Document:

Exhibit 10.3

THIS NOTE AND THE SECURITIES  INTO WHICH THIS NOTE IS CONVERTIBLE  HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,  OR THE SECURITIES LAWS
OF ANY STATE OF THE UNITED STATES OR IN ANY OTHER  JURISDICTION.  THE SECURITIES
REPRESENTED HEREBY MAY NOT BE OFFERED,  SOLD OR TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE  REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES
LAWS UNLESS OFFERED, SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THOSE LAWS.

                       _____% CONVERTIBLE PROMISSORY NOTE

Date: ______, 2004                                         $_________________

         FOR VALUE RECEIVED, LEVEL 8 SYSTEMS, INC., a corporation duly organized
under the laws of the State of Delaware (the "BORROWER"), hereby promises to pay
to the order of ____________________, a ____________________,  or its registered
assigns  (individually,  the "HOLDER," and, collectively with the holders of all
other   notes   of  same   like  and   tenor,   the   "HOLDERS"),   the  sum  of
_______________________   ($_________)  on  March  ____,  2004  (the  "SCHEDULED
MATURITY DATE"),  and to pay interest on the unpaid principal  balance hereof at
the rate of ________  percent  (___%) per annum  (except as  otherwise  provided
herein), all as provided in Article I below.

         The term "NOTE" and all references  thereto,  as used  throughout  this
instrument,  shall mean this  instrument  as  originally  executed,  or if later
amended or supplemented,  then as so amended or supplemented. This Note is being
issued  by  the  Borrower  along  with  similar  convertible   promissory  notes
designated  as ____%  Convertible  Promissory  Notes  (the  "OTHER  NOTES"  and,
together  with this Note,  the  "NOTES")  pursuant  to that  certain  Securities
Purchase  Agreement,  dated as of the date hereof,  between the Borrower and the
signatories  thereto  (the  "SECURITIES  PURCHASE  AGREEMENT").  The Notes,  the
Securities  Purchase  Agreement,  the Warrants issued pursuant to the Securities
Purchase Agreement (the "WARRANTS") and the Registration Rights Agreement, dated
as of the date hereof, between the Borrower and the initial Holders of the Notes
(the "REGISTRATION RIGHTS AGREEMENT") are collectively referred to herein as the
"TRANSACTION  DOCUMENTS." All capitalized  terms used but not otherwise  defined
herein  shall  have  the  respective  meanings  assigned  to such  terms  in the
Securities Purchase Agreement.

                                    ARTICLE I
                        PAYMENT OF PRINCIPAL AND INTEREST

         A. Payment of Interest.  Interest shall accrue on the unpaid  principal
balance hereof from the date hereof until the same is paid, whether at maturity,
or upon  prepayment,  repayment,  conversion  or  otherwise.  Interest  shall be
calculated  based on a 365 day  year  and  shall  be  payable  on the  Scheduled
Maturity Date.

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         B. Payment of Principal. The principal amount hereof, together with all
accrued and unpaid interest  thereon,  shall be due and payable on the Scheduled
Maturity  Date.  Payment of  principal  and accrued  interest  on the  Scheduled
Maturity  Date  shall be made,  at the  Holder's  election  but  subject  to the
limitations  set forth in Article VIII, (i) in cash, (ii) in such number of duly
authorized, validly issued, fully paid and non-assessable shares of Common Stock
determined by dividing the aggregate  amount due on the Scheduled  Maturity Date
by ($X.XX) (the  "CONVERSION  PRICE"),  or (iii) in any  combination of cash and
shares of Common  Stock  with an  aggregate  value  equal to the  principal  and
interest  then due. In the event that the  Borrower is  prohibited  from issuing
shares of Common Stock in connection with the payment pursuant to this Paragraph
B as a result of the  operation  of the  limitations  set forth in Article  VIII
("Payment  Limitations"),  the  Borrower  shall be  required  to pay in cash any
amounts due hereunder as to which it is so prohibited.

         C. Prepayment.  Except as and to the extent otherwise  provided herein,
no amounts of principal or interest due hereunder may be prepaid by the Borrower
without the prior written consent of the Holder.

         D. Manner of  Payments.  All cash  payments of  principal  and interest
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 have given or shall  hereafter  give to
the Borrower by written  notice made in accordance  with the  provisions of this
Note. If any cash payment to be made hereunder  shall be due on a day other than
a business day, such payment shall be made on the next  succeeding  business day
and such extension of time shall be included in computing interest in connection
with such payment. If any payment due hereunder is not made when due, the Holder
shall  thereafter  be entitled  to interest on the unpaid  amount at a per annum
rate equal to the lower of eighteen  percent (18%) and the highest interest rate
permitted by applicable law until such amount is paid in full.

                                   ARTICLE II
                                   CONVERSION

         A.  Conversion at the Option of the Holder.  Subject to the limitations
on  conversions  contained in Article VIII, the Holder may, at any time and from
time to time,  convert  (an  "OPTIONAL  CONVERSION")  all or any  portion of the
unpaid principal amount hereof and any accrued interest thereon into a number of
fully paid and non-assessable shares of Common Stock as is equal to the quotient
obtained by dividing (x) the amount of principal and interest being so converted
by (y) the Conversion Price then in effect.

         B. Mechanics of Conversion.  In order to effect an Optional Conversion,
the Holder shall:  (x) fax (or otherwise  deliver) a copy of the fully  executed
Notice of Conversion to the Borrower (Attention: Secretary) and (y) surrender or
cause to be  surrendered  this  Note,  duly  endorsed,  along with a copy of the
Notice of Conversion  as soon as  practicable  thereafter to the Borrower.  Upon
receipt by the Borrower of a facsimile  copy of a Notice of Conversion  from the
Holder,  the Borrower shall promptly send, via facsimile,  a confirmation to the
Holder stating that the Notice of Conversion  has been  received,  the date upon
which the  Borrower  expects to  deliver  the Common  Stock  issuable  upon such

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conversion and the name and telephone number of a contact person at the Borrower
regarding the conversion. The Borrower shall not be obligated to issue shares of
Common Stock upon a conversion  unless this Note is delivered to the Borrower as
provided  above,  or the Holder  notifies the  Borrower  that this Note has been
lost,  stolen or  destroyed  and  delivers  the  documentation  to the  Borrower
required by Article X.B hereof.

                  (i)  Delivery  of  Common  Stock  Upon  Conversion.  Upon  the
surrender  of this Note  accompanied  by a Notice of  Conversion,  the  Borrower
(itself,  or through its transfer  agent) shall,  no later than the later of (a)
the tenth (10th) business day following the Conversion Date and (b) the business
day following  the date of such  surrender  (or, in the case of lost,  stolen or
destroyed  certificates,  after provision of indemnity  pursuant to Article X.B)
(the  "DELIVERY  PERIOD"),  issue and deliver  (i.e.,  deposit with a nationally
recognized  overnight  courier  service  postage  prepaid)  to the Holder or its
nominee (x) that number of shares of Common Stock  issuable  upon  conversion of
that portion of this Note being  converted and (y) a new Note  representing  the
principal balance of this Note not being converted, if any.  Notwithstanding the
foregoing,  if the Borrower's  transfer agent is participating in the Depository
Trust Company ("DTC") Fast Automated Securities Transfer program, and so long as
the  certificates  therefor do not bear a legend  (pursuant  to the terms of the
Securities  Purchase  Agreement)  and the holder thereof is not then required to
return such  certificate for the placement of a legend thereon  (pursuant to the
terms of the  Securities  Purchase  Agreement),  the  Borrower  shall  cause its
transfer  agent to promptly  electronically  transmit the Common Stock  issuable
upon  conversion  to the Holder by  crediting  the  account of the Holder or its
nominee with DTC through its Deposit  Withdrawal Agent  Commission  system ("DTC
TRANSFER").  If  the  aforementioned  conditions  to  a  DTC  Transfer  are  not
satisfied,  the Borrower shall deliver as provided above to the Holder  physical
certificates  representing the Common Stock issuable upon  conversion.  Further,
the  Holder  may  instruct  the  Borrower  to  deliver  to the  Holder  physical
certificates  representing  the Common Stock issuable upon conversion in lieu of
delivering such shares by way of DTC Transfer.

                  (ii) Taxes.  The Borrower shall pay any and all taxes that may
be imposed  upon it with  respect to the  issuance and delivery of the shares of
Common Stock upon the conversion of this Note.

                  (iii) No  Fractional  Shares.  If any  conversion of this Note
would result in the issuance of a fractional share of Common Stock  (aggregating
the entire amount of principal and interest being converted  pursuant to a given
Notice of Conversion), such fractional share shall be payable in cash based upon
the Conversion  Price of the Common Stock at such time, and the number of shares
of Common Stock  issuable  upon  conversion of this Note shall be the next lower
whole  number of shares.  If the  Borrower  elects not to, or is unable to, make
such a cash  payment,  the holder  shall be entitled to receive,  in lieu of the
final fraction of a share, one whole share of Common Stock.

                  (iv)  Conversion  Disputes.  In the case of any  dispute  with
respect to a conversion, the Borrower shall promptly issue such number of shares
of Common Stock as are not disputed in accordance with  subparagraph  (i) above.
If such dispute  involves the  calculation  of the  Conversion  Price,  and such
dispute is not  promptly  resolved  by  discussion  between  the Holders and the
Borrower,  the Borrower shall submit the disputed calculations to an independent

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outside accountant (which accountant shall be subject to the reasonable approval
of the Majority  Holders) via facsimile within three business days of receipt of
the Notice of Conversion.  The accountant  shall promptly audit the calculations
and  notify the  Borrower  and the  Holders  of the  results no later than three
business  days  from  the  date  it  receives  the  disputed  calculations.  The
accountant's calculation shall be deemed conclusive,  absent manifest error, and
the party whose proposed calculation is further from the calculation  determined
by the accountant  shall bear all of the accountant's  expenses  (which,  if the
disputing  Holders are the  non-prevailing  party,  shall be allocated  pro rata
among such disputing  Holders).  The Borrower  shall then issue the  appropriate
number of shares of Common Stock in accordance with subparagraph (i) above.

                  (v) Payment of Accrued Amounts.  Upon conversion of any unpaid
principal  amount of this Note, all accrued  interest on such amount through and
including the Conversion Date shall be paid on the Conversion Date in accordance
with one of the permitted payment methods set forth in Article I.A above.

                                   ARTICLE III
                      RESERVATION OF SHARES OF COMMON STOCK

         A.  Reserved  Amount.  On or prior to the Issuance  Date,  the Borrower
shall reserve  ______________  shares of its authorized  but unissued  shares of
Common Stock for issuance upon  conversion of the Notes  pursuant to Article II,
and, thereafter, the number of authorized but unissued shares of Common Stock so
reserved (the "RESERVED AMOUNT") shall at all times be sufficient to provide for
the  full  conversion  of all of  the  Notes  outstanding  at the  then  current
Conversion Price thereof (without giving effect to the limitations  contained in
Article  VIII).  The Reserved  Amount  shall be  allocated  among the Holders as
provided in Article X.C.

                                   ARTICLE IV
                         FAILURE TO SATISFY CONVERSIONS

         A.  Conversion  Defaults.  If, at any time,  (i) the  Holder  submits a
Notice of Conversion  and the Borrower  fails for any reason (other than because
such  issuance  would  exceed the  Holder's  allocated  portion of the  Reserved
Amount,  for which  failures  the holders  shall have the  remedies set forth in
Article III) to deliver,  on or prior to the fifth  business day  following  the
expiration  of the Delivery  Period for such  conversion,  such number of freely
tradable  shares of  Common  Stock to which the  Holder  is  entitled  upon such
conversion,  (such  event  being a  "CONVERSION  DEFAULT"),  then the Holder may
elect, at any time and from time to time prior to the Default Cure Date for such
Conversion Default, by delivery of a Default Notice to the Borrower, to have all
or any  portion of the unpaid  principal  amount  hereof  and  accrued  interest
thereto paid by the Borrower in cash.

                                    ARTICLE V
                                EVENTS OF DEFAULT

         A. Events of Default.  In the event  (each of the events  described  in
clauses  (i)-(v) below after  expiration of the applicable  cure period (if any)
being an "EVENT OF DEFAULT"):

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                  (i) the Borrower  fails to pay in full the  principal  hereof,
and/or the accrued and unpaid interest  thereon,  when due, whether at maturity,
upon acceleration or otherwise;

                  (ii)  the  Borrower  provides  written  notice  (or  otherwise
indicates) to the Holder,  or states by way of public  announcement  distributed
via a press  release,  at any time, of its intention not to issue,  or otherwise
refuses  to issue,  shares of Common  Stock to the  Holder  upon  conversion  in
accordance with the terms of this Note;

                  (iii) 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 a  substantial  part of its
property  or  business,  or  such a  receiver  or  trustee  shall  otherwise  be
appointed;

                  (iv)  bankruptcy,  insolvency,  reorganization  or liquidation
proceedings or other  proceedings  for the relief of debtors shall be instituted
by or against the Borrower or any  subsidiary  of the Borrower and if instituted
against the Borrower or any  subsidiary of the Borrower by a third party,  shall
not be dismissed within 60 days of their initiation; or

                  (v) except with respect to matters covered by subparagraph (i)
- (iv)  above,  as to which  such  applicable  subparagraphs  shall  apply,  the
Borrower  otherwise  shall breach any material term hereunder or under the other
Transaction Documents,  including,  without limitation,  the representations and
warranties  contained therein (i.e., in the event of a material breach as of the
date such  representation  and warranty was made) and if such breach is curable,
shall fail to cure such breach  within  thirty  business days after the Borrower
has been notified thereof in writing by the Holder; then, upon the occurrence of
any such Event of Default, at the option of the Holder,  exercisable in whole or
in part at any time and from time to time by  delivery  of a  written  notice to
such effect (a "DEFAULT  NOTICE")  to the  Borrower  while such Event of Default
continues,  the Borrower shall pay the outstanding principal amount of this Note
and  accrued and unpaid  interest  thereon  (The  "Default  Amount"),  provided,
however,  that (a) in the case of an Event of Default described in clauses (iii)
and (iv) of this Article  V.A,  the  Borrower's  obligation  hereunder  shall be
automatic and shall not require the delivery of a Default  Notice by the Holder.
Such  Default  Amount,   together  with  all  other  ancillary  amounts  payable
hereunder,  shall  immediately  become  due and  payable,  all  without  demand,
presentment or notice,  all of which are hereby expressly waived,  together with
all costs, including, without limitation, legal fees and expenses of collection,
and the Holder  shall be  entitled  to exercise  all other  rights and  remedies
available at law or in equity. Upon the Borrower's receipt of any Default Notice
hereunder, the Borrower shall immediately (and in any event within five business
days following such receipt) deliver a written notice (a "DEFAULT ANNOUNCEMENT")
to all Holders of the Notes  stating the date upon which the  Borrower  received
such Default Notice and the amount of the Notes covered  thereby.  Following the
delivery of a Default Announcement hereunder, at any time and from time to time,
the  Holder may  request  (either  orally or in  writing)  information  from the
Borrower with respect to the instant default (including, but not limited to, the
aggregate  principal  amount  outstanding  of Notes  covered by Default  Notices
received by the Borrower) and the Borrower  shall furnish  (either  orally or in
writing) as soon as practicable such requested information to the Holder.

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         B. Failure to Pay Default  Amounts.  If the  Borrower  fails to pay the
Holder the Default  Amount with  respect to any Note within five  business  days
after its receipt of a Default Notice (the "PREPAYMENT  DATE"),  then the Holder
shall be entitled to interest on the Default Amount at a per annum rate equal to
the lower of eighteen  percent (18%) and the highest  interest rate permitted by
applicable  law from the date on which the Borrower  receives the Default Notice
until the date of  payment of the  Default  Amount  hereunder.  In the event the
Borrower is not able to pay the outstanding  Notes required to be paid hereunder
the Borrower shall pay the outstanding Notes from each Holder pro rata, based on
the total amounts due on the Notes at the time of default..

                                   ARTICLE VI
                       ADJUSTMENTS TO THE CONVERSION PRICE

         The Conversion  Price shall be subject to adjustment  from time to time
as follows:

         A. Stock Splits, Stock Dividends,  Etc. If, at any time on or after the
Issuance Date, the number of outstanding  shares of Common Stock is increased by
a stock split, stock dividend,  combination,  reclassification  or other similar
event, the Conversion Price shall be proportionately  reduced,  or of the number
of  outstanding  shares of Common Stock is  decreased by a reverse  stock split,
combination, reclassification or other similar event, the Conversion Price shall
be  proportionately  increased.  In such event,  the  Borrower  shall notify the
Borrower's  transfer  agent of such  change  on or  before  the  effective  date
thereof.

         B. Merger, Consolidation, Etc. If, at any time after the Issuance Date,
there shall be (i) any  reclassification  or change of the outstanding shares of
Common  Stock  (other  than a change in par  value,  or from par value to no par
value,  or from no par value to par value,  or as a result of a  subdivision  or
combination),  (ii) any  consolidation  or merger of the Borrower with any other
entity (other than a merger in which the Borrower is the surviving or continuing
entity and its capital stock is unchanged), (iii) any sale or transfer of all or
substantially  all of the assets of the  Borrower or (iv) any share  exchange or
other  transaction  pursuant  to which all of the  outstanding  shares of Common
Stock are converted into other  securities or property (each of (i) - (iv) above
being a "CORPORATE CHANGE"),  then the Holder shall thereafter have the right to
receive  upon  conversion,  in lieu of the  shares  of  Common  Stock  otherwise
issuable,  such shares of stock,  securities and/or other property as would have
been issued or payable in such  Corporate  Change with respect to or in exchange
for the number of shares of Common  Stock  which would have been  issuable  upon
conversion had such Corporate  Change not taken place (without  giving effect to
the limitations  contained in Article VIII),  and in any such case,  appropriate
provisions  (in form  and  substance  reasonably  satisfactory  to the  Majority
Holders)  shall be made with  respect to the rights and  interests of the Holder
hereunder  to the  end  that  the  economic  value  of this  Note  are in no way
diminished by such Corporate Change and that the provisions  hereof  (including,
without  limitation,  in the case of any such  consolidation,  merger or sale in
which  the  successor  entity  or  purchasing  entity  is not the  Borrower,  an
immediate  adjustment  of the  Conversion  Price  so that the  Conversion  Price
immediately  after the  Corporate  Change  reflects the same  relative  value as
compared  to the value of the  surviving  entity's  common  stock  that  existed
between  the  Conversion  Price and the  value of the  Borrower's  Common  Stock
immediately prior to such Corporate  Change) shall thereafter be applicable,  as
nearly as may be  practicable  in relation to any shares of stock or  securities

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thereafter  deliverable  upon the  conversion  thereof.  The Borrower  shall not
effect any Corporate  Change unless the resulting  successor or acquiring entity
(if not the  Borrower)  assumes by  written  instrument  (in form and  substance
reasonable   satisfactory  to  the  Holder)  the  obligations  under  this  Note
(including, without limitation, the obligation to make interest payments accrued
but unpaid through the date of such  consolidation,  merger or sale and accruing
thereafter). The above provisions shall apply regardless of whether or not there
would have been a  sufficient  number of shares of Common Stock  authorized  and
available  for  issuance  upon  conversion  of this  Note as of the date of such
transaction,   and  shall  similarly  apply  to  successive   reclassifications,
consolidations, mergers, sales, transfers or share exchanges.

         C. Distributions. If, at any time after the Issuance Date, the Borrower
shall declare or make any  distribution  of its assets (or rights to acquire its
assets) to holders of Common Stock as a partial liquidating  dividend, by way of
return of capital or otherwise  (including any dividend or  distribution  to the
Borrower's  stockholders  in cash or shares  (or  rights to  acquire  shares) of
capital stock of a subsidiary (i.e., a spin-off)) (a  "DISTRIBUTION"),  then the
Holder shall be  entitled,  upon any  conversion  of this Note after the date of
record for determining stockholders entitled to such Distribution (or if no such
record is taken,  the date on which such  Distribution  is declared or made), to
receive  the amount of such assets  which would have been  payable to the Holder
with  respect  to the  shares  of Common  Stock  issuable  upon such  conversion
(without  giving  effect to the  limitations  contained in Article VIII) had the
Holder been the holder of such shares of Common Stock on the record date for the
determination  of  stockholders  entitled  to such  Distribution  (or if no such
record is taken, the date on which such Distribution is declared or made).

         D. Convertible  Securities and Purchase  Rights.  If, at any time after
the Issuance Date, the Borrower issues any securities or other instruments which
are  convertible   into  or  exercisable  or   exchangeable   for  Common  Stock
("CONVERTIBLE  SECURITIES") or options,  warrants or other rights to purchase or
subscribe for Common Stock or  Convertible  Securities  ("PURCHASE  RIGHTS") pro
rata to the record holders of the Common Stock,  whether or not such Convertible
Securities  or  Purchase  Rights are  immediately  convertible,  exercisable  or
exchangeable,  then the Holder shall be entitled,  upon any  conversion  of this
Note after the date of record for determining  stockholders  entitled to receive
such  Convertible  Securities or Purchase Rights (or if no such record is taken,
the date on which such Convertible Securities or Purchase Rights are issued), to
receive the aggregate number of Convertible  Securities or Purchase Rights which
the  Holder  would have  received  with  respect  to the shares of Common  Stock
issuable  upon  such  conversion  (without  giving  effect  to  the  limitations
contained  in  Article  VIII) had the Holder  been the holder of such  shares of
Common Stock on the record date for the  determination of stockholders  entitled
to receive such Convertible  Securities or Purchase Rights (or if no such record
is taken, the date on which such Convertible  Securities or Purchase Rights were
issued).

         F. Notice of  Adjustments.  Upon the  occurrence of each  adjustment or
readjustment of the Conversion  Price pursuant to this Article VI amounting to a
more than ten percent (10%) change in such  Conversion  Price,  or any change in
the number or type of stock,  securities  and/or other  property  issuable  upon
conversion of the Notes,  the Borrower,  at its expense,  shall promptly compute
such  adjustment or readjustment or change and prepare and furnish to the Holder

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a  certificate  setting  forth such  adjustment  or  readjustment  or change and
showing in detail the facts upon which such adjustment or readjustment or change
is based.  The  Borrower  shall,  upon the  written  request  at any time of the
Holder,  furnish  to the  Holder  a like  certificate  setting  forth  (i)  such
adjustment or readjustment or change,  (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 the Notes.

                                   ARTICLE VII
                            NOTICE OF CERTAIN ACTIONS

         A. Notice  Rights.  The  Borrower  shall  provide the Holder with prior
notification of any meeting of the  stockholders  (and copies of proxy materials
and other information sent to  stockholders).  If the Borrower takes a record of
its  stockholders  for the purpose of determining  stockholders  entitled to (i)
receive  payment of any dividend or other  distribution,  any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other  right,  or (ii) to vote in  connection  with any  proposed
sale,  lease or  conveyance  of all or  substantially  all of the  assets of the
Borrower,  or any proposed merger,  consolidation,  liquidation,  dissolution or
winding up of the  Borrower,  the  Borrower  shall mail a notice to the  Holder,
promptly,  but in no event  earlier than public  announcement  of such  proposed
transaction, of the date on which any such record is to be taken for the purpose
of  such  vote,  dividend,  distribution,  right  or  other  event,  and a brief
statement   regarding  the  amount  and   character  of  such  vote,   dividend,
distribution, right or other event to the extent known at such time.

                                  ARTICLE VIII
          LIMITATIONS ON CERTAIN CONVERSIONS, REDEMPTIONS AND TRANSFERS

         In no event  shall the  Borrower  issue  Common  Stock to the Holder in
connection  with the  repayment of this Note  pursuant to Article I.B, and in no
event shall the Holder have the right to effect an Optional  Conversion  of this
Note into  shares of Common  Stock or to dispose of this Note to the extent that
such  repayment,  conversion or right to effect such  conversion or  disposition
would result in the Holder and its affiliates together  beneficially owning more
than 4.99% of the  outstanding  shares of Common  Stock.  For  purposes  of this
Article VIII,  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.

The  restriction  contained in this  Article  VIII may not be altered,  amended,
deleted or changed in any manner  whatsoever unless the holders of a majority of
the outstanding shares of Common Stock and the Holder shall approve, in writing,
such alteration,  amendment,  deletion or change. In the event that the Borrower
is  prohibited  from  issuing  shares of  Common  Stock in  connection  with the
repayment of this Note  pursuant to Article I.B as a result of the  operation of
this Article VIII, the Borrower shall make such repayment in cash.

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                                   ARTICLE IX
                               CERTAIN DEFINITIONS

         For  purposes of this Note,  in  addition  to the other  terms  defined
herein, the following terms shall have the following meanings:

         A.  "BUSINESS  DAY" means any day, other than a Saturday or Sunday or a
day on which  banking  institutions  in the State of New York are  authorized or
obligated by law, regulation or executive order to close.

         B. "COMMON  STOCK" means the common  stock of the  Borrower,  par value
$0.001 per share.

         C.  "CONVERSION  DATE"  means,  as  applicable,  (i) for  any  Optional
Conversion  (as defined in Article  II.A),  the date  specified in the notice of
conversion in the form attached hereto (the "NOTICE OF CONVERSION"),  so long as
a copy of the  Notice  of  Conversion  is faxed  (or  delivered  by other  means
resulting in notice) to the Borrower  before 11:59 p.m.,  New York City time, on
the Conversion  Date indicated in the Notice of Conversion;  provided,  however,
that if the Notice of Conversion is not so faxed or otherwise  delivered  before
such  time,  then the  Conversion  Date  shall be the date the  holder  faxes or
otherwise delivers the Notice of Conversion to the Borrower.

         D.  "CONVERSION  PRICE" means $X.XX, and shall be subject to adjustment
as provided herein.

         E.  "DEFAULT  CURE DATE" means,  as  applicable,  (i) with respect to a
Conversion  Default  described  in  clause  (i) of  Article  IV.A,  the date the
Borrower effects the conversion of the full amount of this Note being converted,
(ii) with  respect to a Conversion  Default  described in clause (ii) of Article
IV.A, the date the Borrower issues shares of Common Stock in satisfaction of the
conversion of the full amount of this Note being  converted in  accordance  with
Article II, or (iii) with  respect to either type of a Conversion  Default,  the
date on which the Borrower prepays this Note pursuant to Article IV.A.

         F.  "ISSUANCE  DATE" means the date of the closing under the Securities
Purchase  Agreement,  pursuant to which the Borrower issued, and such purchasers
purchased, the Notes.

         G. "MAJORITY  HOLDERS" means the holders of a majority of the aggregate
principal amount and accrued interest represented by the then outstanding Notes.

                                    ARTICLE X
                                  MISCELLANEOUS

         A. Failure or Indulgency Not Waiver. No failure or delay on the part of
any 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. Lost or Stolen  Notes.  Upon receipt by the Borrower of (i) evidence
of the loss,  theft,  destruction  or mutilation of any Note and (ii) (y) in the
case of loss,  theft or  destruction,  of  indemnity  (without any bond or other

                                      103
<PAGE>

security)  reasonably  satisfactory  to the  Borrower,  or (z)  in the  case  of
mutilation, the Note (surrendered for cancellation),  the Borrower shall execute
and deliver a new Note of like tenor and date.  However,  the Borrower shall not
be obligated to reissue such lost,  stolen,  destroyed or mutilated  Note if the
Holder contemporaneously requests the Borrower to convert such Note.

         C. Allocation of Reserved Amount.  The initial Reserved Amount shall be
allocated pro rata among the Holders of the Notes based on the principal  amount
of Notes  issued to each Holder.  Any  increase to the Reserved  Amount shall be
allocated pro rata among the Holders of the Notes based on the principal  amount
of Notes held by each Holder at the time of the increase in the Reserved Amount.
In the event a Holder  shall sell or  otherwise  transfer  any of such  Holder's
Notes,   each  transferee  shall  be  allocated  a  pro  rata  portion  of  such
transferor's  Reserved Amount.  Any portion of the Reserved Amount which remains
allocated  to any  person  or  entity  which  does not hold any  Notes  shall be
allocated to the remaining Holders of the Notes, pro rata based on the principal
balance of Notes then held by such Holders.

         D. Status as Stockholder.  Upon submission of a Notice of Conversion by
the Holder, (i) the shares covered thereby (other than the shares, if any, which
cannot be issued  because  their  issuance  would exceed the Holder's  allocated
portion of the Reserved  Amount) shall be deemed converted into shares of Common
Stock and (ii) the  Holder's  rights as a holder of such  converted  Note  shall
cease and terminate,  excepting only the right to receive  certificates for such
shares  of  Common  Stock  and to any  remedies  provided  herein  or  otherwise
available at law or in equity to the Holder because of a failure by the Borrower
to comply with the terms of this Note.  Notwithstanding  the  foregoing,  if the
Holder has not received certificates for all shares of Common Stock prior to the
Sixth  (6th)  business  day after the  expiration  of the  Delivery  Period with
respect to a  conversion  of this Note for any reason,  then  (unless the Holder
otherwise  elects  to  retain  its  status  as a holder  of  Common  Stock by so
notifying the Borrower  within five  business days after the  expiration of such
six  business  day period after  expiration  of the Delivery  Period) the Holder
shall regain the rights of a holder of this Note and the Borrower shall, as soon
as practicable,  return such unconverted  Note to the Holder.  In all cases, the
Holder shall retain all of its rights and remedies for the Borrower's failure to
convert this Note.

         E.  Remedies  Cumulative.  The remedies  provided in this Note shall be
cumulative and in addition to all other remedies  available  under this Note, at
law or in  equity  (including  a decree of  specific  performance  and/or  other
injunctive relief),  and nothing herein shall limit the Holder's right to pursue
actual  damages for any failure by the Borrower to comply with the terms of this
Note. The Borrower acknowledges that a breach by it of its obligations hereunder
will  cause  irreparable  harm to the  Holder and that the remedy at law for any
such breach may be inadequate.  The Borrower  therefore  agrees, in the event of
any such breach or  threatened  breach,  that the Holder shall be  entitled,  in
addition to all other  available  remedies,  to an  injunction  restraining  any
breach,  without the necessity of showing  economic loss and without any bond or
other security being required.

         F. Waiver.  Notwithstanding any provision in this Note to the contrary,
any provision contained herein and any right of the Holder granted hereunder may
be waived as to all Notes (and the Holders  thereof) upon the written consent of
the Majority Holders,  unless a higher percentage is required by applicable law,

                                      104
<PAGE>

in which case the  written  consent of the  Holders of not less than such higher
percentage of Notes shall be required.

         G.  Notices.  Any notices  required or  permitted to be given under the
terms  hereof  shall be sent by certified  or  registered  mail (return  receipt
requested)  or delivered  personally,  by  responsible  overnight  carrier or by
confirmed 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  responsible  overnight  carrier  or  confirmed  facsimile,  in each  case
addressed to a party. The addresses for such communications are:

                  (i) if to the Borrower, to:

                                              Level 8 Systems, Inc.
                                              214 Carnegie Center, Suite 303
                                              Princeton, New Jersey 08540
                                              Attn:    John P. Broderick

                  With a Copy to:             Lemery Greisler LLC
                                              10 Railroad Place
                                              Saratoga Springs, New York 12866
                                              Attn:    Robert J. May, Jr., Esq.

                  (ii) if to the  Holder,  to the  address  set forth  under the
Holder's name on the execution page to the  Securities  Purchase  Agreement,  or
such  other  address as may be  designated  in  writing  hereafter,  in the same
manner, by such person.

         H.  Amendment  Provision.  This Note and any  provision  hereof  may be
amended only by an instrument in writing signed by the Borrower and the Holder.

         I. Assignability.  This Note shall be binding upon the Borrower and its
successors  and  assigns  and shall  inure to the  benefit of the Holder and its
successors and assigns.  Notwithstanding  anything to the contrary  contained in
this Note or the Transaction Documents,  this Note may be pledged and all rights
of the Holder  under this Note may be assigned to any  affiliate or to any other
person or entity without the consent of the Borrower.

         J. Cost of  Collection.  If an Event of Default occurs  hereunder,  the
Borrower shall pay the Holder hereof costs of collection,  including  reasonable
attorneys' fees.

         K.  Governing  Law;  Jurisdiction.  This Note 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.  The  Borrower
irrevocably consents to the jurisdiction of the United States federal courts and
the state courts located in the County of New Castle, State of Delaware,  in any
suit or proceeding  based on or arising under this Note and  irrevocably  agrees
that all claims in respect of such suit or proceeding  may be determined in such
courts. The Borrower  irrevocably waives the defense of an inconvenient forum to

                                      105
<PAGE>

the maintenance of such suit or proceeding in such forum.  The Borrower  further
agrees  that  service of process  upon the  Borrower  mailed by first class mail
shall be deemed in every respect  effective service of process upon the Borrower
in any such suit or  proceeding.  Nothing  herein  shall affect the right of the
Holder to serve  process in any other  manner  permitted  by law.  The  Borrower
agrees 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.

         L. Denominations.  At the request of the Holder, upon surrender of this
Note, the Borrower  shall promptly issue new Notes in the aggregate  outstanding
principal amount hereof, in the form hereof,  in such  denominations of at least
$25,000 as the Holder shall request.

         M.  Certain  Waivers.  The  Borrower  and each  endorser  hereby  waive
presentment,  notice of nonpayment or dishonor,  protest,  notice of protest and
all other notices in  connection  with the  delivery,  acceptance,  performance,
default or  enforcement  of payment of this Note, and hereby waive all notice or
right of approval of any  extensions,  renewals,  modifications  or forbearances
which may be allowed.

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

         O. Maximum  Interest Rate. If the effective  interest rate on this Note
would otherwise  violate any applicable  usury law, then the interest rate shall
be reduced to the  maximum  permissible  rate and any  payment  received  by the
Holder  in  excess  of the  maximum  permissible  rate  shall  be  treated  as a
prepayment of the principal of this Note.

                  [REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]

                                      106
<PAGE>

         IN WITNESS WHEREOF, the Borrower has caused this Note to be executed by
its duly authorized officer as of the date first written above.

                            LEVEL 8 SYSTEMS, INC.

                            By:
                               -------------------------------------------------
                               John P. Broderick
                               Chief Financial Officer, Chief Operating Officer

                 [SIGNATURE PAGE TO CONVERTIBLE PROMISSORY NOTE]

                                      107
<PAGE>

                                    EXHIBIT A
                          NOTICE OF OPTIONAL CONVERSION

To:      Level 8 Systems, Inc.
         214 Carnegie Center, Suite 303
         Princeton, New Jersey 08540
         Attention:  John P. Broderick,
         Chief Financial Officer

The  undersigned  hereby  irrevocably  elects to  convert  $____________  of the
outstanding  principal  balance  of,  and  accrued  interest  on,  the Note (the
"CONVERSION"),  into shares of common stock ("COMMON STOCK") of Level 8 Systems,
Inc. (the  "CORPORATION")  according to the conditions of the ____%  Convertible
Promissory  Note dated  March ___,  2004 (the  "NOTE"),  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.  No fee will be charged to the  holder for any  conversion,  except for
transfer taxes, if any. The original of the Note is attached hereto (or evidence
of loss, theft or destruction thereof).

Except as may be provided below, the Corporation shall  electronically  transmit
the Common Stock  issuable  pursuant to this Notice of Conversion to the account
of the undersigned or its nominee (which is  ________________)  with DTC through
its Deposit Withdrawal Agent Commission System ("DTC TRANSFER").

In the event of partial exercise,  please reissue an appropriate Note(s) for the
principal balance which shall not have been converted.

The  undersigned  acknowledges  and  agrees  that all  offers  and  sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Note have been or will be made only pursuant to an effective registration of the
transfer of the Common Stock under the  Securities  Act of 1933, as amended (the
"ACT"), or pursuant to an exemption from registration under the Act.

Check Box if Applicable:

[ ] In lieu of receiving  the shares of Common Stock  issuable  pursuant to this
Notice of Conversion by way of DTC Transfer,  the  undersigned  hereby  requests
that the  Corporation  issue and deliver to the  undersigned  or its nominee (if
applicable) physical certificates representing such shares of Common Stock.

           Date of Conversion:
                              -------------------------------------------------

           Applicable Conversion Price:
                                       ----------------------------------------
           Number of Shares of
           Common Stock to be Issued:
                                     ------------------------------------------

           Signature:
                     ----------------------------------------------------------

           Name:
                ---------------------------------------------------------------

           Address:
                   ------------------------------------------------------------

                                      108Exhibit 4.3
                                WARRANT AGREEMENT

                                     BETWEEN

                         COATES MOTORCYCLE COMPANY, LTD.

                                       AND

                     AMERICAN STOCK TRANSFER & TRUST COMPANY

                        DATED AS OF            , 2004
                                     ----------

                                WARRANT AGREEMENT

     This Agreement, dated as of ____________ __, 2004, is between Coates
Motorcycle Company, Ltd., a Delaware corporation (the "Company") and American
Stock Transfer & Trust Company _____________, a ______________, (the "Warrant
Agent").

     The Company, at or about the time that it is entering into this Agreement,
proposes to issue and sell to public investors up to 2,000,000 Units (the
"Units"). Each Unit consists of two shares of Common Stock, $0.001 par value, of
the Company and one warrant (collectively, the "Warrants"). Each Warrant is
exercisable to purchase one share of Common Stock upon the terms and conditions
and subject to adjustment in certain circumstances, all as set forth in this
Agreement.

     The Company wishes to retain the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, transfer, exchange and replacement of the certificates evidencing the
Warrants to be issued under this Agreement (the "Warrant Certificates") and the
exercise of the Warrants;

     The Company and the Warrant Agent wish to enter into this Agreement to set
forth the terms and conditions of the Warrants and the rights of the holders
thereof ("Warrantholders") and to set forth the respective rights and
obligations of the Company and the Warrant Agent. Each Warrantholder is an
intended beneficiary of this Agreement with respect to the rights of
Warrantholders herein.

     NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:

<PAGE>

     1. Appointment of Warrant Agent. The Company appoints the Warrant Agent to
act as agent for the Company in accordance with the instructions in this
Agreement and the Warrant Agent accepts such appointment.

     2. Date, Denomination and Execution of Warrant Certificates.

        (a) The Warrant Certificates (and the Form of Election to Purchase and
the Form of Assignment to be printed on the reverse thereof) shall be in
registered form only and shall be substantially of the tenor and purport recited
in Exhibit A hereto, and may have such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any law, or with any rule or regulation made pursuant
thereto, or with any rule or regulation of any stock exchange on which the
Common Stock or the Warrants may be listed or any automated quotation system, or
to conform to usage. Each Warrant Certificate shall entitle the registered
holder thereof, subject to the provisions of this Agreement and of the Warrant
Certificate, to purchase, on or after ____________, 2004 and on or before the
close of business on _________, 2009 (the "Expiration Date"), one fully paid and
non-assessable share of Common Stock for each Warrant evidenced by such Warrant
Certificate for $6.00. The exercise price of the Warrants (the "Exercise Price")
is subject to adjustments as provided in Section 6 hereof. Each Warrant
Certificate issued as a part of a Unit offered to the public as described in the
recitals, above, shall be dated _____________, 2004; each other Warrant
Certificate shall be dated the date on which the Warrant Agent receives valid
issuance instructions from the Company or a transferring holder of a Warrant
Certificate or, if such instructions specify another date, such other date.

        (b) For purposes of this Agreement, the term "close of business" on any
given date shall mean 5:00 p.m., Eastern time, on such date; provided, however,
that if such date is not a business day, it shall mean 5:00 p.m., Eastern time,
on the next succeeding business day. For purposes of this Agreement, the term
"business day" shall mean any day other than a Saturday, Sunday, or a day on
which banking institutions in New York, New York or in the State in which the
Warrant Agent maintains the principal office in which it conducts business
related to the Warrants are authorized or obligated by law to be closed.

        (c) Each Warrant Certificate shall be executed on behalf of the Company
by the Chairman of the Board or its President or a Vice President, either
manually or by facsimile signature printed thereon, and have affixed thereto the
Company's seal or a facsimile thereof which shall be attested by the Secretary
or an Assistant Secretary of the Company, either manually or by facsimile
signature. Each Warrant Certificate shall be manually countersigned by the
Warrant Agent and shall not be valid for any purpose unless so countersigned. In
case any officer of the Company who shall have signed any Warrant Certificate
shall cease to be such officer of the Company before countersignature by the
Warrant Agent and issue and delivery thereof by the Company, such Warrant
Certificate, nevertheless, may be countersigned by the Warrant Agent, issued and
delivered with the same force and effect as though the person who signed such
Warrant Certificate had not ceased to be such officer of the Company.

        3. Subsequent Issue of Warrant Certificates. Subsequent to their
original issuance, no Warrant Certificates shall be reissued except (i) Warrant
Certificates issued upon transfer thereof in accordance with Section 4 hereof,
(ii) Warrant Certificates issued upon any combination, split-up or exchange of
Warrant Certificates pursuant to Section 4 hereof, (iii) Warrant Certificates
issued in replacement of mutilated, destroyed, lost or stolen Warrant
Certificates pursuant to Section 5 hereof, (iv) Warrant Certificates issued upon
the partial exercise of Warrant Certificates pursuant to Section 7 hereof, and

<PAGE>

(v) Warrant Certificates issued to reflect any adjustment or change in the
Exercise Price or the number or kind of shares purchasable thereunder pursuant
to Section 22 hereof. The Warrant Agent is hereby irrevocably authorized to
countersign and deliver, in accordance with the provisions of said Sections 4,
5, 7 and 22, the new Warrant Certificates required for purposes thereof, and the
Company, whenever required by the Warrant Agent, will supply the Warrant Agent
with Warrant Certificates duly executed on behalf of the Company for such
purposes.

         4. Transfers and Exchanges of Warrant Certificates.

        (a) The Warrant Agent will keep or cause to be kept books for
registration of ownership and transfer of the Warrant Certificates issued
hereunder. Such registers shall show the names and addresses of the respective
holders of the Warrant Certificates and the kind and number of Warrants
evidenced by each such Warrant Certificate.

        (b) The Warrant Agent shall, from time to time, register the transfer of
any outstanding Warrants upon the books to be maintained by the Warrant Agent
for that purpose, upon surrender of the Warrant Certificate evidencing such
Warrants, with the Form of Assignment duly filled in and executed with such
signature guaranteed by a banking institution or NASD member and such supporting
documentation as the Warrant Agent or the Company may reasonably require, to the
Warrant Agent at its stock transfer office in New York, New York at any time on
or before the Expiration Date of such Warrant, and upon payment to the Warrant
Agent for the account of the Company of an amount equal to any applicable
transfer tax. Payment of the amount of such tax may be made in cash, or by
certified or official bank check, payable in lawful money of the United States
of America to the order of the Company.

        (c) Upon receipt of a Warrant Certificate, with the Form of Assignment
duly filled in and executed, accompanied by payment of an amount equal to any
applicable transfer tax, the Warrant Agent shall promptly cancel the surrendered
Warrant Certificate and countersign and deliver to the transferee a new Warrant
Certificate for the number of full Warrants transferred to such transferee;
provided, however, that in case the registered holder of any Warrant Certificate
shall elect to transfer fewer than all of the Warrants evidenced by such Warrant
Certificate, the Warrant Agent in addition shall promptly countersign and
deliver to such registered holder a new Warrant Certificate or Certificates for
the number of full Warrants not so transferred.

        (d) Any Warrant Certificate or Certificates may be exchanged at the
option of the holder thereof for another Warrant Certificate or Certificates of
different denominations, of like tenor and representing in the aggregate the
same kind and number of Warrants, upon surrender of such Warrant Certificate or
Certificates, with the Form of Assignment duly filled in and executed, to the
Warrant Agent, at any time or from time to time after the close of business on
the date hereof and prior to the close of business on the Expiration Date
relating to such Warrant. The Warrant Agent shall promptly cancel the
surrendered Warrant Certificate and deliver the new Warrant Certificate pursuant
to the provisions of this Section.

        5. Mutilated, Destroyed, Lost or Stolen Warrant Certificates. Upon
receipt by the Company and the Warrant Agent of evidence reasonably satisfactory
to them of the loss, theft, destruction or mutilation of any Warrant
Certificate, and in the case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and reimbursement to them of all
reasonable expenses incidental thereto, and, in the case of mutilation, upon
surrender and cancellation of the Warrant Certificate, the Warrant Agent shall
countersign and deliver a new Warrant Certificate of like tenor for the same
kind and number of Warrants.

<PAGE>

      6. Adjustments of Number and Kind of Shares Purchasable and Exercise
Price. The number and kind of securities or other property purchasable upon
exercise of a Warrant shall be subject to adjustment from time to time upon the
occurrence, after the date hereof, of any of the following events:

        (a) In case the Company shall (1) pay a dividend in, or make a
distribution of, shares of capital stock on its outstanding Common Stock, (2)
subdivide its outstanding shares of Common Stock into a greater number of such
shares or (3) combine its outstanding shares of Common Stock into a smaller
number of such shares, the total number of shares of Common Stock purchasable
upon the exercise of each Warrant outstanding immediately prior thereto shall be
adjusted so that the holder of any Warrant Certificate thereafter surrendered
for exercise shall be entitled to receive at the same aggregate Exercise Price
the number of shares of capital stock (of one or more classes) which such holder
would have owned or have been entitled to receive immediately following the
happening of any of the events described above had such Warrant been exercised
in full immediately prior to the record date with respect to such event. Any
adjustment made pursuant to this Subsection shall, in the case of a stock
dividend or distribution, become effective as of the record date therefor and,
in the case of a subdivision or combination, be made as of the effective date
thereof. If, as a result of an adjustment made pursuant to this Subsection, the
holder of any Warrant Certificate thereafter surrendered for exercise shall
become entitled to receive shares of two or more classes of capital stock of the
Company, the Board of Directors of the Company (whose determination shall be
conclusive and shall be evidenced by a Board resolution filed with the Warrant
Agent) shall determine the allocation of the adjusted Exercise Price between or
among shares of such classes of capital stock.

        (b) In the event of a capital reorganization or a reclassification of
the Common Stock (except as provided in Subsection (a) above or Subsection (e)
below), any Warrantholder, upon exercise of Warrants, shall be entitled to
receive, in substitution for the Common Stock to which he would have become
entitled upon exercise immediately prior to such reorganization or
reclassification, the shares (of any class or classes) or other securities or
property of the Company (or cash) that he would have been entitled to receive at
the same aggregate Exercise Price upon such reorganization or reclassification
if such Warrants had been exercised immediately prior to the record date with
respect to such event; and in any such case, appropriate provision (as
determined by the Board of Directors of the Company, whose determination shall
be conclusive and shall be evidenced by a certified Board resolution filed with
the Warrant Agent) shall be made for the application of this Section 6 with
respect to the rights and interests thereafter of the Warrantholders (including
but not limited to the allocation of the Exercise Price between or among shares
of classes of capital stock), to the end that this Section 6 (including the
adjustments of the number of shares of Common Stock or other securities
purchasable and the Exercise Price thereof) shall thereafter be reflected, as
nearly as reasonably practicable, in all subsequent exercises of the Warrants
for any shares or securities or other property (or cash) thereafter deliverable
upon the exercise of the Warrants.

        (c) Whenever the number of shares of Common Stock or other securities
purchasable upon exercise of a Warrant is adjusted as provided in this Section
6, the Company will promptly file with the Warrant Agent a certificate signed by
a Chairman or co-Chairman of the Board or the President or a Vice President of
the Company and by the Treasurer or an Assistant Treasurer or the Secretary or
an Assistant Secretary of the Company setting forth the number and kind of
securities or other property purchasable upon exercise of a Warrant, as so
adjusted, stating that such adjustments in the number or kind of shares or other
securities or property conform to the requirements of this Section 6, and
setting forth a brief statement of the facts accounting for such adjustments.
Promptly after receipt of such certificate, the Company, or the Warrant Agent at
the Company's request, will deliver, by first-class, postage prepaid mail, a
brief summary thereof (to be supplied by the Company) to the registered holders
of the outstanding Warrant Certificates; provided, however, that failure to file
or to give any notice required under this Subsection, or any defect therein,
shall not affect the legality or validity of any such

<PAGE>

adjustments under this Section 6; and provided, further, that, where
appropriate, such notice may be given in advance and included as part of the
notice required to be given pursuant to Section 12 hereof.

        (d) In case of any consolidation of the Company with, or merger of the
Company into, another corporation (other than a consolidation or merger which
does not result in any reclassification or change of the outstanding Common
Stock), or in case of any sale or conveyance to another corporation of the
property of the Company as an entirety or substantially as an entirety, the
corporation formed by such consolidation or merger or the corporation which
shall have acquired such assets, as the case may be, shall execute and deliver
to the Warrant Agent a supplemental warrant agreement providing that the holder
of each Warrant then outstanding shall have the right thereafter (until the
expiration of such Warrant) to receive, upon exercise of such Warrant, solely
the kind and amount of shares of stock and other securities and property (or
cash) receivable upon such consolidation, merger, sale or transfer by a holder
of the number of shares of Common Stock of the Company for which such Warrant
might have been exercised immediately prior to such consolidation, merger, sale
or transfer. Such supplemental warrant agreement shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided in this Section. The above provision of this Subsection shall similarly
apply to successive consolidations, mergers, sales or transfers.

      The Warrant Agent shall not be under any responsibility to determine the
correctness of any provision contained in any such supplemental warrant
agreement relating to either the kind or amount of shares of stock or securities
or property (or cash) purchasable by holders of Warrant Certificates upon the
exercise of their Warrants after any such consolidation, merger, sale or
transfer or of any adjustment to be made with respect thereto, but subject to
the provisions of Section 20 hereof, may accept as conclusive evidence of the
correctness of any such provisions, and shall be protected in relying upon, a
certificate of a firm of independent certified public accountants (who may be
the accountants regularly employed by the Company) with respect thereto.

        (e) Irrespective of any adjustments in the number or kind of shares
issuable upon exercise of Warrants, Warrant Certificates theretofore or
thereafter issued may continue to express the same price and number and kind of
shares as are stated in the similar Warrant Certificates initially issuable
pursuant to this Warrant Agreement.

        (f) The Company may retain a firm of independent public accountants of
recognized standing, which may be the firm regularly retained by the Company,
selected by the Audit Committee of the Board of Directors of the Company, and
not disapproved by the Warrant Agent, to make any computation required under
this Section, and a certificate signed by such firm shall, in the absence of
fraud or gross negligence, be conclusive evidence of the correctness of any
computation made under this Section.

        (g) For the purpose of this Section, the term "Common Stock" shall mean
(i) the Common Stock or (ii) any other class of stock resulting from successive
changes or reclassifications of such Common Stock consisting solely of changes
in par value, or from par value to no par value, or from no par value to par
value. In the event that at any time as a result of an adjustment made pursuant
to this Section, the holder of any Warrant thereafter surrendered for exercise
shall become entitled to receive any shares of capital stock of the Company
other than shares of Common Stock, thereafter the number of such other shares so
receivable upon exercise of any Warrant shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in this Section, and all
other provisions of this Agreement, with respect to the Common Stock, shall
apply on like terms to any such other shares.

<PAGE>

        (h) The Company may, from time to time and to the extent permitted by
law, reduce the Exercise Price of the Warrants by any amount for a period of not
less than 20 days. If the Company so reduces the Exercise Price of such
Warrants, it will give not less than 15 days' notice of such decrease, which
notice may be in the form of a press release, and shall take such other steps as
may be required under applicable law in connection with any offers or sales of
securities at the reduced price.

      7. Exercise and Redemption of Warrants. Unless the Warrants have been
redeemed as provided in this Section 7, the registered holder of any Warrant
Certificate may exercise the Warrants evidenced thereby, in whole at any time or
in part from time to time at or prior to the close of business, on the
Expiration Date relating to such Warrant, subject to the provisions of Section
9, at which time the Warrant Certificates shall be and become wholly void and of
no value. Warrants may be exercised by their holders or redeemed by the Company
as follows:

        (a) Exercise of Warrants shall be accomplished upon surrender of the
Warrant Certificate evidencing such Warrants, with the Form of Election to
Purchase on the reverse side thereof duly filled in and executed, to the Warrant
Agent at its stock transfer office in New York, New York, together with payment
to the Company of the Exercise Price (as of the date of such surrender) of the
Warrants then being exercised and an amount equal to any applicable transfer tax
and, if requested by the Company, any other taxes or governmental charges which
the Company may be required by law to collect in respect of such exercise.
Payment of the Exercise Price and other amounts may be made by wire transfer of
good funds, or by certified or bank cashier's check, payable in lawful money of
the United States of America to the order of the Company. No adjustment shall be
made for any cash dividends, whether paid or declared, on any securities
issuable upon exercise of a Warrant.

        (b) Upon receipt of a Warrant Certificate, with the Form of Election to
Purchase duly filled in and executed, accompanied by payment of the Exercise
Price of the Warrants being exercised (and of an amount equal to any applicable
taxes or government charges as aforesaid), the Warrant Agent shall promptly
request from the Transfer Agent with respect to the securities to be issued and
deliver to or upon the order of the registered holder of such Warrant
Certificate, in such name or names as such registered holder may designate, a
certificate or certificates for the number of full shares of the securities to
be purchased, together with cash made available by the Company pursuant to
Section 8 hereof in respect of any fraction of a share of such securities
otherwise issuable upon such exercise. If the Warrant is then exercisable to
purchase property other than securities, the Warrant Agent shall take
appropriate steps to cause such property to be delivered to or upon the order of
the registered holder of such Warrant Certificate. In addition, if it is
required by law and upon instruction by the Company, the Warrant Agent will
deliver to each Warrantholder a prospectus which complies with the provisions of
Section 9 of the Securities Act of 1933, as amended, and the Company agrees to
supply Warrant Agent with sufficient number of prospectuses to effectuate that
purpose.

        (c) In case the registered holder of any Warrant Certificate shall
exercise fewer than all of the Warrants evidenced by such Warrant Certificate,
the Warrant Agent shall promptly countersign and deliver to the registered
holder of such Warrant Certificate, or to his duly authorized assigns, a new
Warrant Certificate or Certificates evidencing the number of Warrants that were
not so exercised.

        (d) Each person in whose name any certificate for securities is issued
upon the exercise of Warrants shall for all purposes be deemed to have become
the holder of record of the securities represented thereby as of, and such
certificate shall be dated, the date upon which the Warrant Certificate was duly
surrendered in proper form and payment of the Exercise Price (and of any
applicable taxes or other governmental charges) was made; provided, however,
that if the date of such surrender and payment is a date on which the stock
transfer books of the Company are closed, such person shall be deemed to have
become the record holder of such shares as of, and the certificate for such
shares shall be dated, the

<PAGE>

next succeeding business day on which the stock transfer books of the Company
are open (whether before, on or after the Expiration Date relating to such
Warrant) and the Warrant Agent shall be under no duty to deliver the certificate
for such shares until such date. The Company covenants and agrees that it shall
not cause its stock transfer books to be closed for a period of more than 20
consecutive business days except upon consolidation, merger, sale of all or
substantially all of its assets, dissolution or liquidation or as otherwise
provided by law.

        (e) Beginning on ____________, 2004, the Warrants outstanding at the
time of a redemption may be redeemed at the option of the Company, in whole or
in part on a pro-rata basis, by giving not less than 30 days prior notice as
provided in Section 7(f) below, which notice may not be give before, but may be
given at any time after, the closing price of the Common Stock on the principal
exchange on which it is then traded has equaled or exceeded $ 14.00 per share on
each of thirty consecutive trading days that occur subsequent to the date of
this Warrant Agreement. The price at which Warrants may be redeemed (the
"Redemption Price") is $0.25 per Warrant. On and after the redemption date the
holders of record of redeemed Warrants shall be entitled to payment of the
Redemption Price upon surrender of such redeemed Warrants to the Company at the
office of the Warrant Agent designated for that purpose.

        (f) Notice of redemption of Warrants shall be given at least 30 days
prior to the redemption date by mailing, by registered or certified mail, return
receipt requested, a copy of such notice to the Warrant Agent and to all of the
holders of record of Warrants at their respective addresses appearing on the
books or transfer records of the Company or such other address designated in
writing by the holder of record to the Warrant Agent not less than 40 days prior
to the redemption date.

        (g) From and after the redemption date, all rights of the Warrantholders
(except the right to receive the Redemption Price) shall terminate, but only if
(i) no later than one day prior to the redemption date the Company shall have
irrevocably deposited with the Warrant Agent as paying agent a sufficient amount
to pay on the redemption date the Redemption Price for all Warrants called for
redemption and (ii) the notice of redemption shall have stated the name and
address of the Warrant Agent and the intention of the Company to deposit such
amount with the Warrant Agent no later than one day prior to the redemption
date.

        (h) On the Redemption Date, the Warrant Agent shall pay to the holders
of record of redeemed Warrants all monies received by the Warrant Agent for the
redemption of Warrants to which the holders of record of such redeemed Warrants
who shall have surrendered their Warrants are entitled. The Warrant Agent shall
have no obligation to pay for the redemption of the warrants except to the
extent that funds for such payment have been provided to it by the Company.

        (i) Any amounts deposited with the Warrant Agent that are not required
for redemption of Warrants may be withdrawn by the Company. Any amounts
deposited with the Warrant Agent that shall be unclaimed after six months after
the redemption date shall be redelivered back to the Company, and thereafter the
holders of the Warrants called for redemption for which such funds were
deposited shall look solely to the Company for payment. The Company shall be
entitled to the interest, if any, on funds deposited with the Warrant Agent and
the holders of redeemed Warrants shall have no right to any such interest. At
the instruction of the Company, the Warrant agent shall deposit or invest any
and all funds deposited with it by the Company in connection with any redemption
in federally insured, interest bearing accounts with a financial institution or
institutions designated by the Company but shall have no liability with respect
to the performance of any such investments other than, in the case of funds
deposited in accounts maintained by the Warrant Agent, the liability of the
Warrant Agent to its depositors in such accounts, generally.

<PAGE>

        (j) If the Company fails to make a sufficient deposit with the Warrant
Agent as provided above, the holder of any Warrants called for redemption may at
the option of the holder (i) by notice to the Company declare the notice of
redemption a nullity as to such holder, or (ii) maintain an action against the
Company for the Redemption Price. If the holder brings such an action, the
Company will pay reasonable attorneys' fees of the holder. If the holder fails
to bring an action against the Company for the Redemption Price within 60 days
after the redemption date, the holder shall be deemed to have elected to declare
the notice of redemption to be a nullity as to such holder and such notice shall
be without any force or effect as to such holder. Except as otherwise
specifically provided in this Paragraph 7(j), a notice of redemption, once
mailed by the Company as provided in Paragraph F, shall be irrevocable.

        (k) The Company may not give a notice of redemption of Warrants under
this Section 7 unless the underlying shares are covered by an effective
registration statement. Additionally, an effective registration statement must
be in place for at least 30 calendar days after mailing of the notice of
redemption before the redemption may be effected. Consequently, if an effective
registration statement covering the underlying shares is in place at the time
that the Company mails its notice of redemption, but, during the notice period,
the registration statement ceases to be in effect (or is suspended), then the
notice period will automatically be extended for that number of calendar days
equal to the number of calendar days of cessation (or suspension), unless waived
in writing by the warrant holder.

      8. Fractional Interests. The Company shall not be required to issue any
Warrant Certificate evidencing a fraction of a Warrant or to issue fractions of
shares of securities on the exercise of the Warrants. If any fraction
(calculated to the nearest one-hundredth) of a Warrant or a share of securities
would, except for the provisions of this Section, be issuable on the exercise of
any Warrant, the Company shall, at its option, either purchase such fraction for
an amount in cash equal to the current value of such fraction computed on the
basis of the closing market price (as quoted on the American Stock Exchange) on
the trading day immediately preceding the day upon which such Warrant
Certificate was surrendered for exercise in accordance with Section 7 hereof or
issue the required fractional Warrant or share. By accepting a Warrant
Certificate, the holder thereof expressly waives any right to receive a Warrant
Certificate evidencing any fraction of a Warrant or to receive any fractional
share of securities upon exercise of a Warrant.

      9. Reservation of Equity Securities. The Company covenants that it will at
all times reserve and keep available, free from any pre-emptive rights, out of
its authorized and unissued equity securities, solely for the purpose of issue
upon exercise of the Warrants, such number of shares of equity securities of the
Company as shall then be issuable upon the exercise of all outstanding Warrants
("Equity Securities"). The Company covenants that all Equity Securities which
shall be so issuable shall, upon such issue, be duly authorized, validly issued,
fully paid and non-assessable.

      The Company covenants that if any equity securities, required to be
reserved for the purpose of issue upon exercise of the Warrants hereunder,
require registration with or approval of any governmental authority under any
federal or state law before such shares may be issued upon exercise of Warrants,
the Company will use all commercially reasonable efforts to cause such
securities to be duly registered, or approved, as the case may be, and, to the
extent practicable, take all such action in anticipation of and prior to the
exercise of the Warrants, including, without limitation, filing any and all
post-effective amendments to the Company's Registration Statement on Form SB-2
(Registration No. 333-109119) necessary to permit a public offering of the
securities underlying the Warrants at any and all times during the term of this
Agreement, provided, however, that in no event shall such securities be issued,
and the Company is authorized to refuse to honor the exercise of any Warrant, if
such exercise would result in the opinion of the Company's Board of Directors,
upon advice of counsel, in the violation of any law; and provided further that,
in the case of a Warrant exercisable solely for securities listed on a
securities exchange or for which there are at least three independent market
makers, in lieu of obtaining such

<PAGE>

registration or approval, the Company may elect to redeem Warrants submitted to
the Warrant Agent for exercise for a price equal to the difference between the
aggregate low asked price, or closing price, as the case may be, of the
securities for which such Warrant is exercisable on the date of such submission
and the Exercise Price of such Warrants; in the event of such redemption, the
Company will pay to the holder of such Warrants the above-described redemption
price in cash within 10 business days after receipt of notice from the Warrant
Agent that such Warrants have been submitted for exercise.

      10. Reduction of Conversion Price Below Par Value. Before taking any
action that would cause an adjustment pursuant to Section 6 hereof reducing the
portion of the Exercise Price required to purchase one share of capital stock
below the then par value (if any) of a share of such capital stock, the Company
will use its best efforts to take any corporate action which, in the opinion of
its counsel, may be necessary in order that the Company may validly and legally
issue fully paid and non-assessable shares of such capital stock.

      11. Payment of Taxes. The Company covenants and agrees that it will pay
when due and payable any and all federal and state documentary, stamp and other
original issue taxes which may be payable in respect of the original issuance of
the Warrant Certificates, or any shares of Common Stock or other securities upon
the exercise of Warrants. The Company shall not, however, be required (a) to pay
any tax which may be payable in respect of any transfer involved in the transfer
and delivery of Warrant Certificates or the issuance or delivery of certificates
for Common Stock or other securities in a name other than that of the registered
holder of the Warrant Certificate surrendered for purchase or (b) to issue or
deliver any certificate for shares of Common Stock or other securities upon the
exercise of any Warrant Certificate until any such tax shall have been paid, all
such tax being payable by the holder of such Warrant Certificate at the time of
surrender.

      12. Notice of Certain Corporate Action. In case the Company after the date
hereof shall propose (a) to offer to the holders of Common Stock, generally,
rights to subscribe to or purchase any additional shares of any class of its
capital stock, any evidences of its indebtedness or assets, or any other rights
or options or (b) to effect any reclassification of Common Stock (other than a
reclassification involving merely the subdivision or combination of outstanding
shares of Common Stock) or any capital reorganization, or any consolidation or
merger to which the Company is a party and for which approval of any
stockholders of the Company is required, or any sale, transfer or other
disposition of its property and assets substantially as an entirety, or the
liquidation, voluntary or involuntary dissolution or winding-up of the Company,
then, in each such case, the Company shall file with the Warrant Agent and the
Company, or the Warrant Agent on its behalf, shall mail (by first-class, postage
prepaid mail) to all registered holders of the Warrant Certificates notice of
such proposed action, which notice shall specify the date on which the books of
the Company shall close or a record be taken for such offer of rights or
options, or the date on which such reclassification, reorganization,
consolidation, merger, sale, transfer, other disposition, liquidation, voluntary
or involuntary dissolution or winding-up shall take place or commence, as the
case may be, and which shall also specify any record date for determination of
holders of Common Stock entitled to vote thereon or participate therein and
shall set forth such facts with respect thereto as shall be reasonably necessary
to indicate any adjustments in the Exercise Price and the number or kind of
shares or other securities purchasable upon exercise of Warrants which will be
required as a result of such action. Such notice shall be filed and mailed in
the case of any action covered by clause (a) above, at least ten days prior to
the record date for determining holders of the Common Stock for purposes of such
action or, if a record is not to be taken, the date as of which the holders of
shares of Common Stock of record are to be entitled to such offering; and, in
the case of any action covered by clause (b) above, at least 20 days prior to
the earlier of the date on which such reclassification, reorganization,
consolidation, merger, sale, transfer, other disposition, liquidation, voluntary
or involuntary dissolution or winding-up is expected to become effective and the
date on which it is expected that holders of shares of Common Stock of record on
such date shall be entitled to exchange

<PAGE>

their shares for securities or other property deliverable upon such
reclassification, reorganization, consolidation, merger, sale, transfer, other
disposition, liquidation, voluntary or involuntary dissolution or winding-up.

      Failure to give any such notice or any defect therein shall not affect the
legality or validity of any transaction listed in this Section 12.

      13. Disposition of Proceeds on Exercise of Warrant Certificates, etc. The
Warrant Agent shall account promptly to the Company with respect to Warrants
exercised and concurrently pay to the Company all moneys received by the Warrant
Agent for the purchase of securities or other property through the exercise of
such Warrants.

      The Warrant Agent shall keep copies of this Agreement available for
inspection by Warrantholders during normal business hours at its stock transfer
office. Copies of this Agreement may be obtained upon written request addressed
to the Warrant Agent at its stock transfer office in New York, New York.

      14. Warrantholder Not Deemed a Stockholder. No Warrantholder, as such,
shall be entitled to vote, receive dividends or be deemed the holder of Common
Stock or any other securities of the Company which may at any time be issuable
on the exercise of the Warrants represented thereby for any purpose whatever,
nor shall anything contained herein or in any Warrant Certificate be construed
to confer upon any Warrantholder, as such, any of the rights of a stockholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action (whether upon any recapitalization, issuance of
stock, reclassification of stock, change of par value or change of stock to no
par value, consolidation, merger, conveyance or otherwise), or to receive notice
of meetings or other actions affecting stockholders (except as provided in
Section 12 hereof), or to receive dividend or subscription rights, or otherwise,
until such Warrant Certificate shall have been exercised in accordance with the
provisions hereof and the receipt of the Exercise Price and any other amounts
payable upon such exercise by the Warrant Agent.

      15. Right of Action. All rights of action in respect to this Agreement are
vested in the respective registered holders of the Warrant Certificates; and any
registered holder of any Warrant Certificate, without the consent of the Warrant
Agent or of any other holder of a Warrant Certificate, may, in his own behalf
for his own benefit, enforce, and may institute and maintain any suit, action or
proceeding against the Company suitable to enforce, or otherwise in respect of,
his right to exercise the Warrants evidenced by such Warrant Certificate, for
the purchase of shares of the Common Stock in the manner provided in the Warrant
Certificate and in this Agreement.

      16. Agreement of Holders of Warrant Certificates. Every holder of a
Warrant Certificate by accepting the same consents and agrees with the Company,
the Warrant Agent and with every other holder of a Warrant Certificate that:

            (a) the Warrant Certificates are transferable on the registry books
of the Warrant Agent only upon the terms and conditions set forth in this
Agreement; and

            (b) the Company and the Warrant Agent may deem and treat the person
in whose name the Warrant Certificate is registered as the absolute owner of the
Warrant (notwithstanding any notation of ownership or other writing thereon made
by anyone other than the Company or the Warrant Agent) for all purposes whatever
and neither the Company nor the Warrant Agent shall be affected by any notice to
the contrary.

<PAGE>

      17. Cancellation of Warrant Certificates. In the event that the Company
shall purchase or otherwise acquire any Warrant Certificate or Certificates
after the issuance thereof, such Warrant Certificate or Certificates shall
thereupon be delivered to the Warrant Agent and be canceled by it and retired.
The Warrant Agent shall also cancel any Warrant Certificate delivered to it for
exercise, in whole or in part, or delivered to it for transfer, split-up,
combination or exchange. Warrant Certificates so canceled shall be delivered by
the Warrant Agent to the Company from time to time, or disposed of in accordance
with the instructions of the Company.

      18. Concerning the Warrant Agent. The Company agrees to pay to the Warrant
Agent from time to time, on demand of the Warrant Agent, reasonable compensation
for all services rendered by it hereunder and also its reasonable expenses,
including counsel fees, and other disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Warrant Agent for, and to
hold it harmless against, any loss, liability or expense, incurred without gross
negligence, bad faith or willful misconduct on the part of the Warrant Agent,
arising out of or in connection with the acceptance and administration of this
Agreement.

      19. Merger or Consolidation or Change of Name of Warrant Agent. Any
corporation into which the Warrant Agent may be merged or with which it may be
consolidated, or any corporation resulting from any merger or consolidation to
which the Warrant Agent shall be a party, or any corporation succeeding to the
corporate trust business of the Warrant Agent, shall be the successor to the
Warrant Agent hereunder without the execution or filing of any paper or any
further act on the part of any of the parties hereto, provided that such
corporation would be eligible for appointment as a successor warrant agent under
the provisions of Section 21 hereof. In case at the time such successor to the
Warrant Agent shall succeed to the agency created by this Agreement, any of the
Warrant Certificates shall have been countersigned but not delivered, any such
successor to the Warrant Agent may adopt the countersignature of the original
Warrant Agent and deliver such Warrant Certificates so countersigned; and in
case at that time any of the Warrant Certificates shall not have been
countersigned, any successor to the Warrant Agent may countersign such Warrant
Certificates either in the name of the predecessor Warrant Agent or in the name
of the successor Warrant Agent; and in all such cases such Warrant Certificates
shall have the full force provided in the Warrant Certificates and in this
Agreement.

      In case at any time the name of the Warrant Agent shall be changed and at
such time any of the Warrant Certificates shall have been countersigned but not
delivered, the Warrant Agent may adopt the countersignature under its prior name
and deliver Warrant Certificates so countersigned; and in case at that time any
of the Warrant Certificates shall not have been countersigned, the Warrant Agent
may countersign such Warrant Certificates either in its prior name or in its
changed name; and in all such cases such Warrant Certificates shall have the
full force provided in the Warrant Certificates and in this Agreement.

      20. Duties of Warrant Agent. The Warrant Agent undertakes the duties and
obligations imposed by this Agreement upon the following terms and conditions,
by all of which the Company and the holders of Warrant Certificates, by their
acceptance thereof, shall be bound:

      (a) The Warrant Agent may consult with counsel satisfactory to it (who may
be counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Warrant Agent as to any action
taken, suffered or omitted by it in good faith and in accordance with such
opinion; provided, however, that the Warrant Agent shall have exercised
reasonable care in the selection of such counsel. Fees and expenses of such
counsel, to the extent reasonable, shall be paid by the Company.

<PAGE>

        (b) Whenever in the performance of its duties under this Agreement, the
Warrant Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by a Chairman or co-Chairman of the Board or
the President or a Vice President or the Secretary of the Company and delivered
to the Warrant Agent; and such certificate shall be full authorization to the
Warrant Agent for any action taken or suffered in good faith by it under the
provisions of this Agreement in reliance upon such certificate.

        (c) The Warrant Agent shall be liable hereunder only for its own gross
negligence, bad faith or willful misconduct.

        (d) The Warrant Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Warrant
Certificates (except its countersignature on the Warrant Certificates and such
statements or recitals as describe the Warrant Agent or action taken or to be
taken by it) or be required to verify the same, but all such statements and
recitals are and shall be deemed to have been made by the Company only.

        (e) The Warrant Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Warrant Agent) or in respect of the validity or
execution of any Warrant Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Warrant Certificate; nor shall
it be responsible for the making of any change in the number of shares of Common
Stock for which a Warrant is exercisable required under the provisions of
Section 6 or responsible for the manner, method or amount of any such change or
the ascertaining of the existence of facts that would require any such
adjustment or change (except with respect to the exercise of Warrant
Certificates after actual notice of any adjustment of the Exercise Price); nor
shall it by any act hereunder be deemed to make any representation or warranty
as to the authorization or reservation of any shares of Common Stock to be
issued pursuant to this Agreement or any Warrant Certificate or as to whether
any shares of Common Stock will, when issued, be validly issued, fully paid and
non-assessable.

        (f) The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or take any other action likely to involve
expense unless the Company or one or more registered holders of Warrant
Certificates shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses which may be incurred. All rights of action
under this Agreement or under any of the Warrants may be enforced by the Warrant
Agent without the possession of any of the Warrants or the production thereof at
any trial or other proceeding relative thereto, and any such action, suit or
proceeding instituted by the Warrant Agent shall be brought in its name as
Warrant Agent, and any recovery of judgment shall be for the ratable benefit of
the registered holders of the Warrant Certificates, as their respective rights
or interests may appear.

        (g) The Warrant Agent and any stockholder, director, officer or employee
of the Warrant Agent may buy, sell or deal in any of the Warrants or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to or
otherwise act as fully and freely as though it were not Warrant Agent under this
Agreement. Nothing herein shall preclude the Warrant Agent from acting in any
other capacity for the Company or for any other legal entity.

<PAGE>

        (h) The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from a
Chairman or co-Chairman of the Board or President or a Vice President or the
Secretary or the Controller of the Company, and to apply to such officers for
advice or instructions in connection with the Warrant Agent's duties, and it
shall not be liable for any action taken or suffered or omitted by it in good
faith in accordance with instructions of any such officer.

        (i) The Warrant Agent will not be responsible for any failure of the
Company to comply with any of the covenants contained in this Agreement or in
the Warrant Certificates to be complied with by the Company.

        (j) The Warrant Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys, agents or employees and the Warrant Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys, agents or employees or for any loss to the Company resulting
from such neglect or misconduct; provided, however, that reasonable care shall
have been exercised in the selection and continued employment of such attorneys,
agents and employees.

        (k) The Warrant Agent will not incur any liability or responsibility to
the Company or to any holder of any Warrant Certificate for any action taken, or
any failure to take action, in reliance on any notice, resolution, waiver,
consent, order, certificate, or other paper, document or instrument reasonably
believed by the Warrant Agent to be genuine and to have been signed, sent or
presented by the proper party or parties.

        (l) The Warrant Agent will act hereunder solely as agent of the Company
in a ministerial capacity, and its duties will be determined solely by the
provisions hereof. The Warrant Agent will not be liable for anything which it
may do or refrain from doing in connection with this Agreement except for its
own gross negligence, bad faith or willful conduct.

      21. Change of Warrant Agent. The Warrant Agent may resign and be
discharged from its duties under this Agreement upon 30 days' prior notice in
writing mailed, by registered or certified mail, to the Company. The Company may
remove the Warrant Agent or any successor warrant agent upon 30 days' prior
notice in writing, mailed to the Warrant Agent or successor warrant agent, as
the case may be, by registered or certified mail. If the Warrant Agent shall
resign or be removed or shall otherwise become incapable of acting, the Company
shall appoint a successor to the Warrant Agent and shall, within 15 days
following such appointment, give notice thereof in writing to each registered
holder of the Warrant Certificates. If the Company shall fail to make such
appointment within a period of 15 days after giving notice of such removal or
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Warrant Agent, then the Company agrees to perform the
duties of the Warrant Agent hereunder until a successor Warrant Agent is
appointed. After appointment and execution of a copy of this Agreement in effect
at that time, the successor Warrant Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as
Warrant Agent without further act or deed; but the former Warrant Agent shall
deliver and transfer to the successor Warrant Agent, within a reasonable time,
any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Failure to
give any notice provided for in this Section, however, or any defect therein
shall not affect the legality or validity of the resignation or removal of the
Warrant Agent or the appointment of the successor warrant agent, as the case may
be.

      22. Issuance of New Warrant Certificates. Notwithstanding any of the
provisions of this Agreement or the several Warrant Certificates to the
contrary, the Company may, at its option, issue new Warrant Certificates in such
form as may be approved by its Board of Directors to reflect any adjustment or

<PAGE>

change in the Exercise Price or the number or kind of shares purchasable under
the several Warrant Certificates made in accordance with the provisions of this
Agreement.

      23. Notices. Notice or demand pursuant to this Agreement to be given or
made on the Company by the Warrant Agent or by the registered holder of any
Warrant Certificate shall be sufficiently given or made if sent by first-class
or registered mail, postage prepaid, addressed (until another address is filed
in writing by the Company with the Warrant Agent) as follows:

      Coates Motorcycle Company, Ltd.
      Central Avenue
      Building 3
      Farmingdale, New Jersey 07727
      Attention: President

      Subject to the provisions of Section 21, any notice pursuant to this
Agreement to be given or made by the Company or by the holder of any Warrant
Certificate to or on the Warrant Agent shall be sufficiently given or made if
sent by first-class or registered mail, postage prepaid, addressed (until
another address is filed in writing by the Warrant Agent with the Company) as
follows:

      American Stock Transfer & Trust Company
      40 Wall Street - 46th Floor
      New York, New York 13005

      Any notice or demand authorized to be given or made to the registered
holder of any Warrant Certificate under this Agreement shall be sufficiently
given or made if sent by first-class or registered mail, postage prepaid, to the
last address of such holder as it shall appear on the registers maintained by
the Warrant Agent.

      24. Modification of Agreement. The Warrant Agent may, without the consent
or concurrence of the Warrantholders, by supplemental agreement or otherwise,
concur with the Company in making any changes or corrections in this Agreement
that the Warrant Agent shall have been advised by counsel (who may be counsel
for the Company) are necessary or desirable to cure any ambiguity or to correct
any defective or inconsistent provision or clerical omission or mistake or
manifest error herein contained, or to make any other provisions in regard to
matters or questions arising hereunder and which shall not be inconsistent with
the provisions of the Warrant Certificates and which shall not adversely affect
the interests of the Warrantholders. As of the date hereof, this Agreement
contains the entire and only agreement, understanding, representation,
condition, warranty or covenant between the parties hereto with respect to the
matters herein, supersedes any and all other agreements between the parties
hereto relating to such matters, and may be modified or amended only by a
written agreement signed by both parties hereto pursuant to the authority
granted by the first sentence of this Section.

      25. Successors. All the covenants and provisions of this Agreement by or
for the benefit of the Company or the Warrant Agent shall bind and inure to the
benefit of their respective successors and assigns hereunder.

      26. Governing Law. This Agreement and each Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York, and for all purposes shall be construed in accordance with the laws of
said State. All disputes relating to this Agreement and each Warrant Certificate
issued hereunder shall be adjudicated in a court located in New York, New York
to the exclusion of all other courts that might have jurisdiction.

<PAGE>

      27. Termination. This Agreement shall terminate as of the close of
business on the Expiration Date, or such earlier date upon which all Warrants
shall have been exercised or redeemed, except that the Warrant Agent shall
account to the Company as to all Warrants outstanding and all cash held by it as
of the close of business on the Expiration Date.

      28. Benefits of this Agreement. Nothing in this Agreement or in the
Warrant Certificates shall be construed to give to any person or corporation
other than the Company, the Warrant Agent, and their respective successors and
assigns hereunder and the registered holders of the Warrant Certificates any
legal or equitable right, remedy or claim under this Agreement; but this
Agreement shall be for the sole and exclusive benefit of the Company, the
Warrant Agent, their respective successors and assigns hereunder and the
registered holders of the Warrant Certificates.

      29. Descriptive Headings. The descriptive headings of the several Sections
of this Agreement are inserted for convenience only and shall not control or
affect the meaning or construction of any of the provisions hereof.

      30. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument.

      (Remainder of page intentionally left blank; signature page follows)

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

                                      COATES MOTORCYCLE COMPANY, LTD.

                                          By:
                                         ----------------------------
                                          Gregory G. Coates
                                          President

                                         AMERICAN STOCK TRANSFER & TRUST COMPANY

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

<PAGE>

                                    EXHIBIT A

            VOID AFTER 5 P.M. PACIFIC TIME ON _________________, 2009

                        WARRANTS TO PURCHASE COMMON STOCK

No. CMC-_____                                                 _________ Warrants

                         Coates Motorcycle Company, Ltd.

                                CUSIP ___________

THIS CERTIFIES THAT

or registered assigns, is the registered holder of the number of Warrants
("Warrants") set forth above. Each Warrant, unless and until redeemed by the
Company as provided in the Warrant Agreement, hereinafter more fully described
(the "Warrant Agreement") entitles the holder thereof to purchase from Coates
Motorcycle Company, Ltd., a corporation incorporated under the laws of the State
of Delaware (the "Company"), subject to the terms and conditions set forth
hereinafter and in the Warrant Agreement, at any time on or after ___________,
2004 and before the close of business on ________, 2009 ("Expiration Date"), one
fully paid and non-assessable share of Common Stock, par value $0.001 per share,
of the Company ("Common Stock") upon presentation and surrender of this Warrant
Certificate, with the instructions for the registration and delivery of Common
Stock filled in, at the stock transfer office in New York, New York, of American
Stock Transfer & Trust Company, Warrant Agent of the Company ("Warrant Agent")
or of its successor warrant agent or, if there be no successor warrant agent, at
the corporate offices of the Company, and upon payment of the Exercise Price (as
defined in the Warrant Agreement) and any applicable taxes paid either in cash,
or by certified or official bank check, payable in lawful money of the United
States of America to the order of the Company. Each Warrant initially entitles
the holder to purchase one share of Common Stock for $6.00. The number and kind
of securities or other property for which the Warrants are exercisable are
subject to adjustment in certain events, such as mergers, splits, stock
dividends, splits and the like, to prevent dilution. Beginning on _____________,
2004, the Company may redeem any or all outstanding and unexercised warrants by
giving not less than 30 days prior notice at any time after the closing price of
the Common Stock on the principal exchange on which it is traded has equaled or
exceeded $ 14 per share on each of thirty consecutive trading days subsequent to
_________, 2004. The Redemption Price is $0.25 per Warrant (subject to
adjustment in the event of a stock split, dividend or the like). All Warrants
not theretofore exercised will expire on the Expiration Date.

      This Warrant Certificate is subject to all of the terms, provisions and
conditions of the Warrant Agreement, dated as of ________________, 2004, between
the Company and the Warrant Agent, to all of which terms, provisions and
conditions the registered holder of this Warrant Certificate consents by
acceptance hereof. The Warrant Agreement is incorporated herein by reference and
made a part hereof and reference is made to the Warrant Agreement for a full
description of the rights, limitations of rights, obligations, duties and
immunities of the Warrant Agent, the Company and the holders of the Warrant

<PAGE>

Certificates. Copies of the Warrant Agreement are available for inspection at
the stock transfer office of the Warrant Agent or may be obtained upon written
request addressed to the Company at Coates Motorcycle Company, Ltd., Central
Avenue, Building 3, Farmingdale, New Jersey 07727, Attention: President.

      The Company shall not be required upon the exercise of the Warrants
evidenced by this Warrant Certificate to issue fractions of Warrants, Common
Stock or other securities, but shall make adjustment therefor in cash on the
basis of the current market value of any fractional interest as provided in the
Warrant Agreement.

      In certain cases, the sale of securities by the Company upon exercise of
Warrants may violate the securities laws of the United States, certain states
thereof or other jurisdictions. The Company has agreed to use all commercially
reasonable efforts to cause a registration statement to continue to be effective
during the term of the Warrants with respect to such sales under the Securities
Act of 1933, and to take such action under the laws of various states as may be
required to cause the sale of securities upon exercise to be lawful. However,
the Company will not be required to honor the exercise of Warrants if, in the
opinion of the Board of Directors, upon advice of counsel, the sale of
securities upon such exercise would be unlawful. In certain cases, the Company
may, but is not required to, purchase Warrants submitted for exercise for a cash
price equal to the difference between the market price of the securities
obtainable upon such exercise and the exercise price of such Warrants.

      This Warrant Certificate, with or without other Certificates, upon
surrender to the Warrant Agent, any successor warrant agent or, in the absence
of any successor warrant agent, at the corporate offices of the Company, may be
exchanged for another Warrant Certificate or Certificates evidencing in the
aggregate the same number of Warrants as the Warrant Certificate or Certificates
so surrendered. If the Warrants evidenced by this Warrant Certificate shall be
exercised in part, the holder hereof shall be entitled to receive upon surrender
hereof another Warrant Certificate or Certificates evidencing the number of
Warrants not so exercised.

      No holder of this Warrant Certificate, as such, shall be entitled to vote,
receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose whatsoever, nor shall anything contained in the Warrant
Agreement or herein be construed to confer upon the holder of this Warrant
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof or give or withhold consent to any corporate
action (whether upon any matter submitted to stockholders at any meeting
thereof, or give or withhold consent to any merger, recapitalization, issuance
of stock, reclassification of stock, change of par value or change of stock to
no par value, consolidation, conveyance or otherwise) or to receive notice of
meetings or other actions affecting stockholders (except as provided in the
Warrant Agreement) or to receive dividends or subscription rights or otherwise
until the Warrants evidenced by this Warrant Certificate shall have been
exercised and the Common Stock purchasable upon the exercise thereof shall have
become deliverable as provided in the Warrant Agreement.

      If this Warrant Certificate shall be surrendered for exercise within any
period during which the transfer books for the Company's Common Stock or other
class of stock purchasable upon the exercise of the Warrants evidenced by this
Warrant Certificate are closed for any purpose, the Company shall not be
required to make delivery of certificates for shares purchasable upon such
transfer until the date of the reopening of said transfer books.

<PAGE>

      Every holder of this Warrant Certificate by accepting the same consents
and agrees with the Company, the Warrant Agent, and with every other holder of a
Warrant Certificate that:

      (a) this Warrant Certificate is transferable on the registry books of the
Warrant Agent only upon the terms and conditions set forth in the Warrant
Agreement, and

      (b) the Company and the Warrant Agent may deem and treat the person in
whose name this Warrant Certificate is registered as the absolute owner hereof
(notwithstanding any notation of ownership or other writing thereon made by
anyone other than the Company or the Warrant Agent) for all purposes whatsoever
and neither the Company nor the Warrant Agent shall be affected by any notice to
the contrary. The Company shall not be required to issue or deliver any
certificate for shares of Common Stock or other securities upon the exercise of
Warrants evidenced by this Warrant Certificate until any tax which may be
payable in respect thereof by the holder of this Warrant Certificate pursuant to
the Warrant Agreement shall have been paid, such tax being payable by the holder
of this Warrant Certificate at the time of surrender.

      This Warrant Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Warrant Agent.

      (Remainder of page intentionally left blank; signature page follows)

<PAGE>

      WITNESS the facsimile signatures of the proper officers of the Company and
its corporate seal.

Dated:
----------------------

                              COATES MOTORCYCLE COMPANY, LTD.

                        By:
                        -------------------------------
                              Gregory G. Coates
                              President

                        Attest:
                       ---------------------------------
                              Secretary

<PAGE>

Countersigned:

American Stock Transfer & Trust Company
Warrant Agent and Registrar
6201 15th Avenue
Brooklyn, New York 11219

By:
---------------------------------------
   Authorized Officer

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