Document:

Exhibit 10.40

                    INVESTOR REGISTRATION RIGHTS AGREEMENT

      THIS  REGISTRATION  RIGHTS  AGREEMENT  (this  "Agreement"),  dated as of
November 30, 2005, by and among  COMPLIANCE  SYSTEMS  CORPORATION,  a Delaware
corporation (the  "Company"), and the undersigned investors listed on Schedule
I attached hereto (each, an "Investor" and collectively, the "Investors").

                                  RECITALS:

      WHEREAS,  in connection  with the Securities  Purchase  Agreement by and
among the parties  hereto of even date  herewith  (the  "Securities  Purchase
Agreement"),  the  Company  has  agreed,  upon the  terms and  subject  to the
conditions  of the  Securities  Purchase  Agreement,  to issue and sell to the
Investors secured convertible debentures (the "Convertible  Debentures") which
shall be  convertible  into that  number of  shares  of the  Company's  common
stock, par value $0.001 per share (the "Common Stock"),  pursuant to the terms
of the  Securities  Purchase  Agreement for an aggregate  purchase price of up
to One Million  Dollars ($1,000,000).  Capitalized  terms not  defined  herein
shall have the meaning ascribed to them in the Securities  Purchase Agreement;
and

      WHEREAS,  to induce the Investors to execute and deliver the  Securities
Purchase  Agreement,  the Company has agreed to provide  certain  registration
rights  under  the  Securities  Act of 1933,  as  amended,  and the  rules and
regulations there under, or any similar successor  statute (collectively,  the
"Securities Act"), and applicable state securities laws.

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

      1.    DEFINITIONS.

      As used in this Agreement,  the following terms shall have the following
meanings:

            (a)   "Person" means a corporation,  a limited liability  company,
an association, a partnership,  an organization,  a business, an individual, a
governmental or political subdivision thereof or a governmental agency.

            (b)   "Register,"  "registered,"  and  "registration"  refer  to a
registration  effected  by  preparing  and  filing  one or  more  Registration
Statements  (as  defined  below) in  compliance  with the  Securities  Act and
pursuant to Rule 415 under the  Securities Act or any successor rule providing
for offering  securities on a continuous  or delayed  basis ("Rule 415"),  and
the   declaration   or  ordering  of   effectiveness   of  such   Registration
Statement(s)  by the United States  Securities  and Exchange  Commission  (the
"SEC").

            (c)   "Registrable  Securities"  means the shares of Common  Stock
issuable  to the  Investors  upon  conversion  of the  Convertible  Debentures
pursuant to the Securities Purchase Agreement.

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            (d)   "Registration  Statement"  means  a  registration  statement
under the Securities Act which covers the Registrable Securities.

      2.    REGISTRATION.

            (a)   Subject to the terms and conditions of this  Agreement,  the
Company  shall  prepare and file,  no later than forty five (45) days from the
date hereof (the  "Scheduled  Filing  Deadline"),  with the SEC a registration
statement  on Form S-1 or SB-2 (or, if the Company is then  eligible,  on Form
S-3) under the Securities Act (the "Initial  Registration  Statement") for the
resale by the  Investors  of the  Registrable  Securities,  which  includes at
least   65,000,000   shares  of  Common  Stock   underlying  the   Convertible
Debentures.  The Company  shall  cause the  Registration  Statement  to remain
effective  until all of the Registrable  Securities  have been sold.  Prior to
the filing of the  Registration  Statement  with the SEC,  the  Company  shall
furnish a copy of the Initial  Registration  Statement  to the  Investors  for
their  review  and  comment.  The  Investors  shall  furnish  comments  on the
Initial  Registration  Statement to the Company within  twenty-four (24) hours
of the receipt thereof from the Company.

            (b)   Effectiveness  of the Initial  Registration  Statement.  The
Company  shall  use its  best  efforts  (i) to have the  Initial  Registration
Statement  declared  effective  by the SEC no later  than one  hundred  twenty
(120) days after the date filed (the "Scheduled  Effective Deadline") and (ii)
to  insure  that  the  Initial  Registration   Statement  and  any  subsequent
Registration  Statement  remains  in  effect  until  all  of  the  Registrable
Securities  have  been  sold,  subject  to the terms  and  conditions  of this
Agreement.  It  shall  be  an  event  of  default  hereunder  if  the  Initial
Registration  Statement  is not declared  effective  by the SEC within  ninety
(90) days after filing thereof.

            (c)   Failure to File or Obtain Effectiveness of the Registration
Statement.  In the  event  the  Registration  Statement  is not  filed  by the
Scheduled  Filing  Deadline  or is not  declared  effective  by the  SEC on or
before the Scheduled  Effective Date, or if after the  Registration  Statement
has been declared  effective by the SEC,  sales cannot be made pursuant to the
Registration  Statement (whether because of a failure to keep the Registration
Statement effective,  failure to disclose such information as is necessary for
sales to be made pursuant to the Registration  Statement,  failure to register
sufficient  shares of Common Stock or otherwise then as partial relief for the
damages to any holder of  Registrable  Securities  by reason of any such delay
in or reduction of its ability to sell the  underlying  shares of Common Stock
(which  remedy  shall  not be  exclusive  of any other  remedies  at law or in
equity),  the  Company  will  pay as  liquidated  damages  (the  "Liquidated
Damages")  to the  holder,  at the  holder's  option,  either a cash amount or
shares of the  Company's  Common Stock within three (3) business  days,  after
demand  therefore,  equal to two percent (2%) of the  liquidated  value of the
Convertible  Debentures outstanding as Liquidated Damages for each thirty (30)
day period after the  Scheduled  Filing  Deadline or the  Scheduled  Effective
Date as the case may be.

            (d)   Liquidated  Damages.  The  Company and the  Investor  hereto
acknowledge and agree that the sums payable under  subsection 2(c) above shall
constitute  liquidated  damages and not  penalties  and are in addition to all
other  rights of the  Investor,  including  the right to call a  default.  The
parties further  acknowledge  that (i) the amount of loss or damages likely to
be incurred is  incapable or is  difficult  to  precisely  estimate,  (ii) the
amounts  specified in such subsections bear a reasonable  relationship to, and

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are not plainly or grossly  disproportionate  to, the probable  loss likely to
be  incurred  in  connection  with any  failure  by the  Company  to obtain or
maintain  the  effectiveness  of a  Registration  Statement,  (iii) one of the
reasons for the  Company and the  Investor  reaching an  agreement  as to such
amounts was the uncertainty  and cost of litigation  regarding the question of
actual  damages,  and (iv) the  Company  and the  Investor  are  sophisticated
business  parties and have been  represented by  sophisticated  and able legal
counsel and negotiated this Agreement at arm's length.

      3.    RELATED OBLIGATIONS.

            (a)   The Company shall keep the Registration  Statement effective
pursuant to Rule 415 at all times until the date on which the  Investor  shall
have  sold  all  the  Registrable  Securities  covered  by  such  Registration
Statement  (the   "Registration   Period"),   which   Registration   Statement
(including any amendments or supplements  thereto and  prospectuses  contained
therein) shall not contain any untrue  statement of a material fact or omit to
state a material fact required to be stated therein,  or necessary to make the
statements  therein,  in light of the  circumstances  in which they were made,
not misleading.

            (b)   The  Company  shall  prepare  and  file  with  the SEC  such
amendments (including   post-effective   amendments)   and  supplements  to  a
Registration  Statement  and the  prospectus  used  in  connection  with  such
Registration  Statement,  which prospectus is to be filed pursuant to Rule 424
promulgated  under  the  Securities  Act,  as may be  necessary  to keep  such
Registration  Statement effective at all times during the Registration Period,
and,  during such period,  comply with the  provisions of the  Securities  Act
with respect to the disposition of all  Registrable  Securities of the Company
covered  by  such  Registration  Statement  until  such  time  as all of  such
Registrable  Securities  shall have been  disposed of in  accordance  with the
intended  methods of disposition by the seller or sellers thereof as set forth
in such Registration  Statement.  In the case of amendments and supplements to
a  Registration  Statement  which are  required  to be filed  pursuant to this
Agreement  (including  pursuant  to  this  Section  3(b))  by  reason  of  the
Company's  filing a report  on Form  10-KSB,  Form  10-QSB  or Form 8-K or any
analogous  report under the  Securities  Exchange Act of 1934, as amended (the
"Exchange Act"),  the Company shall  incorporate such report by reference into
the Registration  Statement,  if applicable,  or shall file such amendments or
supplements  with the SEC on the same day on which the  Exchange Act report is
filed which  created the  requirement  for the Company to amend or  supplement
the Registration Statement.

            (c)   The   Company   shall   furnish  to  each   Investor   whose
Registrable  Securities are included in any  Registration  Statement,  without
charge,  (i) at least one (1) copy of such Registration  Statement as declared
effective  by the  SEC  and  any  amendment(s)  thereto,  including  financial
statements and  schedules,  all documents  incorporated  therein by reference,
all  exhibits  and each  preliminary  prospectus,  (ii) ten (10) copies of the
final prospectus  included in such  Registration  Statement and all amendments
and  supplements  thereto (or such other number of copies as such Investor may
reasonably  request)  and (iii)  such other  documents  as such  Investor  may
reasonably  request from time to time in order to facilitate  the  disposition
of the Registrable Securities owned by such Investor.

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            (d)   The Company  shall use its best  efforts to (i) register and
qualify the Registrable  Securities covered by a Registration  Statement under
such other  securities or "blue sky" laws of such  jurisdictions in the United
States as any Investor  reasonably  requests,  (ii) prepare  and file in those
jurisdictions,  such  amendments  (including  post-effective  amendments)  and
supplements to such  registrations  and  qualifications as may be necessary to
maintain the effectiveness  thereof during the Registration Period, (iii) take
such other  actions as may be necessary  to maintain  such  registrations  and
qualifications  in effect at all times  during the  Registration  Period,  and
(iv) take all other actions  reasonably  necessary or advisable to qualify the
Registrable  Securities  for sale in such  jurisdictions;  provided,  however,
that the  Company  shall  not be  required  in  connection  therewith  or as a
condition  thereto to (w) make any change to its articles of  incorporation or
by-laws,  (x) qualify to do business  in any  jurisdiction  where it would not
otherwise  be  required  to qualify  but for this  Section  3(d),  (y) subject
itself to general  taxation  in any such  jurisdiction,  or (z) file a general
consent to service of process  in any such  jurisdiction.  The  Company  shall
promptly notify each Investor who holds Registrable  Securities of the receipt
by the  Company of any  notification  with  respect to the  suspension  of the
registration or  qualification  of any of the Registrable  Securities for sale
under the  securities  or "blue  sky" laws of any  jurisdiction  in the United
States or its  receipt  of actual  notice of the  initiation  or threat of any
proceeding for such purpose.

            (e)   As  promptly as  practicable  after  becoming  aware of such
event or  development,  the Company  shall notify each  Investor in writing of
the happening of any event as a result of which the  prospectus  included in a
Registration  Statement,  as then in effect, includes an untrue statement of a
material  fact or  omission  to state a material  fact  required  to be stated
therein  or  necessary  to  make  the  statements  therein,  in  light  of the
circumstances under which they were made, not misleading  (provided that in no
event shall such notice  contain any  material,  nonpublic  information),  and
promptly prepare a supplement or amendment to such  Registration  Statement to
correct  such untrue  statement  or  omission,  and deliver ten (10) copies of
such  supplement  or  amendment  to each  Investor.  The  Company  shall  also
promptly  notify  each  Investor  in  writing  (i)  when a  prospectus  or any
prospectus  supplement or post-effective  amendment has been filed, and when a
Registration  Statement or any  post-effective  amendment has become effective
(notification  of such  effectiveness  shall be delivered to each  Investor by
facsimile on the same day of such  effectiveness),  (ii) of any request by the
SEC for  amendments  or  supplements  to a  Registration  Statement or related
prospectus  or related  information,  and  (iii) of the  Company's  reasonable
determination  that a  post-effective  amendment to a  Registration  Statement
would be appropriate.

            (f)   The  Company  shall  use its best  efforts  to  prevent  the
issuance  of  any  stop  order  or  other  suspension  of  effectiveness  of a
Registration  Statement,  or the suspension of the qualification of any of the
Registrable  Securities for sale in any jurisdiction  within the United States
of  America  and,  if such an order or  suspension  is  issued,  to obtain the
withdrawal of such order or suspension at the earliest  possible moment and to
notify  each  Investor  who holds  Registrable  Securities  being  sold of the
issuance  of such order and the  resolution  thereof or its  receipt of actual
notice of the initiation or threat of any proceeding for such purpose.

            (g)   At the  reasonable  request  of any  Investor,  the  Company
shall  furnish  to such  Investor,  on the  date of the  effectiveness  of the
Registration  Statement and  thereafter  from time to time on such dates as an
Investor  may  reasonably  request  (i) a letter,  dated such  date,  from the
Company's  independent  certified public  accountants in form and substance as

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is  customarily   given  by  independent   certified  public   accountants  to
underwriters in an underwritten  public offering,  and (ii) an opinion,  dated
as of such date,  of counsel  representing  the Company  for  purposes of such
Registration  Statement,  in form, scope and substance as is customarily given
in an underwritten public offering, addressed to the Investors.

            (h)   The Company shall make  available for  inspection by (i) any
Investor and (ii) one (1) firm of accountants or other agents  retained by the
Investors  (collectively,  the "Inspectors") all pertinent financial and other
records,  and  pertinent  corporate  documents  and  properties of the Company
(collectively,  the  "Records"),  as shall be reasonably  deemed  necessary by
each Inspector,  and cause the Company's officers,  directors and employees to
supply all information which any Inspector may reasonably  request;  provided,
however,  that each Inspector shall agree, and each Investor hereby agrees, to
hold in strict  confidence  and shall not make any  disclosure  (except  to an
Investor)  or  use  any  Record  or  other   information   which  the  Company
determines in good faith to be confidential,  and of which  determination  the
Inspectors  are so  notified,  unless (a) the  disclosure  of such  Records is
necessary to avoid or correct a misstatement  or omission in any  Registration
Statement or is otherwise  required under the Securities  Act, (b) the release
of such  Records is ordered  pursuant to a final,  non-appealable  subpoena or
order from a court or government  body of competent  jurisdiction,  or (c) the
information  in such Records has been made  generally  available to the public
other than by disclosure in violation of this or any other  agreement of which
the Inspector  and the Investor has  knowledge.  Each Investor  agrees that it
shall,  upon  learning  that  disclosure  of such Records is sought in or by a
court or governmental  body of competent  jurisdiction or through other means,
give prompt  notice to the Company and allow the Company,  at its expense,  to
undertake  appropriate  action  to  prevent  disclosure  of,  or to  obtain  a
protective order for, the Records deemed confidential.

            (i)   The  Company  shall  hold in  confidence  and not  make  any
disclosure  of  information  concerning  an  Investor  provided to the Company
unless (i) disclosure of such  information is necessary to comply with federal
or  state  securities  laws,  (ii)  the  disclosure  of  such  information  is
necessary to avoid or correct a misstatement  or omission in any  Registration
Statement,  (iii) the  release of such  information  is ordered  pursuant to a
subpoena or other  final,  non-appealable  order from a court or  governmental
body of  competent  jurisdiction,  or (iv)  such  information  has  been  made
generally  available  to the public other than by  disclosure  in violation of
this  Agreement  or any other  agreement.  The  Company  agrees that it shall,
upon learning that  disclosure of such  information  concerning an Investor is
sought in or by a court or  governmental  body of  competent  jurisdiction  or
through  other means,  give prompt  written  notice to such Investor and allow
such Investor,  at the Investor's expense, to undertake  appropriate action to
prevent disclosure of, or to obtain a protective order for, such information.

            (j)   The Company  shall use its best efforts  either to cause all
the  Registrable  Securities  covered by a  Registration  Statement  (i) to be
listed on each  securities  exchange on which  securities of the same class or
series  issued by the Company are then listed,  if any, if the listing of such
Registrable  Securities is then permitted  under the rules of such exchange or
(ii) the  inclusion  for quotation on the National  Association  of Securities
Dealers,  Inc.  OTC  Bulletin  Board  for  such  Registrable  Securities.  The
Company  shall pay all fees and expenses in  connection  with  satisfying  its
obligation under this Section 3(j).

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            (k)   The Company  shall  cooperate  with the  Investors  who hold
Registrable  Securities  being  offered  and,  to the  extent  applicable,  to
facilitate the timely  preparation and delivery of  certificates  (not bearing
any restrictive legend) representing the Registrable  Securities to be offered
pursuant to a  Registration  Statement and enable such  certificates  to be in
such  denominations  or  amounts,  as the case may be,  as the  Investors  may
reasonably request and registered in such names as the Investors may request.

            (l)   The  Company  shall  use  its  best  efforts  to  cause  the
Registrable Securities covered by the applicable  Registration Statement to be
registered   with  or  approved  by  such  other   governmental   agencies  or
authorities  as may  be  necessary  to  consummate  the  disposition  of  such
Registrable Securities.

            (m)   The Company shall make  generally  available to its security
holders as soon as  practical,  but not later than  ninety (90) days after the
close of the period covered thereby,  an earnings statement (in form complying
with the  provisions of Rule 158 under the  Securities  Act) covering a twelve
(12) month  period  beginning  not later  than the first day of the  Company's
fiscal  quarter  next  following  the  effective  date  of  the   Registration
Statement.

            (n)   The Company  shall  otherwise use its best efforts to comply
with all applicable  rules and  regulations of the SEC in connection  with any
registration hereunder.

            (o)   Within two (2) business days after a Registration  Statement
which  covers  Registrable  Securities  is declared  effective by the SEC, the
Company  shall  deliver,  and shall  cause  legal  counsel  for the Company to
deliver,  to the transfer agent for such  Registrable  Securities (with copies
to  the  Investors   whose   Registrable   Securities  are  included  in  such
Registration  Statement)  confirmation  that such  Registration  Statement has
been declared effective by the SEC in the form attached hereto as Exhibit A.

            (p)   The  Company  shall  take  all  other   reasonable   actions
necessary  to  expedite  and  facilitate   disposition  by  the  Investors  of
Registrable Securities pursuant to a Registration Statement.

      4.    OBLIGATIONS OF THE INVESTORS.

      Each Investor  agrees that,  upon receipt of any notice from the Company
of the  happening  of any event of the kind  described  in Section 3(f) or the
first   sentence  of  3(e),   such  Investor  will   immediately   discontinue
disposition   of   Registrable   Securities   pursuant  to  any   Registration
Statement(s)  covering  such  Registrable  Securities  until  such  Investor's
receipt of the copies of the supplemented or amended  prospectus  contemplated
by Section  3(e) or receipt  of notice  that no  supplement  or  amendment  is
required.  Notwithstanding  anything to the contrary,  the Company shall cause
its transfer  agent to deliver  unlegended  certificates  for shares of Common
Stock to a  transferee  of an  Investor  in  accordance  with the terms of the
Securities  Purchase  Agreement  in  connection  with any sale of  Registrable
Securities  with  respect to which an Investor has entered into a contract for
sale  prior to the  Investor's  receipt  of a notice  from the  Company of the
happening  of any event of the kind  described  in  Section  3(f) or the first
sentence of 3(e) and for which the Investor has not yet settled.

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      5.    EXPENSES OF REGISTRATION.

      All  expenses  incurred in  connection  with  registrations,  filings or
qualifications  pursuant to Sections 2 and 3, including,  without  limitation,
all  registration,  listing  and  qualifications  fees,  printers,  legal  and
accounting fees shall be paid by the Company.

      6.    INDEMNIFICATION.

      With  respect  to  Registrable   Securities  which  are  included  in  a
Registration Statement under this Agreement:

            (a)   To the fullest  extent  permitted by law, the Company  will,
and hereby  does,  indemnify,  hold  harmless  and defend each  Investor,  the
directors,  officers,  partners,  employees,  agents,  representatives of, and
each Person,  if any,  who  controls  any  Investor  within the meaning of the
Securities Act or the Exchange Act (each,  an "Indemnified  Person"),  against
any  losses,  claims,  damages,  liabilities,   judgments,  fines,  penalties,
charges,  costs,  reasonable  attorneys'  fees,  amounts paid in settlement or
expenses,   joint   or   several   (collectively,    "Claims")   incurred   in
investigating,  preparing  or  defending  any action,  claim,  suit,  inquiry,
proceeding,  investigation or appeal taken from the foregoing by or before any
court or governmental,  administrative or other regulatory agency, body or the
SEC, whether pending or threatened,  whether or not an indemnified party is or
may be a party  thereto  ("Indemnified  Damages"),  to  which  any of them may
become  subject  insofar as such  Claims (or actions or  proceedings,  whether
commenced or threatened,  in respect  thereof) arise out of or are based upon:
(i) any untrue  statement or alleged untrue  statement of a material fact in a
Registration  Statement  or any  post-effective  amendment  thereto  or in any
filing made in connection  with the  qualification  of the offering  under the
securities or other "blue sky" laws of any  jurisdiction in which  Registrable
Securities  are  offered ("Blue  Sky  Filing"),  or the  omission  or  alleged
omission to state a material fact  required to be stated  therein or necessary
to make the statements  therein not misleading;  (ii) any untrue  statement or
alleged untrue  statement of a material fact contained in any final prospectus
(as amended or  supplemented,  if the Company files any  amendment  thereof or
supplement  thereto with the SEC) or the omission or alleged omission to state
therein any material fact  necessary to make the statements  made therein,  in
light of the circumstances  under which the statements  therein were made, not
misleading;  or (iii) any violation or alleged violation by the Company of the
Securities  Act,  the  Exchange  Act,  any  other  law,   including,   without
limitation,  any state  securities law, or any rule or regulation  there under
relating  to the offer or sale of the  Registrable  Securities  pursuant  to a
Registration  Statement  (the  matters in the  foregoing  clauses  (i) through
(iii) being,  collectively,  "Violations").  The Company  shall  reimburse the
Investors  and each such  controlling  person  promptly as such  expenses  are
incurred  and are due and  payable,  for any legal  fees or  disbursements  or
other reasonable  expenses  incurred by them in connection with  investigating
or  defending  any  such  Claim.  Notwithstanding  anything  to  the  contrary
contained  herein,  the  indemnification  agreement  contained in this Section
6(a): (x) shall not apply to a Claim by an  Indemnified  Person arising out of
or based upon a  Violation  which  occurs in reliance  upon and in  conformity
with  information  furnished  in  writing to the  Company by such  Indemnified
Person   expressly  for  use  in  connection   with  the  preparation  of  the
Registration  Statement or any such amendment  thereof or supplement  thereto;
(y) shall not be  available  to the extent such Claim is based on a failure of
the  Investor  to  deliver or to cause to be  delivered  the  prospectus  made
available by the Company,  if such prospectus was timely made available by the
Company  pursuant to Section 3(c);  and (z) shall not apply to amounts paid in
settlement  of any Claim if such  settlement  is  effected  without  the prior
written  consent  of the  Company,  which  consent  shall not be  unreasonably
withheld.  Such indemnity shall remain in full force and effect  regardless of
any  investigation  made by or on behalf of the  Indemnified  Person and shall
survive the transfer of the Registrable  Securities by the Investors  pursuant
to Section 9 hereof.

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            (b)   In connection with a Registration  Statement,  each Investor
agrees to severally and not jointly  indemnify,  hold harmless and defend,  to
the same  extent and in the same manner as is set forth in Section  6(a),  the
Company,   each  of  its   directors,   each  of  its   officers,   employees,
representatives,  or agents and each Person,  if any, who controls the Company
within  the  meaning  of the  Securities  Act or the  Exchange  Act  (each  an
"Indemnified  Party"),  against any Claim or Indemnified  Damages to which any
of them may become  subject,  under the  Securities  Act,  the Exchange Act or
otherwise,  insofar as such Claim or  Indemnified  Damages  arise out of or is
based upon any Violation,  in each case to the extent, and only to the extent,
that such  Violation  occurs in reliance upon and in  conformity  with written
information  furnished to the Company by such  Investor  expressly  for use in
connection with such  Registration  Statement;  and,  subject to Section 6(d),
such Investor will reimburse any legal or other expenses  reasonably  incurred
by  them in  connection  with  investigating  or  defending  any  such  Claim;
provided,  however,  that the  indemnity  agreement  contained in this Section
6(b) and the  agreement  with respect to  contribution  contained in Section 7
shall not apply to amounts paid in settlement of any Claim if such  settlement
is effected without the prior written consent of such Investor,  which consent
shall not be  unreasonably  withheld;  provided,  further,  however,  that the
Investor  shall be liable  under this  Section  6(b) for only that amount of a
Claim or  Indemnified  Damages  as does not exceed  the net  proceeds  to such
Investor as a result of the sale of  Registrable  Securities  pursuant to such
Registration  Statement.  Such indemnity shall remain in full force and effect
regardless  of any  investigation  made by or on  behalf  of such  Indemnified
Party and shall  survive the  transfer of the  Registrable  Securities  by the
Investors  pursuant to Section 9.  Notwithstanding  anything  to the  contrary
contained  herein,  the  indemnification  agreement  contained in this Section
6(b) with  respect  to any  prospectus  shall not inure to the  benefit of any
Indemnified  Party if the  untrue  statement  or  omission  of  material  fact
contained  in the  prospectus  was  corrected  and  such  new  prospectus  was
delivered to each Investor  prior to such  Investor's use of the prospectus to
which the Claim relates.

            (c)   Promptly   after  receipt  by  an   Indemnified   Person  or
Indemnified  Party under this Section 6 of notice of the  commencement  of any
action  or  proceeding  (including  any  governmental  action  or  proceeding)
involving a Claim,  such Indemnified  Person or Indemnified  Party shall, if a
Claim in respect  thereof is to be made against any  indemnifying  party under
this  Section 6,  deliver to the  indemnifying  party a written  notice of the
commencement  thereof,  and the  indemnifying  party  shall  have the right to
participate in, and, to the extent the indemnifying party so desires,  jointly
with any other indemnifying party similarly noticed,  to assume control of the
defense thereof with counsel mutually  satisfactory to the indemnifying  party
and the  Indemnified  Person  or the  Indemnified  Party,  as the case may be;
provided,  however, that an Indemnified Person or Indemnified Party shall have
the right to retain its own  counsel  with the fees and  expenses  of not more
than one (1) counsel for such  Indemnified  Person or Indemnified  Party to be
paid by the  indemnifying  party,  if, in the  reasonable  opinion  of counsel
retained by the indemnifying  party, the representation by such counsel of the
Indemnified  Person or Indemnified  Party and the indemnifying  party would be
inappropriate  due to actual or  potential  differing  interests  between such
Indemnified  Person or  Indemnified  Party and any other party  represented by
such counsel in such proceeding.  The Indemnified Party or Indemnified  Person

                                       8
<PAGE>

shall  cooperate  fully with the  indemnifying  party in  connection  with any
negotiation or defense of any such action or claim by the  indemnifying  party
and  shall  furnish  to the  indemnifying  party  all  information  reasonably
available to the  Indemnified  Party or  Indemnified  Person which  relates to
such  action or claim.  The  indemnifying  party  shall  keep the  Indemnified
Party or  Indemnified  Person fully  apprised at all times as to the status of
the  defense  or  any  settlement   negotiations  with  respect  thereto.   No
indemnifying party shall be liable for any settlement of any action,  claim or
proceeding  effected  without its prior written  consent;  provided,  however,
that  the  indemnifying  party  shall  not  unreasonably  withhold,  delay  or
condition  its  consent.  No  indemnifying  party  shall,  without  the  prior
written consent of the  Indemnified  Party or Indemnified  Person,  consent to
entry of any judgment or enter into any settlement or other  compromise  which
does not include as an  unconditional  term thereof the giving by the claimant
or  plaintiff to such  Indemnified  Party or  Indemnified  Person of a release
from  all  liability  in  respect  to  such  claim  or  litigation.  Following
indemnification  as provided for hereunder,  the  indemnifying  party shall be
subrogated to all rights of the Indemnified  Party or Indemnified  Person with
respect to all third  parties,  firms or  corporations  relating to the matter
for which  indemnification  has been made.  The  failure  to  deliver  written
notice to the indemnifying  party within a reasonable time of the commencement
of any such action shall not relieve such indemnifying  party of any liability
to the  Indemnified  Person or Indemnified  Party under this Section 6, except
to the extent  that the  indemnifying  party is  prejudiced  in its ability to
defend such action.

            (d)   The  indemnification  required  by this  Section  6 shall be
made by  periodic  payments  of the  amount  thereof  during the course of the
investigation  or  defense,  as and when  bills are  received  or  Indemnified
Damages are incurred.

            (e)   The  indemnity  agreements  contained  herein  shall  be  in
addition to (i) any cause of action or similar right of the Indemnified  Party
or Indemnified  Person against the indemnifying  party or others, and (ii) any
liabilities the indemnifying party may be subject to pursuant to the law.

      7.    CONTRIBUTION.

      To  the  extent  any   indemnification   by  an  indemnifying  party  is
prohibited  or  limited  by law,  the  indemnifying  party  agrees to make the
maximum  contribution with respect to any amounts for which it would otherwise
be liable under Section 6 to the fullest  extent  permitted by law;  provided,
however,  that: (i) no seller of Registrable  Securities  guilty of fraudulent
misrepresentation  (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to  contribution  from any seller of Registrable  Securities
who was not guilty of fraudulent  misrepresentation;  and (ii) contribution by
any  seller of  Registrable  Securities  shall be limited in amount to the net
amount of proceeds  received by such seller from the sale of such  Registrable
Securities.

                                       9
<PAGE>

      8.    REPORTS UNDER THE EXCHANGE ACT.

      With a view to making  available to the  Investors  the benefits of Rule
144 promulgated  under the Securities Act or any similar rule or regulation of
the SEC that may at any time permit the  Investors to sell  securities  of the
Company to the public without registration ("Rule 144") the Company agrees to:

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

            (b)   file with the SEC in a timely  manner all  reports and other
documents  required of the Company under the  Securities  Act and the Exchange
Act so long as the  Company  remains  subject to such  requirements  (it being
understood  that nothing  herein shall limit the Company's  obligations  under
Section  4(c) of the  Securities  Purchase  Agreement)  and the filing of such
reports and other  documents as are required by the  applicable  provisions of
Rule 144; and

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

      9.    AMENDMENT OF REGISTRATION RIGHTS.

      Provisions of this Agreement may be amended and the  observance  thereof
may be  waived  (either  generally  or in a  particular  instance  and  either
retroactively or prospectively),  only with the written consent of the Company
and  Investors  who then  hold at least  two-thirds  (2/3) of the  Registrable
Securities.   Any  amendment  or  waiver  effected  in  accordance  with  this
Section 9  shall be  binding  upon  each  Investor  and the  Company.  No such
amendment  shall be  effective to the extent that it applies to fewer than all
of the  holders  of the  Registrable  Securities.  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 this Agreement unless the same  consideration  also
is offered to all of the parties to this Agreement.

      10.   MISCELLANEOUS.

            (a)   A Person is deemed to be a holder of Registrable  Securities
whenever  such  Person  owns or is deemed to own of  record  such  Registrable
Securities.  If the  Company  receives  conflicting  instructions,  notices or
elections  from two (2) or more Persons  with respect to the same  Registrable
Securities,  the Company shall act upon the basis of  instructions,  notice or
election received from the registered owner of such Registrable Securities.

            (b)   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

                                       10
<PAGE>

confirmation of transmission is mechanically or  electronically  generated and
kept on file by the  sending  party);  or (iii)  one (1)  business  day  after
deposit with a nationally  recognized overnight delivery 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, to:          Compliance Systems Corporation
                                90 Pratt Oval
                                Glen Cove, NY 11542
                                Attention:  Dean Garfinkel
                                Telephone:  (516) 656-5155
                                Facsimile:  (516) 676-2420

With Copy to:                   Kirkpatrick & Lockhart Nicholson Graham, LLP
                                201 South Biscayne Boulevard, Suite 2000
                                Miami, Florida 33131
                                Attention:  Clayton E. Parker, Esq.
                                Telephone:  (305) 539-3306
                                Facsimile:  (305) 328-7095

If to an  Investor,  to its address and  facsimile  number on the  Schedule of
Investors attached hereto,  with copies to such Investor's  representatives as
set  forth on the  Schedule  of  Investors  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 a  courier  or  overnight  courier  service  shall be  rebuttable
evidence  of  personal  service,  receipt  by  facsimile  or  receipt  from  a
nationally  recognized  overnight  delivery  service in accordance with clause
(i), (ii) or (iii) above, respectively.

            (c)   Failure of any party to exercise  any right or remedy  under
this Agreement or otherwise,  or delay by a party in exercising  such right or
remedy, shall not operate as a waiver thereof.

            (d)   The laws of the State of New Jersey  shall govern all issues
concerning  the  relative  rights  of the  Company  and the  Investors  as its
stockholders.  All other  questions  concerning  the  construction,  validity,
enforcement  and  interpretation  of this  Agreement  shall be governed by the
internal laws of the State of New Jersey,  without giving effect to any choice
of law or  conflict  of law  provision  or rule  (whether  of the State of New
Jersey or any other  jurisdiction)  that would  cause the  application  of the
laws of any  jurisdiction  other  than the  State of New  Jersey.  Each  party
hereby irrevocably  submits to the non-exclusive  jurisdiction of the Superior
Courts of the State of New Jersey,  sitting in Hudson  County,  New Jersey and
federal courts for the District of New Jersey sitting Newark,  New Jersey, 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

                                       11
<PAGE>

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.  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.  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  HEREWITH OR ARISING
OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

            (e)   This    Agreement,    the    Irrevocable    Transfer   Agent
Instructions,   the  Securities   Purchase  Agreement  and  related  documents
including the  Convertible  Debenture and the Escrow  Agreement dated the date
hereof by and among the Company,  the  Investors  set forth on the Schedule of
Investors attached hereto, and David Gonzalez,  Esq. (the "Escrow  Agreement")
and the Security  Agreement  dated the date hereof (the "Security  Agreement")
constitute the entire  agreement  among the parties hereto with respect to the
subject  matter  hereof  and  thereof.  There are no  restrictions,  promises,
warranties or  undertakings,  other than those set forth or referred to herein
and therein.  This  Agreement,  the Irrevocable  Transfer Agent  Instructions,
the  Securities   Purchase  Agreement  and  related  documents  including  the
Convertible  Debenture,  the  Escrow  Agreement  and  the  Security  Agreement
supersede all prior  agreements  and  understandings  among the parties hereto
with respect to the subject matter hereof and thereof.

            (f)   This Agreement  shall inure to the benefit of and be binding
upon the permitted successors and assigns of each of the parties hereto.

            (g)   The  headings  in  this  Agreement  are for  convenience  of
reference only and shall not limit or otherwise affect the meaning hereof.

            (h)   This  Agreement  may be executed in identical  counterparts,
each of which  shall be deemed an original  but all of which shall  constitute
one and the same agreement.  This Agreement,  once executed by a party, may be
delivered  to the other party hereto by  facsimile  transmission  of a copy of
this  Agreement  bearing  the  signature  of  the  party  so  delivering  this
Agreement.

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

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.

                                       12
<PAGE>

            (j)   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.

        [SIGNATURE PAGE FOLLOWS; REMAINDER OF PAGE INTENTIONALLY BLANK]

<PAGE>

      IN WITNESS WHEREOF,  the parties have caused this Investor  Registration
Rights Agreement to be duly executed as of day and year first above written.

                                         COMPANY:
                                         COMPLIANCE SYSTEMS CORPORATION

                                         By:_______________________________
                                         Name: Dean Garfinkel
                                         Title:      Chairman

                                       13
<PAGE>

                                  SCHEDULE I

                            SCHEDULE OF INVESTORS

<TABLE>
<CAPTION>
                                                              Address/Facsimile
         Name                      Signature                 Number of Investors
         ----                      ---------                 -------------------
<S>                     <C>                              <C>
Montgomery Equity       By:   Yorkville Advisors, LLC    101 Hudson Street - Suite
Partners, Ltd.                                           3700
                        Its:  General Partner            Jersey City, NJ  07303
                                                         Facsimile:  (201) 985-8266

                        By:
                        Name: Mark Angelo
                        Its:  Portfolio Manager

With a copy to:         David Gonzalez, Esq.             101 Hudson Street - Suite
                                                         3700
                                                         Jersey City, NJ 07302
                                                         Facsimile:  (201) 985-8266
</TABLE>

<PAGE>

                                  EXHIBIT A

                       FORM OF NOTICE OF EFFECTIVENESS
                          OF REGISTRATION STATEMENT

Attention:

      Re:   COMPLIANCE SYSTEMS CORPORATION

Ladies and Gentlemen:

      We  are  counsel  to   Compliance   Systems   Corporation,   a  Delaware
corporation  (the  "Company"),  and have represented the Company in connection
with that certain  Securities  Purchase  Agreement (the "Securities  Purchase
Agreement")  entered  into by and among the  Company and the  investors  named
therein  (collectively,  the "Investors") pursuant to which the Company issued
to the Investors  shares of its Common Stock,  par value $0.001 per share (the
"Common  Stock").  Pursuant to the  Purchase  Agreement,  the Company also has
entered  into  a  Registration   Rights  Agreement  with  the  Investors  (the
"Investor  Registration  Rights  Agreement")  pursuant  to which  the  Company
agreed,  among  other  things,  to register  the  Registrable  Securities  (as
defined in the  Registration  Rights  Agreement)  under the  Securities Act of
1933, as amended (the  "Securities  Act").  In  connection  with the Company's
obligations  under the Registration  Rights Agreement,  on ____________  ____,
the  Company  filed  a   Registration   Statement  on  Form   ________   (File
No. 333-_____________)  (the "Registration Statement") with the Securities and
Exchange  SEC (the "SEC") relating to the Registrable  Securities  which names
each of the Investors as a selling stockholder there under.

      In  connection  with the  foregoing,  we advise you that a member of the
SEC's  staff has  advised us by  telephone  that the SEC has  entered an order
declaring the  Registration  Statement  effective  under the Securities Act at
[ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS]  and we have no
knowledge,  after telephonic  inquiry of a member of the SEC's staff, that any
stop  order  suspending  its   effectiveness  has  been  issued  or  that  any
proceedings  for that purpose are pending  before,  or threatened  by, the SEC
and the  Registrable  Securities are available for resale under the Securities
Act pursuant to the Registration Statement.

                                    Very truly yours,

                                    KIRKPATRICK & LOCKHART NICHOLSON GRAHAM,
                                    LLP

                                    By:
                                       ---------------------------------

cc:   [LIST NAMES OF INVESTORS]Exhibit 10.41

                                                     Dated:  November 30, 2005

      NEITHER THIS DEBENTURE NOR THE  SECURITIES  INTO WHICH THIS DEBENTURE IS
      CONVERTIBLE  HAVE  BEEN  REGISTERED  WITH THE  SECURITIES  AND  EXCHANGE
      COMMISSION  OR THE  SECURITIES  COMMISSION OF ANY STATE IN RELIANCE UPON
      AN EXEMPTION  FROM  REGISTRATION  UNDER THE  SECURITIES  ACT OF 1933, AS
      AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY,  MAY NOT BE OFFERED OR
      SOLD EXCEPT  PURSUANT TO AN EFFECTIVE  REGISTRATION  STATEMENT UNDER THE
      SECURITIES  ACT OR  PURSUANT TO AN  AVAILABLE  EXEMPTION  FROM,  OR IN A
      TRANSACTION  NOT  SUBJECT  TO,  THE  REGISTRATION  REQUIREMENTS  OF  THE
      SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.

No. MEP-1                                                             $600,000

                        COMPLIANCE SYSTEMS CORPORATION

                        Secured Convertible Debenture

                            Due November 30, 2007

      This  Secured  Convertible  Debenture  (the  "Debenture")  is  issued on
November  30, 2005  ("Closing  Date") by  COMPLIANCE  SYSTEMS  CORPORATION,  a
Delaware corporation (the "Obligor"),  to MONTGOMERY EQUITY PARTNERS, LTD (the
"Holder"),  pursuant  to  that  certain  Securities  Purchase  Agreement  (the
"Securities Purchase Agreement") of even date herewith.

      FOR VALUE RECEIVED,  the Obligor hereby promises to pay to the Holder or
its successors and assigns the principal sum of Six Hundred  Thousand  Dollars
($600,000),  together  with accrued but unpaid  interest on or before two year
anniversary of the Closing Date (the "Maturity  Date") in accordance  with the
following terms:

      Interest.  Interest shall accrue on the  outstanding  principal  balance
hereof  at an  annual  rate  equal to ten  percent  (10%).  Interest  shall be
calculated  on the  basis of a  360-day  year and the  actual  number  of days
elapsed,  to the extent permitted by applicable law.  Interest  hereunder will
be paid to the  Holder or its  assignee  (as  defined  in  Section 4) in whose
name this  Debenture  is  registered  on the records of the Obligor  regarding
registration and transfers of Debentures (the "Debenture Register").

      Right of  Redemption.  The  Obligor at its option  shall have the right,
with  three (3)  business  days  advance  written  notice  (the  "Redemption
Notice"),  to redeem a portion or all amounts outstanding under this Debenture
prior to the Maturity  Date if the closing bid price of the  Obligor's  Common
Stock, as reported by Bloomberg,  LP, is less than the Fixed Price at the time
of the  Redemption  Notice.  The  Obligor  shall  pay an  amount  equal to the
principal  amount  being  redeemed  and accrued  interest,  plus a  redemption
premium  ("Redemption  Premium")  equal to twenty  percent (20%) of the amount
being redeemed  (collectively  referred to as the  "Redemption  Amount").  The
Obligor shall deliver to the Holder the  Redemption  Amount on the third (3rd)
business day after the Redemption Notice.

<PAGE>

      Notwithstanding  the foregoing in the event that the Obligor has elected
to redeem a portion of the outstanding  principal  amount and accrued interest
under  this  Debenture  the  Holder  shall  still be  entitled  to  effectuate
Conversions as contemplated hereunder.

      Security  Agreement.  This Debenture is secured by a Security  Agreement
(the "Security  Agreement") of even date herewith  between the Obligor and the
Holder and a Pledge and Escrow  Agreement  ("Pledge  Agreement")  of even date
herewith between the Obligor, the Holder, and the Escrow Agent.

      Consent of Holder to Sell  Capital  Stock or Grant  Security  Interests.
So long as any of the principal  amount or interest on this Debenture  remains
unpaid and  unconverted,  the Obligor shall not,  without the prior consent of
the Holder,  (i) issue or sell any shares of common  stock or preferred  stock
without  consideration  or for  consideration  per share less than the Closing
Bid Price of the common stock  determined  immediately  prior to its issuance,
(ii) issue or sell any preferred  stock,  warrant,  option,  right,  contract,
call, or other  security or instrument  granting the holder  thereof the right
to acquire common stock without  consideration or for  consideration per share
less than the Closing  Bid Price of the common  stock  determined  immediately
prior to its issuance,  (iii) enter into any security  instrument granting the
holder a  security  interest  in any of the  assets of the  Obligor  except in
connection with the Company leasing or purchasing office  equipment,  computer
and  networking  equipment,  co-location  equipment  and other  equipment  and
supplies in the  ordinary  course of the  Company's  business,  provided  such
equipment  and  supplies  do not,  in the  aggregate,  exceed  fifty  thousand
dollars  ($50,000.00) per annum, or (iv) file any  registration  statements on
Form S-8.

      Rights of First  Refusal.   So long as any portion of this  Debenture is
outstanding (including principal or accrued interest),  if the Obligor intends
to raise  additional  capital by the issuance or sale of capital  stock of the
Obligor,  including  without  limitation  shares of any class of common stock,
any class of  preferred  stock,  options,  warrants  or any  other  securities
convertible or  exercisable  into shares of common stock (whether the offering
is conducted by the Company, underwriter,  placement agent or any third party)
the Obligor  shall be obligated  to offer to the Holder such  issuance or sale
of capital stock,  by providing in writing the principal  amount of capital it
intends to raise and  outline of the  material  terms of such  capital  raise,
prior to the  offering  such  issuance or sale of capital  stock  to any third
parties  including,  but  not  limited  to,  current  or  former  officers  or
directors,  current or former  shareholders  and/or  investors of the obligor,
underwriters,  brokers,  agents or other third parties.  The Holder shall have
ten (10)  business days from receipt of such notice of the sale or issuance of
capital  stock to accept or reject  all or a portion of such  capital  raising
offer.

      This Debenture is subject to the following additional provisions:

      Section 1.  This  Debenture  is  exchangeable  for  an  equal  aggregate
principal  amount of  Debentures  of different  authorized  denominations,  as
requested by the Holder  surrendering the same. No service charge will be made
for such registration of transfer or exchange.

                                       2
<PAGE>

      Section 2.  Events of Default.

      (a)   An "Event of Default",  wherever used herein, means any one of the
following  events  (whatever  the reason and whether it shall be  voluntary or
involuntary  or effected  by  operation  of law or  pursuant to any  judgment,
decree  or  order  of any  court,  or any  order,  rule or  regulation  of any
administrative or governmental body):

            (i)   Any default in the payment of the principal of,  interest on
or  other  charges  in  respect  of  this  Debenture,  free  of any  claim  of
subordination,  as and when the same shall become due and payable  (whether on
a Conversion Date or the Maturity Date or by acceleration or otherwise);

            (ii)  The  Obligor  shall fail to  observe  or  perform  any other
covenant,  agreement or warranty  contained in, or otherwise commit any breach
or default of any  provision  of this  Debenture  (except as may be covered by
Section 2(a)(i) hereof) or any Transaction  Document (as defined in Section 4)
which is not cured with in the time prescribed;

            (iii) The  Obligor  or  any   subsidiary   of  the  Obligor  shall
commence,  or there shall be commenced  against the Obligor or any  subsidiary
of the Obligor under any  applicable  bankruptcy or insolvency  laws as now or
hereafter  in  effect  or  any  successor  thereto,  or  the  Obligor  or  any
subsidiary  of  the  Obligor   commences  any  other   proceeding   under  any
reorganization,   arrangement,   adjustment   of  debt,   relief  of  debtors,
dissolution,  insolvency  or  liquidation  or similar law of any  jurisdiction
whether now or hereafter in effect  relating to the Obligor or any  subsidiary
of the Obligor or there is commenced  against the Obligor or any subsidiary of
the Obligor any such bankruptcy,  insolvency or other proceeding which remains
undismissed  for a period of 61 days; or the Obligor or any  subsidiary of the
Obligor is adjudicated  insolvent or bankrupt; or any order of relief or other
order approving any such case or proceeding is entered;  or the Obligor or any
subsidiary of the Obligor  suffers any  appointment of any custodian,  private
or court appointed  receiver or the like for it or any substantial part of its
property which  continues  undischarged  or unstayed for a period of sixty one
(61) days;  or the Obligor or any  subsidiary  of the Obligor  makes a general
assignment  for the benefit of creditors;  or the Obligor or any subsidiary of
the  Obligor  shall fail to pay,  or shall  state that it is unable to pay, or
shall be unable  to pay,  its  debts  generally  as they  become  due;  or the
Obligor  or any  subsidiary  of  the  Obligor  shall  call  a  meeting  of its
creditors with a view to arranging a composition,  adjustment or restructuring
of its debts;  or the Obligor or any  subsidiary  of the Obligor  shall by any
act or failure to act  expressly  indicate  its  consent  to,  approval  of or
acquiescence  in any of the  foregoing;  or any  corporate  or other action is
taken by the  Obligor or any  subsidiary  of the  Obligor  for the  purpose of
effecting any of the foregoing;

            (iv)  The Obligor or any  subsidiary  of the Obligor shall default
in any of its obligations  under any other  debenture or any mortgage,  credit
agreement  or other  facility,  indenture  agreement,  factoring  agreement or
other  instrument  under which  there may be issued,  or by which there may be
secured or evidenced any  indebtedness  for borrowed  money or money due under
any  long  term  leasing  or  factoring  arrangement  of  the  Obligor  or any
subsidiary  of the  Obligor  in an amount  exceeding  $100,000,  whether  such
indebtedness  now exists or shall  hereafter be created and such default shall
result in such  indebtedness  becoming or being declared due and payable prior
to the date on which it would otherwise become due and payable;

                                       3
<PAGE>

            (v)   The Common  Stock  shall  cease to be quoted for  trading or
listed for trading on either the Nasdaq OTC  Bulletin  Board  ("OTC"),  Nasdaq
SmallCap  Market,  New York Stock  Exchange,  American  Stock  Exchange or the
Nasdaq  National  Market (each, a "Subsequent  Market") and shall not again be
quoted or listed for trading  thereon  within  five (5)  Trading  Days of such
delisting;

            (vi)  The  Obligor or any  subsidiary  of the  Obligor  shall be a
party to any Change of Control Transaction (as defined in Section 4);

            (vii) The  Obligor  shall  fail  to  file  the  Underlying  Shares
Registration  Statement  (as  defined in Section  4) with the  Commission  (as
defined in Section 4), or the Underlying Shares  Registration  Statement shall
not have been declared  effective by the  Commission,  in each case within the
time  periods  set forth in the  Registration  Rights  Agreement  of even date
herewith between the Obligor and the Holder;

            (viii)      If  the   effectiveness   of  the  Underlying   Shares
Registration  Statement  lapses  for any  reason  or the  Holder  shall not be
permitted  to resell  the shares of Common  Stock  underlying  this  Debenture
under the Underlying Shares Registration  Statement,  in either case, for more
than five (5)  consecutive  Trading Days or an aggregate of eight Trading Days
(which need not be consecutive Trading Days);

            (ix)  The  Obligor  shall fail for any  reason to  deliver  Common
Stock  certificates  to a Holder prior to the fifth (5th)  Trading Day after a
Conversion  Date or the Obligor shall provide notice to the Holder,  including
by way of public  announcement,  at any time,  of its  intention not to comply
with requests for  conversions of this Debenture in accordance  with the terms
hereof;

            (x)   The  Obligor  shall  fail  for any  reason  to  deliver  the
payment in cash  pursuant to a Buy-In (as  defined  herein)  within  three (3)
days after notice is claimed delivered hereunder;

       (b)  During   the  time  that  any   portion  of  this   Debenture   is
outstanding,  if any Event of Default has occurred,  the full principal amount
of this  Debenture,  together with interest and other amounts owing in respect
thereof,  to the date of acceleration  shall become at the Holder's  election,
immediately due and payable in cash, provided however,  the Holder may request
(but shall have no  obligation  to request)  payment of such amounts in Common
Stock of the  Obligor.  In addition to any other  remedies,  the Holder  shall
have the right (but not the  obligation) to convert this Debenture at any time
after  (x) an Event of  Default  or (y) the  Maturity  Date at the  Conversion
Price then  in-effect.  The Holder need not  provide  and the  Obligor  hereby
waives any presentment,  demand,  protest or other notice of any kind, and the
Holder may immediately and without  expiration of any grace period enforce any
and all of its rights and remedies  hereunder and all other remedies available
to it under  applicable law. Such declaration may be rescinded and annulled by
Holder  at any  time  prior  to  payment  hereunder.  No  such  rescission  or
annulment  shall  affect any  subsequent  Event of Default or impair any right
consequent  thereon.  Upon an  Event of  Default,  notwithstanding  any  other
provision of this  Debenture  or any  Transaction  Document,  the Holder shall
have no  obligation  to comply with or adhere to any  limitations,  if any, on
the conversion of this Debenture or the sale of the Underlying Shares.

                                       4
<PAGE>

      Section 3.  Conversion.

      (a)   (i)   Conversion at Option of Holder.

            (A)   This Debenture  shall be  convertible  into shares of Common
Stock at the  option of the  Holder,  in whole or in part at any time and from
time to time,  after  the  Original  Issue  Date (as  defined  in  Section  4)
(subject  to the  limitations  on  conversion  set forth in  Section  3(a)(ii)
hereof).  The  number of shares of Common  Stock  issuable  upon a  conversion
hereunder equals the quotient obtained by dividing (x) the outstanding  amount
of this Debenture to be converted by (y) the  Conversion  Price (as defined in
Section 3(c)(i)).  The Obligor shall deliver Common Stock  certificates to the
Holder prior to the Fifth (5th) Trading Day after a Conversion Date.

            (B)   Notwithstanding  anything to the contrary  contained herein,
if on any  Conversion  Date:  (1) the number of shares of Common  Stock at the
time  authorized,  unissued  and  unreserved  for  all  purposes,  or  held as
treasury stock,  is  insufficient  to pay principal and interest  hereunder in
shares of Common  Stock;  (2) the  Common  Stock is not  listed or quoted  for
trading on the OTC or on a  Subsequent  Market;  (3) the Obligor has failed to
timely  satisfy its  conversion;  or (4) the issuance of such shares of Common
Stock would result in a violation of Section 3(a)(ii),  then, at the option of
the  Holder,  the  Obligor,  in lieu of  delivering  shares  of  Common  Stock
pursuant to Section 3(a)(i)(A),  shall deliver,  within three (3) Trading Days
of each applicable  Conversion Date, an amount in cash equal to the product of
the  outstanding  principal  amount  to be  converted  plus any  interest  due
therein divided by the Conversion  Price and multiplied by the highest closing
price of the stock from date of the conversion  notice till the date that such
cash payment is made.

      Further,  if the  Obligor  shall  not  have  delivered  any  cash due in
respect of conversion of this  Debenture or as payment of interest  thereon by
the fifth (5th)  Trading  Day after the  Conversion  Date,  the Holder may, by
notice to the  Obligor,  require the Obligor to issue  shares of Common  Stock
pursuant to Section 3(c),  except that for such purpose the  Conversion  Price
applicable  thereto  shall  be the  lesser  of  the  Conversion  Price  on the
Conversion  Date and the  Conversion  Price on the date of such Holder demand.
Any such shares will be subject to the provisions of this Section.

            (C)   The Holder shall effect  conversions  by  delivering  to the
Obligor  a  completed  notice  in the form  attached  hereto  as  Exhibit A (a
"Conversion  Notice").  The date on which a Conversion  Notice is delivered is
the  "Conversion  Date." Unless the Holder is converting the entire  principal
amount  outstanding  under  this  Debenture,  the  Holder is not  required  to
physically  surrender  this  Debenture  to the  Obligor  in  order  to  effect
conversions.  Conversions  hereunder  shall  have the effect of  lowering  the
outstanding  principal  amount of this  Debenture  plus all accrued and unpaid
interest thereon in an amount equal to the applicable  conversion.  The Holder
and the Obligor shall maintain  records showing the principal amount converted
and the date of such conversions.  In the event of any dispute or discrepancy,
the  records of the  Holder  shall be  controlling  and  determinative  in the
absence of manifest error.

                                       5
<PAGE>

            (ii)  Certain Conversion Restrictions.

                  (A)   A Holder may not  convert  this  Debenture  or receive
shares of Common  Stock as payment of  interest  hereunder  to the extent such
conversion  or receipt of such  interest  payment  would result in the Holder,
together with any affiliate  thereof,  beneficially  owning (as  determined in
accordance  with Section  13(d) of the Exchange Act and the rules  promulgated
thereunder)  in excess of 4.9% of the then  issued and  outstanding  shares of
Common Stock,  including  shares  issuable upon  conversion of, and payment of
interest  on, this  Debenture  held by such Holder after  application  of this
Section.  Since the Holder will not be  obligated to report to the Obligor the
number  of  shares  of  Common  Stock it may hold at the time of a  conversion
hereunder,  unless the  conversion  at issue would  result in the  issuance of
shares of Common  Stock in  excess of 4.9% of the then  outstanding  shares of
Common Stock  without  regard to any other  shares  which may be  beneficially
owned by the  Holder  or an  affiliate  thereof,  the  Holder  shall  have the
authority and  obligation to determine  whether the  restriction  contained in
this Section will limit any particular  conversion hereunder and to the extent
that the Holder  determines  that the  limitation  contained  in this  Section
applies,  the  determination  of which portion of the principal amount of this
Debenture is  convertible  shall be the  responsibility  and obligation of the
Holder.  If the Holder  has  delivered  a  Conversion  Notice for a  principal
amount of this  Debenture  that,  without  regard to any other shares that the
Holder or its  affiliates may  beneficially  own, would result in the issuance
in excess of the  permitted  amount  hereunder,  the Obligor  shall notify the
Holder of this fact and shall honor the conversion  for the maximum  principal
amount  permitted to be converted on such  Conversion  Date in accordance with
the periods described in Section  3(a)(i)(A) and, at the option of the Holder,
either retain any principal  amount  tendered for  conversion in excess of the
permitted  amount  hereunder  for future  conversions  or return  such  excess
principal  amount to the Holder.  The provisions of this Section may be waived
by a Holder (but only as to itself and not to any other  Holder) upon not less
than 65 days prior notice to the Obligor.  Other  Holders  shall be unaffected
by any such waiver.

      (b)   (i)   Nothing  herein  shall  limit a  Holder's  right  to  pursue
actual  damages or declare  an Event of Default  pursuant  to Section 2 herein
for the  Obligor 's failure to  deliver  certificates  representing  shares of
Common  Stock upon  conversion  within the  period  specified  herein and such
Holder 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,  in each case  without  the need to post a bond or
provide  other  security.  The  exercise of any such rights shall not prohibit
the Holder  from  seeking to enforce  damages  pursuant  to any other  Section
hereof or under applicable law.

            (ii)  In addition to any other rights available to the Holder,  if
the Obligor fails to deliver to the Holder such  certificate  or  certificates
pursuant  to  Section  3(a)(i)(A)  by the fifth  (5th)  Trading  Day after the
Conversion  Date,  and if  after  such  fifth  (5th)  Trading  Day the  Holder
purchases  (in an open  market  transaction  or  otherwise)  Common  Stock  to
deliver in  satisfaction  of a sale by such  Holder of the  Underlying  Shares
which the Holder  anticipated  receiving  upon such  conversion  (a "Buy-In"),
then the  Obligor  shall (A) pay in cash to the  Holder  (in  addition  to any
remedies  available  to or elected by the  Holder) the amount by which (x) the
Holder's total purchase price (including  brokerage  commissions,  if any) for
the Common  Stock so  purchased  exceeds (y) the product of (1) the  aggregate
number of shares of Common Stock that such Holder  anticipated  receiving from

                                       6
<PAGE>

the  conversion  at issue  multiplied  by (2) the  market  price of the Common
Stock at the time of the sale giving rise to such purchase  obligation and (B)
at the option of the  Holder,  either  reissue a  Debenture  in the  principal
amount equal to the principal  amount of the  attempted  conversion or deliver
to the  Holder  the  number of shares of Common  Stock  that  would  have been
issued had the Obligor timely  complied with its delivery  requirements  under
Section  3(a)(i)(A).  For example, if the Holder purchases Common Stock having
a total  purchase  price  of  $11,000  to cover a Buy-In  with  respect  to an
attempted  conversion of Debentures  with respect to which the market price of
the  Underlying  Shares on the date of conversion was a total of $10,000 under
clause  (A) of the  immediately  preceding  sentence,  the  Obligor  shall  be
required  to pay the Holder  $1,000.  The Holder  shall  provide  the  Obligor
written notice  indicating the amounts payable to the Holder in respect of the
Buy-In.

      (c)   (i)   The Holder is entitled,  at its option, to convert, and sell
on the same day, at any time, until payment in full of this Debenture,  all or
any part of the  principal  amount of the  Debenture,  plus accrued  interest,
into shares of the Company's  Common Stock at the price per share equal to the
lesser of (a) the  lowest Closing Bid Price of the Common Stock during the ten
(10)  trading  days  immediately  prior  to the  date the  Obligor  files  the
Underlying Shares  Registration  Statement (the "Fixed  Conversion  Price") or
(b)   eighty  percent (80%)  of the lowest  Closing  Bid  Price,  as quoted by
Bloomberg,  LP (the  "VWAP") of the Common Stock for the five (5) trading days
immediately  preceding the Conversion  Date.  Subparagraphs (a)  and (b) above
are  individually  referred  to as a  "Conversion  Price" and may be  adjusted
pursuant to the other terms of this Debenture.

            (ii)  If  the  Obligor,  at  any  time  while  this  Debenture  is
outstanding,  shall (a) pay a stock  dividend or otherwise make a distribution
or  distributions  on shares of its Common Stock or any other equity or equity
equivalent  securities  payable  in  shares  of Common  Stock,  (b)  subdivide
outstanding  shares of  Common  Stock  into a larger  number  of  shares,  (c)
combine  (including  by way of  reverse  stock  split)  outstanding  shares of
Common   Stock   into  a   smaller   number  of   shares,   or  (d)  issue  by
reclassification  of shares of the Common Stock any shares of capital stock of
the Obligor,  then the  Conversion  Price shall be multiplied by a fraction of
which the numerator  shall be the number of shares of Common Stock  (excluding
treasury  shares,  if any)  outstanding  before  such  event  and of which the
denominator  shall be the number of shares of Common Stock  outstanding  after
such  event.  Any  adjustment  made  pursuant  to this  Section  shall  become
effective   immediately  after  the  record  date  for  the  determination  of
stockholders  entitled  to receive  such  dividend or  distribution  and shall
become  effective  immediately  after  the  effective  date  in the  case of a
subdivision, combination or re-classification.

            (iii) If  the  Obligor,  at  any  time  while  this  Debenture  is
outstanding,  shall issue rights, options or warrants to all holders of Common
Stock (and not to the  Holder)  entitling  them to  subscribe  for or purchase
shares of Common  Stock at a price per share less than the  Closing  Bid Price
at the  record  date  mentioned  below,  then the  Conversion  Price  shall be
multiplied  by a  fraction,  of which the  denominator  shall be the number of
shares of the Common Stock (excluding  treasury shares, if any) outstanding on
the  date of  issuance  of  such  rights  or  warrants  (plus  the  number  of
additional  shares of Common Stock offered for subscription or purchase),  and
of which the  numerator  shall be the  number of  shares of the  Common  Stock
(excluding  treasury  shares,  if any)  outstanding on the date of issuance of
such  rights  or  warrants,  plus the  number of  shares  which the  aggregate
offering  price of the total  number of shares so offered  would  purchase  at
such Closing Bid Price.  Such adjustment shall be made whenever such rights or
warrants are issued,  and shall become effective  immediately after the record
date for the  determination  of stockholders  entitled to receive such rights,

                                       7
<PAGE>

options or warrants.  However,  upon the expiration of any such right,  option
or  warrant  to  purchase  shares of the Common  Stock the  issuance  of which
resulted in an adjustment in the  Conversion  Price  pursuant to this Section,
if any such  right,  option or  warrant  shall  expire and shall not have been
exercised,  the Conversion  Price shall  immediately  upon such  expiration be
recomputed and effective  immediately upon such expiration be increased to the
price which it would have been (but  reflecting  any other  adjustments in the
Conversion  Price made  pursuant to the  provisions  of this Section after the
issuance of such rights or  warrants)  had the  adjustment  of the  Conversion
Price made upon the issuance of such rights,  options or warrants been made on
the basis of offering for  subscription or purchase only that number of shares
of the Common  Stock  actually  purchased  upon the  exercise of such  rights,
options or warrants actually exercised.

            (iv)  If the Obligor or any  subsidiary  thereof,  as  applicable,
with  respect to Common  Stock  Equivalents  (as defined  below),  at any time
while this  Debenture  is  outstanding,  shall issue shares of Common Stock or
rights,  warrants,  options or other  securities or debt that are  convertible
into or exchangeable  for shares of Common Stock ("Common Stock  Equivalents")
entitling any Person to acquire  shares of Common Stock,  at a price per share
less than the  Conversion  Price (if the holder of the Common  Stock or Common
Stock  Equivalent  so  issued  shall at any  time,  whether  by  operation  of
purchase price adjustments,  reset provisions,  floating conversion,  exercise
or exchange  prices or  otherwise,  or due to warrants,  options or rights per
share  which is issued  in  connection  with such  issuance,  be  entitled  to
receive  shares  of Common  Stock at a price per share  which is less than the
Conversion  Price,  such  issuance  shall be deemed to have  occurred for less
than the  Conversion  Price),  then,  at the sole  option of the  Holder,  the
Conversion  Price  shall be  adjusted  to mirror the  conversion,  exchange or
purchase  price for such Common Stock or Common Stock  Equivalents  (including
any  reset  provisions  thereof)  at  issue.  Such  adjustment  shall  be made
whenever  such  Common  Stock or Common  Stock  Equivalents  are  issued.  The
Obligor  shall  notify the Holder in writing,  no later than one (1)  business
day  following  the issuance of any Common  Stock or Common  Stock  Equivalent
subject to this Section,  indicating therein the applicable issuance price, or
of applicable reset price, exchange price,  conversion price and other pricing
terms.  No  adjustment  under  this  Section  shall  be  made as a  result  of
issuances and  exercises of options to purchase  shares of Common Stock issued
for  compensatory  purposes  pursuant to any of the Obligor's  stock option or
stock purchase plans.

            (v)   If  the  Obligor,  at  any  time  while  this  Debenture  is
outstanding,  shall  distribute to all holders of Common Stock (and not to the
Holder)  evidences  of its  indebtedness  or assets or rights or  warrants  to
subscribe for or purchase any security,  then in each such case the Conversion
Price at  which  this  Debenture  shall  thereafter  be  convertible  shall be
determined by multiplying the Conversion Price in effect  immediately prior to
the record date fixed for  determination  of stockholders  entitled to receive
such  distribution by a fraction of which the denominator shall be the Closing
Bid Price  determined as of the record date mentioned  above, and of which the
numerator  shall be such  Closing  Bid Price on such record date less the then
fair  market  value at such  record  date of the  portion  of such  assets  or
evidence of  indebtedness so distributed  applicable to one outstanding  share
of the Common Stock as determined by the Board of Directors in good faith.  In
either case the adjustments shall be described in a statement  provided to the
Holder of the portion of assets or evidences of  indebtedness  so  distributed
or such  subscription  rights  applicable to one share of Common  Stock.  Such
adjustment  shall be made  whenever  any such  distribution  is made and shall
become effective immediately after the record date mentioned above.

                                       8
<PAGE>

            (vi)  In case of any  reclassification  of the Common Stock or any
compulsory  share  exchange  pursuant to which the Common  Stock is  converted
into other  securities,  cash or  property,  the  Holder  shall have the right
thereafter  to, at its  option,  (A) convert  the then  outstanding  principal
amount,  together  with all accrued but unpaid  interest and any other amounts
then owing  hereunder  in respect of this  Debenture  into the shares of stock
and other securities,  cash and property  receivable upon or deemed to be held
by  holders of the  Common  Stock  following  such  reclassification  or share
exchange,  and the Holder of this Debenture  shall be entitled upon such event
to receive  such amount of  securities,  cash or property as the shares of the
Common Stock of the Obligor into which the then outstanding  principal amount,
together  with all  accrued but unpaid  interest  and any other  amounts  then
owing  hereunder  in  respect  of this  Debenture  could  have been  converted
immediately prior to such  reclassification  or share exchange would have been
entitled,  or (B)  require  the  Obligor to prepay the  outstanding  principal
amount of this Debenture,  plus all interest and other amounts due and payable
thereon.  The entire  prepayment  price shall be paid in cash.  This provision
shall similarly apply to successive reclassifications or share exchanges.

            (vii) Within  30  days  of the  date  hereof,  the  Obligor  shall
maintain a share  reserve of not less than  65,000,000  shares of Common Stock
issuable  upon  conversion  of this  Debenture;  and within three (3) Business
Days  following  the  receipt by the  Obligor of a Holder's  notice  that such
minimum  number of  Underlying  Shares is not so reserved,  the Obligor  shall
promptly reserve a sufficient  number of shares of Common Stock to comply with
such requirement.

            (viii)      All  calculations   under  this  Section  3  shall  be
rounded up to the nearest $0.001 of a share.

            (ix)  Whenever  the  Conversion  Price  is  adjusted  pursuant  to
Section 3 hereof,  the  Obligor  shall  promptly  mail to the  Holder a notice
setting forth the Conversion  Price after such  adjustment and setting forth a
brief statement of the facts requiring such adjustment.

            (x)   If (A) the Obligor  shall  declare a dividend  (or any other
distribution)  on the Common  Stock;  (B) the Obligor  shall declare a special
nonrecurring  cash dividend on or a redemption  of the Common  Stock;  (C) the
Obligor  shall  authorize  the  granting  to all  holders of the Common  Stock
rights or warrants to subscribe  for or purchase  any shares of capital  stock
of any class or of any rights;  (D) the  approval of any  stockholders  of the
Obligor  shall be  required in  connection  with any  reclassification  of the
Common  Stock,  any  consolidation  or merger to which the Obligor is a party,
any  sale  or  transfer  of all or  substantially  all  of the  assets  of the
Obligor,  of any  compulsory  share  exchange  whereby  the  Common  Stock  is
converted into other  securities,  cash or property;  or (E) the Obligor shall
authorize the voluntary or involuntary dissolution,  liquidation or winding up
of the affairs of the Obligor;  then, in each case, the Obligor shall cause to
be filed at each office or agency  maintained for the purpose of conversion of
this  Debenture,  and  shall  cause to be  mailed  to the  Holder  at its last
address  as it shall  appear  upon the stock  books of the  Obligor,  at least

                                       9
<PAGE>

twenty (20) calendar  days prior to the  applicable  record or effective  date
hereinafter  specified,  a notice stating (x) the date on which a record is to
be taken for the purpose of such dividend,  distribution,  redemption,  rights
or  warrants,  or if a record  is not to be  taken,  the date as of which  the
holders  of the  Common  Stock of  record  to be  entitled  to such  dividend,
distributions,  redemption, rights or warrants are to be determined or (y) the
date on which such reclassification,  consolidation, merger, sale, transfer or
share  exchange is expected to become  effective or close,  and the date as of
which it is  expected  that  holders  of the Common  Stock of record  shall be
entitled to exchange their shares of the Common Stock for securities,  cash or
other property deliverable upon such reclassification,  consolidation, merger,
sale,  transfer  or share  exchange,  provided,  that the failure to mail such
notice or any defect  therein or in the mailing  thereof  shall not affect the
validity of the  corporate  action  required to be  specified  in such notice.
The Holder is entitled to convert this  Debenture  during the 20-day  calendar
period  commencing  the date of such notice to the effective date of the event
triggering such notice.

            (xi)  In case of any (1) merger or  consolidation  of the  Obligor
or any subsidiary of the Obligor with or into another  Person,  or (2) sale by
the  Obligor or any  subsidiary  of the  Obligor of more than  one-half of the
assets of the  Obligor  in one or a series of related  transactions,  a Holder
shall  have the right to (A)  exercise  any rights  under  Section  2(b),  (B)
convert the  aggregate  amount of this  Debenture  then  outstanding  into the
shares of stock and other  securities,  cash and property  receivable  upon or
deemed  to  be  held  by  holders  of  Common  Stock  following  such  merger,
consolidation  or sale,  and such Holder shall be entitled  upon such event or
series of  related  events to  receive  such  amount of  securities,  cash and
property  as the shares of Common  Stock into which such  aggregate  principal
amount of this Debenture could have been converted  immediately  prior to such
merger,  consolidation  or sales would have been entitled,  or (C) in the case
of a merger or  consolidation,  require the  surviving  entity to issue to the
Holder a convertible  Debenture with a principal amount equal to the aggregate
principal amount of this Debenture then held by such Holder,  plus all accrued
and unpaid  interest and other amounts owing thereon,  which such newly issued
convertible  Debenture shall have terms  identical  (including with respect to
conversion)  to the terms of this  Debenture,  and shall be entitled to all of
the rights and  privileges  of the Holder of this  Debenture  set forth herein
and the agreements  pursuant to which this Debentures were issued. In the case
of clause (C), the conversion  price applicable for the newly issued shares of
convertible preferred stock or convertible  Debentures shall be based upon the
amount of securities,  cash and property that each share of Common Stock would
receive in such  transaction  and the Conversion  Price in effect  immediately
prior to the effectiveness or closing date for such transaction.  The terms of
any such  merger,  sale or  consolidation  shall  include  such terms so as to
continue  to give the  Holder the right to receive  the  securities,  cash and
property  set  forth  in  this  Section  upon  any  conversion  or  redemption
following such event.  This provision shall similarly apply to successive such
events.

      (d)   The Obligor  covenants  that it will at all times reserve and keep
available  out of its  authorized  and unissued  shares of Common Stock solely
for the purpose of issuance upon  conversion of this  Debenture and payment of
interest on this  Debenture,  each as herein  provided,  free from  preemptive
rights or any other actual  contingent  purchase  rights of persons other than
the Holder,  not less than such number of shares of the Common  Stock as shall
(subject to any  additional  requirements  of the Obligor as to reservation of
such shares set forth in this Debenture) be issuable  (taking into account the
adjustments  and  restrictions  of Sections 2(b) and 3(c)) upon the conversion
of the outstanding  principal amount of this Debenture and payment of interest

                                       10
<PAGE>

hereunder.  The Obligor  covenants  that all shares of Common Stock that shall
be so issuable shall, upon issue, be duly and validly  authorized,  issued and
fully  paid,   nonassessable  and,  if  the  Underlying  Shares   Registration
Statement has been declared  effective  under the Securities  Act,  registered
for  public  sale in  accordance  with  such  Underlying  Shares  Registration
Statement.

      (e)   Upon a conversion  hereunder  the Obligor shall not be required to
issue  stock  certificates  representing  fractions  of shares  of the  Common
Stock, but may if otherwise  permitted,  make a cash payment in respect of any
final  fraction of a share based on the Closing Bid Price at such time. If the
Obligor  elects not,  or is unable,  to make such a cash  payment,  the Holder
shall be entitled to receive,  in lieu of the final  fraction of a share,  one
whole share of Common Stock.

      (f)   The  issuance of  certificates  for shares of the Common  Stock on
conversion  of this  Debenture  shall be made  without  charge  to the  Holder
thereof  for any  documentary  stamp or  similar  taxes that may be payable in
respect  of the  issue or  delivery  of such  certificate,  provided  that the
Obligor  shall not be  required  to pay any tax that may be payable in respect
of any transfer  involved in the issuance and delivery of any such certificate
upon  conversion in a name other than that of the Holder of such  Debenture so
converted  and the  Obligor  shall not be  required  to issue or deliver  such
certificates  unless or until the person or persons  requesting  the  issuance
thereof  shall have paid to the  Obligor  the amount of such tax or shall have
established to the satisfaction of the Obligor that such tax has been paid.

      (g)   Any notices,  consents,  waivers or other communications  required
or  permitted  to be given under the terms  hereof 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 (1) Trading  Day after  deposit  with a
nationally  recognized  overnight  delivery  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, to:          Compliance Systems Corporation
                                90 Pratt Oval
                                Glen Cove, NY 11542
                                Attention:  Dean Garfinkel
                                Telephone:  (516) 656-5155
                                Facsimile:  (516) 676-2420

With a copy to:                 Kirkpatrick & Lockhart Nicholson Graham, LLP
                                201 South Biscayne Boulevard, Suite 2000
                                Miami, Florida 33131
                                Attention:  Clayton E. Parker, Esq.
                                Telephone:  (305) 539-3306
                                Facsimile:  (305) 328-7095

If to the Holder:               Montgomery Equity Partners, Ltd.
                                101 Hudson Street, Suite 3700
                                Jersey City, NJ  07303
                                Attention:  Mark Angelo
                                Telephone:  (201) 985-8300

                                       11
<PAGE>

With a copy to:                 David Gonzalez, Esq.
                                101 Hudson Street - Suite 3700
                                Jersey City, NJ 07302
                                Telephone:  (201) 985-8300
                                Facsimile:  (201) 985-8266

or at 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 three (3) business  days prior to the  effectiveness
of such change.  Written  confirmation  of receipt (i) given by the  recipient
of such notice, consent,  waiver or other communication,  (ii) 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 (iii) provided by a nationally  recognized  overnight delivery
service,  shall  be  rebuttable  evidence  of  personal  service,  receipt  by
facsimile or receipt from a nationally  recognized  overnight delivery service
in accordance with clause (i), (ii) or (iii) above, respectively.

      Section 4.  Definitions.  For the purposes  hereof,  the following terms
shall have the following meanings:

      "Business Day" means any day except  Saturday,  Sunday and any day which
shall be a  federal  legal  holiday  in the  United  States  or a day on which
banking  institutions  are  authorized or required by law or other  government
action to close.

      "Change  of  Control   Transaction"  means  the  occurrence  of  (a)  an
acquisition  after the date hereof by an individual or legal entity or "group"
(as  described in Rule  13d-5(b)(1)  promulgated  under the  Exchange  Act) of
effective  control (whether  through legal or beneficial  ownership of capital
stock of the Obligor,  by contract or otherwise) of in excess of fifty percent
(50%) of the voting  securities of the Obligor (except that the acquisition of
voting  securities  by the  Holder  shall not  constitute  a Change of Control
Transaction for purposes  hereof),  (b) a replacement at one time or over time
of more than  one-half of the members of the board of directors of the Obligor
which is not  approved by a majority of those  individuals  who are members of
the board of  directors  on the date hereof (or by those  individuals  who are
serving as members of the board of directors on any date whose  nomination  to
the board of directors  was approved by a majority of the members of the board
of  directors  who  are  members  on  the  date   hereof),   (c)  the  merger,
consolidation  or sale of fifty  percent  (50%) or more of the  assets  of the
Obligor  or any  subsidiary  of the  Obligor  in one or a  series  of  related
transactions  with or into another entity, or (d) the execution by the Obligor
of an  agreement  to which  the  Obligor  is a party or by which it is  bound,
providing for any of the events set forth above in (a), (b) or (c).

      "Commission" means the Securities and Exchange Commission.

      "Common Stock" means the common stock, par value $0.001,  of the Obligor
and stock of any other class into which such shares may  hereafter  be changed
or reclassified.

                                       12
<PAGE>

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

      "Funding Event" means any  transaction or series of transactions  closed
after the Original Issue Date in which the Obligor  raises  $1,000,000 or more
through the sale of their  equity  securities  or  securities  exercisable  or
convertible into equity securities.

      "Original  Issue Date" shall mean the date of the first issuance of this
Debenture  regardless of the number of transfers and  regardless of the number
of instruments, which may be issued to evidence such Debenture.

      "Closing  Bid  Price"  means the  price  per share in the last  reported
trade of the  Common  Stock on the OTC or on the  exchange  which  the  Common
Stock is then listed as quoted by Bloomberg, LP.

      "Person"   means  a   corporation,   an   association,   a  partnership,
organization,   a  business,   an   individual,   a  government  or  political
subdivision thereof or a governmental agency.

       "Securities Act" means the Securities Act of 1933, as amended,  and the
rules and regulations promulgated thereunder.

      "Trading  Day"  means a day on which  the  shares  of  Common  Stock are
quoted on the OTC or quoted or traded on such  Subsequent  Market on which the
shares of Common Stock are then quoted or listed;  provided, that in the event
that the shares of Common  Stock are not listed or quoted,  then  Trading  Day
shall mean a Business Day.

      "Transaction  Documents" means the Securities  Purchase Agreement or any
other  agreement   delivered  in  connection  with  the  Securities   Purchase
Agreement,  including,  without limitation, the Security Agreement, the Pledge
and Escrow Agreement, and the Investor Registration Rights Agreement.

      "Underlying  Shares"  means the  shares of Common  Stock  issuable  upon
conversion of this Debenture or as payment of interest in accordance  with the
terms hereof.

      "Underlying   Shares   Registration   Statement"  means  a  registration
statement  meeting  the  requirements  set  forth in the  Registration  Rights
Agreement,  covering  among other things the resale of the  Underlying  Shares
and naming the Holder as a "selling stockholder" thereunder.

      Section 5.  Except as expressly  provided  herein,  no provision of this
Debenture  shall alter or impair the  obligations  of the  Obligor,  which are
absolute  and  unconditional,  to pay the  principal  of,  interest  and other
charges (if any) on, this Debenture at the time,  place,  and rate, and in the
coin or currency,  herein  prescribed.  This Debenture is a direct  obligation
of the Obligor.  This Debenture ranks pari passu with all other Debentures now
or  hereafter  issued  under  the  terms  set  forth  herein.  As long as this
Debenture  is  outstanding,  the  Obligor  shall  not and  shall  cause  their
subsidiaries  not to,  without  the  consent  of the  Holder,  (i)  amend  its
certificate  of  incorporation,  bylaws or other  charter  documents  so as to
adversely affect any rights of the Holder; (ii) repay,  repurchase or offer to
repay,  repurchase  or otherwise  acquire  shares of its Common Stock or other
equity  securities  other  than  as to the  Underlying  Shares  to the  extent
permitted or required  under the  Transaction  Documents;  or (iii) enter into
any agreement with respect to any of the foregoing.

                                       13
<PAGE>

      Section 6.  This  Debenture  shall not  entitle the Holder to any of the
rights of a stockholder  of the Obligor,  including  without  limitation,  the
right to vote,  to receive  dividends and other  distributions,  or to receive
any  notice  of,  or  to  attend,   meetings  of  stockholders  or  any  other
proceedings of the Obligor,  unless and to the extent converted into shares of
Common Stock in accordance with the terms hereof.

      Section 7.  If this Debenture is mutilated,  lost,  stolen or destroyed,
the Obligor shall execute and deliver,  in exchange and  substitution  for and
upon  cancellation  of  the  mutilated   Debenture,   or  in  lieu  of  or  in
substitution for a lost,  stolen or destroyed  Debenture,  a new Debenture for
the  principal  amount  of  this  Debenture  so  mutilated,  lost,  stolen  or
destroyed  but  only  upon  receipt  of  evidence  of  such  loss,   theft  or
destruction of such Debenture,  and of the ownership hereof, and indemnity, if
requested, all reasonably satisfactory to the Obligor.

      Section 8.  Except as set forth in the Disclosure  Schedule  attached to
the Securities  Purchase  Agreement,  no indebtedness of the Obligor is senior
to this  Debenture  in right of payment,  whether  with  respect to  interest,
damages  or  upon  liquidation  or  dissolution  or  otherwise.   Without  the
Holder's  consent,  the  Obligor  will not and will  not  permit  any of their
subsidiaries to, directly or indirectly,  enter into, create, incur, assume or
suffer to exist any  indebtedness  of any kind,  on or with  respect to any of
its  property  or  assets  now owned or  hereafter  acquired  or any  interest
therein or any income or profits  there from that is senior in any  respect to
the obligations of the Obligor under this Debenture.

      Section 9.  This  Debenture  shall  be  governed  by  and  construed  in
accordance with the laws of the State of New Jersey,  without giving effect to
conflicts of laws thereof.  Each of the parties  consents to the  jurisdiction
of the Superior  Courts of the State of New Jersey  sitting in Hudson  County,
New  Jersey  and the  U.S. District  Court  for  the  District  of New  Jersey
sitting in Newark,  New Jersey in  connection  with any dispute  arising under
this Debenture and hereby waives,  to the maximum extent permitted by law, any
objection,  including  any  objection  based on forum  non  conveniens  to the
bringing of any such proceeding in such jurisdictions.

      Section 10. If the Obligor  fails to  strictly  comply with the terms of
this  Debenture,  then the Obligor shall reimburse the Holder promptly for all
fees, costs and expenses,  including, without limitation,  attorneys' fees and
expenses  incurred  by the  Holder  in any  action  in  connection  with  this
Debenture,  including,  without  limitation,  those  incurred:  (i) during any
workout,  attempted workout,  and/or in connection with the rendering of legal
advice as to the Holder's rights,  remedies and  obligations,  (ii) collecting
any sums which become due to the Holder,  (iii)  defending or prosecuting  any
proceeding  or any  counterclaim  to any  proceeding  or  appeal;  or (iv) the
protection,  preservation  or  enforcement  of any rights or  remedies  of the
Holder.

      Section 11. Any  waiver by the  Holder of a breach of any  provision  of
this  Debenture  shall not  operate as or be  construed  to be a waiver of any
other  breach of such  provision  or of any breach of any other  provision  of
this Debenture.  The failure of the Holder to insist upon strict  adherence to
any term of this Debenture on one or more occasions  shall not be considered a
waiver or deprive  that party of the right  thereafter  to insist  upon strict
adherence  to that term or any other term of this  Debenture.  Any waiver must
be in writing.

                                       14
<PAGE>

      Section 12. If any  provision of this  Debenture is invalid,  illegal or
unenforceable,  the balance of this Debenture  shall remain in effect,  and if
any  provision  is  inapplicable  to any  person  or  circumstance,  it  shall
nevertheless  remain applicable to all other persons and circumstances.  If it
shall  be  found  that  any  interest  or other  amount  deemed  interest  due
hereunder shall violate  applicable laws governing  usury, the applicable rate
of interest due hereunder shall  automatically be lowered to equal the maximum
permitted rate of interest.  The Obligor  covenants (to the extent that it may
lawfully do so) that it shall not at any time insist  upon,  plead,  or in any
manner  whatsoever  claim or take the  benefit  or  advantage  of,  any  stay,
extension  or usury law or other law  which  would  prohibit  or  forgive  the
Obligor  from  paying all or any  portion of the  principal  of or interest on
this Debenture as contemplated  herein,  wherever enacted,  now or at any time
hereafter in force,  or which may affect the covenants or the  performance  of
this  indenture,  and the Obligor (to the extent it may lawfully do so) hereby
expressly  waives all benefits or  advantage  of any such law,  and  covenants
that it will not,  by resort to any such law,  hinder,  delay or  impeded  the
execution  of any power  herein  granted to the  Holder,  but will  suffer and
permit the execution of every such as though no such law has been enacted.

      Section 13. Whenever any payment or other obligation  hereunder shall be
due on a day other  than a Business  Day,  such  payment  shall be made on the
next succeeding Business Day.

      Section 14. THE PARTIES HEREBY KNOWINGLY,  VOLUNTARILY AND INTENTIONALLY
WAIVE  THE  RIGHT  ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN  RESPECT  OF ANY
LITIGATION  BASED HEREON OR ARISING OUT OF, UNDER OR IN  CONNECTION  WITH THIS
AGREEMENT  OR ANY  TRANSACTION  DOCUMENT OR ANY COURSE OF  CONDUCT,  COURSE OF
DEALING,  STATEMENTS  (WHETHER  VERBAL OR  WRITTEN)  OR  ACTIONS OF ANY PARTY.
THIS PROVISION IS A MATERIAL  INDUCEMENT  FOR THE PARTIES'  ACCEPTANCE OF THIS
AGREEMENT.

        [SIGNATURE PAGE FOLLOWS; REMAINDER OF PAGE INTENTIONALLY BLANK]

                                       15
<PAGE>

      IN WITNESS  WHEREOF,  the Obligor has caused  this  Secured  Convertible
Debenture to be duly executed by a duly authorized  officer as of the date set
forth above.

                                     COMPLIANCE SYSTEMS CORPORATION

                                     By:_____________________________
                                     Name: Dean Garfinkel
                                     Title:      Chairman

                                       16
<PAGE>

                                  EXHIBIT A

                             NOTICE OF CONVERSION

       (To be executed by the Holder in order to convert the Debenture)

TO:

      The undersigned hereby irrevocably elects to convert $__________________
of  the principal  amount of the above  Debenture  into Shares of Common Stock
of  Compliance  Systems  Corporation,   according  to  the  conditions  stated
therein, as of the Conversion Date written below.

Conversion Date:
                               ------------------------------------------------
Applicable Conversion Price:
                               ------------------------------------------------
Signature:
                               ------------------------------------------------
Name:
                               ------------------------------------------------
Address:
                               ------------------------------------------------
Amount to be converted:      $
                               ------------------------------------------------
Amount of Debenture
unconverted:                 $
                               ------------------------------------------------
Conversion Price per share:  $
                               ------------------------------------------------
Number of shares of Common
Stock to be issued:
                               ------------------------------------------------
Please issue the shares of
Common Stock in the
following name and to the
following address:
                               ------------------------------------------------
Issue to:
                               ------------------------------------------------
Authorized Signature:
                               ------------------------------------------------
Name:
                               ------------------------------------------------
Title:
                               ------------------------------------------------
Phone Number:
                               ------------------------------------------------
Broker DTC Participant Code:
                               ------------------------------------------------
Account Number:

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