Document:

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                                                                    Exhibit 10.1

                          SECURITIES PURCHASE AGREEMENT

     SECURITIES PURCHASE AGREEMENT (the "AGREEMENT"), dated as of November 21,
2006, by and among Catuity, Inc., a Delaware corporation, with its principal
executive offices located at 2711 E. Jefferson Avenue, Detroit, Michigan 48207
(the "COMPANY"), and the investors listed on the Schedule of Buyers attached
hereto (individually, a "BUYER" and collectively, the "BUYERS").

     WHEREAS:

     A. The Company and each Buyer is executing and delivering this Agreement in
reliance upon the exemption from securities registration afforded by Section
4(2) of the Securities Act of 1933, as amended (the "1933 ACT"), and Rule 506 of
Regulation D ("REGULATION D") as promulgated by the United States Securities and
Exchange Commission (the "SEC") under the 1933 Act.

     B. The Company has authorized a new series of senior secured convertible
notes of the Company which notes shall be convertible into the Company's common
stock, par value $0.001 per share (the "COMMON STOCK"), in accordance with the
terms of the Notes (as defined below).

     C. Each Buyer wishes to purchase, and the Company wishes to sell, upon the
terms and conditions stated in this Agreement, (i) that aggregate principal
amount of the Notes, in substantially the form attached hereto as Exhibit A (the
"NOTES"), set forth opposite such Buyer's name in column (3) on the Schedule of
Buyers attached hereto (which aggregate amount for all Buyers shall be
$1,800,000) (as converted, collectively, the "NOTE CONVERSION SHARES"), and (ii)
warrants, in substantially the form attached hereto as Exhibit B (the
"WARRANTS"), to acquire that number of shares of Common Stock (as exercised,
collectively, the "WARRANT SHARES") set forth opposite such Buyer's name in
column (4) on the Schedule of Note Buyers.

     D. The Company has authorized a new series of convertible preferred stock
of the Company designated as Series A Cumulative Preferred Stock, the terms of
which are set forth in the certificate of designation for such series of
preferred stock (the "CERTIFICATE OF DESIGNATIONS") in the form attached hereto
as Exhibit D (together with any convertible Preferred Stock issued in
replacement thereof in accordance with the terms thereof, the "PREFERRED
STOCK"), which Preferred Stock shall be convertible into Common Stock, in
accordance with the terms of the Certificate of Designations.

     E. Each Buyer wishes to purchase, and the Company wishes to sell, upon the
terms and conditions stated in this Agreement, that aggregate number of
Preferred Stock set forth opposite such Buyer's name in column (3) on the
Schedule of Buyers (which aggregate number for all Buyers shall be up to 700
shares of Preferred Stock and the shares of Common Stock into which such
Preferred Stock are convertible being referred to herein as the "PREFERRED STOCK
CONVERSION SHARES" and together with the Note Conversion Shares, the "CONVERSION
SHARES").

     F. Contemporaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement,
substantially in the

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form attached hereto as Exhibit F (the "REGISTRATION RIGHTS AGREEMENT"),
pursuant to which the Company has agreed to provide certain registration rights
with respect to the Conversion Shares under the 1933 Act and the rules and
regulations promulgated thereunder, and applicable state securities laws.

     G. The Notes, the Preferred Stock, the Conversion Shares, the Warrants and
the Warrant Shares collectively are referred to herein as the "SECURITIES".

     H. The Notes will rank senior to all future indebtedness of the Company,
subject to Permitted Senior Indebtedness (as defined in the Notes), and will be
secured by a perfected security interest in all of the assets of the Company and
each of the Company's subsidiaries, as evidenced by the security agreement
attached hereto as Exhibit G (the "SECURITY AGREEMENT") and together with the
Guaranty, attached hereto as Exhibit H (the "GUARANTY"), and any ancillary
documents related thereto, collectively the "SECURITY DOCUMENTS").

     NOW, THEREFORE, the Company and each Buyer hereby agree as follows:

1. PURCHASE AND SALE OF NOTES, PREFERRED STOCK AND WARRANTS.

     (a) Purchase of Notes, Preferred Stock and Warrants.

     (b) Subject to the satisfaction (or waiver) of the conditions set forth in
Sections 6 and 7 below, the Company shall issue and sell to each Buyer, and each
Buyer severally, but not jointly, will purchase from the Company on the Closing
Date (as defined below), (w) a principal amount of Notes as is set forth
opposite such Buyer's name in column (3) on the Schedule of Note Buyers, (x)
Warrants to acquire that number of Warrant Shares as is set forth opposite such
Buyer's name in column (4) on the Schedule of Note Buyers, (y) the number of
Preferred Stock as is set forth opposite such Buyer's name in column (3) on the
Schedule of Preferred Stock Buyers (the "CLOSING").

          (i) Closing. The date and time of the Closing (the "CLOSING DATE")
     shall be 10:00 a.m., New York City Time, on November 22, 2006 (or such
     later date as is mutually agreed to by the Company and the Required Holders
     (as defined in the Note and Certificate of Designation)) after notification
     of satisfaction (or waiver) of the conditions to the Closing set forth in
     Sections 6 and 7 below at the offices of Gottbetter & Partners, LLP, 488
     Madison Avenue, New York, NY 10022.

          (ii) Notes and Warrants Purchase Price. The aggregate purchase price
     for the Notes and the Warrants to be purchased by each Buyer at the Closing
     (the "NOTE PURCHASE PRICE") shall be 90% of their face value. Each Buyer
     shall pay $.90 for each $1.00 of principal amount of Notes and related
     Warrants to be purchased by such Buyer at the Closing.

          (iii) Preferred Stock Purchase Price. The aggregate purchase price for
     the Preferred Stock to be purchased by each Buyer (the "PREFERRED STOCK
     PURCHASE PRICE") shall be the amount set forth opposite such Buyer's name
     in column (4) on the

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     Schedule of Preferred Stock Buyers. Each Buyer shall pay $900 for each
     share of Preferred Stock to be purchased by such Buyer at the Closing.

     (c) Form of Payment. On the Closing Date, (i) each Buyer shall pay its
Purchase Price to the Company for the Notes, Preferred Stock and the Warrants to
be issued and sold to such Buyer at the Closing by wire transfer of immediately
available funds in accordance with the Company's written wire instructions and
(ii) the Company shall deliver to each Buyer (A) the Notes (in the principal
amounts as such Buyer shall have requested prior to the Closing) which such
Buyer is then purchasing, (B) the Preferred Stock which such Buyer is then
buying and (C) the Warrants (in the amounts as such Buyer shall have requested
prior to the Closing) which such Buyer is purchasing, in each case duly executed
on behalf of the Company and registered in the name of such Buyer or its
designee.

     (d) Closing. The Closing shall occur on the applicable Closing Date at the
offices of Gottbetter & Partners, LLP, 488 Madison Avenue, New York, NY 10022.

2. BUYER'S REPRESENTATIONS AND WARRANTIES.

     Each Buyer represents and warrants with respect to only itself that:

     (a) No Public Sale or Distribution. Such Buyer is (i) acquiring the Notes,
the Preferred Stock and the Warrants and (ii) upon conversion of the Notes and
the Preferred Stock and exercise of the Warrants (other than pursuant to a
Cashless Exercise (as defined in the Warrants)) will acquire the Conversion
Shares issuable upon conversion of the Notes and the Preferred Stock and the
Warrant Shares issuable upon exercise of the Warrants, for its own account and
not with a view towards, or for resale in connection with, the public sale or
distribution thereof, except pursuant to sales registered or exempted under the
1933 Act; provided, however, that by making the representations herein, such
Buyer does not agree to hold any of the Securities for any minimum or other
specific term and reserves the right to dispose of the Securities at any time in
accordance with or pursuant to a registration statement or an exemption under
the 1933 Act. Such Buyer is acquiring the Securities hereunder in the ordinary
course of its business. Such Buyer does not presently have any agreement or
understanding, directly or indirectly, with any Person to distribute any of the
Securities.

     (b) Accredited Investor Status. Such Buyer is an "accredited investor" as
that term is defined in Rule 501(a) under the 1933 Act. Such Buyer is not a
registered broker-dealer under Section 15 of the 1934 Act.

     (c) Reliance on Exemptions. Such Buyer understands that the Securities are
being offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying in part upon the truth and accuracy of, and such
Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire the Securities.

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     (d) Information. Such Buyer and its advisors, if any, have been furnished
with all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Securities which
have been requested by such Buyer. Such Buyer and its advisors, if any, have
been afforded the opportunity to ask questions of the Company. Neither such
inquiries nor any other due diligence investigations conducted by such Buyer or
its advisors, if any, or its representatives shall modify, amend or affect such
Buyer's right to rely on the Company's representations and warranties contained
herein. Such Buyer understands that its investment in the Securities involves a
high degree of risk. Such Buyer has sought such accounting, legal and tax advice
as it has considered necessary to make an informed investment decision with
respect to its acquisition of the Securities.

     (e) No Governmental Review. Such Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.

     (f) Transfer or Resale. Such Buyer understands that except as provided in
the Registration Rights Agreement: (i) the Securities have not been and are not
being registered under the 1933 Act or any state securities laws, and may not be
offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) such Buyer shall have delivered to the Company an
opinion of counsel, in a form reasonably acceptable to the Company, to the
effect that such Securities to be sold, assigned or transferred may be sold,
assigned or transferred pursuant to an exemption from such registration, or (C)
such Buyer provides the Company with reasonable assurance that such Securities
can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A
promulgated under the 1933 Act, as amended, (or a successor rule thereto)
(collectively, "RULE 144"); (ii) any sale of the Securities made in reliance on
Rule 144 may be made only in accordance with the terms of Rule 144 and further,
if Rule 144 is not applicable, any resale of the Securities under circumstances
in which the seller (or the Person (as defined in Section 3(s)) through whom the
sale is made) may be deemed to be an underwriter (as that term is defined in the
1933 Act) may require compliance with some other exemption under the 1933 Act or
the rules and regulations of the SEC thereunder; and (iii) neither the Company
nor any other Person is under any obligation to register the Securities under
the 1933 Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder. The Notes, Preferred Stock or Warrants
may be pledged in connection with a bona fide margin account or other loan or
financing arrangement secured by the Notes, Preferred Stock or Warrants and such
pledge of Securities shall not be deemed to be a transfer, sale or assignment of
the Notes, Preferred Stock or Warrants hereunder, and no Buyer effecting a
pledge of Notes, Preferred Stock or Warrants shall be required to provide the
Company with any notice thereof or otherwise make any delivery to the Company
pursuant to this Agreement or any other Transaction Document (as defined in
Section 3(b)), including, without limitation, this Section 2(f).

     (g) Legends. Such Buyer understands that the certificates or other
instruments representing the Notes, the Preferred Stock and the Warrants and,
until such time as the resale of the Conversion Shares have been registered
under the 1933 Act as contemplated by each of the

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Registration Rights Agreement, the stock certificates representing the
Conversion Shares and the Warrant Shares, except as set forth below, shall bear
any legend as required by the "blue sky" laws of any state and a restrictive
legend in substantially the following form (and a stop-transfer order may be
placed against transfer of such stock certificates):

     [NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS
     CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
     [CONVERTIBLE] [EXERCISABLE] HAVE BEEN] [THE SECURITIES REPRESENTED BY THIS
     CERTIFICATE HAVE NOT BEEN] REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
     AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE
     OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A)
     AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES
     ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A FORM REASONABLY
     ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT
     OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.
     NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION
     WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT
     SECURED BY THE SECURITIES.

The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if, unless otherwise required by state securities laws, (i) such
Securities are registered for resale under the 1933 Act, (ii) in connection with
a sale, assignment or other transfer, such holder provides the Company with an
opinion of counsel, in a form reasonably acceptable to the Company, to the
effect that such sale, assignment or transfer of the Securities may be made
without registration under the applicable requirements of the 1933 Act, or (iii)
such holder provides the Company with reasonable assurance that the Securities
can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A.

     (h) Validity; Enforcement. This Agreement, the Registration Rights
Agreement and the Security Documents to which such Buyer is a party have been
duly and validly authorized, executed and delivered on behalf of such Buyer and
shall constitute the legal, valid and binding obligations of such Buyer
enforceable against such Buyer in accordance with their respective terms, except
as such enforceability may be limited by general principles of equity or to
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and
other similar laws relating to, or affecting generally, the enforcement of
applicable creditors' rights and remedies.

     (i) No Conflicts. The execution, delivery and performance by such Buyer of
this Agreement, the Registration Rights Agreement and the Security Documents to
which such Buyer is a party and the consummation by such Buyer of the
transactions contemplated hereby and

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thereby will not (i) result in a violation of the organizational documents of
such Buyer or (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 agreement, indenture or instrument to which such Buyer is a party, or (iii)
result in a violation of any law, rule, regulation, order, judgment or decree
(including federal and state securities laws) applicable to such Buyer, except
in the case of clauses (ii) and (iii) above, for such conflicts, defaults,
rights or violations which would not, individually or in the aggregate,
reasonably be expected to have a material adverse effect on the ability of such
Buyer to perform its obligations hereunder.

     (j) Residency. Such Buyer is a resident of that jurisdiction specified
below its address on the Schedule of Buyers.

     (k) Independent Investment Decision. Such Buyer has independently evaluated
the merits of its decision to purchase Securities pursuant to the Transaction
Documents (as defined herein), and such Buyer confirms that it has not relied on
the advice of any other Buyer's business and/or legal counsel in making such
decision.

     (l) Certain Trading Activities. Such Buyer has not directly or indirectly,
nor has any Person acting on behalf of or pursuant to any understanding with
such Buyer, engaged in any transactions in the securities of the Company
(including, without limitations, any Short Sales involving the Company's
securities) since the time that such Buyer was first contacted by the Company
regarding the transactions contemplated hereby. Such Buyer covenants that
neither it nor any Person acting on its behalf or pursuant to any understanding
with it will engage in any transactions in the securities of the Company
(including Short Sales) prior to the time that the transactions contemplated by
this Agreement are publicly disclosed. For the purpose of this Agreement, "SHORT
SALES" include, without limitation, all "short sales" as defined in Rule 200
promulgated under Regulation SHO under the 1934 Act and all types of direct and
indirect stock pledges, forward sale contracts, options, puts, calls, swaps and
similar arrangements (including on a total return basis), and sales and other
transactions through non-US broker dealers or foreign regulated brokers.

     (m) Limited Ownership. The purchase by such Buyer of the Securities
issuable to it at any Closing will not result in such Buyer or in the aggregate
with other Buyers (individually or together with other Persons with whom such
Buyer has identified, or will have identified, itself as part of a "group" in a
public filing made with the SEC involving the Company's securities) acquiring,
or obtaining the right to acquire, in excess of 19.999% of the outstanding
shares of Common Stock or the voting power of the Company on a post transaction
basis that assumes that the Closing shall have occurred. Such Buyer does not
presently intend to, alone or together with others, make a public filing with
the SEC to disclose that it has (or that it together with such other Persons
have) acquired, or obtained the right to acquire, as a result of the Closing
(when added to any other securities of the Company that it or they then own or
have the right to acquire), in excess of 19.999% of the outstanding shares of
Common Stock or the voting power of the Company on a post transaction basis that
assumes that the Closing shall have occurred.

     (n) General Solicitation. Such Buyer is not purchasing the Securities as a
result of

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any advertisement, article, notice or other communication regarding the
Securities published in any newspaper, magazine or similar media or broadcast
over television or radio or presented at any seminar.

     (o) Organization. Such Buyer is an entity duly organized, validly existing
and in good standing under the laws of the jurisdiction of its organization with
the requisite corporate or partnership power and authority to enter into and to
consummate the transactions contemplated by the applicable Transaction Documents
and otherwise to carry out its obligations thereunder.

     (p) Prohibited Transactions. During the last ten (10) days prior to the
date hereof, neither such Buyer nor any Person acting on behalf of or pursuant
to any understanding with such Buyer has, directly or indirectly, effected or
agreed to effect any short sale, whether or not against the box, established any
"put equivalent position" (as defined in Rule 16a-1(h) under the Exchange Act)
with respect to the Common Stock, granted any other right (including, without
limitation, any put or call option) with respect to the Common Stock or with
respect to any security that includes, relates to or derived any significant
part of its value from the Common Stock or otherwise sought to hedge its
position in the Securities (but not including any actions to secure available
shares to borrow in order to effect short sales or similar transactions in the
future) (each, a "PROHIBITED TRANSACTION"). Prior to the earliest to occur of
(i) the termination of this Agreement or (ii) the date of the 8-K Filing as
described in Section 4(i), such Buyer shall not, and shall cause any Person
acting on behalf of or pursuant to any understanding with such Buyer not to,
engage, directly or indirectly, in a Prohibited Transaction. Such Buyer
acknowledges that the representations, warranties and covenants contained in
this Section 2(p) are being made for the benefit of the Buyers as well as the
Company.

3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

     The Company represents and warrants to each of the Buyers that:

     (a) Organization and Qualification. The Company and its "SUBSIDIARIES"
(which for purposes of this Agreement means any joint venture or any entity in
which the Company, directly or indirectly, owns capital stock or holds an equity
or similar interest) are entities duly organized and validly existing in good
standing under the laws of the jurisdiction in which they are formed, and have
the requisite power and authority to own their properties and to carry on their
business as now being conducted. Each of the Company and its Subsidiaries is
duly qualified as a foreign entity 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. As used in this Agreement, "MATERIAL ADVERSE EFFECT"
means any material adverse effect on the business, properties, assets,
operations, results of operations, condition (financial or otherwise) or
prospects of the Company and its Subsidiaries, taken as a whole, or on the
transactions contemplated hereby and the other Transaction Documents or by the
agreements and instruments to be entered into in connection herewith or
therewith, or on the authority or ability of the Company to perform its
obligations under the Transaction Documents (as defined below). The Company has
no Subsidiaries except as set forth on Schedule 3(a). The

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Company owns, directly or indirectly, all of the capital stock or other equity
interests of each Subsidiary free and clear of any liens, and all the issued and
outstanding shares of capital stock of each Subsidiary are validly issued and
are fully paid, non-assessable and free of preemptive and similar rights to
subscribe for or purchase securities.

     (b) Authorization; Enforcement; Validity. The Company has the requisite
power and authority to enter into and perform its obligations under this
Agreement, the Notes, the Preferred Stock, the Certificate of Designations, the
Warrants, the Registration Rights Agreement, the Security Documents, the Power
of Attorney (as defined in Section 5(b)), the Transfer Agent Letter (as defined
in Section 5(b)), and each of the other agreements entered into by the parties
hereto in connection with the transactions contemplated by this Agreement
(collectively, the "TRANSACTION DOCUMENTS") and to issue the Securities in
accordance with the terms hereof and thereof. The execution and delivery of this
Agreement and the other Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby,
including, without limitation, the issuance of the Notes, the Preferred Stock
and the Warrants, the reservation for issuance and the issuance of the
Conversion Shares issuable upon conversion of the Notes or the Preferred Stock,
the reservation for issuance and issuance of Warrant Shares issuable upon
exercise of the Warrants, and the granting of a security interest in the
Collateral (as defined in the Security Documents) have been duly authorized by
the Company's Board of Directors and (other than (i) the filing of appropriate
UCC financing statements with the appropriate states and other authorities
pursuant to the Security Agreement, (ii) the filing of a Form D under Regulation
D of the 1933 Act and (iii) the filing with the SEC of one or more Registration
Statements in accordance with the requirements of the Registration Rights
Agreement) no further filing, consent, or authorization is required by the
Company, its Board of Directors or its stockholders. This Agreement and the
other Transaction Documents of even date herewith have been duly executed and
delivered by the Company, and constitute the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective 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 applicable creditors' rights and remedies.

     (c) Issuance of Securities. The issuance of the Notes, the Preferred Stock
and the Warrants are duly authorized and are free from all taxes, liens and
charges with respect to the issue thereof and the Preferred Stock shall be
entitled to the rights and preferences set forth in the Certificate of
Designations. As of the Closing, a number of shares of Common Stock shall have
been duly authorized and reserved for issuance which equals 300% of the maximum
number of shares Common Stock issuable upon conversion of the Notes and the
Preferred Stock and upon exercise of the Warrants (without taking into account
any limitations on ownership set forth in the Notes or the Certificate of
Designations). Upon conversion in accordance with the Notes or Preferred Stock
or exercise in accordance with the Warrants, as the case may be, the Conversion
Shares and the Warrant Shares, respectively, will be validly issued, fully paid
and nonassessable and free from all preemptive or similar rights, taxes, liens
and charges with respect to the issue thereof, with the holders being entitled
to all rights accorded to a holder of Common Stock. The offer and issuance by
the Company of the Securities is exempt from registration under the 1933 Act.
The Certificate of Designations shall be filed with the Secretary of State of
Delaware on or

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prior to the Closing.

     (d) No Conflicts. The execution, delivery and performance of this Agreement
and the other Transaction Documents by the Company and the consummation by the
Company of the transactions contemplated hereby and thereby (including, without
limitation, the issuance of the Notes, the Preferred Stock and the Warrants, the
granting of a security interest in the Collateral and reservation for issuance
and issuance of the Conversion Shares and the Warrant Shares) will not (i)
result in a violation of the Articles of Incorporation (as defined in Section
3(r)) of the Company or any of its Subsidiaries, any capital stock of the
Company or Bylaws (as defined in Section 3(r)) of the Company or any of its
Subsidiaries or the Certificate of Designations or (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 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 federal and state securities laws and regulations and the rules and
regulations of the Nasdaq Small Cap Market (the "PRINCIPAL MARKET") 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.

     (e) Consents. Other than as set forth on Schedule 3(e), 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 or any other Person in order for it to execute, deliver
or perform any of its obligations under or contemplated by the Transaction
Documents, in each case 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 Closing Date, and the Company and its Subsidiaries
are unaware of any facts or circumstances which might prevent the Company from
obtaining or effecting any of the registration, application or filings pursuant
to the preceding sentence. The Company is not in violation of the applicable
listing requirements of the Principal Market and has no knowledge of any facts
which would reasonably lead to delisting or suspension of the Common Stock in
the foreseeable future. The issuance by the Company of the Securities shall not
have the effect of delisting or suspending the Common Stock from the Principal
Market.

     (f) Acknowledgment Regarding Buyer's Purchase of Securities. The Company
acknowledges and agrees that each Buyer is acting solely in the capacity of an
arm's length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby and that no Buyer is (i) an officer
or director of the Company, (ii) to the knowledge of the Company, an "affiliate"
of the Company (as defined in Rule 144) or (iii) to the knowledge of the
Company, a "beneficial owner" of more than 10% of the shares of Common Stock (as
defined for purposes of Rule 13d-3 of the Securities Exchange Act of 1934, as
amended (the "1934 ACT"). The Company further acknowledges that no Buyer is
acting as a financial advisor or fiduciary of the Company (or in any similar
capacity) with respect to this Agreement and the other Transaction Documents and
the transactions contemplated hereby and thereby, and any advice given by a
Buyer or any of its representatives or agents in connection with this Agreement
and the other Transaction Documents and the transactions contemplated hereby and
thereby is

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merely incidental to such Buyer's purchase of the Securities. The Company
further represents to each Buyer that the Company's decision to enter into the
Transaction Documents has been based solely on the independent evaluation by the
Company and its representatives.

     (g) No General Solicitation. Neither the Company, nor any of its
Subsidiaries or affiliates, nor, to the Company's knowledge, any Person acting
on its or their behalf, has engaged in any form of general solicitation or
general advertising (within the meaning of Regulation D) in connection with the
offer or sale of the Securities.

     (h) No Integrated Offering. None of the Company, its Subsidiaries, any of
their affiliates, or any Person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the 1933 Act or cause this offering of the Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable stockholder approval provisions, including, without limitation,
under the rules and regulations of any exchange or automated quotation system on
which any of the securities of the Company are listed or designated. None of the
Company, its Subsidiaries, their affiliates or any Person acting on its or their
behalf will take any action or steps referred to in the preceding sentence that
would require registration of any of the Securities under the 1933 Act or cause
the offering of the Securities to be integrated with other offerings.

     (i) Dilutive Effect. The Company understands and acknowledges that the
number of Conversion Shares issuable upon conversion of the Notes, the Preferred
Stock and the Warrant Shares issuable upon exercise of the Warrants will
increase in certain circumstances. The Company further acknowledges that its
obligation to issue Conversion Shares upon conversion of the Notes in accordance
with this Agreement and the Notes, its obligation to issue Conversion Shares
upon conversion of the Preferred Stock in accordance with this Agreement and the
Certificate of Designation and its obligation to issue the Warrant Shares upon
exercise of the Warrants in accordance with this Agreement and the Warrant is,
in each case, absolute and unconditional regardless of the dilutive effect that
such issuance may have on the ownership interests of other stockholders of the
Company.

     (j) Application of Takeover Protections; Rights Agreement. The Company and
its board of directors have taken all necessary action, if any, in order to
render inapplicable any control share acquisition, business combination, poison
pill (including any distribution under a rights agreement) or other similar
anti-takeover provision under the Articles of Incorporation or the laws of the
jurisdiction of its formation which is or could become applicable to any Buyer
as a result of the transactions contemplated by this Agreement, including,
without limitation, the Company's issuance of the Securities and any Buyer's
ownership of the Securities. The Company has not adopted a stockholder rights
plan or similar arrangement relating to accumulations of beneficial ownership of
Common Stock or a change in control of the Company.

     (k) SEC Documents; Financial Statements. Except as disclosed in Schedule
3(k), during the two (2) years prior to the date hereof, 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 1934 Act
(all of the foregoing filed prior to the date hereof and all

                                       10

<PAGE>

exhibits included therein and financial statements, notes and schedules thereto
and documents incorporated by reference therein being hereinafter referred to as
the "SEC DOCUMENTS"). The Company has delivered to the Buyers or their
respective representatives true, correct and complete copies of the SEC
Documents not available on the EDGAR system if such SEC Documents have been
requested in writing by Buyers. As of their respective filing dates, the SEC
Documents complied in all material respects with the requirements of the 1934
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 the light of the circumstances under which they
were made, not misleading. As of their respective filing 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 (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
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). No other information provided by or on behalf of the Company to
the Buyers in connection with the transactions contemplated hereby which is not
included in the SEC Documents, including, without limitation, information
referred to in Section 2(d) of this Agreement or in any disclosure schedules,
contains any untrue statement of a material fact or omits 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.

     (l) Absence of Certain Changes. Except as disclosed in Schedule 3(l), since
the date of the Company's most recent audited financial statements contained in
a Form 10-K, there has been no material adverse change and no material adverse
development in the business, assets, properties, operations, condition
(financial or otherwise), results of operations or prospects of the Company.
Except as disclosed in Schedule 3(l), since the date of the Company's most
recent audited financial statements contained in a Form 10-K, neither the
Company nor any of its Subsidiaries has (i) declared or paid any dividends, (ii)
sold any assets, individually or in the aggregate, in excess of $100,000 outside
of the ordinary course of business or (iii) except as set forth in Schedule
3(l), had capital expenditures, individually or in the aggregate, in excess of
$100,000. Neither Company nor any of its Subsidiaries has taken any steps to
seek protection pursuant to any bankruptcy law nor does the Company have any
knowledge or reason to believe that its creditors intend to initiate involuntary
bankruptcy proceedings or any actual knowledge of any fact which would
reasonably lead a creditor to do so. The Company and its Subsidiaries,
individually and on a consolidated basis, are not as of the date hereof, and
after giving effect to the transactions contemplated hereby to occur at the
Closing, will not be Insolvent (as defined below). For purposes of this Section
3(l), "INSOLVENT" means (i) to the knowledge of the Company, the present fair
saleable value of the Company's assets is less than the amount required to pay
the Company's total Indebtedness (as defined in Section 3(s)), (ii) the Company
is unable to pay its debts and liabilities, subordinated, contingent or
otherwise, as such debts and

                                       11

<PAGE>

liabilities become absolute and matured, (iii) the Company intends to incur or
believes that it will incur debts that would be beyond its ability to pay as
such debts mature or (iv) the Company has unreasonably small capital with which
to conduct the business in which it is engaged as such business is now conducted
and is proposed to be conducted.

     (m) No Undisclosed Events, Liabilities, Developments or Circumstances. No
event, liability, development or circumstance has occurred or exists, or is
contemplated to occur with respect to the Company, 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 on Form S-1 filed with the SEC
relating to an issuance and sale by the Company of its Common Stock and which
has not been publicly announced.

     (n) Conduct of Business; Regulatory Permits. Neither the Company nor any of
its Subsidiaries is in violation of any term of or in default under the
Certificate of Designations, its Articles of Incorporation or Bylaws or their
organizational charter or certificate of incorporation or bylaws, respectively.
Neither the Company nor any of its Subsidiaries is in violation of any judgment,
decree or order or any law, statute, ordinance, rule or regulation applicable to
the Company or its Subsidiaries, and neither the Company nor any of its
Subsidiaries will conduct its business in violation of any of the foregoing,
except for possible violations which would not, individually or in the
aggregate, have a Material Adverse Effect. Without limiting the generality of
the foregoing, the Company is not in violation of any of the rules, regulations
or requirements of the Principal Market and has no knowledge of any facts or
circumstances which would reasonably lead to delisting or suspension of the
Common Stock by the Principal Market in the foreseeable future. During the two
(2) years prior to the date hereof, (i) the Common Stock has been designated for
quotation on the Principal Market, (ii) trading in the Common Stock has not been
suspended by the SEC or the Principal Market and (iii) the Company has received
no communication, written or oral, from the SEC or the Principal Market
regarding the suspension or delisting of the Common Stock from the Principal
Market. The Company and its Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate regulatory authorities
necessary to conduct their respective businesses, except where the failure to
possess such certificates, authorizations or permits would not have,
individually or in the aggregate, a Material Adverse Effect, and neither the
Company nor any such Subsidiary has received any notice of proceedings relating
to the revocation or modification of any such certificate, authorization or
permit.

     (o) Foreign Corrupt Practices. Neither the Company, nor any of its
Subsidiaries, nor any director, officer, agent, employee or other Person acting
on behalf of the Company or any of its Subsidiaries has, in the course of its
actions for, or on behalf of, the Company or any of its Subsidiaries (i) used
any corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity; (ii) made any direct or
indirect unlawful payment to any foreign or domestic government official or
employee from corporate funds; (iii) violated or is in violation of any
provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (iv)
made any unlawful bribe, rebate, payoff, influence payment, kickback or other
unlawful payment to any foreign or domestic government official or employee.

                                       12

<PAGE>

     (p) Sarbanes-Oxley Act. The Company is in compliance with any and all
applicable requirements of the Sarbanes-Oxley Act of 2002 that are effective as
of the date hereof, and any and all applicable rules and regulations promulgated
by the SEC thereunder that are effective as of the date hereof.

     (q) Transactions With Affiliates. Except as set forth in the SEC Documents
filed at least ten days prior to the date hereof and other than the grant of
stock options disclosed on Schedule 3(q), none of the officers, directors or
employees of the Company or any of its Subsidiaries is presently a party to any
transaction with the Company or any of its Subsidiaries (other than for ordinary
course services as employees, officers or directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any such officer, director or employee or, to the
knowledge of the Company or any of its Subsidiaries, any corporation,
partnership, trust or other entity in which any such officer, director, or
employee has a substantial interest or is an officer, director, trustee or
partner.

     (r) Equity Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of (i) 6,666,667 shares of Common Stock, of which
as of the date hereof, 2,252,593 are issued and 2,237,166 are outstanding, up to
675,667 shares will be reserved for issuance pursuant to the Company's stock
option and purchase plans and no shares are reserved for issuance pursuant to
securities (other than the Notes, the Preferred Stock and the Warrants)
exercisable or exchangeable for, or convertible into, shares of Common Stock and
(ii) 666,667 shares of preferred stock, par value $0.001 per share, of which as
of the date hereof, none are issued and outstanding (excluding the Preferred
Stock to be issued pursuant hereto. All of such outstanding shares have been, or
upon issuance will be, validly issued and are fully paid and nonassessable.
Except as disclosed in Schedule 3(r): (i) none of the Company's capital stock is
subject to preemptive rights or any other similar rights or any liens or
encumbrances suffered or permitted by the Company; (ii) 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 into, or
exercisable or exchangeable for, any 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 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 into, or exercisable
or exchangeable for, any capital stock of the Company or any of its
Subsidiaries; (iii) there are no outstanding debt securities, notes, credit or
loan agreements, credit facilities or other agreements, documents or instruments
evidencing Indebtedness (as defined below) of the Company or any of its
Subsidiaries or by which the Company or any of its Subsidiaries is or may become
bound; (iv) there are no financing statements securing obligations in any
material amounts, either singly or in the aggregate, filed in connection with
the Company or any of its Subsidiaries; (v) 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 pursuant
to the Registration Rights Agreement); (vi) there are no outstanding securities
or instruments 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 purchase, repurchase, retire or

                                       13

<PAGE>

redeem a security of the Company or any of its Subsidiaries; (vii) there are no
securities or instruments containing anti-dilution or similar provisions that
will be triggered by the issuance of the Securities; (viii) the Company does not
have any stock appreciation rights or "phantom stock" plans or agreements or any
similar plan or agreement; and (ix) the Company and its Subsidiaries have no
liabilities or obligations required to be disclosed in the SEC Documents but not
so disclosed in the SEC Documents, other than those incurred in the ordinary
course of the Company's or its Subsidiaries' respective businesses and which,
individually or in the aggregate, do not or would not have a Material Adverse
Effect. The Company has furnished to the Buyer true, correct and complete copies
of the Company's Articles of Incorporation, as amended and as in effect on the
date hereof (the "ARTICLES OF INCORPORATION"), and the Company's Bylaws, as
amended and as in effect on the date hereof (the "BYLAWS"), and the terms of all
securities convertible into, or exercisable or exchangeable for, shares of
Common Stock and the material rights of the holders thereof in respect thereto.

     (s) Indebtedness and Other Contracts. Except as disclosed in Schedule 3(s),
neither the Company nor any of its Subsidiaries (i) has any outstanding
Indebtedness (as defined below), (ii) is a party to any contract, agreement or
instrument, the violation of which, or default under which, by the other
party(ies) to such contract, agreement or instrument would result in a Material
Adverse Effect, (iii) is in violation of any term of or in default under any
contract, agreement or instrument relating to any Indebtedness, except where
such violations and defaults would not result, individually or in the aggregate,
in a Material Adverse Effect, or (iv) is a party to any contract, agreement or
instrument relating to any Indebtedness, the performance of which, in the
judgment of the Company's officers, has or is expected to have a Material
Adverse Effect. Schedule 3(s) provides a detailed description of the material
terms of any such outstanding Indebtedness. For purposes of this Agreement: (x)
"INDEBTEDNESS" of any Person means, without duplication (A) all indebtedness for
borrowed money, (B) all obligations issued, undertaken or assumed as the
deferred purchase price of property or services including (without limitation)
"Capital Leases" in accordance with generally accepted accounting principles
(other than trade payables entered into in the ordinary course of business), (C)
all reimbursement or payment obligations with respect to letters of credit,
surety bonds and other similar instruments, (D) all obligations evidenced by
notes, bonds, debentures or similar instruments, including obligations so
evidenced incurred in connection with the acquisition of property, assets or
businesses, (E) all indebtedness created or arising under any conditional sale
or other title retention agreement, or incurred as financing, in either case
with respect to any property or assets acquired with the proceeds of such
indebtedness (even though the rights and remedies of the seller or bank under
such agreement in the event of default are limited to repossession or sale of
such property), (F) all monetary obligations under any leasing or similar
arrangement which, in connection with generally accepted accounting principles,
consistently applied for the periods covered thereby, is classified as a capital
lease, (G) all indebtedness referred to in clauses (A) through (F) above secured
by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any mortgage, lien, pledge, charge,
security interest or other encumbrance upon or in any property or assets
(including accounts and contract rights) owned by any Person, even though the
Person which owns such assets or property has not assumed or become liable for
the payment of such indebtedness, and (H) all Contingent Obligations in respect
of indebtedness or obligations of others of the kinds referred to in clauses (A)
through (G) above; (y) "CONTINGENT OBLIGATION" means, as to any Person, any
direct or

                                       14

<PAGE>

indirect liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto; and (z)
"PERSON" means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof.

     (t) Absence of Litigation. There is no action, suit, proceeding, inquiry or
investigation before or by the Principal Market, any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company, threatened against or affecting the Company or any of
its Subsidiaries, the Common Stock or any of the Company's Subsidiaries or any
of the Company's or its Subsidiaries' officers or directors, except as set forth
in Schedule 3(t).

     (u) Insurance. The Company and each of its Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its Subsidiaries are
engaged. Neither the Company nor any such Subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such
Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a Material Adverse Effect.

     (v) Employee Relations.

          (i) Neither the Company nor any of its Subsidiaries is a party to any
collective bargaining agreement or employs any member of a union. The Company
and its Subsidiaries believe that their relations with their employees are good.
No executive officer of the Company or any of its Subsidiaries (as defined in
Rule 501(f) of the 1933 Act) has notified the Company or any such Subsidiary
that such officer intends to leave the Company or any such Subsidiary or
otherwise terminate such officer's employment with the Company or any such
Subsidiary. No executive officer of the Company or any of its Subsidiaries, to
the knowledge of the Company or any such Subsidiary, is, or is now expected to
be, in violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any restrictive
covenant, and the continued employment of each such executive officer does not
subject the Company or any of its Subsidiaries to any liability with respect to
any of the foregoing matters.

          (ii) The Company and its Subsidiaries are in compliance with all
federal, state, local and foreign laws and regulations respecting labor,
employment and employment practices and benefits, terms and conditions of
employment and wages and hours, except where failure to be in compliance would
not, either individually or in the aggregate, reasonably be expected to result
in a Material Adverse Effect.

                                       15

<PAGE>

     (w) Title. The Company and its Subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all personal
property owned by them which is material to the business of the Company and its
Subsidiaries, in each case free and clear of all liens, encumbrances and defects
except such as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company and any of its Subsidiaries. Any real property and facilities held under
lease by the Company and any of its Subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
facilities by the Company and its Subsidiaries.

     (x) Intellectual Property Rights. The Company and its Subsidiaries own or
possess adequate rights or licenses to use all trademarks, trade names, service
marks, service mark registrations, service names, patents, patent rights,
copyrights, inventions, licenses, approvals, governmental authorizations, trade
secrets and other intellectual property rights ("INTELLECTUAL PROPERTY RIGHTS")
necessary to conduct their respective businesses as now conducted. Except as set
forth in Schedule 3(x), none of the Company's Intellectual Property Rights have
expired or terminated, or are expected to expire or terminate, within three
years from the date of this Agreement. The Company does not have any knowledge
of any infringement by the Company or its Subsidiaries of Intellectual Property
Rights of others. There is no claim, action or proceeding being made or brought,
or to the knowledge of the Company, being threatened, against the Company or any
of its Subsidiaries regarding its Intellectual Property Rights. The Company is
unaware of any facts or circumstances which might give rise to any of the
foregoing infringements or claims, actions or proceedings. Neither the Company
nor any of its Subsidiaries and its Subsidiaries has taken reasonable security
measures to protect the secrecy, confidentiality and value of all of their
Intellectual Property Rights.

     (y) Environmental Laws. The Company and its Subsidiaries (i) are in
compliance with any and all Environmental Laws (as hereinafter defined), (ii)
have received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and (iii)
are in compliance with all terms and conditions of any such permit, license or
approval where, in each of the foregoing clauses (i), (ii) and (iii), the
failure to so comply could be reasonably expected to have, individually or in
the aggregate, a Material Adverse Effect. The term "ENVIRONMENTAL LAWS" means
all federal, state, local or foreign laws relating to pollution or protection of
human health or the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata), including,
without limitation, laws relating to emissions, discharges, releases or
threatened releases of chemicals, pollutants, contaminants, or toxic or
hazardous substances or wastes (collectively, "HAZARDOUS MATERIALS") into the
environment, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous Materials,
as well as all authorizations, codes, decrees, demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved thereunder.

     (z) Subsidiary Rights. Except as set forth in Schedule 3(z), the Company or
one of its Subsidiaries has the unrestricted right to vote, and (subject to
limitations imposed by

                                       16

<PAGE>

applicable law) to receive dividends and distributions on, all capital
securities of its Subsidiaries as owned by the Company or such Subsidiary.

     (aa) Investment Company. The Company is not, and is not an affiliate of, an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.

     (bb) Tax Status. The Company and each of its Subsidiaries (i) has made or
filed all foreign, federal and state income and all other tax returns, reports
and declarations required by any jurisdiction to which it is subject, (ii) has
paid all taxes and other governmental assessments and charges that are material
in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set aside
on its books provision reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply. There are no unpaid taxes in any material amount claimed to be due by the
taxing authority of any jurisdiction, and the officers of the Company know of no
basis for any such claim. No liens have been filed and no claims are being
asserted by or against the Company or any of its Subsidiaries with respect to
any taxes (other than liens for taxes not yet due and payable). Neither the
Company nor it Subsidiaries has received notice of assessment or proposed
assessment of any taxes claimed to be owed by it or any other Person on its
behalf. Except as disclosed on Schedule 3(w), neither the Company nor any
Subsidiary is a party to any tax sharing or tax indemnity agreement or any other
agreement of a similar nature that remains in effect. Each of the Company and
its Subsidiaries has complied in all material respects with all applicable legal
requirements relating to the payment and withholding of taxes and, within the
time and in the manner prescribed by law, has withheld from wages, fees and
other payments and paid over to the proper governmental or regulatory
authorities all amounts required.

     (cc) Internal Accounting and Disclosure Controls. The Company and each of
its Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
and liability accountability, (iii) access to assets or incurrence of
liabilities is permitted only in accordance with management's general or
specific authorization and (iv) the recorded accountability for assets and
liabilities is compared with the existing assets and liabilities at reasonable
intervals and appropriate action is taken with respect to any difference (the
"INTERNAL ACCOUNTING CONTROLS"). The Company maintains disclosure controls and
procedures (as such term is defined in Rule 13a-14 under the 1934 Act) that are
effective in ensuring that information required to be disclosed by the Company
in the reports that it files or submits under the 1934 Act is recorded,
processed, summarized and reported, within the time periods specified in the
rules and forms of the SEC, including, without limitation, controls and
procedures designed in to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the 1934 Act is
accumulated and communicated to the Company's management, including its
principal executive officer or officers and its principal financial officer or
officers, as appropriate, to allow timely decisions regarding required
disclosure.

     (dd) Off Balance Sheet Arrangements. There is no transaction, arrangement,
or other

                                       17

<PAGE>

relationship between the Company or any of its Subsidiaries and an
unconsolidated or other off balance sheet entity that is required to be
disclosed by the Company in its Exchange Act filings and is not so disclosed or
that otherwise would be reasonably likely to have a Material Adverse Effect.

     (ee) Ranking of Notes. Except as set forth on Schedule (ee), no
Indebtedness of the Company is senior to or ranks pari passu with the Notes in
right of payment, whether with respect of payment of redemptions, interest,
damages or upon liquidation or dissolution or otherwise.

     (ff) Form S-1 Eligibility. The Company is eligible to register the
Conversion Shares and the Warrant Shares for resale by the Buyers using Form S-1
promulgated under the 1933 Act.

     (gg) Transfer Taxes. On the Closing Date, all stock transfer or other taxes
(other than income or similar taxes) which are required to be paid in connection
with the sale and transfer of the Securities to be sold to each Buyer hereunder
will be, or will have been, fully paid or provided for by the Company, and all
material laws imposing such taxes will be or will have been complied with.

     (hh) Manipulation of Price. The Company and its Subsidiaries have not, and
to its knowledge no one acting on its behalf has, (i) taken, directly or
indirectly, any action designed to cause or to result or that could reasonably
be expected to cause or result in the stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or paid any compensation for
soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay
to any person any compensation for soliciting another to purchase any other
securities of the Company.

     (ii) U.S. Real Property Holding Corporation. The Company is not, nor has
ever been, a U.S. real property holding corporation within the meaning of
Section 897 of the Internal Revenue Code of 1986, as amended, and the Company
shall so certify upon Buyer's request.

     (jj) Disclosure. The Company confirms that neither it nor any other Person
acting on its behalf has provided any of the Buyers or their agents or counsel
with any information that constitutes or could reasonably be expected to
constitute material, nonpublic information other than the existence of the
transactions contemplated by this Agreement or the other Transaction Documents.
The Company understands and confirms that each of the Buyers will rely on the
foregoing representations in effecting transactions in the Securities. All
disclosure provided to the Buyers regarding the Company, its business and the
transactions contemplated by this Agreement and the other Transaction Documents,
including the Schedules and Exhibits hereto and thereto, furnished by or on
behalf of the Company is true and correct and does not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made herein or herein, in the light of the
circumstances under which they were made, not misleading. Each press release
issued by the Company or its Subsidiaries during the twelve (12) months
preceding the date of this Agreement did not at the time of release contain any
untrue statement of a material fact or omit to state a material fact required to
be

                                       18

<PAGE>

stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. No event
or circumstance has occurred or information exists with respect to the Company
or any of its Subsidiaries or its or their business, assets, liabilities,
properties, prospects, operations or financial conditions (financial or
otherwise), which, under applicable law, rule or regulation, requires public
disclosure or announcement by the Company but which has not been so publicly
announced or disclosed.

     (kk) Lien Searches. Within 6 Business Days prior to the date hereof, the
Company shall have delivered or caused to be delivered to each Buyer certified
copies of UCC financing statement search results listing any and all effective
financing statements filed within five years prior to such date in any
applicable jurisdiction that name the Company or any of their Subsidiaries as a
debtor to perfect an interest in any of the assets thereof, together with copies
of such financing statements, none of which financing statements, except for any
financing statements filed with respect to the Senior Indebtedness and as
otherwise agreed to in writing by the Buyers, shall cover any of the
"Collateral" (as defined in the Security Documents), and the results of searches
for any effective tax liens and judgment liens filed against any such Person or
its property in any applicable jurisdiction, which results, except as otherwise
agreed to in writing by the Buyers, shall not show any such effective tax liens
and judgment liens.

4. COVENANTS.

     (a) Best Efforts. Each party shall use its best efforts timely to satisfy
each of the conditions to be satisfied by it as provided in Sections 6 and 7 of
this Agreement.

     (b) Form D and Blue Sky. 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 each Buyer promptly after such filing. The Company shall, on or before the
Closing Date, take such action as the Company shall reasonably determine is
necessary in order to obtain an exemption for or to qualify the Securities for
sale to the Buyers at the Closing pursuant to this 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 Buyers on or prior to the Closing Date. The Company shall
make all filings and reports relating to the offer and sale of the Securities
required under applicable securities or "Blue Sky" laws of the states of the
United States following the Closing Date.

     (c) Reporting Status. Until the date on which the Investors (as defined in
the Registration Rights Agreement) shall have sold all the Conversion Shares and
Warrant Shares and none of the Notes, Preferred Stock or Warrants is outstanding
(the "REPORTING PERIOD"), the Company shall file all reports required to be
filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate
its status as an issuer required to file reports under the 1934 Act even if the
1934 Act or the rules and regulations thereunder would otherwise permit such
termination.

     (d) Use of Proceeds. The Company will use the proceeds from the sale of the
Securities for general corporate and for working capital purposes, provided,
that the Company

                                       19

<PAGE>

may not use the proceeds from the sale of the Securities for (i) the repayment
of any other outstanding Indebtedness of the Company or any of its Subsidiaries,
other than Indebtedness set forth on Schedule 4(d) or (ii) the redemption or
repurchase of any of its or its Subsidiaries' equity securities.

     (e) Financial Information. The Company agrees to send the following to each
Investor (as defined in the Registration Rights Agreement) during the Reporting
Period (i) unless the following are filed with the SEC through EDGAR and are
available to the public through the EDGAR system, within one (1) Business Day
after the filing thereof with the SEC, a copy of its Annual Reports on Form 10-K
or 10-KSB, any interim reports or any consolidated balance sheets, income
statements, stockholders' equity statements and/or cash flow statements for any
period other than annual, any Current Reports on Form 8-K and any registration
statements (other than on Form S-8) or amendments filed pursuant to the 1933
Act, (ii) on the same day as the release thereof, facsimile or e-mailed copies
of all press releases issued by the Company or any of its Subsidiaries, and
(iii) copies of any notices and other information made available or given to the
stockholders of the Company generally, contemporaneously with the making
available or giving thereof to the stockholders. As used herein "Business Day"
means any other day other than a Saturday, Sunday, or other day on which
commercial banks in The City of New York are authorized or required by law to
remain closed.

     (f) Listing. The Company shall promptly secure the listing of all of the
Registrable Securities (as defined in the Registration Rights Agreement) upon
each national securities exchange and automated quotation system, if any, upon
which the Common Stock is then listed (subject to official notice of issuance)
and shall maintain such listing of all Registrable Securities from time to time
issuable under the terms of the Transaction Documents. The Company shall
maintain the Common Stock's authorization for quotation on the Principal Market.
Neither the Company nor any of its Subsidiaries shall take any action which
would be reasonably expected to result in the delisting or suspension of the
Common Stock on the Principal Market. The Company shall pay all fees and
expenses in connection with satisfying its obligations under this Section 4(f).

     (g) Fees. The Company shall (i) pay Gottbetter & Partners, LLP ("G&P")
$20,000 in legal fees for services related to the Notes plus reasonable
expenses; (ii) pay G&P $20,000 in legal fees for services related to the
Preferred Stock plus reasonable expenses and (iii) shall reimburse Gottbetter
Capital Master, Ltd. (a Buyer) ("GCF") or its designee(s) $20,000 for due
diligence and all reasonable expenses incurred in connection with the
transactions contemplated by the Transaction Documents (including all reasonable
legal fees and disbursements in connection therewith, documentation and
implementation of the transactions contemplated by the Transaction Documents and
due diligence in connection therewith), which amounts shall be withheld by such
Buyer from its Purchase Price at the Closing. GCF and G&P acknowledge G&P
received $20,000 delivered prior to the date hereof as an advance against legal
fees. The Company shall be responsible for the payment of any placement agent's
fees, financial advisory fees, or broker's commissions (other than for Persons
engaged by any Buyer) relating to or arising out of the transactions
contemplated by the Transaction Documents. The Company shall pay, and hold each
Buyer harmless against, any liability, loss or expense (including, without
limitation, reasonable attorney's fees and out-of-pocket expenses) arising in
connection with any

                                       20
<PAGE>

claim against a Buyer relating to any such payment. Except as otherwise set
forth in the Transaction Documents, each party to this Agreement shall bear its
own expenses in connection with the sale of the Securities to the Buyers.

     (h) Pledge of Securities. The Company acknowledges and agrees that the
Notes, Preferred Stock or Warrants may be pledged by an Investor (as defined in
the Registration Rights Agreement) in connection with a bona fide margin
agreement or other loan or financing arrangement that is secured by the Notes,
Preferred Stock or Warrants. The pledge of Notes, Preferred Stock or Warrants
shall not be deemed to be a transfer, sale or assignment of the Notes, Preferred
Stock or Warrants hereunder, and no Investor effecting a pledge of Notes,
Preferred Stock or Warrants shall be required to provide the Company with any
notice thereof or otherwise make any delivery to the Company pursuant to this
Agreement or any other Transaction Document, including, without limitation,
Section 2(f) hereof; provided that an Investor and its pledgee shall be required
to comply with the provisions of Section 2(f) hereof in order to effect a sale,
transfer or assignment of Notes, Preferred Stock or Warrants to such pledgee.
The Company hereby agrees to execute and deliver such documentation as a pledgee
of the Notes, Preferred Stock or Warrants may reasonably request in connection
with a pledge of the Notes, Preferred Stock or Warrants to such pledgee by an
Investor.

     (i) Disclosure of Transactions and Other Material Information. On or before
8:30 a.m., New York Time, on the first Business Day following the date of this
Agreement, the Company shall file a Current Report on Form 8-K describing the
terms of the transactions contemplated by the Transaction Documents in the form
required by the 1934 Act and attaching the material Transaction Documents
(including, without limitation, this Agreement (and all schedules to this
Agreement), the form of each of the Notes, the form of the Certificate of
Designations, the form of Warrants, the Registration Rights Agreement and the
Security Documents) as exhibits to such filing (including all attachments, the
"8-K FILING"). From and after the filing of the 8-K Filing with the SEC, no
Buyer shall be in possession of any material, nonpublic information received
from the Company, any of its Subsidiaries or any of their respective officers,
directors, employees, stockholders, representatives or agents, that is not
disclosed in the 8-K Filing. The Company shall not, and shall cause each of its
Subsidiaries and its and each of their respective officers, directors, employees
and agents, not to, provide any Buyer with any material, nonpublic information
regarding the Company or any of its Subsidiaries from and after the filing of
the 8-K Filing with the SEC without the express written consent of such Buyer.
In the event of a breach of the foregoing covenant by the Company, any of their
Subsidiaries, or any of their respective officers, directors, employees and
agents, in addition to any other remedy provided herein or in the Transaction
Documents, a Buyer shall have the right to make a public disclosure, in the form
of a press release, public advertisement or otherwise, of such material,
nonpublic information without the prior approval by the Company, their
Subsidiaries, or any of their respective officers, directors, employees or
agents. No Buyer shall have any liability to the Company, its Subsidiaries, or
any of its or their respective officers, directors, employees, stockholders or
agents for any such disclosure. Subject to the foregoing, none of the Company,
its Subsidiaries or any Buyer shall issue any press releases or any other public
statements with respect to the transactions contemplated hereby without the
approval of all of the Buyers; provided, however , that the Company shall be
entitled, without the prior approval of any Buyer, to make any press release or
other public disclosure with respect to such

                                       21

<PAGE>

transactions (i) in substantial conformity with the 8-K Filing and
contemporaneously therewith and (ii) as is required by applicable law and
regulations (provided that in the case of clause (i) the Required Holders shall
be consulted by the Company in connection with any such press release or other
public disclosure prior to its release). Without the prior written consent of
any applicable Buyer, the Company shall not disclose the name of any Buyer in
any filing, announcement, release or otherwise.

     (j) Restriction on Redemption and Cash Dividends. So long as any Notes or
Preferred Stock are outstanding, the Company shall not, directly or indirectly,
redeem, or declare or pay any cash dividend or distribution on, the Common Stock
without the prior express written consent of the Required Holders (as defined in
the Notes and in the Certificate of Designations).

     (k) Additional Notes; Variable Securities; Dilutive Issuances. So long as
any Buyer beneficially owns any Securities, the Company will not issue any Notes
or Preferred Stock (other than to the Buyers as contemplated hereby) and the
Company shall not issue any other securities that would cause a breach or
default under the Notes. For long as any Notes, Preferred Stock or Warrants
remain outstanding, the Company shall not, in any manner, issue or sell any
rights, warrants or options to subscribe for or purchase Common Stock or
directly or indirectly convertible into or exchangeable or exercisable for
Common Stock at a price which varies or may vary with the market price of the
Common Stock, including by way of one or more reset(s) to any fixed price unless
the conversion, exchange or exercise price of any such security cannot be less
than the then applicable Conversion Price (as defined in the Notes) with respect
to the Common Stock into which any Note is convertible, the then applicable
Conversion Price (as defined in the Certificate of Designations) with respect
with the Common Stock into which the Preferred Stock is convertible or the then
applicable Exercise Price (as defined in the Warrants) with respect to the
Common Stock into which any Warrant is exercisable. For long as any Notes,
Preferred Stock or Warrants remain outstanding, the Company shall not, in any
manner, enter into or affect any Dilutive Issuance (as defined in the Notes and
in the Certificate of Designations) if the effect of such Dilutive Issuance is
to cause the Company to be required to issue upon conversion of any Note or
Preferred Stock or exercise of any Warrant any shares of Common Stock in excess
of that number of shares of Common Stock which the Company has authorized and
reserved for purposes of such conversions or exercises or which the Company may
issue upon conversion of the Notes and the Preferred Stock and exercise of the
Warrants without breaching the Company's obligations under the rules or
regulations of the Principal Market.

     (l) Corporate Existence. So long as any Buyer beneficially owns any
Securities, the Company shall not be party to any Fundamental Transaction (as
defined in the Notes and in the Certificate of Designations) unless the Company
is in compliance with the applicable provisions governing Fundamental
Transactions set forth in the Notes, the Certificate of Designations and the
Warrants.

     (m) Reservation of Shares. So long as any Buyer owns any Securities, the
Company shall take all action necessary to at all times have authorized, and
reserved for the purpose of issuance, no less than 300% of the number of shares
of Common Stock issuable upon conversion of all of the Notes and Preferred Stock
and issuable upon exercise of the Warrants then

                                       22

<PAGE>

outstanding (without taking into account any limitations on the conversion of
the Notes, the Preferred Stock or exercise of the Warrants set forth in the
Notes, the Certificate of Designations and Warrants, respectively).

     (n) Conduct of Business. The business of the Company and its Subsidiaries
shall not be conducted in violation of any law, ordinance or regulation of any
government, or any department or agency thereof or governmental entity, except
where such violations would not result, either individually or in the aggregate,
in a Material Adverse Effect.

     (o) Additional Issuances of Securities.

          (i) For purposes of this Section 4(o), the following definitions shall
     apply.

               (1) "CONVERTIBLE SECURITIES" means any stock or securities (other
          than Options) convertible into or exercisable or exchangeable for
          shares of Common Stock.

               (2) "OPTIONS" means any rights, warrants or options to subscribe
          for or purchase shares of Common Stock or Convertible Securities.

               (3) "COMMON STOCK EQUIVALENTS" means, collectively, Options and
          Convertible Securities.

          (ii) From the date hereof until the date that is 30 Trading Days (as
     defined in the Notes and Certificate of Designations) following the
     Effective Date (as defined in the Registration Rights Agreement) (the
     "TRIGGER DATE"), the Company will not, directly or indirectly, offer, sell,
     grant any option to purchase, or otherwise dispose of (or announce any
     offer, sale, grant or any option to purchase or other disposition of) any
     of its or its Subsidiaries' equity or equity equivalent securities,
     including without limitation any debt, preferred stock or other instrument
     or security that is, at any time during its life and under any
     circumstances, convertible into or exchangeable or exercisable for shares
     of Common Stock or Common Stock Equivalents (any such offer, sale, grant,
     disposition or announcement being referred to as a "SUBSEQUENT PLACEMENT").

          (iii) From the Trigger Date until the date on which none of the Notes
     or Preferred Stock is outstanding, the Company will not, directly or
     indirectly, effect any Subsequent Placement unless the Company shall have
     first complied with this Section 4(o)(iii).

               (1) The Company shall deliver to each Buyer who still holds Notes
          or Preferred Stock a written notice (the "OFFER NOTICE") of any
          proposed or intended issuance or sale or exchange (the "OFFER") of the
          securities being offered (the "OFFERED SECURITIES") in a Subsequent
          Placement, which Offer Notice shall (w) identify and describe the
          Offered Securities, (x) describe the price and other terms upon which
          they are to be issued, sold or exchanged, and the number or amount of
          the Offered Securities to be issued, sold or exchanged, (y) identify
          the persons or entities (if known) to which or with which the Offered
          Securities are to be

                                       23

<PAGE>

          offered, issued, sold or exchanged and (z) offer to issue and sell to
          or exchange with such Buyers all of the Offered Securities, allocated
          among such Buyers (a) based on such Buyer's pro rata portion of the
          aggregate principal amount of Notes and Preferred Stock purchased
          hereunder (the "BASIC AMOUNT"), and (b) with respect to each Buyer
          that elects to purchase its Basic Amount, any additional portion of
          the Offered Securities attributable to the Basic Amounts of other
          Buyers as such Buyer shall indicate it will purchase or acquire should
          the other Buyers subscribe for less than their Basic Amounts (the
          "UNDERSUBSCRIPTION AMOUNT").

               (2) To accept an Offer, in whole or in part, such Buyer must
          deliver a written notice to the Company prior to the end of the tenth
          (10th ) Business Day after such Buyer's receipt of the Offer Notice
          (the "OFFER PERIOD"), setting forth the portion of such Buyer's Basic
          Amount that such Buyer elects to purchase and, if such Buyer shall
          elect to purchase all of its Basic Amount, the Undersubscription
          Amount, if any, that such Buyer elects to purchase (in either case,
          the "NOTICE OF ACCEPTANCE"). If the Basic Amounts subscribed for by
          all Buyers are less than the total of all of the Basic Amounts, then
          each Buyer who has set forth an Undersubscription Amount in its Notice
          of Acceptance shall be entitled to purchase, in addition to the Basic
          Amounts subscribed for, the Undersubscription Amount it has subscribed
          for; provided, however , that if the Undersubscription Amounts
          subscribed for exceed the difference between the total of all the
          Basic Amounts and the Basic Amounts subscribed for (the "AVAILABLE
          UNDERSUBSCRIPTION AMOUNT"), each Buyer who has subscribed for any
          Undersubscription Amount shall be entitled to purchase only that
          portion of the Available Undersubscription Amount as the Basic Amount
          of such Buyer bears to the total Basic Amounts of all Buyers that have
          subscribed for Undersubscription Amounts, subject to rounding by the
          Company to the extent its deems reasonably necessary.

               (3) The Company shall have ten (10) Business Days from the
          expiration of the Offer Period above to offer, issue, sell or exchange
          all or any part of such Offered Securities as to which a Notice of
          Acceptance has not been given by the Buyers (the "REFUSED
          SECURITIES"), but only to the offerees described in the Offer Notice
          (if so described therein) and only upon terms and conditions
          (including, without limitation, unit prices and interest rates) that
          are not more favorable to the acquiring person or persons or less
          favorable to the Company than those set forth in the Offer Notice.

               (4) In the event the Company shall propose to sell less than all
          the Refused Securities (any such sale to be in the manner and on the
          terms specified in Section 4(o)(iii)(3) above), then each Buyer may,
          at its sole option and in its sole discretion, reduce the number or
          amount of the Offered Securities specified in its Notice of Acceptance
          to an amount that shall be not less than the number or amount of the
          Offered Securities that such Buyer elected to purchase pursuant to
          Section 4(o)(iii)(2) above multiplied by a fraction, (i) the numerator
          of which

                                       24

<PAGE>

          shall be the number or amount of Offered Securities the Company
          actually proposes to issue, sell or exchange (including Offered
          Securities to be issued or sold to Buyers pursuant to Section
          4(o)(iii)(3) above prior to such reduction) and (ii) the denominator
          of which shall be the original amount of the Offered Securities. In
          the event that any Buyer so elects to reduce the number or amount of
          Offered Securities specified in its Notice of Acceptance, the Company
          may not issue, sell or exchange more than the reduced number or amount
          of the Offered Securities unless and until such securities have again
          been offered to the Buyers in accordance with Section 4(o)(iii)(1)
          above.

               (5) Upon the closing of the issuance, sale or exchange of all or
          less than all of the Refused Securities, the Buyers shall acquire from
          the Company, and the Company shall issue to the Buyers, the number or
          amount of Offered Securities specified in the Notices of Acceptance,
          as reduced pursuant to Section 4(o)(iii)(3) above if the Buyers have
          so elected, upon the terms and conditions specified in the Offer. The
          purchase by the Buyers of any Offered Securities is subject in all
          cases to the preparation, execution and delivery by the Company and
          the Buyers of a purchase agreement relating to such Offered Securities
          reasonably satisfactory in form and substance to the Buyers and their
          respective counsel and to the Company and its counsel.

               (6) Any Offered Securities not acquired by the Buyers or other
          persons in accordance with Section 4(o)(iii)(3) above may not be
          issued, sold or exchanged until they are again offered to the Buyers
          under the procedures specified in this Agreement.

          (iv) The restrictions contained in subsections (ii) and (iii) of this
     Section 4(o) shall not apply in connection with the issuance of any
     Excluded Securities (as defined in the Notes).

     (p) Additional Registration Statements. Until the Effective Date (as
defined in the Registration Rights Agreement), the Company will not file a
registration statement under the 1933 Act relating to securities that are not
the Securities.

     (q) No Short Position. Each of the Buyers and any of its Affiliates do not
have an open short position in the Common Stock.

     (r) Account Control Agreements. The Company shall deliver to the Buyer(s)
within ten (10) Business Days following the Closing Date, a deposit account
control agreement, in form and substance satisfactory to the Buyer(s), duly
executed by the Company, the Buyer(s) and LaSalle Bank (the "DEPOSITORY BANK")
with respect to the accounts of the Company and, if applicable, the accounts of
its Subsidiaries maintained at the LaSalle Bank.

     (s) Transactions With Affiliates. So long as any Note or Warrant is
outstanding, the Company shall not, and shall cause each of its Subsidiaries not
to, enter into, amend, modify or supplement, or permit any Subsidiary to enter
into, amend, modify or supplement any agreement,

                                       25

<PAGE>

transaction, commitment, or arrangement with any of its or any Subsidiary's
officers, directors, person who were officers or directors at any time during
the previous two (2) years, stockholders who beneficially own five percent (5%)
or more of the Common Stock, or Affiliates (as defined below) or with any
individual related by blood, marriage, or adoption to any such individual or
with any entity in which any such entity or individual owns a five percent (5%)
or more beneficial interest (each a "RELATED PARTY"), except for (a) customary
employment arrangements and benefit programs on reasonable terms, (b) any
investment in an Affiliate of the Company, (c) any agreement, transaction,
commitment, or arrangement on an arms-length basis on terms no less favorable
than terms which would have been obtainable from a person other than such
Related Party, (d) any agreement transaction, commitment, or arrangement which
is approved by a majority of the disinterested directors of the Company, for
purposes hereof, any director who is also an officer of the Company or any
subsidiary of the Company shall not be a disinterested director with respect to
any such agreement, transaction, commitment, or arrangement. "Affiliate" for
purposes hereof means, with respect to any person or entity, another person or
entity that, directly or indirectly, (i) has a ten percent (10%) or more equity
interest in that person or entity, (ii) has ten percent (10%) or more common
ownership with that person or entity, (iii) controls that person or entity, or
(iv) shares common control with that person or entity. "Control" or "controls"
for purposes hereof means that a person or entity has the power, direct or
indirect, to conduct or govern the policies of another person or entity.

     (t) Restriction on Issuance of the Capital Stock. Except for Excluded
Securities (as defined in the Convertible Debentures), the Company shall not,
without the prior written consent of the Buyer, (i) issue or sell shares of
Common Stock or preferred stock without consideration or for a consideration per
share less than the greater of the Closing Bid Price of the Common Stock
determined immediately prior to its issuance or $.01, if the Common Stock is not
traded or quoted on the Nasdaq Small Cap Market or any national exchange, (ii)
issue any warrant, option, right, contract, call, or other security instrument
granting the holder thereof, the right to acquire Common Stock without
consideration or for a consideration less than the greater of such Common
Stock's Closing Bid Price value determined immediately prior to its issuance or
$.01, if the Common Stock is not traded on the Nasdaq Small Cap Market or any
national exchange, (iii) enter into any security instrument granting the holder
a security interest in any and all assets of the Company, or (iv) file any
registration statement on Form S-8, provided that (x) such shares are not issued
without consideration or for a consideration less than the greater of the Common
Stock's Closing Bid Price on the date of issuance or $.01, if the Common Stock
is not traded or quoted on the Nasdaq Small Cap Market or any national exchange,
and (y) such Form S-8 registration statement is not filed prior to 90 days
following the effectiveness of the registration statement. "Closing Bid Price"
on any day shall be the closing bid price for a share of Common Stock on such
date on the Nasdaq Small Cap Market (or such other exchange, market, or other
system that the Common Stock is then traded on), as reported on Bloomberg, L.P.
(or similar organization or agency succeeding to its functions of reporting
prices).

     (u) Removal of Legend. In addition to the Buyer's other available remedies,
the Company shall pay to the Buyer, in cash, as partial liquidated damages and
not as a penalty, for each $1,000 of Warrant Shares and/or Conversion Shares
(based on the closing price of the Common Stock on the date such Warrant Shares
and/or Conversion Shares are submitted to the Company's transfer agent), $5 per
trading day (increasing to $10 per trading day five (5) trading days after such
damages have begun to accrue) for each trading day after the third (3rd) trading

                                       26

<PAGE>

day following delivery by a Buyer to the Company or the Company's transfer agent
of a certificate representing Warrant Shares and/or Conversion Shares issued
with a restrictive legend, until such certificate is delivered to the Buyer with
such legend removed. Nothing herein shall limit the Buyer's right to pursue
actual damages for the failure of the Company and its transfer agent to deliver
certificates representing any securities as required hereby or by the Transfer
Agent Letter and the Power of Attorney, and the Buyer shall have the right to
pursue all remedies available to it at law or in equity, including, without
limitation, a decree of specific performance and/or injunctive relief.

     (v) Stockholder Approval. The Company shall provide each stockholder
entitled to vote at a special or annual meeting of stockholders of the Company
(the "STOCKHOLDER MEETING"), which shall be promptly called and held not later
than January 31, 2007 (the "STOCKHOLDER MEETING DEADLINE"), a proxy statement,
substantially in the form which has been previously reviewed by the Buyers and
Gottbetter & Partners, LLP, soliciting each such stockholder's affirmative vote
at the Stockholder Meeting for approval of resolutions providing for the
Company's issuance of all of the Securities as described in the Transaction
Documents in accordance with applicable law and the rules and regulations of the
Principal Market and such affirmative approval being referred to herein as the
"STOCKHOLDER APPROVAL"), and the Company shall use its reasonable best efforts
to solicit its stockholders' approval of such resolutions and to cause the Board
of Directors of the Company to recommend to the stockholders that they approve
such resolutions. The Company shall be obligated to use its reasonable best
efforts to obtain the Stockholder Approval by the Stockholder Meeting Deadline.
If, despite the Company's reasonable best efforts the Stockholder Approval is
not obtained on or prior to the Stockholder Meeting Deadline, the Company shall
cause an additional Stockholder Meeting to be held every six (6) months
thereafter until such Stockholder Approval is obtained or the Notes are no
longer outstanding. The parties acknowledge that this is a material covenant.

5. REGISTER; TRANSFER AGENT INSTRUCTIONS.

     (a) Register. The Company shall maintain at its principal executive offices
(or such other office or agency of the Company as it may designate by notice to
each holder of Securities), a register for the Notes, Preferred Stock and the
Warrants in which the Company shall record the name and address of the Person in
whose name the Notes, Preferred Stock and the Warrants have been issued
(including the name and address of each transferee), the principal amount of
Notes held by such Person, the number of shares of Preferred Stock held by such
Person, the number of Conversion Shares issuable upon conversion of the Notes,
the number of Conversion Shares issuable upon conversion of Preferred Stock and
the number of Warrant Shares issuable upon exercise of the Warrants held by such
Person. The Company shall keep the register open and available at all times
during business hours for inspection of any Buyer or its legal representatives
following reasonable written notice of not less than two Business Days.

     (b) Transfer Agent Instructions. The Company shall issue to Computershare
(the "Transfer Agent") irrevocable instructions for the Transfer Agent (the
"Transfer Agent Letter", to be in the form of Exhibit I attached hereto) to
establish three reserve accounts of authorized but unissued Common Stock (the
"Reserve Account") to be used in conjunction with the Conversion Shares and the
Warrant Shares and to authorize the Transfer Agent to accept and act

                                       27

<PAGE>

upon instructions of the Buyers (in the Form of Exhibit J attached hereto) in
connection with the Reserve Account. The Company hereby agrees to give a power
of attorney (the "Power of Attorney") as is evidenced by Exhibit K attached
hereto. All acts done under such power of attorney are hereby ratified and
approved and neither the Attorney-in-Fact nor any designee or agent thereof
shall be liable for any acts of commission or omission, for any error of
judgment or for any mistake of fact or law, as long as the Attorney-in-Fact is
operating within the scope of the power of attorney and this Agreement and its
exhibits. The power of attorney, being coupled with an interest, shall be
irrevocable while any of the Notes or Preferred Stock remain unconverted, any of
the Warrants remain unexercised or any portion of this Agreement remains
unsatisfied. In addition, the Company shall give the Attorney-in-Fact
resolutions executed by the Board of Directors of the Company which authorize
(i) transfers of the Notes, the Preferred Stock and Warrants and (ii) future
issuances of the Conversion Shares or Warrant Shares, and which resolutions
state that they are irrevocable while any of the Notes or Preferred Stock remain
unconverted or the any of the Warrants remain unexercised, or any portion of
this Agreement remains unsatisfied.

     In the event that any sale, assignment or transfer under this Agreement
involves Conversion Shares or Warrant Shares sold, assigned or transferred
pursuant to an effective registration statement or pursuant to Rule 144, the
transfer agent shall issue such Securities to the Buyer, assignee or transferee,
as the case may be, without any restrictive legend. The Company acknowledges
that a breach by it of its obligations hereunder will cause irreparable harm to
a Buyer. Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section 5(b) will be inadequate and agrees,
in the event of a breach or threatened breach by the Company of the provisions
of this Section 5(b), that a Buyer shall be entitled, in addition to all other
available remedies, to an order and/or injunction restraining any breach and
requiring immediate issuance and transfer, without the necessity of showing
economic loss and without any bond or other security being required.

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

     (a) Closing Date. The obligation of the Company hereunder to issue and sell
the Notes, Preferred Stock and the related Warrants to each Buyer at the Closing
is subject to the satisfaction, at or before the Closing Date, of each of the
following conditions, provided that these conditions are for the Company's sole
benefit and may be waived by the Company at any time in its sole discretion by
providing each Buyer with prior written notice thereof:

          (i) Such Buyer shall have executed each of the Transaction Documents
     to which it is a party and delivered the same to the Company.

          (ii) Such Buyer and each other Buyer shall have delivered to the
     Company the Purchase Price (less, in the case of GCF, the amounts withheld
     pursuant to Section 4(g)) for the Notes, Preferred Stock and the related
     Warrants being purchased by such Buyer at the Closing by wire transfer of
     immediately available funds pursuant to the wire instructions provided by
     the Company.

          (iii) The representations and warranties of such Buyer shall be true
     and correct in all material respects as of the date when made and as of the
     Closing Date as though

                                       28

<PAGE>

     made at that time (except for representations and warranties that speak as
     of a specific date), and such Buyer shall have performed, satisfied and
     complied in all material respects with the covenants, agreements and
     conditions required by this Agreement to be performed, satisfied or
     complied with by such Buyer at or prior to the Closing Date.

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

     (a) Closing Date. The obligation of each Buyer hereunder to purchase the
Notes, Preferred Stock and the Warrants at the Closing is subject to the
satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for each Buyer's sole benefit and
may be waived by such Buyer at any time in its sole discretion by providing the
Company with prior written notice thereof:

          (i) The Company shall have executed and delivered to such Buyer (A)
     each of the Transaction Documents, (B) the Notes (in such principal amounts
     as such Buyer shall request) being purchased by such Buyer at the Closing
     pursuant to this Agreement, (C) the Preferred Stock is being purchased at
     the closing pursuant to this Agreement, and (D) the Warrants (in such
     amounts as such Buyer shall request) being purchased by such Buyer at the
     Closing pursuant to this Agreement.

          (ii) Such Buyer shall have received the opinion of Jaffe, Raitt, Heuer
     & Weiss, P.C., the Company's outside counsel, dated as of the Closing Date,
     in substantially the form of Exhibit L attached hereto.

          (iii) The Company shall have delivered to such Buyer a true copy of
     the Transfer Agent Letter and the Power of Attorney.

          (iv) The Company shall have delivered to such Buyer a true copy of
     certificate evidencing the formation and good standing of the Company and
     each of its Subsidiaries in such entity's jurisdiction of formation issued
     by the Secretary of State (or comparable office) of such jurisdiction, as
     of a date within 10 days of the Closing Date.

          (v) The Company shall have delivered to such Buyer a true copy of
     certificate evidencing the Company's qualification as a foreign corporation
     and good standing issued by the Secretary of State (or comparable office)
     of each jurisdiction in which the Company conducts business, as of a date
     within 10 days of the Closing Date.

          (vi) The Company shall have delivered to such Buyer a certified copy
     of the Articles of Incorporation as certified by the Secretary of State of
     the State of Delaware within ten (10) days of the Closing Date.

          (vii) The Company shall have delivered to such Buyer a certificate,
     executed by the Chief Executive Officer of the Company and dated as of the
     Closing Date, as to (i) the resolutions consistent with Section 3(b),
     appointing the attorney-in-fact pursuant to the Power of Attorney and as
     consistent with Section 5(b), as adopted by the Company's Board of
     Directors in a form reasonably acceptable to such Buyer, (ii) the Articles
     of

                                       29

<PAGE>

     Incorporation and (iii) the Bylaws, each as in effect at the Closing, in
     the form attached hereto as Exhibit M .

          (viii) The representations and warranties of the Company shall be true
     and correct in all material respects (other than representations and
     warranties that are already qualified by materiality or Material Adverse
     Effect which shall be true and correct in all respects) as of the date when
     made and as of the Closing Date as though made at that time (except for
     representations and warranties that speak as of a specific date) and the
     Company shall have performed, satisfied and complied in all respects with
     the covenants, agreements and conditions required by the Transaction
     Documents to be performed, satisfied or complied with by the Company at or
     prior to the Closing Date. Such Buyer shall have received a certificate,
     executed by the Chief Executive Officer of the Company, dated as of the
     Closing Date, to the foregoing effect and as to such other matters as may
     be reasonably requested by such Buyer in the form attached hereto as
     Exhibit N .

          (ix) The Company shall have delivered to such Buyer a letter from the
     Company's transfer agent certifying the number of shares of Common Stock
     outstanding as of a date within five days of the Closing Date.

          (x) The Common Stock (I) shall be designated for quotation or listed
     on the Principal Market and (II) shall not have been suspended, as of the
     Closing Date, by the SEC or the Principal Market from trading on the
     Principal Market nor shall suspension by the SEC or the Principal Market
     have been threatened, as of the Closing Date, either (A) in writing by the
     SEC or the Principal Market or (B) by falling below the minimum listing
     maintenance requirements of the Principal Market.

          (xi) The Company shall have obtained all governmental, regulatory or
     third party consents and approvals, if any, necessary for the sale of the
     Securities.

          (xii) Within six (6) Business Days prior to the Closing, the Company
     shall have delivered or caused to be delivered to each Buyer (A) true
     copies of UCC search results, listing all effective financing statements
     which name as debtor the Company or any of its Subsidiaries filed in the
     prior five years to perfect an interest in any assets thereof, together
     with copies of such financing statements, none of which, except as
     otherwise agreed in writing by the Buyers, shall cover any of the
     Collateral (as defined in the Security Documents) and the results of
     searches for any tax lien and judgment lien filed against such Person or
     its property, which results, except as otherwise agreed to in writing by
     the Buyers shall not show any such Liens (as defined in the Security
     Documents); and (B) a perfection opinion in form and substance satisfactory
     to the Buyers.

          (xiii) The Certificate of Designations shall have been filed with the
     Secretary of State of the State of Delaware and shall be in full force and
     effect, enforceable against the Company in accordance with its terms and
     shall not have been amended.

                                       30

<PAGE>

          (xiv) The Company shall have delivered to the Buyers Board of
     Directors resolutions of the Company which authorize (i) transfers of the
     Notes, the Preferred Stock and Warrants and (ii) future issuances of the
     Conversion Shares or Warrant Shares, and which resolutions state that they
     are irrevocable while any of the Notes or Preferred Stock remain
     unconverted or the any of the Warrants remain unexercised, or any portion
     of this Agreement remains unsatisfied

          (xv) The Company shall have delivered to such Buyer such other
     documents relating to the transactions contemplated by this Agreement as
     such Buyer or its counsel may reasonably request.

8. TERMINATION. In the event that the Closing shall not have occurred with
respect to a Buyer on or before five (5) Business Days from the date hereof due
to the Company's or such Buyer's failure to satisfy the conditions set forth in
Sections 6 and 7 above (and the nonbreaching party's failure to waive such
unsatisfied condition(s)), the nonbreaching party shall have the option to
terminate this Agreement with respect to such breaching party at the close of
business on such date without liability of any party to any other party;
provided, however, that if this Agreement is terminated pursuant to this Section
8, the Company shall remain obligated to reimburse the non-breaching Buyers for
the expenses described in Section 4(g) above.

9. MISCELLANEOUS.

     (a) Governing Law; Jurisdiction; Jury Trial. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by the internal laws of the State of New York, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York. Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in The City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is 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 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. EACH PARTY HEREBY IRREVOCABLY
WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF
THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

     (b) Counterparts. This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and
shall become

                                       31

<PAGE>

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.

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

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

     (e) Entire Agreement; Amendments. This Agreement and the other Transaction
Documents supersede all other prior oral or written agreements between the
Buyers, the Company, their Affiliates and Persons acting on their behalf with
respect to the matters discussed herein, and this Agreement, the other
Transaction Documents and the instruments referenced herein and therein 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 any Buyer makes any representation, warranty, covenant
or undertaking with respect to such matters.

     No provision of this Agreement may be amended other than by an instrument
in writing signed by the Company and the Required Holders, and any amendment to
this Agreement made in conformity with the provisions of this Section 9(e) shall
be binding on all Buyers and holders of Securities, as applicable. No provision
hereof may be waived other than by an instrument in writing signed by the party
against whom enforcement is sought. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the applicable
Securities then outstanding. No consideration shall be offered or paid to any
Person to amend or consent to a waiver or modification of any provision of any
of the Transaction Documents unless the same consideration also is offered to
all of the parties to the Transaction Documents, holders of Notes, holders of
Preferred Stock or holders of the Warrants, as the case may be. The Company has
not, directly or indirectly, made any agreements with any Buyers relating to the
terms or conditions of the transactions contemplated by the Transaction
Documents except as set forth in the Transaction Documents.

     (f) Notices. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one Business Day after deposit with
an overnight courier service, in each case properly addressed to the party to
receive the same. The addresses and facsimile numbers for such communications
shall be:

     If to the Company:

                                Catuity, Inc.
                                300 Preston Avenue
                                Suite 302

                                       32

<PAGE>

                                Charlottesville, VA 22902
                                Telephone: (434) 979-0724
                                Facsimile: (734) 293-4213
                                Attention: John Racine

     Copy to (for informational purposes only):

                                Jaffe, Raitt, Heuer, & Weiss, P.C.
                                27777 Franklin Road, Suite 2500
                                Southfield, MI 48043
                                Telephone: (248) 351-3000
                                Facsimile: (248) 351-3082
                                Attention: David D. Warner

     If to the Transfer Agent:  Computershare Investor Services
                                2 North LaSalle Street
                                Chicago, IL 60602
                                Telephone: (312) 588-4747
                                Facsimile: (312) 601-4348

     If to a Buyer, to its address and facsimile number set forth on the
Schedule of Buyers, with copies to such Buyer's representatives as set forth on
the Schedule of Buyers, with a copy (for informational purposes only) to:

                                Gottbetter & Partners, LLP
                                488 Madison Avenue, 12th Floor
                                New York, New York 10022
                                Telephone: (212) 400-6900
                                Facsimile: (212) 400-6901
                                Attention: Jason M. Rimland, Esq.

     or to such other address and/or facsimile number and/or to the attention of
such other Person as the recipient party has specified by written notice given
to each other party five (5) days prior to the effectiveness of such change.
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 an overnight courier service shall be rebuttable evidence of
personal service, receipt by facsimile or receipt from an overnight courier
service in accordance with clause (i), (ii) or (iii) above, respectively.

     (g) Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their respective successors and assigns,
including any purchasers of the Notes, Preferred Stock or the Warrants. The
Company shall not assign this Agreement or any rights or obligations hereunder
without the prior written consent of the Required Holders (unless the Company is
in compliance with the applicable provisions governing Fundamental Transactions
set forth in the Notes, the Certificate of Designations and the Warrants). A
Buyer

                                       33

<PAGE>

may assign some or all of its rights hereunder without the consent of the
Company, in which event such assignee shall be deemed to be a Buyer hereunder
with respect to such assigned rights; provided that such assignee agrees in
writing to be bound by all of the provisions contained herein.

     (h) No Third Party Beneficiaries. This 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. Unless this Agreement is terminated under Section 8, the
representations and warranties of the Company and the Buyers contained in
Sections 2 and 3 and the agreements and covenants set forth in Sections 4, 5 and
9 shall survive the Closing. Each Buyer shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.

     (j) 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
any other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

     (k) Indemnification. In consideration of each Buyer's execution and
delivery of the Transaction Documents and acquiring the Securities thereunder
and in addition to all of the Company's other obligations under the Transaction
Documents, the Company shall defend, protect, indemnify and hold harmless each
Buyer and each other holder of the Securities and all of their stockholders,
partners, members, officers, directors, employees 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 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, instrument 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, instrument or document contemplated hereby or thereby or
(c) any cause of action, suit or claim brought or made against such Indemnitee
by a third party (including for these purposes a derivative action brought on
behalf of the Company) and arising out of or resulting from (i) the execution,
delivery, performance 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, (iii) any
disclosure made by such Buyer pursuant to Section 4(i), or (iv) the status of
such Buyer or holder of the Securities as an investor in the Company pursuant to
the transactions contemplated by the Transaction Documents. To the extent that
the foregoing undertaking by

                                       34

<PAGE>

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(k) shall be the same as those set forth in
Section 6 of the Registration Rights Agreement.

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

     (m) Remedies. Each Buyer and each holder of the Securities 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 this Agreement 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 this
Agreement and to exercise all other rights granted by law. Furthermore, the
Company recognizes that in the event that it fails to perform, observe, or
discharge any or all of its obligations under the Transaction Documents, any
remedy at law may prove to be inadequate relief to the Buyers. The Company
therefore agrees that the Buyers shall be entitled to seek temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages and without posting a bond or other security.

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

     (o) Payment Set Aside. To the extent that the Company makes a payment or
payments to the Buyers hereunder or pursuant to any of the other Transaction
Documents or the Buyers enforce or exercise their rights hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a trustee,
receiver or any other Person under any law (including, without limitation, any
bankruptcy law, foreign, state or federal law, common law or equitable cause of
action), then to the extent of any such restoration the obligation or part
thereof originally intended to be satisfied shall be revived and continued in
full force and effect as if such payment had not been made or such enforcement
or setoff had not occurred.

     (p) Independent Nature of Buyers' Obligations and Rights. The obligations
of each Buyer under any Transaction Document are several and not joint with the
obligations of any other Buyer, and no Buyer shall be responsible in any way for
the performance of the obligations

                                       35

<PAGE>

of any other Buyer under any Transaction Document. Nothing contained herein or
in any other Transaction Document, and no action taken by any Buyer pursuant
hereto or thereto, shall be deemed to constitute the Buyers as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Buyers are in any way acting in concert or as a group with
respect to such obligations or the transactions contemplated by the Transaction
Documents and the Company acknowledges that to its knowledge the Buyers are not
acting in concert or as a group, and the Company will not assert any such claim,
with respect to such obligations or the transactions contemplated by the
Transaction Documents. Each Buyer confirms that it has independently
participated in the negotiation of the transaction contemplated hereby with the
advice of its own counsel and advisors. Each Buyer shall be entitled to
independently protect and enforce its rights, including, without limitation, the
rights arising out of this Agreement or out of any other Transaction Documents,
and it shall not be necessary for any other Buyer to be joined as an additional
party in any proceeding for such purpose.

                            [SIGNATURE PAGE FOLLOWS]

                                       36

<PAGE>

     IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

                                        COMPANY:

                                        CATUITY, INC.

                                        By:
                                            ------------------------------------
                                        Name: John Racine
                                        Title: Chief Executive Officer

                                       37

<PAGE>

     IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

                                        BUYERS:

                                        GOTTBETTER CAPITAL MASTER, LTD.

                                        By:
                                            ------------------------------------
                                        Name: Adam S. Gottbetter
                                        Title: Director

                                        BRIDGEPOINTE MASTER FUND LTD.

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

                                       38
<PAGE>

                             SCHEDULE OF NOTE BUYERS

<TABLE>
<CAPTION>
                                                             (4)
                                                  (3)     AGGREGATE
                               (2)             AGGREGATE  NUMBER OF       (5)                      (6)
        (1)                ADDRESS AND         PRINCIPAL   WARRANT      PURCHASE          LEGAL REPRESENTATIVE'S
       BUYER             FACSIMILE NUMBER       OF NOTE     SHARES       PRICE         ADDRESS AND FACSIMILE NUMBER
       -----             ----------------      ---------  ---------     --------       ----------------------------
<S>                  <C>                      <C>         <C>        <C>            <C>
Gottbetter Capital   488 Madison Avenue        1,111,112   220,459   $1,000,000.80  Jason M. Rimland, Esq.
Master, Ltd.         12th Floor                                                     Gottbetter & Partners, LLP
                     New York, NY 10022                                             488 Madison Avenue
                     Facsimile: 212.400.6999                                        12th Floor
                                                                                    New York, NY 10022
                                                                                    Facsimile: 212.400.6901

BridgePointe Master  1125 Sanctuary Parkway      688,888   136,684      619,999.20  P. Bradford Hathorn, Esq.
Fund Ltd.            Suite 275                                                      Roswell Capital Partners, LLC
                     Alpharetta, GA 30004                                           1125 Sanctuary Parkway, Suite 275
                     Facsimile: 770.777.5844                                        Alpharetta, GA 30004
                                                                                    Facsimile: 770-777-5844
                                              ----------   -------   -------------
Total:                                        $1,800,000   357,143   $   1,620,000
                                              ==========   =======   =============
</TABLE>

                                       39

<PAGE>

                       SCHEDULE OF PREFERRED STOCK BUYERS

<TABLE>
<CAPTION>
                                                  (3)
                                               AGGREGATE                              (5)
                               (2)             NUMBER OF      (4)            LEGAL REPRESENTATIVE'S
        (1)                ADDRESS AND         PREFERRED    PURCHASE              ADDRESS AND
       BUYER             FACSIMILE NUMBER       SHARES       PRICE              FACSIMILE NUMBER
       -----             ----------------      ---------    --------         ----------------------
<S>                  <C>                      <C>         <C>          <C>
Gottbetter Capital   488 Madison Avenue         432.10     388,889.10  Jason M. Rimland, Esq.
Master, Ltd.         12th Floor                                        Gottbetter & Partners, LLP
                     New York, NY 10022                                488 Madison Avenue
                     Facsimile: 212.400.6999                           12th Floor
                                                                       New York, NY 10022
                                                                       Facsimile: 212.400.6901

BridgePointe Master  1125 Sanctuary Parkway     267.90     241,110.90  P. Bradford Hathorn, Esq.
Fund Ltd.            Suite 275                                         Roswell Capital Partners, LLC
                     Alpharetta, GA 30004                              1125 Sanctuary Parkway, Suite 275
                     Facsimile: 770.777.5844                           Alpharetta, GA 30004
                                                                       Facsimile: 770-777-5844
                                                ------    -----------
Total:                                             700    $   630,000
                                                ======    ===========
</TABLE>

                                       40<PAGE>

                                                                    Exhibit 10.2

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE
144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD
CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 20(a)
HEREOF. THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE
SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET
FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

                                  CATUITY, INC.
                         SENIOR SECURED CONVERTIBLE NOTE

Issuance Date: November 22, 2006   Original Principal Amount: U.S. $1,111,112

FOR VALUE RECEIVED, Catuity, Inc., a Delaware corporation (the "COMPANY"),
hereby promises to pay to the order of Gottbetter Capital Master, Ltd. or
registered assigns ("HOLDER") the amount set out above as the Original Principal
Amount (as reduced pursuant to the terms hereof pursuant to redemption,
conversion or otherwise, the "PRINCIPAL") when due, whether upon the Maturity
Date (as defined below), on any Installment Date with respect to the Installment
Amount due on such Installment Date, acceleration, redemption or otherwise (in
each case in accordance with the terms hereof) and to pay interest ("INTEREST")
on any outstanding Principal at a rate per annum equal to the Interest Rate (as
defined below), from the date set out above as the Issuance Date (the "ISSUANCE
DATE") until the same becomes due and payable, whether upon an Interest Date (as
defined below), any Installment Date, or the Maturity Date, acceleration,
conversion, redemption or otherwise (in each case in accordance with the terms
hereof). This Senior Secured Convertible Note (including all Senior Secured
Convertible Notes issued in exchange, transfer or replacement hereof, this
"NOTE") is one of an issue of Senior Secured Convertible Notes issued pursuant
to the Securities Purchase Agreement on the Closing Date (collectively, the
"NOTES" and such other Senior Secured Convertible Notes, the "OTHER NOTES").
Certain capitalized terms are defined in Section 28.

1. PAYMENTS OF PRINCIPAL; MATURITY. On each Installment Date commencing December
1, 2007, the Company shall pay to the Holder an amount equal to the Installment
Amount due on such Installment Date in cash by wire transfer of immediately
available funds.

<PAGE>

The "MATURITY DATE" shall be November 21, 2009, as may be extended at the option
of the Holder (i) in the event that, and for so long as, an Event of Default (as
defined in Section 4(a)) shall have occurred and be continuing or any event
shall have occurred and be continuing which with the passage of time and the
failure to cure would result in an Event of Default, (ii) through the date that
is ten (10) days after the consummation of a Change of Control in the event that
a Change of Control is publicly announced or a Change of Control Notice (as
defined in Section 5(b)) is delivered prior to the Maturity Date and (iii) in
accordance with Section 8(d).

2. INTEREST; INTEREST RATE.

     (a) Interest on this Note shall commence accruing on the Issuance Date and
shall be computed on the basis of a 360-day year and actual days elapsed and
shall be payable in arrears for each Calendar Month during the period beginning
on the Issuance Date and ending on, and including, the Maturity Date (each, an
"INTEREST DATE") with the first Interest Date being December 1, 2006. Interest
shall be payable on each Interest Date, to the record holder of this Note on the
applicable Interest Date, in cash ("CASH INTEREST").

     (b) From and after the occurrence of an Event of Default, the Interest Rate
shall be increased to fifteen percent (15%). In the event that such Event of
Default is subsequently cured, the adjustment referred to in the preceding
sentence shall cease to be effective as of the date of such cure; provided that
the Interest as calculated at such increased rate during the continuance of such
Event of Default shall continue to apply to the extent relating to the days
after the occurrence of such Event of Default through and including the date of
cure of such Event of Default.

3. CONVERSION OF NOTES. This Note shall be convertible into shares of common
stock of the Company, par value $0.001 per share (the "COMMON STOCK"), on the
terms and conditions set forth in this Section 3.

     (a) Conversion Right. Subject to the provisions of Section 3(d), at any
time or times on or after the Issuance Date, the Holder shall be entitled to
convert any portion of the outstanding and unpaid Conversion Amount (as defined
below) into fully paid and nonassessable shares of Common Stock in accordance
with Section 3(c), at the Conversion Rate (as defined below). The Company shall
not issue any fraction of a share of Common Stock upon any conversion. If the
issuance would result in the issuance of a fraction of a share of Common Stock,
the Company shall round such fraction of a share of Common Stock up to the
nearest whole share. The Company shall pay any and all taxes that may be payable
with respect to the issuance and delivery of Common Stock upon conversion of any
Conversion Amount.

     (b) Conversion Rate. The number of shares of Common Stock issuable upon
conversion of any Conversion Amount pursuant to Section 3(a) shall be determined
by dividing (x) such Conversion Amount by (y) the Conversion Price (the
"CONVERSION RATE").

          (i) "CONVERSION AMOUNT" means the portion of the Principal to be
     converted, redeemed or otherwise with respect to which this determination
     is being made.

                                       2

<PAGE>

          (ii) "CONVERSION PRICE" means, as of any Conversion Date (as defined
     below) or other date of determination, $3.25 (appropriately adjusted for
     any stock split, stock dividend, stock combination or other similar
     transaction that proportionately decreases or increases the Common Stock).

     (c) Mechanics of Conversion.

          (i) Optional Conversion. To convert any Conversion Amount into shares
     of Common Stock on any date (a "CONVERSION DATE"), the Holder shall (A)
     transmit by facsimile (or otherwise deliver), for receipt on or prior to
     11:59 p.m., New York Time, on such date, a copy of an executed notice of
     conversion in the form attached hereto as Exhibit I (the "CONVERSION
     NOTICE") to the Company and (B) if required by Section 3(c)(iv), surrender
     this Note to a nationally recognized overnight delivery service for
     delivery to the Company (or an indemnification undertaking with respect to
     this Note in the case of its loss, theft or destruction). On or before the
     next Trading Day following the date of receipt of a Conversion Notice, the
     Company shall transmit by facsimile a confirmation of receipt of such
     Conversion Notice to the Holder and the Transfer Agent. On or before the
     second (2nd) Trading Day following the date of receipt of a Conversion
     Notice (the "SHARE DELIVERY DATE"), the Company shall (1) (X) provided that
     the Transfer Agent is participating in the Fast Automated Securities
     Transfer Program of DTC credit such aggregate number of shares of Common
     Stock to which the Holder shall be entitled to the Holder's or its
     designee's balance account with DTC through its Deposit Withdrawal Agent
     Commission system or (Y) if the Transfer Agent is not participating in the
     DTC Fast Automated Securities Transfer Program, issue and deliver to the
     address as specified in the Conversion Notice, a certificate, registered in
     the name of the Holder or its designee, for the number of shares of Common
     Stock to which the Holder shall be entitled, (2) pay to the Holder in cash
     an amount equal to the accrued and unpaid Interest on the Conversion Amount
     up to and including the Conversion Date. If this Note is physically
     surrendered for conversion as required by Section 3(c)(iv) and the
     outstanding Principal of this Note is greater than the Principal portion of
     the Conversion Amount being converted, then the Company shall as soon as
     practicable and in no event later than three Business Days after receipt of
     this Note and at its own expense, issue and deliver to the holder a new
     Note (in accordance with Section 18(d)) representing the outstanding
     Principal not converted. The Person or Persons entitled to receive the
     shares of Common Stock issuable upon a conversion of this Note shall be
     treated for all purposes as the record holder or holders of such shares of
     Common Stock on the Conversion Date. In the event of a partial conversion
     of this Note pursuant hereto, the principal amount converted shall be
     deducted from the Installment Amounts relating to the Installment Dates as
     set forth in the Conversion Notice.

          (ii) Company's Failure to Timely Convert. If within three (3) Trading
     Days after the Company's receipt of the facsimile copy of a Conversion
     Notice the Company shall fail to issue and deliver a certificate to the
     Holder or credit the Holder's balance account with DTC for the number of
     shares of Common Stock to which the Holder is entitled upon such holder's
     conversion of any Conversion Amount (a "CONVERSION FAILURE"), and if on or
     after such Trading Day the Holder purchases (in an open market

                                       3

<PAGE>

     transaction or otherwise) Common Stock to deliver in satisfaction of a sale
     by the Holder of Common Stock issuable upon such conversion that the Holder
     anticipated receiving from the Company (a "BUY-IN"), then the Company
     shall, within three (3) Business Days after the Holder's request and
     provision of trade confirmations and in the Holder's discretion, either (i)
     pay cash to the Holder in an amount equal to the Holder's total purchase
     price (including brokerage commissions and other out-of-pocket expenses, if
     any) for the shares of Common Stock so purchased (the "BUY-IN PRICE"), at
     which point the Company's obligation to deliver such certificate (and to
     issue such Common Stock) shall terminate, or (ii) promptly honor its
     obligation to deliver to the Holder a certificate or certificates
     representing such Common Stock and pay cash to the Holder in an amount
     equal to the excess (if any) of the Buy-In Price over the product of (A)
     such number of shares of Common Stock, times (B) the Closing Bid Price on
     the Conversion Date.

          (iii) Registration; Book-Entry. The Company shall maintain a register
     (the "REGISTER") for the recordation of the names and addresses of the
     holders of each Note and the principal amount of the Notes held by such
     holders (the "REGISTERED NOTES"). The entries in the Register shall be
     conclusive and binding for all purposes absent manifest error. The Company
     and the holders of the Notes shall treat each Person whose name is recorded
     in the Register as the owner of a Note for all purposes, including, without
     limitation, the right to receive payments of principal and interest
     hereunder, notwithstanding notice to the contrary. A Registered Note may be
     assigned or sold in whole or in part only by registration of such
     assignment or sale on the Register. Upon its receipt of a request to assign
     or sell all or part of any Registered Note by a Holder, to the extent
     permitted by applicable securities laws the Company shall record the
     information contained therein in the Register and issue one or more new
     Registered Notes in the same aggregate principal amount as the principal
     amount of the surrendered Registered Note to the designated assignee or
     transferee pursuant to Section 17. Notwithstanding anything to the contrary
     set forth herein, upon conversion of any portion of this Note in accordance
     with the terms hereof, the Holder shall not be required to physically
     surrender this Note to the Company unless (A) the full Conversion Amount
     represented by this Note is being converted or (B) the Holder has provided
     the Company with prior written notice (which notice may be included in a
     Conversion Notice) requesting physical surrender and reissue of this Note.
     The Holder and the Company shall maintain records showing the Principal,
     Interest and Late Charges converted and the dates of such conversions or
     shall use such other method, reasonably satisfactory to the Holder and the
     Company, so as not to require physical surrender of this Note upon
     conversion.

          (iv) Disputes. In the event of a dispute as to the number of shares of
     Common Stock issuable to the Holder in connection with a conversion of this
     Note, the Company shall issue to the Holder the number of shares of Common
     Stock not in dispute and resolve such dispute in accordance with Section
     23.

     (d) Limitations on Conversions.

          (i) Beneficial Ownership. The Company shall not effect any conversion
     of this Note, and the Holder of this Note (including any successor,
     transferee or assignee)

                                       4

<PAGE>

     shall not have the right to convert any portion of this Note pursuant to
     Section 3(a), to the extent that after giving effect to such conversion,
     the Holder (together with the Holder's affiliates) would beneficially own
     in excess of 4.99% (the "MAXIMUM PERCENTAGE") of the number of shares of
     Common Stock outstanding immediately after giving effect to such
     conversion. For purposes of the foregoing sentence, the number of shares of
     Common Stock beneficially owned by the Holder and its affiliates shall
     include the number of shares of Common Stock issuable upon conversion of
     this Note with respect to which the determination of such sentence is being
     made, but shall exclude the number of shares of Common Stock which would be
     issuable upon (A) conversion of the remaining, nonconverted portion of this
     Note beneficially owned by the Holder or any of its affiliates and (B)
     exercise or conversion of the unexercised or nonconverted portion of any
     other securities of the Company (including, without limitation, any Other
     Notes or warrants) subject to a limitation on conversion or exercise
     analogous to the limitation contained herein beneficially owned by the
     Holder or any of its affiliates. Except as set forth in the preceding
     sentence, for purposes of this Section 3(d)(i), beneficial ownership shall
     be calculated in accordance with Section 13(d) of the Securities Exchange
     Act of 1934, as amended. For purposes of this Section 3(d)(i), in
     determining the number of outstanding shares of Common Stock, the Holder
     may rely on the number of outstanding shares of Common Stock as reflected
     in (x) the Company's most recent Form 10-KSB, Form 10-K, Form 10-QSB, Form
     10-Q or Form 8-K, as the case may be (y) a more recent public announcement
     by the Company or (z) any other notice by the Company or the Transfer Agent
     setting forth the number of shares of Common Stock outstanding. For any
     reason at any time, during regular business hours of the Company and upon
     the written request of the Holder, the Company shall within two (2)
     Business Days confirm in writing to the Holder the number of shares of
     Common Stock then outstanding. In any case, the number of outstanding
     shares of Common Stock shall be determined after giving effect to the
     conversion or exercise of securities of the Company, including this Note,
     by the Holder or its affiliates since the date as of which such number of
     outstanding shares of Common Stock was reported. By written notice to the
     Company, the Holder may increase or decrease the Maximum Percentage to any
     other percentage specified in such notice; provided that (i) any such
     increase will not be effective until the sixty-first (61st ) day after such
     notice is delivered to the Company, and (ii) any such increase or decrease
     will apply only to the Holder and not to any other holder of Notes.

          (ii) Principal Market Regulation. The Company shall not be obligated
     to issue any shares of Common Stock upon conversion of this Note, and the
     Holder of this Note shall not have the right to receive upon conversion of
     this Note any shares of Common Stock, if the issuance of such shares of
     Common Stock would exceed the aggregate number of shares of Common Stock
     which the Company may issue upon conversion or exercise, as applicable, of
     the Notes, the Preferred Stock and Warrants without breaching the Company's
     obligations under the rules or regulations of the Principal Market or the
     Australian Stock Exchange (the "EXCHANGE CAP"), except that such limitation
     shall not apply in the event that the Company (A) obtains the approval of
     its stockholders as required by the applicable rules of the Principal
     Market or the Australian Stock Exchange for issuances of Common Stock in
     excess of such amount or (B) obtains a written opinion from outside counsel
     to the Company that such approval is not required, which opinion

                                       5

<PAGE>

     shall be reasonably satisfactory to the Required Holders. Until such
     approval or written opinion is obtained, no purchaser of the Notes pursuant
     to the Securities Purchase Agreement (the "PURCHASERS") shall be issued in
     the aggregate, upon conversion or exercise, as applicable, of Notes, the
     Preferred Stock or Warrants, shares of Common Stock in an amount greater
     than the product of the Exchange Cap multiplied by a fraction, the
     numerator of which is the principal amount of Notes issued to the
     Purchasers pursuant to the Securities Purchase Agreement on the Closing
     Date and the denominator of which is the aggregate principal amount of all
     Notes issued to the Purchasers pursuant to the Securities Purchase
     Agreement on the Closing Date (with respect to each Purchaser, the
     "EXCHANGE CAP ALLOCATION"). In the event that any Purchaser shall sell or
     otherwise transfer any of such Purchaser's Notes, the transferee shall be
     allocated a pro rata portion of such Purchaser's Exchange Cap Allocation,
     and the restrictions of the prior sentence shall apply to such transferee
     with respect to the portion of the Exchange Cap Allocation allocated to
     such transferee. In the event that any holder of Notes shall convert all of
     such holder's Notes into a number of shares of Common Stock which, in the
     aggregate, is less than such holder's Exchange Cap Allocation, then the
     difference between such holder's Exchange Cap Allocation and the number of
     shares of Common Stock actually issued to such holder shall be allocated to
     the respective Exchange Cap Allocations of the remaining holders of Notes
     on a pro rata basis in proportion to the aggregate principal amount of the
     Notes then held by each such holder.

4. RIGHTS UPON EVENT OF DEFAULT.

     (a) Event of Default. Each of the following events shall constitute an
"Event of Default ":

          (i) the failure of the applicable Registration Statement required to
     be filed pursuant to the Registration Rights Agreement to be declared
     effective by the SEC on or prior to the date that is ninety (90) days after
     the applicable Effectiveness Deadline (as defined in the Registration
     Rights Agreement), or, while the applicable Registration Statement is
     required to be maintained effective pursuant to the terms of the
     Registration Rights Agreement, the effectiveness of the applicable
     Registration Statement lapses for any reason (including, without
     limitation, the issuance of a stop order) or is unavailable to any holder
     of the Notes for sale of all of such holder's Registrable Securities (as
     defined in the Registration Rights Agreement) in accordance with the terms
     of the Registration Rights Agreement, and such lapse or unavailability
     continues for a period of five (5) consecutive days or for more than an
     aggregate of ten (10) days in any 365-day period (other than days during an
     Allowable Grace Period (as defined in the Registration Rights Agreement));

          (ii) the suspension from trading or failure of the Common Stock to be
     listed on the Principal Market or on an Eligible Market for a period of
     five (5) consecutive Trading Days or for more than an aggregate of ten (10)
     Trading Days in any 365-day period;

          (iii) the Company's (A) failure to cure a Conversion Failure by
     delivery of the

                                       6

<PAGE>

     required number of shares of Common Stock within ten (10) Business Days
     after the applicable Conversion Date or (B) written notice to any holder of
     the Notes, including by way of public announcement or through any of its
     authorized agents, at any time, of its intention not to comply with a
     request for conversion of any Notes into shares of Common Stock that is
     tendered in accordance with the provisions of the Notes;

          (iv) at any time following the tenth (10th) consecutive Business Day
     that the authorized number of shares is less than the number of shares of
     Common Stock that the Holder would be entitled to receive upon a conversion
     of three hundred percent (300%) of the full Conversion Amount of this Note
     (without regard to any limitations on conversion set forth in Section 3(d)
     or otherwise);

          (v) the Company's failure to pay to the Holder any amount of Principal
     (including, without limitation, any redemption or make-whole payments),
     Interest, Late Charges or other amounts when and as due under this Note or
     any other Transaction Document (as defined in the Securities Purchase
     Agreement) or any other agreement, document, certificate or other
     instrument delivered in connection with the transactions contemplated
     hereby and thereby to which the Holder is a party, except, in the case of a
     failure to pay Interest and Late Charges when and as due, in which case
     only if such failure continues for a period of at least five (5) Business
     Days;

          (vi) any default under, redemption of or acceleration prior to
     maturity of any Indebtedness in excess of $100,000, in the aggregate, of
     the Company or any of its Subsidiaries (as defined in Section 3(a) of the
     Securities Purchase Agreement);

          (vii) the Company or any of its Subsidiaries, pursuant to or within
     the meaning of Title 11, U.S. Code, or any similar Federal, foreign or
     state law for the relief of debtors (collectively, "BANKRUPTCY LAW"), (A)
     commences a voluntary case, (B) consents to the entry of an order for
     relief against it in an involuntary case, (C) consents to the appointment
     of a receiver, trustee, assignee, liquidator or similar official (a
     "CUSTODIAN"), (D) makes a general assignment for the benefit of its
     creditors or (E) admits in writing that it is generally unable to pay its
     debts as they become due;

          (viii) a court of competent jurisdiction enters an order or decree
     under any Bankruptcy Law that (A) is for relief against the Company or any
     of its Subsidiaries in an involuntary case, (B) appoints a Custodian of the
     Company or any of its Subsidiaries or (C) orders the liquidation of the
     Company or any of its Subsidiaries;

          (ix) a final judgment or judgments for the payment of money
     aggregating in excess of $250,000 are rendered against the Company or any
     of its Subsidiaries and which judgments are not, within sixty (60) days
     after the entry thereof, bonded, discharged or stayed pending appeal, or
     are not discharged within sixty (60) days after the expiration of such
     stay; provided, however, that any judgment which is covered by insurance or
     an indemnity from a credit worthy party shall not be included in
     calculating the $250,000 amount set forth above so long as the Company
     provides the Holder a written statement from such insurer or indemnity
     provider (which written statement shall

                                       7

<PAGE>

     be reasonably satisfactory to the Holder) to the effect that such judgment
     is covered by insurance or an indemnity and the Company will receive the
     proceeds of such insurance or indemnity within thirty (30) days of the
     issuance of such judgment;

          (x) the Company breaches any material representation, warranty,
     covenant or other term or condition of any Transaction Document, except, in
     the case of a breach of a covenant which is curable, only if such breach
     continues for a period of at least ten (10) consecutive Business Days;

          (xi) any breach or failure in any respect to comply with (x) Section
     15 of this Note or (y) any of the Potential Partner Conditions;

          (xii) any breach or failure to comply with the Company's obligations
     under the Series A Certificate of Designation;

          (xiii) any Event of Default (as defined in the Other Notes) occurs
     with respect to any Other Notes;

          (ix) the inability of the Common Stock to be transferred with DTC
     through the Deposit Withdrawal at Custodian system;

          (x) failure by the Company to issue the Holder once every six months,
     or as otherwise required by the Transfer Agent, a power-of-attorney, as set
     forth in Section 5 (b) of the Securities Purchase Agreement, to instruct
     the Transfer Agent to convert the Notes or the Preferred Stock into shares
     of the Company's Common Stock or to convert the Warrants into shares of the
     Company's Common Stock, such that a valid Power-of-Attorney (as defined in
     the Securities Purchase Agreement) no longer exists for such conversions;
     and

          (xi) in the event that the Transfer Agent does not recognize a
     Power-of-Attorney as sufficient instruction from the Holder to convert the
     Notes or the Preferred Stock or to allow for the exercise of the Warrants,
     failure by the Company to switch within three weeks to a different Transfer
     Agent that recognizes the Power-of-Attorney allowing the Holder to convert
     the Notes or the Preferred Stock into shares of the Company's Common Stock
     or to convert the Warrants into shares of the Company's Common Stock.

     (b) Redemption Right. Upon the occurrence of an Event of Default with
respect to this Note, the Company shall within two (2) Business Days after the
day on which the Company is aware of the Event of Default deliver written notice
thereof via facsimile and overnight courier (an "EVENT OF DEFAULT NOTICE") to
the Holder. At any time after the earlier of the Holder's receipt of an Event of
Default Notice and the Holder becoming aware of an Event of Default, the Holder
may require the Company to redeem all or any portion of this Note by delivering
written notice thereof (the "Event of Default Redemption Notice") to the
Company, which Event of Default Redemption Notice shall indicate the portion of
this Note the Holder is electing to redeem. Each portion of this Note subject to
redemption by the Company pursuant to this

                                       8

<PAGE>

Section 4(b) shall be redeemed by the Company at a price equal to the greater of
(i) the product of (x) the Conversion Amount to be redeemed and (y) the
Redemption Premium and (ii) the product of (A) the Conversion Rate with respect
to such Conversion Amount in effect at such time as the Holder delivers an Event
of Default Redemption Notice and (B) the Closing Sale Price of the Common Stock
on the date immediately preceding such Event of Default (the "EVENT OF DEFAULT
REDEMPTION PRICE"). Redemptions required by this Section 4(b) shall be made in
accordance with the provisions of Section 12. To the extent redemptions required
by this Section 4(b) are deemed or determined by a court of competent
jurisdiction to be prepayments of the Note by the Company, such redemptions
shall be deemed to be voluntary prepayments. The parties hereto agree that in
the event of the Company's redemption of any portion of the Note under this
Section 4(b), the Holder's damages would be uncertain and difficult to estimate
because of the parties' inability to predict future interest rates and the
uncertainty of the availability of a suitable substitute investment opportunity
for the Holder. Accordingly, any Redemption Premium due under this Section 4(b)
is intended by the parties to be, and shall be deemed, a reasonable estimate of
the Holder's actual loss of its investment opportunity and not as a penalty.

5. RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.

     (a) Assumption. The Company shall not enter into or be party to a
Fundamental Transaction unless (i) the Successor Entity assumes in writing all
of the obligations of the Company under this Note and the other Transaction
Documents in accordance with the provisions of this Section 5(a) pursuant to
written agreements in form and substance satisfactory to the Required Holders
and approved by the Required Holders prior to such Fundamental Transaction,
including agreements to deliver to each holder of Notes in exchange for such
Notes a security of the Successor Entity evidenced by a written instrument
substantially similar in form and substance to the Notes, including, without
limitation, having a principal amount and interest rate equal to the principal
amounts and the interest rates of the Notes held by such holder, having similar
conversion rights as the Notes and having similar ranking to the Notes, and
satisfactory to the Required Holders and (ii) the Successor Entity (including
its Parent Entity) is a publicly traded corporation whose common stock is quoted
on or listed for trading on an Eligible Market. Upon the occurrence of any
Fundamental Transaction, the Successor Entity shall succeed to, and be
substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Note referring to the "Company" shall refer
instead to the Successor Entity), and may exercise every right and power of the
Company and shall assume all of the obligations of the Company under this Note
with the same effect as if such Successor Entity had been named as the Company
herein. Upon consummation of the Fundamental Transaction, the Successor Entity
shall deliver to the Holder confirmation that there shall be issued upon
conversion or redemption of this Note at any time after the consummation of the
Fundamental Transaction, in lieu of the shares of Common Stock (or other
securities, cash, assets or other property) issuable upon the conversion of the
Notes prior to such Fundamental Transaction, such shares of publicly traded
common stock (or their equivalent) of the Successor Entity, as adjusted in
accordance with the provisions of this Note. The provisions of this Section
shall apply similarly and equally to successive Fundamental Transactions and
shall be applied without regard to any limitations on the conversion of this
Note.

     (b) Redemption Right. No sooner than fifteen (15) days nor later than ten
(10) days

                                       9

<PAGE>

prior to the consummation of a Change of Control, but not prior to the public
announcement of such Change of Control, the Company shall deliver written notice
thereof via facsimile and overnight courier to the Holder (a "CHANGE OF CONTROL
NOTICE"). At any time during the period beginning after the Holder's receipt of
a Change of Control Notice and ending ten (10) Trading Days after the
consummation of such Change of Control, the Holder may require the Company to
redeem all or any portion of this Note by delivering written notice thereof
("CHANGE OF CONTROL REDEMPTION NOTICE") to the Company, which Change of Control
Redemption Notice shall indicate the Conversion Amount the Holder is electing to
have redeemed. The portion of this Note subject to redemption pursuant to this
Section 5 shall be redeemed by the Company in cash at a price equal to the
greater of (i) the Change of Control Premium multiplied by the product of (x)
the sum of the Conversion Amount being redeemed and any accrued and unpaid
Interest with respect to such Conversion Amount and accrued and unpaid Late
Charges with respect to such Conversion Amount and Interest and (y) the Closing
Sale Price of the Common Stock immediately following the public announcement of
such proposed Change of Control and (ii) 150% of the sum of the Conversion
Amount being redeemed and any accrued and unpaid Interest with respect to such
Conversion Amount subject to such Change of Control Redemption and accrued and
unpaid Late Charges with respect to such Conversion Amount and Interest (the
"CHANGE OF CONTROL REDEMPTION PRICE"). For example and the avoidance of any
doubt, if the Change of Control Premium is 130%, the Conversion Amount being
redeemed including all accrued and unpaid Interest and Late Charges is $100,000
and the Closing Sale Price of the Common Stock immediately following the public
announcement of the Change of Control is $2.00, then the Redemption Price shall
be the greater of:

                       130% * [$100,000 * $2] or $260,000

                                       and

                          150% * $100,000 or $150,000.

Redemptions required by this Section 5 shall be made in accordance with the
provisions of Section 15 and shall have priority to payments to shareholders in
connection with a Change of Control. To the extent redemptions required by this
Section 5(b) are deemed or determined by a court of competent jurisdiction to be
prepayments of the Note by the Company, such redemptions shall be deemed to be
voluntary prepayments. Notwithstanding anything to the contrary in this Section
5, until the Change of Control Redemption Price (together with any interest
thereon) is paid in full, the Conversion Amount submitted for redemption under
this Section 5(c) may be converted, in whole or in part, by the Holder into
shares of Common Stock, or in the event the Conversion Date is after the
consummation of the Change of Control, shares of publicly traded common stock
(or their equivalent) of the Successor Entity pursuant to Section 3. The parties
hereto agree that in the event of the Company's redemption of any portion of the
Note under this Section 5(b), the Holder's damages would be uncertain and
difficult to estimate because of the parties' inability to predict future
interest rates and the uncertainty of the availability of a suitable substitute
investment opportunity for the Holder. Accordingly, any redemption premium due
under this Section 5(b) is intended by the parties to be, and shall be deemed, a
reasonable estimate of the Holder's actual loss of its investment opportunity
and not as a penalty.

                                       10

<PAGE>

6. RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.

     (a) Purchase Rights. If at any time the Company grants, issues or sells any
Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "PURCHASE RIGHTS"), then the Holder will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the
number of shares of Common Stock acquirable upon complete conversion of this
Note (without taking into account any limitations or restrictions on the
convertibility of this Note) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.

     (b) Other Corporate Events. In addition to and not in substitution for any
other rights hereunder, prior to the consummation of any Fundamental Transaction
pursuant to which holders of shares of Common Stock are entitled to receive
securities or other assets with respect to or in exchange for shares of Common
Stock (a "CORPORATE EVENT"), the Company shall make appropriate provision to
insure that the Holder will thereafter have the right to receive upon a
conversion of this Note, at the Holder's option, (i) in addition to the shares
of Common Stock receivable upon such conversion, such securities or other assets
to which the Holder would have been entitled with respect to such shares of
Common Stock had such shares of Common Stock been held by the Holder upon the
consummation of such Corporate Event (without taking into account any
limitations or restrictions on the convertibility of this Note) or (ii) in lieu
of the shares of Common Stock otherwise receivable upon such conversion, such
securities or other assets received by the holders of shares of Common Stock in
connection with the consummation of such Corporate Event in such amounts as the
Holder would have been entitled to receive had this Note initially been issued
with conversion rights for the form of such consideration (as opposed to shares
of Common Stock) at a conversion rate for such consideration commensurate with
the Conversion Rate. Provision made pursuant to the preceding sentence shall be
in a form and substance satisfactory to the Required Holders. The provisions of
this Section shall apply similarly and equally to successive Corporate Events
and shall be applied without regard to any limitations on the conversion or
redemption of this Note.

7. RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

     (a) Adjustment of Conversion Price upon Issuance of Common Stock. If at any
time after the Subscription Date, the Company issues or sells, or in accordance
with this Section 7(a) is deemed to have issued or sold, any shares of Common
Stock (including the issuance or sale of shares of Common Stock owned or held by
or for the account of the Company, but excluding shares of Common Stock deemed
to have been issued or sold by the Company in connection with any Excluded
Securities) for a consideration per share (the "NEW ISSUANCE PRICE") less than a
price (the "APPLICABLE PRICE") equal to Conversion Price in effect immediately
prior to such issue or sale (the foregoing a "DILUTIVE ISSUANCE"), then
immediately after such Dilutive Issuance, the Conversion Price then in effect
shall be reduced to the New Issuance Price. For

                                       11

<PAGE>

purposes of determining the adjusted Conversion Price under this Section 7(a),
the following shall be applicable:

          (i) Issuance of Options. If the Company in any manner grants or sells
     any Options and the lowest price per share for which one share of Common
     Stock is issuable upon the exercise of any such Option or upon conversion
     or exchange or exercise of any Convertible Securities issuable upon
     exercise of such Option is less than the Applicable Price, then such share
     of Common Stock shall be deemed to be outstanding and to have been issued
     and sold by the Company at the time of the granting or sale of such Option
     for such price per share. For purposes of this Section 7(a)(i), the "lowest
     price per share for which one share of Common Stock is issuable upon the
     exercise of any such Option or upon conversion or exchange or exercise of
     any Convertible Securities issuable upon exercise of such Option" shall be
     equal to the sum of the lowest amounts of consideration (if any) received
     or receivable by the Company with respect to any one share of Common Stock
     upon granting or sale of the Option, upon exercise of the Option and upon
     conversion or exchange or exercise of any Convertible Security issuable
     upon exercise of such Option. No further adjustment of the Conversion Price
     shall be made upon the actual issuance of such share of Common Stock or of
     such Convertible Securities upon the exercise of such Options or upon the
     actual issuance of such Common Stock upon conversion or exchange or
     exercise of such Convertible Securities.

          (ii) Issuance of Convertible Securities. If the Company in any manner
     issues or sells any Convertible Securities and the lowest price per share
     for which one share of Common Stock is issuable upon such conversion or
     exchange or exercise thereof is less than the Applicable Price, then such
     share of Common Stock shall be deemed to be outstanding and to have been
     issued and sold by the Company at the time of the issuance or sale of such
     Convertible Securities for such price per share. For the purposes of this
     Section 7(a)(ii), the "lowest price per share for which one share of Common
     Stock is issuable upon such conversion or exchange or exercise" shall be
     equal to the sum of the lowest amounts of consideration (if any) received
     or receivable by the Company with respect to any one share of Common Stock
     upon the issuance or sale of the Convertible Security and upon the
     conversion or exchange or exercise of such Convertible Security. No further
     adjustment of the Conversion Price shall be made upon the actual issuance
     of such share of Common Stock upon conversion or exchange or exercise of
     such Convertible Securities, and if any such issue or sale of such
     Convertible Securities is made upon exercise of any Options for which
     adjustment of the Conversion Price had been or are to be made pursuant to
     other provisions of this Section 7(a), no further adjustment of the
     Conversion Price shall be made by reason of such issue or sale.

          (iii) Change in Option Price or Rate of Conversion. If the purchase
     price provided for in any Options, the additional consideration, if any,
     payable upon the issue, conversion, exchange or exercise of any Convertible
     Securities, or the rate at which any Convertible Securities are convertible
     into or exchangeable or exercisable for Common Stock changes at any time,
     the Conversion Price in effect at the time of such change shall be adjusted
     to the Conversion Price which would have been in effect at such time had
     such Options or Convertible Securities provided for such changed purchase
     price,

                                       12

<PAGE>

     additional consideration or changed conversion rate, as the case may be, at
     the time initially granted, issued or sold. For purposes of this Section
     7(a)(iii), if the terms of any Option or Convertible Security that was
     outstanding as of the Subscription Date are changed in the manner described
     in the immediately preceding sentence, then such Option or Convertible
     Security and the Common Stock deemed issuable upon exercise, conversion or
     exchange thereof shall be deemed to have been issued as of the date of such
     change. No adjustment shall be made if such adjustment would result in an
     increase of the Conversion Price then in effect.

          (iv) Calculation of Consideration Received. In case any Option is
     issued in connection with the issue or sale of other securities of the
     Company, together comprising one integrated transaction in which no
     specific consideration is allocated to such Options by the parties thereto,
     the Options will be deemed to have been issued for such consideration as
     determined in good faith by the Board of Directors of the Company. If any
     Common Stock, Options or Convertible Securities are issued or sold or
     deemed to have been issued or sold for cash, the consideration received
     therefor will be deemed to be the net amount received by the Company
     therefor. If any Common Stock, Options or Convertible Securities are issued
     or sold for a consideration other than cash, the amount of the
     consideration other than cash received by the Company will be the fair
     value of such consideration as determined in good faith by the Board of
     Directors of the Company, except where such consideration consists of
     securities, in which case the amount of consideration received by the
     Company will be the Closing Sale Price of such securities on the date of
     receipt. If any Common Stock, Options or Convertible Securities are issued
     to the owners of the non-surviving entity in connection with any merger in
     which the Company is the surviving entity, the amount of consideration
     therefor will be deemed to be the fair value of such portion of the net
     assets and business of the non-surviving entity as is attributable to such
     Common Stock, Options or Convertible Securities, as the case may be. The
     fair value of any consideration other than cash or securities will be
     determined jointly by the Company and the Required Holders. If such parties
     are unable to reach agreement within ten (10) days after the occurrence of
     an event requiring valuation (the "VALUATION EVENT"), the fair value of
     such consideration will be determined within five (5) Business Days after
     the tenth day following the Valuation Event by an independent, reputable
     appraiser jointly selected by the Company and the Required Holders. The
     determination of such appraiser shall be deemed binding upon all parties
     absent manifest error and the fees and expenses of such appraiser shall be
     borne by the Company.

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

                                       13

<PAGE>

     (b) Adjustment of Conversion Price upon Subdivision or Combination of
Common Stock. If the Company at any time on or after the Subscription Date
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
one or more classes of its outstanding shares of Common Stock into a greater
number of shares, the Conversion Price in effect immediately prior to such
subdivision will be proportionately reduced. If the Company at any time on or
after the Subscription Date combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Conversion Price in effect immediately prior to
such combination will be proportionately increased.

     (c) Other Events. If any event occurs of the type contemplated by the
provisions of this Section 7 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company's
Board of Directors will make an appropriate adjustment in the Conversion Price
so as to protect the rights of the Holder under this Note; provided that no such
adjustment will increase the Conversion Price as otherwise determined pursuant
to this Section 7.

8. COMPANY RIGHT OF REDEMPTION.

     (a) General. The Company at its option shall have the right to redeem, with
three (3) Business Days advance written notice (the "COMPANY REDEMPTION
NOTICE"), a portion or all of the outstanding principal of the Note. The Holder
may convert after the Company Redemption Notice is received and until the
Company Redemption Price is received by the Holder. The redemption price shall
be the greater of (i) One Hundred and Twenty percent (120%) of the face amount
redeemed plus accrued interest and (ii) sixty-eight percent (68%) of the (x)
product of the remaining Conversion Amount divided by the Conversion Price (not
less than $1 (as adjusted for any stock dividend, stock combination, stock split
or other similar transactions that proportionately increases or decreases the
Common Stock)) in effect on the Trading Day before the Company Redemption Notice
is sent and (y) the Closing Sale Price on the Trading Day before the Company
Redemption Notice is sent, plus accrued interest (the "COMPANY REDEMPTION
PRICE"). The Company shall pay the Company Redemption Price on all payments made
pursuant to the Note, including payments made before, on, or after the Maturity
Date. For all payments under this Note, the payment of the Company Redemption
Price by the Company shall be in addition to any accrued interest due.

     (b) Mechanics of Company Redemption. If the Company elects to redeem the
Note in accordance with Section 8(a), then the Company Redemption Price, if any,
which is to be paid to the Holder, shall be paid, by wire transfer of
immediately available funds, an amount in cash equal to 100% of the Company
Redemption Price. If the Company fails to redeem the Company Redemption Price on
such date, then at the option of the Holder designated in writing to the Company
(any such designation, "Conversion Notice" for purposes of this Note), the
Holder may require the Company to convert all or any part of the Company
Redemption Amount at the Conversion Price. Conversions required by this Section
8(b) shall be made in accordance with the provisions of Section 3(c).
Notwithstanding anything to the contrary in this Section 8(b), but subject to
Section 3(d), until the Company Redemption Price (together with any interest
thereon) is paid in full, the Company Redemption Price (together with any
interest thereon) may be

                                       14

<PAGE>

converted, in whole or in part, by the Holder into Common Stock pursuant to
Section 3.

     (c) Pro Rata Redemption Requirement. If the Company elects to convert any
Conversion Amount of this Note pursuant to Section 8(a), then it must
simultaneously take the same action in the same proportion with respect to the
Other Notes.

9. SECURITY. This Note and the Other Notes are secured to the extent and in the
manner set forth in the Security Documents (as defined in the Securities
Purchase Agreement).

10. NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company
will not, by amendment of its Articles of Incorporation, Bylaws or through any
reorganization, transfer of assets, consolidation, merger, scheme of
arrangement, dissolution, issue or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Note, and will at all times in good faith carry out all of the
provisions of this Note and take all reasonable action as may be required to
protect the rights of the Holder of this Note.

11. RESERVATION OF AUTHORIZED SHARES.

     (a) Reservation. The Company initially shall reserve out of its authorized
and unissued Common Stock a number of shares of Common Stock for each of the
Notes equal to 300% of the Conversion Rate with respect to the Conversion Amount
of each such Note as of the Issuance Date. So long as any of the Notes are
outstanding, the Company shall take all action necessary to reserve and keep
available out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Notes, 300% of the number of shares
of Common Stock as shall from time to time be necessary to effect the conversion
of all of the Notes then outstanding; provided that at no time shall the number
of shares of Common Stock so reserved be less than the number of shares required
to be reserved of the previous sentence (without regard to any limitations on
conversions) (the "REQUIRED RESERVE AMOUNT"). The initial number of shares of
Common Stock reserved for conversions of the Notes and each increase in the
number of shares so reserved shall be allocated pro rata among the holders of
the Notes based on the principal amount of the Notes held by each holder at the
Closing (as defined in the Securities Purchase Agreement) or increase in the
number of reserved shares, as the case may be (the "AUTHORIZED SHARE
ALLOCATION"). In the event that a holder shall sell or otherwise transfer any of
such holder's Notes, each transferee shall be allocated a pro rata portion of
such holder's Authorized Share Allocation. Any shares of Common Stock reserved
and allocated to any Person which ceases to hold any Notes shall be allocated to
the remaining holders of Notes, pro rata based on the principal amount of the
Notes then held by such holders.

     (b) Insufficient Authorized Shares. If at any time while any of the Notes
remain outstanding the Company does not have a sufficient number of authorized
and unreserved shares of Common Stock to satisfy its obligation to reserve for
issuance upon conversion of the Notes at least a number of shares of Common
Stock equal to the Required Reserve Amount (an "AUTHORIZED SHARE FAILURE"), then
the Company shall immediately take all action necessary to increase the
Company's authorized shares of Common Stock to an amount sufficient to allow the
Company to reserve the Required Reserve Amount for the Notes then outstanding.
Without

                                       15

<PAGE>

limiting the generality of the foregoing sentence, as soon as practicable after
the date of the occurrence of an Authorized Share Failure, but in no event later
than ninety (90) days after the occurrence of such Authorized Share Failure, the
Company shall hold a meeting of its shareholders for the approval of an increase
in the number of authorized shares of Common Stock. In connection with such
meeting, the Company shall provide each shareholder with a proxy or information
statement and shall use its reasonable best efforts to solicit its shareholders'
approval of such increase in authorized shares of Common Stock and to cause its
board of directors to recommend to the shareholders that they approve such
proposal.

12. HOLDER'S REDEMPTIONS. (a) The Company shall deliver the applicable Event of
Default Redemption Price to the Holder within five (5) Business Days after the
Company's receipt of the Holder's Event of Default Redemption Notice. If the
Holder has submitted a Change of Control Redemption Notice in accordance with
Section 5(b), the Company shall deliver the applicable Change of Control
Redemption Price to the Holder concurrently with the consummation of such Change
of Control if such notice is received prior to the consummation of such Change
of Control and within five (5) Business Days after the Company's receipt of such
notice otherwise. In the event of a redemption of less than all of the
Conversion Amount of this Note, the Company shall promptly cause to be issued
and delivered to the Holder a new Note (in accordance with Section 18(d))
representing the outstanding Principal which has not been redeemed. In the event
that the Company does not pay the applicable Redemption Price to the Holder
within the time period required, at any time thereafter and until the Company
pays such unpaid Redemption Price in full, the Holder shall have the option, in
lieu of redemption, to require the Company to promptly return to the Holder all
or any portion of this Note representing the Conversion Amount that was
submitted for redemption and for which the applicable Redemption Price (together
with any Late Charges thereon) has not been paid. Upon the Company's receipt of
such notice, (x) the applicable Redemption Notice shall be null and void with
respect to such Conversion Amount, (y) the Company shall immediately return this
Note, or issue a new Note (in accordance with Section 18(d)) to the Holder
representing the sum of such Conversion Amount to be redeemed together with
accrued and unpaid Interest with respect to such Conversion Amount and accrued
and unpaid Late Charges with respect to such Conversion Amount and Interest and
(z) the Conversion Price of this Note or such new Notes shall be adjusted to the
lesser of (A) the Conversion Price as in effect on the date on which the
applicable Redemption Notice is voided and (B) the lowest Closing Bid Price
during the period beginning on and including the date on which the applicable
Redemption Notice is delivered to the Company and ending on and including the
date on which the applicable Redemption Notice is voided. The Holder's delivery
of a notice voiding a Redemption Notice and exercise of its rights following
such notice shall not affect the Company's obligations to make any payments of
Late Charges which have accrued prior to the date of such notice with respect to
the Conversion Amount subject to such notice.

     (b) Redemption by Other Holders. Upon the Company's receipt of notice from
any of the holders of the Other Notes for redemption or repayment as a result of
an event or occurrence substantially similar to the events or occurrences
described in Section 4(b) or Section 5(b) (each, an "OTHER REDEMPTION NOTICE"),
the Company shall immediately, but no later than one (1) Business Day of its
receipt thereof, forward to the Holder by facsimile a copy of such notice. If
the Company receives a Redemption Notice and one or more Other Redemption
Notices, during

                                       16

<PAGE>

the seven (7) Business Day period beginning on and including the date which is
three (3) Business Days prior to the Company's receipt of the Holder's
Redemption Notice and ending on and including the date which is three (3)
Business Days after the Company's receipt of the Holder's Redemption Notice and
the Company is unable to redeem all principal, interest and other amounts
designated in such Redemption Notice and such Other Redemption Notices received
during such seven (7) Business Day period, then the Company shall redeem a pro
rata amount from each holder of the Notes (including the Holder) based on the
principal amount of the Notes submitted for redemption pursuant to such
Redemption Notice and such Other Redemption Notices received by the Company
during such seven (7) Business Day period.

13. RESTRICTION ON REDEMPTION AND CASH DIVIDENDS. Until all of the Notes have
been converted, redeemed or otherwise satisfied in accordance with their terms,
the Company shall not, directly or indirectly, redeem, repurchase or declare or
pay any cash dividend or distribution on its capital stock without the prior
express written consent of the Required Holders.

14. VOTING RIGHTS. The Holder shall have no voting rights as the holder of this
Note, except as required by law, including but not limited to Chapter 78 of the
Delaware Revised Statutes, and as expressly provided in this Note.

15. COVENANTS.

     (a) Rank. All payments due under this Note shall rank pari passu with all
Other Notes and no other Indebtedness of the Company and its Subsidiaries shall
be senior to the Indebtedness of the Company and its Subsidiary evidenced by the
Note and the Other Notes.

     (b) Incurrence of Indebtedness. So long as this Note is outstanding, the
Company shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, incur or guarantee, assume or suffer to exist any
Indebtedness, other than (i) the Indebtedness evidenced by this Note and (ii)
Permitted Indebtedness.

     (c) Existence of Liens. So long as this Note is outstanding, the Company
shall not, and the Company shall not permit any of its Subsidiaries to, directly
or indirectly, allow or suffer to exist any mortgage, lien, pledge, charge,
security interest or other encumbrance upon or in any property or assets
(including accounts and contract rights) owned by the Company or any of its
Subsidiaries (collectively, "LIENS") other than Permitted Liens.

     (d) Restricted Payments. The Company shall not, and the Company shall not
permit any of its Subsidiaries to, directly or indirectly, redeem, defease,
repurchase, repay or make any payments in respect of, by the payment of cash or
cash equivalents (in whole or in part, whether by way of open market purchases,
tender offers, private transactions or otherwise), all or any portion of any
Permitted Indebtedness, whether by way of payment in respect of principal of (or
premium, if any) or interest on, such Indebtedness if at the time such payment
is due or is otherwise made or, after giving effect to such payment, an event
constituting, or that with the passage of time and without being cured would
constitute, an Event of Default has occurred and is continuing.

                                       17

<PAGE>

     (e) Sales of Equity Securities. Until the Company has obtained the
Stockholder Approval (as defined in the Securities Purchase Agreement), except
for any issuance of Securities in accordance with the Transaction Documents or
as set forth on Schedule 18(e) attached hereto, the Company will not, directly
or indirectly, offer, sell, grant any option to purchase, or otherwise dispose
of (or announce any offer, sale, grant or any option to purchase or other
disposition of) any of its equity or Common Stock Equivalents (as defined in the
Securities Purchase Agreement), including without limitation any debt, preferred
stock or other instrument or security that is, at any time during its life and
under any circumstances, convertible into or exchangeable or exercisable for
shares of common equity of the Company, without the prior written consent of the
Required Holders.

     (f) Subsidiary Internal Accounting Controls. So long as this Note is
outstanding, the Company and each of its Subsidiaries shall maintain, in all
material respects, a system of internal accounting controls consistent with the
Internal Accounting Controls (as defined in the Securities Purchase Agreement).

16. VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote at a
meeting duly called for such purpose or the written consent without a meeting of
the Required Holders shall be required for any change or amendment to this Note
or the Other Notes.

17. TRANSFER. The Holder acknowledges and agrees that this Note may only be
offered, sold, assigned or transferred by the Holder without the consent of the
Company, provided that the provisions of Section 2(f) of the Securities Purchase
Agreement are complied with in all respects.

18. REISSUANCE OF THIS NOTE.

     (a) Transfer. If this Note is to be transferred, the Holder shall surrender
this Note to the Company, whereupon the Company will issue, promptly following
the satisfaction of the provisions of Section 2(f) of the Securities Purchase
Agreement, and deliver upon the order of the Holder a new Note (in accordance
with Section 18(d)), in the name of the validly registered assigns or
transferee, representing the outstanding Principal being transferred by the
Holder and, if less then the entire outstanding Principal is being transferred,
a new Note (in accordance with Section 18(d)) to the Holder representing the
outstanding Principal not being transferred. The Holder and any assignee, by
acceptance of this Note, acknowledge and agree that, by reason of the provisions
of Section 3(c)(iii) and this Section 18(a), following conversion or redemption
of any portion of this Note, the outstanding Principal represented by this Note
may be less than the Principal stated on the face of this Note.

     (b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Note, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company in customary form and,
in the case of mutilation, upon surrender and cancellation of this Note, the
Company shall execute and deliver to the Holder a new Note (in accordance with
Section 18(d)) representing the outstanding Principal.

                                       18

<PAGE>

     (c) Note Exchangeable for Different Denominations. This Note is
exchangeable, upon the surrender hereof by the Holder at the principal office of
the Company, for a new Note or Notes (in accordance with Section (d) and in
principal amounts of at least $100,000) representing in the aggregate the
outstanding Principal of this Note, and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the time
of such surrender.

     (d) Issuance of New Notes. Whenever the Company is required to issue a new
Note pursuant to the terms of this Note, such new Note (i) shall be of like
tenor with this Note, (ii) shall represent, as indicated on the face of such new
Note, the Principal remaining outstanding (or in the case of a new Note being
issued pursuant to Section 18(a) or Section 18(c), the Principal designated by
the Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued Interest and
Late Charges on the Principal and Interest of this Note, from the Issuance Date.

19. REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE
RELIEF. The remedies provided in this Note shall be cumulative and in addition
to all other remedies available under this Note and any of the other Transaction
Documents at law or in equity (including a decree of specific performance and/or
other injunctive relief), and nothing herein shall limit the Holder's right to
pursue actual and consequential damages for any failure by the Company to comply
with the terms of this Note. Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof) shall
be the amounts to be received by the Holder and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, the Holder
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.

20. PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is
placed in the hands of an attorney for collection or enforcement or is collected
or enforced through any legal proceeding or the Holder otherwise takes action to
collect amounts due under this Note or to enforce the provisions of this Note or
(b) there occurs any bankruptcy, reorganization, receivership of the Company or
other proceedings affecting Company creditors' rights and involving a claim
under this Note, then the Company shall pay the costs incurred by the Holder for
such collection, enforcement or action or in connection with such bankruptcy,
reorganization, receivership or other proceeding, including, but not limited to,
attorneys' fees and disbursements.

                                       19

<PAGE>

21. CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by
the Company and all the Purchasers and shall not be construed against any person
as the drafter hereof. The headings of this Note are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Note.

22. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the
Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privilege.

23. DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Closing Bid Price, the Closing Sale Price or the Weighted Average Price or the
arithmetic calculation of the Conversion Rate or any Redemption Price, the
Company shall submit the disputed determinations or arithmetic calculations via
facsimile within one (1) Business Day of receipt of the Conversion Notice or
Redemption Notice or other event giving rise to such dispute, as the case may
be, to the Holder. If the Holder and the Company are unable to agree upon such
determination or calculation within one (1) Business Day of such disputed
determination or arithmetic calculation being submitted to the Holder, then the
Company shall, within one (1) Business Day submit via facsimile (a) the disputed
determination of the Closing Bid Price, the Closing Sale Price or the Weighted
Average Price to an independent, reputable investment bank selected by the
Company and approved by the Holder (such approval not to be unreasonably
withheld or delayed) or (b) the disputed arithmetic calculation of the
Conversion Rate or any Redemption Price to the Company's independent, outside
accountant. The Company, at the Company's expense, shall cause the investment
bank or the accountant, as the case may be, to perform the determinations or
calculations and notify the Company and the Holder of the results no later than
five (5) Business Days from the time it receives the disputed determinations or
calculations. Such investment bank's or accountant's determination or
calculation, as the case may be, shall be binding upon all parties absent
demonstrable error.

24. NOTICES; PAYMENTS.

     (a) Notices. Whenever notice is required to be given under this Note,
unless otherwise provided herein, such notice shall be given in accordance with
Section 9(f) of the Securities Purchase Agreement. The Company shall provide the
Holder with prompt written notice of all actions taken pursuant to this Note,
including in reasonable detail a description of such action and the reason
therefore. Without limiting the generality of the foregoing, the Company will
give written notice to the Holder (i) immediately upon any adjustment of the
Conversion Price, setting forth in reasonable detail, and certifying, the
calculation of such adjustment and (ii) at least twenty days prior to the date
on which the Company closes its books or takes a record (A) with respect to any
dividend or distribution upon the Common Stock, (B) with respect to any pro rata
subscription offer to holders of Common Stock or (C) for determining rights to
vote with respect to any Fundamental Transaction, dissolution or liquidation,
provided in each case that such information shall be made known to the public
prior to or in conjunction with such notice being provided to the Holder.

     (b) Payments. Whenever any payment of cash is to be made by the Company to
any

                                       20

<PAGE>

Person pursuant to this Note, such payment shall be made in lawful money of the
United States of America by a check drawn on the account of the Company and sent
via overnight courier service to such Person at such address as previously
provided to the Company in writing (which address, in the case of each of the
Purchasers, shall initially be as set forth on the Schedule of Buyers attached
to the Securities Purchase Agreement); provided that the Holder may elect to
receive a payment of cash via wire transfer of immediately available funds by
providing the Company with prior written notice setting out such request and the
Holder's wire transfer instructions. Whenever any amount expressed to be due by
the terms of this Note is due on any day which is not a Business Day, the same
shall instead be due on the next succeeding day which is a Business Day and, in
the case of any Interest Date which is not the date on which this Note is paid
in full, the extension of the due date thereof shall not be taken into account
for purposes of determining the amount of Interest due on such date. Any amount
of Principal or other amounts due under the Transaction Documents, other than
Interest, which is not paid when due shall result in a late charge being
incurred and payable by the Company in an amount equal to interest on such
amount at the rate of fifteen (15%) per annum from the date such amount was due
until the same is paid in full ("Late Charge").

25. CANCELLATION. After all Principal, accrued Interest and other amounts at any
time owed on this Note has been paid in full, this Note shall automatically be
deemed canceled, shall be surrendered to the Company for cancellation and shall
not be reissued.

26 WAIVER OF NOTICE. To the extent permitted by law, the Company hereby waives
demand, notice, protest and all other demands and notices in connection with the
delivery, acceptance, performance, default or enforcement of this Note and the
Securities Purchase Agreement.

27. GOVERNING LAW; JURISDICTION; JURY TRIAL. This Note shall be construed and
enforced in accordance with, and all questions concerning the construction,
validity, interpretation and performance of this Note shall be governed by, the
internal laws of the State of New York, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York. The Company hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting in
The City of New York, Borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. The Company 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 it set forth
on the signature page hereto 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. In the event that any provision of this Note is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute

                                       21

<PAGE>

or rule of law. Any such provision which may prove invalid or unenforceable
under any law shall not affect the validity or enforceability of any other
provision of this Note. Nothing contained herein shall be deemed or operate to
preclude the Holder from bringing suit or taking other legal action against the
Company in any other jurisdiction to collect on the Company's obligations to the
Holder, to realize on any collateral or any other security for such obligations,
or to enforce a judgment or other court ruling in favor of the Holder. THE
COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED
HEREBY.

28. CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall
have the following meanings:

     (a) "APPROVED STOCK PLAN" means any employee benefit plan which has been
approved by the Board of Directors of the Company, pursuant to which the
Company's securities may be issued to any employee, consultant, officer or
director for services provided to the Company.

     (b) "BLOOMBERG" means Bloomberg Financial Markets.

     (c) "BUSINESS DAY" means any day other than Saturday, Sunday or other day
on which commercial banks in The City of New York are authorized or required by
law to remain closed.

     (d) "CALENDAR MONTH" means the period beginning on and including the first
of each calendar month and ending on and including the last day of such calendar
month.

     (e) "CHANGE OF CONTROL" means any Fundamental Transaction other than (i)
any reorganization, recapitalization or reclassification of the Common Stock in
which holders of the Company's voting power immediately prior to such
reorganization, recapitalization or reclassification continue after such
reorganization, recapitalization or reclassification to hold publicly traded
securities and, directly or indirectly, the voting power of the surviving entity
or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (ii) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company.

     (f) "CHANGE OF CONTROL PREMIUM" means (i) 130% or (ii) 120% in the event of
a Change of Control involving consideration paid to holders of the Company's
Common Stock where the consideration per share of the Company's Common Stock to
be received by the holders thereof is greater (as to amounts other than cash, as
determined reasonably and in good faith by the Board of Directors of the
Company) than 200% of the Conversion Price as of the Initial Issuance Date (as
adjusted for stock splits, stock dividends, reverse stock splits,
recapitalizations, reclassifications and similar events).

     (g) "CLOSING BID PRICE" and "CLOSING SALE PRICE" means, for any security as
of any

                                       22

<PAGE>

date, the last closing bid price and last closing trade price, respectively, for
such security on the Principal Market, as reported by Bloomberg, or, if the
Principal Market begins to operate on an extended hours basis and does not
designate the closing bid price or the closing trade price, as the case may be,
then the last bid price or last trade price, respectively, of such security
prior to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the
Principal Market is not the principal securities exchange or trading market for
such security, the last closing bid price or last trade price, respectively, of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price or last trade price, respectively, of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no closing bid price or last
trade price, respectively, is reported for such security by Bloomberg, the
average of the bid prices, or the ask prices, respectively, of any market makers
for such security as reported in the "pink sheets" by Pink Sheets LLC (formerly
the National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing
Sale Price cannot be calculated for a security on a particular date on any of
the foregoing bases, the Closing Bid Price or the Closing Sale Price, as the
case may be, of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such
dispute shall be resolved pursuant to Section 23. All such determinations to be
appropriately adjusted for any stock dividend, stock split, stock combination or
other similar transaction during the applicable calculation period.

     (h) "CLOSING DATE" shall have the meaning set forth in the Securities
Purchase Agreement, which date is the date the Company initially issued Notes
pursuant to the terms of the Securities Purchase Agreement.

     (i) "CONTINGENT OBLIGATION" means, as to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto.

     (j) "CONVERTIBLE SECURITIES" means any stock or securities (other than
Options) directly or indirectly convertible into or exercisable or exchangeable
for Common Stock.

     (k) "ELIGIBLE MARKET" means, the Principal Market, The New York Stock
Exchange, Inc., Over-the-Counter Bulletin Board, the Nasdaq National Market or
the American Stock Exchange.

     (l) "EXCLUDED SECURITIES" means any Common Stock issued or issuable: (i) in
connection with any Approved Stock Plan up to a maximum of five percent (5%) of
the outstanding Common Stock; (ii) upon conversion of, or in exchange for, the
Notes or the exercise of the Warrants; (iii) in connection with any acquisition
by the Company, whether through an acquisition of stock or a merger of any
business, assets or technologies the primary purpose of which is not to raise
equity capital; and (iv) upon conversion of any Options or

                                       23

<PAGE>

Convertible Securities which are outstanding on the day immediately preceding
the Subscription Date, provided that the terms of such Options or Convertible
Securities are not amended, modified or changed on or after the Subscription
Date.

     (m) "FUNDAMENTAL TRANSACTION" means that the Company shall, directly or
indirectly, in one or more related transactions, (i) consolidate or merge with
or into (whether or not the Company is the surviving corporation) another
Person, or (ii) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the Company to another Person,
or (iii) allow another Person or Persons to make a purchase, tender or exchange
offer that is accepted by the holders of more than the 50% of the outstanding
shares of Voting Stock (not including any shares of Voting Stock held by the
Person or Persons making or party to, or associated or affiliated with the
Person or Persons making or party to, such purchase, tender or exchange offer),
or (iv) consummate a stock purchase agreement or other business combination
(including, without limitation, a reorganization, recapitalization, spin-off or
scheme of arrangement) with another Person whereby such other Person acquires
more than the 50% of either the outstanding shares of Voting Stock (not
including any shares of Voting Stock held by the other Person or other Persons
making or party to, or associated or affiliated with the other Persons making or
party to, such stock purchase agreement or other business combination), (v)
reorganize, recapitalize or reclassify its Common Stock or (vi) any "person" or
"group" (as these terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act) is or shall become the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 50% of the aggregate
Voting Stock of the Company.

     (n) "GAAP" means United States generally accepted accounting principles,
consistently applied.

     (o) "INDEBTEDNESS" of any Person means, without duplication (i) all
indebtedness for borrowed money, (ii) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services, including
(without limitation) "capital leases" in accordance with generally accepted
accounting principles (other than trade payables entered into in the ordinary
course of business), (iii) all reimbursement or payment obligations with respect
to letters of credit, surety bonds and other similar instruments, (iv) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (v) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (vi) all monetary obligations under any
leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby, is
classified as a capital lease, (vii) all indebtedness referred to in clauses (i)
through (vi) above secured by (or for which the holder of such Indebtedness has
an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person,
even though the Person which owns such assets or property has not assumed or
become liable for the payment of such indebtedness, (viii) all obligations
issued, undertaken or assumed as part of any financing facility

                                       24

<PAGE>

with respect to accounts receivables of the Company and its Subsidiaries,
including, without limitation, any factoring arrangement of such accounts
receivables and (ix) all Contingent Obligations in respect of indebtedness or
obligations of others of the kinds referred to in clauses (i) through (viii)
above.

     (p) "INITIAL ISSUANCE DATE" means November 22, 2006.

     (q) "INSTALLMENT AMOUNT" means with respect to any Installment Date, the
lesser of (A) $30,864.22 and (B) the remaining principal due hereunder. In the
event the Holder shall sell or otherwise transfer any portion of this Note, the
transferee shall be allocated a pro rata portion of the each unpaid Installment
Amount hereunder.

     (r) "INSTALLMENT DATE" means the first day of each calendar month.

     (s) "INTEREST RATE" means ten percent (10%) per annum, subject to periodic
adjustment pursuant to Section 2.

     (t) "OPTIONS" means any rights, warrants or options to subscribe for or
purchase Common Stock or Convertible Securities.

     (u) "PARENT ENTITY" of a Person means an entity that, directly or
indirectly, controls the applicable Person and whose common stock or equivalent
equity security is quoted or listed on an Eligible Market, or, if there is more
than one such Person or Parent Entity, the Person or Parent Entity with the
largest public market capitalization as of the date of consummation of the
Fundamental Transaction.

     (v) "PERMITTED INDEBTEDNESS" means (A) Indebtedness incurred by the Company
that is made expressly subordinate in right of payment to the Indebtedness
evidenced by this Note, as reflected in a written agreement acceptable to the
Holder and approved by the Holder in writing (which approval shall not be
unreasonably delayed), and which Indebtedness does not provide at any time for
(1) the payment, prepayment, repayment, repurchase or defeasance, directly or
indirectly, of any principal or premium, if any, thereon until ninety-one (91)
days after the Maturity Date or later and (2) total interest and fees at a rate
in excess of the Interest Rate hereunder, (B) Indebtedness secured by Permitted
Liens, (C) Indebtedness to trade creditors incurred in the ordinary course of
business, and (D) extensions, refinancings and renewals of any items of
Permitted Indebtedness, provided that the principal amount is not increased or
the terms modified to impose more burdensome terms upon the Company or its
Subsidiary, as the case may be.

     (w) "PERMITTED LIENS" means (i) any Lien for taxes not yet due or
delinquent or being contested in good faith by appropriate proceedings for which
adequate reserves have been established in accordance with GAAP, (ii) any
statutory Lien arising in the ordinary course of business by operation of law
with respect to a liability that is not yet due or delinquent, (iii) any Lien
created by operation of law, such as materialmen's liens, mechanics' liens and
other similar liens, arising in the ordinary course of business with respect to
a liability that is not yet due or delinquent or that are being contested in
good faith by appropriate proceedings, (iv) Liens

                                       25

<PAGE>

securing the Company's obligations under the Notes, (v) Liens (A) upon or in any
equipment (as defined in the Security Agreement) acquired or held by the Company
or any of its Subsidiaries to secure the purchase price of such equipment or
indebtedness incurred solely for the purpose of financing the acquisition or
lease of such equipment, or (B) existing on such equipment at the time of its
acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment, (vi)
Liens incurred in connection with the extension, renewal or refinancing of the
indebtedness secured by Liens of the type described in clauses (i) and (v)
above, provided that any extension, renewal or replacement Lien shall be limited
to the property encumbered by the existing Lien and the principal amount of the
Indebtedness being extended, renewed or refinanced does not increase, (vii)
leases or subleases and licenses and sublicenses granted to others in the
ordinary course of the Company's business, not interfering in any material
respect with the business of the Company and its Subsidiaries taken as a whole,
(viii) Liens in favor of customs and revenue authorities arising as a matter of
law to secure payments of custom duties in connection with the importation of
goods; (ix) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under Section 4(a)(ix) and
(x) Liens with respect to Indebtedness not individually in excess of $25,000 or
in the aggregate in excess of $100,000, which individually and in aggregate are
not material to the Company.

     (x) "PERSON" means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization, any other entity and a government or any department or agency
thereof.

     (y) "POTENTIAL PARTNER CONDITIONS" means at any time during the period
commencing on the date of the consummation of any material transaction between
the Company and a Person and ending on the first anniversary of the Effective
Date, there shall be no disclosure that any executive officer of such Person has
(i) exhibited dishonesty in the performance of his or her duties, which is
materially and demonstrably injurious to the Company; or (ii) been convicted of
(x) a felony under the laws of the United States or any state thereof or (y) a
misdemeanor involving moral turpitude, in each case, which is materially and
demonstrably injurious to the Company.

     (z) "PRINCIPAL MARKET" means the Nasdaq Capital Market.

     (aa) "REDEMPTION NOTICES" means, collectively, the Event of Default
Redemption Notices, Change of Control Redemption Notices, the Company Redemption
Notice, and, each of the foregoing, individually, a Redemption Notice.

     (bb) "REDEMPTION PREMIUM" means (i) in the case of the Events of Default
described in Section 4(a)(i) - (vi) and (ix) - (xii), 125% or (ii) in the case
of the Events of Default described in Section 4(a)(vii) - (viii), 120%.

     (cc) "REDEMPTION PRICES" means, collectively, the Event of Default
Redemption Price, Change of Control Redemption Price, and the Company Redemption
Amount, the Holder Optional Redemption Price and the Holder Partial Redemption
Price and, each of the foregoing, individually, a Redemption Price.

                                       26

<PAGE>

     (dd) "REGISTRATION RIGHTS AGREEMENT" means that certain registration rights
agreement between the Company and the initial holders of the Notes relating to,
among other things, the registration of the resale of the Common Stock issuable
upon conversion of the Notes and exercise of the Warrants.

     (ee) "REQUIRED HOLDERS" means the holders of Notes representing at least a
majority of the aggregate principal amount of the Notes then outstanding.

     (ff) "SEC" means the United States Securities and Exchange Commission.

     (gg) "SECURITIES PURCHASE AGREEMENT" means that certain securities purchase
agreement dated the Subscription Date by and among the Company and the initial
holders of the Notes pursuant to which the Company issued the Notes.

     (hh) "SUBSCRIPTION DATE" means November 21, 2006

     (ii) "SUCCESSOR ENTITY" means the Person, which may be the Company, formed
by, resulting from or surviving any Fundamental Transaction or the Person with
which such Fundamental Transaction shall have been made, provided that if such
Person is not a publicly traded entity whose common stock or equivalent equity
security is quoted or listed for trading on an Eligible Market, Successor Entity
shall mean such Person's Parent Entity.

     (jj) "TRADING DAY" means any day on which the Common Stock are traded on
the Principal Market, or, if the Principal Market is not the principal trading
market for the Common Stock, then on the principal securities exchange or
securities market on which the Common Stock are then traded; provided that
"Trading Day" shall not include any day on which the Common Stock are scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock are suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00:00 p.m., New York Time).

     (kk) "VOTING STOCK" of a Person means capital stock of such Person of the
class or classes pursuant to which the holders thereof have the general voting
power to elect, or the general power to appoint, at least a majority of the
board of directors, managers or trustees of such Person (irrespective of whether
or not at the time capital stock of any other class or classes shall have or
might have voting power by reason of the happening of any contingency).

     (ll) "WARRANTS" has the meaning ascribed to such term in the Securities
Purchase Agreement, and shall include all warrants issued in exchange therefor
or replacement thereof.

     (mm) "WEIGHTED AVERAGE PRICE" means, for any security as of any date, the
dollar volume-weighted average price for such security on the Principal Market
during the period beginning at 9:30:01 a.m., New York Time (or such other time
as the Principal Market publicly announces is the official open of trading), and
ending at 4:00:00 p.m., New York Time (or such

                                       27

<PAGE>

other time as the Principal Market publicly announces is the official close of
trading) as reported by Bloomberg through its "Volume at Price" functions, or,
if the foregoing does not apply, the dollar volume-weighted average price of
such security in the over-the-counter market on the electronic bulletin board
for such security during the period beginning at 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of
trading), and ending at 4:00:00 p.m., New York Time (or such other time as such
market publicly announces is the official close of trading) as reported by
Bloomberg, or, if no dollar volume-weighted average price is reported for such
security by Bloomberg for such hours, the average of the highest closing bid
price and the lowest closing ask price of any of the market makers for such
security as reported in the "pink sheets" by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.). If the Weighted Average Price cannot be
calculated for a security on a particular date on any of the foregoing bases,
the Weighted Average Price of such security on such date shall be the fair
market value as mutually determined by the Company and the Holder. If the
Company and the Holder are unable to agree upon the fair market value of such
security, then such dispute shall be resolved pursuant to Section 23. All such
determinations to be appropriately adjusted for any stock dividend, stock split,
stock combination or other similar transaction during the applicable calculation
period.

29. DISCLOSURE. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Note, unless the Company has in good faith
determined that the matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries, the Company
shall within one (1) Business Day after any such receipt or delivery publicly
disclose such material, nonpublic information on a Current Report on Form 8-K or
otherwise. In the event that the Company believes that a notice contains
material, nonpublic information, relating to the Company or its Subsidiaries,
the Company shall indicate to the Holder contemporaneously with delivery of such
notice, and in the absence of any such indication, the Holder shall be allowed
to presume that all matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries.

                            [Signature Page Follows]

                                       28

<PAGE>

IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of
the Issuance Date set out above.

                                         CATUITY, INC.

                                         By:
                                             -----------------------------------
                                         Name: John Racine
                                         Title: Chief Executive Officer

                                       29
<PAGE>

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE
144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD
CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 20(a)
HEREOF. THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE
SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET
FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

                                  CATUITY, INC.
                         SENIOR SECURED CONVERTIBLE NOTE

Issuance Date: November 22, 2006   Original Principal Amount: U.S. $688,888

FOR VALUE RECEIVED, Catuity, Inc., a Delaware corporation (the "COMPANY"),
hereby promises to pay to the order of BridgePointe Master Fund Ltd. or
registered assigns ("HOLDER") the amount set out above as the Original Principal
Amount (as reduced pursuant to the terms hereof pursuant to redemption,
conversion or otherwise, the "PRINCIPAL") when due, whether upon the Maturity
Date (as defined below), on any Installment Date with respect to the Installment
Amount due on such Installment Date, acceleration, redemption or otherwise (in
each case in accordance with the terms hereof) and to pay interest ("INTEREST")
on any outstanding Principal at a rate per annum equal to the Interest Rate (as
defined below), from the date set out above as the Issuance Date (the "ISSUANCE
DATE") until the same becomes due and payable, whether upon an Interest Date (as
defined below), any Installment Date, or the Maturity Date, acceleration,
conversion, redemption or otherwise (in each case in accordance with the terms
hereof). This Senior Secured Convertible Note (including all Senior Secured
Convertible Notes issued in exchange, transfer or replacement hereof, this
"NOTE") is one of an issue of Senior Secured Convertible Notes issued pursuant
to the Securities Purchase Agreement on the Closing Date (collectively, the
"NOTES" and such other Senior Secured Convertible Notes, the "OTHER NOTES").
Certain capitalized terms are defined in Section 28.

1. PAYMENTS OF PRINCIPAL; MATURITY. On each Installment Date commencing December
1, 2007, the Company shall pay to the Holder an amount equal to the Installment
Amount due on such Installment Date in cash by wire transfer of immediately
available funds.

<PAGE>

The "MATURITY DATE" shall be November 21, 2009, as may be extended at the option
of the Holder (i) in the event that, and for so long as, an Event of Default (as
defined in Section 4(a)) shall have occurred and be continuing or any event
shall have occurred and be continuing which with the passage of time and the
failure to cure would result in an Event of Default, (ii) through the date that
is ten (10) days after the consummation of a Change of Control in the event that
a Change of Control is publicly announced or a Change of Control Notice (as
defined in Section 5(b)) is delivered prior to the Maturity Date and (iii) in
accordance with Section 8(d).

2. INTEREST; INTEREST RATE.

     (a) Interest on this Note shall commence accruing on the Issuance Date and
shall be computed on the basis of a 360-day year and actual days elapsed and
shall be payable in arrears for each Calendar Month during the period beginning
on the Issuance Date and ending on, and including, the Maturity Date (each, an
"INTEREST DATE") with the first Interest Date being December 1, 2006. Interest
shall be payable on each Interest Date, to the record holder of this Note on the
applicable Interest Date, in cash ("CASH INTEREST").

     (b) From and after the occurrence of an Event of Default, the Interest Rate
shall be increased to fifteen percent (15%). In the event that such Event of
Default is subsequently cured, the adjustment referred to in the preceding
sentence shall cease to be effective as of the date of such cure; provided that
the Interest as calculated at such increased rate during the continuance of such
Event of Default shall continue to apply to the extent relating to the days
after the occurrence of such Event of Default through and including the date of
cure of such Event of Default.

3. CONVERSION OF NOTES. This Note shall be convertible into shares of common
stock of the Company, par value $0.001 per share (the "COMMON STOCK"), on the
terms and conditions set forth in this Section 3.

     (a) Conversion Right. Subject to the provisions of Section 3(d), at any
time or times on or after the Issuance Date, the Holder shall be entitled to
convert any portion of the outstanding and unpaid Conversion Amount (as defined
below) into fully paid and nonassessable shares of Common Stock in accordance
with Section 3(c), at the Conversion Rate (as defined below). The Company shall
not issue any fraction of a share of Common Stock upon any conversion. If the
issuance would result in the issuance of a fraction of a share of Common Stock,
the Company shall round such fraction of a share of Common Stock up to the
nearest whole share. The Company shall pay any and all taxes that may be payable
with respect to the issuance and delivery of Common Stock upon conversion of any
Conversion Amount.

     (b) Conversion Rate. The number of shares of Common Stock issuable upon
conversion of any Conversion Amount pursuant to Section 3(a) shall be determined
by dividing (x) such Conversion Amount by (y) the Conversion Price (the
"CONVERSION RATE").

          (i) "CONVERSION AMOUNT" means the portion of the Principal to be
     converted, redeemed or otherwise with respect to which this determination
     is being made.

                                        2

<PAGE>

          (ii) "CONVERSION PRICE" means, as of any Conversion Date (as defined
     below) or other date of determination, $3.25 (appropriately adjusted for
     any stock split, stock dividend, stock combination or other similar
     transaction that proportionately decreases or increases the Common Stock).

     (c) Mechanics of Conversion.

          (i) Optional Conversion. To convert any Conversion Amount into shares
     of Common Stock on any date (a "CONVERSION DATE"), the Holder shall (A)
     transmit by facsimile (or otherwise deliver), for receipt on or prior to
     11:59 p.m., New York Time, on such date, a copy of an executed notice of
     conversion in the form attached hereto as Exhibit I (the "CONVERSION
     NOTICE") to the Company and (B) if required by Section 3(c)(iv), surrender
     this Note to a nationally recognized overnight delivery service for
     delivery to the Company (or an indemnification undertaking with respect to
     this Note in the case of its loss, theft or destruction). On or before the
     next Trading Day following the date of receipt of a Conversion Notice, the
     Company shall transmit by facsimile a confirmation of receipt of such
     Conversion Notice to the Holder and the Transfer Agent. On or before the
     second (2nd) Trading Day following the date of receipt of a Conversion
     Notice (the "SHARE DELIVERY DATE"), the Company shall (1) (X) provided that
     the Transfer Agent is participating in the Fast Automated Securities
     Transfer Program of DTC credit such aggregate number of shares of Common
     Stock to which the Holder shall be entitled to the Holder's or its
     designee's balance account with DTC through its Deposit Withdrawal Agent
     Commission system or (Y) if the Transfer Agent is not participating in the
     DTC Fast Automated Securities Transfer Program, issue and deliver to the
     address as specified in the Conversion Notice, a certificate, registered in
     the name of the Holder or its designee, for the number of shares of Common
     Stock to which the Holder shall be entitled, (2) pay to the Holder in cash
     an amount equal to the accrued and unpaid Interest on the Conversion Amount
     up to and including the Conversion Date. If this Note is physically
     surrendered for conversion as required by Section 3(c)(iv) and the
     outstanding Principal of this Note is greater than the Principal portion of
     the Conversion Amount being converted, then the Company shall as soon as
     practicable and in no event later than three Business Days after receipt of
     this Note and at its own expense, issue and deliver to the holder a new
     Note (in accordance with Section 18(d)) representing the outstanding
     Principal not converted. The Person or Persons entitled to receive the
     shares of Common Stock issuable upon a conversion of this Note shall be
     treated for all purposes as the record holder or holders of such shares of
     Common Stock on the Conversion Date. In the event of a partial conversion
     of this Note pursuant hereto, the principal amount converted shall be
     deducted from the Installment Amounts relating to the Installment Dates as
     set forth in the Conversion Notice.

          (ii) Company's Failure to Timely Convert. If within three (3) Trading
     Days after the Company's receipt of the facsimile copy of a Conversion
     Notice the Company shall fail to issue and deliver a certificate to the
     Holder or credit the Holder's balance account with DTC for the number of
     shares of Common Stock to which the Holder is entitled upon such holder's
     conversion of any Conversion Amount (a "CONVERSION FAILURE"), and if on or
     after such Trading Day the Holder purchases (in an open market

                                        3

<PAGE>

     transaction or otherwise) Common Stock to deliver in satisfaction of a sale
     by the Holder of Common Stock issuable upon such conversion that the Holder
     anticipated receiving from the Company (a "BUY-IN"), then the Company
     shall, within three (3) Business Days after the Holder's request and
     provision of trade confirmations and in the Holder's discretion, either (i)
     pay cash to the Holder in an amount equal to the Holder's total purchase
     price (including brokerage commissions and other out-of-pocket expenses, if
     any) for the shares of Common Stock so purchased (the "BUY-IN PRICE"), at
     which point the Company's obligation to deliver such certificate (and to
     issue such Common Stock) shall terminate, or (ii) promptly honor its
     obligation to deliver to the Holder a certificate or certificates
     representing such Common Stock and pay cash to the Holder in an amount
     equal to the excess (if any) of the Buy-In Price over the product of (A)
     such number of shares of Common Stock, times (B) the Closing Bid Price on
     the Conversion Date.

          (iii) Registration; Book-Entry. The Company shall maintain a register
     (the "REGISTER") for the recordation of the names and addresses of the
     holders of each Note and the principal amount of the Notes held by such
     holders (the "REGISTERED NOTES"). The entries in the Register shall be
     conclusive and binding for all purposes absent manifest error. The Company
     and the holders of the Notes shall treat each Person whose name is recorded
     in the Register as the owner of a Note for all purposes, including, without
     limitation, the right to receive payments of principal and interest
     hereunder, notwithstanding notice to the contrary. A Registered Note may be
     assigned or sold in whole or in part only by registration of such
     assignment or sale on the Register. Upon its receipt of a request to assign
     or sell all or part of any Registered Note by a Holder, to the extent
     permitted by applicable securities laws the Company shall record the
     information contained therein in the Register and issue one or more new
     Registered Notes in the same aggregate principal amount as the principal
     amount of the surrendered Registered Note to the designated assignee or
     transferee pursuant to Section 17. Notwithstanding anything to the contrary
     set forth herein, upon conversion of any portion of this Note in accordance
     with the terms hereof, the Holder shall not be required to physically
     surrender this Note to the Company unless (A) the full Conversion Amount
     represented by this Note is being converted or (B) the Holder has provided
     the Company with prior written notice (which notice may be included in a
     Conversion Notice) requesting physical surrender and reissue of this Note.
     The Holder and the Company shall maintain records showing the Principal,
     Interest and Late Charges converted and the dates of such conversions or
     shall use such other method, reasonably satisfactory to the Holder and the
     Company, so as not to require physical surrender of this Note upon
     conversion.

          (iv) Disputes. In the event of a dispute as to the number of shares of
     Common Stock issuable to the Holder in connection with a conversion of this
     Note, the Company shall issue to the Holder the number of shares of Common
     Stock not in dispute and resolve such dispute in accordance with Section
     23.

     (d) Limitations on Conversions.

          (i) Beneficial Ownership. The Company shall not effect any conversion
     of this Note, and the Holder of this Note (including any successor,
     transferee or assignee)

                                        4

<PAGE>

     shall not have the right to convert any portion of this Note pursuant to
     Section 3(a), to the extent that after giving effect to such conversion,
     the Holder (together with the Holder's affiliates) would beneficially own
     in excess of 4.99% (the "MAXIMUM PERCENTAGE") of the number of shares of
     Common Stock outstanding immediately after giving effect to such
     conversion. For purposes of the foregoing sentence, the number of shares of
     Common Stock beneficially owned by the Holder and its affiliates shall
     include the number of shares of Common Stock issuable upon conversion of
     this Note with respect to which the determination of such sentence is being
     made, but shall exclude the number of shares of Common Stock which would be
     issuable upon (A) conversion of the remaining, nonconverted portion of this
     Note beneficially owned by the Holder or any of its affiliates and (B)
     exercise or conversion of the unexercised or nonconverted portion of any
     other securities of the Company (including, without limitation, any Other
     Notes or warrants) subject to a limitation on conversion or exercise
     analogous to the limitation contained herein beneficially owned by the
     Holder or any of its affiliates. Except as set forth in the preceding
     sentence, for purposes of this Section 3(d)(i), beneficial ownership shall
     be calculated in accordance with Section 13(d) of the Securities Exchange
     Act of 1934, as amended. For purposes of this Section 3(d)(i), in
     determining the number of outstanding shares of Common Stock, the Holder
     may rely on the number of outstanding shares of Common Stock as reflected
     in (x) the Company's most recent Form 10-KSB, Form 10-K, Form 10-QSB, Form
     10-Q or Form 8-K, as the case may be (y) a more recent public announcement
     by the Company or (z) any other notice by the Company or the Transfer Agent
     setting forth the number of shares of Common Stock outstanding. For any
     reason at any time, during regular business hours of the Company and upon
     the written request of the Holder, the Company shall within two (2)
     Business Days confirm in writing to the Holder the number of shares of
     Common Stock then outstanding. In any case, the number of outstanding
     shares of Common Stock shall be determined after giving effect to the
     conversion or exercise of securities of the Company, including this Note,
     by the Holder or its affiliates since the date as of which such number of
     outstanding shares of Common Stock was reported. By written notice to the
     Company, the Holder may increase or decrease the Maximum Percentage to any
     other percentage specified in such notice; provided that (i) any such
     increase will not be effective until the sixty-first (61st ) day after such
     notice is delivered to the Company, and (ii) any such increase or decrease
     will apply only to the Holder and not to any other holder of Notes.

          (ii) Principal Market Regulation. The Company shall not be obligated
     to issue any shares of Common Stock upon conversion of this Note, and the
     Holder of this Note shall not have the right to receive upon conversion of
     this Note any shares of Common Stock, if the issuance of such shares of
     Common Stock would exceed the aggregate number of shares of Common Stock
     which the Company may issue upon conversion or exercise, as applicable, of
     the Notes, the Preferred Stock and Warrants without breaching the Company's
     obligations under the rules or regulations of the Principal Market or the
     Australian Stock Exchange (the "EXCHANGE CAP"), except that such limitation
     shall not apply in the event that the Company (A) obtains the approval of
     its stockholders as required by the applicable rules of the Principal
     Market or the Australian Stock Exchange for issuances of Common Stock in
     excess of such amount or (B) obtains a written opinion from outside counsel
     to the Company that such approval is not required, which opinion

                                        5

<PAGE>

     shall be reasonably satisfactory to the Required Holders. Until such
     approval or written opinion is obtained, no purchaser of the Notes pursuant
     to the Securities Purchase Agreement (the "PURCHASERS") shall be issued in
     the aggregate, upon conversion or exercise, as applicable, of Notes, the
     Preferred Stock or Warrants, shares of Common Stock in an amount greater
     than the product of the Exchange Cap multiplied by a fraction, the
     numerator of which is the principal amount of Notes issued to the
     Purchasers pursuant to the Securities Purchase Agreement on the Closing
     Date and the denominator of which is the aggregate principal amount of all
     Notes issued to the Purchasers pursuant to the Securities Purchase
     Agreement on the Closing Date (with respect to each Purchaser, the
     "EXCHANGE CAP ALLOCATION"). In the event that any Purchaser shall sell or
     otherwise transfer any of such Purchaser's Notes, the transferee shall be
     allocated a pro rata portion of such Purchaser's Exchange Cap Allocation,
     and the restrictions of the prior sentence shall apply to such transferee
     with respect to the portion of the Exchange Cap Allocation allocated to
     such transferee. In the event that any holder of Notes shall convert all of
     such holder's Notes into a number of shares of Common Stock which, in the
     aggregate, is less than such holder's Exchange Cap Allocation, then the
     difference between such holder's Exchange Cap Allocation and the number of
     shares of Common Stock actually issued to such holder shall be allocated to
     the respective Exchange Cap Allocations of the remaining holders of Notes
     on a pro rata basis in proportion to the aggregate principal amount of the
     Notes then held by each such holder.

4. RIGHTS UPON EVENT OF DEFAULT.

     (a) Event of Default. Each of the following events shall constitute an
"Event of Default ":

          (i) the failure of the applicable Registration Statement required to
     be filed pursuant to the Registration Rights Agreement to be declared
     effective by the SEC on or prior to the date that is ninety (90) days after
     the applicable Effectiveness Deadline (as defined in the Registration
     Rights Agreement), or, while the applicable Registration Statement is
     required to be maintained effective pursuant to the terms of the
     Registration Rights Agreement, the effectiveness of the applicable
     Registration Statement lapses for any reason (including, without
     limitation, the issuance of a stop order) or is unavailable to any holder
     of the Notes for sale of all of such holder's Registrable Securities (as
     defined in the Registration Rights Agreement) in accordance with the terms
     of the Registration Rights Agreement, and such lapse or unavailability
     continues for a period of five (5) consecutive days or for more than an
     aggregate of ten (10) days in any 365-day period (other than days during an
     Allowable Grace Period (as defined in the Registration Rights Agreement));

          (ii) the suspension from trading or failure of the Common Stock to be
     listed on the Principal Market or on an Eligible Market for a period of
     five (5) consecutive Trading Days or for more than an aggregate of ten (10)
     Trading Days in any 365-day period;

          (iii) the Company's (A) failure to cure a Conversion Failure by
     delivery of the

                                        6

<PAGE>

     required number of shares of Common Stock within ten (10) Business Days
     after the applicable Conversion Date or (B) written notice to any holder of
     the Notes, including by way of public announcement or through any of its
     authorized agents, at any time, of its intention not to comply with a
     request for conversion of any Notes into shares of Common Stock that is
     tendered in accordance with the provisions of the Notes;

          (iv) at any time following the tenth (10th) consecutive Business Day
     that the authorized number of shares is less than the number of shares of
     Common Stock that the Holder would be entitled to receive upon a conversion
     of three hundred percent (300%) of the full Conversion Amount of this Note
     (without regard to any limitations on conversion set forth in Section 3(d)
     or otherwise);

          (v) the Company's failure to pay to the Holder any amount of Principal
     (including, without limitation, any redemption or make-whole payments),
     Interest, Late Charges or other amounts when and as due under this Note or
     any other Transaction Document (as defined in the Securities Purchase
     Agreement) or any other agreement, document, certificate or other
     instrument delivered in connection with the transactions contemplated
     hereby and thereby to which the Holder is a party, except, in the case of a
     failure to pay Interest and Late Charges when and as due, in which case
     only if such failure continues for a period of at least five (5) Business
     Days;

          (vi) any default under, redemption of or acceleration prior to
     maturity of any Indebtedness in excess of $100,000, in the aggregate, of
     the Company or any of its Subsidiaries (as defined in Section 3(a) of the
     Securities Purchase Agreement);

          (vii) the Company or any of its Subsidiaries, pursuant to or within
     the meaning of Title 11, U.S. Code, or any similar Federal, foreign or
     state law for the relief of debtors (collectively, "BANKRUPTCY LAW"), (A)
     commences a voluntary case, (B) consents to the entry of an order for
     relief against it in an involuntary case, (C) consents to the appointment
     of a receiver, trustee, assignee, liquidator or similar official (a
     "CUSTODIAN"), (D) makes a general assignment for the benefit of its
     creditors or (E) admits in writing that it is generally unable to pay its
     debts as they become due;

          (viii) a court of competent jurisdiction enters an order or decree
     under any Bankruptcy Law that (A) is for relief against the Company or any
     of its Subsidiaries in an involuntary case, (B) appoints a Custodian of the
     Company or any of its Subsidiaries or (C) orders the liquidation of the
     Company or any of its Subsidiaries;

          (ix) a final judgment or judgments for the payment of money
     aggregating in excess of $250,000 are rendered against the Company or any
     of its Subsidiaries and which judgments are not, within sixty (60) days
     after the entry thereof, bonded, discharged or stayed pending appeal, or
     are not discharged within sixty (60) days after the expiration of such
     stay; provided, however, that any judgment which is covered by insurance or
     an indemnity from a credit worthy party shall not be included in
     calculating the $250,000 amount set forth above so long as the Company
     provides the Holder a written statement from such insurer or indemnity
     provider (which written statement shall

                                        7

<PAGE>

     be reasonably satisfactory to the Holder) to the effect that such judgment
     is covered by insurance or an indemnity and the Company will receive the
     proceeds of such insurance or indemnity within thirty (30) days of the
     issuance of such judgment;

          (x) the Company breaches any material representation, warranty,
     covenant or other term or condition of any Transaction Document, except, in
     the case of a breach of a covenant which is curable, only if such breach
     continues for a period of at least ten (10) consecutive Business Days;

          (xi) any breach or failure in any respect to comply with (x) Section
     15 of this Note or (y) any of the Potential Partner Conditions;

          (xii) any breach or failure to comply with the Company's obligations
     under the Series A Certificate of Designation;

          (xiii) any Event of Default (as defined in the Other Notes) occurs
     with respect to any Other Notes;

          (ix) the inability of the Common Stock to be transferred with DTC
     through the Deposit Withdrawal at Custodian system;

          (x) failure by the Company to issue the Holder once every six months,
     or as otherwise required by the Transfer Agent, a power-of-attorney, as set
     forth in Section 5 (b) of the Securities Purchase Agreement, to instruct
     the Transfer Agent to convert the Notes or the Preferred Stock into shares
     of the Company's Common Stock or to convert the Warrants into shares of the
     Company's Common Stock, such that a valid Power-of-Attorney (as defined in
     the Securities Purchase Agreement) no longer exists for such conversions;
     and

          (xi) in the event that the Transfer Agent does not recognize a
     Power-of-Attorney as sufficient instruction from the Holder to convert the
     Notes or the Preferred Stock or to allow for the exercise of the Warrants,
     failure by the Company to switch within three weeks to a different Transfer
     Agent that recognizes the Power-of-Attorney allowing the Holder to convert
     the Notes or the Preferred Stock into shares of the Company's Common Stock
     or to convert the Warrants into shares of the Company's Common Stock.

     (b) Redemption Right. Upon the occurrence of an Event of Default with
respect to this Note, the Company shall within two (2) Business Days after the
day on which the Company is aware of the Event of Default deliver written notice
thereof via facsimile and overnight courier (an "EVENT OF DEFAULT NOTICE") to
the Holder. At any time after the earlier of the Holder's receipt of an Event of
Default Notice and the Holder becoming aware of an Event of Default, the Holder
may require the Company to redeem all or any portion of this Note by delivering
written notice thereof (the "Event of Default Redemption Notice") to the
Company, which Event of Default Redemption Notice shall indicate the portion of
this Note the Holder is electing to redeem. Each portion of this Note subject to
redemption by the Company pursuant to this

                                        8

<PAGE>

Section 4(b) shall be redeemed by the Company at a price equal to the greater of
(i) the product of (x) the Conversion Amount to be redeemed and (y) the
Redemption Premium and (ii) the product of (A) the Conversion Rate with respect
to such Conversion Amount in effect at such time as the Holder delivers an Event
of Default Redemption Notice and (B) the Closing Sale Price of the Common Stock
on the date immediately preceding such Event of Default (the "EVENT OF DEFAULT
REDEMPTION PRICE"). Redemptions required by this Section 4(b) shall be made in
accordance with the provisions of Section 12. To the extent redemptions required
by this Section 4(b) are deemed or determined by a court of competent
jurisdiction to be prepayments of the Note by the Company, such redemptions
shall be deemed to be voluntary prepayments. The parties hereto agree that in
the event of the Company's redemption of any portion of the Note under this
Section 4(b), the Holder's damages would be uncertain and difficult to estimate
because of the parties' inability to predict future interest rates and the
uncertainty of the availability of a suitable substitute investment opportunity
for the Holder. Accordingly, any Redemption Premium due under this Section 4(b)
is intended by the parties to be, and shall be deemed, a reasonable estimate of
the Holder's actual loss of its investment opportunity and not as a penalty.

5. RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.

     (a) Assumption. The Company shall not enter into or be party to a
Fundamental Transaction unless (i) the Successor Entity assumes in writing all
of the obligations of the Company under this Note and the other Transaction
Documents in accordance with the provisions of this Section 5(a) pursuant to
written agreements in form and substance satisfactory to the Required Holders
and approved by the Required Holders prior to such Fundamental Transaction,
including agreements to deliver to each holder of Notes in exchange for such
Notes a security of the Successor Entity evidenced by a written instrument
substantially similar in form and substance to the Notes, including, without
limitation, having a principal amount and interest rate equal to the principal
amounts and the interest rates of the Notes held by such holder, having similar
conversion rights as the Notes and having similar ranking to the Notes, and
satisfactory to the Required Holders and (ii) the Successor Entity (including
its Parent Entity) is a publicly traded corporation whose common stock is quoted
on or listed for trading on an Eligible Market. Upon the occurrence of any
Fundamental Transaction, the Successor Entity shall succeed to, and be
substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Note referring to the "Company" shall refer
instead to the Successor Entity), and may exercise every right and power of the
Company and shall assume all of the obligations of the Company under this Note
with the same effect as if such Successor Entity had been named as the Company
herein. Upon consummation of the Fundamental Transaction, the Successor Entity
shall deliver to the Holder confirmation that there shall be issued upon
conversion or redemption of this Note at any time after the consummation of the
Fundamental Transaction, in lieu of the shares of Common Stock (or other
securities, cash, assets or other property) issuable upon the conversion of the
Notes prior to such Fundamental Transaction, such shares of publicly traded
common stock (or their equivalent) of the Successor Entity, as adjusted in
accordance with the provisions of this Note. The provisions of this Section
shall apply similarly and equally to successive Fundamental Transactions and
shall be applied without regard to any limitations on the conversion of this
Note.

     (b) Redemption Right. No sooner than fifteen (15) days nor later than ten
(10) days

                                        9

<PAGE>

prior to the consummation of a Change of Control, but not prior to the public
announcement of such Change of Control, the Company shall deliver written notice
thereof via facsimile and overnight courier to the Holder (a "CHANGE OF CONTROL
NOTICE"). At any time during the period beginning after the Holder's receipt of
a Change of Control Notice and ending ten (10) Trading Days after the
consummation of such Change of Control, the Holder may require the Company to
redeem all or any portion of this Note by delivering written notice thereof
("CHANGE OF CONTROL REDEMPTION NOTICE") to the Company, which Change of Control
Redemption Notice shall indicate the Conversion Amount the Holder is electing to
have redeemed. The portion of this Note subject to redemption pursuant to this
Section 5 shall be redeemed by the Company in cash at a price equal to the
greater of (i) the Change of Control Premium multiplied by the product of (x)
the sum of the Conversion Amount being redeemed and any accrued and unpaid
Interest with respect to such Conversion Amount and accrued and unpaid Late
Charges with respect to such Conversion Amount and Interest and (y) the Closing
Sale Price of the Common Stock immediately following the public announcement of
such proposed Change of Control and (ii) 150% of the sum of the Conversion
Amount being redeemed and any accrued and unpaid Interest with respect to such
Conversion Amount subject to such Change of Control Redemption and accrued and
unpaid Late Charges with respect to such Conversion Amount and Interest (the
"CHANGE OF CONTROL REDEMPTION PRICE"). For example and the avoidance of any
doubt, if the Change of Control Premium is 130%, the Conversion Amount being
redeemed including all accrued and unpaid Interest and Late Charges is $100,000
and the Closing Sale Price of the Common Stock immediately following the public
announcement of the Change of Control is $2.00, then the Redemption Price shall
be the greater of:

                       130% * [$100,000 * $2] or $260,000

                                       and

                          150% * $100,000 or $150,000.

Redemptions required by this Section 5 shall be made in accordance with the
provisions of Section 15 and shall have priority to payments to shareholders in
connection with a Change of Control. To the extent redemptions required by this
Section 5(b) are deemed or determined by a court of competent jurisdiction to be
prepayments of the Note by the Company, such redemptions shall be deemed to be
voluntary prepayments. Notwithstanding anything to the contrary in this Section
5, until the Change of Control Redemption Price (together with any interest
thereon) is paid in full, the Conversion Amount submitted for redemption under
this Section 5(c) may be converted, in whole or in part, by the Holder into
shares of Common Stock, or in the event the Conversion Date is after the
consummation of the Change of Control, shares of publicly traded common stock
(or their equivalent) of the Successor Entity pursuant to Section 3. The parties
hereto agree that in the event of the Company's redemption of any portion of the
Note under this Section 5(b), the Holder's damages would be uncertain and
difficult to estimate because of the parties' inability to predict future
interest rates and the uncertainty of the availability of a suitable substitute
investment opportunity for the Holder. Accordingly, any redemption premium due
under this Section 5(b) is intended by the parties to be, and shall be deemed, a
reasonable estimate of the Holder's actual loss of its investment opportunity
and not as a penalty.

                                       10

<PAGE>

6. RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS .

     (a) Purchase Rights. If at any time the Company grants, issues or sells any
Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "PURCHASE RIGHTS"), then the Holder will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the
number of shares of Common Stock acquirable upon complete conversion of this
Note (without taking into account any limitations or restrictions on the
convertibility of this Note) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.

     (b) Other Corporate Events. In addition to and not in substitution for any
other rights hereunder, prior to the consummation of any Fundamental Transaction
pursuant to which holders of shares of Common Stock are entitled to receive
securities or other assets with respect to or in exchange for shares of Common
Stock (a "CORPORATE EVENT"), the Company shall make appropriate provision to
insure that the Holder will thereafter have the right to receive upon a
conversion of this Note, at the Holder's option, (i) in addition to the shares
of Common Stock receivable upon such conversion, such securities or other assets
to which the Holder would have been entitled with respect to such shares of
Common Stock had such shares of Common Stock been held by the Holder upon the
consummation of such Corporate Event (without taking into account any
limitations or restrictions on the convertibility of this Note) or (ii) in lieu
of the shares of Common Stock otherwise receivable upon such conversion, such
securities or other assets received by the holders of shares of Common Stock in
connection with the consummation of such Corporate Event in such amounts as the
Holder would have been entitled to receive had this Note initially been issued
with conversion rights for the form of such consideration (as opposed to shares
of Common Stock) at a conversion rate for such consideration commensurate with
the Conversion Rate. Provision made pursuant to the preceding sentence shall be
in a form and substance satisfactory to the Required Holders. The provisions of
this Section shall apply similarly and equally to successive Corporate Events
and shall be applied without regard to any limitations on the conversion or
redemption of this Note.

7. RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

     (a) Adjustment of Conversion Price upon Issuance of Common Stock. If at any
time after the Subscription Date, the Company issues or sells, or in accordance
with this Section 7(a) is deemed to have issued or sold, any shares of Common
Stock (including the issuance or sale of shares of Common Stock owned or held by
or for the account of the Company, but excluding shares of Common Stock deemed
to have been issued or sold by the Company in connection with any Excluded
Securities) for a consideration per share (the "NEW ISSUANCE PRICE") less than a
price (the "APPLICABLE PRICE") equal to Conversion Price in effect immediately
prior to such issue or sale (the foregoing a "DILUTIVE ISSUANCE"), then
immediately after such Dilutive Issuance, the Conversion Price then in effect
shall be reduced to the New Issuance Price. For

                                       11

<PAGE>

purposes of determining the adjusted Conversion Price under this Section 7(a),
the following shall be applicable:

          (i) Issuance of Options. If the Company in any manner grants or sells
     any Options and the lowest price per share for which one share of Common
     Stock is issuable upon the exercise of any such Option or upon conversion
     or exchange or exercise of any Convertible Securities issuable upon
     exercise of such Option is less than the Applicable Price, then such share
     of Common Stock shall be deemed to be outstanding and to have been issued
     and sold by the Company at the time of the granting or sale of such Option
     for such price per share. For purposes of this Section 7(a)(i), the "lowest
     price per share for which one share of Common Stock is issuable upon the
     exercise of any such Option or upon conversion or exchange or exercise of
     any Convertible Securities issuable upon exercise of such Option" shall be
     equal to the sum of the lowest amounts of consideration (if any) received
     or receivable by the Company with respect to any one share of Common Stock
     upon granting or sale of the Option, upon exercise of the Option and upon
     conversion or exchange or exercise of any Convertible Security issuable
     upon exercise of such Option. No further adjustment of the Conversion Price
     shall be made upon the actual issuance of such share of Common Stock or of
     such Convertible Securities upon the exercise of such Options or upon the
     actual issuance of such Common Stock upon conversion or exchange or
     exercise of such Convertible Securities.

          (ii) Issuance of Convertible Securities. If the Company in any manner
     issues or sells any Convertible Securities and the lowest price per share
     for which one share of Common Stock is issuable upon such conversion or
     exchange or exercise thereof is less than the Applicable Price, then such
     share of Common Stock shall be deemed to be outstanding and to have been
     issued and sold by the Company at the time of the issuance or sale of such
     Convertible Securities for such price per share. For the purposes of this
     Section 7(a)(ii), the "lowest price per share for which one share of Common
     Stock is issuable upon such conversion or exchange or exercise" shall be
     equal to the sum of the lowest amounts of consideration (if any) received
     or receivable by the Company with respect to any one share of Common Stock
     upon the issuance or sale of the Convertible Security and upon the
     conversion or exchange or exercise of such Convertible Security. No further
     adjustment of the Conversion Price shall be made upon the actual issuance
     of such share of Common Stock upon conversion or exchange or exercise of
     such Convertible Securities, and if any such issue or sale of such
     Convertible Securities is made upon exercise of any Options for which
     adjustment of the Conversion Price had been or are to be made pursuant to
     other provisions of this Section 7(a), no further adjustment of the
     Conversion Price shall be made by reason of such issue or sale.

          (iii) Change in Option Price or Rate of Conversion. If the purchase
     price provided for in any Options, the additional consideration, if any,
     payable upon the issue, conversion, exchange or exercise of any Convertible
     Securities, or the rate at which any Convertible Securities are convertible
     into or exchangeable or exercisable for Common Stock changes at any time,
     the Conversion Price in effect at the time of such change shall be adjusted
     to the Conversion Price which would have been in effect at such time had
     such Options or Convertible Securities provided for such changed purchase
     price,

                                       12

<PAGE>

     additional consideration or changed conversion rate, as the case may be, at
     the time initially granted, issued or sold. For purposes of this Section
     7(a)(iii), if the terms of any Option or Convertible Security that was
     outstanding as of the Subscription Date are changed in the manner described
     in the immediately preceding sentence, then such Option or Convertible
     Security and the Common Stock deemed issuable upon exercise, conversion or
     exchange thereof shall be deemed to have been issued as of the date of such
     change. No adjustment shall be made if such adjustment would result in an
     increase of the Conversion Price then in effect.

          (iv) Calculation of Consideration Received. In case any Option is
     issued in connection with the issue or sale of other securities of the
     Company, together comprising one integrated transaction in which no
     specific consideration is allocated to such Options by the parties thereto,
     the Options will be deemed to have been issued for such consideration as
     determined in good faith by the Board of Directors of the Company. If any
     Common Stock, Options or Convertible Securities are issued or sold or
     deemed to have been issued or sold for cash, the consideration received
     therefor will be deemed to be the net amount received by the Company
     therefor. If any Common Stock, Options or Convertible Securities are issued
     or sold for a consideration other than cash, the amount of the
     consideration other than cash received by the Company will be the fair
     value of such consideration as determined in good faith by the Board of
     Directors of the Company, except where such consideration consists of
     securities, in which case the amount of consideration received by the
     Company will be the Closing Sale Price of such securities on the date of
     receipt. If any Common Stock, Options or Convertible Securities are issued
     to the owners of the non-surviving entity in connection with any merger in
     which the Company is the surviving entity, the amount of consideration
     therefor will be deemed to be the fair value of such portion of the net
     assets and business of the non-surviving entity as is attributable to such
     Common Stock, Options or Convertible Securities, as the case may be. The
     fair value of any consideration other than cash or securities will be
     determined jointly by the Company and the Required Holders. If such parties
     are unable to reach agreement within ten (10) days after the occurrence of
     an event requiring valuation (the "VALUATION EVENT"), the fair value of
     such consideration will be determined within five (5) Business Days after
     the tenth day following the Valuation Event by an independent, reputable
     appraiser jointly selected by the Company and the Required Holders. The
     determination of such appraiser shall be deemed binding upon all parties
     absent manifest error and the fees and expenses of such appraiser shall be
     borne by the Company.

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

                                       13

<PAGE>

     (b) Adjustment of Conversion Price upon Subdivision or Combination of
Common Stock. If the Company at any time on or after the Subscription Date
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
one or more classes of its outstanding shares of Common Stock into a greater
number of shares, the Conversion Price in effect immediately prior to such
subdivision will be proportionately reduced. If the Company at any time on or
after the Subscription Date combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Conversion Price in effect immediately prior to
such combination will be proportionately increased.

     (c) Other Events. If any event occurs of the type contemplated by the
provisions of this Section 7 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company's
Board of Directors will make an appropriate adjustment in the Conversion Price
so as to protect the rights of the Holder under this Note; provided that no such
adjustment will increase the Conversion Price as otherwise determined pursuant
to this Section 7.

8. COMPANY RIGHT OF REDEMPTION.

     (a) General. The Company at its option shall have the right to redeem, with
three (3) Business Days advance written notice (the "COMPANY REDEMPTION
NOTICE"), a portion or all of the outstanding principal of the Note. The Holder
may convert after the Company Redemption Notice is received and until the
Company Redemption Price is received by the Holder. The redemption price shall
be the greater of (i) One Hundred and Twenty percent (120%) of the face amount
redeemed plus accrued interest and (ii) sixty-eight percent (68%) of the (x)
product of the remaining Conversion Amount divided by the Conversion Price (not
less than $1 (as adjusted for any stock dividend, stock combination, stock split
or other similar transactions that proportionately increases or decreases the
Common Stock)) in effect on the Trading Day before the Company Redemption Notice
is sent and (y) the Closing Sale Price on the Trading Day before the Company
Redemption Notice is sent, plus accrued interest (the "COMPANY REDEMPTION
PRICE"). The Company shall pay the Company Redemption Price on all payments made
pursuant to the Note, including payments made before, on, or after the Maturity
Date. For all payments under this Note, the payment of the Company Redemption
Price by the Company shall be in addition to any accrued interest due.

     (b) Mechanics of Company Redemption. If the Company elects to redeem the
Note in accordance with Section 8(a), then the Company Redemption Price, if any,
which is to be paid to the Holder, shall be paid, by wire transfer of
immediately available funds, an amount in cash equal to 100% of the Company
Redemption Price. If the Company fails to redeem the Company Redemption Price on
such date, then at the option of the Holder designated in writing to the Company
(any such designation, "Conversion Notice" for purposes of this Note), the
Holder may require the Company to convert all or any part of the Company
Redemption Amount at the Conversion Price. Conversions required by this Section
8(b) shall be made in accordance with the provisions of Section 3(c).
Notwithstanding anything to the contrary in this Section 8(b), but subject to
Section 3(d), until the Company Redemption Price (together with any interest
thereon) is paid in full, the Company Redemption Price (together with any
interest thereon) may be

                                       14

<PAGE>

converted, in whole or in part, by the Holder into Common Stock pursuant to
Section 3.

     (c) Pro Rata Redemption Requirement. If the Company elects to convert any
Conversion Amount of this Note pursuant to Section 8(a), then it must
simultaneously take the same action in the same proportion with respect to the
Other Notes.

9. SECURITY. This Note and the Other Notes are secured to the extent and in the
manner set forth in the Security Documents (as defined in the Securities
Purchase Agreement).

10. NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company
will not, by amendment of its Articles of Incorporation, Bylaws or through any
reorganization, transfer of assets, consolidation, merger, scheme of
arrangement, dissolution, issue or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Note, and will at all times in good faith carry out all of the
provisions of this Note and take all reasonable action as may be required to
protect the rights of the Holder of this Note.

11. RESERVATION OF AUTHORIZED SHARES.

     (a) Reservation. The Company initially shall reserve out of its authorized
and unissued Common Stock a number of shares of Common Stock for each of the
Notes equal to 300% of the Conversion Rate with respect to the Conversion Amount
of each such Note as of the Issuance Date. So long as any of the Notes are
outstanding, the Company shall take all action necessary to reserve and keep
available out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Notes, 300% of the number of shares
of Common Stock as shall from time to time be necessary to effect the conversion
of all of the Notes then outstanding; provided that at no time shall the number
of shares of Common Stock so reserved be less than the number of shares required
to be reserved of the previous sentence (without regard to any limitations on
conversions) (the "REQUIRED RESERVE AMOUNT"). The initial number of shares of
Common Stock reserved for conversions of the Notes and each increase in the
number of shares so reserved shall be allocated pro rata among the holders of
the Notes based on the principal amount of the Notes held by each holder at the
Closing (as defined in the Securities Purchase Agreement) or increase in the
number of reserved shares, as the case may be (the "AUTHORIZED SHARE
ALLOCATION"). In the event that a holder shall sell or otherwise transfer any of
such holder's Notes, each transferee shall be allocated a pro rata portion of
such holder's Authorized Share Allocation. Any shares of Common Stock reserved
and allocated to any Person which ceases to hold any Notes shall be allocated to
the remaining holders of Notes, pro rata based on the principal amount of the
Notes then held by such holders.

     (b) Insufficient Authorized Shares. If at any time while any of the Notes
remain outstanding the Company does not have a sufficient number of authorized
and unreserved shares of Common Stock to satisfy its obligation to reserve for
issuance upon conversion of the Notes at least a number of shares of Common
Stock equal to the Required Reserve Amount (an "AUTHORIZED SHARE FAILURE"), then
the Company shall immediately take all action necessary to increase the
Company's authorized shares of Common Stock to an amount sufficient to allow the
Company to reserve the Required Reserve Amount for the Notes then outstanding.
Without

                                       15

<PAGE>

limiting the generality of the foregoing sentence, as soon as practicable after
the date of the occurrence of an Authorized Share Failure, but in no event later
than ninety (90) days after the occurrence of such Authorized Share Failure, the
Company shall hold a meeting of its shareholders for the approval of an increase
in the number of authorized shares of Common Stock. In connection with such
meeting, the Company shall provide each shareholder with a proxy or information
statement and shall use its reasonable best efforts to solicit its shareholders'
approval of such increase in authorized shares of Common Stock and to cause its
board of directors to recommend to the shareholders that they approve such
proposal.

12. HOLDER'S REDEMPTIONS. (a) The Company shall deliver the applicable Event of
Default Redemption Price to the Holder within five (5) Business Days after the
Company's receipt of the Holder's Event of Default Redemption Notice. If the
Holder has submitted a Change of Control Redemption Notice in accordance with
Section 5(b), the Company shall deliver the applicable Change of Control
Redemption Price to the Holder concurrently with the consummation of such Change
of Control if such notice is received prior to the consummation of such Change
of Control and within five (5) Business Days after the Company's receipt of such
notice otherwise. In the event of a redemption of less than all of the
Conversion Amount of this Note, the Company shall promptly cause to be issued
and delivered to the Holder a new Note (in accordance with Section 18(d))
representing the outstanding Principal which has not been redeemed. In the event
that the Company does not pay the applicable Redemption Price to the Holder
within the time period required, at any time thereafter and until the Company
pays such unpaid Redemption Price in full, the Holder shall have the option, in
lieu of redemption, to require the Company to promptly return to the Holder all
or any portion of this Note representing the Conversion Amount that was
submitted for redemption and for which the applicable Redemption Price (together
with any Late Charges thereon) has not been paid. Upon the Company's receipt of
such notice, (x) the applicable Redemption Notice shall be null and void with
respect to such Conversion Amount, (y) the Company shall immediately return this
Note, or issue a new Note (in accordance with Section 18(d)) to the Holder
representing the sum of such Conversion Amount to be redeemed together with
accrued and unpaid Interest with respect to such Conversion Amount and accrued
and unpaid Late Charges with respect to such Conversion Amount and Interest and
(z) the Conversion Price of this Note or such new Notes shall be adjusted to the
lesser of (A) the Conversion Price as in effect on the date on which the
applicable Redemption Notice is voided and (B) the lowest Closing Bid Price
during the period beginning on and including the date on which the applicable
Redemption Notice is delivered to the Company and ending on and including the
date on which the applicable Redemption Notice is voided. The Holder's delivery
of a notice voiding a Redemption Notice and exercise of its rights following
such notice shall not affect the Company's obligations to make any payments of
Late Charges which have accrued prior to the date of such notice with respect to
the Conversion Amount subject to such notice.

     (b) Redemption by Other Holders. Upon the Company's receipt of notice from
any of the holders of the Other Notes for redemption or repayment as a result of
an event or occurrence substantially similar to the events or occurrences
described in Section 4(b) or Section 5(b) (each, an "OTHER REDEMPTION NOTICE"),
the Company shall immediately, but no later than one (1) Business Day of its
receipt thereof, forward to the Holder by facsimile a copy of such notice. If
the Company receives a Redemption Notice and one or more Other Redemption
Notices, during

                                       16

<PAGE>

the seven (7) Business Day period beginning on and including the date which is
three (3) Business Days prior to the Company's receipt of the Holder's
Redemption Notice and ending on and including the date which is three (3)
Business Days after the Company's receipt of the Holder's Redemption Notice and
the Company is unable to redeem all principal, interest and other amounts
designated in such Redemption Notice and such Other Redemption Notices received
during such seven (7) Business Day period, then the Company shall redeem a pro
rata amount from each holder of the Notes (including the Holder) based on the
principal amount of the Notes submitted for redemption pursuant to such
Redemption Notice and such Other Redemption Notices received by the Company
during such seven (7) Business Day period.

13. RESTRICTION ON REDEMPTION AND CASH DIVIDENDS. Until all of the Notes have
been converted, redeemed or otherwise satisfied in accordance with their terms,
the Company shall not, directly or indirectly, redeem, repurchase or declare or
pay any cash dividend or distribution on its capital stock without the prior
express written consent of the Required Holders.

14. VOTING RIGHTS. The Holder shall have no voting rights as the holder of this
Note, except as required by law, including but not limited to Chapter 78 of the
Delaware Revised Statutes, and as expressly provided in this Note.

15. COVENANTS.

     (a) Rank. All payments due under this Note shall rank pari passu with all
Other Notes and no other Indebtedness of the Company and its Subsidiaries shall
be senior to the Indebtedness of the Company and its Subsidiary evidenced by the
Note and the Other Notes.

     (b) Incurrence of Indebtedness. So long as this Note is outstanding, the
Company shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, incur or guarantee, assume or suffer to exist any
Indebtedness, other than (i) the Indebtedness evidenced by this Note and (ii)
Permitted Indebtedness.

     (c) Existence of Liens. So long as this Note is outstanding, the Company
shall not, and the Company shall not permit any of its Subsidiaries to, directly
or indirectly, allow or suffer to exist any mortgage, lien, pledge, charge,
security interest or other encumbrance upon or in any property or assets
(including accounts and contract rights) owned by the Company or any of its
Subsidiaries (collectively, "LIENS") other than Permitted Liens.

     (d) Restricted Payments. The Company shall not, and the Company shall not
permit any of its Subsidiaries to, directly or indirectly, redeem, defease,
repurchase, repay or make any payments in respect of, by the payment of cash or
cash equivalents (in whole or in part, whether by way of open market purchases,
tender offers, private transactions or otherwise), all or any portion of any
Permitted Indebtedness, whether by way of payment in respect of principal of (or
premium, if any) or interest on, such Indebtedness if at the time such payment
is due or is otherwise made or, after giving effect to such payment, an event
constituting, or that with the passage of time and without being cured would
constitute, an Event of Default has occurred and is continuing.

                                       17

<PAGE>

     (e) Sales of Equity Securities. Until the Company has obtained the
Stockholder Approval (as defined in the Securities Purchase Agreement), except
for any issuance of Securities in accordance with the Transaction Documents or
as set forth on Schedule 18(e) attached hereto, the Company will not, directly
or indirectly, offer, sell, grant any option to purchase, or otherwise dispose
of (or announce any offer, sale, grant or any option to purchase or other
disposition of) any of its equity or Common Stock Equivalents (as defined in the
Securities Purchase Agreement), including without limitation any debt, preferred
stock or other instrument or security that is, at any time during its life and
under any circumstances, convertible into or exchangeable or exercisable for
shares of common equity of the Company, without the prior written consent of the
Required Holders.

     (f) Subsidiary Internal Accounting Controls. So long as this Note is
outstanding, the Company and each of its Subsidiaries shall maintain, in all
material respects, a system of internal accounting controls consistent with the
Internal Accounting Controls (as defined in the Securities Purchase Agreement).

16. VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote at a
meeting duly called for such purpose or the written consent without a meeting of
the Required Holders shall be required for any change or amendment to this Note
or the Other Notes.

17. TRANSFER. The Holder acknowledges and agrees that this Note may only be
offered, sold, assigned or transferred by the Holder without the consent of the
Company, provided that the provisions of Section 2(f) of the Securities Purchase
Agreement are complied with in all respects.

18. REISSUANCE OF THIS NOTE.

     (a) Transfer. If this Note is to be transferred, the Holder shall surrender
this Note to the Company, whereupon the Company will issue, promptly following
the satisfaction of the provisions of Section 2(f) of the Securities Purchase
Agreement, and deliver upon the order of the Holder a new Note (in accordance
with Section 18(d)), in the name of the validly registered assigns or
transferee, representing the outstanding Principal being transferred by the
Holder and, if less then the entire outstanding Principal is being transferred,
a new Note (in accordance with Section 18(d)) to the Holder representing the
outstanding Principal not being transferred. The Holder and any assignee, by
acceptance of this Note, acknowledge and agree that, by reason of the provisions
of Section 3(c)(iii) and this Section 18(a), following conversion or redemption
of any portion of this Note, the outstanding Principal represented by this Note
may be less than the Principal stated on the face of this Note.

     (b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Note, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company in customary form and,
in the case of mutilation, upon surrender and cancellation of this Note, the
Company shall execute and deliver to the Holder a new Note (in accordance with
Section 18(d)) representing the outstanding Principal.

                                       18

<PAGE>

     (c) Note Exchangeable for Different Denominations. This Note is
exchangeable, upon the surrender hereof by the Holder at the principal office of
the Company, for a new Note or Notes (in accordance with Section (d) and in
principal amounts of at least $100,000) representing in the aggregate the
outstanding Principal of this Note, and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the time
of such surrender.

     (d) Issuance of New Notes. Whenever the Company is required to issue a new
Note pursuant to the terms of this Note, such new Note (i) shall be of like
tenor with this Note, (ii) shall represent, as indicated on the face of such new
Note, the Principal remaining outstanding (or in the case of a new Note being
issued pursuant to Section 18(a) or Section 18(c), the Principal designated by
the Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued Interest and
Late Charges on the Principal and Interest of this Note, from the Issuance Date.

19. REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE
RELIEF. The remedies provided in this Note shall be cumulative and in addition
to all other remedies available under this Note and any of the other Transaction
Documents at law or in equity (including a decree of specific performance and/or
other injunctive relief), and nothing herein shall limit the Holder's right to
pursue actual and consequential damages for any failure by the Company to comply
with the terms of this Note. Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof) shall
be the amounts to be received by the Holder and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, the Holder
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.

20. PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is
placed in the hands of an attorney for collection or enforcement or is collected
or enforced through any legal proceeding or the Holder otherwise takes action to
collect amounts due under this Note or to enforce the provisions of this Note or
(b) there occurs any bankruptcy, reorganization, receivership of the Company or
other proceedings affecting Company creditors' rights and involving a claim
under this Note, then the Company shall pay the costs incurred by the Holder for
such collection, enforcement or action or in connection with such bankruptcy,
reorganization, receivership or other proceeding, including, but not limited to,
attorneys' fees and disbursements.

                                       19

<PAGE>

21. CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by
the Company and all the Purchasers and shall not be construed against any person
as the drafter hereof. The headings of this Note are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Note.

22. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the
Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privilege.

23. DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Closing Bid Price, the Closing Sale Price or the Weighted Average Price or the
arithmetic calculation of the Conversion Rate or any Redemption Price, the
Company shall submit the disputed determinations or arithmetic calculations via
facsimile within one (1) Business Day of receipt of the Conversion Notice or
Redemption Notice or other event giving rise to such dispute, as the case may
be, to the Holder. If the Holder and the Company are unable to agree upon such
determination or calculation within one (1) Business Day of such disputed
determination or arithmetic calculation being submitted to the Holder, then the
Company shall, within one (1) Business Day submit via facsimile (a) the disputed
determination of the Closing Bid Price, the Closing Sale Price or the Weighted
Average Price to an independent, reputable investment bank selected by the
Company and approved by the Holder (such approval not to be unreasonably
withheld or delayed) or (b) the disputed arithmetic calculation of the
Conversion Rate or any Redemption Price to the Company's independent, outside
accountant. The Company, at the Company's expense, shall cause the investment
bank or the accountant, as the case may be, to perform the determinations or
calculations and notify the Company and the Holder of the results no later than
five (5) Business Days from the time it receives the disputed determinations or
calculations. Such investment bank's or accountant's determination or
calculation, as the case may be, shall be binding upon all parties absent
demonstrable error.

24. NOTICES; PAYMENTS.

     (a) Notices. Whenever notice is required to be given under this Note,
unless otherwise provided herein, such notice shall be given in accordance with
Section 9(f) of the Securities Purchase Agreement. The Company shall provide the
Holder with prompt written notice of all actions taken pursuant to this Note,
including in reasonable detail a description of such action and the reason
therefore. Without limiting the generality of the foregoing, the Company will
give written notice to the Holder (i) immediately upon any adjustment of the
Conversion Price, setting forth in reasonable detail, and certifying, the
calculation of such adjustment and (ii) at least twenty days prior to the date
on which the Company closes its books or takes a record (A) with respect to any
dividend or distribution upon the Common Stock, (B) with respect to any pro rata
subscription offer to holders of Common Stock or (C) for determining rights to
vote with respect to any Fundamental Transaction, dissolution or liquidation,
provided in each case that such information shall be made known to the public
prior to or in conjunction with such notice being provided to the Holder.

     (b) Payments. Whenever any payment of cash is to be made by the Company to
any

                                       20

<PAGE>

Person pursuant to this Note, such payment shall be made in lawful money of the
United States of America by a check drawn on the account of the Company and sent
via overnight courier service to such Person at such address as previously
provided to the Company in writing (which address, in the case of each of the
Purchasers, shall initially be as set forth on the Schedule of Buyers attached
to the Securities Purchase Agreement); provided that the Holder may elect to
receive a payment of cash via wire transfer of immediately available funds by
providing the Company with prior written notice setting out such request and the
Holder's wire transfer instructions. Whenever any amount expressed to be due by
the terms of this Note is due on any day which is not a Business Day, the same
shall instead be due on the next succeeding day which is a Business Day and, in
the case of any Interest Date which is not the date on which this Note is paid
in full, the extension of the due date thereof shall not be taken into account
for purposes of determining the amount of Interest due on such date. Any amount
of Principal or other amounts due under the Transaction Documents, other than
Interest, which is not paid when due shall result in a late charge being
incurred and payable by the Company in an amount equal to interest on such
amount at the rate of fifteen (15%) per annum from the date such amount was due
until the same is paid in full ("Late Charge").

25. CANCELLATION. After all Principal, accrued Interest and other amounts at any
time owed on this Note has been paid in full, this Note shall automatically be
deemed canceled, shall be surrendered to the Company for cancellation and shall
not be reissued.

26 WAIVER OF NOTICE. To the extent permitted by law, the Company hereby waives
demand, notice, protest and all other demands and notices in connection with the
delivery, acceptance, performance, default or enforcement of this Note and the
Securities Purchase Agreement.

27. GOVERNING LAW; JURISDICTION; JURY TRIAL. This Note shall be construed and
enforced in accordance with, and all questions concerning the construction,
validity, interpretation and performance of this Note shall be governed by, the
internal laws of the State of New York, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York. The Company hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting in
The City of New York, Borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. The Company 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 it set forth
on the signature page hereto 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. In the event that any provision of this Note is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute

                                       21

<PAGE>

or rule of law. Any such provision which may prove invalid or unenforceable
under any law shall not affect the validity or enforceability of any other
provision of this Note. Nothing contained herein shall be deemed or operate to
preclude the Holder from bringing suit or taking other legal action against the
Company in any other jurisdiction to collect on the Company's obligations to the
Holder, to realize on any collateral or any other security for such obligations,
or to enforce a judgment or other court ruling in favor of the Holder. THE
COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED
HEREBY.

28. CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall
have the following meanings:

     (a) "APPROVED STOCK PLAN" means any employee benefit plan which has been
approved by the Board of Directors of the Company, pursuant to which the
Company's securities may be issued to any employee, consultant, officer or
director for services provided to the Company.

     (b) "BLOOMBERG" means Bloomberg Financial Markets.

     (c) "BUSINESS DAY" means any day other than Saturday, Sunday or other day
on which commercial banks in The City of New York are authorized or required by
law to remain closed.

     (d) "CALENDAR MONTH" means the period beginning on and including the first
of each calendar month and ending on and including the last day of such calendar
month.

     (e) "CHANGE OF CONTROL" means any Fundamental Transaction other than (i)
any reorganization, recapitalization or reclassification of the Common Stock in
which holders of the Company's voting power immediately prior to such
reorganization, recapitalization or reclassification continue after such
reorganization, recapitalization or reclassification to hold publicly traded
securities and, directly or indirectly, the voting power of the surviving entity
or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (ii) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company.

     (f) "CHANGE OF CONTROL PREMIUM" means (i) 130% or (ii) 120% in the event of
a Change of Control involving consideration paid to holders of the Company's
Common Stock where the consideration per share of the Company's Common Stock to
be received by the holders thereof is greater (as to amounts other than cash, as
determined reasonably and in good faith by the Board of Directors of the
Company) than 200% of the Conversion Price as of the Initial Issuance Date (as
adjusted for stock splits, stock dividends, reverse stock splits,
recapitalizations, reclassifications and similar events).

     (g) "CLOSING BID PRICE" and "CLOSING SALE PRICE" means, for any security as
of any

                                       22

<PAGE>

date, the last closing bid price and last closing trade price, respectively, for
such security on the Principal Market, as reported by Bloomberg, or, if the
Principal Market begins to operate on an extended hours basis and does not
designate the closing bid price or the closing trade price, as the case may be,
then the last bid price or last trade price, respectively, of such security
prior to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the
Principal Market is not the principal securities exchange or trading market for
such security, the last closing bid price or last trade price, respectively, of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price or last trade price, respectively, of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no closing bid price or last
trade price, respectively, is reported for such security by Bloomberg, the
average of the bid prices, or the ask prices, respectively, of any market makers
for such security as reported in the "pink sheets" by Pink Sheets LLC (formerly
the National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing
Sale Price cannot be calculated for a security on a particular date on any of
the foregoing bases, the Closing Bid Price or the Closing Sale Price, as the
case may be, of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such
dispute shall be resolved pursuant to Section 23. All such determinations to be
appropriately adjusted for any stock dividend, stock split, stock combination or
other similar transaction during the applicable calculation period.

     (h) "CLOSING DATE" shall have the meaning set forth in the Securities
Purchase Agreement, which date is the date the Company initially issued Notes
pursuant to the terms of the Securities Purchase Agreement.

     (i) "CONTINGENT OBLIGATION" means, as to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto.

     (j) "CONVERTIBLE SECURITIES" means any stock or securities (other than
Options) directly or indirectly convertible into or exercisable or exchangeable
for Common Stock.

     (k) "ELIGIBLE MARKET" means, the Principal Market, The New York Stock
Exchange, Inc., Over-the-Counter Bulletin Board, the Nasdaq National Market or
the American Stock Exchange.

     (l) "EXCLUDED SECURITIES" means any Common Stock issued or issuable: (i) in
connection with any Approved Stock Plan up to a maximum of five percent (5%) of
the outstanding Common Stock; (ii) upon conversion of, or in exchange for, the
Notes or the exercise of the Warrants; (iii) in connection with any acquisition
by the Company, whether through an acquisition of stock or a merger of any
business, assets or technologies the primary purpose of which is not to raise
equity capital; and (iv) upon conversion of any Options or

                                       23

<PAGE>

Convertible Securities which are outstanding on the day immediately preceding
the Subscription Date, provided that the terms of such Options or Convertible
Securities are not amended, modified or changed on or after the Subscription
Date.

     (m) "FUNDAMENTAL TRANSACTION" means that the Company shall, directly or
indirectly, in one or more related transactions, (i) consolidate or merge with
or into (whether or not the Company is the surviving corporation) another
Person, or (ii) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the Company to another Person,
or (iii) allow another Person or Persons to make a purchase, tender or exchange
offer that is accepted by the holders of more than the 50% of the outstanding
shares of Voting Stock (not including any shares of Voting Stock held by the
Person or Persons making or party to, or associated or affiliated with the
Person or Persons making or party to, such purchase, tender or exchange offer),
or (iv) consummate a stock purchase agreement or other business combination
(including, without limitation, a reorganization, recapitalization, spin-off or
scheme of arrangement) with another Person whereby such other Person acquires
more than the 50% of either the outstanding shares of Voting Stock (not
including any shares of Voting Stock held by the other Person or other Persons
making or party to, or associated or affiliated with the other Persons making or
party to, such stock purchase agreement or other business combination), (v)
reorganize, recapitalize or reclassify its Common Stock or (vi) any "person" or
"group" (as these terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act) is or shall become the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 50% of the aggregate
Voting Stock of the Company.

     (n) "GAAP" means United States generally accepted accounting principles,
consistently applied.

     (o) "INDEBTEDNESS" of any Person means, without duplication (i) all
indebtedness for borrowed money, (ii) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services, including
(without limitation) "capital leases" in accordance with generally accepted
accounting principles (other than trade payables entered into in the ordinary
course of business), (iii) all reimbursement or payment obligations with respect
to letters of credit, surety bonds and other similar instruments, (iv) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (v) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (vi) all monetary obligations under any
leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby, is
classified as a capital lease, (vii) all indebtedness referred to in clauses (i)
through (vi) above secured by (or for which the holder of such Indebtedness has
an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person,
even though the Person which owns such assets or property has not assumed or
become liable for the payment of such indebtedness, (viii) all obligations
issued, undertaken or assumed as part of any financing facility

                                       24

<PAGE>

with respect to accounts receivables of the Company and its Subsidiaries,
including, without limitation, any factoring arrangement of such accounts
receivables and (ix) all Contingent Obligations in respect of indebtedness or
obligations of others of the kinds referred to in clauses (i) through (viii)
above.

     (p) "INITIAL ISSUANCE DATE" means November 22, 2006.

     (q) "INSTALLMENT AMOUNT" means with respect to any Installment Date, the
lesser of (A) $19,135.77 and (B) the remaining principal due hereunder. In the
event the Holder shall sell or otherwise transfer any portion of this Note, the
transferee shall be allocated a pro rata portion of the each unpaid Installment
Amount hereunder.

     (r) "INSTALLMENT DATE" means the first day of each calendar month.

     (s) "INTEREST RATE" means ten percent (10%) per annum, subject to periodic
adjustment pursuant to Section 2.

     (t) "OPTIONS" means any rights, warrants or options to subscribe for or
purchase Common Stock or Convertible Securities.

     (u) "PARENT ENTITY" of a Person means an entity that, directly or
indirectly, controls the applicable Person and whose common stock or equivalent
equity security is quoted or listed on an Eligible Market, or, if there is more
than one such Person or Parent Entity, the Person or Parent Entity with the
largest public market capitalization as of the date of consummation of the
Fundamental Transaction.

     (v) "PERMITTED INDEBTEDNESS" means (A) Indebtedness incurred by the Company
that is made expressly subordinate in right of payment to the Indebtedness
evidenced by this Note, as reflected in a written agreement acceptable to the
Holder and approved by the Holder in writing (which approval shall not be
unreasonably delayed), and which Indebtedness does not provide at any time for
(1) the payment, prepayment, repayment, repurchase or defeasance, directly or
indirectly, of any principal or premium, if any, thereon until ninety-one (91)
days after the Maturity Date or later and (2) total interest and fees at a rate
in excess of the Interest Rate hereunder, (B) Indebtedness secured by Permitted
Liens, (C) Indebtedness to trade creditors incurred in the ordinary course of
business, and (D) extensions, refinancings and renewals of any items of
Permitted Indebtedness, provided that the principal amount is not increased or
the terms modified to impose more burdensome terms upon the Company or its
Subsidiary, as the case may be.

     (w) "PERMITTED LIENS" means (i) any Lien for taxes not yet due or
delinquent or being contested in good faith by appropriate proceedings for which
adequate reserves have been established in accordance with GAAP, (ii) any
statutory Lien arising in the ordinary course of business by operation of law
with respect to a liability that is not yet due or delinquent, (iii) any Lien
created by operation of law, such as materialmen's liens, mechanics' liens and
other similar liens, arising in the ordinary course of business with respect to
a liability that is not yet due or delinquent or that are being contested in
good faith by appropriate proceedings, (iv) Liens

                                       25

<PAGE>

securing the Company's obligations under the Notes, (v) Liens (A) upon or in any
equipment (as defined in the Security Agreement) acquired or held by the Company
or any of its Subsidiaries to secure the purchase price of such equipment or
indebtedness incurred solely for the purpose of financing the acquisition or
lease of such equipment, or (B) existing on such equipment at the time of its
acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment, (vi)
Liens incurred in connection with the extension, renewal or refinancing of the
indebtedness secured by Liens of the type described in clauses (i) and (v)
above, provided that any extension, renewal or replacement Lien shall be limited
to the property encumbered by the existing Lien and the principal amount of the
Indebtedness being extended, renewed or refinanced does not increase, (vii)
leases or subleases and licenses and sublicenses granted to others in the
ordinary course of the Company's business, not interfering in any material
respect with the business of the Company and its Subsidiaries taken as a whole,
(viii) Liens in favor of customs and revenue authorities arising as a matter of
law to secure payments of custom duties in connection with the importation of
goods; (ix) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under Section 4(a)(ix) and
(x) Liens with respect to Indebtedness not individually in excess of $25,000 or
in the aggregate in excess of $100,000, which individually and in aggregate are
not material to the Company.

     (x) "PERSON" means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization, any other entity and a government or any department or agency
thereof.

     (y) "POTENTIAL PARTNER CONDITIONS" means at any time during the period
commencing on the date of the consummation of any material transaction between
the Company and a Person and ending on the first anniversary of the Effective
Date, there shall be no disclosure that any executive officer of such Person has
(i) exhibited dishonesty in the performance of his or her duties, which is
materially and demonstrably injurious to the Company; or (ii) been convicted of
(x) a felony under the laws of the United States or any state thereof or (y) a
misdemeanor involving moral turpitude, in each case, which is materially and
demonstrably injurious to the Company.

     (z) "PRINCIPAL MARKET" means the Nasdaq Capital Market.

     (aa) "REDEMPTION NOTICES" means, collectively, the Event of Default
Redemption Notices, Change of Control Redemption Notices, the Company Redemption
Notice, and, each of the foregoing, individually, a Redemption Notice.

     (bb) "REDEMPTION PREMIUM" means (i) in the case of the Events of Default
described in Section 4(a)(i) - (vi) and (ix) - (xii), 125% or (ii) in the case
of the Events of Default described in Section 4(a)(vii) - (viii), 120%.

     (cc) "REDEMPTION PRICES" means, collectively, the Event of Default
Redemption Price, Change of Control Redemption Price, and the Company Redemption
Amount, the Holder Optional Redemption Price and the Holder Partial Redemption
Price and, each of the foregoing, individually, a Redemption Price.

                                       26

<PAGE>

     (dd) "REGISTRATION RIGHTS AGREEMENT" means that certain registration rights
agreement between the Company and the initial holders of the Notes relating to,
among other things, the registration of the resale of the Common Stock issuable
upon conversion of the Notes and exercise of the Warrants.

     (ee) "REQUIRED HOLDERS" means the holders of Notes representing at least a
majority of the aggregate principal amount of the Notes then outstanding.

     (ff) "SEC" means the United States Securities and Exchange Commission.

     (gg) "SECURITIES PURCHASE AGREEMENT" means that certain securities purchase
agreement dated the Subscription Date by and among the Company and the initial
holders of the Notes pursuant to which the Company issued the Notes.

     (hh) "SUBSCRIPTION DATE" means November 21, 2006

     (ii) "SUCCESSOR ENTITY" means the Person, which may be the Company, formed
by, resulting from or surviving any Fundamental Transaction or the Person with
which such Fundamental Transaction shall have been made, provided that if such
Person is not a publicly traded entity whose common stock or equivalent equity
security is quoted or listed for trading on an Eligible Market, Successor Entity
shall mean such Person's Parent Entity.

     (jj) "TRADING DAY" means any day on which the Common Stock are traded on
the Principal Market, or, if the Principal Market is not the principal trading
market for the Common Stock, then on the principal securities exchange or
securities market on which the Common Stock are then traded; provided that
"Trading Day" shall not include any day on which the Common Stock are scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock are suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00:00 p.m., New York Time).

     (kk) "VOTING STOCK" of a Person means capital stock of such Person of the
class or classes pursuant to which the holders thereof have the general voting
power to elect, or the general power to appoint, at least a majority of the
board of directors, managers or trustees of such Person (irrespective of whether
or not at the time capital stock of any other class or classes shall have or
might have voting power by reason of the happening of any contingency).

     (ll) "WARRANTS" has the meaning ascribed to such term in the Securities
Purchase Agreement, and shall include all warrants issued in exchange therefor
or replacement thereof.

     (mm) "WEIGHTED AVERAGE PRICE" means, for any security as of any date, the
dollar volume-weighted average price for such security on the Principal Market
during the period beginning at 9:30:01 a.m., New York Time (or such other time
as the Principal Market publicly announces is the official open of trading), and
ending at 4:00:00 p.m., New York Time (or such

                                       27

<PAGE>

other time as the Principal Market publicly announces is the official close of
trading) as reported by Bloomberg through its "Volume at Price" functions, or,
if the foregoing does not apply, the dollar volume-weighted average price of
such security in the over-the-counter market on the electronic bulletin board
for such security during the period beginning at 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of
trading), and ending at 4:00:00 p.m., New York Time (or such other time as such
market publicly announces is the official close of trading) as reported by
Bloomberg, or, if no dollar volume-weighted average price is reported for such
security by Bloomberg for such hours, the average of the highest closing bid
price and the lowest closing ask price of any of the market makers for such
security as reported in the "pink sheets" by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.). If the Weighted Average Price cannot be
calculated for a security on a particular date on any of the foregoing bases,
the Weighted Average Price of such security on such date shall be the fair
market value as mutually determined by the Company and the Holder. If the
Company and the Holder are unable to agree upon the fair market value of such
security, then such dispute shall be resolved pursuant to Section 23. All such
determinations to be appropriately adjusted for any stock dividend, stock split,
stock combination or other similar transaction during the applicable calculation
period.

29. DISCLOSURE. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Note, unless the Company has in good faith
determined that the matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries, the Company
shall within one (1) Business Day after any such receipt or delivery publicly
disclose such material, nonpublic information on a Current Report on Form 8-K or
otherwise. In the event that the Company believes that a notice contains
material, nonpublic information, relating to the Company or its Subsidiaries,
the Company shall indicate to the Holder contemporaneously with delivery of such
notice, and in the absence of any such indication, the Holder shall be allowed
to presume that all matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries.

                            [Signature Page Follows]

                                       28

<PAGE>

IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of
the Issuance Date set out above.

                                        CATUITY, INC.

                                        By:
                                            ------------------------------------
                                        Name: John Racine
                                        Title: Chief Executive Officer

                                       29

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