Document:

<PAGE>

                                                                     EXHIBIT 4.5

                               EXCHANGE AGREEMENT

     This EXCHANGE AGREEMENT is made as of October 1, 2001 by and between
CONSTELLATION 3D, INC., Delaware corporation (the "Company"), and HALIFAX FUND,
L.P, a Cayman Islands limited partnership (the "Purchaser").

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

     WHEREAS, in two transactions on August 23, 2000 and September 19, 2000, the
Purchaser invested a total of $10,000,000 in the Company pursuant to a Common
Stock Investment Agreement and a Letter Agreement (together, the "Purchase
Agreement") in exchange for shares of the Company's common stock, $.00001 par
value ("Common Stock"), and warrants to purchase (i) additional shares of Common
Stock and (ii) additional warrants, all on the terms and conditions described in
the Purchase Agreement;

     WHEREAS, pursuant to Section 7.1 of the Purchase Agreement, 4,241,447
shares of Common Stock are issuable to the Purchaser as Anti-Dilution Shares
with additional Anti-Dilution Shares potentially issuable pursuant to such
Section 7.1 in the future;

     WHEREAS, the Purchaser and the Company agree that in lieu of the Purchaser
receiving the aforementioned Anti-Dilution Shares, they each wish to enter into
an agreement whereby the Purchaser will deliver to the Company warrants
exercisable for 393,968 shares of Common Stock in exchange for delivery by the
Company of (a) a 5% Secured Convertible Debenture due October 1, 2006 of the
Company in the initial principal amount of $5,000,000 in the form and substance
of Exhibit A attached hereto (the "Debenture") which is convertible into shares
   ---------
of Common Stock (such shares, together with the shares of Common Stock into
which the Additional Debentures are convertible, being the "Debenture Shares");
(b) a warrant in the form and substance of Exhibit B attached hereto (the
                                           ---------
"Optional Debenture Warrant") to purchase additional Debentures (the "Additional
Debentures" and together with the Debenture, the "Debentures"); and (c)
1,120,723 shares of Common Stock (the "New Shares");

     WHEREAS, the Debenture Shares and the New Shares will carry registration
rights pursuant to the Registration Rights Agreement (as defined herein);

     WHEREAS, the Company's payment and performance obligations under the
Debenture and the Additional Debentures (if and when issued) to the Purchaser
will be secured pursuant to a Security Agreement dated as of the date hereof
entered into by the Company, the Company's Subsidiaries and the Purchaser (the
"Security Agreement"); and

     WHEREAS, the execution and delivery of this Exchange Agreement by the
Company and the Purchaser and the transactions contemplated hereby are being
made in reliance upon the provisions of Section 3(a)(9) of the Securities Act of
1933, as amended;

     NOW THEREFORE, in consideration of the mutual covenants set forth in this
Exchange Agreement, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

<PAGE>

     1. Definitions. As used in this Exchange Agreement, the following terms,
        -----------
when capitalized, shall have the respective meanings assigned to them below,
unless the context clearly indicates otherwise:

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

     "Approved Market" means any of the following: the New York Stock Exchange,
the American Stock Exchange, the Nasdaq National Market System and the Nasdaq
SmallCap Market.

     "Disclosure Letter" means the letter delivered by the Company to the
Purchaser in connection with the Company's representations and warranties
contained herein.

     "Effective Registration" shall mean: (i) the Company is in compliance with
the Transaction Documents; (ii) the resale of Registrable Securities is covered
by an effective registration statement and such registration statement is not
subject to any suspension or stop orders; (iii) the resale of such securities
may be effected pursuant to a current and deliverable prospectus that is not
subject to any blackout or similar circumstance; (iv) the securities are listed
on an Approved Market and are not subject to any trading suspension; (v) no
Interfering Event (as described in the Registration Rights Agreement) then
exists; and (vi) none of the Company or any direct or indirect subsidiary of the
Company is subject to any bankruptcy, insolvency or similar proceeding.

     "Equity Line Registration Rights Agreement" means the Registration Rights
Agreement between the Company and The Gleneagles Fund Company II dated as of
August 16, 2001.

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

     "Indebtedness" means (i) all obligations for borrowed money, (ii) all
obligations evidenced by debentures, notes or other similar instruments, (iii)
all obligations in respect of letters of credit or bankers acceptances or
similar instruments (or reimbursements obligations with respect thereto), (iv)
all obligations to pay the deferred purchase price of property or services,
except trade accounts payable arising in the ordinary course of business, (v)
all obligations as lessee which are capitalized in accordance with generally
accepted accounting principles, and (vi) all Indebtedness of others guaranteed
by the Company or any of its subsidiaries or for which the Company or any of its
subsidiaries is legally responsible or liable (whether by agreement to purchase
indebtedness of, or to supply funds to or to invest in, others).

     "Material Adverse Effect" means any material adverse effect on the
business, properties, assets, operations, results of operations or financial
condition of the Company and its subsidiaries taken as a whole, or on the
transactions contemplated hereby or by the agreements and instruments to be
entered into in connection herewith, or on the authority or ability of the
Company to perform its obligations under the Transaction Documents.

     "Permitted Liens" means (i) liens in favor of the Purchaser created
pursuant to the Security Agreement, (ii) liens arising by operation of law or in
the ordinary course of business

<PAGE>

and (iii) purchase money security interests incurred in connection with the
acquisition of fixed assets in the ordinary course of business.

     "Registrable Securities" shall have the meaning given to such term in the
Registration Rights Agreement, as modified by Section 6 below.

     "Registration Rights Agreement" means the Registration Rights Agreement
between the Company and the Purchaser dated as of August 23, 2000 entered into
in connection with the Purchase Agreement.

     "Sands Debt" means the Company's 10% subordinated convertible debenture in
the original and still outstanding principal amount of $4,000,000 issued to
Sands Brothers Venture Capital Associates LLC on March 24, 2000.

     "SEC" means the Securities and Exchange Commission.

     "SEC Documents" means all reports, schedules, forms, statements and other
documents filed by the Company with the SEC pursuant to the reporting
requirements of the 1933 Act and the Exchange Act, including, without
limitation, all exhibits included therein and financial statements and schedules
thereto and documents incorporated by reference.

     "Securities" mean, collectively, the Debenture, Optional Debenture Warrant,
Debenture Shares, Interest Shares, New Shares and Additional Debentures.

     "Subsidiary" means any entity in which the Company, directly or indirectly,
owns more than 50% of the outstanding capital or holds an equity or similar
interest representing at least 50% of the outstanding equity or similar
interests of such entity.

     "Trading Day" means (x) if the Common Stock is listed on the New York Stock
Exchange or the American Stock Exchange, a day on which there is trading on such
stock exchange, or (y) if the Common Stock is not listed on either such stock
exchange but sale prices of the Common Stock are reported on an automated
quotation system, a day on which trading is reported on the principal automated
quotation system on which sales of the Common Stock are reported or (z) if the
foregoing provisions are inapplicable, a day on which quotations are reported by
the National Quotation Bureau Incorporated.

     "Transaction Documents" mean, collectively, this Exchange Agreement, the
Debenture, the Optional Debenture Warrant, the Additional Debentures, the
Security Agreement (including any financing statements on Form UCC-1 or such
other appropriate form to be filed in connection with the Security Agreement),
the Registration Rights Agreement and the Disclosure Letter.

     "Valuation Report" means the report prepared by the Company's financial
management titled "Valuation of Constellation 3D, Inc. as of August 30, 2001"
which has been previously delivered to the Purchaser.

<PAGE>

     "Warrant" means the Amended and Restated Common Stock Purchase Warrant (No.
W2) dated September 19, 2000 issued to the Purchaser in connection with the
Purchase Agreement and which is currently exercisable for 393,968 shares of
Common Stock.

     2.  Exchange Transactions.
         ---------------------

     (a) The Purchaser and the Company hereby agree to the exchange of the
Warrant and termination of the Company's obligations under Section 7.1 of the
Purchase Agreement (as described in Section 2(c) below) for (i) the Debenture,
(ii) the Optional Debenture Warrant and (iii) the New Shares (such transaction
being referred to herein as the "Exchange"). The closing of the Exchange (the
"Exchange Closing") shall take place at the offices of Kleinberg, Kaplan, Wolff
& Cohen, P.C., 551 Fifth Avenue, New York, New York 10176, on such date as may
be mutually agreed to by the Purchaser and the Company.

     (b) At the Exchange Closing (i) the Purchaser shall deliver the Warrant to
the Company for cancellation and (ii) the Company shall deliver to the Purchaser
the Debenture, the Optional Debenture Warrant, and certificates representing the
New Shares (with the number and denomination of such certificates as requested
by the Purchaser), each registered in the Company's books and records in the
name of the Purchaser, along with the documents referred to in Section 6 below.
In lieu of delivering physical certificates representing the New Shares, the
Company shall use its best efforts to cause its transfer agent to electronically
transmit the New Shares to the Purchaser by crediting the account of the
Purchaser's prime broker with the Depository Trust Company through its Deposit
Withdrawal Agent Commission ("DWAC") system.

     (c) Immediately following the Exchange Closing, the Company shall be deemed
to have fully complied with its existing obligations under Section 7.1(a) of the
Purchase Agreement, and Section 7.1(a) of the Purchase Agreement shall be
automatically terminated in its entirety and shall be of no further force or
effect.

     3.  Representations of Purchaser. The Purchaser hereby represents and
         ----------------------------
warrants to the Company as of the date hereof and as of the date of the Exchange
Closing as follows:

     (a) Authority. The execution and delivery by the Purchaser of this Exchange
         ---------
Agreement, and the performance by the Purchaser of its obligations hereunder,
have been duly and validly authorized by the Purchaser, with no other action on
the part of the Purchaser or its partners being necessary. This Exchange
Agreement has been duly and validly executed and delivered by the Purchaser and
constitute the legal, valid and binding obligation of the Purchaser enforceable
against the Purchaser in accordance with its terms, except as such
enforceability may be limited by general principles of equity or applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally, the enforcement of creditors' rights and
remedies.

     (b) Ownership. The Purchaser is the owner of the Warrant free and clear of
         ---------
any and all liens, claims and encumbrances.

     (c) No Conflicts. Neither the execution and delivery by the Purchaser of
         ------------
this Exchange Agreement, nor the performance by the Purchaser of its obligations
hereunder and the

<PAGE>

consummation of the transactions contemplated hereby, will conflict with or
result in a violation or breach of: (i) any of the terms, conditions or
provisions of the partnership agreement of the Purchaser; (ii) any terms,
conditions or provisions of any material agreement or instrument to which the
Purchaser is a party; or (iii) any law, rule, regulation or judgment applicable
to the Purchaser.

     (d) Ability to Bear Economic Risk. The Purchaser is an accredited investor
         -----------------------------
as defined in Rule 501 of Regulation D under the 1933 Act, and it (i) is able to
bear the economic risk of its investment in the Securities, (ii) is able to hold
the Securities for an indefinite period of time, (iii) can afford a complete
loss of its investment in the Securities and (iv) has adequate means of
providing for its current needs.

     (e) No Public Solicitation. At no time was the Purchaser presented with or
         ----------------------
solicited by any general mailing, leaflet, public promotional meeting, newspaper
or magazine article, radio or television advertisement, or any other form of
general advertising or general solicitation in connection with the issuance of
the Securities.

     4.  Representations of the Company. The Company hereby represents and
         ------------------------------
warrants to the Purchaser as of the date hereof and as of the date of the
Exchange Closing as follows:

     (a) Organization and Qualification. The Company and its Subsidiaries are
         ------------------------------
corporations duly organized and validly existing in good standing under the laws
of the jurisdiction in which they are incorporated, and have the requisite
corporate power and authorization to own their properties and to carry on their
business as now being conducted and currently contemplated. Each of the Company
and its Subsidiaries is duly qualified as a foreign corporation to do business
and is in good standing in every jurisdiction in which its ownership of property
or the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in
good standing would not have a Material Adverse Effect.

     (b) Authorization; Enforcement; Compliance with Other Instruments. The
         -------------------------------------------------------------
Company has the requisite corporate power and authority to enter into and
perform its obligations under the Transaction Documents, (ii) the execution and
delivery of the Transaction Documents by the Company and the consummation by it
of the transactions contemplated thereby have been duly authorized by the
Company's Board of Directors and no further consent or authorization is required
by the Company, its Board of Directors or its shareholders, (iii) the
Transaction Documents have been duly executed and delivered by the Company, and
(iv) the Transaction Documents constitute the valid and binding obligations of
the Company enforceable against the Company in accordance with their terms,
except as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of creditors'
rights and remedies.

     (c) Capitalization. As of August 31, 2001, the authorized capital stock of
         --------------
the Company consisted of (i) 100,000,000 shares of Common Stock, of which as of
the date thereof, 46,407,887 shares are issued and outstanding, 6,671,515 shares
are issuable upon exercise of

<PAGE>

outstanding stock options, whether or not currently exercisable, 2,049,794
shares are issuable upon exercise of outstanding warrants, whether or not
currently exercisable, and 319,913 shares are issuable upon conversion of
convertible loans. All of such outstanding shares have been, or upon issuance
will be, validly issued, fully paid and nonassessable. As of the date hereof,
except as disclosed in the Disclosure Letter, (i) no shares of the Company's
capital stock are subject to preemptive rights or any other similar rights or
are secured by any liens or encumbrances against the Company or its assets, (ii)
there are no outstanding debt securities, (iii) there are no outstanding
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible,
exercisable or exchangeable into, any shares of capital stock of the Company or
any of its Subsidiaries, or contracts, commitments, understandings or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to issue additional shares of capital stock of the Company or any of its
Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible, exercisable or exchangeable into, any shares of capital stock of
the Company or any of its Subsidiaries, (iv) there are no agreements or
arrangements under which the Company or any of its Subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act (except the
Registration Rights Agreement and the Equity Line Registration Rights
Agreement), (v) there are no outstanding securities of the Company or any of its
Subsidiaries which contain any redemption or similar provisions, and there are
no contracts, commitments, understandings or arrangements by which the Company
or any of its Subsidiaries is or may become bound to redeem a security of the
Company or any of its Subsidiaries, (vi) there are no securities or instruments
containing anti-dilution, most-favored-nations or similar provisions that will
be triggered by the issuance of the Securities as described in the Transaction
Documents and, (vii) the Company does not have any stock appreciation rights or
"phantom stock" plans or agreements or any similar plan or agreement. The
Company has furnished to the Purchaser true and correct copies of the Company's
Articles of Incorporation, as amended and as in effect on the date hereof (the
"Certificate of Incorporation"), and the Company's By-laws, as in effect on the
date hereof (the "By-laws"), and the terms of all securities convertible or
exchangeable into or exercisable for Common Stock and the material rights of the
holders thereof in respect thereto.

     (d) No Conflicts. The execution, delivery and performance of the
         ------------
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby will not (i) result in a violation
of the Certificate of Incorporation, any Certificate of Designations,
Preferences and Rights of any outstanding series of preferred stock of the
Company or the By-laws; (ii) conflict with, or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, indenture or instrument to which the
Company or any of its Subsidiaries is a party, or (iii) result in a violation of
any law, rule, regulation, order, judgment or decree (including without
limitation Delaware General Corporation Law, United States federal and state
securities laws and regulations and the rules and regulations of the Nasdaq
National Market System) applicable to the Company or any of its Subsidiaries or
by which any property or asset of the Company or any of its Subsidiaries is
bound or affected. Neither the Company nor any of its Subsidiaries is in
violation of any term of, or in default under, (x) its Certificate of
Incorporation, any Certificate of Designations, Preferences and Rights of any
outstanding series of preferred stock or By-laws or its organizational charter
or by-laws, respectively, (y) any material contract, agreement,

<PAGE>

mortgage, indebtedness, indenture, instrument, or (z) any judgment, decree or
order or any statute, rule or regulation applicable to the Company or its
Subsidiaries, the non-compliance with which (in the case of clause (z) only) may
cause a Material Adverse Effect. The business of the Company and its
Subsidiaries is not being conducted in violation of any law, ordinance or
regulation of any governmental entity, except for any violations which
individually or in the aggregate will not have a Material Adverse Effect. Except
as specifically contemplated by this Exchange Agreement and as required under
the 1933 Act (or applicable "Blue Sky" laws), the Company is not required to
obtain any consent, authorization or order of, or make any filing or
registration with, any court, governmental agency or any regulatory or
self-regulatory agency in order for it to execute, deliver or perform any of its
obligations under, or contemplated by, the Transaction Documents in accordance
with the terms hereof or thereof. All consents, authorizations, orders, filings
and registrations which the Company is required to obtain pursuant to the
preceding sentence have been obtained or effected on or prior to the date
hereof.

     (e)  SEC Documents; Financial Statements. Since January 12, 1999, the
          -----------------------------------
Company has filed all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC pursuant to the reporting requirements
of the Exchange Act. The Company has delivered to the Purchaser or its
representatives true and complete copies of the SEC Documents. As of their
respective dates, the SEC Documents complied in all material respects with the
requirements of the Exchange Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. As of their
respective dates, the financial statements of the Company included in the SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, during the
periods involved (except in the case of unaudited interim statements, to the
extent they may exclude footnotes or may be condensed or summary statements) and
fairly present in all material respects the financial position of the Company as
of the dates thereof and the results of its operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments). The Valuation Report does not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstance under
which they are or were made, not misleading. The Valuation Report has been
approved and accepted by the Company's Board of Directors.

     (f)  No Undisclosed Events, Liabilities, Developments or Circumstances. No
          -----------------------------------------------------------------
event, liability, development or circumstance has occurred or exists with
respect to the Company or its Subsidiaries or their respective business,
properties, prospects, operations or financial condition, that would be required
to be disclosed by the Company under applicable securities laws on a
registration statement filed with the SEC relating to an issuance and sale by
the Company of its Common Stock and which has not been publicly disclosed.

     (g)  No Integrated Offering. Neither the Company, nor any of its
          ----------------------
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any

<PAGE>

security or solicited any offers to buy any security, under circumstances that
would cause the transactions contemplated by the Transaction Documents to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable shareholder approval provisions, including, without limitation,
under the rules and regulations of the Nasdaq National Market System, nor will
the Company or any of its Subsidiaries take any action or steps that would cause
the transactions contemplated by the Transaction Documents to be integrated with
other offerings.

     (h)  Obligations Absolute. The Company acknowledges that, subject only to
          --------------------
the conditions, qualifications and exceptions (if any) specifically set forth in
the Transaction Documents, its obligations under the Transaction Documents are
unconditional and absolute. Except to the extent (if any) specifically set forth
in the Transaction Documents, the Company's obligations thereunder are not
subject to any right of set off, counterclaim, delay or reduction.

     (i)  Issuance of Securities. The New Shares and the Debenture Shares are
          ----------------------
duly authorized and reserved for issuance and the New Shares and, upon issuance
of and payment for them in accordance with the terms of the Debenture and the
Additional Debenture, the Debenture Shares will be validly issued, fully paid
and non-assessable, free and clear of any and all liens, claims and
encumbrances, and entitled to be traded on the Nasdaq National Market System or
such other market upon which the Common Stock is then principally traded, and
the holders of such New Shares and Debenture Shares will be entitled to all
rights and preferences accorded to a holder of Common Stock.

     (j)  Brokers. The Company has taken no action which would give rise to any
          -------
claim by any person for brokerage commissions, finder's fees or similar payments
by the Company or the Purchaser relating to the transactions contemplated by the
Transaction Documents.

     (k)  Purchase Agreement. Except as described in the Disclosure Letter, the
          ------------------
Company hereby restates and reaffirms to the Purchaser, as of the date hereof
and as of the Closing Date, each of the Company's representations and warranties
set forth in Sections 2.1(i) through 2.1(x) of the Purchase Agreement.

     (l)  Solvency. As of August 30, 2001, the Company was not insolvent (as
          --------
such term is used in Sections 547 and 548 of the U.S. Bankruptcy Code) and will
not be rendered insolvent as a result of entering into the Exchange or any of
the other transactions contemplated by the Transaction Documents.

     (m)  Sands Debt. The Company has entered into a term sheet with Sands
          ----------
Brothers Venture Capital Associates LLC regarding the restructuring of the Sands
Debt, a copy of which is attached hereto as Exhibit F, and neither such term
                                            ---------
sheet nor the transactions contemplated thereby have been terminated,
restructured in any material way or abandoned by either party thereto.

     5.   Covenants.
          ---------

     (a)  Registration and Listing; Effective Registration. Until the earlier of
          ------------------------------------------------
(i) five years from the date of the Exchange Closing and (ii) the date on which
the Purchaser neither holds any Registrable Securities nor has the right to
acquire any Registrable Securities, the Company will

<PAGE>

cause the New Shares, Debenture Shares and the Interest Shares issuable under
the Debenture and the Additional Debentures, if and when such securities are
issued, to continue at all times to be registered under Section 12(b) or Section
12(g) of the Exchange Act, will comply in all respects with its reporting and
filing obligations under the Exchange Act, and will not take any action or file
any document (whether or not permitted by the Exchange Act or the rules
thereunder) to terminate or suspend such reporting and filing obligations. Until
the earlier of (i) five years from the date of the Exchange Closing and (ii) the
date on which the Purchaser neither holds any Registrable Securities nor has the
right to acquire any Registrable Securities, the Company shall continue the
listing and/or quoting of the Registrable Securities on the Nasdaq National
Market System or one of the other Approved Markets and comply in all respects
with the Company's reporting, filing and other obligations under the bylaws or
rules of each Approved Market on which the Registrable Securities are listed
and/or quoted, as the case may be. The Company shall cause the Registrable
Securities to be quoted on the Nasdaq National Market System no later than the
registration of the Registrable Securities under the 1933 Act, and at all times
shall continue such listing(s) and/or quoting on one of the Approved Markets.

     (b)  Partial Exercise. Upon any partial exercise by the Purchaser (or then
          ----------------
holder) of the Debenture, Optional Debenture Warrant, or an Additional
Debenture, the Company shall issue and deliver to the Purchaser (or holder)
within 3 Trading Days of the date on which such securities are exercised, a new
debenture or warrant (as applicable) representing the applicable principal
amount or number of shares in accordance with the terms of such security.

     (c)  Replacement Certificates. The certificate(s) representing the
          ------------------------
Securities held by the Purchaser (or then holder) may be exchanged by the
Purchaser (or such holder) at any time and from time to time for certificates
with different denominations representing an equal aggregate number of
Securities as requested by such Purchaser (or such holder) upon surrendering the
same. The Company will deliver such substitute certificates within 3 trading
days. No service charge will be made for such registration or transfer or
exchange.

     (d)  Dividends or Distributions; Purchases of Equity Securities. For so
          ----------------------------------------------------------
long as any portion of the Debenture, an Additional Debenture, or Optional
Debenture Warrant remains outstanding, the Company agrees that it shall not (i)
declare or pay any dividends or make any distributions to any holder or holders
of Common Stock (other than dividends payable in Common Stock) in their capacity
as shareholders, or (ii) purchase or otherwise acquire for value, directly or
indirectly, any shares of Common Stock or other equity security of the Company,
or publicly announce a self-tender offer under Rule 13e-4 promulgated under the
Exchange Act.

     (e)  Notices. The Company agrees to provide the Purchaser with copies of
          -------
all notices and information, including without limitation notices and proxy
statements in connection with any meetings, that are provided to the holders of
shares of Common Stock, contemporaneously with the delivery of such notices or
information to such Common Stock holders.

     (f)  Best Efforts. The parties shall use their best efforts to satisfy
          ------------
timely each of the conditions described in Sections 5 and 6 of this Agreement.

<PAGE>

     (g)  Limitations on Transfers. The Company shall not contribute or transfer
          ------------------------
its assets to any of its Subsidiaries, other than a Subsidiary that has
delivered its guarantee to the Purchaser in form and substance satisfactory to
the Purchaser.

     (h)  Form D; Blue Sky Laws. The Company agrees to file a Form D with
          ---------------------
respect to the Securities, as required under Regulation D and to provide a copy
thereof to the Purchaser promptly after such filing. The Company shall, on or
before the date of the Exchange Closing, take such action as the Company shall
have reasonably determined is necessary to qualify the applicable Securities for
sale to the Purchaser at the Exchange Closing pursuant to this Exchange
Agreement under applicable securities or "blue sky" laws of the states of the
United States (or to obtain an exemption from such qualification), and shall
provide evidence of any such action so taken to the Purchaser on or prior to the
Exchange Closing.

     (i)  Transactions With Affiliates. The Company agrees that any transaction
          ----------------------------
or arrangement between it or any of its Subsidiaries and any affiliate or
employee of the Company shall be effected on an arms' length basis in accordance
with customary commercial practice and, except with respect to grants of options
and stock to service providers, including employees, shall be approved by a
majority of the Company's outside directors.

     (j)  Reporting Lack of Effective Registration. The Company shall promptly
          ----------------------------------------
notify each Purchaser in writing if there shall ever be a lack of Effective
Registration, as well as when Effective Registration is re-established.

     (k)  Rule 144. With a view to making available to the Purchaser the
          --------
benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or
regulation of the SEC that may at any time permit the Purchaser to sell
securities of the Company to the public without registration ("Rule 144"), the
Company agrees, until such time as all of the Securities may be freely sold to
the public under Rule 144(k) (or any successor thereto), to:

                 (1)  make and keep public information available, as those terms
are understood and defined in Rule 144;

                 (2)  file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the Exchange Act so
long as the Company remains subject to such requirements (it being understood
that nothing herein shall limit any of the Company's other obligations under
this Exchange Agreement and the filing of such reports and other documents is
required for the applicable provisions of Rule 144); and

                 (3)  furnish to the Purchaser so long as it owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the 1933 Act and
the Exchange Act, (ii) a copy of the most recent annual or quarterly report of
the Company and such other reports and documents so filed by the Company, and
(iii) such other information as may be reasonably requested to permit the
investors to sell such securities pursuant to Rule 144 without registration.

     (l)  Negative Covenants. So long as any Debentures remain outstanding, the
          ------------------
Company agrees that neither it nor any of its subsidiaries shall (i) create,
incur, assume, guarantee, secure or in any manner become liable in respect of
any additional Indebtedness

<PAGE>

unless such Indebtedness is expressly subordinated to the Debentures (to the
reasonable satisfaction of the Purchaser) and has a maturity date that is later
than the Maturity Date (as defined in the Debentures) or (ii) create, incur or
permit to exist any security interest, lien or other encumbrance on or with
respect to any assets of the Company or any of its subsidiaries other than
Permitted Liens. The Company agrees that any current Indebtedness of the Company
or its subsidiaries, other than the Sands Debt, shall be made expressly
subordinate to the Debentures by the terms of such Indebtedness, and the Sands
Debt shall be made expressly pari passu with the Debentures by the terms
thereof.

     6.   Registration.
          ------------

     (a)  The New Shares, the Debenture Shares issuable upon conversion of the
Debenture and the Interest Shares issuable under the Debenture shall be
considered Registrable Securities for the purpose of the Registration Rights
Agreement and are registered pursuant to the Company's Registration Statement
(number 333-55114) that covers the disposition of Registrable Securities issued
pursuant to the Purchase Agreement and the documents related thereto. To the
extent required to accomplish the foregoing, within three business days from the
date hereof, the Company shall deliver to the Purchaser and file with the SEC a
prospectus supplement to the aforementioned Registration Statement in accordance
with the 1933 Act and the rules and regulations thereunder. Any such prospectus
supplement shall be submitted to the Purchaser at least two business days prior
to its filing for review and shall be subject to the Purchaser's prior approval.

     (b)  To the extent that there is an insufficient number of Common Shares
available for resale by the Purchaser under the Registration Statement referred
to in Section 6(a) above to cover the disposition of all of the Registrable
Securities following the Closing, the Company shall file one or more additional
Registration Statements with the SEC covering such excess Registrable Securities
in accordance with the terms of the Registration Rights Agreement by no later
than 60 calendar days after the Closing Date, and use its best efforts to have
such additional Registration Statement declared effective by the SEC as soon
thereafter as possible. Such additional Registration Statements shall be
considered Registration Statements under the Registration Rights Agreement and
the terms of the Registration Rights Agreement shall apply mutatis mutandis to
such additional Registration Statements as they applied to the aforementioned
Registration Statement previously filed by the Company pursuant thereto. If (I)
Registration Statements covering the resale of all of the New Shares are not
declared effective by the SEC by the earlier of (i) 120 calendar days following
the Closing Date and (ii) 5 Trading Days after SEC clearance to request
acceleration, or (II) if Registration Statements covering the resale of all of
the Registrable Securities are not declared effective by the earlier of (x) 180
calendar days following the Closing Date and (y) 5 Trading Days after SEC
clearance to request acceleration, then the Purchaser shall have all of the
rights and remedies available to it under the Registration Rights Agreement for
a failure to have a Registration Statement effective by the Effectiveness
Deadline including, without limitation, the right to Monthly Delay Payments and
redemptions.

     (c)  The Debenture Shares issuable upon the conversion of the Additional
Debentures and the Interest Shares issuable under the Additional Debentures
shall also be considered Registrable Securities for the purpose of the
Registration Rights Agreement. The Company

<PAGE>

agrees to use its best efforts to effect the registration of such Debenture
Shares and Interest Shares for resale by the Purchaser in accordance with the
provisions of the Registration Rights Agreement; provided, that for purposes of
the Registration Rights Agreement, the term "Closing Date" with respect to any
such Debenture Shares and Interest Shares shall be deemed to mean the date on
which the Optional Debenture Warrant is exercised for the Debenture in
connection with which such Debenture Shares and Interest Shares were received.
For the avoidance of doubt, if the Company fails to register such Debenture
Shares or the Interest Shares in accordance with the terms of the Registration
Rights Agreement, the Purchaser shall have all rights and remedies set forth
therein with respect to a failure to register Registrable Securities.

     7.  Conditions Precedent to the Obligation of the Purchaser. The obligation
         -------------------------------------------------------
hereunder of the Purchaser to effect the Exchange is subject to the
satisfaction, at or before the Exchange Closing, of each of the conditions set
forth below. These conditions are for the Purchaser's sole benefit and may be
waived by the Purchaser at any time in its sole discretion.

     (a) The representations and warranties of the Company contained herein
shall be true and correct as of the date of this Exchange Agreement and as of
the Exchange Closing as though made at that time.

     (b) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by the Transaction
Documents.

     (c) The Purchaser shall have received an opinion of counsel to the Company
in the form and substance of Exhibit C attached hereto.
                             ---------

     (d) The Purchaser shall have received a secretary's certificate from the
Company in the form and substance of Exhibit D hereto.
                                     ---------

     (e) The Company shall have executed and delivered each of the Transaction
Documents (other than the Additional Debentures) to the Purchaser.

     (f) The Company shall have provided the Purchaser with copies of duly
adopted resolutions of the Company's Board of Directors in form and substance
reasonably satisfactory to the Purchaser that demonstrate that the transactions
contemplated by the Transaction Documents are being, and will be, effected by
the Company in compliance with Section 160(a) of the Delaware General
Corporation Law.

     8.  Conditions Precedent to the Obligations of the Company. The obligation
         ------------------------------------------------------
hereunder of the Company to effect the Exchange is subject to the satisfaction,
at or before the Exchange Closing, of each of the conditions set forth below.
These conditions are for the Company's sole benefit and may be waived by the
Company at any time in its sole discretion.

     (a) The representations and warranties of the Purchaser contained herein
shall be true and correct as of the date of this Exchange Agreement and as of
the Exchange Closing as though made at that time.

<PAGE>

     (b) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by the Transaction
Documents.

     (c) The Purchaser shall have executed and delivered each of the Transaction
Documents to which it is a party to the Company.

     9.  Indemnification. In consideration of the Purchaser's execution and
         ---------------
delivery of this Exchange Agreement and in addition to all of the Company's
other obligations under the Transaction Documents, the Company shall defend,
protect, indemnify and hold harmless the Purchaser and all of its partners,
officers, directors, employees, members and direct or indirect investors and any
of the foregoing persons' agents or other representatives (including, without
limitation, those retained in connection with the transactions contemplated by
this Exchange Agreement) (collectively, the "Indemnitees") from and against any
and all actions, causes of action, suits, claims, losses, costs, penalties,
fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys' fees
and disbursements (the "Indemnified Liabilities"), incurred by any Indemnitee as
a result of, or arising out of, or relating to (a) any misrepresentation or
breach of any representation or warranty made by the Company in the Transaction
Documents or any other certificate or document contemplated hereby or thereby,
(b) any breach of any covenant, agreement or obligation of the Company contained
in the Transaction Documents or any other certificate or document contemplated
hereby or thereby, and (c) any cause of action, suit or claim brought or made
against such Indemnitee by a third party and arising out of or resulting from
(i) the execution, delivery, performance, breach by the Company or enforcement
of the Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby, (ii) any transaction financed or to be financed
in whole or in part, directly or indirectly, with the proceeds of the issuance
of the Securities or (iii) the status of the Purchaser or holder of the
Securities as an investor in the Company, and (d) the enforcement of this
Section. Notwithstanding the foregoing, Indemnified Liabilities shall not
include any liability of any Indemnitee arising solely out of such Indemnitee's
willful misconduct or fraudulent action(s). To the extent that the foregoing
undertaking by the Company may be unenforceable for any reason, the Company
shall make the maximum contribution to the payment and satisfaction of each of
the Indemnified Liabilities which is permissible under applicable law. Except as
otherwise set forth herein, the mechanics and procedures with respect to the
rights and obligations under this Section 9 shall be the same as those set forth
in Section 6 (other than Section 6(b)) of the Registration Rights Agreement,
including, without limitation, those procedures with respect to the settlement
of claims and Company's right to assume the defense of claims.

     10. Miscellaneous.
         -------------

     (a) Governing Law. THIS EXCHANGE AGREEMENT SHALL BE GOVERNED BY AND
         -------------
INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD
TO THE PRINCIPLES OF CONFLICT OF LAWS. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO
THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE STATE
OF NEW YORK, CITY

<PAGE>

OF NEW YORK, BOROUGH OF MANHATTAN, FOR THE ADJUDICATION OF ANY DISPUTE UNDER OR
IN CONNECTION WITH THIS EXCHANGE AGREEMENT OR WITH ANY TRANSACTION CONTEMPLATED
HEREBY OR DISCUSSED HEREIN, AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO
ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY
SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR
PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF SUCH SUIT,
ACTION OR PROCEEDING IS IMPROPER. EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL
SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION
OR PROCEEDING BY MAILING A COPY THEREOF TO SUCH PARTY AT THE ADDRESS FOR SUCH
NOTICES TO IT UNDER THIS EXCHANGE AGREEMENT AND AGREES THAT SUCH SERVICE SHALL
CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING
CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS
IN ANY MANNER PERMITTED BY LAW. IF ANY PROVISION OF THIS EXCHANGE AGREEMENT
SHALL BE INVALID OR UNENFORCEABLE IN ANY JURISDICTION, SUCH INVALIDITY OR
UNENFORCEABILITY SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF THE
REMAINDER OF THIS EXCHANGE AGREEMENT IN THAT JURISDICTION OR THE VALIDITY OR
ENFORCEABILITY OF ANY PROVISION OF THIS EXCHANGE AGREEMENT IN ANY OTHER
JURISDICTION. EACH PARTY HERETO IRREVOCABLY WAIVES ANY RIGHT TO TRIAL BY JURY.

     (b) Expenses.
         --------

                (1) The Company agrees to reimburse the Purchaser or its
counsel, designees or clients, as applicable, for reasonable expenses (including
reasonable legal expenses) relating to the negotiation and execution of the
Transaction Documents up to $25,000 in the aggregate. The Company will make such
payment to the Purchaser and/or its counsel at the Closing for an estimate of
all such costs and expenses. If the Purchaser or its counsel (as the case may
be) discovers that such estimates were higher than actual costs and expenses, it
will reimburse any excess to the Company within 30 days of such discovery to
extent such excess is not offset against other or further reimbursable expenses.
To the extent such estimate does not so cover all such reimbursable costs and
expenses, the Company shall promptly pay the Purchaser and/or its counsel
following demand therefor.

                (2) Except as otherwise set forth in this Section 10(b), each
party shall pay the fees and expenses of its advisers, counsel, accountants and
other experts, if any, and all other expenses incurred by such party incident to
the negotiation, preparation, execution, delivery and performance of the
transactions contemplated by the Transaction Documents. Any attorneys' fees and
expenses incurred by either the Company or by the Purchaser in connection with
the preparation, negotiation, execution and delivery of any amendments to the
Transaction Documents or relating to the enforcement of the rights of any party,
after the occurrence of any breach of the terms of the Transaction Documents by
another party or any default by another party in respect of the transactions
contemplated thereunder, shall be paid on demand by the party which breached the
Transaction Documents and/or defaulted, as the case may be. The

<PAGE>

Company shall pay all stamp and other taxes and duties levied in connection with
the issuance of any Securities issued pursuant to the Transaction Documents.

        (c) Counterparts; Facsimile. This Exchange Agreement may be executed in
            -----------------------
two or more identical counterparts, all of which shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature.

        (d) Headings.  The headings of this Exchange Agreement are for
            --------
convenience of reference and shall not form part of, or affect the
interpretation of, this Exchange Agreement.

        (e) Entire Agreement; Amendments; Waivers. This Exchange Agreement
            -------------------------------------
supersedes all other prior oral or written agreements between the Purchaser and
the Company with respect to the matters discussed herein, and this Exchange
Agreement and the instruments referenced herein (including the other Transaction
Documents) contain the entire understanding of the parties with respect to the
matters covered herein and therein and, except as specifically set forth herein
or therein, neither the Company nor the Purchaser makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Exchange Agreement may be amended other than by an instrument in writing
signed by the Company and the Purchaser, and no provision hereof may be waived
other than by an instrument in writing signed by the party against whom
enforcement is sought. The Purchaser may at any time elect, by notice to the
Company, to waive (whether permanently or temporarily, and subject to such
conditions, if any, as the Purchaser may specify in such notice) any of its
rights, any of the Company's obligations to the Purchaser, or any of the
conditions precedent with which the Company must comply that are for the sole
benefit of the Purchaser, with respect to or in connection with the Purchaser's
acquisition of Common Stock from the Company pursuant to the Transaction
Documents, in which event such waiver shall be binding against the Purchaser in
accordance with its terms.

        (f) Notices. Any notices, consents, waivers or other communications
            -------
required or permitted to be given under the terms of this Exchange Agreement
must be in writing, must be delivered by (i) a nationally recognized delivery
service, mail or hand delivery or (ii) facsimile, and will be deemed to have
been delivered (A) upon receipt, when delivered via delivery service; or (B)
upon receipt, when sent by facsimile (provided confirmation of transmission is
mechanically or electronically generated and kept on file by the sending party).
The addresses and facsimile numbers for such communications shall be:

        If to the Company:

        Constellation 3D, Inc.
        805 Third Avenue, 14th Floor
        New York, New York 94005
        Telephone:  212-308-3572
        Facsimile:  212-650-308-3573
        Attention:  Mr. Craig Weiner

<PAGE>

         with a copy to:

         Baker & McKenzie
         1200 Brickell Avenue, 19th Floor
         Miami, Florida  33131
         Telephone:  305-789-8999
         Facsimile:  305-789-8953
         Attention:  Roy J. Larson, Esq.

         If to the Purchaser:

         Halifax Fund, L.P.
         c/o The Palladin Group, L.P.
         195 Maplewood Avenue
         Maplewood, New Jersey 07040
         Telephone:  973-313-6477
         Facsimile:  973-313-6491
         Attention:  Mr. Maurice Hryshko

         with a copy to:

         Kleinberg, Kaplan, Wolff & Cohen, P.C.
         551 Fifth Avenue
         New York, New York 10176
         Telephone:  212-986-6000
         Facsimile:  212-986-8866
         Attention:  Stephen M. Schultz, Esq.

         Each party shall provide 5 days prior written notice to the other party
of any change in address, telephone number or facsimile number. Written
confirmation of receipt (A) given by the recipient of such notice, consent,
waiver or other communication, (B) mechanically or electronically generated by
the sender's facsimile machine containing the time, date, recipient facsimile
number and an image of the first page of such transmission or (C) provided by a
nationally recognized overnight delivery service shall be rebuttable evidence of
personal service, receipt by facsimile or receipt from a nationally recognized
overnight delivery service in accordance with clause (i), (ii) or (iii) above,
respectively.

         (g) Successors and Assigns. Except as otherwise provided herein, this
             ----------------------
Exchange Agreement shall be binding upon and inure to the benefit of the parties
and their respective successors and assigns. Neither the Purchaser nor the
Company shall assign this Exchange Agreement or any rights or obligations
hereunder without the prior written consent of the other, including, in the case
of the Company only, by merger or consolidation. Notwithstanding anything to the
contrary contained in the Transaction Documents, the Purchaser shall be entitled
to pledge the Debenture Shares in connection with a bona fide margin account at
any time and from time to time after the Exchange Closing.

<PAGE>

        (h) No Third Party Beneficiaries. This Exchange Agreement is intended
            ----------------------------
for the benefit of the parties hereto and their respective permitted successors
and assigns, and is not for the benefit of, nor may any provision hereof be
enforced by, any other person.

        (i) Survival. The representations and warranties of the Company and the
            --------
Purchaser contained in the Transaction Documents or incorporated by reference
therein, and the indemnification provisions set forth herein, shall survive the
Exchange Closing, for a period of 3 years following the Exchange Closing.

        (j) Publicity. The Company and the Purchaser shall have the right to
            ---------
approve before issuance any press releases or any other public statements with
respect to the transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior approval of the Purchaser, to make
any press release or other public disclosure with respect to such transactions
as is required by applicable law and regulations (although the Purchaser shall
be consulted by the Company in connection with any such press release or other
public disclosure prior to its release and shall be provided with a copy
thereof).

        (k) Further Assurances. Each party shall do and perform, or cause to be
            ------------------
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Exchange Agreement and the consummation of the
transactions contemplated hereby.

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

        (m) Remedies. The Purchaser shall have all rights and remedies set forth
            --------
in the Transaction Documents and all rights and remedies which such holders have
been granted at any time under any other agreement or contract and all of the
rights which such holders have under any law. Any person having any rights under
any provision of the Transaction Documents shall be entitled to enforce such
rights specifically (without posting a bond or other security), to recover
damages by reason of any breach of any provision of the Transaction Documents
and to exercise all other rights granted by law. The Purchaser without prejudice
may withdraw, revoke or suspend its pursuit of any remedy at any time prior to
its complete recovery as a result of such remedy. Notwithstanding the foregoing,
in no event shall either party be liable to the other party for any indirect,
incidental, consequential, special or exemplary damages arising from or in
connection with the Transaction Documents (other than pursuant to a party's
indemnification obligations under the Registration Rights Agreement) even if
such party has been advised of the possibility of such damages.

        (n) Rescission and Withdrawal Right. Notwithstanding anything to the
            -------------------------------
contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, wherever a party exercises a right, election, demand or
option under a Transaction Document and the other party does not fully perform
its related obligations within the periods therein provided, then the first
party in its sole discretion may rescind or withdraw from time to time any
relevant notice, demand or election in whole or in part without prejudice to its
future actions and rights.

<PAGE>

        (o) Filing of Form 8-K. As soon as reasonably practicable after the date
            ------------------
of this Agreement, the Company shall file with the SEC a Current Report on Form
8-K announcing and describing the terms of the transactions contemplated by the
Transaction Documents, a copy of which shall be provided to the Purchaser for
its review and comment prior to filing.

        (p) Rule 144. The Company agrees to take the position that, for purposes
            --------
of Rule 144 the Purchaser's holding period for the New Shares, the Debenture and
the Optional Debenture Warrant commenced on August 23, 2000.

        IN WITNESS WHEREOF, the parties hereto have caused this Exchange
Agreement to be duly executed as of the date first above written.

                                               CONSTELLATION 3D, INC.

                                               By: /s/ Eugene Levich
                                                   -----------------
                                               Name:
                                               Title: Chief Executive Officer

                                               HALIFAX FUND, L.P.

                                               By: /s/ Maurice Hryshko
                                                   -------------------
                                               Name
                                               Title: Counsel, The Palladin
                                               Group, L.P.<PAGE>

                                                                     EXHIBIT 4.6

                               SECURITY AGREEMENT
                               ------------------

         This SECURITY AGREEMENT, dated as of October 1, 2001, is made by
CONSTELLATION 3D, INC., a corporation organized under the laws of the State of
Delaware (the "Company"), with its principal offices located at 230 Park Avenue,
Suite 453, New York, New York 10169, and each of the Company's undersigned
subsidiaries (the "Subsidiaries"), (the Company and the Subsidiaries are
hereinafter sometimes referred to collectively as the "Debtors" or individually
as a "Debtor"), in favor of Halifax Fund, L.P, a Cayman Islands limited
partnership ("Halifax" or the "Secured Parties") and Halifax Fund, L.P., as
collateral agent (the "Collateral Agent").

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

         WHEREAS, the Company and the Halifax are entering into the Exchange
Agreement, dated as of the date hereof (the "Exchange Agreement") pursuant to
which the Company shall issue to Halifax $5,000,000 aggregate principal amount
of its 5% Senior Secured Convertible Debentures (the "Debentures") and its
Optional Debenture Warrant (the "Warrant") that entitles Halifax to purchase an
additional $5,000,000 aggregate principal amount of Debentures;

         WHEREAS, the Subsidiaries are parties to the Subsidiary Guaranty, dated
the date hereof (the "Subsidiary Guarantee") pursuant to which the Subsidiaries
guarantee the obligations of the Company under the Exchange Agreement, the
Debentures, the Warrant and any Debentures issued in the future upon the
exercise of the Warrant;

         WHEREAS, pursuant to the Exchange Agreement, the Company and the
Subsidiaries have agreed that all of the Company's obligations under the
Exchange Agreement, the Debenture, the Warrant and any Debentures issued upon
the exercise of the Warrant, the Registration Rights Agreement between the
Company and Halifax dated August 23, 2000 and the Subsidiaries' obligations
under the Subsidiary Guarantee (collectively, the "Secured Obligations") be
secured by a first priority lien on all of the assets of the Company and of the
Subsidiaries pursuant to the terms of this Security Agreement.

         NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein and in order to induce Halifax to enter into the Exchange
Agreement, the Debtors hereby agree with the Collateral Agent and the Secured
Parties as follows:

<PAGE>

SECTION 1:  DEFINITIONS

     1.1 Definitions. The following words shall have the following meanings when
used in this Security Agreement. All terms used herein not otherwise defined in
this Security Agreement shall have the meanings attributed to such terms in the
Exchange Agreement, and if not defined in the Exchange Agreement, then the New
York Uniform Commercial Code, as may be amended from time to time. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.

     "Account Debtor" means any person who is or who may become obligated under,
      --------------
with respect to, or on account of an Account.

     "Accounts" means all presently existing and hereafter arising accounts,
      --------
contract rights, and all other forms of obligations owed or owing now or in the
future to a Debtor or any joint venture among Debtors, including, without
limitation any obligations arising out of the sale or lease of goods or the
rendition of services by such persons, or arising out of the sale or lease of
goods or the rendition of services by a person other than such persons and
acquired by such persons from such person by assignment or purchase, including,
without limitation, rights to payment with respect to accounts that are sold or
assigned to Debtors, irrespective of whether earned by performance, and any and
all credit insurance, guarantees, or security therefor.

     "Bankruptcy Code" means The Bankruptcy Reform Act of 1978, as heretofore
      ---------------
and hereinafter amended, and codified as 11 U.S.C. (S)(S) 101 et seq.

     "Debtors' Books" means all of the Debtors' books and records including:
      --------------
ledgers; records indicating, summarizing, or evidencing each Debtor's assets or
liabilities, or the Collateral; all information relating to each Debtor's
business operations or financial condition; and all computer programs, disc or
tape files, printouts, runs, or other computer prepared information, and the
equipment containing such information.

     "Collateral" means all of the assets of the Debtors (whether currently
      ----------
owned or hereafter acquired or owned by a Debtor) including, but not limited to,
each of the following: the Pledged Securities; Accounts; Debtors' Books;
Equipment; General Intangibles; Goods; Inventory; Negotiable Collateral; any
money or other assets of the Debtors that hereafter comes into possession,
custody or control of the Collateral Agent; and the proceeds and any and all of
the products, whether tangible or intangible, of any of the foregoing including
proceeds of insurance covering any or all of the Collateral, and any and all
Accounts, Equipment, General Intangibles, Goods, Inventory, Negotiable
Collateral, money, deposit accounts, or other tangible or intangible, real or
personal, property resulting from the sale, exchange, collection, rent, lease,
license, or other disposition of the Collateral, or any portion thereof or
interest therein, and the proceeds thereof.

     "Debt" shall mean for any person: (i) obligations incurred by such person
      ----
for borrowed money (whether by loan, the issuance and sale of debt securities or
the sale of property to another person subject to an understanding or agreement,
contingent or otherwise, to repurchase such property from such person), (ii)
obligations evidenced by bonds, debentures, notes or other similar instruments,
(iii) obligations to pay the deferred purchase price of property or services,

                                        2

<PAGE>

(iv) obligations as lessee under capital leases, and (v) obligations under
direct or indirect guaranties in respect of, and obligations (contingent or
otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor
against loss in respect of, indebtedness or obligations of others of the kinds
referred to in clauses (i)-(iv) above

     "Default" shall mean any condition, act or event which, with notice or
      -------
lapse of time or both, would constitute an Event of Default.

     "Equipment" means all machinery, equipment, office machinery, furniture,
      ---------
fixtures, conveyors, tools, materials, storage and handling equipment, computer
equipment and hardware including central processing units, terminals, drives,
memory units, printers, keyboards, screens, peripherals and input or output
devices, automotive equipment, trucks, molds dies, stamps, motor vehicles and
other equipment of every kind and nature and wherever situated now or hereafter
directly or indirectly owned by the Debtors or in which the Debtors have any
interest together with all additions and accessions thereto, all replacements
and all accessories and parts therefor, all manuals, blueprints, know-how,
warranties and records in connection therewith, all rights against suppliers,
warrantors, manufacturers, sellers or others in connection therewith, and
together with all substitutions for any of the foregoing, wherever located.

     "Event of Default" means and includes any of the Events of Default set
      ----------------
forth in Section 3.

     "General Intangibles" shall mean all "General Intangibles," as such term is
      -------------------
defined in Section 9-106 of the Uniform Commercial Code of the State of New
York, now or hereafter directly or indirectly owned by the Debtors, including,
without limitation, present and future trade secrets and other proprietary
information; trademarks, trade names and trademark applications, service marks,
business names, logos and the goodwill of the business relating thereto;
copyrights and copyright applications and all tangible property embodying the
copyrights; unpatented inventions (whether or not patentable); designs; research
and development results; patent applications and patents; customer contracts;
license agreements related to any of the foregoing and the income therefrom;
books, records, computer tapes or disks, flow diagrams, specification sheets,
source codes, object codes, and other physical manifestations of the foregoing.

     "Indebtedness" means all amounts due and owing to the Secured Parties
      ------------
pursuant to, and all payment obligations arising under, the Debentures, the
Warrant, the Registration Rights Agreement, the Subsidiary Guarantee and the
Exchange Agreement together with all reasonable expenses relating to enforcement
thereof, including, without limitation, reasonable legal fees.

     "Inventory" means all present and future inventory in which the Debtors or
      ---------
joint ventures thereof have any interest, including goods held for sale or lease
or to be furnished under a contract of service and all of such persons' present
and future raw materials, work in process, finished goods, and packing and
shipping materials, wherever located, and any documents of title representing
any of the above.

     "Negotiable Collateral" means all of a Debtor's present and future letters
      ---------------------
of credit, notes, drafts, instruments, certificated securities, documents,
personal property leases (wherein a Debtor

                                        3

<PAGE>

is the lessor), chattel paper, and Debtors' Books relating to any of the
foregoing.

     "Pledged Securities" means (i) all capital stock of all current and future
      ------------------
Subsidiaries, whether currently issued or issued in the future ("Subsidiary
Shares"); (ii) any capital stock or other securities currently owned or received
by the Debtors in the future ("Further Securities"); (iii) all other securities
which may be delivered to and held by the Collateral Agent in respect of the
Further Securities and Subsidiary Shares pursuant to the terms hereof; (iv) all
dividends, cash, instruments, securities and other property from time to time
received, receivable or otherwise distributed, in respect of, in, for, or upon
the exchange or conversion of the securities referred to in clauses (i), (ii)
and (iii) above; and (v) all rights and privileges of the Debtors with respect
to the Pledged Securities and other properties referred to in clauses (i), (ii),
(iii) and (iv).

     "Registration Rights Agreement" means the Registration Rights Agreement, as
      -----------------------------
defined in the Exchange Agreement.

     "Security Agreement" means this Security Agreement, as this Security
      ------------------
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Security Agreement from time to time.

     "Secured Obligations" means all of the obligations of the Debtors,
      -------------------
including but not limited to, the Indebtedness, under the Exchange Agreement,
the Debentures, the Warrant, any Debentures issued upon the exercise of the
Warrant, the Registration Rights Agreement and the Subsidiary Guarantee.

     "subsidiary" means each subsidiary (as defined under U.S. generally
      ----------
accepted accounting principles) of the Debtors.

     "Transaction Documents" means the Exchange Agreement, the Debentures, the
      ---------------------
Warrant, any Debenture issued upon the exercise of the Warrant, the Registration
Rights Agreement, the Subsidiary Guarantee and this Security Agreement.

SECTION 2:  GRANT OF SECURITY INTEREST; OBLIGATIONS OF THE DEBTORS

     2.1 Grant of Security Interest. (a) As collateral security for all of the
         --------------------------
Indebtedness, the Debtors hereby grant to the Collateral Agent a continuing
first security interest in all currently existing and hereafter acquired or
arising Collateral to secure prompt repayment of any and all Indebtedness and to
secure prompt performance by the Debtors of each of their respective covenants
and duties under the Transaction Documents. The Debtors further agree that the
Collateral Agent and the Secured Parties shall have the rights stated in this
Security Agreement with respect to the Collateral in addition to all other
rights which the Secured Parties may have by law.

         (b) Concurrently with the execution of this Security Agreement, the
Company is delivering to the Collateral Agent, certificates representing all of
the outstanding Subsidiary Shares, together with all stock powers duly executed
in blank. Upon the issuance of any additional Subsidiary Shares, the Company
shall immediately deliver such Shares to the Collateral Agent, together with
stock powers duly executed in blank and corporate resolutions

                                        4

<PAGE>

authorizing the transfer of title of such stock to the Secured Parties, the
Collateral Agent or their respective designee or designees upon an Event of
Default pursuant to the terms of this Security Agreement.

         (c) Upon receipt of Further Securities by any Debtor, such Debtor shall
immediately deliver the certificates representing such securities, together with
stock powers duly executed in blank to the Collateral Agent and corporate
resolutions of the type described in Section 2.1(b) above.

         (d) A reasonably detailed list of the Collateral existing as of the
date hereof is set forth on Schedule A attached hereto. For each item of
Collateral, Schedule A provides the location, description and ownership and, for
items of Collateral which have a certificate of title, the jurisdiction of such
certificates, and for those items of Collateral which are mobile goods (goods
that are mobile and generally used in more than one jurisdiction such as motor
vehicles, trailers and similar items) the present location of such goods.
Schedule A also identifies any liens and encumbrances with respect to any items
of Collateral.

     2.2 Representations and Obligations of the Debtors. Each of the Debtors
jointly and severally represents, warrants and covenants to the Collateral Agent
and the Secured Parties as follows:

         (a) Perfection of Security Interest. Each of the Debtors agrees to
execute at any time and from time to time such financing statements and to take
whatever other actions are requested by The Collateral Agent to perfect and
continue The Collateral Agent's security interest in the Collateral. Upon
request of the Collateral Agent, each Debtor will deliver to the Collateral
Agent any and all documents evidencing or constituting the Collateral,
possession of which is required in order for the Collateral Agent to perfect its
security interest therein. Upon request of the Collateral Agent, the Debtors
will note Collateral Agent's interest, as the case may be, upon any and all
Accounts if not delivered to Collateral Agent for possession by Collateral
Agent. The Collateral Agent may at any time and from time to time, and without
further authorization from the Debtors, file a carbon, photographic or other
reproduction of any financing statement or of this Security Agreement for use as
a financing statement. The Debtors will reimburse The Collateral Agent for all
reasonable expenses for the perfection and the continuation of the perfection of
Collateral Agent's security interest in the Collateral. Each Debtor will
promptly notify The Collateral Agent of any change in its name including any
change to the assumed business names of such Debtor. This is a continuing
Security Agreement and will continue in effect until all of the Indebtedness is
paid in full and any other Secured Obligations are satisfied and The Collateral
Agent shall release its interest in the Collateral upon the full and final
payment and satisfaction of the Indebtedness and other Secured Obligations. If
payment is made by a Debtor, whether voluntarily or otherwise, or by any third
party, on the Indebtedness and thereafter a Secured Party is forced to remit the
amount of that payment to such Debtor's trustee in bankruptcy or to any similar
person under any federal, state or foreign bankruptcy law or other law for the
relief of debtors, the Indebtedness shall be considered unpaid for the purpose
of enforcement of this Security Agreement. If permitted or required under
applicable law, the Collateral Agent may file any financing statements with
respect to the Collateral without the signatures of the Debtors. Any financing
statements may state that the Collateral Agent have a lien in all of the
Debtors' assets. The Debtors will make any necessary

                                        5

<PAGE>

filings and take any other necessary actions to provide a first priority and
perfected security interest to the Collateral Agent with respect to any
Collateral located outside the United States. The Debtors will also make any
filings in the United States Patent and Trademark Office that are necessary to
provide a perfected first priority security interest in any Collateral that is
intellectual property. Evidence of such filings and action by the Debtors will
be provided to the Collateral Agent on a timely basis.

         (b) Power of Attorney. Each Debtor hereby irrevocably makes,
constitutes, and appoints the Collateral Agent (and all of such Collateral
Agent's general partners, officers, employees, or agents designated by such
Collateral Agent) as its true and lawful attorney, with power to: (i) sign such
Debtor's name on any of the documents described hereunder or on any other
similar documents to be executed, recorded, or filed in order to perfect or
continue perfected the Collateral Agent's security interest in the Collateral;
(ii) at any time that an Event of Default has occurred and is continuing,
execute, sign and endorse such Debtor's name on any invoice or bill of lading
relating to any Account, drafts against Account Debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to Account
Debtors; (iii) send requests for verification of Accounts; (iv) at any time that
an Event of Default has occurred and is continuing, execute, sign and endorse
such Debtor's name on any checks, notices, instruments, acceptances, money
orders, drafts, warrants or other item of payment or security that may come into
Collateral Agent's possession; (v) at any time that an Event of Default has
occurred and is continuing, demand, collect, receive, receipt for, sue and
recover all sums of money or other property which may now or hereafter become
due, owing or payable from the Collateral; (vi) file any claim or claims or,
following an Event of Default, take any action or institute or take part in any
proceedings, either in its own name or in the name of such Debtor, or otherwise,
which in the discretion of the Collateral Agent may seem to be necessary or
advisable; (vii) at any time that an Event of Default has occurred and following
acceleration of the Indebtedness, direct the Account Debtors and other persons
sending mail to the Debtors to send all mail relating to the Collateral to the
Collateral Agent; (viii) at any time that an Event of Default has occurred and
is continuing, make, settle, and adjust all claims under the Debtors' policies
of insurance and make all determinations and decisions with respect to such
policies of insurance; and (ix) at any time that an Event of Default has
occurred and is continuing, settle and adjust disputes and claims respecting the
Accounts directly with Account Debtors, for amounts and upon terms which the
Collateral Agent determines to be reasonable, and the Collateral Agent may cause
to be executed and delivered any documents and releases which the Collateral
Agent determines to be necessary. The appointment of the Collateral Agent as
such Debtor's attorney, and each and every one of the Collateral Agent's rights
and powers, being coupled with an interest, is irrevocable and shall remain in
full force and effect until all of the Indebtedness has been fully repaid and
performed and the Collateral Agent renounces such appointment.

         (c) No Violation. The execution and delivery of this Security Agreement
does not violate any law or agreement governing any Debtor or to which any
Debtor is a party, and the Debtors' certificate or articles of incorporation and
bylaws or other organizational documents do not prohibit any term or condition
of this Security Agreement. The execution and delivery hereof is in the interest
of each of the Debtors.

         (d) Enforceability of Collateral. With respect to the Accounts, the
Collateral is enforceable in accordance with its terms, is genuine, and complies
in all material respects with

                                        6

<PAGE>

applicable laws concerning form, content and manner of preparation and
execution, and, to the best of the knowledge of the Debtors, all persons
appearing to be obligated on the Collateral have authority and capacity to
contract and are in fact obligated as they appear to be on the Collateral.

         (e) Accounts. All Accounts existing as of the date hereof are good and
valid Accounts representing an undisputed, bona fide indebtedness incurred by
the Account Debtors, and there exists no set-offs or counterclaims against any
such Accounts and no agreements under which any deductions or discounts may be
claimed with any Account Debtor except as disclosed to the Collateral Agent in
writing.

         (f) Removal of Collateral; Transactions Involving Collateral. To the
extent the Collateral consists of Accounts, General Intangibles, Negotiable
Collateral or Debtors' Books the records and other documents pertaining to the
Collateral shall be kept at the principal office of the Debtor that owns such
collateral, or at such other locations as are reasonably acceptable to the
Collateral Agent. Except as provided below, the Debtors shall keep the
non-mobile tangible Collateral at the location(s) at which they are kept
specified on Schedule A and shall maintain any certificate of title of any
tangible Collateral in the same jurisdiction as indicated on Schedule A. Except
for transactions in the ordinary course of business in accordance with past
practice or for sales or dispositions on arm's length terms and for fair
equivalent value, the Debtors shall not sell, offer to sell, or otherwise
transfer, dispose of or encumber any tangible Collateral. Without the prior
written consent of the Secured Parties, Debtors shall not sell, offer to sell,
or otherwise transfer, dispose of or encumber any intangible Collateral,
provided, however the Debtors may sell their interest in Velor Inc., a Delaware
corporation, and any other Collateral not related to Debtors' core business of
fluorescent disk multimedia technology provided that, at the Secured Parties'
option (A) 50% of the proceeds of such sale or other disposition in excess of
$1,500,000 are used to prepay the Debentures, or (B) 50% of the proceeds of such
sale or other disposition in excess of $1,500,000 are placed in a segregated
account in which the Collateral Agent has a perfected first priority security
interest. The Debtors shall not pledge, mortgage, encumber or otherwise permit
the Collateral to be subject to any lien, security interest, encumbrance, or
charge, other than the security interest provided for in this Security Agreement
and Permitted Liens (as set forth in the Exchange Agreement), without the prior
written consent of the Secured Parties which may be withheld for any reason in
the Secured Parties' sole discretion. Without the prior written consent of the
Secured Parties, no Collateral that is located in the United States shall be
moved outside of the United States except that Debtors can move tangible
Collateral among themselves provided (i) such move is in the ordinary course of
business consistent with past business practice, (ii) the Collateral Agent
continues to hold a perfected first priority security interest in such
Collateral and (iii) as to Collateral transfers to subsidiaries, the transferee
subsidiary has executed and provided to the Secured Parties a Guaranty in the
form of the Subsidiary Guarantee.

         (g) Title. As of the date hereof, the Debtors hold good and marketable
title to the Collateral, free and clear of all liens and encumbrances except for
the lien of this Security Agreement and Permitted Liens. No financing statement
or other evidence of a lien or transfer covering any of the Collateral is on
file in any public office in any jurisdiction other than those which reflect the
security interest created by this Security Agreement or Permitted Liens. The

                                        7

<PAGE>

Debtors shall defend the Collateral Agent's rights in the Collateral against any
and all claims and demands.

         (h) Prepayments. None of the Collateral has been prepaid by any Account
Debtor for any Accounts.

         (i) Collateral Schedules and Locations. On a monthly basis, the Debtors
shall deliver to the Collateral Agent and the Secured Parties schedules of the
Collateral, including such information as the Collateral Agent may require,
including without limitation names and addresses of Account Debtors, the
location of mobile goods or changes in any certificates of title. The Debtors
represent and warrant to the Collateral Agent and Secured Parties that Schedule
A is true, accurate and complete in all material respects and shall be updated
monthly by the Debtors to reflect any changes thereto.

         (j) Application of Payments Received With Respect to Collateral. Unless
an Event of Default has occurred and is continuing, any amounts received by or
on behalf of any Debtor with respect to any Account pledged as Collateral
hereunder may be used by such Debtor in the ordinary course of its business.
Following the occurrence and continuance of an Event of Default, any amounts
received by or on behalf of any Debtor with respect to any Account shall be
applied in the following order: (i) costs and expenses of the Collateral Agent
and Secured Parties incurred in connection with collecting the Indebtedness and
enforcing this Agreement; (i) unpaid interest due and owing on the Indebtedness
as of such date; and (iii) unpaid principal due and owing with respect to the
Indebtedness as of such date.

         (k) Possession and Collection of Accounts. Following an Event of
Default and following acceleration of the Indebtedness, the records and
documents evidencing the Accounts pledged as Collateral hereunder shall, upon
the Collateral Agent's request, be delivered to the Collateral Agent or their
agent and held in accordance with the terms of this Security Agreement.

         (l) Maintenance and Inspection of Collateral. The Debtors shall
maintain or cause to be maintained all tangible Collateral in good condition and
repair except for ordinary wear and tear. The Debtors will not commit or permit
damage to or destruction of the Collateral or any part of the Collateral. The
Collateral Agent and its designated representatives and agents shall have the
right at all reasonable times, upon reasonable advance notice, to examine,
inspect, and audit the Collateral wherever located and the books, records or any
property which is otherwise used in connection with the Collateral. The Debtors
shall immediately notify the Collateral Agent of all material cases involving
the return, rejection, repossession, loss or damage of or to any Collateral; of
any request for credit or adjustment or of any other dispute arising with
respect to the Collateral; and generally of all happenings and events materially
adversely affecting the Collateral or the value or the amount of the Collateral.

         (m) Taxes, Assessments and Liens. The Debtors will pay when due all
taxes, assessments and liens upon the Collateral, its use or operation and upon
the Transaction Documents. A Debtor may withhold any such payment or may elect
to contest any lien if such Debtor is in good faith conducting an appropriate
proceeding to contest the obligation to pay and so long as the Collateral
Agent's interest in the Collateral is not jeopardized in the Collateral

                                        8

<PAGE>

Agent's sole reasonable opinion. If any of the Collateral is subjected to a lien
which is not discharged or bonded, or the enforcement thereof stayed (in either
case without granting any security interests in any of the assets of any Debtor)
within fifteen (15) days, the Debtors shall deposit with the Collateral Agent
cash, a sufficient corporate surety bond or other security satisfactory to the
Collateral Agent (in their discretion) in an amount adequate to provide for the
discharge of the lien plus any interest, reasonable costs, attorneys' fees or
other charges that could accrue as a result of foreclosure or sale of the
Collateral. In any contest the Debtor or Debtors shall defend itself or
themselves and the Collateral Agent and shall satisfy any final adverse judgment
before enforcement against the Collateral. The Debtors shall name the Collateral
Agent as an additional obligee under any surety bond furnished in such contest
proceedings.

     (n) Incorporation by Reference. The Debtors hereby restate and affirm all
representations, warranties and agreements contained in the other Transaction
Documents (as of each date and time such representations and warranties are made
under each of the other Transaction Documents), the terms and conditions of
which are hereby incorporated herein by reference.

     (o) Compliance With Governmental Requirements. The Debtors shall comply
promptly with all laws, ordinances and regulations of all governmental
authorities applicable to the production, disposition, or use of the Collateral.
The Debtors may contest in good faith any such law, ordinance or regulation and
withhold compliance during any proceeding, including appropriate appeals, so
long as the Collateral Agent's interest in the Collateral, in the Collateral
Agent's sole reasonable opinion, is not jeopardized.

     (p) Insurance. The Debtors shall comply with all insurance requirements and
provisions set forth in the Transaction Documents.

     (q) The Debtors' Right to Possession and to Collect Accounts. Except as
otherwise provided herein, until the occurrence of an Event of Default or
acceleration of Indebtedness, the Debtors may have possession of the tangible
personal property and beneficial use of all the Collateral and may use it in any
lawful manner not inconsistent with this Security Agreement or the other
Transaction Documents, provided that the Debtors' right to possession and
beneficial use shall not apply to any Collateral where possession of the
Collateral by the Collateral Agent is required by law to perfect the Collateral
Agent's security interest in such Collateral. At any time an Event of Default
exists or following acceleration of Indebtedness, the Collateral Agent may
exercise its right to directly collect the Accounts and to notify Account
Debtors to make payments directly to the Collateral Agent for application to the
Indebtedness, and the Debtors authorize and direct the Account Debtors, if the
Collateral Agent exercises such right, to make payments on the Accounts to the
Collateral Agent. If the Collateral Agent at any time has possession of any
Collateral, whether before or after an Event of Default, the Collateral Agent
shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral if the Collateral Agent takes such action for
that purpose as the Debtors shall reasonably request or as the Collateral Agent,
in the Collateral Agent's sole reasonable discretion, shall deem appropriate
under the circumstances, but failure to honor any request by the Debtors shall
not of itself be deemed to be a failure to exercise reasonable care. The
Collateral Agent shall not be required to take any steps necessary to preserve
any rights in the

                                        9

<PAGE>

Collateral against prior parties, nor to protect, preserve or maintain any
security interest given to secure the Collateral. The Collateral Agent shall
have the right to direct who shall collect and service the Accounts.

     (r) Transactions with Others. After the occurrence and during the
continuation of any Event of Default, the Collateral Agent may (i) extend the
time for payment or other performance, (ii) grant a renewal or change in terms
or conditions, or (iii) compromise, compound or release any obligation with an
Account Obligor as the Collateral Agent deems advisable, without obtaining the
prior written consent of the Debtors, and no such act or failure to act shall
affect the Collateral Agent's or Secured Parties' rights against the Debtors or
the Collateral.

     (s) Expenditures by the Collateral Agent. If not discharged or paid when
due, and provided that such items have not been contested as permitted herein,
the Collateral Agent may (but shall not be obligated to) discharge or pay any
amounts required to be discharged or paid by the Debtors under this Security
Agreement, including without limitation all taxes, liens, security interests,
encumbrances, and other claims, at any time levied or placed on the Collateral.
The Collateral Agent also may (but shall not be obligated to) pay all reasonable
costs for insuring, maintaining and preserving the Collateral. All such
expenditures incurred or paid by the Collateral Agent for such purposes will
then bear interest at the then rate charged under the Debentures from the date
incurred or paid by the Collateral Agent to the date of repayment by the
Debtors. All such expenses shall become a part of the Indebtedness and, at the
Collateral Agent's option, will (i) be payable on demand or (ii) be added to the
balance of the Debentures becoming a part of the outstanding principal amount
due and payable on the Interest Payment Dates (as defined in the Debentures).
This Security Agreement also will secure payment of these amounts. Such right
under this subsection shall be in addition to all other rights and remedies to
which the Collateral Agent and Secured Parties may be entitled upon the
occurrence of an Event of Default.

     (t) Sale or Factoring of Accounts; Release of Accounts. Except with respect
to Permitted Liens, or as otherwise expressly permitted herein, the Debtors
shall not sell or otherwise transfer or encumber any of the Accounts, or other
Collateral without the Secured Parties' written consent. It is expressly agreed
that the Secured Parties are under no obligation to grant such a consent and
will do so only in its sole and absolute discretion on terms and conditions they
deem acceptable in their sole and absolute discretion.

     (u) In the event that in the future, any Accounts or Inventory are held by
subsidiaries, affiliates or joint ventures of the Debtors who are not a party to
this Agreement, then the Debtors shall cause such entities to grant the
Collateral Agent an exclusive first priority lien in such Accounts and
Inventory, to cause such entities to enter into security agreements reasonably
satisfactory to the Collateral Agent, and to take all actions necessary to
perfect such security interests.

     (v) Debt. The Company has no Debt other than Debt created under the
Transaction Documents or as disclosed therein. None of the Subsidiaries have any
Debt.

                                       10

<PAGE>

            (w) Monthly Compliance Certificate. On the last business day of each
calendar month, the Company shall deliver a certificate executed by the Chief
Financial Officer of the Company stating that each of the representations made
by the Debtors in this Security Agreement are true as of the date of such
certificate and no default or Event of Default has occurred under this Security
Agreement.

SECTION 3:   EVENTS OF DEFAULT; REMEDIES

     3.1    Events of Default. Each of the following shall constitute an Event
of Default under this Security Agreement:

            (a) Event of Default under Debentures. An Event of Default shall
have occurred under the Debentures.

            (b) Other Defaults. Failure of any Debtor to comply with or to
perform when due or required (after the expiration of any applicable stated cure
periods) any term, obligation, covenant or condition contained in this Security
Agreement.

            (c) False Statements. Any warranty, representation or statement made
or furnished to the Collateral Agent or the Secured Parties by or on behalf of
the Debtors under this Security Agreement or any certificate or schedule
required thereby, including but not limited to those required by Sections 2.2(i)
and (x) hereof, is false or misleading in any material respect, either now or at
the time made or furnished.

            (d) Defective Collateralization. This Security Agreement ceases to
be in full force and effect (including failure to create a valid and perfected
security interest or lien as intended) at any time and for any reason.

            (e) Material Adverse Change. the Collateral Agent shall have
determined in good faith (which determination shall be conclusive) that a
material adverse change has occurred in the condition, value or operation of a
material portion of the Collateral.

     3.2    Rights and Remedies on Default. If an Event of Default occurs and is
continuing under this Security Agreement, at any time thereafter, the Collateral
Agent and the Secured Parties shall have all the rights of a secured party under
the New York Uniform Commercial Code. In addition and without limitation, the
Collateral Agent and the Secured Parties may exercise any one or more of the
following rights and remedies:

            (a) Accelerate Indebtedness. The Collateral Agent may declare the
entire Indebtedness immediately due and payable, without notice.

            (b) Assemble Collateral. The Collateral Agent may require the
Debtors to deliver to the Collateral Agent all or any portion of the Collateral
and other documents relating to the Collateral. the Collateral Agent may require
the Debtors to assemble the Collateral and make it available to the Collateral
Agent at a place to be designated by the Collateral Agent. The Collateral Agent
also shall have full power to enter upon the property of the Debtors to take
possession of and remove the Collateral. If the Collateral contains other goods
not covered by this Security Agreement at the time of repossession, the Debtors
agree that the Collateral Agent

                                       11

<PAGE>

may take such other goods, provided that the Collateral Agent makes reasonable
efforts to return them to the Debtors after repossession.

            (c) Sell the Collateral. The Collateral Agent shall have full power
to sell, lease, transfer, or otherwise deal with the Collateral or proceeds
thereof in its own name or that of the Debtors. The Collateral Agent may sell
the Collateral at public auction or private sale. Unless the Collateral
threatens to decline speedily in value or is of a type customarily sold on a
recognized market, the Collateral Agent will give the Debtors reasonable notice
of the time after which any private sale or any other intended disposition of
the Collateral is to be made. The requirements of reasonable notice shall be met
if such notice is given at least ten (10) days before the time of the sale or
disposition. All expenses relating to the disposition of the Collateral,
including without limitation the expenses of retaking, holding, insuring,
preparing for sale and selling the Collateral, shall become a part of the
Indebtedness secured by this Security Agreement and shall be payable on demand,
with interest at the lower of eighteen percent (18%) per annum or the highest
rate permitted by law from date of expenditure until repaid.

            (d) Foreclosure. Maintain a judicial suit for foreclosure and sale
of the Collateral.

            (e) Appoint Receiver. To the extent permitted by applicable law, the
Collateral Agent shall have the following rights and remedies regarding the
appointment of a receiver: (i) the Collateral Agent may have a receiver
appointed as a matter of right, (ii) the receiver may be an employee of the
Collateral Agent and may serve without band, and (iii) all fees of the receiver
and the receiver's attorney shall become part of the Indebtedness secured by
this Security Agreement and shall be payable on demand, with interest at the
lower of eighteen percent (18%) per annum or the highest rate permitted by law
from date of expenditure until repaid.

            (f) Transfer Title. Effect transfer of title upon sale of all or
part of the Collateral. For this purpose, the Debtors irrevocably appoint the
Collateral Agent, acting singly, as its attorneys-in-fact to execute
endorsements, assignments and instruments in the name of the Debtors as shall be
necessary or reasonable.

            (g) Collect Revenues, Apply Accounts. The Collateral Agent, either
itself or through a receiver, may collect the payments, rents, income, and
revenues from the Collateral. The Collateral Agent may at any time in its
discretion transfer any Collateral into its own names or that of its nominees
and receive the payments, rents, income, and revenues therefrom and hold the
same as security for the Indebtedness or apply it to payment of the Indebtedness
in such order of preference as the Collateral Agent may determine. The
Collateral Agent may demand, collect, receipt for, settle, compromise, adjust,
sue for, foreclose, or realize on the Collateral as the Collateral Agent may
determine, whether or not the Indebtedness is then due. For these purposes, the
Collateral Agent may, on behalf of and in the name of the Debtors, open and
dispose of mail addressed to any Debtor; change any address to which mail and
payments are to be sent; and endorse notes, checks, drafts, money orders,
documents of title, instruments and items pertaining to payment, shipment or
storage of any Collateral. To facilitate collection, the Collateral Agent may,
notify Account Debtors and obligors on any Collateral to make payments directly
to the Collateral Agent.

                                       12

<PAGE>

            (h) Obtain Deficiency. If the Collateral Agent chooses to sell any
or all of the Collateral and/or pursue any other remedy available hereunder,
under any other agreement, at law or in equity, the Collateral Agent may obtain
a judgment against the Debtors for any deficiency remaining on the Indebtedness
due to the Secured Parties after application of all amounts received from the
exercise of the rights provided in this Security Agreement. The Debtors shall be
liable for a deficiency even if the transaction described in this Subsection is
a sale of accounts or chattel paper.

            (i) Application of Proceeds. The proceeds of any foreclosure or
            realization upon the Collateral shall be applied:

                (A) First, to the costs and expenses of collection;

                (B) Second, to overdue interest;

                (C) Third, to the outstanding principal amount of the
            Indebtedness; and

                (D) Fourth, any excess to the Debtors or other party or parties
            in accordance with applicable law or court order.

            (j) Other Rights and Remedies. The Collateral Agent shall have all
the rights and remedies of a secured creditor under the provisions of the New
York Uniform Commercial Code, as may be amended from time to time. In addition,
the Collateral Agent and the Secured Parties shall have and may exercise any or
all rights and remedies they may have available at law, in equity, or otherwise.

      3.3   Cumulative Remedies. All of the Secured Parties' rights and
remedies, whether evidenced by this Security Agreement, or the other Transaction
Documents or by any other writing, shall be cumulative and may be exercised
singularly or concurrently. Election by the Collateral Agent to pursue any
remedy shall not exclude pursuit of any other remedy, and an election to make
expenditures or to take action to perform an obligation of a Debtor under this
Security Agreement, after such Debtor's failure to perform, shall not affect the
Collateral Agent's right to declare a default and to exercise their remedies.

SECTION 3A.     PLEDGED SECURITIES

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

                                       13

<PAGE>

          (A)  The Debtors shall be entitled to exercise any and all voting and
     other consensual rights pertaining to the Pledged Securities or any part
     thereof for any purpose not inconsistent with the terms of this Security
     Agreement or the Transaction Documents; provided, however, that the Debtors
     shall not exercise or refrain from exercising any such right if such action
     would have a material adverse effect on the value of the Pledged Securities
     or any part thereof; and provided further that the Debtors shall give the
     Collateral Agent at least five days' prior written notice of the manner in
     which it intends to exercise, or the reasons for refraining from
     exercising, any such right.

          (B)  The Debtors shall be entitled to receive and retain any and all
     dividends and interest paid in respect of the Pledge Securities; provided,
     however, that any and all

               (i)   dividends and interest paid or payable other than in cash
          in respect of, and instruments and other property received, receivable
          or otherwise distributed in respect of, or in exchange for, any Pledge
          Securities,

               (ii)  dividends and other distributions paid or payable in cash
          in respect of any Pledge Securities in connection with a partial or
          total liquidation or dissolution or in connection with a reduction of
          capital, capital surplus or paid-in-surplus, and

               (iii) cash paid, payable or otherwise distributed in respect of
          principal of, or in redemption of, or in exchange for, any Pledged
          Securities

shall be, and shall be forthwith delivered to the Collateral Agent to hold as,
Collateral and shall, if received by the Debtors, be received in trust for the
benefit of the Collateral Agent, be segregated from the other property or funds
of the Debtors and be forthwith delivered to the Collateral Agent as Collateral
in the same form as so received (with any necessary endorsement) and such cash
received by the Collateral Agent will be deposited in an account held by the
Collateral Agent. The Debtors, promptly upon the request of the Collateral
Agent, shall execute such documents and do such acts as may be necessary or
desirable in the reasonable judgment of the Collateral Agent to give effect to
this clause (B).

          (C) The Debtors shall deliver to the Collateral Agent any distribution
     consisting of Subsidiary Shares or Further Securities immediately upon
     receipt, together with executed stock powers and corporate resolutions
     authorizing the transfer of title of such shares after an Event of Default
     pursuant to the terms of this Security Agreement.

          (D) The Collateral Agent shall execute and deliver (or cause to be
     executed and delivered) to the Debtors all such proxies and other
     instruments as Debtors may reasonably request for the purpose of enabling
     the Debtors to

                                       14

<PAGE>

          exercise the voting and other rights that it is entitled to exercise
          pursuant to clause (A) above and to receive the dividends or interest
          payments that it is authorized to receive and retain pursuant to
          clause (B) above.

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

               (A) All rights of Debtors (x) to exercise or refrain from
          exercising the voting and other consensual rights that it would
          otherwise be entitled to exercise pursuant to Section 3A(a)(A) shall,
          upon notice to Debtors by the Collateral Agent, cease and (y) to
          receive the dividends and interest payments that it would otherwise be
          authorized to receive and retain pursuant to Section 3A(a)(B) shall
          automatically cease, and all such rights shall thereupon become vested
          in the Collateral Agent, which shall thereupon have the sole right to
          exercise or refrain from exercising such voting and other consensual
          rights and to receive and hold as Pledge Securities such dividends,
          interest payments and other distributions. For the avoidance of doubt,
          the Collateral Agent is hereby granted an irrevocable proxy coupled
          with an interest to exercise all voting power with respect to the
          Subsidiary Shares and/or the Further Securities, effective upon the
          occurrence of an Event of Default.

               (B) All dividends, interest payments and other distributions that
          are received by the Debtors contrary to the provisions of clause (A)
          of this Section 3A(b) shall be received in trust for the benefit of
          the Collateral Agent, shall be segregated from other funds of Debtors
          and shall be forthwith paid over to the Collateral Agent as Collateral
          in the same form as so received (with any necessary endorsement).

SECTION 3B.    The Collateral Agent's Duties.

          (a)  Other than as specified in this Security Agreement and any
amendment hereto, the Collateral Agent shall not be required to take or refrain
from taking any actions, to exercise or refrain from exercising any rights, or
to make or refrain from making any requests unless it shall first receive proper
instructions from the Collateral Agent (or their respective successors or
assigns).

          (b)  The Collateral Agent shall hold all Collateral received by it,
and shall make disposition thereof, only in accordance with this Security
Agreement or any amendment thereto. Except for the safe custody of any
Collateral in its possession and the accounting for moneys actually received by
it hereunder, the Collateral Agent shall have no duty as to any Collateral, as
to ascertaining or taking action with respect to calls, conversions, exchanges,
maturities, tenders or other matters relative to any Pledged Securities, whether
or not the Collateral Agent or any the Collateral Agent has or is deemed to have
knowledge of such matters, or as to the taking of any necessary steps to
preserve rights against any parties or any other rights pertaining to any
Collateral.

          (c)  The Collateral Agent shall not be under any duty or obligation to
inspect, review or examine any document, instrument, certificate, agreement or
other papers to determine

                                       15

<PAGE>

that they are enforceable or that they are other than what they purport to be on
their face. The Collateral Agent shall hold any Collateral delivered to the
Collateral Agent as the agent of the Collateral Agent.

     (d) The duties and obligations of the Collateral Agent shall be determined
solely by the express provisions of this Security Agreement or any amendment
hereto or any instructions permitted hereby. The Collateral Agent shall have no
obligation with respect to any other matters covered in any other document other
than as expressly provided herein, or any amendment hereto. The Collateral Agent
shall not be liable except for the performance of such duties and obligations as
are specifically set forth in this Security Agreement or as set forth in a
written amendment to this Security Agreement executed by the parties hereto or
their successors or assigns. No representations, warranties, covenants or
obligations of the Collateral Agent shall be implied with respect to this
Agreement or the Collateral Agent's services hereunder. Without limiting the
generality of the foregoing, the Collateral Agent:

         (i)   shall use the same degree of care and skill as a reasonably
     prudent person would use in similar circumstances (without limiting the
     generality of the foregoing, the Collateral Agent shall be deemed to have
     exercised reasonable care in the custody and preservation of any Collateral
     in its possession if such Collateral is accorded treatment substantially
     equal to that which the Collateral Agent accords its own property of like
     tenor);

         (ii)  shall not be obligated to take any legal action hereunder that
     might in its reasonable judgment involve any expense or liability unless it
     has been furnished with reasonable indemnity;

         (iii) may rely on and shall be protected in acting in good faith upon
     any certificate, instrument, opinion, notice, letter, telegram or other
     document, or any security, delivered to it and in good faith believed by it
     to be genuine and to have been signed by the proper party or parties;

         (iv)  may rely on and shall be protected in acting in good faith upon
     the written instructions of the Collateral Agent;

         (v)   may consult its own independent counsel satisfactory to it and
     the opinion of such counsel shall be full and complete authorization and
     protection in respect of any action taken, suffered, or omitted by it
     hereunder in good faith and in furtherance of its duties hereunder, in
     accordance with the opinion of such counsel;

         (vi)  may execute any of the powers hereunder or perform any duties
     hereunder either directly or through agents or attorneys; and

         (vii) will be regarded as making no representation and having no
     responsibilities (except as expressly set forth herein) as to the validity,
     sufficiency, value, genuineness, ownership or transferability of any
     portion of the Collateral, and will not be required to and will not make
     any representations as to

                                       16

<PAGE>
          the validity, value or genuineness of any portion of the Collateral.

          (e) Neither the Collateral Agent nor any of its partners, agents or
employees, shall be liable for any error in judgment, for any mistake of fact or
for any action taken or omitted to be taken by it or them hereunder or in
connection herewith in good faith and believed by it or them to be within the
purview of this Security Agreement, except for its or their own gross
negligence, lack of good faith or willful misconduct. In no event shall the
Collateral Agent or its partners, officers, agents and employees be held liable
for any special, indirect or consequential damages resulting from any action
taken or omitted to be taken by it or them hereunder in connection herewith even
if advised of the possibility of such damages.

          (f) Whenever, in the administration of this Security Agreement, the
Collateral Agent reasonably shall deem it necessary that a matter be proved or
established prior to taking, suffering or omitting any action under this
Security Agreement, such matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate of the Secured Parties, and such certificate shall
be full warranty to the Collateral Agent for any action taken, suffered or
omitted under the provisions of this Agreement, upon the faith thereof.

SECTION 4:        MISCELLANEOUS PROVISIONS

     4.1   Entire Agreement; Amendments. This Security Agreement, together with
the other Transaction Documents, constitute the entire understanding and
agreement of the parties as to the matters set forth in this Security Agreement.
No alteration of or amendment to this Security Agreement shall be effective
unless given in writing and signed by the party or parties sought to be charged
or bound by the alteration or amendment.

     4.2   CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. THE VALIDITY OF THIS
           ------------------------------------------
SECURITY AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE
RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. THE
PARTIES IRREVOCABLY AND UNCONDITIONALLY AGREE (1) THAT ALL ACTIONS OR
PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND
LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE STATE OF NEW YORK,
NEW YORK COUNTY AND THAT THE PARTIES SHALL BE SUBJECT TO THE JURISDICTION OF
SUCH COURTS, AND (2) THAT SERVICE OF PROCESS BY CERTIFIED MAIL, RETURN RECEIPT
REQUESTED, SHALL CONSTITUTE PERSONAL SERVICE. EACH DEBTOR, THE COLLATERAL AGENT
AND THE SECURED PARTIES WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW,
ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO
OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS
SECTION 4.2. EACH DEBTOR, THE COLLATERAL AGENT AND THE SECURED PARTIES HEREBY
WAIVES THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF THIS SECURITY AGREEMENT OR ANY OF THE ACTIONS
CONTEMPLATED HEREIN, INCLUDING WITHOUT LIMITATION

                                       17

<PAGE>

CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH DEBTOR, THE COLLATERAL AGENT AND THE SECURED PARTIES
REPRESENTS THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY
WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE
EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT
TO A TRIAL BY THE COURT.

     4.3 Attorneys' Fees; Expenses. The Debtors agrees to pay, jointly and
severally upon demand, all of the Collateral Agent's costs and expenses,
including without limitation reasonable attorneys' fees and legal expenses,
incurred in connection with the enforcement of this Security Agreement. The
Collateral Agent may pay someone else to help enforce this Security Agreement,
and the Debtors shall pay the costs and expenses of such enforcement. Costs and
expenses include without limitation the Collateral Agent's reasonable attorneys'
fees and legal expenses whether or not there is a lawsuit, reasonable attorneys'
fees and legal expenses for bankruptcy proceedings (and including efforts to
modify or vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. The Debtors also shall pay all court costs
and such additional fees as may be directed by the court.

     4.4 Caption Headings. Caption headings in this Security Agreement are for
convenience purposes only and are not to be used to interpret or define the
provisions of this Security Agreement.

     4.5 Notices. All notices required to be given under this Security Agreement
shall be given in writing and shall be effective when actually delivered or two
(2) days after being deposited in the United States mail, first class, postage
prepaid, addressed to the party to whom the notice is to be given or, if via
facsimile, when sent via facsimile transmission to the party to whom the notice
is to be given and confirmation of such transmission has been received, at the
address and/or facsimile number shown below:

     if to the Collateral Agent

              Halifax Fund, L.P.
              c/o The Palladin Group, L.P.
              195 Maplewood Avenue
              Maplewood, New Jersey  07040
              Telephone: (973) 313-6477
              Facsimile: (973) 313-6491
              Attn: Maurice Hryshko

     With a copy to:

              Kleinberg, Kaplan, Wolff & Cohen, P.C.
              551 Fifth Avenue, 18/th/ Floor
              New York, New York 10176
              Telephone: (212) 986-6000
              Facsimile No: (212) 986-8866

                                       18

<PAGE>

              Attn:  Stephen M. Schultz, Esq.

     if to Halifax:

              Halifax Fund, L.P.
              c/o The Palladin Group, L.P.
              195 Maplewood Avenue
              Maplewood, New Jersey  07040
              Telephone: (973) 313-6477
              Facsimile: (973) 313-6491
              Attn: Maurice Hryshko

     With a copy to:

              Kleinberg, Kaplan, Wolff & Cohen, P.C.
              551 Fifth Avenue, 18/th/ Floor
              New York, New York 10176
              Telephone: (212) 986-6000
              Facsimile No: (212) 986-8866
              Attn: Stephen M. Schultz, Esq.

     If to the Debtors

              Constellation 3D, Inc.
              805 Third Avenue, 14/th/ Floor
              New York, New York  94005
              Telephone: (212) 308-3572
              Facsimile: (212) 308-3573
              Attn: Mr. Craig Weiner

     with a copy to:

              Baker & McKenzie
              1200 Brickell Avenue, 19/th/ Floor
              Miami, Florida 33131
              Telephone: (305) 789-8900
              Facsimile: (305) 789-8953
              Attn: Roy Larson

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

Any party may change its address for notices under this Security Agreement by
giving formal written notice to the other parties, specifying that the purpose
of the notice is to change the party's address. For notice purposes, the Debtors
agrees to keep the Collateral Agent informed at all times of the Debtors'
current addresses.

     4.6 Severability. The parties acknowledge and agree that the Collateral
Agent and

                                       19

<PAGE>

Secured Parties are not agents or partners of each other, that all
representations, warranties, covenants and agreements of the Collateral Agent
and Secured Parties hereunder are several and not joint, that the Collateral
Agent and Secured Parties shall not have any responsibility or liability for the
representations, warrants, agreements, acts or omissions of the other and that
any rights granted to "the Collateral Agent and Secured Parties" hereunder shall
be enforceable by each of the Collateral Agent and Secured Parties hereunder. If
a court of competent jurisdiction finds any provision of this Security Agreement
to be invalid or unenforceable as to any person or circumstance, such finding
shall not render that provision invalid or unenforceable as to any other persons
or circumstances. If feasible, any such offending provision shall be deemed to
be modified to be within the limits of enforceability or validity; however, if
the offending provision cannot be so modified, it shall be stricken, and all
other provisions of this Security Agreement in all other respects shall remain
valid and enforceable and such offending provision shall not be affected in any
other jurisdiction.

     4.7 Successor Interests. Subject to the limitations set forth above on
transfer of the Collateral, this Security Agreement shall be binding upon and
inure to the benefit of the parties, their successors and assigns. The Debtors
shall not, however, have the right to assign this Security Agreement without the
prior written consent of the Secured Parties which may be withheld for any
reason in the Secured Parties' sole discretion.

     4.8 Waiver. the Collateral Agent and Secured Parties shall not be deemed to
have waived any rights under this Security Agreement unless such waiver is given
in writing and signed by the Collateral Agent and Secured Parties. No delay or
omission on the part of the Collateral Agent and Secured Parties in exercising
any right shall operate as a waiver of such right or any other right. A waiver
by the Collateral Agent and Secured Parties of a provision of this Security
Agreement shall not prejudice or constitute a waiver of the Collateral Agent's
and Secured Parties' right otherwise to demand strict compliance with that
provision or any other provision of this Security Agreement. No prior waiver by
the Collateral Agent and Secured Parties, nor any course of dealing between the
Collateral Agent and Secured Parties and the Debtors, shall constitute a waiver
of any of the Collateral Agent's and Secured Parties' rights or of any of the
Debtors' obligations as to any future transactions. Whenever the consent of the
Collateral Agent and Secured Parties is required under this Security Agreement,
the granting of such consent by the Collateral Agent and Secured Parties in any
instance shall not constitute continuing consent to subsequent instances where
such consent is required and in all cases such consent may be granted or
withheld in the sole discretion of the Collateral Agent and Secured Parties.

     4.9 Indemnity. Except to the extent caused directly by the Collateral Agent
or a Secured Parties' gross negligence or wilful misconduct, the Debtors agree,
jointly and severally, to indemnify, pay and hold the Collateral Agent, each
Secured Party and the officers, partners, directors, employees, agents and
affiliates thereof (collectively, the "indemnitees") harmless from and against
any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, claims, costs, expenses and disbursements of any kind or
nature whatsoever (including, without limitation, the reasonable fees and
disbursements of counsel) that may be imposed on, incurred by, or asserted
against any indemnitee, in any manner relating to or arising out of this
Security Agreement and any action undertaken or contemplated hereby. This
indemnification shall survive the satisfaction and payment of the Indebtedness
and termination of

                                       20

<PAGE>
this Security Agreement.

     4.10 Subsidiary Liability. Anything herein or in any other to the contrary
notwithstanding, the maximum liability of each Subsidiary hereunder and under
the other Transaction Documents shall in no event exceed the amount allowed
under applicable federal and state laws, including laws relating to the
insolvency of debtors, fraudulent conveyance or transfer or laws affecting the
rights of creditors generally (after giving effect to the right of contribution
established in Section 4.11).

     4.11 Right Of Contribution. Each Debtor hereby agrees that to the extent
that a Debtor shall have paid more than its proportionate share of any payment
made hereunder, such Debtor shall be entitled to seek and receive contribution
from and against any other Debtor hereunder which has not paid its proportionate
share of such payment. Each Debtor's right of contribution shall be subject to
the terms and conditions of Section 4.12. The provisions of this Section 4.11
shall in no respect limit the obligations and liabilities of any Debtor to the
Secured Parties, and each Debtor shall remain liable to the Secured Parties for
the full amount for which such Debtor is obligated hereunder.

     4.12 No Subrogation. Notwithstanding any payment made by any Debtor
hereunder or any set-off or application of funds of any Debtor by the Secured
Parties, no Debtor shall be entitled to be subrogated to any of the rights of
the Secured Parties against a Debtor or any collateral security or guarantee or
right of offset held by the Secured Parties for the payment of the Indebtedness,
nor shall any Debtor seek or be entitled to seek any contribution or
reimbursement from another Debtor in respect of payments made by such Debtor
hereunder, until all amounts owing to the Secured Parties by the Debtors under
any Indebtedness Documents are paid in full. If any amount shall be paid to any
Debtor on account of such subrogation rights at any time when any such amounts
shall not have been paid in full, such amount shall be held by such Debtor in
trust for the Secured Parties, segregated from other funds of such Debtor, and
shall, forthwith upon receipt by such Debtor, be turned over to the Secured
Parties in the exact form received by such Debtor (duly indorsed by such Debtor
to the Investor, if required), to be applied against the Indebtedness of the
Debtors under the Indebtedness Documents, whether matured or unmatured, in such
order as the Secured Parties may determine.

                            [SIGNATURE PAGE FOLLOWS]

                                       21

<PAGE>
         IN WITNESS WHEREOF, the parties hereto have caused this Security
Agreement to be executed as of the date first written above.

                                 CONSTELLATION 3D, INC.

                                 By: /s/ Eugene Levich
                                     -----------------
                                 Name:
                                 Title: Chief Executive Officer

                                 VELOR INCORPORATED

                                 By: /s/ Eugene Levich
                                     Name:
                                     Title:

                                 TRIDSTORE IP, L.L.C.

                                 By: /s/ Eugene Levich
                                 Name:
                                 Title:

                                 TRID STORE VOSTOK

                                 By: /s/ Eugene Levich
                                     Name:
                                     Title:

                                 C-TRID ISRAEL LTD

                                 By: /s/ Eugene Levich
                                     Name:
                                     Title:

                                 TRIDSV, INC.

                                       22

<PAGE>

                                      By: /s/ Eugene Levich
                                          Name:
                                          Title:

                                      CONSTELLATION 3D TRUST LLC

                                      By: /s/ Eugene Levich
                                          Name:
                                          Title:

                                       23

<PAGE>

                                 COLLATERAL AGENT

                                 HALIFAX FUND, L.P.

                                 By:      THE PALLADIN GROUP, L.P.
                                          Attorney-in-fact

                                          By: /s/ Maurice Hryshko.
                                          Name:
                                          Title: Counsel

                                 HALIFAX FUND, L.P.

                                 By:      THE PALLADIN GROUP, L.P.
                                          Attorney-in Fact

                                 By:      /s/ Maurice Hryshko
                                          Name:
                                          Title: Counsel

                                       24

<PAGE>

                                   SCHEDULE A

              Identification, Ownership and Location of Collateral
              ----------------------------------------------------

                             Please see attachments.

                                       25

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