Document:

EXHIBIT 4.2

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY 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 AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH  EFFECT,  THE  SUBSTANCE  OF WHICH SHALL BE  REASONABLY  ACCEPTABLE  TO THE
COMPANY.  THIS  SECURITY AND THE  SECURITIES  ISSUABLE  UPON  CONVERSION OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION  WITH A BONA FIDE MARGIN  ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.

Original Issue Date: February 8, 2005
Original Conversion Price (subject to adjustment herein): $1.30

                                                                $_______________

                          SECURED CONVERTIBLE DEBENTURE
                              DUE FEBRUARY 8, 2007

      THIS  DEBENTURE is one of a series of duly  authorized  and issued Secured
Convertible  Debentures of RCG Companies  Incorporated,  a Delaware corporation,
having a  principal  place of  business  at  _____________________________  (the
"Company"),  designated as its Secured  Convertible  Debenture,  due February 8,
2007 (the "Debenture(s)").

      FOR    VALUE    RECEIVED,    the    Company    promises    to    pay    to
________________________ or its registered assigns (the "Holder"), or shall have
paid pursuant to the terms hereunder,  the principal sum of  $_______________ by
February  8, 2007,  or such  earlier  date as the  Debentures  are  required  or
permitted  to be  repaid as  provided  hereunder  (the  "Maturity  Date").  This
Debenture is subject to the following additional provisions:

      Section 1. Definitions.  For the purposes hereof, in addition to the terms
defined elsewhere in this Debenture: (a) capitalized terms not otherwise defined
herein have the meanings given to such terms in the Purchase Agreement,  and (b)
the following terms shall have the following meanings:

            "Alternate  Consideration"  shall  have  the  meaning  set  forth in
Section 5(d).

            "Base Conversion  Price" shall have the meaning set forth in Section
5(b).

                                       1
<PAGE>

            "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 in the State of New York and Charlotte,  North
      Carolina are authorized or required by law or other  government  action to
      close.

            "Buy-In" shall have the meaning set forth in Section 4(d)(v).

            "Change of Control  Transaction" means the occurrence after the date
      hereof of any 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  Company,  by  contract or
      otherwise)  of in excess of 50% of the voting  securities  of the Company,
      (b) the Company merges into or consolidates  with any other Person, or any
      Person  merges into or  consolidates  with the Company  and,  after giving
      effect to such  transaction,  the stockholders of the Company  immediately
      prior to such  transaction own less than 50% of the aggregate voting power
      of the Company or the  successor  entity of such  transaction,  or (c) the
      Company sells or transfers its assets,  as an entirety or substantially as
      an  entirety,  to  another  Person  and the  stockholders  of the  Company
      immediately  prior to such  transaction own less than 50% of the aggregate
      voting power of the acquiring entity immediately after the transaction, or
      (d) a  replacement  at one time or  within a one year  period of more than
      one-half of the members of the Company's  board of directors  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),  or (e) the execution by
      the Company of an agreement to which the Company is a party or by which it
      is bound,  providing  for any of the events set forth above in (a) through
      (d).

            "Closing  Price" means on any particular  date (a) the last reported
      closing  bid price per share of Common  Stock on such date on the  Trading
      Market (as reported by Bloomberg  L.P. at 4:15 PM (New York time),  or (b)
      if there is no such price on such date,  then the closing bid price on the
      Trading  Market on the date  nearest  preceding  such date (as reported by
      Bloomberg  L.P.  at 4:15 PM (New York time) for the  closing bid price for
      regular  session  trading on such day),  or (c) if the Common Stock is not
      then  listed or quoted on a Trading  Market  and if prices  for the Common
      Stock are then quoted on the OTC Bulletin Board,  the closing bid price of
      the Common Stock for such date (or the nearest  preceding date) on the OTC
      Bulletin  Board (as reported by Bloomberg L.P. at 4:15 PM (New York time),
      (d) if the Common Stock is not then listed or quoted on the Trading Market
      and if prices for the Common Stock are then  reported in the "pink sheets"
      published by the Pink Sheets LLC (formerly the National  Quotation  Bureau
      Incorporated  (or a  similar  organization  or  agency  succeeding  to its
      functions of reporting prices), the most recent bid price per share of the
      Common  Stock so  reported,  or (e) if the shares of Common  Stock are not
      then  publicly  traded the fair market value of a share of Common Stock as
      determined by a qualified  independent appraiser selected in good faith by
      the  Purchasers  of a majority  in  interest  of the  Principal  Amount of
      Debentures then outstanding.

                                       2
<PAGE>

            "Common Stock" means the common stock, par value $0.04 per share, of
      the  Company  and stock of any other  class  into  which  such  shares may
      hereafter have been reclassified or changed.

            "Conversion Date" shall have the meaning set forth in Section 4(a).

            "Conversion Price" shall have the meaning set forth in Section 4(b).

            "Conversion  Shares" means the shares of Common Stock  issuable upon
      conversion of Debentures.

            "Debenture  Register"  shall have the  meaning  set forth in Section
      2(c).

            "Dilutive  Issuance"  shall  have the  meaning  set forth in Section
      5(b).

            "Dilutive  Issuance  Notice"  shall  have the  meaning  set forth in
      Section 5(b).

            "Effectiveness  Period" shall have the meaning given to such term in
      the Registration Rights Agreement.

            "Equity  Conditions" shall mean, during the period in question,  (i)
      the  Company  shall  have  duly  honored  or  cured  all  conversions  and
      redemptions  scheduled  to occur or  occurring  by  virtue  of one or more
      Notice of  Conversions,  if any,  (ii) all  liquidated  damages  and other
      amounts  thus  owing in respect  of the  Debentures  shall have been paid;
      (iii) there is an effective  Registration  Statement pursuant to which the
      Holder is permitted to utilize the prospectus  thereunder to resell all of
      the  shares  issuable  pursuant  to  the  Transaction   Documents  or  the
      Conversion  Shares are  available  for resale  under Rule  144(k) (and the
      Company  believes,  in good faith, that such  effectiveness  will continue
      uninterrupted  for the  foreseeable  future),  (iv)  the  Common  Stock is
      trading on the Trading Market and all of the shares  issuable  pursuant to
      the Transaction  Documents are listed for trading on a Trading Market (and
      the Company believes, in good faith, that trading of the Common Stock on a
      Trading Market will continue  uninterrupted  for the foreseeable  future),
      (v) there is a sufficient  number of authorized but unissued and otherwise
      unreserved  shares of Common  Stock for the  issuance of all of the shares
      issuable  pursuant  to the  Transaction  Documents,  (vi)  there  is  then
      existing no Event of Default,  (vii) all of the shares  issued or issuable
      pursuant to the transaction proposed would not violate the limitations set
      forth in Sections  4(c)(i) and 4(c)(ii) and (viii) no public  announcement
      of a pending  or  proposed  Fundamental  Transaction,  Change  of  Control
      Transaction  or  acquisition  transaction  has occurred  that has not been
      consummated.

            "Event of Default" shall have the meaning set forth in Section 8.

                                       3
<PAGE>

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

            "Fundamental  Transaction"  shall  have  the  meaning  set  forth in
      Section 5(d).

            "Late Fees" shall have the meaning set forth in Section 2(d).

            "Mandatory Prepayment Amount" for any Debentures shall equal the sum
      of (i) the greater of: (A) 120% of the  Principal  Amount of Debentures to
      be  prepaid,  or (B) the  principal  amount of  Debentures  to be prepaid,
      divided by the Conversion  Price on (x) the date the Mandatory  Prepayment
      Amount is due or (y) the date the Mandatory  Prepayment  Amount is paid in
      full,  whichever is less,  multiplied by the Closing Price on (x) the date
      the  Mandatory  Prepayment  Amount is demanded or otherwise due or (y) the
      date  the  Mandatory  Prepayment  Amount  is paid in  full,  whichever  is
      greater,  and (ii) all  other  amounts,  costs,  expenses  and  liquidated
      damages due in respect of such Debentures.

            "New York Courts" shall have the meaning set forth in Section 9(d).

            "Notice of  Conversion"  shall have the meaning set forth in Section
      4(a).

            "Optional  Redemption"  shall have the  meaning set forth in Section
      6(a).

            "Optional  Redemption  Amount" shall mean the sum of (i) 130% of the
      principal  amount of the  Debenture  then  outstanding,  (ii)  accrued but
      unpaid interest and (iii) all liquidated  damages and other amounts due in
      respect of the Debenture.

            "Optional  Redemption  Notice"  shall have the  meaning set forth in
      Section 6(a).

            "Optional  Redemption  Notice Date" shall have the meaning set forth
      in Section 6(a).

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

            "Permitted Liens" shall mean the following: (a) liens which arise by
      operation of law for taxes, assessments or charges not yet due and payable
      or which are being contested in good faith and by appropriate proceedings;
      (b)  carriers',  warehousemen's,  mechanics',  materialmen's,  repairmen's
      liens;  (c) pledges or deposits in connection  with worker's  compensation
      and unemployment  insurance laws and other social security legislation and
      (d) purchase money security interests.

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

                                       4
<PAGE>

            "Purchase Agreement" means the Securities Purchase Agreement,  dated
      as of February 8, 2005,  to which the Company and the original  Holder are
      parties,  as  amended,  modified  or  supplemented  from  time  to time in
      accordance with its terms.

            "Registration   Rights  Agreement"  means  the  Registration  Rights
      Agreement,  dated as of the date of the Purchase  Agreement,  to which the
      Company and the  original  Holder are  parties,  as  amended,  modified or
      supplemented from time to time in accordance with its terms.

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

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

            "Shareholder  Approval" shall have the meaning given to such term in
      the Purchase Agreement.

            "Subsidiary"  shall  have  the  meaning  given  to such  term in the
      Purchase Agreement.

            "Trading  Day" means a day on which the Common  Stock is traded on a
      Trading Market.

            "Trading  Market" means the following  markets or exchanges on which
      the Common  Stock is listed or quoted for trading on the date in question:
      the Nasdaq  SmallCap  Market,  the American Stock  Exchange,  the New York
      Stock Exchange or the Nasdaq National Market.

            "Transaction  Documents"  shall  have the  meaning  set forth in the
      Purchase Agreement.

      Section 2. Interest.

            a) No Payment of Interest. The Company shall not pay interest to the
      Holder on this Debenture.  The Company  acknowledges  and agrees that this
      Debenture was issued for an Original Issue Discount in lieu of future cash
      interest payments.

            b) Prepayment.  Except as otherwise set forth in this Debenture, the
      Company  may not  prepay  any  portion  of the  principal  amount  of this
      Debenture without the prior written consent of the Holder.

      Section 3. Registration of Transfers and Exchanges.

                                       5
<PAGE>

            a) Different  Denominations.  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.

            b)  Investment  Representations.  This  Debenture  has  been  issued
      subject to certain  investment  representations of the original Holder set
      forth in the Purchase  Agreement and may be  transferred or exchanged only
      in compliance with the Purchase Agreement and applicable federal and state
      securities laws and regulations.

            c) Reliance on Debenture  Register.  Prior to due presentment to the
      Company for transfer of this  Debenture,  the Company and any agent of the
      Company  may  treat  the  Person  in whose  name  this  Debenture  is duly
      registered on the  Debenture  Register as the owner hereof for the purpose
      of  receiving  payment  as herein  provided  and for all  other  purposes,
      whether or not this Debenture is overdue,  and neither the Company nor any
      such agent shall be affected by notice to the contrary.

      Section 4. Conversion.

            a) Voluntary  Conversion.  At any time after the Original Issue Date
      until this Debenture is no longer  outstanding,  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  (subject  to the
      limitations  on conversion  set forth in Section 4(c) hereof).  The Holder
      shall effect  conversions  by delivering to the Company the form of Notice
      of  Conversion  attached  hereto as Annex A (a  "Notice  of  Conversion"),
      specifying  therein the principal amount of Debentures to be converted and
      the date on which such conversion is to be effected (a "Conversion Date").
      If no  Conversion  Date  is  specified  in a  Notice  of  Conversion,  the
      Conversion  Date  shall be the date that  such  Notice  of  Conversion  is
      provided hereunder. To effect conversions hereunder,  the Holder shall not
      be required to physically  surrender  Debentures to the Company unless the
      entire  principal  amount of this Debenture.  Conversions  hereunder shall
      have the  effect of  lowering  the  outstanding  principal  amount of this
      Debenture in an amount equal to the applicable conversion.  The Holder and
      the Company shall maintain  records showing the principal amount converted
      and the date of such conversions.  The Company shall deliver any objection
      to any  Notice of  Conversion  within 2  Business  Days of receipt of such
      notice.  In the event of any  dispute or  discrepancy,  the records of the
      Holder shall be controlling and  determinative  in the absence of manifest
      error.  THE HOLDER AND ANY  ASSIGNEE,  BY  ACCEPTANCE  OF THIS  DEBENTURE,
      ACKNOWLEDGE AND AGREE THAT, BY REASON OF THE PROVISIONS OF THIS PARAGRAPH,
      FOLLOWING  CONVERSION  OF A PORTION  OF THIS  DEBENTURE,  THE  UNPAID  AND
      UNCONVERTED PRINCIPAL AMOUNT OF THIS DEBENTURE MAY BE LESS THAN THE AMOUNT
      STATED ON THE FACE HEREOF.

      b) Conversion  Price.  The conversion  price shall equal $1.30 (subject to
adjustment herein)(the "Conversion Price").

      c) Conversion Limitations.

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<PAGE>

                  i. Trading Market Limitations. Notwithstanding anything herein
            to the  contrary,  if  the  Company  has  not  obtained  Shareholder
            Approval (as defined below) and if required by the applicable  rules
            and  regulations  of the  then  Trading  Market  (or  any  successor
            entity), then until such time as Shareholder Approval is obtained or
            is not otherwise  required,  this Debenture shall not be convertible
            into Conversion Shares.

                  ii. Holder's Restriction on Conversion.  The Company shall not
            effect any  conversion of this  Debenture,  and the Holder shall not
            have the right to convert any portion of this Debenture, pursuant to
            Section 4(a) or otherwise, to the extent that after giving effect to
            such conversion, the Holder (together with the Holder's affiliates),
            as  set  forth  on  the  applicable  Notice  of  Conversion,   would
            beneficially  own in excess of 4.99% of the  number of shares of the
            Common Stock  outstanding  immediately  after giving  effect to such
            conversion.  For purposes of the foregoing  sentence,  the number of
            shares of Common  Stock  beneficially  owned by the  Holder  and its
            affiliates  shall  include  the  number of  shares  of Common  Stock
            issuable upon conversion of this Debenture with respect to which the
            determination  of such sentence is being made, but shall exclude the
            number of shares of Common  Stock which  would be issuable  upon (A)
            conversion of the remaining,  nonconverted portion of this Debenture
            beneficially  owned by the Holder or any of its  affiliates  and (B)
            exercise or conversion of the unexercised or nonconverted portion of
            any other securities of the Company (including,  without limitation,
            any other  Debentures  or the  Warrants)  subject to a limitation on
            conversion or exercise analogous to the limitation  contained herein
            beneficially owned by the Holder or any of its affiliates. Except as
            set forth in the  preceding  sentence,  for purposes of this Section
            4(c)(ii),  beneficial  ownership  shall be  calculated in accordance
            with  Section  13(d) of the  Exchange  Act.  To the extent  that the
            limitation  contained in this section applies,  the determination of
            whether  this  Debenture  is  convertible   (in  relation  to  other
            securities  owned  by the  Holder)  and of which a  portion  of this
            Debenture is  convertible  shall be in the sole  discretion  of such
            Holder. To ensure compliance with this restriction,  the Holder will
            be deemed to represent to the Company each time it delivers a Notice
            of Conversion  that such Notice of  Conversion  has not violated the
            restrictions  set forth in this paragraph and the Company shall have
            no   obligation   to  verify  or  confirm   the   accuracy  of  such
            determination. For purposes of this Section 4(c)(ii), in determining
            the number of  outstanding  shares of Common  Stock,  the Holder may
            rely  on the  number  of  outstanding  shares  of  Common  Stock  as
            reflected in (x) the  Company's  most recent Form 10-Q or Form 10-K,
            as the case may be, (y) a more  recent  public  announcement  by the
            Company  or (z) any  other  written  notice  by the  Company  or the
            Company's  Transfer  Agent  setting  forth  the  number of shares of
            Common  Stock  outstanding.  Upon the written or oral request of the
            Holder, the Company shall within two Trading Days confirm orally and
            in writing  to the Holder the number of shares of Common  Stock then
            outstanding. In any case, the number of outstanding shares of Common
            Stock shall be determined  after giving effect to the  conversion or
            exercise of securities of the Company,  including this Debenture, by
            the Holder or its affiliates  since the date as of which such number
            of outstanding  shares of Common Stock was reported.  The provisions
            of this  Section  4(c) may be  waived  by the  Holder  upon,  at the
            election of the Holder,  not less than 61 days' prior  notice to the
            Company,  and the  provisions of this Section 4(c) shall continue to
            apply until such 61st day (or such later date,  as determined by the
            Holder, as may be specified in such notice of waiver).

                                       7
<PAGE>

      d) Mechanics of Conversion

                  i.  Conversion  Shares  Issuable Upon  Conversion of Principal
            Amount.  The  number  of  shares of  Common  Stock  issuable  upon a
            conversion hereunder shall be determined by the quotient obtained by
            dividing (x) the outstanding  principal  amount of this Debenture to
            be converted by (y) the Conversion Price. i.

                  ii. Delivery of Certificate  Upon  Conversion.  Not later than
            three  Trading  Days after any  Conversion  Date,  the Company  will
            deliver to the Holder a certificate or certificates representing the
            Conversion  Shares  which shall be free of  restrictive  legends and
            trading  restrictions  (other than those  required  by the  Purchase
            Agreement)  representing  the number of shares of Common Stock being
            acquired upon the  conversion of Debentures.  The Company shall,  if
            available and if allowed under  applicable  securities laws, use its
            reasonable  best efforts to deliver any  certificate or certificates
            required  to  be  delivered  by  the  Company   under  this  Section
            electronically  through the Depository Trust  Corporation or another
            established clearing corporation performing similar functions.

                  iii.  Failure to Deliver  Certificates.  If in the case of any
            Notice  of  Conversion  such  certificate  or  certificates  are not
            delivered  to or as directed by the  applicable  Holder by the third
            Trading Day after a Conversion Date, the Holder shall be entitled by
            written  notice to the  Company at any time on or before its receipt
            of such  certificate  or  certificates  thereafter,  to rescind such
            conversion,  in which event the Company shall immediately return the
            certificates   representing   the  principal  amount  of  Debentures
            tendered for conversion.

                                       8
<PAGE>

                  iv. Obligation  Absolute;  Partial Liquidated  Damages. If the
            Company  fails  for  any  reason  to  deliver  to  the  Holder  such
            certificate  or  certificates  pursuant  to Section  4(d)(ii) by the
            third Trading Day after the  Conversion  Date, the Company shall pay
            to such Holder, in cash, as liquidated damages and not as a penalty,
            for each $1000 of principal amount being converted,  $10 per Trading
            Day  (increasing  to $20 per Trading Day after 5 Trading  Days after
            such damages  begin to accrue) for each Trading Day after such third
            Trading Day until such  certificates  are  delivered.  The Company's
            obligations  to  issue  and  deliver  the  Conversion   Shares  upon
            conversion of this Debenture in accordance with the terms hereof are
            absolute and  unconditional,  irrespective of any action or inaction
            by the  Holder to  enforce  the same,  any  waiver or  consent  with
            respect  to any  provision  hereof,  the  recovery  of any  judgment
            against any Person or any action to enforce the same, or any setoff,
            counterclaim,  recoupment,  limitation or termination, or any breach
            or  alleged  breach  by  the  Holder  or  any  other  Person  of any
            obligation to the Company or any  violation or alleged  violation of
            law by the Holder or any other person, and irrespective of any other
            circumstance  which might  otherwise  limit such  obligation  of the
            Company  to the  Holder  in  connection  with the  issuance  of such
            Conversion  Shares;  provided,  however,  such  delivery  shall  not
            operate as a waiver by the  Company of any such  action the  Company
            may have against the Holder. In the event a Holder of this Debenture
            shall  elect  to  convert  any or all of the  outstanding  principal
            amount hereof,  the Company may not refuse  conversion  based on any
            claim that the Holder or any one  associated or affiliated  with the
            Holder of has been engaged in any violation of law, agreement or for
            any other reason,  unless,  an injunction  from a court,  on notice,
            restraining  and or  enjoining  conversion  of all or  part  of this
            Debenture  shall have been sought and obtained and the Company posts
            a surety bond for the benefit of the Holder in the amount of 150% of
            the principal amount of this Debenture outstanding, which is subject
            to the  injunction,  which  bond  shall  remain in effect  until the
            completion of arbitration/litigation of the dispute and the proceeds
            of which  shall be payable  to such  Holder to the extent it obtains
            judgment.  In the absence of an injunction  precluding the same, the
            Company shall issue Conversion Shares or, if applicable,  cash, upon
            a properly noticed conversion. Nothing herein shall limit a Holder's
            right to  pursue  actual  damages  or  declare  an Event of  Default
            pursuant  to Section 8 herein for the  Company's  failure to deliver
            Conversion Shares 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.  The  exercise  of any such
            rights  shall not  prohibit  the  Holders  from  seeking  to enforce
            damages  pursuant to any other  Section  hereof or under  applicable
            law.

                  v.  Compensation  for  Buy-In on  Failure  to  Timely  Deliver
            Certificates  Upon  Conversion.  In  addition  to any  other  rights
            available  to the  Holder,  if the  Company  fails for any reason to
            deliver to the Holder such  certificate or certificates  pursuant to
            Section 4(d)(ii) by the third Trading Day after the Conversion Date,
            and if after such third  Trading  Day the Holder is  required by its
            brokerage  firm  to  purchase  (in an  open  market  transaction  or
            otherwise) Common Stock to deliver in satisfaction of a sale by such
            Holder  of  the  Conversion  Shares  which  the  Holder  anticipated
            receiving upon such conversion (a "Buy-In"),  then the Company 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 the conversion at issue multiplied by (2)
            the actual  sale  price of the Common  Stock at the time of the sale
            (including  brokerage  commissions,  if  any)  giving  rise  to such
            purchase  obligation  was  exceeded  and  (B) at the  option  of the
            Holder,  either reissue  Debentures in 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  Company   timely   complied   with  its   delivery
            requirements  under  Section  4(d)(ii).  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 actual sale price of the Conversion Shares
            at the time of the sale (including  brokerage  commissions,  if any)
            giving rise to such purchase obligation was a total of $10,000 under
            clause (A) of the immediately preceding sentence,  the Company shall
            be required to pay the Holder  $1,000.  The Holder shall provide the
            Company written notice  indicating the amounts payable to the Holder
            in respect of the Buy-In together with applicable  confirmation  and
            other evidence reasonably requested by the Company.  Notwithstanding
            anything contained herein to the contrary,  if a Holder requires the
            Company to make  payment  in respect of a Buy-In for the  failure to
            timely deliver certificates hereunder and the Company timely pays in
            full such  payment,  the  Company  shall not be required to pay such
            Holder  liquidated  damages under Section 4(d)(iv) in respect of the
            certificates resulting in such Buy-In.

                                       9
<PAGE>

                  vi.  Reservation  of  Shares  Issuable  Upon  Conversion.  The
            Company  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  the
            Debentures,  as herein provided,  free from preemptive rights or any
            other actual  contingent  purchase  rights of persons other than the
            Holders,  not less than such number of shares of the Common Stock as
            shall (subject to any additional  requirements  of the Company as to
            reservation  of such shares set forth in the Purchase  Agreement) be
            issuable  (taking into account the adjustments  and  restrictions of
            Section 5) upon the conversion of the outstanding  principal  amount
            of the Debentures.  The Company  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
            Registration  Statement is then effective  under the Securities Act,
            registered  for public  sale in  accordance  with such  Registration
            Statement.

                  vii.  Fractional  Shares.  Upon  a  conversion  hereunder  the
            Company   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  Price at such time. If the
            Company 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.

                  viii.  Transfer Taxes. The issuance of certificates for shares
            of the Common Stock on  conversion of the  Debentures  shall be made
            without charge to the Holders 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 Company 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  Debentures  so  converted  and  the  Company  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 Company the amount of such tax or shall have  established to the
            satisfaction of the Company that such tax has been paid.

                                       10
<PAGE>

      Section 5. Certain Adjustments.

            a) Stock  Dividends  and Stock Splits.  If the Company,  at any time
      while the  Debentures are  outstanding:  (A) shall 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 (which,  for avoidance of doubt,  shall not include
      any  shares  of  Common  Stock  issued  by the  Company  pursuant  to this
      Debenture), (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  Company,  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.

            b)  Subsequent  Equity  Sales.  If the  Company  or  any  Subsidiary
      thereof,  as applicable,  at any time while  Debentures  are  outstanding,
      shall  sell,  grant any option to  purchase  or sell or grant any right to
      reprice its securities,  or otherwise dispose of or issue any Common Stock
      or Common  Stock  Equivalents  entitling  any Person to acquire  shares of
      Common  Stock,  at an  effective  price  per  share  less  than  the  then
      Conversion Price (such lower price,  the "Base Conversion  Price" and such
      issuances collectively,  a "Dilutive Issuance"), as adjusted hereunder (if
      the holder of the Common Stock or Common Stock Equivalents 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 an  effective  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 the Conversion Price shall be reduced to equal the
      Base Conversion  Price. Such adjustment shall be made whenever such Common
      Stock or Common Stock Equivalents are issued. The Company shall notify the
      Holder in  writing,  no later than the second  Trading Day  following  the
      issuance of any Common Stock or Common Stock  Equivalents  subject to this
      section,   indicating  therein  the  applicable   issuance  price,  or  of
      applicable reset price, exchange price, conversion price and other pricing
      terms  (such  notice the  "Dilutive  Issuance  Notice").  For  purposes of
      clarification,  whether or not the  Company  provides a Dilutive  Issuance
      Notice pursuant to this Section 5(b), after the occurrence of any Dilutive
      Issuance  and upon any  conversion,  the Holder is  entitled  to receive a
      number  of  Conversion   Shares  based  upon  the  Base  Conversion  Price
      regardless of whether the Holder  accurately refers to the Base Conversion
      Price in the Notice of Conversion.

                                       11
<PAGE>

            c) Pro  Rata  Distributions.  If the  Company,  at  any  time  while
      Debentures  are  outstanding,  shall  distribute  to all holders of Common
      Stock (and not to  Holders)  evidences  of its  indebtedness  or assets or
      rights or warrants to subscribe  for or purchase any security  (other than
      Common  Stock),  then in each  such  case the  Conversion  Price  shall be
      determined by  multiplying  such  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 Price determined as of the record date mentioned above, and
      of which the  numerator  shall be such  Closing  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  Holders  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.

            d) Fundamental Transaction.  If, at any time while this Debenture is
      outstanding,  (A) the Company effects any merger or  consolidation  of the
      Company  with or into  another  Person  in which  it is not the  surviving
      entity, or the Company's then existing shareholders will own less than 51%
      of the  surviving  entity,,  (B) the  Company  effects  any sale of all or
      substantially   all  of  its   assets  in  one  or  a  series  of  related
      transactions,  (C) any tender  offer or  exchange  offer  (whether  by the
      Company  or another  Person) is  completed  pursuant  to which  holders of
      Common Stock are  permitted  to tender or exchange  their shares for other
      securities,  cash or  property,  the  result  of  which  to the  Company's
      shareholders  at such time own less than 51% of the shares of Common Stock
      of the Company or (D) the  Company  effects  any  reclassification  of the
      Common Stock or any compulsory share exchange pursuant to which the Common
      Stock is  effectively  converted  into or exchanged for other  securities,
      cash or property (in any such case,  a  "Fundamental  Transaction"),  then
      upon any subsequent  conversion of this  Debenture,  the Holder shall have
      the right to  receive,  for each  Conversion  Share  that  would have been
      issuable upon such conversion  absent such  Fundamental  Transaction,  the
      same kind and amount of securities, cash or property as it would have been
      entitled to receive upon the occurrence of such Fundamental Transaction if
      it had been, immediately prior to such Fundamental Transaction, the holder
      of one share of Common Stock (the "Alternate Consideration"). For purposes
      of any such conversion, the determination of the Conversion Price shall be
      appropriately  adjusted to apply to such Alternate  Consideration based on
      the amount of Alternate  Consideration issuable in respect of one share of
      Common  Stock  in such  Fundamental  Transaction,  and the  Company  shall
      apportion  the  Conversion  Price among the Alternate  Consideration  in a
      reasonable   manner   reflecting  the  relative  value  of  any  different

                                       12
<PAGE>

      components of the Alternate Consideration.  If holders of Common Stock are
      given any choice as to the securities,  cash or property to be received in
      a Fundamental Transaction,  then the Holder shall be given the same choice
      as to the Alternate  Consideration it receives upon any conversion of this
      Debenture following such Fundamental Transaction.  To the extent necessary
      to effectuate  the foregoing  provisions,  any successor to the Company or
      surviving entity in such Fundamental Transaction shall issue to the Holder
      a new debenture  consistent  with the foregoing  provisions and evidencing
      the Holder's right to convert such debenture into Alternate Consideration.
      The terms of any agreement pursuant to which a Fundamental  Transaction is
      effected  shall  include terms  requiring any such  successor or surviving
      entity to comply with the  provisions of this  paragraph (d) and that this
      Debenture (or any such  replacement  security) will be similarly  adjusted
      upon any subsequent transaction analogous to a Fundamental Transaction.

            e) Calculations. All calculations under this Section 5 shall be made
      to the nearest cent or the nearest 1/100th of a share, as the case may be.
      For  purposes  of this  Section  5, the  number of shares of Common  Stock
      deemed to be issued and outstanding as of a given date shall be the sum of
      the number of shares of Common Stock (excluding  treasury shares,  if any)
      issued and outstanding.

            f) Exempt  Issuance.  Notwithstanding  the foregoing,  no adjustment
      will be made under this Section 5 in respect of an Exempt Issuance.

            g) Notice to Holders.

                  i.  Adjustment to Conversion  Price.  Whenever the  Conversion
            Price is  adjusted  pursuant  to any of this  Section 5, the Company
            shall  promptly  mail to each  Holder a  notice  setting  forth  the
            Conversion  Price after such  adjustment  and setting  forth a brief
            statement of the facts  requiring  such  adjustment.  If the Company
            issues a variable rate security,  despite the prohibition thereon in
            the Purchase  Agreement,  the Company shall be deemed to have issued
            Common  Stock or Common  Stock  Equivalents  at the lowest  possible
            conversion  or  exercise  price  at  which  such  securities  may be
            converted or exercised  in the case of a Variable  Rate  Transaction
            (as defined in the Purchase Agreement).

                  ii. Notice to Allow  Conversion by Holder.  If (A) the Company
            shall declare a dividend (or any other  distribution)  on the Common
            Stock;  (B) the Company  shall declare a special  nonrecurring  cash
            dividend on or a  redemption  of the Common  Stock;  (C) the Company
            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 Company shall be required in connection with any
            reclassification of the Common Stock, any consolidation or merger to
            which  the  Company  is a  party,  any  sale or  transfer  of all or
            substantially  all of the assets of the Company,  of any  compulsory

                                       13
<PAGE>

            share  exchange  whereby the Common  Stock is  converted  into other
            securities,  cash or property;  (E) the Company shall  authorize the
            voluntary or involuntary  dissolution,  liquidation or winding up of
            the affairs of the Company;  then,  in each case,  the Company shall
            cause  to be filed  at each  office  or  agency  maintained  for the
            purpose  of  conversion  of the  Debentures,  and shall  cause to be
            mailed to the Holders at their last  addresses  as they shall appear
            upon the stock books of the Company, at least 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. Holders are entitled to convert Debentures during the 20-day
            period  commencing  the date of such notice to the effective date of
            the event triggering such notice.

      Section 6. Redemption. [

            a)  Optional  Redemption  at  Election  of  Company.  Subject to the
      provisions  of this  Section 6, the  Company  may  deliver a notice to the
      Holders  (an  "Optional  Redemption  Notice"  and the date such  notice is
      deemed delivered hereunder,  the "Optional Redemption Notice Date") of its
      irrevocable  election  to  redeem  some  or all of  the  then  outstanding
      Debentures,  for an  amount,  in cash,  equal to the  Optional  Redemption
      Amount on the 20th Trading Day  following the Optional  Redemption  Notice
      Date (such date, the "Optional  Redemption Date" and such redemption,  the
      "Optional  Redemption").  The Optional Redemption Amount is due in full on
      the  Optional  Redemption  Date.  The  Company may only effect an Optional
      Redemption  if during the period  commencing  on the  Optional  Redemption
      Notice Date through to the Optional  Redemption  Date,  each of the Equity
      Conditions  shall  have been met.  If any of the Equity  Conditions  shall
      cease to be  satisfied at any time during the  required  period,  then the
      Holder may elect to nullify the  Optional  Redemption  Notice by notice to
      the  Company  within 3 Trading  Days after the first day on which any such
      Equity Condition has not been met (provided that if, by a provision of the
      Transaction Documents the Company is obligated to notify the Holder of the
      non-existence of an Equity Condition, such notice period shall be extended
      to the third  Trading Day after  proper  notice from the Company) in which
      case the Optional Redemption Notice shall be null and void, ab initio. The
      Company  covenants and agrees that it will honor all Notice of Conversions
      tendered  from the time of  delivery  of the  Optional  Redemption  Notice
      through the date all amounts owing thereon are due and paid in full.

                                       14
<PAGE>

            b)  Redemption  Procedure.  The  payment  of  cash  pursuant  to the
      Optional  Redemption shall be made on the Optional Redemption Date. If any
      portion of the cash payment for an Optional  Redemption  shall not be paid
      by the Company by the respective  due date,  interest shall accrue thereon
      at the rate of 18% per annum (or the maximum rate  permitted by applicable
      law,  whichever  is less)  until the  payment of the  Optional  Redemption
      Amount, plus all amounts owing thereon is paid in full. Alternatively,  if
      any portion of the Optional  Redemption  Amount  remains unpaid after such
      date, the Holders  subject to such redemption may elect, by written notice
      to the Company given at any time thereafter,  to invalidate ab initio such
      redemption,  notwithstanding  anything  herein  contained to the contrary,
      and,  with  respect  the  failure to honor the  Optional  Redemption,  the
      Company shall have no further right to exercise such Optional  Redemption.
      Notwithstanding  anything to the contrary in this Section 6, the Company's
      determination  to redeem  under  Section  6(a) shall be applied  among the
      Holders of Debentures  ratably  (based on the then  outstanding  principal
      amount  held  by such  Holder).  The  Holder  may  elect  to  convert  the
      outstanding  principal amount of the Debenture pursuant to Section 4 prior
      to actual payment in cash for any  redemption  under this Section 6 by fax
      delivery of a Notice of Conversion to the Company.

      Section 7. Negative Covenants. So long as any portion of this Debenture is
outstanding, the Company will not and will not permit any of its Subsidiaries to
directly or  indirectly:

            a) except for Permitted Liens, enter into, create,  incur, assume or
      suffer to exist  (other than as set forth on the  Disclosure  Schedules to
      the Purchase  Agreement) any indebtedness or liens 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  therefrom that is senior
      to, or pari passu with, in any respect,  the Company's  obligations  under
      the Debentures;

            b) amend its certificate of  incorporation,  bylaws or other charter
      documents so as to adversely affect any rights of the Holder;

            c) repay,  repurchase  or offer to repay,  repurchase  or  otherwise
      acquire  more than a de minimis  number of shares of its  Common  Stock or
      other  equity  securities  other than as to the  Conversion  Shares to the
      extent  permitted  or  required  under  the  Transaction  Documents  or as
      otherwise permitted by the Transaction  Documents or as required under any
      existing documents of the Company; or

            d) enter into any agreement with respect to any of the foregoing.

      Section 8. Events of Default.

                                       15
<PAGE>

            a) "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  amount in
            respect  of,  any  Debenture,  in each  case  free of any  claim  of
            subordination,  as and when the same shall  become  due and  payable
            (whether on a Maturity Date or by acceleration  or otherwise)  which
            default, is not cured, if possible to cure, within 3 Trading Days);

                  ii. the Company  shall  materially  fail to observe or perform
            any other material covenant or agreement contained in this Debenture
            (other  than a breach by the Company of its  obligations  to deliver
            shares of Common Stock to the Holder upon conversion which breach is
            addressed  in clause  (xii)  below)  which  material  failure is not
            cured,  if possible to cure,  within 10 Trading Days after notice of
            such default sent by the Holder or by any other Holder;

                  iii. a default or event of  default  (subject  to any grace or
            cure period  provided for in the applicable  agreement,  document or
            instrument)  shall occur under (A) any of the Transaction  Documents
            other  than the  Debentures,  or (B) any other  material  agreement,
            lease, document or instrument to which the Company or any Subsidiary
            is bound;

                  iv. any  material  representation  or material  warranty  made
            herein,  in any  other  Transaction  Documents  shall be  untrue  or
            incorrect in any material respect as of the date when made or deemed
            made;

                  v. (i) the Company or any of its Subsidiaries  shall commence,
            or  there  shall  be  commenced  against  the  Company  or any  such
            Subsidiary,  a case under any  applicable  bankruptcy  or insolvency
            laws as now or hereafter in effect or any successor thereto,  or the
            Company or any Subsidiary  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
            Company or any Subsidiary thereof or (ii) there is commenced against
            the  Company  or  any  Subsidiary   thereof  any  such   bankruptcy,
            insolvency  or other  proceeding  which  remains  undismissed  for a
            period of 60 days; or (iii) the Company or any Subsidiary thereof is
            adjudicated  by a  court  of  competent  jurisdiction  insolvent  or
            bankrupt;  or any order of relief or other order  approving any such
            case or proceeding is entered; or (iv) the Company or any Subsidiary
            thereof  suffers any appointment of any custodian or the like for it
            or any substantial part of its property which continues undischarged
            or  unstayed  for a period  of 60 days;  or (v) the  Company  or any
            Subsidiary  thereof  makes a general  assignment  for the benefit of
            creditors;  or (vi) the  Company  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 (vii) the Company or any Subsidiary
            thereof  shall  call a  meeting  of  its  creditors  with a view  to
            arranging a composition,  adjustment or  restructuring of its debts;
            or (viii) the Company or any Subsidiary  thereof shall by any act or
            failure to act  expressly  indicate  its consent to,  approval of or
            acquiescence in any of the foregoing; or (ix) any corporate or other
            action is taken by the  Company or any  Subsidiary  thereof  for the
            purpose of effecting any of the foregoing;

                                       16
<PAGE>

                  vi. the Company or any Subsidiary  shall default in any of its
            obligations under 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  Company in an
            amount exceeding  $250,000,  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;

                  vii. the Common  Stock shall not be eligible for  quotation on
            or quoted  for  trading  on a Trading  Market and shall not again be
            eligible  for and quoted or listed for trading  thereon  within five
            Trading Days;

                  viii.  the  Company  shall be a party to any Change of Control
            Transaction,  shall  agree to sell or dispose of all or in excess of
            33% of its assets in one or more  transactions  (whether or not such
            sale  would  constitute  a Change of Control  Transaction)  or shall
            redeem  or  repurchase   more  than  a  de  minimis  number  of  its
            outstanding shares of Common Stock or other equity securities of the
            Company (other than redemptions of Conversion Shares and repurchases
            of shares of Common  Stock or other equity  securities  of departing
            officers and  directors of the Company;  provided  such  repurchases
            shall not exceed  $100,000,  in the aggregate,  for all officers and
            directors during the term of this Debenture);

                  ix. a  Registration  Statement  shall not have  been  declared
            effective by the  Commission  on or prior to the 180th  calendar day
            after the Closing Date;

                  x. if,  during the  Effectiveness  Period  (as  defined in the
            Registration   Rights   Agreement),   the   effectiveness   of   the
            Registration Statement lapses for any reason or the Holder shall not
            be permitted  to resell  Registrable  Securities  (as defined in the
            Registration Rights Agreement) under the Registration  Statement, in
            either  case,  other than as a result of any action or inaction of a
            Holder,   for  more  than  60  calendar  days  (which  need  not  be
            consecutive  days) during any 12 month  period;  provided,  however,
            that  in the  event  that  the  Company  is  negotiating  a  merger,
            consolidation,  acquisition or sale of all or  substantially  all of
            its assets or a similar  transaction  and in the written  opinion of
            counsel  to  the  Company,  the  Registration  Statement,  would  be
            required  to be  amended  to  include  information  concerning  such
            transactions or the parties thereto that is not available or may not
            be publicly disclosed at the time, the Company shall be permitted an
            additional  15  consecutive  Trading Days during any 12 month period
            relating to such an event;

                                       17
<PAGE>

                  xi.  the  Company   shall  fail  for  any  reason  to  deliver
            certificates  to a Holder  prior to the 10th  Trading Day after such
            shares are  required to be  delivered  hereunder  pursuant to and in
            accordance  with Section 4(d) or the Company 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 any
            Debentures in accordance with the terms hereof; or

                  xii. any Person shall breach the  agreements  delivered to the
            initial  Holders  pursuant  to Section  2.2(a)(iv)  of the  Purchase
            Agreement and the Company does not obtain Shareholder Approval. i.

            b) Remedies Upon Event of Default.  If any Event of Default  occurs,
      the full principal  amount of this Debenture,  together with other amounts
      owing in respect thereof, to the date of acceleration shall become, at the
      Holder's  election,  immediately  due and payable in cash.  The  aggregate
      amount  payable upon an Event of Default  shall be equal to the  Mandatory
      Prepayment Amount.  Commencing 5 days after the occurrence of any Event of
      Default that results in the eventual  acceleration of this Debenture,  the
      interest rate on this Debenture shall accrue at the rate of 18% per annum,
      or such lower  maximum  amount of interest  permitted to be charged  under
      applicable  law. All Debentures  for which the full  Mandatory  Prepayment
      Amount  hereunder  shall  have  been  paid in  accordance  herewith  shall
      promptly be surrendered to or as directed by the Company.  The Holder need
      not provide and the Company 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  and the  Holder  shall  have all rights as a
      Debenture  holder until such time,  if any, as the full payment under this
      Section  shall have been  received by it. No such  rescission or annulment
      shall  affect  any  subsequent  Event  of  Default  or  impair  any  right
      consequent thereon. a)

      Section 9. Miscellaneous.

            a)  Notices.   Any  and  all  notices  or  other  communications  or
      deliveries  to be provided by the Holders  hereunder,  including,  without
      limitation,  any Notice of  Conversion,  shall be in writing and delivered
      personally,  by  facsimile,  sent  by a  nationally  recognized  overnight
      courier service, addressed to the Company, at the address set forth above,
      facsimile  number  (704) 366 5056,  ATTN:  WILLIAM  HODGE,  or such  other
      address or facsimile  number as the Company may specify for such  purposes
      by notice to the Holders  delivered in accordance  with this Section.  Any
      and all notices or other  communications  or  deliveries to be provided by
      the Company  hereunder  shall be in writing and delivered  personally,  by
      facsimile,  sent by a  nationally  recognized  overnight  courier  service
      addressed to each Holder at the facsimile  telephone  number or address of
      such Holder appearing on the books of the Company, or if no such facsimile
      telephone number or address appears, at the principal place of business of
      the Holder.  Any notice or other  communication  or  deliveries  hereunder
      shall be deemed  given and  effective  on the  earliest of (i) the date of
      transmission,  if such notice or  communication is delivered via facsimile
      at the facsimile  telephone number specified in this Section prior to 5:00
      p.m. (New York City time),  (ii) the date after the date of  transmission,
      if  such  notice  or  communication  is  delivered  via  facsimile  at the
      facsimile  telephone number specified in this Section later than 5:00 p.m.
      (New York City time) on any date and  earlier  than  11:59 p.m.  (New York
      City time) on such date,  (iii) the second Business Day following the date
      of mailing, if sent by nationally recognized overnight courier service, or
      (iv) upon  actual  receipt by the party to whom such notice is required to
      be given.

                                       18
<PAGE>

            b) Absolute  Obligation.  Except as expressly  provided  herein,  no
      provision of this  Debenture  shall alter or impair the  obligation of the
      Company, which is absolute and unconditional,  to pay the principal of and
      liquidated  damages (if any) on, this  Debenture at the time,  place,  and
      rate, and in the coin or currency, herein prescribed.  This Debenture is a
      direct debt  obligation of the Company.  This  Debenture  ranks pari passu
      with all other  Debentures  now or  hereafter  issued  under the terms set
      forth herein.

            c)  Lost  or  Mutilated  Debenture.   If  this  Debenture  shall  be
      mutilated,  lost,  stolen or  destroyed,  the  Company  shall  execute and
      deliver,  in exchange  and  substitution  for and upon  cancellation  of a
      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 Company.

            d)  Governing  Law.  All  questions   concerning  the  construction,
      validity,  enforcement  and  interpretation  of this  Debenture  shall  be
      governed by and  construed  and enforced in  accordance  with the internal
      laws of the  State  of New  York,  without  regard  to the  principles  of
      conflicts  of law thereof.  Each party  agrees that all legal  proceedings
      concerning   the   interpretations,   enforcement   and   defense  of  the
      transactions  contemplated  by any of the Transaction  Documents  (whether
      brought  against a party hereto or its respective  affiliates,  directors,
      officers,  shareholders,  employees  or agents)  shall be commenced in the
      state and  federal  courts  sitting  in the City of New York,  Borough  of
      Manhattan  (the "New York Courts").  Each party hereto hereby  irrevocably
      submits  to the  exclusive  jurisdiction  of the New York  Courts  for the
      adjudication  of any dispute  hereunder or in connection  herewith or with
      any transaction  contemplated  hereby or discussed herein  (including with
      respect  to the  enforcement  of any of the  Transaction  Documents),  and
      hereby irrevocably waives, and agrees not to assert in any suit, action or
      proceeding,   any  claim  that  it  is  not  personally   subject  to  the
      jurisdiction  of any such court,  or such New York Courts are  improper or
      inconvenient  venue for such  proceeding.  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  via
      registered  or certified  mail or  overnight  delivery  (with  evidence of
      delivery)  to such party at the  address in effect for notices to it under
      this  Debenture  and agrees that such service  shall  constitute  good and
      sufficient service of process and notice thereof. Nothing contained herein
      shall be  deemed  to limit in any way any  right to serve  process  in any
      manner permitted by law. Each party hereto hereby  irrevocably  waives, to
      the fullest extent permitted by applicable law, any and all right to trial
      by  jury  in any  legal  proceeding  arising  out of or  relating  to this
      Debenture or the transactions  contemplated  hereby. If either party shall
      commence  an  action or  proceeding  to  enforce  any  provisions  of this
      Debenture, then the prevailing party in such action or proceeding shall be
      reimbursed by the other party for its  attorneys  fees and other costs and
      expenses incurred with the  investigation,  preparation and prosecution of
      such action or proceeding.

                                       19
<PAGE>

            e) Waiver.  Any  waiver by the  Company or 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  Company or 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.

            f)  Severability.  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  violates  applicable laws governing  usury,
      the  applicable  rate of interest due  hereunder  shall  automatically  be
      lowered to equal the  maximum  permitted  rate of  interest.  The  Company
      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 Company 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 Company
      (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.

            g) Next  Business  Day.  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.

            h) Headings. The headings contained herein are for convenience only,
      do not  constitute  a part of this  Debenture  and  shall not be deemed to
      limit or affect any of the provisions hereof.

                                       20
<PAGE>

            i) Security Interest.  This Debenture is a direct debt obligation of
      the  Company  and,  pursuant  to the  Security  Agreement  is secured by a
      perfected  security  interest  in all of the assets of the Company for the
      benefit of the Holders.

                              *********************

                                       21
<PAGE>

      IN WITNESS  WHEREOF,  the  Company has caused  this  Debenture  to be duly
executed by a duly authorized officer as of the date first above indicated.

                                          RCG COMPANIES INCORPORATED

                                          By:___________________________________
                                               Name:
                                               Title:

                                       22
<PAGE>

                                     ANNEX A

                              NOTICE OF CONVERSION

      The  undersigned  hereby  elects to convert  principal  under the  Secured
Convertible Debenture of RCG Companies Incorporated, a Delaware corporation (the
"Company"),  due on February 8, 2007,  into  shares of common  stock,  par value
$0.04 per share (the "Common Stock"), of the Company according to the conditions
hereof,  as of the date written below. If shares are to be issued in the name of
a person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering  herewith such  certificates  and
opinions as reasonably requested by the Company in accordance therewith.  No fee
will be  charged  to the holder  for any  conversion,  except for such  transfer
taxes, if any.

      By the delivery of this Notice of Conversion  the  undersigned  represents
and  warrants to the Company  that its  ownership  of the Common  Stock does not
exceed the amounts  determined in accordance  with Section 13(d) of the Exchange
Act, specified under Section 4 of this Debenture.

      The undersigned agrees to comply with the prospectus delivery requirements
under the  applicable  securities  laws in  connection  with any transfer of the
aforesaid shares of Common Stock.

Conversion calculations:
                                 Date to Effect Conversion:

                                 Principal Amount of Debentures to be Converted:

                                 Number of shares of Common Stock to be issued:

                                 Signature:

                                 Name:

                                 Address:

                                       23
<PAGE>

                                   SCHEDULE 1

                               CONVERSION SCHEDULE

The Secured  Convertible  Debentures  due on February 8, 2007,  in the aggregate
principal amount of  $____________  issued by RCG Companies  Incorporated.  This
Conversion  Schedule  reflects  conversions  made  under  Section 4 of the above
referenced Debenture.

                                                     Dated:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------

                                                           Aggregate Principal
                                                             Amount Remaining
      Date of Conversion                                      Subsequent to
(or for first entry, Original                                   Conversion
         Issue Date)              Amount of Conversion         (or original              Company Attest
                                                            Principal Amount)
----------------------------------------------------------------------------------------------------------------
<S>                               <C>                      <C>                         <C>

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

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

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

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

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

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

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

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

================================================================================================================
</TABLE>

                                                       24EXHIBIT 4.3

                               SECURITY AGREEMENT

      SECURITY AGREEMENT, dated as of February 8, 2005 (this "Agreement"), among
RCG Companies  Incorporated,  a Delaware  corporation (the "Company") and all of
the  Subsidiaries  of the Company (such  subsidiaries,  the  "Guarantors")  (the
Company and  Guarantors are  collectively  referred to as the "Debtors") and the
holder or holders of the Company's Secured Convertible Debenture due February 8,
2007 in the original aggregate  principal amount of $7,000,000 (the "Debenture")
and  Warrants,  signatory  hereto,  their  endorsees,  transferees  and  assigns
(collectively referred to as, the "Secured Parties").

                              W I T N E S S E T H:

      WHEREAS,  pursuant to the  Debenture,  the Secured  Parties have severally
agreed to extend the loans to the Company evidenced by the Debenture;

      WHEREAS,  pursuant to a certain Subsidiary  Guarantee dated as of the date
hereof (the  "Guaranty"),  the Guarantors  have jointly and severally  agreed to
guaranty and act as surety for payment of such loans; and

      WHEREAS,  in order to induce  the  Secured  Parties  to  extend  the loans
evidenced  by the  Debentures,  each Debtor has agreed to execute and deliver to
the Secured Parties this Agreement and to grant the Secured Parties,  pari passu
with each other Secured Party, a perfected security interest in certain property
of such Debtor to secure the prompt  payment,  performance and discharge in full
of all of the Company's  obligations  under the Debenture and the other Debtor's
obligations under the Guaranty.

      NOW,  THEREFORE,  in consideration of the agreements herein contained fand
for other good and valuable consideration,  the receipt and sufficiency of which
is hereby acknowledged, the parties hereto hereby agree as follows:

      1. CERTAIN  DEFINITIONS.  As used in this  Agreement,  the following terms
shall  have  the  meanings  set  forth in this  Section  1.  Terms  used but not
otherwise  defined in this  Agreement  that are  defined in Article 9 of the UCC
(such as "account", "chattel paper", "commercial tort claim", "deposit account",
"document",    "equipment",    "fixtures",   "general   intangibles",   "goods",
"instruments",  "inventory",  "investment property",  "letter-of-credit rights",
"proceeds" and  "supporting  obligations")  shall have the  respective  meanings
given such terms in Article 9 of the UCC.

            (a)  "Collateral"  means the collateral in which the Secured Parties
      are granted a security  interest by this Agreement and which shall include
      the following personal property of the Debtors, whether presently owned or
      existing  or  hereafter  acquired  or  coming  into  existence,   wherever
      situated,  and all additions and accessions  thereto and all substitutions
      and replacements thereof, and all proceeds, products and accounts thereof,
      including,  without limitation,  all proceeds from the sale or transfer of
      the Collateral  and of insurance  covering the same and of any tort claims
      in  connection  therewith,  and  all  dividends,  interest,  cash,  notes,
      securities, equity interest or other property at any time and from time to
      time  acquired,  receivable or otherwise  distributed in respect of, or in
      exchange for, any or all of the Pledged Securities (as defined below):

<PAGE>

                  (i)  All  goods,  including,   without  limitations,  (A)  all
            machinery,  equipment,  computers,  motor vehicles,  trucks,  tanks,
            boats,  ships,  appliances,  furniture,  special and general  tools,
            fixtures,  test and quality  control  devices and other equipment of
            every kind and  nature  and  wherever  situated,  together  with all
            documents  of  title  and  documents   representing  the  same,  all
            additions and accessions thereto,  replacements  therefor, all parts
            therefor, and all substitutes for any of the foregoing and all other
            items used and useful in connection with any Debtor's businesses and
            all improvements thereto; and (B) all inventory;

                  (ii)  All  contract  rights  and  other  general  intangibles,
            including, without limitation, all partnership interests, membership
            interests,  stock  or  other  securities,  rights  under  any of the
            Organizational   Documents,   agreements   related  to  the  Pledged
            Securities,  licenses,  distribution and other agreements,  computer
            software (whether "off-the-shelf",  licensed from any third party or
            developed  by any Debtor),  computer  software  development  rights,
            leases,  franchises,  customer lists,  quality  control  procedures,
            grants  and  rights,  goodwill,  trademarks,  service  marks,  trade
            styles, trade names, patents, patent applications,  copyrights,  and
            income tax refunds;

                  (iii)  All  accounts,  together  with  all  instruments,   all
            documents of title representing any of the foregoing,  all rights in
            any merchandising, goods, equipment, motor vehicles and trucks which
            any of the same may represent,  and all right,  title,  security and
            guaranties  with  respect to each  account,  including  any right of
            stoppage in transit;

                  (iv) All documents, instruments and chattel paper;

                  (v) All commercial tort claims;

                  (vi) All deposit accounts (other than deposit accounts held by
            FS  SunTours  d/b/a  Suntrips,  Inc.) and all cash  (whether  or not
            deposited in such deposit accounts);

                  (vii) All investment property;

                  (viii) All supporting obligations; and

                  (ix) All files,  records,  books of account,  business papers,
            and computer programs; and

                  (x)  the  products  and  proceeds  of  all  of  the  foregoing
            Collateral set forth in clauses (i)-(ix) above.

                                       2
<PAGE>

                        Without  limiting the generality of the  foregoing,  the
                  "Collateral" shall include all investment property and general
                  intangibles respecting ownership and/or other equity interests
                  in each Guarantor,  including,  without limitation, the shares
                  of  capital  stock and the other  equity  interests  listed on
                  Schedule  H hereto (as the same may be  modified  from time to
                  time  pursuant to the terms  hereof),  and any other shares of
                  capital  stock  and/or  other  equity  interests  of any other
                  direct or indirect  subsidiary  of any Debtor  obtained in the
                  future   (except   for,   with   respect   to  RCG   Companies
                  Incorporated,  capital  stock of a subsidiary  to be formed in
                  connection with such acquisitions as set forth on Schedule 2),
                  and, in each case, all certificates  representing  such shares
                  and/or  equity  interests  and,  in  each  case,  all  rights,
                  options,  warrants,  stock,  other  securities  and/or  equity
                  interests  that  may  hereafter  be  received,  receivable  or
                  distributed  in  respect  of,  or  exchanged  for,  any of the
                  foregoing  (all of the foregoing  being  referred to herein as
                  the "Pledged  Securities")  and all rights arising under or in
                  connection  with the Pledged  Securities,  including,  but not
                  limited to, all dividends, interest and cash.

                        Notwithstanding  the foregoing,  nothing herein shall be
                  deemed to constitute an assignment of any asset which,  in the
                  event  of  an   assignment,   becomes  void  by  operation  of
                  applicable  law  or  the  assignment  of  which  is  otherwise
                  prohibited by applicable  law (in each case to the extent that
                  such applicable law is not overridden by Sections 9-406, 9-407
                  and/or  9-408 of the UCC or  other  similar  applicable  law);
                  provided,  however, that to the extent permitted by applicable
                  law, this Agreement shall create a valid security  interest in
                  such asset and, to the extent  permitted  by  applicable  law,
                  this Agreement  shall create a valid security  interest in the
                  proceeds of such asset.

            (b)  "Intellectual  Property" means the collective  reference to all
      rights,  priorities  and  privileges  relating to  intellectual  property,
      whether  arising  under United  States,  multinational  or foreign laws or
      otherwise, including, without limitation, (i) all copyrights arising under
      the  laws  of the  United  States,  any  other  country  or any  political
      subdivision  thereof,  whether  registered  or  unregistered  and  whether
      published or unpublished,  all registrations and recordings  thereof,  and
      all applications in connection therewith,  including,  without limitation,
      all  registrations,  recordings  and  applications  in the  United  States
      Copyright Office,  (ii) all letters patent of the United States, any other
      country or any political  subdivision thereof, all reissues and extensions
      thereof,  and all  applications for letters patent of the United States or
      any    other    country    and   all    divisions,    continuations    and
      continuations-in-part   thereof,   (iii)  all  trademarks,   trade  names,
      corporate names, company names, business names, fictitious business names,
      trade  dress,  service  marks,  logos,  domain  names and other  source or
      business identifiers,  and all goodwill associated therewith, now existing
      or  hereafter  adopted  or  acquired,  all  registrations  and  recordings
      thereof,  and all  applications  in connection  therewith,  whether in the
      United  States  Patent and  Trademark  Office or in any similar  office or
      agency of the United States, any State thereof or any other country or any
      political  subdivision  thereof,  or otherwise,  and all common law rights
      related  thereto,  (iv) all trade  secrets  arising  under the laws of the
      United States, any other country or any political subdivision thereof, (v)
      all  rights  to  obtain  any  reissues,  renewals  or  extensions  of  the
      foregoing,  (vi) all  licenses  for any of the  foregoing,  and  (vii) all
      causes of action for infringement of the foregoing.

                                       3
<PAGE>

            (c) "Majority in Interest" shall mean, at any time of determination,
      the majority in interest (based on  then-outstanding  principal amounts of
      Debentures at the time of such determination) of the Secured Parties.

            (d) "Necessary Endorsement" shall mean undated stock powers endorsed
      in blank or other proper  instruments of assignment duly executed and such
      other  instruments  or  documents  as the Agent  (as that term is  defined
      below) may reasonably request.

            (e) "Obligations"  means all of the Debtors'  obligations under this
      Agreement, the Debentures, the Guaranty and any other written instruments,
      agreements  or  other  written  documents  executed  and/or  delivered  in
      connection  herewith or therewith,  in each case, whether now or hereafter
      existing,  voluntary  or  involuntary,  direct or  indirect,  absolute  or
      contingent,  liquidated or unliquidated,  whether or not jointly owed with
      others, and whether or not from time to time decreased or extinguished and
      later  increased,  created  or  incurred,  and all or any  portion of such
      obligations or liabilities that are paid, to the extent all or any part of
      such payment is avoided or recovered  directly or  indirectly  from any of
      the Secured Parties as a preference,  fraudulent  transfer or otherwise as
      such  obligations  may be amended,  supplemented,  converted,  extended or
      modified  from  time to  time.  Without  limiting  the  generality  of the
      foregoing, the term "Obligations" shall include,  without limitation:  (i)
      principal  of,  and  interest  on the  Debentures  and the loans  extended
      pursuant  thereto;  (ii)  any  and all  other  fees,  indemnities,  costs,
      obligations  and  liabilities of the Debtors from time to time under or in
      connection with this Agreement, the Debentures, the Guaranty and any other
      instruments,  agreements or other documents  executed and/or  delivered in
      connection herewith or therewith; and (iii) all amounts (including but not
      limited to post-petition  interest) in respect of the foregoing that would
      be payable but for the fact that the  obligations  to pay such amounts are
      unenforceable  or not  allowable  due to the  existence  of a  bankruptcy,
      reorganization or similar proceeding involving any Debtor.

            (f) "Organizational Documents" means with respect to any Debtor, the
      documents by which such Debtor was  organized  (such as a  certificate  of
      incorporation,   certificate   of  limited   partnership  or  articles  of
      organization,  and including,  without  limitation,  any  certificates  of
      designation  for preferred  stock or other forms of preferred  equity) and
      which relate to the internal  governance of such Debtor (such as bylaws, a
      partnership  agreement  or an  operating,  limited  liability  or  members
      agreement).

            (g) "UCC" means the Uniform Commercial Code of the State of New York
      and  or any  other  applicable  law  of any  state  or  states  which  has
      jurisdiction  with  respect to all, or any portion of, the  Collateral  or
      this  Agreement,  from time to time.  It is the intent of the parties that
      defined  terms in the UCC should be construed in their  broadest  sense so
      that  the term  "Collateral"  will be  construed  in its  broadest  sense.
      Accordingly  if there are, from time to time,  changes to defined terms in
      the UCC that broaden the definitions,  they are incorporated herein and if
      existing  definitions in the UCC are broader than the amended definitions,
      the existing ones shall be controlling.

                                       4
<PAGE>

      2. GRANT OF PERFECTED FIRST PRIORITY SECURITY  INTEREST.  As an inducement
for the Secured  Parties to extend the loans as evidenced by the  Debentures and
to secure the complete and timely payment, performance and discharge in full, as
the case may be, of all of the Obligations,  each Debtor hereby  unconditionally
and  irrevocably  pledges,  grants and  hypothecates  to the  Secured  Parties a
continuing and perfected security interest in and to, a lien upon and a right of
set-off against all of their respective right,  title and interest of whatsoever
kind  and  nature  in  and  to,  the  Collateral   (the  "Security   Interest").
Notwithstanding  anything herein to the contrary, this Agreement shall be second
in priority  and  subordinate  to the security  interest  and rights  previously
granted to CSDH, LLC and the other entities or person set forth on Schedule 2.

      3.  DELIVERY  OF  CERTAIN  COLLATERAL.  Contemporaneously  or prior to the
execution of this Agreement,  each Debtor shall deliver or cause to be delivered
to the Agent (a) any and all certificates and other instruments  representing or
evidencing the Pledged  Securities,  and (b) any and all  certificates and other
instruments or documents representing any of the other Collateral, in each case,
together with all  Necessary  Endorsements.  The Debtors are,  contemporaneously
with the execution hereof,  delivering to Agent, or have previously delivered to
Agent, a true and correct copy of each Organizational  Document governing any of
the Pledged Securities.

      4. REPRESENTATIONS,  WARRANTIES,  COVENANTS AND AGREEMENTS OF THE DEBTORS.
Each Debtor  represents  and warrants  to, and  covenants  and agrees with,  the
Secured Parties as follows:

            (a) Each Debtor has the requisite  corporate,  partnership,  limited
      liability  company  or  other  power  and  authority  to enter  into  this
      Agreement  and  otherwise  to carry  out its  obligations  hereunder.  The
      execution,  delivery and  performance by each Debtor of this Agreement and
      the  filings  contemplated  therein  have  been  duly  authorized  by  all
      necessary  action  on the part of such  Debtor  and no  further  action is
      required by such Debtor.  This  Agreement  has been duly  executed by each
      Debtor. This Agreement constitutes the legal, valid and binding obligation
      of each Debtor,  enforceable  against each Debtor in  accordance  with its
      terms  except  as  such   enforceability  may  be  limited  by  applicable
      bankruptcy,  insolvency,   reorganization  and  similar  laws  of  general
      application  relating to or affecting the rights and remedies of creditors
      and by general principles of equity.

            (b) The Debtors  have no place of  business  or offices  where their
      respective  books of account and records are kept (other than  temporarily
      at the offices of its attorneys or accountants) or places where Collateral
      is stored or located,  except as set forth on Schedule A attached  hereto.
      No Debtor holds any real property. There exist no mortgages or other liens
      on any such real property  except for  Permitted  Liens (as defined in the
      Debentures). Except as disclosed on Schedule A, none of such Collateral is
      in the  possession  of  any  consignee,  bailee,  warehouseman,  agent  or
      processor.

                                       5
<PAGE>

            (c) Except for Permitted  Liens (as defined in the  Debentures)  and
      except as set forth on  Schedule B attached  hereto,  the  Debtors are the
      sole owner of the Collateral (except for non-exclusive licenses granted by
      any  Debtor in the  ordinary  course of  business),  free and clear of any
      liens, security interests,  encumbrances,  rights or claims, and are fully
      authorized to grant the Security Interest. Except as set forth on Schedule
      B attached hereto,  there is not on file in any governmental or regulatory
      authority,  agency or recording office an effective  financing  statement,
      security  agreement,  license  or  transfer  or any  notice  of any of the
      foregoing  (other  than those  that will be filed in favor of the  Secured
      Parties  pursuant  to this  Agreement)  covering or  affecting  any of the
      Collateral.  So long as this  Agreement  shall be in effect,  the  Debtors
      shall not execute and shall not knowingly permit to be on file in any such
      office  or  agency  any such  financing  statement  or other  document  or
      instrument  (except  (x) to the extent  filed or  recorded in favor of the
      Secured  Parties  pursuant to the terms of this  Agreement  and (y) to the
      extent set forth on Schedule B).

            (d) No  written  claim  has been  received  that any  Collateral  or
      Debtor's  use of any  Collateral  violates  the rights of any third party.
      There has been no adverse  decision  to any  Debtor's  claim of  ownership
      rights in or exclusive rights to use the Collateral in any jurisdiction or
      to any Debtor's  right to keep and maintain such  Collateral in full force
      and effect,  and there is no proceeding  involving said rights pending or,
      to the best knowledge of any Debtor, threatened before any court, judicial
      body,   administrative   or   regulatory   agency,   arbitrator  or  other
      governmental authority.

            (e) Each Debtor shall at all times maintain its books of account and
      records  relating to the Collateral at its principal place of business and
      its  Collateral at the  locations set forth on Schedule A attached  hereto
      and may not  relocate  such  books of  account  and  records  or  tangible
      Collateral  unless it  delivers  to the  Secured  Parties at least 30 days
      prior to such relocation (i) written notice of such relocation and the new
      location  thereof  (which  must be  within  the  United  States)  and (ii)
      evidence that  appropriate  financing  statements  under the UCC and other
      necessary documents have been filed and recorded and other steps have been
      taken to perfect the  Security  Interest to create in favor of the Secured
      Parties a valid,  perfected and continuing  perfected and, except as forth
      on Schedule A attached hereto, first priority lien in the Collateral.

            (f) This Agreement  creates in favor of the Secured Parties a valid,
      security  interest in the Collateral,  subject only to Permitted Liens (as
      defined in the  Debentures)  securing the payment and  performance  of the
      Obligations.   Upon  making  the  filings  described  in  the  immediately
      following  paragraph,  all  security  interests  created  hereunder in any
      Collateral  which may be  perfected  by  filing  Uniform  Commercial  Code
      financing statements shall have been duly perfected. Except for the filing
      of the Uniform  Commercial  Code financing  statements  referred to in the
      immediately  following  paragraph,  the  recordation  of the  Intellectual
      Property Security  Agreement (as defined below) with respect to copyrights
      and copyright  applications in the United States Copyright Office referred
      to in  paragraph  (m) and  the  delivery  of the  certificates  and  other
      instruments  provided  in  Section  3, no action is  necessary  to create,
      perfect or protect  the  security  interests  created  hereunder.  Without
      limiting the  generality of the  foregoing,  except for the filing of said
      financing  statements and the  recordation of said  Intellectual  Property
      Security Agreement,  no consent of any third parties and no authorization,
      approval  or other  action  by,  and no  notice  to or  filing  with,  any
      governmental  authority  or  regulatory  body  is  required  for  (i)  the
      execution,  delivery and performance of this Agreement,  (ii) the creation
      or  perfection  of  the  Security   Interests  created  hereunder  in  the
      Collateral or (iii) the  enforcement of the rights of the Secured  Parties
      hereunder.

                                       6
<PAGE>

            (g) Each Debtor hereby  authorizes  the Secured  Parties,  or any of
      them, to file one or more financing statements under the UCC, with respect
      to the Security Interest with the proper filing and recording  agencies in
      any jurisdiction deemed proper by them.

            (h) The execution, delivery and performance of this Agreement by the
      Debtors does not (i) violate any of the  provisions of any  Organizational
      Documents  of any Debtor or any  judgment,  decree,  order or award of any
      court,  governmental  body or  arbitrator or any  applicable  law, rule or
      regulation applicable to any Debtor except where the violation of any law,
      rule or regulation  would not have a material  adverse effect on any Debts
      or the Secured Parties. or (ii) conflict with, or constitute a default (or
      an event that with notice or lapse of time or both would become a default)
      under,   or  give  to  others  any  rights  of   termination,   amendment,
      acceleration  or cancellation  (with or without  notice,  lapse of time or
      both)  of,  any  agreement,  credit  facility,  debt or  other  instrument
      (evidencing  any Debtor's  debt or otherwise)  or other  understanding  to
      which  any  Debtor  is a party or by which  any  property  or asset of any
      Debtor is bound or affected.  No consent  (including,  without limitation,
      from  stockholders  or creditors of any Debtor) is required for any Debtor
      to enter into and perform its obligations hereunder.

            (i) The capital stock and other equity  interests listed on Schedule
      H hereto  represent all of the capital stock and other equity interests of
      the Guarantors, and represent all capital stock and other equity interests
      owned,  directly  or  indirectly,  by the  Company.  All  of  the  Pledged
      Securities  are  validly  issued,  fully paid and  nonassessable,  and the
      Company is the legal and beneficial owner of the Pledged Securities,  free
      and clear of any lien,  security interest or other encumbrance  except for
      the security interests created by this Agreement and other Permitted Liens
      (as defined in the Debenture).

            (j) The ownership  and other equity  interests in  partnerships  and
      limited  liability  companies  (if any)  included in the  Collateral  (the
      "Pledged  Interests")  by their express terms do not provide that they are
      securities  governed  by  Article  8 of the  UCC  and  are  not  held in a
      securities account or by any financial intermediary.

            (k) Each Debtor  shall at all times  maintain the liens and Security
      Interest  provided for  hereunder as valid and  perfected  first  priority
      liens and  security  interests in the  Collateral  in favor of the Secured
      Parties until this Agreement and the Security Interest  hereunder shall be
      terminated  pursuant to Section 11 hereof.  Each Debtor  hereby  agrees to
      defend the same  against the claims of any and all  persons and  entities.
      Each Debtor shall use its reasonable best efforts to safeguard and protect
      all Collateral for the account of the Secured  Parties.  At the request of
      the  Secured  Parties,  each  Debtor  will sign and deliver to the Secured
      Parties at any time or from time to time one or more financing  statements
      pursuant to the UCC in form reasonably satisfactory to the Secured Parties
      and will pay the cost of filing  the same in all public  offices  wherever
      filing  is,  or is deemed  by the  Secured  Parties  to be,  necessary  or
      desirable  to effect the  rights  and  obligations  provided  for  herein.
      Without  limiting the generality of the  foregoing,  each Debtor shall pay
      all fees, taxes and other amounts necessary to maintain the Collateral and
      the Security Interest hereunder,  and each Debtor shall obtain and furnish
      to the Secured  Parties  from time to time,  upon  demand,  such  releases
      and/or  subordinations  of claims  and  liens  which  may be  required  to
      maintain the priority of the Security Interest hereunder.

                                       7
<PAGE>

            (l) No Debtor will transfer, pledge, hypothecate, encumber, license,
      sell or otherwise  dispose of any of the Collateral  (except for a sale or
      transfer in its  ordinary  course of business  and sales of inventory by a
      Debtor in its  ordinary  course of  business)  without  the prior  written
      consent of a Majority in Interest.

            (m) Each Debtor  shall use its  reasonable  best efforts to keep and
      preserve its equipment,  inventory and other  tangible  Collateral in good
      condition,  repair and order (with the  exception of  reasonable  wear and
      tear) and shall not operate or locate any such  Collateral (or cause to be
      operated or located) in any area excluded from insurance coverage.

            (n) Each Debtor shall maintain with financially  sound and reputable
      insurers,  insurance with respect to the Collateral against loss or damage
      of the kinds and in the amounts customarily insured against by entities of
      established reputation having similar properties similarly situated and in
      such amounts as are  customarily  carried under similar  circumstances  by
      other such  entities and  otherwise as is prudent for entities  engaged in
      similar  businesses  but  in  any  event  sufficient  to  cover  the  full
      replacement  cost thereof.  Each Debtor shall cause each insurance  policy
      issued in  connection  herewith to provide,  and the insurer  issuing such
      policy to  certify to the Agent that (a) the Agent will be named as lender
      loss payee and additional insured under each such insurance policy; (b) if
      such  insurance be proposed to be cancelled or materially  changed for any
      reason  whatsoever,  such insurer will promptly  notify the Agent and such
      cancellation or change shall not be effective as to the Agent for at least
      thirty  (30) days after  receipt by the Agent of such  notice,  unless the
      effect of such change is to extend or increase  coverage under the policy;
      and (c) the Agent will have the right (but no  obligation) at its election
      to remedy any default in the payment of premiums  within  thirty (30) days
      of notice from the insurer of such default.

            (o) Each Debtor  shall,  within ten (10)  business days of obtaining
      actual  knowledge  thereof,   advise  the  Secured  Parties  promptly,  in
      sufficient detail, of any substantial change in the Collateral, and of the
      occurrence of any event which would have a material  adverse effect on the
      value of the  Collateral  or on the  Secured  Parties'  security  interest
      therein.

                                       8
<PAGE>

            (p) Each Debtor shall promptly execute and deliver to the Agent such
      further deeds,  mortgages,  assignments,  security  agreements,  financing
      statements or other  instruments,  documents,  certificates and assurances
      and take such  further  action as the Agent may from time to time  request
      and may in its sole  discretion  deem  necessary  to  perfect,  protect or
      enforce  its  security  interest  in  the  Collateral  including,  without
      limitation,  if  applicable,  the  execution  and  delivery  of a separate
      security  agreement  with respect to each Debtor's  Intellectual  Property
      ("Intellectual  Property Security Agreement") in which the Secured Parties
      have been granted a security interest  hereunder,  substantially in a form
      acceptable to the Agent, which Intellectual  Property Security  Agreement,
      other  than as stated  therein,  shall be  subject to all of the terms and
      conditions hereof.

            (q)  Each  Debtor  shall  permit  the  Secured   Parties  and  their
      representatives  and agents to inspect  the  Collateral  from time to time
      during normal  business,  and to make copies of records  pertaining to the
      Collateral as may be requested by a Secured Party from time to time.

            (r)  Each  Debtor  shall  take all  steps  reasonably  necessary  to
      diligently  pursue and seek to  preserve,  enforce and collect any rights,
      claims,  causes  of action  and  accounts  receivable  in  respect  of the
      Collateral.

            (s) Each  Debtor  shall  promptly  notify  the  Secured  Parties  in
      sufficient  detail  upon  becoming  aware  of  any  material   attachment,
      garnishment,   execution  or  other  legal  process   levied  against  any
      Collateral.

            (t) All information heretofore,  herein or hereafter supplied to the
      Secured  Parties  by or on  behalf  of  any  Debtor  with  respect  to the
      Collateral  is accurate and  complete in all  material  respects as of the
      date furnished.

            (u) The Debtors  shall use its  reasonable  best efforts to preserve
      and keep in full force and effect their  respective  valid  existence  and
      good standing and any rights and franchises material to its business.

            (v)  No  Debtor  will  change  its  name,   type  of   organization,
      jurisdiction of organization,  organizational identification number (if it
      has  one),  legal or  corporate  structure,  or  identity,  or add any new
      fictitious  name unless it provides at least 30 days prior written  notice
      to the Secured  Parties of such  change  and, at the time of such  written
      notification,  such Debtor  provides any  financing  statements or fixture
      filings necessary to perfect and continue perfected the perfected security
      Interest granted and evidenced by this Agreement.

            (w) No Debtor may  consign any of its  Inventory  or sell any of its
      Inventory on bill and hold,  sale or return,  sale on  approval,  or other
      conditional  terms of sale  without  the consent of a Majority in Interest
      which  shall  not be  unreasonably  withheld,  except to the  extent  such
      consignment  or sale does not exceed 15% of the total  value of all of the
      Company's finished goods in Inventory.

                                       9
<PAGE>

            (x) No  Debtor  may  relocate  its chief  executive  office to a new
      location without providing 30 days prior written  notification  thereof to
      the  Secured  Parties  and  so  long  as,  at the  time  of  such  written
      notification,  such Debtor  provides any  financing  statements or fixture
      filings necessary to perfect and continue perfected the perfected security
      Interest granted and evidenced by this Agreement.

            (y) Each Debtor was organized and remains organized solely under the
      laws of the  state  set  forth  next to such  Debtor's  name in the  first
      paragraph of this  Agreement.  Schedule D attached  hereto sets forth each
      Debtor's  organizational  identification number or, if any Debtor does not
      have one, states that one does not exist.

            (z) (i) The actual  name of each Debtor is the name set forth in the
      preamble above;  (ii) no Debtor has any trade names except as set forth on
      Schedule E attached  hereto;  (iii) no Debtor has used any name other than
      that stated in the  preamble  hereto or as set forth on Schedule E for the
      preceding  five  years;  and (iv) no entity has merged  into any Debtor or
      been acquired by any Debtor within the past five years except as set forth
      on Schedule E.

            (aa) At any time and from time to time that any Collateral  consists
      of  instruments,  certificated  securities  or other items that require or
      permit  possession by the secured  party to perfect the security  interest
      created hereby, the applicable Debtor shall deliver such Collateral to the
      Agent.

            (bb) Each Debtor, in its capacity as issuer, hereby agrees to comply
      with any and all reasonable orders and instructions of Agent in accordance
      with the terms hereto regarding the Pledged Interests  consistent with the
      terms of this  Agreement  without  the  further  consent  of any Debtor as
      contemplated  by  Section  8-106 (or any  successor  section)  of the UCC.
      Further,  each  Debtor  agrees  that it shall  not  enter  into a  similar
      agreement  (or one that  would  confer  "control"  within  the  meaning of
      Article 8 of the UCC) with any other person or entity.

            (cc) Each Debtor shall cause all tangible chattel paper constituting
      Collateral  to be  delivered  to the Agent,  or, if such  delivery  is not
      possible,  then to cause such  tangible  chattel paper to contain a legend
      noting  that  it is  subject  to the  security  interest  created  by this
      Agreement.  To the  extent  that any  Collateral  consists  of  electronic
      chattel paper,  the applicable  Debtor shall cause the underlying  chattel
      paper to be "marked"  within the  meaning of Section  9-105 of the UCC (or
      successor section thereto).

            (dd) If there is any investment property or deposit account included
      as  Collateral  that can be  perfected  by  "control"  through  an account
      control  agreement,  the  applicable  Debtor  shall  cause such an account
      control agreement,  in form and substance in each case satisfactory to the
      Secured Parties, to be entered into and delivered to the Secured Parties.

            (ee) Intentionally Omitted.

                                       10
<PAGE>

            (ff) To the extent that any  Collateral is in the  possession of any
      third party, the applicable  Debtor shall join with the Secured Parties in
      notifying such third party of the Secured  Parties'  security  interest in
      such  Collateral  and shall use its  reasonble  best  efforts to obtain an
      acknowledgement  and  agreement  from such third party with respect to the
      Collateral, in form and substance satisfactory to the Secured Parties.

            (gg) If any Debtor  shall at any time hold or  acquire a  commercial
      tort claim,  such Debtor shall  promptly  notify the Secured  Parties in a
      writing signed by such Debtor of the particulars  thereof and grant to the
      Secured  Parties in such  writing a security  interest  therein and in the
      proceeds thereof, all upon the terms of this Agreement,  with such writing
      to be in form and substance satisfactory to the Secured Parties.

            (hh) Each Debtor shall promptly  provide written notice to the Agent
      of any and all accounts which arise out of contracts with any governmental
      authority  and,  to the  extent  necessary  to  perfect  or  continue  the
      perfected  status of the Security  Interest in such  accounts and proceeds
      thereof,  shall  execute and deliver to the Agent an  assignment of claims
      for such accounts and  cooperate  with the Agent in taking any other steps
      required,  in its judgment,  under the Federal Assignment of Claims Act or
      any similar federal, state or local statute or rule to perfect or continue
      the  perfected  status  of the  Security  Interest  in such  accounts  and
      proceeds thereof.

            (ii) Each  Debtor  shall  cause each  subsidiary  of such  Debtor to
      immediately become a party hereto (an "Additional  Debtor"),  by executing
      and delivering an Additional  Debtor Joinder in substantially  the form of
      Annex A attached hereto and comply with the provisions  hereof  applicable
      to the Debtors.  Promptly thereafter,  the Additional Debtor shall deliver
      replacement  schedules for, or  supplements to all other  Schedules to (or
      referred to in) this Agreement, as applicable, which replacement schedules
      shall  supersede,  or  supplements  shall modify,  the  Schedules  then in
      effect. The Additional Debtor shall also deliver such opinions of counsel,
      authorizing   resolutions,   good   standing   certificates,    incumbency
      certificates,  organizational  documents,  financing  statements and other
      information  and  documentation  as the  Secured  Parties  may  reasonably
      request.  Upon  delivery  of the  foregoing  to the Secured  Parties,  the
      Additional  Debtor shall be and become a party to this  Agreement with the
      same rights and  obligations  as the Debtors,  for all purposes  hereof as
      fully and to the same  extent as if it were an original  signatory  hereto
      and  shall be  deemed to have  made the  representations,  warranties  and
      covenants  set forth  herein as of the date of  execution  and delivery of
      such Additional Debtor Joinder, and all references herein to the "Debtors"
      shall be deemed to include each Additional Debtor.

            (jj) Each Debtor  shall vote the Pledged  Securities  to comply with
      the covenants and agreements set forth herein and in the Debentures.

            (kk) Each Debtor shall register the pledge of the applicable Pledged
      Securities  on the books of such  Debtor.  Each Debtor  shall  notify each
      issuer of Pledged  Securities  to  register  the pledge of the  applicable
      Pledged Securities in the name of the Secured Parties on the books of such
      issuer.  Further, except with respect to certificated securities delivered
      to  the  Agent,   the   applicable   Debtor  shall  deliver  to  Agent  an
      acknowledgement of pledge (which, where appropriate, shall comply with the
      requirements   of  the  relevant  UCC  with  respect  to   perfection   by
      registration)  signed by the issuer of the applicable Pledged  Securities,
      which acknowledgement shall confirm that: (a) it has registered the pledge
      on its books and records; and (b) at any time directed by Agent during the
      continuation of an Event of Default,  such issuer will transfer the record
      ownership  of such  Pledged  Securities  into the name of any  designee of
      Agent,  will take such steps as may be necessary  to effect the  transfer,
      and will  comply  with all  other  instructions  of Agent  regarding  such
      Pledged Securities without the further consent of the applicable Debtor.

                                       11
<PAGE>

            (ll) In the event that,  upon an  occurrence of an Event of Default,
      Agent shall sell all or any of the Pledged  Securities to another party or
      parties (herein called the  "Transferee")  or shall purchase or retain all
      or any  of the  Pledged  Securities,  each  Debtor  shall,  to the  extent
      applicable,  deliver to Agent or the  Transferee,  as the case may be, the
      articles of incorporation,  bylaws, minute books, stock certificate books,
      corporate  seals,  deeds,  leases,  indentures,  agreements,  evidences of
      indebtedness,   books  of  account,   financial   records  and  all  other
      Organizational  Documents  and records of the Debtors and their direct and
      indirect  subsidiaries that are required by any governmental or regulatory
      body in  order  to  permit  the  sale  of the  Pledged  Securities  to the
      Transferee or the purchase or retention of the Pledged Securities by Agent
      and allow the  Transferee or Agent to continue the business of the Debtors
      and their direct and indirect subsidiaries.

            (mm) Without limiting the generality of the other obligations of the
      Debtors  hereunder,  each Debtor shall promptly (i) cause to be registered
      at the United States Copyright Office all of its material copyrights, (ii)
      cause the  security  interest  contemplated  hereby  with  respect  to all
      Intellectual  Property registered at the United States Copyright Office or
      United  States  Patent and  Trademark  Office to be duly  recorded  at the
      applicable  office,  and (iii) give the Agent notice  whenever it acquires
      (whether  absolutely  or by license) or creates  any  additional  material
      Intellectual Property.

            (nn) Intentionally Omitted.

            (oo)  Schedule F attached  hereto lists all of the  patents,  patent
      applications,  trademarks, trademark applications,  registered copyrights,
      and  domain  names  owned by any of the  Debtors  as of the  date  hereof.
      Schedule F lists all material  licenses in favor of any Debtor for the use
      of any  patents,  trademarks,  copyrights  and domain names as of the date
      hereof.  All material patents and trademarks of the Debtors have been duly
      recorded at the United States Patent and Trademark Office and all material
      copyrights  of the Debtors  have been duly  recorded at the United  States
      Copyright Office.

            (pp) Except as set forth on Schedule G attached hereto,  none of the
      account  debtors or other  persons  or  entities  obligated  on any of the
      Collateral is a governmental  authority covered by the Federal  Assignment
      of Claims Act or any similar  federal,  state or local  statute or rule in
      respect of such Collateral.

                                       12
<PAGE>

      5. EFFECT OF PLEDGE ON CERTAIN RIGHTS. If any of the Collateral subject to
this Agreement consists of nonvoting equity or ownership  interests  (regardless
of class,  designation,  preference or rights) that may be converted into voting
equity or ownership  interests upon the occurrence of certain events (including,
without limitation, upon the transfer of all or any of the other stock or assets
of the  issuer),  it is  agreed  that the  pledge of such  equity  or  ownership
interests pursuant to this Agreement or the enforcement of any of Agent's rights
hereunder  shall not be deemed to be the type of event which would  trigger such
conversion rights notwithstanding any provisions in the Organizational Documents
or agreements to which any Debtor is subject or to which any Debtor is party.

      6. DEFAULTS. The following events shall be "Events of Default":

            (a) The  occurrence  of an  Event  of  Default  (as  defined  in the
      Debenture) under the Debenture;

            (b) The  failure by any  Debtor to  observe  or  perform  any of its
      obligations  hereunder for ten (10) days after  delivery to such Debtor of
      notice of such  failure  by or on behalf of a Secured  Party  unless  such
      default is capable of cure but cannot be cured  within such time frame and
      such Debtor is using best efforts to cure same in a timely fashion; or

            (c) If any  provision  of this  Agreement  shall at any time for any
      reason be declared to be null and void, or the validity or  enforceability
      thereof  shall  be  contested  by any  Debtor,  or a  proceeding  shall be
      commenced  by  any  Debtor,  or  by  any  governmental   authority  having
      jurisdiction  over any Debtor,  seeking to  establish  the  invalidity  or
      unenforceability thereof, or any Debtor shall deny that any Debtor has any
      liability or obligation purported to be created under this Agreement.

      7. DUTY TO HOLD IN TRUST.

            (a) Upon the  occurrence  of any  Event of  Default  and at any time
      thereafter,  each  Debtor  shall,  upon  receipt of any  revenue,  income,
      dividend, interest or other sums subject to the Security Interest, whether
      payable  pursuant to the Debenture or otherwise,  or of any check,  draft,
      note, trade acceptance or other instrument evidencing an obligation to pay
      any such sum,  hold the same in trust for the  Secured  Parties  and shall
      forthwith  endorse and transfer any such sums or instruments,  or both, to
      the Secured Parties,  pro-rata in proportion to their initial purchases of
      Debentures for application to the  satisfaction of the Obligations (and if
      any  Debenture is not  outstanding,  pro-rata in proportion to the initial
      purchases of the remaining Debentures).

            (b) If any Debtor shall become  entitled to receive or shall receive
      any securities or other property (including, without limitation, shares of
      Pledged Securities or instruments representing Pledged Securities acquired
      after the date hereof, or any options,  warrants,  rights or other similar
      property or certificates  representing a dividend,  or any distribution in
      connection  with any  recapitalization,  reclassification  or  increase or
      reduction of capital,  or issued in connection with any  reorganization of
      such Debtor or any of its direct or indirect  subsidiaries)  in respect of
      the Pledged Securities  (whether as an addition to, in substitution of, or
      in exchange for, such Pledged Securities or otherwise), such Debtor agrees
      to (i) accept the same as the agent of the Secured Parties;  (ii) hold the
      same in trust on behalf of and for the benefit of the Secured Parties; and
      (iii) to deliver any and all  certificates  or instruments  evidencing the
      same to Agent on or before the close of business on the fifth business day
      following the receipt  thereof by such Debtor,  in the exact form received
      together with the Necessary  Endorsements,  to be held by Agent subject to
      the terms of this Agreement as Collateral.

                                       13
<PAGE>

      8. RIGHTS AND REMEDIES UPON DEFAULT.

            (a) Upon the  occurrence  of any Event of  Default  and  during  the
      continuing threat, the Secured Parties, acting through any agent appointed
      by them for such  purpose,  shall  have the right to  exercise  all of the
      remedies  conferred  hereunder and under the  Debentures,  and the Secured
      Parties  shall have all the rights and  remedies of a secured  party under
      the UCC. Without limitation,  the Secured Parties shall have the following
      rights and powers:

                  (i)  The  Secured   Parties  shall  have  the  right  to  take
            possession of the Collateral and, for that purpose,  enter, with the
            aid and assistance of any person, any premises where the Collateral,
            or any part  thereof,  is or may be placed and remove the same,  and
            each Debtor shall  assemble the  Collateral and make it available to
            the  Secured  Parties  at places  which the  Secured  Parties  shall
            reasonably select, whether at such Debtor's premises or elsewhere.

                  (ii) Upon notice to the  Debtors by Agent,  all rights of each
            Debtor to exercise the voting and other  consensual  rights which it
            would  otherwise  be  entitled  to  exercise  and all rights of each
            Debtor  to  receive  the  dividends  and  interest  which  it  would
            otherwise be  authorized  to receive and retain,  shall cease.  Upon
            such  notice,  Agent shall have the right to receive  any  interest,
            cash  dividends  or other  payments  on the  Collateral  and, at the
            option of Agent,  to exercise in such Agent's  discretion all voting
            rights  pertaining  thereto.  Without limiting the generality of the
            foregoing,  Agent shall have the right (but not the  obligation)  to
            exercise  all rights with respect to the  Collateral  as it were the
            sole and absolute owners thereof, including,  without limitation, to
            vote and/or to exchange,  at its sole discretion,  any or all of the
            Collateral   in   connection   with   a   merger,    reorganization,
            consolidation,  recapitalization or other readjustment concerning or
            involving  the  Collateral  or any  Debtor  or any of its  direct or
            indirect subsidiaries.

                  (iii) The Secured  Parties shall have the right to operate the
            business  of each  Debtor  using the  Collateral  and shall have the
            right to assign, sell, lease or otherwise dispose of and deliver all
            or any  part  of the  Collateral,  at  public  or  private  sale  or
            otherwise,   either   with  or   without   special   conditions   or
            stipulations,  for cash or on credit,  in such parcel or parcels and
            at such time or times  and at such  place or  places,  and upon such
            terms and  conditions as the Secured  Parties may deem  commercially
            reasonable,  all without  (except as shall be required by applicable
            statute and cannot be waived) advertisement or demand upon or notice
            to any Debtor or right of redemption  of a Debtor,  which are hereby
            expressly waived.  Upon each such sale,  lease,  assignment or other
            transfer of Collateral,  the Secured Parties may, unless  prohibited
            by applicable  law which cannot be waived,  purchase all or any part
            of the  Collateral  being  sold,  free  from and  discharged  of all
            trusts,  claims,  right of  redemption  and  equities of any Debtor,
            which are hereby waived and released.

                                       14
<PAGE>

                  (iv) The  Secured  Parties  shall  have the right (but not the
            obligation)  to notify any account  debtors and any  obligors  under
            instruments  or  accounts to make  payments  directly to the Secured
            Parties and to enforce the  Debtors'  rights  against  such  account
            debtors and obligors.

                  (v) The Secured  Parties may (but are not obligated to) direct
            any financial intermediary or any other person or entity holding any
            investment  property to transfer the same to the Secured  Parties or
            their designee.

                  (vi)  The  Secured  Parties  may (but  are not  obligated  to)
            transfer any or all Intellectual  Property registered in the name of
            any Debtor at the United States  Patent and Trademark  Office and/or
            Copyright  Office  into  the  name  of the  Secured  Parties  or any
            designee or any purchaser of any Collateral.

            (b) The Agent may comply with any applicable law in connection  with
      a disposition  of Collateral  and such  compliance  will not be considered
      adversely  to  affect  the  commercial  reasonableness  of any sale of the
      Collateral.   The  Agent  may  sell  the  Collateral  without  giving  any
      warranties and may  specifically  disclaim such  warranties.  If the Agent
      sells any of the  Collateral on credit,  the Debtors will only be credited
      with payments  actually made by the  purchaser.  In addition,  each Debtor
      waives  any and all  rights  that it may  have to a  judicial  hearing  in
      advance of the  enforcement  of any of the  Agent's  rights  and  remedies
      hereunder,  including, without limitation, its right following an Event of
      Default to take immediate possession of the Collateral and to exercise its
      rights and remedies with respect thereto.

            (c) For the purpose of enabling the Agent to further exercise rights
      and remedies  under this  Section 8 or elsewhere  provided by agreement or
      applicable law, each Debtor hereby grants to the Agent, for the benefit of
      the Agent and the Secured Parties,  an irrevocable,  nonexclusive  license
      (exercisable  without  payment of royalty  or other  compensation  to such
      Debtor) to use, license or sublicense  following an Event of Default,  any
      Intellectual  Property now owned or hereafter acquired by such Debtor, and
      wherever the same may be located,  and including in such license access to
      all media in which any of the licensed items may be recorded or stored and
      to all computer software and programs used for the compilation or printout
      thereof.

                                       15
<PAGE>

      9. APPLICATIONS OF PROCEEDS. The proceeds of any such sale, lease or other
disposition of the Collateral  hereunder shall be applied first, to the expenses
of retaking,  holding, storing,  processing and preparing for sale, selling, and
the like  (including,  without  limitation,  any  taxes,  fees and  other  costs
incurred  in  connection  therewith)  of  the  Collateral,   to  the  reasonable
attorneys' fees and expenses  incurred by the Secured Parties in enforcing their
rights hereunder and in connection with collecting, storing and disposing of the
Collateral,  and then to  satisfaction  of the  Obligations  pro rata  among the
Secured Parties (based on  then-outstanding  principal  amounts of Debentures at
the time of any such  determination),  and to the  payment of any other  amounts
required by  applicable  law,  after which the Secured  Parties shall pay to the
applicable  Debtor any surplus  proceeds.  If,  upon the sale,  license or other
disposition of the Collateral,  the proceeds thereof are insufficient to pay all
amounts to which the Secured Parties are legally  entitled,  the Debtors will be
liable for the deficiency,  together with interest  thereon,  at the rate of 10%
per annum or the lesser amount permitted by applicable law (the "Default Rate"),
and the  reasonable  fees of any  attorneys  employed by the Secured  Parties to
collect such deficiency.  To the extent permitted by applicable law, each Debtor
waives all claims,  damages and demands  against the Secured Parties arising out
of the repossession,  removal,  retention or sale of the Collateral,  unless due
solely to the gross  negligence or willful  misconduct of the Secured Parties as
determined  by a final  judgment  (not subject to further  appeal) of a court of
competent jurisdiction.

      10.  SECURITIES LAW PROVISION.  Each Debtor  recognizes  that Agent may be
limited  in its  ability  to  effect a sale to the  public of all or part of the
Pledged  Securities by reason of certain  prohibitions  in the Securities Act of
1933, as amended, or other federal or state securities laws  (collectively,  the
"Securities  Laws"),  and may be  compelled  to resort to one or more sales to a
restricted  group of  purchasers  who may be  required  to agree to acquire  the
Pledged Securities for their own account,  for investment and not with a view to
the distribution or resale thereof. Each Debtor agrees that sales so made may be
at prices and on terms less favorable than if the Pledged  Securities  were sold
to the public, and that Agent has no obligation to delay the sale of any Pledged
Securities for the period of time  necessary to register the Pledged  Securities
for sale to the public under the Securities  Laws.  Each Debtor shall  cooperate
with Agent in its attempt to satisfy any requirements  under the Securities Laws
(including,  without limitation,  registration thereunder if requested by Agent)
applicable to the sale of the Pledged Securities by Agent.

      11.  COSTS  AND  EXPENSES.  Each  Debtor  agrees  to  pay  all  reasonable
out-of-pocket  fees,  costs and expenses  incurred in connection with any filing
required  hereunder,  including  without  limitation,  any financing  statements
pursuant  to  the  UCC,   continuation   statements,   partial  releases  and/or
termination   statements  related  thereto  or  any  expenses  of  any  searches
reasonably required by the Secured Parties. The Debtors shall also pay all other
claims and charges which in the reasonable  opinion of the Secured Parties might
prejudice,  imperil or otherwise affect the Collateral or the Security  Interest
therein. The Debtors will also promptly pay to the Secured Parties the amount of
any and all reasonable  expenses,  including the reasonable fees and expenses of
its counsel and of any experts and agents,  which the Secured  Parties may incur
in connection with (i) the  enforcement of this  Agreement,  (ii) the custody or
preservation of, or the sale of, collection from, or other realization upon, any
of the Collateral,  or (iii) the exercise or enforcement of any of the rights of
the  Secured  Parties  under the  Debentures.  Until so paid,  any fees  payable
hereunder  shall be added to the principal  amount of the  Debentures  and shall
bear interest at the Default Rate.

                                       16
<PAGE>

      12. RESPONSIBILITY FOR COLLATERAL.  The Debtors assume all liabilities and
responsibility  in connection with all Collateral,  and the Obligations shall in
no way be affected or diminished by reason of the loss,  destruction,  damage or
theft of any of the  Collateral or its  unavailability  for any reason.  Without
limiting the generality of the foregoing,  (a) neither the Agent nor any Secured
Party (i) has any duty  (either  before or after an Event of Default) to collect
any amounts in respect of the  Collateral or to preserve any rights  relating to
the Collateral,  or (ii) has any obligation to clean-up or otherwise prepare the
Collateral for sale, and (b) each Debtor shall remain obligated and liable under
each  contract  or  agreement  included  in the  Collateral  to be  observed  or
performed  by such Debtor  thereunder.  Neither the Agent nor any Secured  Party
shall have any  obligation or liability  under any such contract or agreement by
reason of or arising  out of this  Agreement  or the receipt by the Agent or any
Secured Party of any payment  relating to any of the  Collateral,  nor shall the
Agent or any  Secured  Party be  obligated  in any manner to perform  any of the
obligations  of any Debtor under or pursuant to any such  contract or agreement,
to make inquiry as to the nature or sufficiency  of any payment  received by the
Agent or any Secured Party in respect of the Collateral or as to the sufficiency
of any performance by any party under any such contract or agreement, to present
or file any claim,  to take any action to enforce any  performance or to collect
the payment of any amounts which may have been assigned to the Agent or to which
the Agent or any Secured Party may be entitled at any time or times.

      13. SECURITY INTEREST ABSOLUTE.  All rights of the Secured Parties and all
obligations  of the  Debtors  hereunder,  shall be absolute  and  unconditional,
irrespective of: (a) any lack of validity or  enforceability  of this Agreement,
the Debentures or any agreement  entered into in connection  with the foregoing,
or any portion hereof or thereof; (b) any change in the time, manner or place of
payment  or  performance  of,  or in  any  other  term  of,  all  or  any of the
Obligations, or any other amendment or waiver of or any consent to any departure
from the Debentures or any other  agreement  entered into in connection with the
foregoing; (c) any exchange,  release or nonperfection of any of the Collateral,
or any release or amendment or waiver of or consent to departure  from any other
collateral for, or any guaranty,  or any other  security,  for all or any of the
Obligations; (d) any action by the Secured Parties to obtain, adjust, settle and
cancel in its sole discretion any insurance claims or matters made or arising in
connection  with the  Collateral;  or (e) any  other  circumstance  which  might
otherwise  constitute any legal or equitable defense available to a Debtor, or a
discharge of all or any part of the Security Interest granted hereby.  Until the
Obligations  shall  have  been paid and  performed  in full,  the  rights of the
Secured  Parties  shall  continue  even if the  Obligations  are  barred for any
reason, including, without limitation, the running of the statute of limitations
or bankruptcy.  Each Debtor expressly  waives  presentment,  protest,  notice of
protest,  demand, notice of nonpayment and demand for performance.  In the event
that at any time any transfer of any  Collateral or any payment  received by the
Secured Parties hereunder shall be deemed by final order of a court of competent
jurisdiction to have been a voidable  preference or fraudulent  conveyance under
the bankruptcy or insolvency laws of the United States, or shall be deemed to be
otherwise  due to any party other than the Secured  Parties,  then,  in any such
event, each Debtor's  obligations  hereunder shall survive  cancellation of this
Agreement, and shall not be discharged or satisfied by any prior payment thereof
and/or  cancellation  of this  Agreement,  but shall  remain a valid and binding
obligation  enforceable in accordance with the terms and provisions hereof. Each
Debtor  waives all right to require the Secured  Parties to proceed  against any
other person or entity or to apply any Collateral  which the Secured Parties may
hold at any time, or to marshal assets, or to pursue any other remedy.

                                       17
<PAGE>

      14. TERM OF  AGREEMENT.  This  Agreement and the Security  Interest  shall
terminate  on the date on which  all  payments  under the  Debentures  have been
indefeasibly  paid  in  full  and  all  other  Obligations  have  been  paid  or
discharged;  provided, however, that all indemnities of the Debtors contained in
this Agreement (including, without limitation, Annex B hereto) shall survive and
remain  operative and in full force and effect  regardless of the termination of
this Agreement.

      15. POWER OF ATTORNEY; FURTHER ASSURANCES.

            (a) Each  Debtor  authorizes  the Secured  Parties,  and does hereby
      make,  constitute  and appoint the  Secured  Parties and their  respective
      officers,  agents,  successors or assigns with full power of substitution,
      as such Debtor's true and lawful attorney-in-fact, with power, in the name
      of the various  Secured  Parties or such Debtor,  to, after the occurrence
      and during the  continuance of an Event of Default,  (i) endorse any note,
      checks,  drafts,  money orders or other instruments of payment  (including
      payments  payable  under or in  respect  of any  policy of  insurance)  in
      respect of the  Collateral  that may come into  possession  of the Secured
      Parties;  (ii) to sign and endorse any financing statement pursuant to the
      UCC or any invoice,  freight or express bill,  bill of lading,  storage or
      warehouse receipts, drafts against debtors, assignments, verifications and
      notices in connection with accounts,  and other documents  relating to the
      Collateral;  (iii) to pay or discharge taxes, liens, security interests or
      other  encumbrances at any time levied or placed on or threatened  against
      the Collateral;  (iv) to demand, collect, receipt for, compromise,  settle
      and sue for monies due in respect of the  Collateral;  (v) to transfer any
      Intellectual  Property or provide  licenses  respecting  any  Intellectual
      Property; and (vi) generally, at the option of the Secured Parties, and at
      the expense of the Debtors,  at any time, or from time to time, to execute
      and deliver any and all documents and  instruments  and to do all acts and
      things which the Secured  Parties deem necessary to protect,  preserve and
      realize upon the Collateral and the Security  Interest  granted therein in
      order to effect the intent of this  Agreement  and the  Debentures  all as
      fully and  effectually  as the Debtors  might or could do; and each Debtor
      hereby  ratifies all that said attorney  shall  lawfully do or cause to be
      done by virtue hereof.  This power of attorney is coupled with an interest
      and shall be irrevocable  for the term of this Agreement and thereafter as
      long as any of the Obligations  shall be outstanding.  The designation set
      forth  herein  shall be  deemed to amend and  supersede  any  inconsistent
      provision in the Organizational Documents or other documents or agreements
      to which any Debtor is subject or to which any Debtor is a party.  Without
      limiting the generality of the foregoing,  after the occurrence and during
      the continuance of an Event of Default, each Secured Party is specifically
      authorized  to execute and file any  applications  for or  instruments  of
      transfer and  assignment of any patents,  trademarks,  copyrights or other
      Intellectual  Property with the United States Patent and Trademark  Office
      and the United States Copyright Office.

            (b)  On  a  continuing  basis,  each  Debtor  will  make,   execute,
      acknowledge, deliver, file and record, as the case may be, with the proper
      filing and  recording  agencies in any  jurisdiction,  including,  without
      limitation, the jurisdictions indicated on Schedule C attached hereto, all
      such  instruments,  and take all such action as may  reasonably  be deemed
      necessary or advisable, or as reasonably requested by the Secured Parties,
      to perfect the Security  Interest granted hereunder and otherwise to carry
      out the  intent  and  purposes  of this  Agreement,  or for  assuring  and
      confirming  to the Secured  Parties the grant or perfection of a perfected
      security interest in all the Collateral under the UCC.

                                       18
<PAGE>

            (c) Each Debtor hereby  irrevocably  appoints the Secured Parties as
      such  Debtor's  attorney-in-fact,  with  full  authority  in the place and
      instead of such Debtor and in the name of such  Debtor,  from time to time
      in the Secured Parties' discretion,  to take any action and to execute any
      instrument  which the Secured  Parties may deem  necessary or advisable to
      accomplish the purposes of this  Agreement,  including the filing,  in its
      sole discretion,  of one or more financing or continuation  statements and
      amendments  thereto,  relative  to  any  of  the  Collateral  without  the
      signature  of  such  Debtor  where   permitted  by  law,  which  financing
      statements  may (but need not) describe the  Collateral as "all assets" or
      "all  personal  property" or words of like  import,  and ratifies all such
      actions  taken by the Secured  Parties.  This power of attorney is coupled
      with an interest and shall be  irrevocable  for the term of this Agreement
      and thereafter as long as any of the Obligations shall be outstanding.

      16.  NOTICES.  All  notices,  requests,  demands and other  communications
hereunder shall be subject to the notice provision of the Purchase Agreement (as
such term is defined in the Debentures).

      17.  OTHER  SECURITY.  To the  extent  that  the  Obligations  are  now or
hereafter  secured by property  other than the  Collateral or by the  guarantee,
endorsement or property of any other person, firm,  corporation or other entity,
then the  Secured  Parties  shall have the  right,  in its sole  discretion,  to
pursue,  relinquish,  subordinate,  modify or take any other action with respect
thereto,  without in any way modifying or affecting any of the Secured  Parties'
rights and remedies hereunder.

      18.  APPOINTMENT OF AGENT.  The Secured  Parties hereby appoint  Palisades
Master Fund LP to act as their agent (the  "Agent") for  purposes of  exercising
any  and  all  rights  and  remedies  of the  Secured  Parties  hereunder.  Such
appointment  shall  continue until revoked in writing by a Majority in Interest,
at which time a Majority in Interest shall appoint a new Agent;  provided,  that
the Agent may not be removed as Agent unless  __________________ shall then hold
less than  $____________  principal amount of Debentures;  provided further that
such removal may occur only if each of the other Secured Parties shall then hold
not less than  $______________  principal amount of Debentures.  The Agent shall
have the rights, responsibilities and immunities set forth in Annex B hereto.

      19. MISCELLANEOUS.

            (a) No  course  of  dealing  between  the  Debtors  and the  Secured
      Parties, nor any failure to exercise, nor any delay in exercising,  on the
      part of the Secured Parties,  any right,  power or privilege  hereunder or
      under the  Debentures  shall  operate as a waiver  thereof;  nor shall any
      single or partial exercise of any right,  power or privilege  hereunder or
      thereunder  preclude any other or further exercise thereof or the exercise
      of any other right, power or privilege.

                                       19
<PAGE>

            (b) All of the rights  and  remedies  of the  Secured  Parties  with
      respect to the Collateral, whether established hereby or by the Debentures
      or by any other  agreements,  instruments  or documents or by law shall be
      cumulative and may be exercised singly or concurrently.

            (c) This Agreement  constitutes the entire  agreement of the parties
      with respect to the subject matter hereof and is intended to supersede all
      prior  negotiations,  understandings  and agreements with respect thereto.
      Except as specifically  set forth in this Agreement,  no provision of this
      Agreement  may be  modified  or  amended  except  by a  written  agreement
      specifically  referring  to this  Agreement  and signed by a  majority  in
      interest of the parties hereto.

            (d) In the  event  any  provision  of this  Agreement  is held to be
      invalid,  prohibited or  unenforceable in any jurisdiction for any reason,
      unless such provision is narrowed by judicial construction, this Agreement
      shall,  as  to  such  jurisdiction,  be  construed  as  if  such  invalid,
      prohibited or  unenforceable  provision had been more narrowly drawn so as
      not to be invalid,  prohibited or unenforceable.  If,  notwithstanding the
      foregoing,  any  provision  of  this  Agreement  is  held  to be  invalid,
      prohibited or unenforceable  in any  jurisdiction,  such provision,  as to
      such jurisdiction,  shall be ineffective to the extent of such invalidity,
      prohibition or unenforceability without invalidating the remaining portion
      of such  provision or the other  provisions of this  Agreement and without
      affecting the validity or  enforceability  of such  provision or the other
      provisions of this Agreement in any other jurisdiction.

            (e) No  waiver of any  breach or  default  or any right  under  this
      Agreement  shall be  considered  valid unless in writing and signed by the
      party giving such  waiver,  and no such waiver shall be deemed a waiver of
      any subsequent breach or default or right,  whether of the same or similar
      nature or otherwise.

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

            (g) Each  party  shall take such  further  action  and  execute  and
      deliver such further documents as may be necessary or appropriate in order
      to carry out the provisions and purposes of this Agreement.

            (h) All questions concerning the construction, validity, enforcement
      and  interpretation  of this Agreement  shall be governed by and construed
      and  enforced in  accordance  with the  internal  laws of the State of New
      York,  without regard to the principles of conflicts of law thereof.  Each
      Debtor  agrees  that  all  proceedings   concerning  the  interpretations,
      enforcement and defense of the transactions contemplated by this Agreement
      and  the  Debenture  (whether  brought  against  a  party  hereto  or  its
      respective  affiliates,   directors,  officers,  shareholders,   partners,
      members,  employees or agents) shall be commenced exclusively in the state
      and federal courts sitting in the City of New York,  Borough of Manhattan.

                                       20
<PAGE>

      Each Debtor hereby  irrevocably  submits to the exclusive  jurisdiction of
      the state and federal courts  sitting in the City of New York,  Borough of
      Manhattan for the  adjudication of any dispute  hereunder or in connection
      herewith or with any transaction  contemplated hereby or discussed herein,
      and hereby irrevocably waives, and agrees not to assert in any proceeding,
      any claim that it is not  personally  subject to the  jurisdiction  of any
      such court,  that such  proceeding  is improper.  Each party hereto hereby
      irrevocably  waives  personal  service of process and  consents to process
      being  served  in any  such  proceeding  by  mailing  a copy  thereof  via
      registered  or certified  mail or  overnight  delivery  (with  evidence of
      delivery)  to such party at the  address in effect for notices to it under
      this  Agreement  and agrees that such service  shall  constitute  good and
      sufficient service of process and notice thereof. Nothing contained herein
      shall be  deemed  to limit in any way any  right to serve  process  in any
      manner permitted by law. Each party hereto hereby  irrevocably  waives, to
      the fullest extent permitted by applicable law, any and all right to trial
      by  jury  in any  legal  proceeding  arising  out of or  relating  to this
      Agreement  or the  transactions  contemplated  hereby.  If any party shall
      commence a proceeding to enforce any  provisions of this  Agreement,  then
      the prevailing  party in such proceeding  shall be reimbursed by the other
      party for its  reasonable  attorney's  fees and other  costs and  expenses
      incurred  with the  investigation,  preparation  and  prosecution  of such
      proceeding.

            (i) This  Agreement  may be executed in any number of  counterparts,
      each of which when so executed  shall be deemed to be an original and, all
      of which taken together shall  constitute one and the same  Agreement.  In
      the event that any signature is delivered by facsimile transmission,  such
      signature  shall create a valid binding  obligation of the party executing
      (or on whose behalf such  signature  is  executed)  the same with the same
      force and effect as if such facsimile signature were the original thereof.

            (j) All  Debtors  shall  jointly  and  severally  be liable  for the
      obligations of each Debtor to the Secured Parties hereunder.

            (k) Each Debtor shall  indemnify,  reimburse  and hold  harmless the
      Secured  Parties and their  respective  partners,  members,  shareholders,
      officers,  directors,  employees and agents (collectively,  "Indemnitees")
      from  and  against  any  and all  losses,  claims,  liabilities,  damages,
      penalties,  suits, costs and expenses,  of any kind or nature,  (including
      fees  relating  to the  cost of  investigating  and  defending  any of the
      foregoing)  imposed on, incurred by or asserted against such Indemnitee in
      any way related to or arising from or alleged to arise from this Agreement
      or the Collateral,  except any such losses, claims, liabilities,  damages,
      penalties,   suits,  costs  and  expenses  which  result  from  the  gross
      negligence  or willful  misconduct  of the  Indemnitee  as determined by a
      final,  nonappealable decision of a court of competent jurisdiction.  This
      indemnification provision is in addition to, and not in limitation of, any
      other indemnification provision in the Debentures,  the Purchase Agreement
      (as such  term is  defined  in the  Debentures)  or any  other  agreement,
      instrument or other document executed or delivered in connection  herewith
      or therewith.

                                       21
<PAGE>

            (l) Nothing in this Agreement shall be construed to subject Agent or
      any Secured  Party to  liability  as a partner in any Debtor or any if its
      direct or indirect  subsidiaries  that is a partnership  or as a member in
      any Debtor or any of its direct or indirect subsidiaries that is a limited
      liability company,  nor shall Agent or any Secured Party be deemed to have
      assumed  any  obligations  under  any  partnership  agreement  or  limited
      liability company agreement,  as applicable,  of any such Debtor or any if
      its direct or indirect  subsidiaries  or  otherwise,  unless and until any
      such Secured Party  exercises its right to be substituted  for such Debtor
      as a partner or member, as applicable, pursuant hereto.

            (m) To the extent  that the grant of the  security  interest  in the
      Collateral  and the  enforcement  of the terms hereof require the consent,
      approval or action of any partner or member, as applicable,  of any Debtor
      or any direct or indirect  subsidiary of any Debtor or compliance with any
      provisions  of any of the  Organizational  Documents,  the Debtors  hereby
      grant such consent and approval and waive any such  noncompliance with the
      terms of said documents.

                            [SIGNATURE PAGES FOLLOW]

                                       22
<PAGE>

      IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement
to be duly executed on the day and year first above written.

RCG COMPANIES INCORPORATED

By: __________________________________________
    Name:
    Title:

[SUBSIDIARY]

By: __________________________________________
    Name:
    Title:

                       [SIGNATURE PAGE OF HOLDERS FOLLOWS]

                                       23
<PAGE>

                      [SIGNATURE PAGE OF HOLDERS TO RCG SA]

Name of Investing Entity: _____________________________________________
Signature of Authorized Signatory of Investing entity: ________________
Name of Authorized Signatory: _________________________________________
Title of Authorized Signatory: ________________________________________

                       [SIGNATURE PAGE OF HOLDERS FOLLOWS]

                                       24
<PAGE>

                                   SCHEDULE A

Principal Place of Business of Debtors:

Locations Where Collateral is Located or Stored:

<PAGE>

                                   SCHEDULE B

                                       25
<PAGE>

                                   SCHEDULE C

                                       26
<PAGE>

                                   SCHEDULE D

                     Organizational Identification Numbers

                                       27
<PAGE>

                                   SCHEDULE E

                         Names; Mergers and Acquisitions

                                       28
<PAGE>

                                   SCHEDULE F

                              Intellectual Property

                                       29
<PAGE>

                                   SCHEDULE G

                                 Account Debtors

                                       30
<PAGE>

                                   SCHEDULE H

                               Pledged Securities

                                       31
<PAGE>

                                     ANNEX A
                                       TO
                                    SECURITY
                                    AGREEMENT

                        FORM OF ADDITIONAL DEBTOR JOINDER

                     Security Agreement dated as of February
                       8, 2005 made by RCG Companies Inc.
        and its subsidiaries party thereto from time to time, as Debtors
                               to and in favor of
        the Secured Parties identified therein (the "Security Agreement")

      Reference is made to the Security Agreement as defined above;  capitalized
terms used herein and not otherwise defined herein shall have the meanings given
to such terms in, or by reference in, the Security Agreement.

      The undersigned hereby agrees that upon delivery of this Additional Debtor
Joinder to the Secured Parties referred to above,  the undersigned  shall (a) be
an Additional Debtor under the Security  Agreement,  (b) have all the rights and
obligations of the Debtors under the Security Agreement as fully and to the same
extent as if the undersigned was an original signatory thereto and (c) be deemed
to have made the representations and warranties set forth in Section ___ therein
as of the date of execution  and  delivery of this  Additional  Debtor  Joinder.
WITHOUT LIMITING THE GENERALITY OF THE FOREGOING,  THE UNDERSIGNED  SPECIFICALLY
GRANTS TO THE  SECURED  PARTIES A SECURITY  INTEREST IN THE  COLLATERAL  AS MORE
FULLY SET FORTH IN THE SECURITY  AGREEMENT  AND  ACKNOWLEDGES  AND AGREES TO THE
WAIVER OF JURY TRIAL PROVISIONS SET FORTH THEREIN.

      Attached  hereto are  supplemental  and/or  replacement  Schedules  to the
Security Agreement, as applicable.

      An  executed  copy of this  Joinder  shall  be  delivered  to the  Secured
Parties,  and the Secured Parties may rely on the matters set forth herein on or
after the date hereof. This Joinder shall not be modified, amended or terminated
without the prior written consent of the Secured Parties.

<PAGE>

      IN WITNESS WHEREOF, the undersigned has caused this Joinder to be executed
in the name and on behalf of the undersigned.

                                    [Name of Additional Debtor]

                                    By:
                                    Name:
                                    Title:

                                    Address:

Dated:

<PAGE>

                                    [ANNEX B
                                       TO
                                    SECURITY
                                    AGREEMENT

                                    THE AGENT

            1.  APPOINTMENT.  The Secured  Parties (all  capitalized  terms used
herein and not otherwise defined shall have the respective  meanings provided in
the Security Agreement to which this Annex B is attached (the "Agreement")),  by
their acceptance of the benefits of the Agreement,  hereby  designate  Palisades
Master Fund LP (the "Agent") as the Agent to act as specified  herein and in the
Agreement. Each Secured Party shall be deemed irrevocably to authorize the Agent
to take such action on its behalf under the  provisions of the Agreement and any
other  Transaction  Document (as such term is defined in the  Debentures) and to
exercise such powers and to perform such duties  hereunder and thereunder as are
specifically  delegated  to or  required  of the Agent by the terms  hereof  and
thereof and such other powers as are reasonably  incidental  thereto.  The Agent
may perform any of its duties hereunder by or through its agents or employees.

            2.   NATURE  OF   DUTIES.   The  Agent   shall  have  no  duties  or
responsibilities except those expressly set forth in the Agreement.  Neither the
Agent  nor any of its  partners,  members,  shareholders,  officers,  directors,
employees  or agents  shall be liable for any  action  taken or omitted by it as
such under the Agreement or hereunder or in connection herewith or therewith, be
responsible  for the  consequence  of any  oversight  or  error of  judgment  or
answerable for any loss,  unless caused solely by its or their gross  negligence
or willful  conduct as  determined  by a final  judgment (not subject to further
appeal) of a court of competent  jurisdiction.  The duties of the Agent shall be
mechanical and  administrative in nature;  the Agent shall not have by reason of
the  Agreement or any other  Transaction  Document a fiduciary  relationship  in
respect of any Debtor or any Secured Party;  and nothing in the Agreement or any
other Transaction Document,  expressed or implied, is intended to or shall be so
construed  as to  impose  upon the  Agent  any  obligations  in  respect  of the
Agreement or any other Transaction Document except as expressly set forth herein
and therein.

            3. LACK OF RELIANCE ON THE AGENT. Independently and without reliance
upon the Agent, each Secured Party, to the extent it deems appropriate, has made
and  shall  continue  to  make  (i)  its own  independent  investigation  of the
financial  condition  and  affairs  of  the  Company  and  its  subsidiaries  in
connection with such Secured Party's investment in the Debtors, the creation and
continuance of the Obligations, the transactions contemplated by the Transaction
Documents,  and the taking or not taking of any action in connection  therewith,
and  (ii) its own  appraisal  of the  creditworthiness  of the  Company  and its
subsidiaries,  and of the value of the  Collateral  from  time to time,  and the
Agent shall have no duty or responsibility,  either initially or on a continuing
basis, to provide any Secured Party with any credit, market or other information
with respect thereto,  whether coming into its possession before any Obligations
are  incurred  or at any  time or  times  thereafter.  The  Agent  shall  not be
responsible  to the Debtors or any Secured Party for any  recitals,  statements,
information,   representations   or  warranties   herein  or  in  any  document,
certificate  or other  writing  delivered  in  connection  herewith,  or for the
execution,  effectiveness,  genuineness, validity,  enforceability,  perfection,
collectibility,   priority  or   sufficiency  of  the  Agreement  or  any  other
Transaction Document, or for the financial condition of the Debtors or the value
of any of the Collateral,  or be required to make any inquiry  concerning either
the  performance or observance of any of the terms,  provisions or conditions of
the Agreement or any other Transaction  Document,  or the financial condition of
the Debtors, or the value of any of the Collateral, or the existence or possible
existence of any default or Event of Default under the Agreement, the Debentures
or any of the other Transaction Documents.

<PAGE>

            4.  CERTAIN  RIGHTS OF THE AGENT.  The Agent shall have the right to
take any action with respect to the Collateral,  on behalf of all of the Secured
Parties. To the extent practical,  the Agent shall request instructions from the
Secured Parties with respect to any material act or action (including failure to
act) in connection  with the Agreement or any other  Transaction  Document,  and
shall  be  entitled  to act or  refrain  from  acting  in  accordance  with  the
instructions  of Secured  Parties  holding a  majority  in  principal  amount of
Debentures  (based on  then-outstanding  principal  amounts of Debentures at the
time of any such  determination);  if such instructions are not provided despite
the Agent's request  therefor,  the Agent shall be entitled to refrain from such
act or taking such  action,  and if such  action is taken,  shall be entitled to
appropriate indemnification from the Secured Parties in respect of actions to be
taken by the Agent;  and the Agent  shall not incur  liability  to any person or
entity  by reason of so  refraining.  Without  limiting  the  foregoing,  (a) no
Secured Party shall have any right of action  whatsoever  against the Agent as a
result of the Agent acting or  refraining  from acting  hereunder in  accordance
with the terms of the  Agreement  or any  other  Transaction  Document,  and the
Debtors  shall have no right to question or challenge  the  authority of, or the
instructions  given to, the Agent  pursuant to the  foregoing  and (b) the Agent
shall not be  required  to take any action  which the Agent  believes  (i) could
reasonably be expected to expose it to personal liability or (ii) is contrary to
this Agreement, the Transaction Documents or applicable law.

            5. RELIANCE. The Agent shall be entitled to rely, and shall be fully
protected  in  relying,  upon  any  writing,   resolution,   notice,  statement,
certificate,  telex, teletype or telecopier message, cablegram, radiogram, order
or other document or telephone message signed, sent or made by the proper person
or entity,  and, with respect to all legal  matters  pertaining to the Agreement
and the other Transaction  Documents and its duties  thereunder,  upon advice of
counsel  selected by it and upon all other matters  pertaining to this Agreement
and the other Transaction  Documents and its duties  thereunder,  upon advice of
other experts selected by it.

            6.  INDEMNIFICATION.  To the extent that the Agent is not reimbursed
and  indemnified by the Debtors,  the Secured Parties will jointly and severally
reimburse and indemnify the Agent,  in proportion to their  initially  purchased
respective  principal  amounts  of  Debentures,  from  and  against  any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs,  expenses or disbursements of any kind or nature  whatsoever which may be
imposed on,  incurred by or asserted  against the Agent in performing its duties
hereunder or under the Agreement or any other  Transaction  Document,  or in any
way  relating  to or  arising  out of the  Agreement  or any  other  Transaction
Document except for those determined by a final judgment (not subject to further
appeal) of a court of competent  jurisdiction  to have resulted  solely from the
Agent's own gross negligence or willful  misconduct.  Prior to taking any action
hereunder as Agent,  the Agent may require each Secured Party to deposit with it
sufficient sums as it determines in good faith is necessary to protect the Agent
for costs and expenses associated with taking such action.

<PAGE>

            7. RESIGNATION BY THE AGENT.

            (a) The Agent may resign from the  performance  of all its functions
      and duties under the Agreement and the other Transaction  Documents at any
      time  by  giving  30  days'  prior  written  notice  (as  provided  in the
      Agreement) to the Debtors and the Secured Parties.  Such resignation shall
      take effect upon the  appointment of a successor Agent pursuant to clauses
      (b) and (c) below.

            (b) Upon any such notice of resignation, the Secured Parties, acting
      by a Majority in Interest, shall appoint a successor Agent hereunder.

            (c) If a  successor  Agent shall not have been so  appointed  within
      said 30-day  period,  the Agent shall then  appoint a successor  Agent who
      shall  serve as Agent  until such time,  if any,  as the  Secured  Parties
      appoint a successor  Agent as provided above. If a successor Agent has not
      been appointed within such 30-day period, the Agent may petition any court
      of competent  jurisdiction  or may  interplead the Debtors and the Secured
      Parties in a proceeding for the appointment of a successor  Agent, and all
      fees,  including,  but not limited to,  extraordinary fees associated with
      the filing of interpleader  and expenses  associated  therewith,  shall be
      payable by the Debtors on demand.

            8. RIGHTS WITH RESPECT TO COLLATERAL. Each Secured Party agrees with
all other  Secured  Parties  and the Agent (i) that it shall not,  and shall not
attempt to,  exercise any rights with  respect to its  security  interest in the
Collateral,  whether  pursuant to any other  agreement or otherwise  (other than
pursuant to this  Agreement),  or take or institute any action against the Agent
or any of the other Secured  Parties in respect of the  Collateral or its rights
hereunder (other than any such action arising from the breach of this Agreement)
and (ii) that  such  Secured  Party  has no other  rights  with  respect  to the
Collateral  other than as set forth in this Agreement and the other  Transaction
Documents.

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