exercised, plus the consideration received for issuing or selling
         the Convertible Securities actually converted, plus the
         consideration, if any, actually received by the Company (other than
         by cancellation of liabilities or obligations evidenced by such
         Convertible Securities) on the conversion of such Convertible
         Securities, provided that such readjustment shall not apply to shares
         that have previously been converted.

         (4) "Additional Shares of Common Stock" for purposes hereof shall mean
         all shares of Common Stock issued by the Company, whether or not
         subsequently reacquired or retired by the Company, other than (A)
         shares of Common Stack issued upon conversion of the Convertible Note
         and (B) up to three million five hundred thousand (3,500,000) shares
         of Common Stock, and/or options, warrants or other Common Stock
         purchase rights, including stock appreciation rights, issued after the
         Original Issue Date under the Company's 1994 Stock Option Plan,
         including the proposed amendment thereof (the "1994 Stock Option Plan
         Shares"), to employees, officers or directors of, or consultants or
         advisors to the Company or any subsidiary, net of repurchases and
         option expirations (provided that shares issued pursuant to the
         exercise of options or warrants issued after the Original Issue Date
         shall not be included in such number if such shares were included at
         the time the option or warrant was issued). Notwithstanding anything
         above to the contrary, any 1994 Stock Option Plan Shares (i) sold to
         eligible participants in such Plan after the Original Issue Date at
         less than their fair market value or (ii) purchased after the Original
         Issue Date 


                                       9
<PAGE>

         upon the exercise of option awards that provide for an exercise price
         less than the fair market value of the Common Stock on the date of
         award, shall be deemed Additional Shares of Common Stock for purposes
         of this Section 5(l). The "Effective Price" of Additional Shares of
         Common Stock shall mean the quotient determined by dividing the total
         number of Additional Shares of Common Stock issued or sold, or deemed
         to have been issued or sold by the Company under this Section 5(l),
         into the aggregate consideration received, or deemed to have been
         received by the Company for such issue under this Section 5(l), for
         such Additional Shares of Common Stock.

         (m) Certificate of Adjustment. In each case of an adjustment or
readjustment of the Conversion Price, the Conversion Cap or the Applicable
Conversion Rate, the Company, at its expense, shall compute such adjustment or
readjustment in accordance with the provisions hereof and prepare a certificate
showing such adjustment or readjustment, and shall mail such certificate, by
first class mail, postage prepaid, to the Holder at the Holder's address as
shown in the Company's books. The certificate shall set forth such adjustment
or readjustment, showing in reasonable detail the facts upon which such
adjustment or readjustment is based and the computation thereof.

         (n) Notices of Record Date. Upon (i) any taking by the Company of a
record of the holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend or other
distribution, or (ii) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company, any
merger or consolidation of the Company with or into any other corporation, or
any transfer of all or substantially all the assets of the Company to any other
person, or any voluntary or involuntary dissolution, liquidation or winding up
of the Company, the Company shall mail to the Holder of the Convertible Note at
least five (5) business days prior to the record date specified therein a
notice specifying (1) the date on which any such record is to be taken for the
purpose of such dividend or distribution and a description of such dividend or
distribution, (2) the date on which any such reorganization, reclassification,
transfer, consolidation, merger, dissolution, liquidation or winding up is
expected to become effective, and (3) the date, if any, that is to be fixed as
to when the holders of record of Common Stock (or other securities) shall be
entitled to exchange their shares of Common Stock (or other securities) for
securities or other property deliverable upon such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation or
winding up. 

6. Conversion Rights of the Company

         (a) Mandatory Conversion. The Company may upon notice of such action
to Holder require Holder to convert the Note into shares of Common Stock
("Mandatory Conversion") at the then Applicable Conversion Rate if, at anytime
after the 181st day following the Original Issue Date, the closing price of the
Common Stock on NASDAQ or such other exchange or system on which the Common
Stock is traded, for twenty (20) consecutive trading days, is $3.00 or more per
share, with such price to be adjusted in the event of Common Stock splits,
combinations dividends or distributions in the same manner as provided in
Sections 5(g) and 5(h) for the Conversion Cap.

                                      10
<PAGE>

         (b) Partial Conversion/Redemption. At the end of the Term, the Company
shall pay the Convertible Note, at the Convertible Note Amount, in cash;
provided, however, that at the option of the Company, in lieu of paying to
Holder the entire Convertible Note Amount, the Company shall have the right,
upon written notice of such action to Holder within two business days prior to
the end of the Term, to force the conversion of 25% of the outstanding balance
of the Convertible Note Amount into Common Stock at a price equal to the lower
of $1.40 or the Conversion Price, subject to the Conversion Cap and the
procedure described in this Section 6(b) (the "Mandatory Partial Conversion
Right"). The number of shares of Common Stock to be issued in such conversion
will be determined by the following method: one-quarter of the Convertible Note
Amount (at maturity), will be divided by the lower of $1.40 or the Conversion
Price in effect on such date, and multiplied by 1.2. By way of example,
assuming that at the end of the Term one-quarter of the Convertible Note Amount
was equal to $750,000, and the Conversion Price was $1.00 per share, the
Company, upon exercising its Mandatory Partial Conversion Right, would issue
900,000 shares (1.2 x 750,000).

7.       Other Conversion Provisions.

         (a) Fractional Shares. No fractional shares of Common Stock shall be
issued upon conversion of the Convertible Note. If the conversion would result
in the issuance of any fractional share, the Corporation shall, in lieu of
issuing any fractional share, pay cash equal to the product of such fraction
multiplied by the Common Stock's fair market value (determined as provided in
subsection 5(l)(1)) on the date of conversion.

         (b) Reservation of Stock Issuable Upon Conversion. The Company shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the Convertible Note, such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of the Convertible Note. If
at any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the conversion of the Convertible Note, the Company
will take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purpose.

         (c) Notices. Any notice required by the provisions of this Convertible
Note shall be in writing and shall be deemed effectively given: (i) upon
personal delivery to the party to be notified, (ii) when sent by confirmed
telex or facsimile, (iii) five (5) days after having been sent by registered or
certified mail, return receipt requested, postage prepaid, or (iv) two (2) days
after deposit with a nationally recognized overnight courier, with written
verification of receipt. All notices shall be addressed to Holder at the
address set forth herein or at such subsequent address as Holder shall provide
to the Company in writing.

         (d) Payment of Taxes. The Company will pay all taxes (other than taxes
based upon income) and other governmental charges that may be imposed with 
respect


                                      11
<PAGE>

to the issue or delivery of shares of Common Stock upon conversion of the 
Convertible Note.

          (e) No Dilution or Impairment. The Company shall not amend its
Articles of Incorporation or participate in any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, for the purpose of avoiding or seeking to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but shall at all times in good faith assist in
carrying out all such action as may be reasonably necessary or appropriate in
order to protect the conversion rights of the Holder against dilution or other
impairment.

8. Covenants. The approval of the Holder is required before the Company may
take those actions set forth in Section 5 (the "Covenants") of that certain
Note Purchase Agreement, dated the date hereof, by and between the Holder and
the Company . Such Covenants are incorporated herein by reference as if set
forth in full below and shall remain in effect so long as this Note remains
outstanding. No reference in Section 5 hereof to actions that the Company may
take shall be deemed in any way to prejudice or limit Holder's rights to
enforce the Covenants. The Company acknowledges that the Covenants are a
material inducement to Holder's willingness to purchase the Convertible Note,
and that Holder would not be willing to purchase the Note in the absence of the
Covenants. Accordingly, except to the extent that the Covenants expressly limit
Holder's discretion, the Company acknowledges that Holder shall be free to
enforce the Covenants in its absolute discretion or to condition its consent as
it sees fit.

9. Legal Fees. The Company agrees to pay all Holder's reasonable costs and
expenses, including without limitation reasonable attorneys' fees actually
incurred by Holder in connection with the enforcement of any obligation of the
Company under this Note.

10. Governing Law. This Note shall be governed by and construed in accordance
with the laws of the State of New York.

11. Severability. Should any provision or portion of this Note be held
unenforceable or invalid for any reason, the remaining provisions and portions
of this Note shall be unaffected by such holding.


DUALSTAR TECHNOLOGIES CORPORATION


By:   /s/  Elven M. Tangel
      ----------------------------
Its:  Chairman





                                      12