Document:

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                                                                   EXHIBIT 10.01

                          SECURITIES PURCHASE AGREEMENT

         SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"), dated as of February
24, 2000, by and among SmartSources.com, Inc., a Colorado corporation, with
headquarters located at 2030 Marine Drive, Suite 100, West Vancouver, British
Columbia, V7P1V7 ("COMPANY"), and each of the purchasers set forth on the
signature pages hereto (the "BUYERS").

         WHEREAS:

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

         B. The Buyers desire to purchase and the Company desires to issue and
sell, upon the terms and conditions set forth in this Agreement, (i) convertible
debentures of the Company, in the form attached hereto as EXHIBIT "A", in the
aggregate principal amount of Five Million Dollars ($5,000,000) (together with
any debenture(s) issued in replacement thereof or otherwise with respect thereto
in accordance with the terms thereof, the "DEBENTURES"), convertible into shares
of common stock, no par value, of the Company (the "COMMON STOCK"), upon the
terms and subject to the limitations and conditions set forth in such Debentures
and (ii) warrants, in the form attached hereto as EXHIBIT "B", to purchase Three
Hundred Thirty Thousand (330,000) shares of Common Stock (the "WARRANTS");

         C. Each Buyer wishes to purchase, upon the terms and conditions stated
in this Agreement, such principal amount of Debentures and number of Warrants as
is set forth immediately below its name on the signature pages hereto;

         D. Contemporaneous with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement,
in the form attached hereto as EXHIBIT "C" (the "REGISTRATION RIGHTS
AGREEMENT"), pursuant to which the Company has agreed to provide certain
registration rights under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws; and

         NOW THEREFORE, the Company and each of the Buyers severally (and not
jointly) hereby agree as follows:

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         1. PURCHASE AND SALE OF DEBENTURES AND WARRANTS.

            a. PURCHASE OF DEBENTURES AND WARRANTS. On the Closing Date (as
defined below), the Company shall issue and sell to each Buyer and each Buyer
severally agrees to purchase from the Company such principal amount of
Debentures and number of Warrants as is set forth immediately below such Buyer's
name on the signature pages hereto.

            b. FORM OF PAYMENT. On the Closing Date, (i) each Buyer shall pay
the purchase price for the Debentures and the Warrants to be issued and sold to
it at the Closing (as defined below) (the "PURCHASE PRICE") by wire transfer of
immediately available funds to the Company, in accordance with the Company's
written wiring instructions, against delivery of duly executed Debentures in the
principal amount equal to the Purchase Price and the number of Warrants as is
set forth immediately below such Buyer's name on the signature pages hereto, and
(ii) the Company shall deliver such Debentures and Warrants duly executed on
behalf of the Company, to such Buyer, against delivery of such Purchase Price.

            c. CLOSING DATE. Subject to the satisfaction (or waiver) of the
conditions thereto set forth in Section 6 and Section 7 below, the date and time
of the issuance and sale of the Debentures and the Warrants pursuant to this
Agreement (the "CLOSING DATE") shall be 12:00 noon Eastern Standard Time on
February 24, 2000 or such other mutually agreed upon time. The closing of the
transactions contemplated by this Agreement (the "CLOSING") shall occur on the
Closing Date at the offices of Akerman, Senterfitt & Edison, P.A. at SunTrust
International Center, One S.E. Third Avenue, 28th Floor, Miami, Florida 33131,
or at such other location as may be agreed to by the parties.

         2. BUYERS' REPRESENTATIONS AND WARRANTIES. Each Buyer severally (and
not jointly) represents and warrants to the Company solely as to such Buyer
that:

            a. INVESTMENT PURPOSE. As of the date hereof, the Buyer is
purchasing the Debentures and the shares of Common Stock issuable upon
conversion of or otherwise pursuant to the Debentures (including, without
limitation, (i) such additional shares of Common Stock as are issuable as a
result of the events described in Articles I, II.D.3 and II.E of the Debentures
and Section 2(c) of the Registration Rights Agreement and (ii) the shares of
Common Stock issuable pursuant to the investment options described in Article
II.E of the Debentures (the "INVESTMENT OPTIONS")) (such shares of Common Stock
being collectively referred to herein as the "CONVERSION SHARES") and the
Warrants and the shares of Common Stock issuable upon exercise thereof (the
"WARRANT SHARES" and, collectively with the Debentures, the Warrants and the
Conversion Shares, the "SECURITIES") for its own account and not with a present
view towards the public sale or distribution thereof, except pursuant to sales
registered or exempted from registration under the 1933 Act; provided, however,
that by making the representations herein, the Buyer does not agree to hold any
of the Securities for any minimum or other specific term and reserves the right
to dispose of the Securities at any time in accordance with or pursuant to a
registration statement or an exemption under the 1933 Act.

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            b. ACCREDITED INVESTOR STATUS. The Buyer is an "accredited investor"
as that term is defined in Rule 501(a) of Regulation D (an "ACCREDITED
INVESTOR").

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

            d. INFORMATION. The Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
which have been requested by the Buyer or its advisors. The Buyer and its
advisors, if any, have been afforded the opportunity to ask questions of the
Company. Neither such inquiries nor any other due diligence investigation
conducted by Buyer or any of its advisors or representatives shall modify, amend
or affect Buyer's right to rely on the Company's representations and warranties
contained in Section 3 below. The Buyer understands that its investment in the
Securities involves a significant degree of risk.

            e. GOVERNMENTAL REVIEW. The Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.

            f. TRANSFER OR RE-SALE. The Buyer understands that (i) except as
provided in the Registration Rights Agreement, the sale or re-sale of the
Securities has not been and is not being registered under the 1933 Act or any
applicable state securities laws, and the Securities may not be transferred
unless (a) the Securities are sold pursuant to an effective registration
statement under the 1933 Act, (b) the Buyer shall have delivered to the Company
an opinion of counsel (which opinion shall be in form, substance and scope
customary for opinions of counsel in comparable transactions) to the effect that
the Securities to be sold or transferred may be sold or transferred pursuant to
an exemption from such registration, (c) the Securities are sold or transferred
to an "affiliate" (as defined in Rule 144 promulgated under the 1933 Act (or a
successor rule) ("RULE 144")) of the Buyer who agrees to sell or otherwise
transfer the Securities only in accordance with this Section 2(f) and who is an
Accredited Investor, or (d) the Securities are sold pursuant to Rule 144; (ii)
any sale of such Securities made in reliance on Rule 144 may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any re-sale of such Securities under circumstances in which the
seller (or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the 1933 Act) may require compliance
with some other exemption under the 1933 Act or the rules and regulations of the
SEC thereunder; and (iii) neither the Company nor any other person is under any
obligation to register such Securities under the 1933 Act or any state
securities laws or to comply with the terms and conditions of any exemption
thereunder (in each case, other than pursuant to the Registration Rights
Agreement). Notwithstanding the foregoing or anything else contained herein to
the contrary, the Securities may be pledged as collateral in connection with a
bona fide margin account or other lending arrangement.

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            g. LEGENDS. The Buyer understands that the Debentures and the
Warrants and, until such time as the Conversion Shares (including the shares of
Common Stock issuable upon exercise of the Investment Options) and Warrant
Shares have been registered under the 1933 Act as contemplated by the
Registration Rights Agreement or otherwise may be sold pursuant to Rule 144
without any restriction as to the number of securities as of a particular date
that can then be immediately sold, the Conversion Shares (including the shares
of Common Stock issuable upon exercise of the Investment Options) and Warrant
Shares may bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the certificates for such
Securities):

            "The securities represented by this certificate have not been
            registered under the Securities Act of 1933, as amended. The
            securities may not be sold, transferred or assigned in the absence
            of an effective registration statement for the securities under said
            Act, or an opinion of counsel, in form, substance and scope
            customary for opinions of counsel in comparable transactions, that
            registration is not required under said Act or unless sold pursuant
            to Rule 144 under said Act."

     The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of any Security upon which it is
stamped, if, unless otherwise required by applicable state securities laws, (a)
such Security is registered for re-sale under an effective registration
statement filed under the 1933 Act or otherwise may be sold pursuant to Rule 144
without any restriction as to the number of securities as of a particular date
that can then be immediately sold, or (b) such holder provides the Company with
an opinion of counsel, in form, substance and scope customary for opinions of
counsel in comparable transactions, to the effect that a public sale or transfer
of such Security may be made without registration under the 1933 Act and such
sale or transfer is effected or (c) such holder provides the Company with
reasonable assurances that such Security can be sold pursuant to Rule 144. The
Buyer agrees to sell all Securities, including those represented by a
certificate(s) from which the legend has been removed, in compliance with
applicable prospectus delivery requirements, if any.

            h. AUTHORIZATION; ENFORCEMENT. This Agreement and the Registration
Rights Agreement have been duly and validly authorized. This Agreement has been
duly executed and delivered on behalf of the Buyer, and this Agreement
constitutes, and upon execution and delivery by the Buyer of the Registration
Rights Agreement, such agreement will constitute, valid and binding agreements
of the Buyer enforceable in accordance with their terms.

            i. RESIDENCY. The Buyer is a resident of the jurisdiction set forth
immediately below such Buyer's name on the signature pages hereto.

         3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Buyer that:

            a. ORGANIZATION AND QUALIFICATION. The Company and each of its
Subsidiaries (as defined below), if any, is a corporation duly organized,
validly existing and in good standing

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under the laws of the jurisdiction in which it is incorporated, with full power
and authority (corporate and other) to own, lease, use and operate its
properties and to carry on its business as and where now owned, leased, used,
operated and conducted. SCHEDULE 3(a) sets forth a list of all of the
Subsidiaries of the Company and the jurisdiction in which each is incorporated.
The Company and each of its Subsidiaries is duly qualified as a foreign
corporation to do business and is in good standing in every jurisdiction in
which its ownership or use of property or the nature of the business conducted
by it makes such qualification necessary except where the failure to be so
qualified or in good standing would not have a Material Adverse Effect.
"MATERIAL ADVERSE EFFECT" means any material adverse effect on (i) the
Securities, (ii) the business, operations, assets, financial condition, results
of operations, properties or prospects of the Company and its Subsidiaries, if
any, taken as a whole, (iii) the transactions contemplated hereby or by the
agreements or instruments to be entered into in connection herewith or (iv) the
authority or the ability of the Company to perform its obligation under this
Agreement, the Registration Rights Agreement, the Debentures or the Warrants.
"SUBSIDIARIES" means any corporation or other organization, whether incorporated
or unincorporated, in which the Company owns, directly or indirectly, any equity
or other ownership interest.

            b. AUTHORIZATION; ENFORCEMENT. (i) The Company has all requisite
corporate power and authority to enter into and perform this Agreement, the
Registration Rights Agreement, the Debentures and the Warrants and to consummate
the transactions contemplated hereby and thereby and to issue the Securities, in
accordance with the terms hereof and thereof, (ii) the execution and delivery of
this Agreement, the Registration Rights Agreement, the Debentures and the
Warrants by the Company and the consummation by it of the transactions
contemplated hereby and thereby (including, without limitation, the issuance of
the Debentures and the Warrants and the issuance and reservation for issuance of
the Conversion Shares issuable upon conversion of otherwise pursuant to the
Debentures (including upon exercise of the Investment Options contained therein)
and the Warrant Shares issuable upon exercise of or otherwise pursuant to the
Warrants) have been duly authorized by the Company's Board of Directors and no
further consent or authorization of the Company, its Board of Directors, or its
stockholders is required, (iii) this Agreement has been duly executed and
delivered by the Company, and (iv) this Agreement constitutes, and upon
execution and delivery by the Company of the Registration Rights Agreement, the
Debentures and the Warrants, each of such agreements and instruments will
constitute, a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms.

            c. CAPITALIZATION. As of the date hereof, the authorized capital
stock of the Company consists of (i) 50,000,000 shares of Common Stock, of which
11,418,950 shares are issued and outstanding, 4,000,000 shares are reserved for
issuance pursuant to the Company's stock option plans, 1,450,000 shares are
reserved for issuance pursuant to securities (other than the Debentures and the
Warrants) exercisable for, or convertible into or exchangeable for shares of
Common Stock and 3,732,716 shares are reserved for issuance upon conversion of
or otherwise pursuant to the Debentures (including upon exercise of the
Investment Options) and exercise of the Warrants (subject to adjustment pursuant
to the Company's covenant set forth in Section 4(h) below); and (ii) no shares
of preferred stock. All of such outstanding shares of capital stock are, or upon
issuance will be, duly authorized, validly issued, fully paid and nonassessable.
No shares of capital stock of the Company are subject to preemptive rights or
any other similar rights of the stockholders of the

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Company or any liens or encumbrances imposed through the actions or failure to
act of the Company. Except as disclosed in SCHEDULE 3(c), as of the effective
date of this Agreement, (i) there are no outstanding options, warrants, scrip,
rights to subscribe for, puts, calls, rights of first refusal, agreements,
understandings, claims or other commitments or rights of any character
whatsoever relating to, or securities or rights convertible into or exchangeable
for any shares of capital stock of the Company or any of its Subsidiaries, or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to issue additional shares of capital stock of the Company or any of its
Subsidiaries, (ii) there are no agreements or arrangements under which the
Company or any of its Subsidiaries is obligated to register the sale of any of
its or their securities under the 1933 Act (except the Registration Rights
Agreement) and (iii) there are no anti-dilution or price adjustment provisions
contained in any security issued by the Company (or in any agreement providing
rights to security holders) that will be triggered by the issuance of the
Debentures, the Warrants, the Conversion Shares or Warrant Shares. The Company
has furnished to the Buyer true and correct copies of the Company's Certificate
of Incorporation as in effect on the date hereof ("CERTIFICATE OF
INCORPORATION"), the Company's By-laws, as in effect on the date hereof (the
"BY-LAWS"), and the terms of all securities convertible into or exercisable for
Common Stock of the Company and the material rights of the holders thereof in
respect thereto. The Company shall provide the Buyer with a written update of
this representation signed by the Company's Chief Executive or Chief Financial
Officer on behalf of the Company as of the Closing Date.

            d. ISSUANCE OF SHARES. The Conversion Shares and Warrant Shares are
duly authorized and reserved for issuance and, when issued upon conversion of or
otherwise pursuant to the Debentures (including upon exercise of the Investment
Options) and upon exercise of or otherwise pursuant to the Warrants in
accordance with the terms thereof, will be validly issued, fully paid and
non-assessable, and free from all taxes, liens, claims and encumbrances and
shall not be subject to preemptive rights or other similar rights of
stockholders of the Company and will not impose personal liability upon the
holder thereof.

            e. ACKNOWLEDGMENT OF DILUTION. The Company understands and
acknowledges the potentially dilutive effect to the Common Stock upon the
issuance of the Conversion Shares upon conversion of or otherwise pursuant to
the Debentures (including upon exercise of the Investment Options) and upon
issuance of the Warrant Shares upon exercise of or otherwise pursuant to the
Warrants. The Company's directors and executive officers have studied and fully
understand the nature of the Securities being sold hereunder. The Company
further acknowledges that its obligation to issue Conversion Shares upon
conversion of or otherwise pursuant to the Debentures (including upon exercise
of the Investment Options) and the Warrant Shares upon exercise of or otherwise
pursuant to the Warrants in accordance with this Agreement, the Debentures and
the Warrants is absolute and unconditional regardless of the dilutive effect
that such issuance may have on the ownership interests of other stockholders of
the Company. Taking the foregoing into account, the Company's Board of Directors
has determined, in its good faith business judgment, that the issuance of the
Securities hereunder and under the Debentures and the Warrants and the
consummation of the transactions contemplated hereby and thereby are in the best
interest of the Company and its stockholders.

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            f. NO CONFLICTS. The execution, delivery and performance of this
Agreement, the Registration Rights Agreement, the Debentures and the Warrants by
the Company and the consummation by the Company of the transactions contemplated
hereby and thereby (including, without limitation, the issuance and reservation
for issuance of the Conversion Shares (including those issuable upon exercise of
the Investment Options) and Warrant Shares) will not (i) conflict with or result
in a violation of any provision of the Certificate of Incorporation or By-laws
or (ii) except as set forth on Schedule 3(f), violate or conflict with, or
result in a breach of any provision of, or constitute a default (or an event
which with notice or lapse of time or both could become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture, patent, patent license or instrument
to which the Company or any of its Subsidiaries is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including
federal and state securities laws and regulations and regulations of any self-
regulatory organizations to which the Company or its securities are subject)
applicable to the Company or any of its Subsidiaries or by which any property or
asset of the Company or any of its Subsidiaries is bound or affected (except for
such conflicts, defaults, terminations, amendments, accelerations, cancellations
and violations as would not, individually or in the aggregate, have a Material
Adverse Effect). Neither the Company nor any of its Subsidiaries is in violation
of its Certificate of Incorporation, By-laws or other organizational documents
and neither the Company nor any of its Subsidiaries is in default (and no event
has occurred which with notice or lapse of time or both could put the Company or
any of its Subsidiaries in default) under, and neither the Company nor any of
its Subsidiaries has taken any action or failed to take any action that would
give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its Subsidiaries is a party or by which any property or assets of the
Company or any of its Subsidiaries is bound or affected, except for possible
defaults as would not, individually or in the aggregate, have a Material Adverse
Effect. The businesses of the Company and its Subsidiaries, if any, are not
being conducted, and shall not be conducted so long as a Buyer owns any of the
Securities, in violation of any law, ordinance or regulation of any governmental
entity. Except as specifically contemplated by this Agreement and as required
under the 1933 Act and any applicable state securities laws, the Company is not
required to obtain any consent, authorization or order of, or make any filing or
registration with, any court, governmental agency, regulatory agency, self
regulatory organization or stock market or any third party in order for it to
execute, deliver or perform any of its obligations under this Agreement, the
Registration Rights Agreement, the Debentures or the Warrants in accordance with
the terms hereof or thereof or to issue and sell the Debentures and Warrants in
accordance with the terms hereof and to issue the Conversion Shares upon
conversion of or otherwise pursuant to the Debentures (including upon exercise
of the Investment Options) and the Warrant Shares upon exercise of or otherwise
pursuant to the Warrants. Except as disclosed in SCHEDULE 3(f), all consents,
authorizations, orders, filings and registrations which the Company is required
to obtain pursuant to the preceding sentence have been obtained or effected on
or prior to the date hereof. The Company is not in violation of the listing
requirements of the Over-the-Counter Bulletin Board (the "OTC BB") and does not
reasonably anticipate that the Common Stock will cease trading on the OTC BB in
the foreseeable future (unless such cessation in trading is due to the fact the
Common Stock has been listed or included for quotation on the Nasdaq National
Market ("Nasdaq NMS"), the Nasdaq SmallCap Market ("Nasdaq SmallCap"), the New
York Stock Exchange ("NYSE") or the American Stock

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Exchange (the "AMEX"). The Company and its Subsidiaries are unaware of any facts
or circumstances which might give rise to any of the foregoing.

            g. SEC DOCUMENTS; FINANCIAL STATEMENTS. Except as disclosed on
SCHEDULE 3(q), since September 30, 1997, the Company or its predecessors have
timely filed all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC pursuant to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "1934 ACT") (all of the
foregoing filed prior to the date hereof and all exhibits included therein and
financial statements and schedules thereto and documents (other than exhibits to
such documents) incorporated by reference therein, being hereinafter referred to
as the "SEC DOCUMENTS"). The Company has delivered to each Buyer true and
complete copies of the SEC Documents, except for such exhibits and incorporated
documents. As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the 1934 Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. None of the statements made in any such SEC Documents is, or has
been, required to be amended or updated under applicable law (except for such
statements as have been amended or updated in subsequent filings prior to the
date hereof). As of their respective dates, the financial statements of the
Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have been
prepared in accordance with United States generally accepted accounting
principles, consistently applied, during the periods involved (except (i) as may
be otherwise indicated in such financial statements or the notes thereto, or
(ii) in the case of unaudited interim statements, to the extent they may not
include footnotes or may be condensed or summary statements) and fairly present
in all material respects the consolidated financial position of the Company and
its consolidated Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended (subject,
in the case of unaudited statements, to normal year-end audit adjustments).
Except as set forth in the financial statements of the Company included in the
SEC Documents, the Company has no liabilities, contingent or otherwise, other
than (i) liabilities incurred in the ordinary course of business subsequent to
September 30, 1999 and (ii) obligations under contracts and commitments incurred
in the ordinary course of business and not required under generally accepted
accounting principles to be reflected in such financial statements, which,
individually or in the aggregate, are not material to the financial condition or
operating results of the Company.

            h. ABSENCE OF CERTAIN CHANGES. Since September 30, 1999, there have
been no changes or developments in the Company or its business that may have a
Material Adverse Effect.

            i. ABSENCE OF LITIGATION. There is no action, suit, claim,
proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company or any of its Subsidiaries, threatened against or
affecting the Company or any of its Subsidiaries, or their officers or directors

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in their capacity as such, that could have a Material Adverse Effect. SCHEDULE
3(i) contains a complete list and summary description of any pending or
threatened proceeding against or affecting the Company or any of its
Subsidiaries, without regard to whether it would have a Material Adverse Effect.
The Company and its Subsidiaries are unaware of any facts or circumstances which
might give rise to any of the foregoing.

            j. PATENTS, COPYRIGHTS, ETC.

               (i) Except as disclosed on SCHEDULE 3(j), the Company and each of
its Subsidiaries owns or possesses the requisite licenses or rights to use all
patents, patent applications, patent rights, inventions, know-how, trade
secrets, trademarks, trademark applications, service marks, service names, trade
names and copyrights ("INTELLECTUAL PROPERTY") reasonably necessary to enable it
to conduct its business as now operated (and, except as set forth in SCHEDULE
3(j) hereof, to the best of the Company's knowledge, as presently contemplated
to be operated in the future); there is no claim or action by any person
pertaining to, or proceeding pending, or to the Company's knowledge threatened,
which challenges the right of the Company or of a Subsidiary with respect to any
Intellectual Property necessary to enable it to conduct its business as now
operated (and, except as set forth in SCHEDULE 3(j) hereof, to the best of the
Company's knowledge, as presently contemplated to be operated in the future); to
the best of the Company's knowledge, the Company's or its Subsidiaries' current
and intended products, services and processes do not infringe on any
Intellectual Property or other rights held by any person; and the Company is
unaware of any facts or circumstances which might give rise to any of the
foregoing. The Company and each of its Subsidiaries have taken reasonable
security measures to protect the secrecy, confidentiality and value of their
Intellectual Property.

               (ii) All of the Company's computer software and computer
hardware, and other similar or related items of automated, computerized or
software systems that are used or relied on by the Company in the conduct of its
business or that were, or currently are being, sold or licensed by the Company
to customers (collectively, "INFORMATION TECHNOLOGY"), are Year 2000 Compliant.
For purposes of this Agreement, the term "YEAR 2000 COMPLIANT" means, with
respect to the Company's Information Technology, that the Information Technology
is designed to be used prior to, during and after the calendar Year 2000 A.D.,
and the Information Technology used during each such time period will accurately
receive, provide and process date and time data (including, but not limited to,
calculating, comparing and sequencing) from, into and between the 20th and 21st
centuries, including the years 1999 and 2000, and leap-year calculations, and
will not malfunction, cease to function, or provide invalid or incorrect results
as a result of the date or time data, to the extent that other information
technology, used in combination with the Information Technology, properly
exchanges date and time data with it. The Company has delivered to the Buyer
true and correct copies of all analyses, reports, studies and similar written
information, whether prepared by the Company or another party, relating to
whether the Information Technology is Year 2000 Compliant.

            k. NO MATERIALLY ADVERSE CONTRACTS, ETC. Neither the Company nor any
of its Subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in the
judgment of the Company's officers has or is expected in the

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future to have a Material Adverse Effect. Neither the Company nor any of its
Subsidiaries is a party to any contract or agreement which in the judgment of
the Company's officers has or is expected to have a Material Adverse Effect.

            l. TAX STATUS. Except as set forth on SCHEDULE 3(l), the Company and
each of its Subsidiaries has made or filed all federal, state and foreign income
and all other tax returns, reports and declarations required by any jurisdiction
to which it is subject (unless and only to the extent that the Company and each
of its Subsidiaries has set aside on its books provisions reasonably adequate
for the payment of all unpaid and unreported taxes) and has paid all taxes and
other governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and has set aside on its books provisions
reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations apply. There are no
unpaid taxes in any material amount claimed to be due by the taxing authority of
any jurisdiction, and the officers of the Company know of no basis for any such
claim. The Company has not executed a waiver with respect to the statute of
limitations relating to the assessment or collection of any foreign, federal,
state or local tax. Except as set forth on SCHEDULE 3(l), none of the Company's
tax returns is presently being audited by any taxing authority.

            m. CERTAIN TRANSACTIONS. Except as set forth on SCHEDULE 3(m) and
except for arm's length transactions pursuant to which the Company or any of its
Subsidiaries makes payments in the ordinary course of business upon terms no
less favorable than the Company or any of its Subsidiaries could obtain from
third parties and other than the grant of stock options disclosed on SCHEDULE
3(c), none of the officers, directors, or employees of the Company is presently
a party to any transaction with the Company or any of its Subsidiaries (other
than for services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Company, any corporation, partnership, trust or other entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.

            n. DISCLOSURE. All information relating to or concerning the Company
or any of its Subsidiaries set forth in this Agreement and provided to the
Buyers pursuant to Section 2(d) hereof and otherwise in connection with the
transactions contemplated hereby is true and correct in all material respects
and the Company has not omitted to state any material fact necessary in order to
make the statements made herein or therein, in light of the circumstances under
which they were made, not misleading. No event or circumstance has occurred or
exists with respect to the Company or any of its Subsidiaries or its or their
business, properties, prospects, operations or financial conditions, which has
not been publicly announced or disclosed but under applicable law, rule or
regulation, requires public disclosure or announcement by the Company (assuming
for this purpose that the Company's reports filed under the 1934 Act are being
incorporated into an effective registration statement filed by the Company under
the 1933 Act).

            o. ACKNOWLEDGMENT REGARDING BUYERS' PURCHASE OF SECURITIES. The
Company acknowledges and agrees that the Buyers are acting solely in the
capacity of arm's length

                                     - 10 -

<PAGE>   11

purchasers with respect to this Agreement and the transactions contemplated
hereby. The Company further acknowledges that no Buyer is acting as a financial
advisor or fiduciary of the Company (or in any similar capacity) with respect to
this Agreement and the transactions contemplated hereby and that any statement
made by any Buyer or any of their respective representatives or agents in
connection with this Agreement and the transactions contemplated hereby is not
advice or a recommendation and is merely incidental to the Buyers' purchase of
the Securities and has not been relied upon by the Company, its officers or
directors in any way. The Company further represents to each Buyer that the
Company's decision to enter into this Agreement has been based solely on the
independent evaluation of the Company and its representatives.

            p. NO INTEGRATED OFFERING. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would require registration under the
1933 Act of the issuance of the Securities to the Buyers. The issuance of the
Securities to the Buyers will not be integrated with any other issuance of the
Company's securities (past, current or future) for purposes of any stockholder
approval provisions applicable to the Company or its securities.

            q. NO BROKERS. The Company has taken no action which would give rise
to any claim by any person for brokerage commissions, finder's fees or similar
payments relating to this Agreement or the transactions contemplated hereby,
except for dealings with AB Phoenix, Inc., whose commissions and fees will be
paid for by the Company.

            r. PERMITS; COMPLIANCE. The Company and each of its Subsidiaries is
in possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exemptions, consents, certificates, approvals and orders
reasonably necessary to own, lease and operate its properties and to carry on
its business as it is now being conducted (collectively, the "COMPANY PERMITS"),
and there is no action pending or, to the knowledge of the Company, threatened
regarding suspension or cancellation of any of the Company Permits. Neither the
Company nor any of its Subsidiaries is in conflict with, or in default or
violation of, any of the Company Permits, except for any such conflicts,
defaults or violations which, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect. Since September 30,
1999, neither the Company nor any of its Subsidiaries has received any
notification with respect to possible conflicts, defaults or violations of
applicable laws, except for notices relating to possible conflicts, defaults or
violations, which conflicts, defaults or violations would not have a Material
Adverse Effect.

            s. ENVIRONMENTAL MATTERS.

               (i) Except as set forth in SCHEDULE 3(s), there are, to the
Company's knowledge, with respect to the Company or any of its Subsidiaries or
any predecessor of the Company, no past or present violations of Environmental
Laws (as defined below), releases of any material into the environment, actions,
activities, circumstances, conditions, events, incidents, or contractual
obligations which may give rise to any common law environmental liability or any
liability under the Comprehensive Environmental Response, Compensation and
Liability Act of

                                     - 11 -

<PAGE>   12

1980 or similar federal, state, local or foreign laws and neither the Company
nor any of its Subsidiaries has received any notice with respect to any of the
foregoing, nor is any action pending or, to the Company's knowledge, threatened
in connection with any of the foregoing. The term "ENVIRONMENTAL LAWS" means all
federal, state, local or foreign laws relating to pollution or protection of
human health or the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata), including,
without limitation, laws relating to emissions, discharges, releases or
threatened releases of chemicals, pollutants contaminants, or toxic or hazardous
substances or wastes (collectively, "HAZARDOUS MATERIALS") into the environment,
or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Materials, as
well as all authorizations, codes, decrees, demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved thereunder.

               (ii) Other than those that are or were stored, used or disposed
of in compliance with applicable law, no Hazardous Materials are contained on or
about any real property currently owned, leased or used by the Company or any of
its Subsidiaries, and no Hazardous Materials were released on or about any real
property previously owned, leased or used by the Company or any of its
Subsidiaries during the period the property was owned, leased or used by the
Company or any of its Subsidiaries, except in the normal course of the Company's
or any of its Subsidiaries' business.

               (iii) Except as set forth in SCHEDULE 3(s), there are no
underground storage tanks on or under any real property owned, leased or used by
the Company or any of its Subsidiaries that are not in compliance with
applicable law.

            t. TITLE TO PROPERTY. The Company and its Subsidiaries have good and
marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its Subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in SCHEDULE 3(t) or such
as would not have a Material Adverse Effect. Any real property and facilities
held under lease by the Company and its Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as would not have
a Material Adverse Effect.

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

            v. INTERNAL ACCOUNTING CONTROLS. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient, in
the judgment of the Company's board of directors, to provide reasonable
assurance that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as necessary
to permit

                                     - 12 -

<PAGE>   13

preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.

            w. FOREIGN CORRUPT PRACTICES. Neither the Company, nor any of its
Subsidiaries, nor any director, officer, agent, employee or other person acting
on behalf of the Company or any Subsidiary has, in the course of his actions
for, or on behalf of, the Company, used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds; violated or is
in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977;
or made any bribe, rebate, payoff, influence payment, kickback or other unlawful
payment to any foreign or domestic government official or employee.

            x. SOLVENCY. The Company (both before and after giving effect to the
transactions contemplated by this Agreement) is solvent (i.e., its assets have a
fair market value in excess of the amount required to pay its probable
liabilities on its existing debts as they become absolute and matured) and
currently the Company has no information that would lead it to reasonably
conclude that the Company would not have the ability to, nor does it intend to
take any action that would impair its ability to, pay its debts from time to
time incurred in connection therewith as such debts mature. The Company did not
receive a qualified opinion from its auditors with respect to its most recent
fiscal year end and does not anticipate or know of any basis upon which its
auditors might issue a qualified opinion in respect of its current fiscal year.

            y. NO INVESTMENT COMPANY. The Company is not, and upon the issuance
and sale of the Securities as contemplated by this Agreement will not be an
"investment company" required to be registered under the Investment Company Act
of 1940 (an "INVESTMENT COMPANY"). The Company is not controlled by an
Investment Company.

            z. FORM SB-2 OR FORM S-1 ELIGIBILITY. The Company meets the
requirements for the use of Form SB-2 or Form S-1 for registration of the sale
by the Buyers of the Registrable Securities (as defined in the Registration
Rights Agreement). There exist no facts or circumstances of which the Company is
aware that would prohibit or delay the preparation and filing of a registration
statement on either Form SB-2 or Form S-1 with respect to the Registrable
Securities (as defined in the Registration Rights Agreement) within the time
periods referred to therein.

            aa. NO GENERAL SOLICITATION. Neither the Company nor any distributor
participating on the Company's behalf in the transactions contemplated hereby,
if any, nor any person acting for the Company, or any such distributor, has
conducted any "general solicitation," as such term is defined in Regulation D,
with respect to any of the Securities being offered hereby.

                                     - 13 -

<PAGE>   14

         4. COVENANTS.

            a. BEST EFFORTS. The parties shall use their best efforts to satisfy
timely each of the conditions described in Section 6 and 7 of this Agreement.

            b. FORM D; BLUE SKY LAWS. The Company agrees to file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof to each Buyer promptly after such filing. The Company shall, on or
before the Closing Date, take such action as the Company shall reasonably
determine is necessary to qualify the Securities for sale to the Buyers at the
Closing pursuant to this Agreement under applicable securities or "blue sky"
laws of the states of the United States (or to obtain an exemption from such
qualification), and shall provide evidence of any such action so taken to each
Buyer on or prior to the Closing Date.

            c. REPORTING STATUS; ELIGIBILITY TO USE FORM S-3. The Company's
Common Stock is registered under Section 12(g) of the 1934 Act. So long as any
Buyer beneficially owns any of the Securities, the Company shall timely file all
reports required to be filed with the SEC pursuant to the 1934 Act, and the
Company shall not terminate its status as an issuer required to file reports
under the 1934 Act even if the 1934 Act or the rules and regulations thereunder
would permit such termination. The Company will take all necessary action to
meet the "registrant eligibility" requirements set forth in the general
instructions to Form S-3 as soon as practicable after the date hereof and
thereafter to take all actions necessary to maintain such eligibility.

            d. USE OF PROCEEDS. The Company shall use the proceeds from the sale
of the Debentures and the Warrants in the manner set forth in SCHEDULE 4(d)
attached hereto and made a part hereof and shall not, directly or indirectly,
use such proceeds for any loan to or investment in any other corporation,
partnership, enterprise or other person (except in connection with its currently
existing direct or indirect Subsidiaries).

            e. ADDITIONAL EQUITY CAPITAL; RIGHT OF FIRST REFUSAL. Subject to the
exceptions described below, the Company will not, without the prior written
consent of a majority- in-interest of the Buyers, negotiate or contract with any
party to obtain additional equity financing (including debt financing with an
equity component) during the period (the "LOCK-UP PERIOD") beginning on the
Closing Date and ending on one hundred eighty (180) days from the date the
Registration Statement (as defined in the Registration Rights Agreement) is
declared effective (subject to extension for any days in which sales of all of
the Registrable Securities (as defined in the Registration Rights Agreement)
cannot be made pursuant to the Registration Statement (as defined in the
Registration Rights Agreement) occurring after the date on which such
Registration Statement is first declared effective by the SEC). In addition,
subject to the exceptions described below, the Company will not conduct any
equity financing (including debt with an equity component) ("FUTURE OFFERINGS")
during the period beginning on the Closing Date and ending one hundred eighty
(180) days after the end of the Lock-up Period (subject to extension for any
days in which sales of all of the Registrable Securities cannot be made pursuant
to the Registration Statement occurring after the date on which such
Registration Statement is first declared effective by the SEC) unless it shall
have first delivered to each Buyer, at least fifteen (15) business days prior to
the closing of such Future Offering, written notice describing the proposed
Future Offering,

                                     - 14 -

<PAGE>   15

including the terms and conditions thereof and proposed definitive documentation
to be entered into in connection therewith, and providing each Buyer an option
during the ten (10) day period following delivery of such notice to purchase its
pro rata share (based on the ratio that the aggregate principal amount of
Debentures purchased by it hereunder bears to the aggregate principal amount of
all Debentures purchased hereunder) of the securities being offered in the
Future Offering on the same terms as contemplated by such Future Offering (the
limitations referred to in this sentence and the preceding sentence are
collectively referred to as the "CAPITAL RAISING LIMITATIONS"). In the event the
terms and conditions of a proposed Future Offering are amended in any respect
after delivery of the notice to the Buyers concerning the proposed Future
Offering, the Company shall deliver a new notice to each Buyer describing the
amended terms and conditions of the proposed Future Offering and each Buyer
thereafter shall have an option during the ten (10) day period following
delivery of such new notice to purchase its pro rata share of the securities
being offered on the same terms as contemplated by such proposed Future
Offering, as amended. The foregoing sentence shall apply to successive
amendments to the terms and conditions of any proposed Future Offering. The
Capital Raising Limitations shall not apply to any transaction involving (i)
issuances of securities in a firm commitment underwritten public offering
(excluding a continuous offering pursuant to Rule 415 under the 1933 Act) or
(ii) issuances of securities as consideration for a merger, consolidation or
purchase of assets, or in connection with any strategic partnership or joint
venture (the primary purpose of which is not to raise equity capital), or in
connection with the disposition or acquisition of a business, product or license
by the Company. The Capital Raising Limitations also shall not apply to the
issuance of securities upon exercise or conversion of the Company's options,
warrants or other convertible securities outstanding as of the date hereof or to
the grant of additional options or warrants, or the issuance of additional
securities, under any Company stock option or restricted stock plan approved by
the stockholders of the Company.

            f. EXPENSES. The Company shall pay to Rose Glen Capital Management,
L.P. ("ROSE GLEN") at the Closing a non-accountable expense allowance equal to
Thirty Thousand Dollars ($30,000) ($10,000 of which was previously advanced to
Rose Glen) for all expenses incurred by it in connection with the negotiation,
preparation, execution, delivery and performance of this Agreement and the other
agreements to be executed in connection herewith, including, without limitation,
attorneys' and consultants' fees and expenses and travel expenses.

            g. FINANCIAL INFORMATION. The Company agrees to send the following
reports to each Buyer until such Buyer transfers, assigns, or sells all of the
Securities: (i) within ten (10) days after the filing with the SEC, a copy of
its Annual Report on Form 10-K (or Form 10-KSB), its Quarterly Reports on Form
10-Q (or Form 10-QSB) and any Current Reports on Form 8-K; (ii) within one (1)
day after release, copies of all press releases issued by the Company or any of
its Subsidiaries; and (iii) contemporaneously with the making available or
giving to the stockholders of the Company, copies of any notices or other
information the Company makes available or gives to such stockholders.

            h. RESERVATION OF SHARES. The Company shall at all times have
authorized, and reserved for the purpose of issuance, a sufficient number of
shares of Common Stock to provide for the full conversion of the outstanding
Debentures and issuance of the Conversion Shares issuable upon conversion of or
otherwise pursuant to the Debentures (including sufficient shares to provide

                                     - 15 -

<PAGE>   16

for the full exercise of the Investment Options) (based on the lesser of the
Applicable Percentage multiplied by the Variable Conversion Price in effect from
time to time and the Applicable Percentage multiplied by the Fixed Conversion
Price in effect from time to time (each as defined in the Debentures)) and the
full exercise of the Warrants and the issuance of the Warrant Shares upon
exercise of or otherwise pursuant to the Warrants (based upon the Exercise Price
(as defined in the Warrants) of the Warrants in effect from time to time). The
Company shall not reduce the number of shares of Common Stock reserved for
issuance upon conversion of or otherwise pursuant to the Debentures (including
upon exercise of the Investment Options) and exercise of or otherwise pursuant
to the Warrants without the consent of each Buyer. The Company shall use its
best efforts at all times to maintain the number of shares of Common Stock so
reserved for issuance at no less than two (2) times the number that is then
actually issuable upon full conversion of the Debentures and full exercise of
the Investment Option (based on the lesser of the Applicable Percentage
multiplied by the Variable Conversion Price in effect from time to time and the
Applicable Percentage multiplied by the Fixed Conversion Price in effect from
time to time (each as defined in the Debentures)) and full exercise of the
Warrants (based on the Exercise Price of the Warrants in effect from time to
time). If at any time the number of shares of Common Stock authorized and
reserved for issuance is below the number of Conversion Shares issued and
issuable upon conversion of or otherwise pursuant to the Debentures and full
exercise of the Investment Options (based on the lesser of the Applicable
Percentage multiplied by the Variable Conversion Price in effect from time to
time and the Applicable Percentage multiplied by the Fixed Conversion Price in
effect from time to time (each as defined in the Debentures) and assuming the
full exercise of the Investment Options thereunder) and the number of Warrant
Shares issued or issuable upon exercise of or otherwise pursuant to the Warrants
(based on the Exercise Price of the Warrants in effect from time to time), the
Company will promptly take all corporate action necessary to authorize and
reserve a sufficient number of shares, including, without limitation, calling a
special meeting of stockholders to authorize additional shares to meet the
Company's obligations under this Section 4(h), in the case of an insufficient
number of authorized shares, and using its best efforts to obtain stockholder
approval of an increase in such authorized number of shares.

            i. LISTING. The Company shall promptly secure the listing of the
Conversion Shares and Warrant Shares upon each national securities exchange or
automated quotation system, if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance) and, so long as any Buyer owns
any of the Securities, shall maintain, so long as any other shares of Common
Stock shall be so listed, such listing of all Conversion Shares from time to
time issuable upon conversion of or otherwise pursuant to the Debentures
(including upon exercise of the Investment Options) and all Warrant Shares from
time to time issuable upon exercise of or otherwise pursuant to the Warrants.
The Company will so long as any Buyer owns any of the Securities, maintain the
listing and trading of its Common Stock on the OTC BB until the obligations
under Section 4(l) are met and will comply in all respects with the Company's
reporting, filing and other obligations under the bylaws or rules of the
National Association of Securities Dealers ("NASD") and any other exchanges, as
applicable. The Company shall promptly provide to each Buyer copies of any
notices it receives from OTC BB and any other exchanges or quotation systems on
which the Common Stock is then listed regarding the continued eligibility of the
Common Stock for listing on such exchanges and quotation systems.

                                     - 16 -

<PAGE>   17

            j. CORPORATE EXISTENCE. So long as a Buyer beneficially owns any
Debentures or Warrants, the Company shall maintain its corporate existence and
shall not merge, consolidate or sell all or substantially all of the Company's
assets, except in the event of a merger or consolidation or sale of all or
substantially all of the Company's assets, where (i) the successor or acquiring
entity and, if an entity different from the successor or acquiring entity, the
entity whose securities into which the Debentures shall become convertible
pursuant to Article II.C.2 of the Debentures, in such transaction assumes the
Company's obligations hereunder and under the agreements and instruments entered
into in connection herewith (including the Debentures and the Warrants) and (ii)
the entity whose securities into which the Debentures shall become convertible
pursuant to Article II.C.2 of the Debentures is a publicly traded corporation
whose Common Stock is listed for trading on Nasdaq NMS, Nasdaq SmallCap, NYSE or
AMEX.

            k. NO INTEGRATION. The Company shall not make any offers or sales of
any security (other than the Securities) under circumstances that would require
registration of the Securities being offered or sold hereunder under the 1933
Act or cause the offering of the Securities to be integrated with any other
offering of securities by the Company for the purpose of any stockholder
approval provision applicable to the Company or its securities.

            l. LISTING ON NASDAQ NMS, NASDAQ SMALLCAP, THE NYSE OR AMEX. The
Company will take all necessary action to promptly secure the listing or
quotation of the Common Stock on the Nasdaq NMS or, if the Company is not
eligible for the Nasdaq NMS, the Nasdaq SmallCap or AMEX and will thereafter, so
long as the Buyer owns any of the Securities, maintain the listing or quotation
of the Common Stock on the Nasdaq NMS, the Nasdaq SmallCap, the NYSE or the
AMEX.

         5. TRANSFER AGENT INSTRUCTIONS. The Company shall issue irrevocable
instructions to its transfer agent to issue certificates, registered in the name
of each Buyer or its nominee, for the Conversion Shares and Warrant Shares in
such amounts as specified from time to time by each Buyer to the Company upon
conversion of the Debentures (including upon exercise of the Investment Options)
or exercise of the Warrants in accordance with the terms thereof (the
"IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). Prior to registration of the
Conversion Shares and Warrant Shares under the 1933 Act or the date on which the
Conversion Shares and Warrant Shares may be sold pursuant to Rule 144 without
any restriction as to the number of securities as of a particular date that can
then be immediately sold, all such certificates shall bear the restrictive
legend specified in Section 2(g) of this Agreement. The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 5, and stop transfer instructions to give effect to Section 2(f)
hereof (in the case of the Conversion Shares and Warrant Shares, prior to
registration of the Conversion Shares and Warrant Shares under the 1933 Act or
the date on which the Conversion Shares and Warrant Shares may be sold pursuant
to Rule 144 without any restriction as to the number of securities as of a
particular date that can then be immediately sold), will be given by the Company
to its transfer agent and that the Securities shall otherwise be freely
transferable on the books and records of the Company as and to the extent
provided in this Agreement and the Registration Rights Agreement. Nothing in
this Section shall affect in any way the Buyer's obligations and agreement set
forth in Section 2(g) hereof to comply with all applicable prospectus delivery
requirements, if any, upon re-sale of the Securities. If a Buyer provides the
Company with

                                     - 17 -

<PAGE>   18

(i) an opinion of counsel in form, substance and scope customary for opinions in
comparable transactions, to the effect that a public sale or transfer of such
Securities may be made without registration under the 1933 Act and such sale or
transfer is effected or (ii) the Buyer provides reasonable assurances that the
Securities can be sold pursuant to Rule 144, the Company shall permit the
transfer, and, in the case of the Conversion Shares and Warrant Shares, promptly
instruct its transfer agent to issue one or more certificates, free from any
restrictive legend, in such name and in such denominations as specified by such
Buyer.

         6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligation of
the Company hereunder to issue and sell the Debentures and Warrants to a Buyer
at the Closing is subject to the satisfaction, at or before the Closing Date, of
each of the following conditions thereto, provided that these conditions are for
the Company's sole benefit and may be waived by the Company at any time in its
sole discretion:

            a. The applicable Buyer shall have executed this Agreement and the
Registration Rights Agreement, and delivered the same to the Company.

            b. The applicable Buyer shall have delivered the Purchase Price in
accordance with Section 1(b) above.

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

            d. No litigation, statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by or in any court or governmental authority of competent jurisdiction
or any self-regulatory organization having authority over the matters
contemplated hereby which prohibits the consummation of any of the transactions
contemplated by this Agreement.

         7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE. The obligation of
each Buyer hereunder to purchase the Debentures and Warrants at the Closing is
subject to the satisfaction, at or before the Closing Date, of each of the
following conditions, provided that these conditions are for such Buyer's sole
benefit and may be waived by such Buyer at any time in its sole discretion:

            a. The Company shall have executed this Agreement and the
Registration Rights Agreement, and delivered the same to the Buyer.

                                     - 18 -

<PAGE>   19

            b. The Company shall have delivered to such Buyer duly executed
Debentures (in such denominations as the Buyer shall request, but in no event
shall in any Debenture be issued in an amount less than $1,000,000) and Warrants
in accordance with Section 1(b) above.

            c. The Irrevocable Transfer Agent Instructions, in form and
substance satisfactory to a majority-in-interest of the Buyers, shall have been
delivered to and acknowledged in writing by the Company's Transfer Agent.

            d. The representations and warranties of the Company shall be true
and correct in all material respects as of the date when made and as of the
Closing Date as though made at such time (except for representations and
warranties that speak as of a specific date, which representations and
warranties shall be true and correct as of such date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the Closing Date. The Buyer shall
have received a certificate or certificates, executed by the chief executive
officer of the Company, dated as of the Closing Date, to the foregoing effect
and as to such other matters as may be reasonably requested by such Buyer
including, but not limited to certificates with respect to the Company's
Certificate of Incorporation, By-laws and Board of Directors' resolutions
relating to the transactions contemplated hereby.

            e. No litigation, statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by or in any court or governmental authority of competent jurisdiction
or any self-regulatory organization having authority over the matters
contemplated hereby which prohibits the consummation of any of the transactions
contemplated by this Agreement.

            f. The Conversion Shares and Warrant Shares shall have been
authorized for quotation on the OTC BB and trading in the Common Stock on the
OTC BB shall not have been suspended by the SEC or the OTC BB.

            g. The Buyer shall have received opinions of the Company's counsel,
dated as of the Closing Date, in form, scope and substance reasonably
satisfactory to the Buyer and in substantially the same form as EXHIBIT "D-1"
and EXHIBIT "D-2" attached hereto.

            h. The Buyer shall have received an officer's certificate described
in Section 3(c) above, dated as of the Closing Date.

         8. GOVERNING LAW; MISCELLANEOUS.

            a. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware applicable to agreements
made and to be performed in the State of Delaware (without regard to principles
of conflict of laws). Both parties irrevocably consent to the jurisdiction of
the United States federal courts and the state courts located in Delaware with
respect to any suit or proceeding based on or arising under this Agreement, the
agreements entered into in connection herewith or the transactions contemplated
hereby or thereby

                                     - 19 -

<PAGE>   20

and irrevocably agree that all claims in respect of such suit or proceeding may
be determined in such courts. Both parties irrevocably waive the defense of an
inconvenient forum to the maintenance of such suit or proceeding. Both parties
further agree that service of process upon a party mailed by first class mail
shall be deemed in every respect effective service of process upon the party in
any such suit or proceeding. Nothing herein shall affect either party's right to
serve process in any other manner permitted by law. Both parties agree that a
final non-appealable judgment in any such suit or proceeding shall be conclusive
and may be enforced in other jurisdictions by suit on such judgment or in any
other lawful manner.

            b. COUNTERPARTS; SIGNATURES BY FACSIMILE. This Agreement may be
executed in one or more counterparts, all of which shall be considered one and
the same agreement and shall become effective when counterparts have been signed
by each party and delivered to the other party. This Agreement, once executed by
a party, may be delivered to the other party hereto by facsimile transmission of
a copy of this Agreement bearing the signature of the party so delivering this
Agreement.

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

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

            e. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein and, except as specifically set forth
herein or therein, neither the Company nor the Buyer makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be waived or amended other than by an instrument in writing
signed by the party to be charged with enforcement.

            f. NOTICES. Any notices required or permitted to be given under the
terms of this Agreement shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier (including a recognized
overnight delivery service) or by facsimile and shall be effective five days
after being placed in the mail, if mailed by regular United States mail, or upon
receipt, if delivered personally or by courier (including a recognized overnight
delivery service) or by facsimile, in each case addressed to a party. The
addresses for such communications shall be:

               If to the Company:

                      2030 Marine Drive
                      Suite 100
                      North Vancouver, B.C.  V7P1V7
                      Attention:  Chief Executive Officer
                      Facsimile: (604) 986-0869

                                     - 20 -

<PAGE>   21

            With copy to:

                      Wolin, Ridley & Miller LLP
                      3100 Bank One Center
                      1717 Main Street
                      Dallas, Texas 75201-4681
                      Attention:  Norman Miller
                      Facsimile: (214) 939-4949

            If to a Buyer: To the address set forth immediately below such
                           Buyer's name on the signature pages hereto.

            With copy to:

                      Bradley D. Houser
                      Akerman, Senterfitt & Edison, P.A.
                      SunTrust International Center
                      One S.E. Third Avenue, 28th Floor
                      Miami, Florida  33131-1704
                      Facsimile:  (305) 374-5095

         Each party shall provide notice to the other party of any change in
address.

            g. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and assigns. Neither
the Company nor any Buyer shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other.
Notwithstanding the foregoing, subject to Section 2(f), any Buyer may assign its
rights hereunder to any person that purchases Securities in a private
transaction from a Buyer or to any of its "affiliates," as that term is defined
under the 1934 Act, without the consent of the Company.

            h. THIRD PARTY BENEFICIARIES. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.

            i. SURVIVAL. The representations and warranties of the Company and
the agreements and covenants set forth in Sections 3, 4, 5 and 8 shall survive
the closing hereunder notwithstanding any due diligence investigation conducted
by or on behalf of the Buyers. The Company agrees to indemnify and hold harmless
each of the Buyers and all their officers, directors, employees and agents for
loss or damage arising as a result of or related to any breach or alleged breach
by the Company of any of its representations, warranties and covenants set forth
in Sections 3 and 4 hereof or any of its covenants and obligations under this
Agreement or the Registration Rights Agreement, including advancement of
expenses as they are incurred.

            j. PUBLICITY. The Company and each of the Buyers shall have the
right to review a reasonable period of time before issuance of any press
releases, filings with the SEC,

                                     - 21 -

<PAGE>   22

NASD or any stock exchange or interdealer quotation system, or any other public
statements with respect to the transactions contemplated hereby; provided,
however, that the Company shall be entitled, without the prior approval of each
of the Buyers, to make any press release or public filings with respect to such
transactions as is required by applicable law and regulations (although each of
the Buyers shall be consulted by the Company in connection with any such press
release prior to its release and shall be provided with a copy thereof and be
given an opportunity to comment thereon).

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

            l. NO STRICT CONSTRUCTION. The language used in this Agreement will
be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.

            m. REMEDIES. The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to each Buyer, by vitiating
the intent and purpose of the transactions contemplated hereby. Accordingly, the
Company acknowledges that the remedy at law for a breach of its obligations
under this Agreement will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Agreement, that each
Buyer shall be entitled, in addition to all other available remedies in law or
in equity, to an injunction or injunctions to prevent or cure any breaches of
the provisions of this Agreement and to enforce specifically the terms and
provisions of this Agreement, without the necessity of showing economic loss and
without any bond or other security being required.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                     - 22 -

<PAGE>   23

         IN WITNESS WHEREOF, the undersigned Buyers and the Company have caused
this Agreement to be duly executed as of the date first above written.

SMARTSOURCES.COM., INC.

By:      /s/ DARRYL CARDEY
         ----------------------------------------------------
         Darryl Cardey
         Chief Financial Officer and Vice President - Finance

RGC INTERNATIONAL INVESTORS, LDC

By:      Rose Glen Capital Management, L.P.,
         Investment Manager

By:      RGC General Partner Corp.,
         as General Partner

By:      /s/ STEVEN B. KATZNELSON
         ----------------------------------------------------
         Steven B. Katznelson
         Managing Director

RESIDENCE:  Cayman Islands

ADDRESS:

         c/o Rose Glen Capital Management, L.P.
         3 Bala Plaza East, Suite 200
         251 St. Asaphs Road
         Bala Cynwyd, PA 19004
         Facsimile:        (610) 617-0570
         Telephone:        (610) 617-5900

AGGREGATE SUBSCRIPTION AMOUNT:

         Principal Amount of Debentures:             $5,000,000
         Number of Warrants:                         330,000
         Aggregate Purchase Price:                   $5,000,000

                                     - 23 -<PAGE>   1

                                                                   EXHIBIT 10.02

                                                                       EXHIBIT A
                                                                              TO
                                                                      SECURITIES
                                                                        PURCHASE
                                                                       AGREEMENT

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE SECURITIES
MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT, OR AN
OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF
COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER SAID
ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER THE SECURITIES ACT.

                              CONVERTIBLE DEBENTURE

February 24, 2000                                                  $5,000,000.00

     FOR VALUE RECEIVED, SMARTSOURCES.COM, INC., a corporation organized under
the laws of the State of Colorado (hereinafter called the "BORROWER"), hereby
promises to pay to the order of RGC INTERNATIONAL INVESTORS, LDC or its
registered assigns (the "HOLDER") the sum of Five Million Dollars
($5,000,000.00) on February 24, 2005 (the "MATURITY DATE") and to pay interest
on the unpaid principal balance hereof at the rate of seven percent (7%) per
annum from the date hereof (the "ISSUE DATE") until the same becomes due and
payable (which interest shall accrue on a daily basis), whether at maturity or
upon conversion, redemption, acceleration or otherwise. Any amount of principal
of or interest on this Debenture which, to the extent not converted in
accordance with the provisions hereof, is not paid when due shall bear interest
at the rate of seventeen percent (17%) per annum ("DEFAULT INTEREST") from the
due date thereof until the same is paid. Interest shall be calculated based on a
360-day year and shall commence accruing on the Issue Date and, to the extent
not converted in accordance with the provisions hereof, shall be payable in
arrears at such time as the outstanding principal balance hereof with respect to
which such interest has accrued becomes due and payable hereunder. All payments
of principal and interest (to the extent not converted into shares of the
Borrower's common stock, no par value ("COMMON STOCK"), in accordance with the
terms hereof) shall be made in, and all references herein to monetary
denominations shall refer to, lawful money of the United States of America. All
payments shall be made at such address as the Holder shall hereafter give to the
Borrower by written notice made in accordance with the provisions of this
Debenture. The Maturity Date is subject to extension, at the option of the
Holder, as provided in Article IV hereof. This Debenture is being issued by the
Borrower pursuant to the Securities Purchase Agreement, dated as of February 24,
2000, between

<PAGE>   2

the Borrower and the Holder (the "PURCHASE AGREEMENT"). Each capitalized term
used, but not otherwise defined, herein shall have the meaning ascribed thereto
in the Purchase Agreement. For purposes hereof, the term "DEBENTURES" shall be
deemed to refer to this Debenture, all other convertible debentures issued
pursuant to the Purchase Agreement and all convertible debentures issued in
replacement hereof or thereof or otherwise with respect hereto or thereto.

                                  I. REDEMPTION

     A. MANDATORY REDEMPTION. If any of the following events (each, a "MANDATORY
REDEMPTION EVENT") shall occur:

          1. The Borrower fails to pay the principal hereof or interest thereon
when due on this Debenture, whether at maturity, upon mandatory prepayment
pursuant to Article I.B, upon acceleration or otherwise.

          2. The Borrower (i) fails to issue shares of Common Stock to any
holder of the Debentures upon exercise by the holder of its conversion rights in
accordance with the terms of the Debentures (including upon exercise of or
otherwise pursuant to the Investment Options (as defined in Article II.E.
below)) (for a period of at least sixty (60) days if such failure is solely as a
result of the circumstances governed by the second paragraph of Article II.F
below and the Borrower is using its best efforts to authorize a sufficient
number of shares of Common Stock as soon as practicable), (ii) fails to transfer
or to cause its transfer agent to transfer (electronically or in certificated
form) any certificate for shares of Common Stock issued to any Holder upon
conversion of or otherwise pursuant to the Debentures (or upon exercise of or
otherwise pursuant to the Investment Options) as and when required by the
Debentures or the Registration Rights Agreement, dated as of February 24, 2000,
by and among the Borrower and the other signatories thereto (the "REGISTRATION
RIGHTS AGREEMENT"), (iii) fails to remove any restrictive legend (or to withdraw
any stop transfer instructions in respect thereof) on any certificate or any
shares of Common Stock issued to the holders of the Debentures upon conversion
of or otherwise pursuant to the Debentures (or upon exercise of or otherwise
pursuant to the Investment Options) as and when required by the Debentures, the
Purchase Agreement or the Registration Rights Agreement, or (iv) fails to
fulfill its obligations pursuant to Sections 4(c), 4(d), 4(e), 4(h), 4(i), 4(j),
or 5 of the Purchase Agreement (or makes any announcement, statement or threat
that it does not intend to honor the obligations described in this paragraph),
and any such failure shall continue uncured (or any announcement, statement or
threat not to honor its obligations shall not be rescinded in writing) for ten
(10) days after the Borrower shall have been notified thereof in writing by any
holder of the Debentures;

          3. The Borrower fails to obtain effectiveness with the Securities and
Exchange Commission (the "SEC") prior to August 24, 2000 of the Registration
Statement (as defined in the Registration Rights Agreement, the "REGISTRATION
STATEMENT") required to be filed pursuant to Section 2(a) of the Registration
Rights Agreement, or fails to obtain the effectiveness of any additional
Registration Statement (required to be filed pursuant to Section 3(b)of the
Registration Rights Agreement) within sixty (60) days after the Registration
Trigger Date (as defined in the

                                       2
<PAGE>   3
Registration Rights Agreement), or any such Registration Statement, after its
initial effectiveness and during the Registration Period (as defined in the
Registration Rights Agreement), lapses in effect or sales of all of the
Registrable Securities (as defined in the Registration Rights Agreement, the
"REGISTRABLE SECURITIES") otherwise cannot be made thereunder (whether by reason
of the Borrower's failure to amend or supplement the prospectus included therein
in accordance with the Registration Rights Agreement, the Borrower's failure to
file and obtain effectiveness with the SEC of an additional Registration
Statement required pursuant to Section 3(b) of the Registration Rights Agreement
or otherwise) for more than twenty (20) consecutive days or more than forty-five
(45) days in any twelve (12) month period after such Registration Statement
becomes effective;

          4. The Borrower or any subsidiary of the Borrower shall make an
assignment for the benefit of creditors, or apply for or consent to the
appointment of a receiver or trustee for it or for all or substantially all of
its property or business; or such a receiver or trustee shall otherwise be
appointed;

          5. Bankruptcy, insolvency, reorganization or liquidation proceedings
or other proceedings for relief under any bankruptcy law or any law for the
relief of debtors shall be instituted by or against the Borrower or any
subsidiary of the Borrower;

          6. The Borrower shall: (i) fail to maintain the listing of the Common
Stock on the Over-the-Counter Bulletin Board (the "OTC BB"); (ii) following the
date on which listing or quotation of the Common Stock on the Nasdaq National
Market ("Nasdaq"), the New York Stock Exchange (the "NYSE") or the American
Stock Exchange ("AMEX") or, if the Corporation is not eligible for Nasdaq, the
NYSE or AMEX, the Nasdaq SmallCap Market (the "Nasdaq SmallCap") has been
secured by the Corporation, fail to maintain such listing on any of Nasdaq,
Nasdaq SmallCap, the NYSE or AMEX;

          7. The sale, conveyance or disposition of all or substantially all of
the assets of the Borrower, the effectuation by the Borrower of a transaction or
series of related transactions in which more than 50% of the voting power of the
Borrower is disposed of (other than a disposition of more than 50% of the voting
power of the Borrower to the Holder), or the consolidation, merger or other
business combination of the Borrower with or into any other individual,
corporation, limited liability company, partnership, association, trust or other
entity or organization (each, a "PERSON") or Persons when the Borrower is not
the survivor; or

          8. The Borrower breaches any covenant contained in Article III hereof
and such breach continues uncured for a period of ten (10) days after written
notice thereof to the Borrower from any holder of Debentures,

then, upon the occurrence and during the continuation of any Mandatory
Redemption Event specified in subparagraphs 1, 2, 3, 6, 7 or 8 at the option of
the holders of at least 50% of the then outstanding principal amount of the
Debentures exercisable by the delivery of written notice (the"MANDATORY
REDEMPTION NOTICE") to the Borrower of such Mandatory Redemption Event, or upon
the occurrence of any Mandatory Redemption Event specified in subparagraphs 4 or
5, the then

                                       3
<PAGE>   4

outstanding Debentures shall become immediately redeemable and the Borrower
shall purchase each holder's outstanding Debentures for an amount equal to the
greater of (i) 120% multiplied by the sum of (a) the then outstanding principal
amount of the Debentures, plus (b) all accrued and unpaid interest thereon for
the period beginning on the Issue Date and ending on the date of payment of the
Mandatory Redemption Amount (the "MANDATORY REDEMPTION DATE"), plus (c) Default
Interest, if any, on the amounts referred to in clauses (a) and/or (b), plus (d)
all Conversion Default Payments (as defined in Article II.E below), Delivery
Default Payments (as defined in Article II.D.3 below) and any other amounts owed
to such holder pursuant to Section 2(c) of the Registration Rights Agreement,
and (ii) the "PARITY VALUE" of the Debentures to be redeemed, where parity value
means the product of (a) the highest number of shares of Common Stock issuable
upon conversion of or otherwise pursuant to such Debentures in accordance with
the terms hereof (without giving any effect to any limitations on conversions of
Debentures contained herein, and treating the Trading Day (as defined in Article
II.B.1) immediately preceding the Mandatory Redemption Date as the "CONVERSION
DATE" (as defined in Article II.D.5) for purposes of determining the lowest
applicable Conversion Price, unless the Mandatory Redemption Event arises as a
result of a breach in respect of a specific Conversion Date in which case such
Conversion Date shall be the Conversion Date), multiplied by (b) the highest
Closing Price (as defined below) for the Common Stock during the period
beginning on the date of first occurrence of the Mandatory Redemption Event and
ending one day prior to the Mandatory Redemption Date (the greater of such
amounts being referred to as the "MANDATORY REDEMPTION AMOUNT"). The Mandatory
Redemption Amount, together with all other ancillary amounts payable hereunder,
shall immediately become due and payable, all without demand, presentment or
notice (other than the Mandatory Redemption Notice), all of which hereby are
expressly waived, together with all costs, including, without limitation,
reasonable legal fees and expenses of collection, and Holder shall be entitled
to exercise all other rights and remedies available at law or in equity.
"CLOSING PRICE," as of any date, means the last sale price of the Common Stock
on the OTC BB as reported by Bloomberg Financial Markets or an equivalent
reliable reporting service mutually acceptable to and hereafter designated by
the holders of a majority of the outstanding principal amount of the Debentures
and the Borrower ("BLOOMBERG") or, if the OTC BB is not the principal trading
market for such security, the last sale price of such security on the principal
securities exchange or trading market where such security is listed or traded as
reported by Bloomberg, or, if no last sale price of such security is available
in any of the foregoing manners on the electronic bulletin board for such
security or in any of the foregoing manners, the average of the bid prices of
any market makers for such security that are listed in the "pink sheets" by the
National Quotation Bureau, Inc. If the Closing Price cannot be calculated for
such security on such date in the manner provided above, the Closing Price shall
be the fair market value as mutually determined by the Borrower and the holders
of a majority of the outstanding principal amount of the Debentures for which
the calculation of the Closing Price is required.

     B. TRADING MARKET REDEMPTION. If any Debentures cease to be convertible by
any holder of the Debentures as a result of the limitations described in Article
II.A.3 below (a "TRADING MARKET REDEMPTION EVENT"), and the Borrower has not,
prior to, or within thirty (30) days of, the date that such Trading Market
Redemption Event arises, either (i) obtained the Stockholder Approval (as
defined in Article II.A.3) or (ii) eliminated any prohibitions under applicable
law or the rules or regulations of any stock exchange, interdealer quotation
system or other self-regulatory organization

                                       4
<PAGE>   5

with jurisdiction over the Borrower or any of its securities on the Borrower's
ability to issue shares of Common Stock in excess of the Maximum Share Amount
(as defined in Article II.A.3), then the Borrower shall be obligated to redeem
immediately all of the then outstanding principal amount of the Debentures, in
accordance with this Article I.B. An irrevocable redemption notice (the "TRADING
MARKET REDEMPTION NOTICE") shall be delivered promptly to the holders of the
Debentures in accordance with the terms hereof and shall state (i) that the
Maximum Share Amount (as defined in Article II.A.3) has been issued upon
conversion of the Debentures, (ii) that the Borrower is obligated to redeem all
of the outstanding Debentures and (iii) the Mandatory Redemption Date, which
shall be a date within five (5) business days of the earlier of (a) the date of
the Trading Market Redemption Notice or (b) the date on which the holders of the
Debentures notify the Borrower of the occurrence of a Trading Market Redemption
Event. On the Mandatory Redemption Date, the Borrower shall make payment of the
Mandatory Redemption Amount (as defined in Article I.A above) in cash.

     C. REDEMPTION IN LIEU OF CONVERSION. Notwithstanding anything to the
contrary contained in this Article I and subject to the terms of this Article
I.D, after August 24, 2000, if (i) the Closing Price of the Common Stock is less
than the Fixed Conversion Price (as defined in Article II.B.1) (the "REDEMPTION
THRESHOLD"), (ii) there is no Mandatory Redemption Event or Trading Market
Redemption Event and (iii) (a) any Registration Statement required to be filed
and be effective pursuant to the Registration Rights Agreement is then in effect
and has been in effect and sales of all of the Registrable Securities can be
made thereunder for at least thirty (30) Trading Days prior to the date the
Notice of Conversion is submitted and (b) the Borrower has a sufficient number
of authorized shares of Common Stock reserved for issuance upon full conversion
of the Debentures (including upon full exercise of the Investment Options), on
any day a Notice of Conversion (as defined in Article II.D below) is given, the
Borrower shall have the option, in lieu of issuing shares of Common Stock to the
holders upon conversion in accordance with the terms of Article II below, to
redeem all or any portion of principal amount of the Debentures submitted for
conversion for an amount in cash equal to the number of shares of Common Stock
that would have otherwise been issued upon conversion of the Debentures at the
applicable Conversion Price (as defined in Article II) multiplied by the
Redemption Market Price (as defined herein) (the "REDEMPTION IN LIEU OF
CONVERSION AMOUNT"). "REDEMPTION MARKET PRICE" shall be equal to the Closing
Price of the Common Stock on the Conversion Date. If the Closing Price of the
Common Stock is at any time below the Redemption Threshold (a "REDEMPTION IN
LIEU OF CONVERSION NOTICE TRIGGER DATE"), the Borrower shall promptly notify the
holders of the Debentures as to whether the Borrower will issue shares of Common
Stock, deliver cash in redemption or any combination thereof in respect of the
Debentures submitted for conversion pursuant to Article II. The Borrower will be
bound by such notice for a period of thirty (30) Trading Days (the "TERM") from
the date of such notice, at the end of which the Borrower may elect to renew
such notice. A failure to issue or renew within one (1) Trading Day of the
Redemption In Lieu of Conversion Notice Trigger Date or the end of a Term shall
be deemed to be an election to issue Common Stock upon conversion of the
Debentures during the subsequent Term. Any redemption amounts payable hereunder
shall be paid to the converting Holder within two (2) Trading Days of the
Conversion Date.

                                       5
<PAGE>   6

     D. FAILURE TO PAY REDEMPTION AMOUNTS. In the case of a Mandatory Redemption
Event or the delivery of a Redemption In Lieu of Conversion Notice, if the
Borrower fails to pay the Mandatory Redemption Amount or Redemption In Lieu of
Conversion Amount, as applicable, within five (5) business days of written
notice that such amount is due and payable, then (assuming there are sufficient
authorized shares) in addition to all other available remedies, the Holder shall
have the right at anytime, so long as the Mandatory Redemption Event continues,
or at any time after the Redemption In Lieu of Conversion Date, to require the
Borrower, upon written notice, to issue as soon as practicable thereafter (in
accordance with and subject to the terms of Article II below), in lieu of the
Mandatory Redemption Amount, Redemption In Lieu of Conversion Amount, as
applicable, the number of shares of Common Stock of the Borrower equal to such
applicable redemption amount divided by any Conversion Price (as defined below),
as chosen in the sole discretion of Holder, in effect from the date of the
Mandatory Redemption Event (or the date of delivery of a Redemption In Lieu of
Conversion Notice) until the date Holder elects to exercise its rights pursuant
to this Article I.D.

                     II. CONVERSION AT THE OPTION OF HOLDER

     A. OPTIONAL CONVERSION

          1. CONVERSION AMOUNT. Subject to Article II.A.2 below, the Holder may,
at its option at any time and from time to time, upon surrender of this
Debenture, convert all or any portion of this Debenture into Common Stock as set
forth below (an "OPTIONAL CONVERSION"). This Debenture shall be convertible into
such number of fully paid and nonassessable shares of Common Stock as such
Common Stock exists on the Issue Date, or any other shares of capital stock or
other securities of the Borrower into which such Common Stock is thereafter
changed or reclassified, as is determined by dividing (a) the Conversion Amount
(as defined below) by (b) the Conversion Price (as defined in Article II.B
below); provided, however, that in no event shall Holder be entitled to convert
this Debenture (or exercise Investment Options in connection with any such
conversion) to the extent that the sum of (x) the number of shares of Common
Stock beneficially owned by Holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of this Debenture, the unexercised Investment Options or the
unexercised or unconverted portion of any other securities of the Borrower
(including, without limitation, the warrants issued by the Borrower pursuant to
the Purchase Agreement) subject to a limitation on conversion or exercise
analogous to the limitations contained herein) and (y) the number of shares of
Common Stock issuable upon the conversion of the portion of this Debenture (and
upon the exercise, if any, of Investment Options in connection therewith) with
respect to which the determination of this proviso is being made, would result
in beneficial ownership by Holder and Holder's affiliates of more than 4.9% of
the outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, (i) beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13D-G thereunder, except as otherwise provided in clause
(x) of such proviso and (ii) such proviso may not be amended without (a) the
written consent of the Holder and the Borrower and (b) the approval of the
holders of a majority of Borrower's Common Stock present, or represented by
proxy,

                                       6
<PAGE>   7
and voting at any meeting called to vote on such proviso. "CONVERSION AMOUNT"
means (i) the portion of the principal amount of this Debenture being converted,
plus (ii) all accrued and unpaid interest thereon for the period beginning on
the Issue Date and ending on the Conversion Date (as defined in Article II.B.1),
plus (iii) Default Interest, if any, on the amounts referred to in the
immediately preceding clauses (i) and/or (ii), plus (iv) any Conversion Default
Payments (as defined in Article II.E) and Delivery Default Payments (as defined
in Article II.D.3) payable with respect thereto, together with any other amounts
owed to Holder pursuant to Section 2(c) of the Registration Rights Agreement.

          2. CONVERSION RESTRICTIONS. The Holder may convert this Debenture
beginning on August 24, 2000; provided, however, that the restriction on
conversion of this Debenture prior to August 24, 2000 shall not apply to
conversions taking place on any Conversion Date (i) on which the Trade Price (as
defined below) of the Common Stock is greater than or equal to either (a) one
hundred twenty percent (120%) of the then applicable Market Price (as defined in
Article II.B.1) or (b) $9.25 (subject to adjustment for stock splits, stock
dividends and similar transactions) or (ii) occurring on or after the date the
Borrower makes a public announcement that it intends to merge or consolidate
with any other corporation or sell or transfer substantially all of the assets
of the Borrower or (iii) occurring on or after the date any person, group or
entity (including the Borrower) publicly announces a tender offer to purchase
50% or more of the Borrower's Common Stock (or any other takeover scheme) or
(iv) occurring on or after the date on which there is a material adverse change
in the business, operation, assets, financial condition or prospects of the
Borrower or its subsidiaries, taken as a whole, or (v) occurring on or after the
occurrence of any Mandatory Redemption Event. "TRADE PRICE" means, for any
security as of any date, the trade price of the Common Stock on the OTC BB as
reported by Bloomberg Financial Markets or an equivalent reliable reporting
service mutually acceptable to and hereafter designated by the holders of a
majority of the outstanding principal amount of the Debentures and the Borrower
("BLOOMBERG") or, if the OTC BB is not the principal trading market for such
security, the trade price of such security on the principal securities exchange
or trading market where such security is listed or traded as reported by
Bloomberg, or, if no trade price of such security is available in any of the
foregoing manners, the bid price of any market maker for such security that is
listed in the "pink sheet" by the National Quotation Bureau, Inc. If the Trade
Price cannot be calculated for such security on such date in the manner provided
above, the Trade Price shall be the fair market value as mutually determined by
the Borrower and the holders of a majority of the outstanding principal amount
of the Debentures.

          3. TRADING MARKET LIMITATION. Unless the Borrower either (i) is
permitted (or not prohibited) by the applicable rules and regulations of the
principal securities market on which the Common Stock is listed or traded to
issue shares of Common Stock upon conversion of or otherwise pursuant to the
Debentures in excess of the Maximum Share Amount (as defined below) or (ii) has
obtained stockholder approval of the issuance of shares of Common Stock upon
conversion of or otherwise pursuant to the Debentures and upon exercise of or
otherwise pursuant to the Investment Options in excess of the Maximum Share
Amount in accordance with applicable law and the rules and regulations of any
stock exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Borrower or any of its securities (the

                                       7
<PAGE>   8

"STOCKHOLDER APPROVAL"), in no event shall the total number of shares of Common
Stock issued upon conversion of or otherwise pursuant to the Debentures and upon
exercise of or otherwise pursuant to the Investment Options (including any
shares of capital stock or rights to acquire shares of capital stock issued by
the Borrower which are aggregated or integrated with the Common Stock issued or
issuable upon conversion of or otherwise pursuant to the Debentures and upon
exercise of or otherwise pursuant to the Investment Options for purposes of any
such rule or regulation) exceed 2,282,648 (19.99% of the total shares of Common
Stock outstanding on the Issue Date) (the "MAXIMUM SHARE AMOUNT"), subject to
equitable adjustments from time to time for stock splits, stock dividends,
combinations, capital reorganizations and similar events relating to the Common
Stock occurring after the Issue Date. With respect to each Holder of Debentures,
the Maximum Share Amount shall refer to such Holder's pro rata share thereof
determined in accordance with Article V.I below. In the event that the sum of
(x) the aggregate number of shares of Common Stock actually issued upon
conversion of or otherwise pursuant to the Debentures and upon exercise of or
otherwise pursuant to the Investment Options plus (y) the aggregate number of
shares of Common Stock that remain issuable upon conversion of or otherwise
pursuant to the then outstanding Debentures at the then effective Conversion
Price, represents at least one hundred percent (100%) of the Maximum Share
Amount (the "TRIGGERING EVENT"), the Borrower will use its best efforts to seek
and obtain Stockholder Approval (or obtain such other relief as will allow
conversions hereunder in excess of the Maximum Share Amount) as soon as
practicable following the Triggering Event.

     B. CONVERSION PRICE

          1. CALCULATION OF CONVERSION PRICE. Subject to subparagraph 2 below,
the "CONVERSION PRICE" shall be (x) the Applicable Percentage, multiplied by (y)
the lesser of the Variable Conversion Price (as defined herein) and the Fixed
Conversion Price (as defined herein). The Conversion Price shall be subject to
adjustments pursuant to the provisions of Article II.C below. "VARIABLE
CONVERSION PRICE" shall mean the Market Price (as defined below). "MARKET PRICE"
shall mean the average of the Closing Bid Prices for any seven (7) Trading Days
(which need not be consecutive) (the "MARKET PRICE DAYS") during the thirty-five
(35) consecutive Trading Day period ending one (1) Trading Day prior to the date
the Notice of Conversion (as defined in Article II.D) is sent by the Holder to
the Borrower via facsimile (the "PRICING PERIOD"). The Market Price Days shall
be designated by the converting Holder (from among the days comprising the
Pricing Period) in the Notice of Conversion. "FIXED CONVERSION PRICE" shall mean
$9.7125. "APPLICABLE PERCENTAGE" shall mean 100%; provided, however, that if the
Common Stock (i) is not listed on the Nasdaq SmallCap or the Amex prior to
October 24, 2000, (ii) is not listed on the Nasdaq SmallCap or the AMEX prior to
October 24, 2000 and is not listed on Nasdaq prior to February 24, 2001
(provided that if the Common Stock is not listed on the Nasdaq SmallCap or the
AMEX prior to October 24, 2000 in accordance with clause (i) hereof but is
listed on Nasdaq prior to February 24, 2001, the Applicable Percentage will be
80% for the period beginning on October 24, 2000 and ending on the date prior to
February 24, 2001 on which the Common Stock is first listed on Nasdaq), or (iii)
if so listed on or prior to such dates, is at any time thereafter delisted from
Nasdaq, Nasdaq SmallCap or AMEX (other than delisting, for no more that two (2)
Trading Days, solely in connection with the simultaneous listing of the Common
Stock on the NYSE), the Applicable

                                       8
<PAGE>   9

Percentage shall mean 80%: provided, further, however, that the Applicable
Percentage shall be further reduced by 2.5% for each Default Period (as defined
in the Registration Rights Agreement) (prorated for partial Default Periods) as
set forth in the Registration Rights Agreement. "Closing Bid Price" means, for
any security as of any date, the closing bid price on the OTC BB as reported by
Bloomberg or, if the OTC BB is not the principal trading market for such
security, the closing bid price of such security on the principal securities
exchange or trading market where such security is listed or traded as reported
by Bloomberg, or, if no closing bid price of such security is available in any
of the foregoing manners, the average of the bid prices of any market makers for
such security that are listed in the "pink sheets" by the National Quotation
Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on
such date in the manner provided above, the Closing Bid Price shall be the fair
market value as mutually determined by the Borrower and the holders of a
majority of the principal amount of the Debentures being converted for which the
calculation of the Closing Bid Price is required in order to determine the
Conversion Price of such Debentures. "Trading Day" shall mean any day on which
the Common Stock is traded for any period on the OTC BB, or on the principal
securities exchange or other securities market on which the Common Stock is then
being traded.

          2. CONVERSION PRICE DURING MAJOR ANNOUNCEMENTS. Notwithstanding
anything contained in subparagraph 1 of this Paragraph B to the contrary, in the
event the Borrower (a) makes a public announcement that it intends to
consolidate or merge with any other corporation (other than a merger in which
the Borrower is the surviving or continuing corporation and its capital stock is
unchanged) or sell or transfer all or substantially all of the assets of the
Borrower or (b) any person, group or entity (including the Borrower) publicly
announces a tender offer to purchase 50% or more of the Borrower's Common Stock
(or any other takeover scheme) (the date of the announcement referred to in
clause (a) or (b) is hereinafter referred to as the "ANNOUNCEMENT DATE"), then
the Conversion Price shall, effective on the Announcement Date and continuing
through the Adjusted Conversion Price Termination Date (as defined below), be
equal, for each such date, to the lower of (x) the Conversion Price which would
have been applicable for an Optional Conversion occurring on the Announcement
Date and (y) the Conversion Price that would otherwise be in effect on such
date. From and after the Adjusted Conversion Price Termination Date, the
Conversion Price shall be determined as set forth in subparagraph 1 of this
Article II.B. For purposes hereof, "ADJUSTED CONVERSION PRICE TERMINATION DATE"
shall mean, with respect to any proposed transaction or tender offer (or
takeover scheme) for which a public announcement as contemplated by this
subparagraph 2 has been made, the date upon which the Borrower (in the case of
clause (a) above) or the person, group or entity (in the case of clause (b)
above) consummates or publicly announces the termination or abandonment of the
proposed transaction or tender offer (or takeover scheme) which caused this
subparagraph 2 to become operative.

     C. ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price shall be subject
to adjustment from time to time as follows:

          1. ADJUSTMENT TO CONVERSION PRICE DUE TO STOCK SPLIT, STOCK DIVIDEND,
ETC. If at any time when this Debenture is outstanding, the number of
outstanding shares of Common Stock is increased or decreased by a stock split,
stock dividend, combination, reclassification rights

                                       9
<PAGE>   10

offering below the Trading Price (as defined below) to all holders of Common
Stock or other similar event, which event shall have taken place during the
reference period for determination of the Conversion Price for any Optional
Conversion or Maturity, then the Conversion Price shall be calculated giving
appropriate effect to the stock split, stock dividend, combination,
reclassification or other similar event. In such event, the Borrower shall
notify the Transfer Agent of such change on or before the effective date
thereof. "TRADING PRICE," which shall be measured as of the record date in
respect of the rights offering, means (i) the average of the last reported sale
prices for the shares of Common Stock on the OTC BB as reported by Bloomberg, as
applicable, for the five Trading Days immediately preceding such date, or (ii)
if the OTC BB is not the principal trading market for the shares of Common
Stock, the average of the last reported sale prices on the principal trading
market for the Common Stock during the same period as reported by Bloomberg, or
(iii) if market value cannot be calculated as of such date on any of the
foregoing bases, the Trading Price shall be the fair market value as reasonably
determined in good faith by (x) the Board of Directors of the Borrower or, (y)
at the option of the holders of a majority of the then outstanding principal
amount of the Debentures, by an independent investment bank of nationally
recognized standing in the valuation of businesses similar to the business of
the Borrower.

          2. ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any time when
this Debenture is outstanding and prior to the conversion of all Debentures,
there shall be any merger, consolidation, exchange of shares, recapitalization,
reorganization, or other similar event, as a result of which shares of Common
Stock of the Borrower shall be changed into the same or a different number of
shares of another class or classes of stock or securities of the Borrower or
another entity, or in case of any sale or conveyance of all or substantially all
of the assets of the Borrower other than in connection with a plan of complete
liquidation of the Borrower (each, a "CHANGE OF CONTROL TRANSACTION"), then
Holder shall thereafter have the right to receive upon conversion of this
Debenture (and upon exercise of the Investment Options), upon the basis and upon
the terms and conditions specified herein and in lieu of the shares of Common
Stock immediately theretofore issuable upon conversion (and upon exercise of the
Investment Options), such stock, securities or assets which Holder would have
been entitled to receive in such transaction had this Debenture been converted
(and had the Investment Options been exercised) in full immediately prior to
such transaction (without regard to any limitations on conversion contained
herein), and in any such case appropriate provisions shall be made with respect
to the rights and interests of Holder to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Conversion
Price and of the number of shares of Common Stock issuable upon conversion of
this Debenture (and upon exercise of the Investment Options) shall thereafter be
applicable, as nearly as may be practicable in relation to any securities or
assets thereafter deliverable upon the conversion of this Debenture (and
exercise of the Investment Options). The Borrower shall not effect any
transaction described in this subparagraph 2 unless (i) it first gives, to the
extent practical, thirty (30) days' prior written notice (but in any event at
least fifteen (15) business days prior written notice) of the record date of the
special meeting of stockholders to approve, or if there is no such record date,
the consummation of, such Change of Control Transaction (during which time
Holder shall be entitled to convert this Debenture (and exercise the Investment
Options)), which notice shall be given concurrently with the first public
announcement of such transaction, and (ii) the resulting successor or acquiring
entity (if not the Borrower) and, if an entity different from the successor or
acquiring

                                       10
<PAGE>   11

entity, the entity whose capital stock or assets the holders of the Common Stock
are entitled to receive as a result of such Change of Control Transaction,
assumes by written instrument the obligations of the Borrower hereunder
(including under this subparagraph 2). The above provisions shall similarly
apply to successive consolidations, mergers, sales, transfers or share
exchanges.

          3. ADJUSTMENT DUE TO DISTRIBUTION. Subject to Article III.A, if the
Borrower shall declare or make any distribution of its assets (or rights to
acquire its assets) to holders of Common Stock as a dividend, stock repurchase,
by way of return of capital or otherwise (including any dividend or distribution
to the Borrower's shareholders in cash or shares (or rights to acquire shares)
of capital stock of a subsidiary (i.e., a spin-off)) (a "DISTRIBUTION"), then
Holder shall be entitled, upon any conversion of this Debenture (and upon any
exercise of Investment Options) after the date of record for determining
shareholders entitled to such Distribution, to receive the amount of such assets
which would have been payable to Holder with respect to the shares of Common
Stock issuable upon such conversion (or upon such exercise of Investment
Options) had Holder been the holder of such shares of Common Stock on the record
date for the determination of shareholders entitled to such Distribution.

          4. PURCHASE RIGHTS. Subject to Article III.A, if at any time when this
Debenture is outstanding the Borrower issues any convertible securities or
rights to purchase stock, warrants, securities or other property (the "PURCHASE
RIGHTS") pro rata to the record holders of any class of Common Stock, then
Holder will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which Holder could have acquired if Holder
had held the number of shares of Common Stock acquirable upon complete
conversion of this Debenture (including upon exercise of the Investment Options)
(without regard to any limitations on conversion contained herein and based upon
the Conversion Price as would then be in effect) immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of
Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights.

          5. ADJUSTMENT FOR RESTRICTED PERIODS. In the event that (a) the
Borrower fails to obtain effectiveness with the SEC of any Registration
Statement required to be filed pursuant to the Registration Rights Agreement on
or prior to the date on which such Registration Statement is required to become
effective pursuant to the terms of the Registration Rights Agreement, (b) any
such Registration Statement, after its initial effectiveness and during the
Registration Period, lapses in effect, or sales of all of the Registrable
Securities (as defined in the Registration Rights Agreement) otherwise cannot be
made thereunder, whether by reason of the Borrower's failure or inability to
amend or supplement the prospectus (the "PROSPECTUS") included therein in
accordance with the Registration Rights Agreement or otherwise (including
without, limitation, during an Allowed Delay (as defined in Section 3(f) of the
Registration Rights Agreement)) or (c) a Trading Market Redemption Event occurs
(each of such events described in clauses (a), (b) and (c) being referred to as
an "EXTENDED LOOKBACK EVENT"), then, at the election of the Holder, the Pricing
Period shall be comprised of (x) in the case of an event described in clause
(a), the thirty-five (35) Trading Days preceding the date on which such
Registration Statement is required to become effective pursuant to the terms of
the Registration Rights Agreement, plus all Trading Days through

                                       11
<PAGE>   12

and including the third (3rd) Trading Day following the actual date of
effectiveness of the Registration Statement, (y) in the case of an event
described in clause (b), the thirty-five (35) Trading Days preceding the date on
which Holder is first notified that sales may not be made under the Prospectus
plus all Trading Days through and including the third (3rd) Trading Day
following the date on which Holder is first notified that such sales may again
be made under the Prospectus or (z) in the case of an event described in clause
(c), the thirty-five (35) Trading Days preceding the occurrence of the Trading
Market Redemption Event, plus all Trading Days through and including the third
(3rd) Trading Day following the date the Stockholders' Approval is obtained or
the Borrower is permitted by the applicable rules and regulations of the
principle securities market on which the Common Stock is listed or traded to
issue shares in excess of the Maximum Share Amount (each of such periods
referred to in clauses (x), (y) and (z) being defined as an "EXTENDED LOOKBACK
PERIOD"). If Holder determines that sales may not be made pursuant to the
Prospectus (whether by reason of the Borrower's failure or inability to amend or
supplement the Prospectus or otherwise) it shall so notify the Borrower in
writing and, unless the Borrower provides such Holder with a written opinion of
the Borrower's counsel to the contrary, such determination shall be binding for
purposes of this paragraph. In the event that an Extended Lookback Event occurs
within three (3) Trading Day-period following the cure of any other Extended
Lookback Event, the Extended Lookback Periods shall be cumulative.

     D. MECHANICS OF CONVERSION. In order to convert this Debenture into shares
of Common Stock, Holder shall: (1) submit a copy of the fully executed notice of
conversion in the form attached hereto as Exhibit A ("NOTICE OF CONVERSION") to
the Borrower by facsimile dispatched prior to Midnight, New York City time (the
"CONVERSION NOTICE DEADLINE"), on the date specified therein as the Conversion
Date (as defined in Article II.D.5) (or by other means resulting in, or
reasonably expected to result in, written notice to the Borrower on the date
specified therein as the Conversion Date) to the office of the Borrower or its
designated Transfer Agent for the Debentures, which notice shall specify the
principal amount of this Debenture to be converted, the applicable Conversion
Price and a calculation of the number of shares of Common Stock issuable upon
such conversion (including the number of shares issuable upon exercise of the
Investment Options, if any); and (2) subject to Article II.D.1 below, surrender
this Debenture along with a copy of the Notice of Conversion to the office of
the Borrower as soon as practicable thereafter. In the case of a dispute as to
the calculation of the Conversion Price, the Borrower shall promptly issue that
number of shares of Common Stock as is not disputed in accordance with
subparagraph (3) below. The Borrower shall submit the disputed calculations to
its outside accountant via facsimile within two (2) business days of receipt of
the Notice of Conversion. The accountant shall audit the calculations and notify
the Borrower and Holder of the results no later than 48 hours from the time it
receives the disputed calculations. The accountant's calculation shall be deemed
conclusive absent manifest error.

          1. SURRENDER OF DEBENTURE UPON CONVERSION. Notwithstanding anything to
the contrary set forth herein, upon conversion of this Debenture in accordance
with the terms hereof, Holder shall not be required to physically surrender this
Debenture to the Borrower unless the entire unpaid principal amount of this
Debenture is so converted. Holder and the Borrower shall maintain records
showing the principal amount so converted and the dates of such conversions or
shall use

                                       12
<PAGE>   13

such other method, reasonably satisfactory to Holder and the Borrower, so as not
to require physical surrender of this Debenture upon each such conversion. In
the event of any dispute or discrepancy, such records of the Borrower shall be
controlling and determinative in the absence of manifest error. Notwithstanding
the foregoing, if any portion of this Debenture is converted as aforesaid,
Holder may not transfer this Debenture unless Holder first physically surrenders
this Debenture to the Borrower, whereupon the Borrower will forthwith issue and
deliver upon the order of Holder a new Debenture of like tenor, registered as
Holder may request, representing in the aggregate the remaining unpaid principal
amount of this Debenture. 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.

          2. LOST OR STOLEN DEBENTURES. Upon receipt by the Borrower of evidence
of the loss, theft, destruction or mutilation of this Debenture, and (in the
case of loss, theft or destruction) of indemnity reasonably satisfactory to the
Borrower, and upon surrender and cancellation of this Debenture, if mutilated,
the Borrower shall execute and deliver a new Debenture of like tenor and date.

          3. DELIVERY OF COMMON STOCK UPON CONVERSION. Upon the submission of a
Notice of Conversion, the Borrower shall, within two (2) business days after the
Conversion Date (the "DELIVERY PERIOD"), issue and deliver (or cause its
Transfer Agent to so issue and deliver) in accordance with the terms hereof and
the Purchase Agreement (including, without limitation, in accordance with the
requirements of Section 2(g) of the Purchase Agreement) to or upon the order of
Holder that number of shares of Common Stock for the portion of this Debenture
converted (and, if applicable, the number of shares of Common Stock issuable
upon exercise of Investment Options in connection therewith) as shall be
determined in accordance herewith. In addition to any other remedies available
to Holder, including actual damages and/or equitable relief, the Borrower shall
pay to Holder $2,000 per day in cash for each day beyond a two (2) day grace
period following the Delivery Period that the Borrower fails to deliver Common
Stock (a "DELIVERY DEFAULT") issuable upon conversion of this Debenture pursuant
to the Notice of Conversion until such time as the Borrower has delivered all
such Common Stock (the "DELIVERY DEFAULT PAYMENTS"). Such Delivery Default
Payments shall be paid to Holder by the fifth (5th) day of the month following
the month in which they have accrued or, at the option of Holder (by written
notice to the Borrower by the first day of the month following the month in
which they have accrued), shall be convertible into Common Stock in accordance
with the terms of this Article II.

          In lieu of delivering physical certificates representing the Common
Stock issuable upon conversion, provided the Borrower's Transfer Agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer ("FAST") program, upon written request of Holder and its compliance
with the provisions contained in Article II.A and in this Article II.D, the
Borrower shall use its best efforts to cause its Transfer Agent to
electronically transmit the Common Stock issuable upon conversion to Holder by
crediting the account of Holder's Prime Broker with DTC through its Deposit
Withdrawal Agent Commission ("DWAC") system. The time

                                       13
<PAGE>   14

periods for delivery and penalties described in the immediately preceding
paragraph shall apply to the electronic transmittals described herein.

          4. NO FRACTIONAL SHARES. If any conversion of this Debenture would
result in a fractional share of Common Stock or the right to acquire a
fractional share of Common Stock, such fractional share shall be disregarded and
the number of shares of Common Stock issuable upon conversion of this Debenture
shall be the next higher number of shares.

          5. CONVERSION DATE. The "CONVERSION DATE" shall be the date specified
in the Notice of Conversion, provided that the Notice of Conversion is submitted
by facsimile (or by other means resulting in, or reasonably expected to result
in, written notice) to the Borrower or its Transfer Agent before Midnight, New
York City time, on the date so specified, otherwise the Conversion Date shall be
the first business day after the date so specified on which the Notice of
Conversion is actually received by the Borrower or its Transfer Agent. The
person or persons entitled to receive the shares of Common Stock issuable upon
conversion of this Debenture (or exercise of Investment Options) shall be
treated for all purposes as the record holder or holders of such securities as
of the Conversion Date and all rights with respect to this Debenture (or portion
thereof) surrendered shall forthwith terminate except the right to receive the
shares of Common Stock or other securities or property issuable on such
conversion (or exercise) and except that the holders preferential rights as a
Holder of this Debenture shall survive to the extent the Borrower fails to
deliver such securities.

     E. INVESTMENT OPTIONS. On any Conversion Date relating to a conversion of
this Debenture by Holders, the Holder shall have the option to purchase one
additional share of Common Stock for every share of Common Stock issuable as a
result of such conversion, at an exercise price equal to the Fixed Conversion
Price (the option to purchase such additional shares shall be referred to herein
as the "Investment Options"). Holder (i) shall indicate on the Notice of
Conversion in respect of such Conversion Date that it is exercising its
Investment Option with respect to such conversion and shall specify the number
of shares of Common Stock with respect to which the Investment Option is being
so exercised, and (ii) shall pay to the Borrower, in immediately available
funds, on or within one (1) business day following the Conversion Date, the
aggregate purchase price for the shares of Common Stock issuable as a result of
the exercise of such Investment Options. The provisions of paragraphs A, D.3 (so
long as the Holder has delivered to the Borrower the aggregate purchase price
due in connection with the exercise of the Investment Options) and F of this
Article II shall apply to any exercise by the Holder of Investment Options.

     F. RESERVATION OF SHARES. A number of shares of the authorized but unissued
Common Stock sufficient to provide for the conversion in full of the Debentures
outstanding (based on the lesser of the Applicable Percentage multiplied by the
Variable Conversion Price in effect from time to time and the Applicable
Percentage multiplied by the Fixed Conversion Price in effect from time to time)
and the exercise in full of the Investment Options shall at all times be
reserved by the Borrower, free from preemptive rights, for such conversion. As
of the Issue Date, 3,072,716 authorized and unissued shares of Common Stock have
been duly reserved for issuance upon conversion of the Debentures and upon
exercise of the Investment Options (the "RESERVED AMOUNT"). The Reserved Amount
shall be increased from time to time in accordance with the

                                       14
<PAGE>   15

Borrower's obligations pursuant to Section 4(h) of the Purchase Agreement. In
addition, if the Borrower shall issue any securities or make any change in its
capital structure which would change the number of shares of Common Stock into
which the Debentures shall be convertible and for which the Investment Options
shall be exercisable, the Borrower shall at the same time also make proper
provision so that thereafter there shall be a sufficient number of shares of
Common Stock authorized and reserved, free from preemptive rights, for
conversion of the Debentures and exercise of the Investment Options.

     If at any time Holder submits a Notice of Conversion, and the Borrower does
not have sufficient authorized but unissued shares of Common Stock duly reserved
and available for issuance to effect such conversion in accordance with the
provisions of this Article II (including any Investment Options exercised in
connection therewith) (a "CONVERSION DEFAULT"), subject to Article V.I, the
Borrower shall issue to Holder all of the shares of Common Stock which are
available to effect such conversion. The portion of the principal amount of this
Debenture (or the number of shares of Common Stock including the Investment
Options) included in the Notice of Conversion which exceeds the amount which is
then convertible into available shares of Common Stock (the "EXCESS AMOUNT")
shall, notwithstanding anything to the contrary contained herein, not be
convertible (or exercisable) into Common Stock in accordance with the terms
hereof until (and at Holder's option at any time after) the date additional
shares of Common Stock are authorized and duly reserved by the Borrower to
permit such conversion (or exercise), at which time the Conversion Price in
respect thereof shall be the lesser of (i) the Conversion Price on the
Conversion Default Date (as defined below) and (ii) the Conversion Price on the
Conversion Date elected by Holder in respect thereof. The Borrower shall use its
best efforts to effect an increase in the authorized number of shares of Common
Stock as soon as possible following the earlier of (x) such time that Holder
notifies the Borrower or that the Borrower otherwise becomes aware that there
are or likely will be insufficient authorized and unissued shares to allow full
conversion hereof and (y) a Conversion Default. In addition, the Borrower shall
pay to Holder payments ("CONVERSION DEFAULT PAYMENTS") for a Conversion Default
in the amount of (a) .24, multiplied by (b) the Conversion Default Amount (as
defined below), multiplied by (c)(N/365), where N = the number of days from the
day Holder submits a Notice of Conversion giving rise to a Conversion Default
(the "CONVERSION DEFAULT DATE") to the date (the "AUTHORIZATION DATE") that the
Borrower authorizes a sufficient number of shares of Common Stock to effect
conversion of the Debentures. "CONVERSION DEFAULT AMOUNT" means the then
outstanding principal amount of all Debentures held by Holder plus the aggregate
accrued interest thereon as of the first day of the Conversion Default. The
Borrower shall send notice to Holder of the authorization of additional shares
of Common Stock, the Authorization Date and the amount of Holder's accrued
Conversion Default Payments. The accrued Conversion Default Payment for each
calendar month shall be paid in cash or shall be convertible into Common Stock
at the applicable Conversion Price, at the Borrower's option, as follows:

          1. In the event Holder elects to take such payment in cash, cash
payment shall be made to Holder by the fifth (5th) day of the month following
the month in which it has accrued.

          2. In the event the Holder elects to take such payment in Common
Stock, Holder may convert such payment amount into Common Stock at the
Conversion Price (as in effect at the

                                       15
<PAGE>   16

time of Conversion) at any time after the fifth day of the month following the
month in which it has accrued in accordance with the terms of this Article II
(so long as there is then a sufficient number of authorized shares of Common
Stock).

          Holder's election shall be made in writing to the Borrower at any time
prior to 9:00 p.m, New York City time, on the third (3rd) day of the month
following the month in which Conversion Default payments have accrued. If no
election is made, Holder shall be deemed to have elected to receive cash.
Nothing herein shall limit Holder's right to pursue actual damages (to the
extent in excess of the Conversion Default Payments) for the Borrower's failure
to maintain a sufficient number of authorized shares of Common Stock, and Holder
shall have the right to pursue all remedies available at law or in equity
(including a decree of specific performance and/or injunctive relief).

     G. NOTICE OF CONVERSION PRICE ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Article II,
the Borrower, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to
Holder a certificate setting forth such adjustment or readjustment and showing
in detail the facts upon which such adjustment or readjustment is based. The
Borrower shall, upon the written request at any time of Holder, furnish or cause
to be furnished to Holder a like certificate setting forth (i) such adjustment
or readjustment, (ii) the Conversion Price at the time in effect and (iii) the
number of shares of Common Stock and the amount, if any, of other securities or
property which at the time would be received upon conversion of this Debenture.

                             III. CERTAIN COVENANTS

     A. DISTRIBUTIONS ON CAPITAL STOCK. So long as the Borrower shall have any
obligation under this Debenture, the Borrower shall not, without the Holder's
written consent (a) pay, declare or set apart for such payment, any dividend or
other distribution (whether in cash, property or other securities) on shares of
capital stock or (b) directly or indirectly through any subsidiary make any
other payment or distribution in respect of its capital stock.

     B. RESTRICTION ON STOCK REPURCHASES. So long as the Borrower shall have any
obligation under this Debenture, the Borrower shall not, without the Holder's
written consent redeem, repurchase or otherwise acquire (whether for cash or in
exchange for property or other securities or otherwise) in any one transaction
or series of related transactions any shares of capital stock of the Borrower or
any warrants, rights or options to purchase or acquire any such shares.

     C. BORROWINGS. So long as the Borrower shall have any obligation under this
Debenture, the Borrower shall not, without the written consent of the holders of
a majority of the then outstanding principal amount of the Debentures, create,
incur, assume or suffer to exist any liability for borrowed money, except (a)
borrowings in existence or committed on the date hereof and of which the
Borrower has informed Holder in writing prior to the date hereof, (b) borrowings
from a

                                       16
<PAGE>   17

bona fide financial lending institution, (c) indebtedness to trade creditors
incurred in the ordinary course of business or (d) borrowings, the proceeds of
which shall be used to repay this Debenture.

     D. SALE OF ASSETS. So long as the Borrower shall have any obligation under
this Debenture, the Borrower shall not, without the written consent of the
holders of a majority of the then outstanding principal amount of the
Debentures, sell, lease or otherwise dispose of any of its assets outside the
ordinary course of business. Any consent to the disposition of any assets may be
conditioned on a specified use of the proceeds of disposition.

     E. ADVANCES AND LOANS. So long as the Borrower shall have any obligation
under this Debenture, the Borrower shall not, without the written consent of the
holders of a majority of the then outstanding principal amount of the
Debentures, lend money, give credit or make advances to any person, firm, joint
venture or corporation, including, without limitation, officers, directors,
employees, subsidiaries and affiliates of the Borrower, except loans, credits or
advances (a) in existence or committed on the date hereof and which the Borrower
has informed Holder in writing prior to the date hereof, and (b) made in the
ordinary course of business.

     F. CONTINGENT LIABILITIES. So long as the Borrower shall have any
obligation under this Debenture, the Borrower shall not, without the written
consent of the holders of a majority of the then outstanding principal amount of
the Debentures, assume, guarantee, endorse, contingently agree to purchase or
otherwise become liable upon the obligation of any person, firm, partnership,
joint venture or corporation, except by the endorsement of negotiable
instruments for deposit or collection and except assumptions, guarantees,
endorsements and contingencies (a) in existence or committed on the date hereof
and which the Borrower has informed Holder in writing prior to the date here of,
and (b) similar transactions in the ordinary course of business.

                                  IV. MATURITY

          The entire principal amount of the Debentures then outstanding
(together with any accrued and unpaid interest thereon, Default Interest,
Conversion Default Payments, Delivery Default Payments and all other amounts due
and payable by the Borrower pursuant to Section 2(c) of the Registration Rights
Agreement) on the Maturity Date, shall be paid by the Borrower to the Holder in
cash. At the option of the Holder, the Maturity Date shall be delayed by one (1)
Trading Day for each Trading Day occurring prior thereto and prior to the full
conversion of the Debentures that (i) any Registration Statement required to be
filed and to be effective pursuant to the Registration Rights Agreement is not
effective or sales of all of the Registrable Securities otherwise cannot be made
thereunder during the Registration Period (whether by reason of the Borrower's
failure to properly supplement or amend the prospectus included therein in
accordance with the terms of the Registration Rights Agreement or otherwise),
(ii) any Mandatory Redemption Event or Trading Market Redemption Event exists,
without regard to whether any cure periods shall have run or (iii) the Borrower
is in breach of any of its obligations pursuant to Section 4(h) of the Purchase
Agreement.

                                       17
<PAGE>   18

                                V. MISCELLANEOUS

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

     B. NOTICES. Any notices required or permitted to be given under the terms
of this Debenture shall be sent by certified or registered mail (return receipt
requested) or delivered personally or by courier (including a recognized
overnight delivery service) or by facsimile, and shall be effective five days
after being placed in the mail, if mailed, or upon receipt or refusal of
receipt, if delivered personally or by courier or by facsimile, in each case
addressed to a party. The addresses for such communications shall be:

                         If to the Borrower:

                         SmartSources.com, Inc.
                         2030 Marine Drive, Suite 100
                         North Vancouver, B.C., V7P IV7
                         Attention: Chief Executive Officer
                         Facsimile: (604) 986-0869

                         With copy to:

                         Wolin, Ridley & Miller LLP
                         3100 Bank One Center
                         1717 Main Street
                         Dallas, Texas 75201-4681
                         Attention: Norman Miller
                         Facsimile: (214) 939-4949

     If to Holder, to the address set forth immediately below Holder's name on
the signature pages to the Purchase Agreement or such other address as is
communicated to the Borrower by notice by Holder in accordance with the terms
hereof.

                           With copy to:
                           Bradley D. Houser
                           Akerman, Senterfitt & Eidson, P.A.
                           One Southeast Third Avenue, 28th Floor
                           Miami, Florida 33131
                           Facsimile: (305) 374-5095

                                       18
<PAGE>   19

     C. AMENDMENT PROVISION. The Debentures may be amended only by an instrument
in writing signed by the Borrower and the holders of a majority of the then
outstanding principal amount of the Debentures.

     D. ASSIGNABILITY. This Debenture shall be binding upon the Borrower and its
successors and assigns and shall inure to the benefit of Holder and its
successors and assigns. In the event Holder shall sell or otherwise transfer any
portion of this Debenture, each transferee shall be allocated a pro rata portion
of such transferor's Maximum Share Amount and Reserved Amount. Any portion of
the Maximum Share Amount or Reserved Amount which remains allocated to any
person or entity which does not hold any Debentures shall be allocated to the
remaining holders of Debentures, pro rata based on the total principal amount of
Debentures then held by such holders.

     E. COST OF COLLECTION. If default is made in the payment of this Debenture,
the Borrower shall pay Holder costs of collection, including reasonable
attorneys' fees.

     F. GOVERNING LAW. This Debenture shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to contracts made
and to be performed in the State of Delaware (without regard to principles of
conflict of laws). The Borrower and Holder irrevocably consent to the
jurisdiction of the United States federal courts and state courts located in
Delaware in any suit or proceeding based on or arising under this Debenture, the
agreements entered into in connection herewith or the transactions contemplated
hereby or thereby and irrevocably agree that all claims in respect of such suit
or proceeding may be determined in such courts. The Borrower and Holder
irrevocably waive the defense of an inconvenient forum to the maintenance of
such suit or proceeding. The Borrower and Holder further agree that service of
process upon a party mailed by first class mail shall be deemed in every respect
effective service of process upon the party in any such suit or proceeding.
Nothing herein shall affect Holder's right to serve process in any other manner
permitted by law. The Borrower and Holder agree that a final non-appealable
judgment in any such suit or proceeding shall be conclusive and may be enforced
in other jurisdictions by suit on such judgment or in any other lawful manner.

     G. DENOMINATIONS. At the request of Holder, upon surrender of this
Debenture, the Borrower shall promptly issue new Debentures in the aggregate
outstanding principal amount hereof, in the form hereof, in such denominations
of at least $25,000 as Holder shall request.

     H. PAYMENT OF CASH; DEFAULTS. Whenever the Borrower is required to make any
cash payment to Holder under this Debenture (as a Conversion Default Payment or
otherwise but not including payments of principal and interest hereunder), such
cash payment shall be made to Holder within five Trading Days after delivery by
Holder of a notice specifying that Holder elects to receive such payment in cash
and the method (e.g., by check, wire transfer) in which such payment should be
made and appropriate delivery instructions, including any necessary wire
transfer instructions. If such payment is not delivered within such five-Trading
Day period, Holder shall thereafter be entitled to interest on the unpaid amount
at a per annum rate equal to the lower of 24% and the highest interest rate
permitted by applicable law until such amount is paid in full to Holder.

                                       19
<PAGE>   20

     I. PRO RATA ALLOCATIONS. The Maximum Share Amount and the Reserved Amount
(including any increases thereto) shall be allocated by the Borrower pro rata
among the holders of the Debentures based on the total principal amount of
Debentures originally issued to each holder of the Debentures. Each increase to
the Maximum Share Amount and the Reserved Amount shall be allocated pro rata
among the holders of the Debentures based on the total principal amount of
Debentures held by each holder at the time of the increase in the Maximum Share
Amount or Reserved Amount. In the event a holder shall sell or otherwise
transfer any of such holder's shares of the Debentures, each transferee shall be
allocated a pro rata portion of such transferor's Maximum Share Amount and
Reserved Amount. Any portion of the Maximum Share Amount or Reserved Amount
which remains allocated to any person or entity which does not hold any the
Debentures shall be allocated to the remaining holders of shares of the
Debentures, pro rata based on the total principal amount of Debentures held by
such holders.

     J. REMEDIES CUMULATIVE. The remedies provided in this Debenture shall be
cumulative and in addition to all other remedies available under this Debenture,
at law or in equity (including a decree of specific performance and/or other
injunctive relief), no remedy contained herein shall be deemed a waiver of
compliance giving rise to such remedy and nothing herein shall limit Holder's
right to pursue actual damages for any failure by the Borrower to comply with
the terms of this Debenture. The Borrower acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to Holder and that the
remedy at law for any such breach may be inadequate. The Borrower therefore
agrees, in the event of any such breach or threatened breach, Holder shall be
entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.

     K. USURY. Nothing herein contained, nor any transaction related hereto,
shall be construed or so operate as to require the Borrower to pay interest at a
greater rate than is now lawful in such case to contract for, or to make any
payment, or to do any act contrary to law. Should any interest or other charges
paid by the Borrower, or parties liable for the payment of this Debenture, in
connection with the loan evidenced by this Debenture, or any document delivered
in connection with said loan, result in the computation or earning of interest
in excess of the maximum rate of interest which is legally permitted by law,
then any and all such interest in excess of the maximum legal rate of interest
shall be and the same is hereby waived by the Holder hereof, and any and all
such interest in excess of the maximum legal rate which has been paid shall be
automatically credited against and in reduction of the balance due under this
Debenture, and the portion of said excess which exceeds the balance due under
this Debenture shall be paid by the Holder to the Borrower.

                                       20
<PAGE>   21

     IN WITNESS WHEREOF, Borrower has caused this Debenture to be signed in its
name by its duly authorized officer as of the date first above written.

                                  SMARTSOURCES.COM, INC.

                                  By: /s/ DARRYL CARDEY
                                     -------------------------------------------
                                      Darryl Cardey,
                                      Chief Financial Officer and
                                      Vice President - Finance

                                       21
<PAGE>   22

                                                                       EXHIBIT A

                              NOTICE OF CONVERSION

                    (To be Executed by the Registered Holder
                       in order to Convert the Debentures)

     The undersigned hereby irrevocably elects to convert $________principal
amount of the Debenture (defined below) into shares of common stock, par value
$_____ per share ("COMMON STOCK"), of SmartSources.com, Inc., a Colorado
corporation (the "BORROWER") according to the conditions of the convertible
debentures of the Borrower dated as of _______ __, 200_ (the "DEBENTURES"), as
of the date written below. If securities 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. No
fee will be charged to the Holder for any conversion, except for transfer taxes,
if any.

     The Borrower shall electronically transmit the Common Stock issuable
pursuant to this Notice of Conversion to the account of the undersigned or its
nominee with DTC through its Deposit Withdrawal Agent Commission system ("DWAC
TRANSFER").

         Name of DTC Prime Broker:
                                  ----------------------------------------------
         Account Number:
                        --------------------------------------------------------

[ ]      In lieu of receiving shares of Common Stock issuable pursuant to this
         Notice of Conversion by way of a DWAC Transfer, the undersigned hereby
         requests that the Borrower issue a certificate or certificates for the
         number of shares of Common Stock set forth below (which numbers are
         based on the Holder's calculation attached hereto) in the name(s)
         specified immediately below or, if additional space is necessary, on an
         attachment hereto:

         Name:
              ------------------------------------------------------------------
         Address:
                 ---------------------------------------------------------------

     The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Debentures shall be made pursuant to registration of the securities under the
Securities Act of 1933, as amended (the "ACT"), or pursuant to an exemption from
registration under the Act.

                  Date of Conversion:
                                     ---------------------------
                  Market Price Days:
                                    ----------------------------
                  Applicable Conversion Price:
                                              ------------------
                  Number of Shares of Common Stock to be Issued
                  Pursuant to (i) Conversion of the Debentures:
                                                               --------------
                  (ii) Conversion of Conversion Default Payments, Delivery
                  Default Payments and/or payments pursuant to Section 2(c) of
                  the Registration Rights Agreement:
                                                     ----------
                  Signature:
                            ------------------------------------
                  Name:
                       -----------------------------------------
                  Address:
                          --------------------------------------

*Subject to Article II.D of the Debenture(s), the Borrower is not required to
issue shares of Common Stock until the original Debenture(s) (or evidence of
loss, theft or destruction thereof) to be converted are received by the Borrower
or its Transfer Agent. The Borrower shall issue and deliver shares of Common
Stock to an overnight courier not later than three business days following
receipt of the original Debenture(s) to be converted, and shall make payments
pursuant to the Debentures for the number of business days such issuance and
delivery is late.

                                      A-1

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