Document:

WAIVER

                               September 19, 2005

      Reference is hereby made to that certain Security and Purchase Agreement
dated as of November 9, 2004 (the "Closing Date") by and among Laurus Master
Fund, Ltd. ("Laurus"), Thomas Equipment, Inc. (the "Company), Thomas Ventures,
Inc. and the other subsidiaries of the Company named therein or which thereafter
become a party thereto (as such agreement may be amended, restated, supplemented
and modified from time to time the "Security Agreement") and (b) the Ancillary
Agreements (as defined in the Security Agreement) (the Security Agreement and
the Ancillary Agreements, as each may be amended, restated, supplemented and
modified from time to time, the "Agreements"). Capitalized terms used but not
defined herein shall have the meanings given them in the Agreements.

      WHEREAS, on the date hereof, the Registration Statement (as defined in the
Registration Rights Agreement) has not been declared effective by the Commission
as required pursuant to Section 2(b)(ii) of the Registration Rights Agreement
and as a result thereof, the Company owes Laurus certain liquidated damages (the
"LIQUIDATED DAMAGES") as determined in accordance with Section 2(b) of the
Registration Rights Agreement; and

      WHEREAS, the Company has failed to pay to Laurus the Liquidated Damages to
Laurus, when due; and

      WHEREAS, Laurus has agreed to waive on the terms and conditions set forth
herein (the "Waiver") (i) the Events of Default that may have occurred and be
continuing as a result of the failure by the Company to pay to Laurus the
Liquidated Damages when due; and, (ii) the Liquidated Damages that have accrued
from and after the Closing Date until October 15, 2005;

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

      1. Laurus hereby waives (i) any Event of Default that may have arisen
prior to the date hereof under the Agreements solely as a result of the failure
by the Company to pay to Laurus the Liquidated Damages as determined pursuant to
Section 2(b) of the Registration Rights Agreement; and (ii) the Liquidated
Damages that have accrued and are due and payable to Laurus by the Company from
the Closing Date up to and including the date hereof, and any Liquidated Damages
that may accrue from the date hereof up to and including October 15, 2005.

      2. The waiver set forth herein shall be effective as of the date hereof
when each of the Company and Laurus shall have executed and the Company shall
have delivered to Laurus its respective counterpart to this Waiver.

      3. The Company hereby represents and warrants to Laurus that (i) no Event
of Default exists on the date hereof, after giving effect to this Waiver, (ii)
on the date hereof, after giving effect to this Waiver, all representations,
warranties and covenants made by the Company in connection with the Agreements
are true, correct and complete and (iii) on the date hereof, after giving effect
to this Waiver, all of the Company's and its Subsidiaries' covenant requirements
have been met.

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      4. Except as expressly described above, this Waiver shall not constitute
(a) a modification or an alteration of any of the terms, conditions or covenants
of the Agreements all of which remain in full force and effect, or (b) a waiver,
release or limitation upon Laurus' exercise of any of its rights and remedies
thereunder, all of which are hereby expressly reserved. This Waiver shall not
relieve or release the Company in any way from any of its duties, obligations,
covenants or agreements under the Agreements or from the consequences of any
events of default thereunder, except as expressly described above.

      5. This Waiver shall be governed by and construed under the laws of the
State of New York as applied to agreements among New York residents entered into
and to be performed entirely within New York. Provisions hereof shall inure to
the benefit of, and be binding upon, the successors, assigns, heirs, executors,
and administrators of the parties hereto. This Waiver and Consent constitutes
the full and entire understanding and agreement between the parties with regard
to the subjects hereof. This Waiver and Consent may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.

                            [Signature Pages Follow]

                                       3

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      IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be
signed by their respective representatives thereunto duly authorized, all as of
the date first written above.

                                         COMPANY:

                                         THOMAS EQUIPMENT, INC.

                                         By:  DAVID MARKS
                                         ---------------------------------------
                                         Name:   David Marks
                                         Title:  Chairman

                                         LAURUS MASTER FUND, LTD.

                                         By: DAVID GRIN
                                         ---------------------------------------
                                         Name:   David Grin
                                         Title:  Fund Manager

                                       4EXHIBIT 4.1

                           [FORM OF CONVERTIBLE NOTE]

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

                            INKSURE TECHNOLOGIES INC.

                                CONVERTIBLE NOTE

Issuance Date:  September __, 2005   Original Principal Amount: U.S. $__________

     FOR VALUE RECEIVED, InkSure Technologies Inc., a Delaware corporation (the
"COMPANY"), hereby promises to pay to the order of [SMITHFIELD FIDUCIARY
LLC][OTHER BUYERS] or registered assigns ("HOLDER") the amount set out above as
the Original Principal Amount (as reduced pursuant to the terms hereof pursuant
to redemption, conversion or otherwise, the "PRINCIPAL") when due, whether upon
the Maturity Date (as defined below), acceleration, redemption or otherwise (in
each case in accordance with the terms hereof) and to pay interest ("INTEREST")
on any outstanding Principal at a rate equal to four percent (4.0%) per annum
(the "INTEREST RATE"), from the date set out above as the Issuance Date (the
"ISSUANCE DATE") until the same becomes due and payable, whether upon an
Interest Date (as defined below), the Maturity Date, acceleration, conversion,
redemption or otherwise (in each case in accordance with the terms hereof). This
Convertible Note (including all Convertible Notes issued in exchange, transfer
or replacement hereof, this "NOTE") is one of an issue of Convertible Notes
(collectively, the "NOTES" and such other Convertible Notes, the "OTHER NOTES")
issued pursuant to the Securities Purchase Agreement (as defined below). Certain
capitalized terms are defined in Section 30.

<PAGE>

     (1) MATURITY. On the Maturity Date, the Holder shall surrender this Note to
the Company and the Company shall pay to the Holder an amount in cash
representing all outstanding Principal, accrued and unpaid Interest and accrued
and unpaid Late Charges, if any. The "MATURITY DATE" shall be September __,
2010, as may be extended at the option of the Holder (i) in the event that, and
for so long as, an Event of Default (as defined in Section 4(a)) shall have
occurred and be continuing or any event shall have occurred and be continuing
which with the passage of time and the failure to cure would result in an Event
of Default and (ii) through the date that is ten (10) Business Days after the
consummation of a Change of Control in the event that a Change of Control is
publicly announced or a Change of Control Notice (as defined in Section 5) is
delivered prior to the Maturity Date.

     (2) INTEREST; INTEREST RATE. Interest on this Note shall commence accruing
on the Issuance Date and shall be computed on the basis of a 365-day year and
actual days elapsed and shall be payable in arrears on the last day of each
Calendar Quarter during the period beginning on the Issuance Date and ending on,
and including, the Maturity Date (each, an "INTEREST DATE") with the first
Interest Date being [December 31], 2005(1). Interest shall be payable on each
Interest Date in cash. Prior to the payment of Interest on an Interest Date,
Interest on this Note shall accrue at the Interest Rate and be payable by way of
inclusion of the Interest in the Conversion Amount in accordance with Section
3(b)(i). From and after the occurrence of an Event of Default, the Interest Rate
shall be increased to twelve percent (12.0%). In the event that such Event of
Default is subsequently cured, the adjustment referred to in the preceding
sentence shall cease to be effective as of the date of such cure; provided that
the Interest as calculated at such increased rate during the continuance of such
Event of Default shall continue to apply to the extent relating to the days
after the occurrence of such Event of Default through and including the date of
cure of such Event of Default.

     (3) CONVERSION OF NOTES. This Note shall be convertible into shares of
common stock of the Company, par value $0.01 per share (the "COMMON STOCK"), on
the terms and conditions set forth in this Section 3.

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

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

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(1) Insert appropriate upcoming Interest Date in Additional Notes.

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               (i) "CONVERSION AMOUNT" means the sum of (A) the portion of the
          Principal to be converted, redeemed or otherwise with respect to which
          this determination is being made, (B) accrued and unpaid Interest with
          respect to such Principal and (C) accrued and unpaid Late Charges with
          respect to such Principal and Interest.

               (ii) "CONVERSION PRICE" means, as of any Conversion Date (as
          defined below) or other date of determination, $3.00(2), subject to
          adjustment as provided herein.

          (c) MECHANICS OF CONVERSION.

               (i) OPTIONAL CONVERSION. To convert any Conversion Amount into
          shares of Common Stock on any date (a "CONVERSION DATE"), the Holder
          shall (A) transmit by facsimile (or otherwise deliver), for receipt on
          or prior to 11:59 p.m., New York Time, on such date, a copy of an
          executed notice of conversion in the form attached hereto as EXHIBIT I
          (the "CONVERSION NOTICE") to the Company and (B) if required by
          Section 3(c)(iii), surrender this Note to a common carrier for
          delivery to the Company as soon as practicable on or following such
          date (or an indemnification undertaking with respect to this Note in
          the case of its loss, theft or destruction). On or before the first
          (1st) Business Day following the date of receipt of a Conversion
          Notice, the Company shall transmit by facsimile a confirmation of
          receipt of such Conversion Notice to the Holder and the Company's
          transfer agent (the "TRANSFER AGENT"). On or before the second (2nd)
          Business Day following the date of receipt of a Conversion Notice (the
          "SHARE DELIVERY DATE"), the Company shall (X) provided the Transfer
          Agent is participating in the Depository Trust Company ("DTC") Fast
          Automated Securities Transfer Program credit such aggregate number of
          shares of Common Stock to which the Holder shall be entitled to the
          Holder's or its designee's balance account with DTC through its
          Deposit Withdrawal Agent Commission system or (Y) if the Transfer
          Agent is not participating in the DTC Fast Automated Securities
          Transfer Program, issue and deliver to the address as specified in the
          Conversion Notice, a certificate, registered in the name of the Holder
          or its designee, for the number of shares of Common Stock to which the
          Holder shall be entitled. If this Note is physically surrendered for
          conversion as required by Section 3(c)(iii) and the outstanding
          Principal of this Note is greater than the Principal portion of the
          Conversion Amount being converted, then the Company shall as soon as
          practicable and in no event later than three (3) Business Days after
          receipt of this Note and at its own expense, issue and deliver to the
          holder a new Note (in accordance with Section 20(d)) representing the
          outstanding Principal not converted. The Person or Persons entitled to
          receive the shares of Common Stock issuable upon a conversion of this
          Note shall be treated for all purposes as the record holder or holders
          of such shares of Common Stock on the Conversion Date.

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(2)      Insert in Additional Notes $3.60.

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               (ii) COMPANY'S FAILURE TO TIMELY CONVERT. If the Company shall
          fail to issue a certificate to the Holder or credit the Holder's
          balance account with DTC for the number of shares of Common Stock to
          which the Holder is entitled upon conversion of any Conversion Amount
          on or prior to the date which is five (5) Business Days after the
          Conversion Date (a "CONVERSION FAILURE"), then (A) the Company shall
          pay damages to the Holder for each date of such Conversion Failure in
          an amount equal to 1.0% (the "INITIAL PENALTY") of the product of (I)
          the sum of the number of shares of Common Stock not issued to the
          Holder on or prior to the Share Delivery Date and to which the Holder
          is entitled, and (II) the Closing Sale Price of the Common Stock on
          the Share Delivery Date and (B) the Holder, upon written notice to the
          Company, may void its Conversion Notice with respect to, and retain or
          have returned, as the case may be, any portion of this Note that has
          not been converted pursuant to such Conversion Notice; PROVIDED that
          the voiding of a Conversion Notice shall not affect the Company's
          obligations to make any payments which have accrued prior to the date
          of such notice pursuant to this Section 3(c)(ii) or otherwise. In
          addition to the foregoing, if within three (3) Trading Days after the
          Company's receipt of the facsimile copy of a Conversion Notice the
          Company shall fail to issue and deliver a certificate to the Holder or
          credit the Holder's balance account with DTC for the number of shares
          of Common Stock to which the Holder is entitled upon such holder's
          conversion of any Conversion Amount, and if on or after such Trading
          Day the Holder purchases (in an open market transaction or otherwise)
          Common Stock to deliver in satisfaction of a sale by the Holder of
          Common Stock issuable upon such conversion that the Holder anticipated
          receiving from the Company (a "BUY-IN"), then the Company shall,
          within three (3) Business Days (or ten (10) Business Days if the
          failure to deliver Common Stock is due to a Force Majeure Event) after
          the Holder's request and in the Holder's discretion, either (i) pay
          cash to the Holder in an amount equal to the Holder's total purchase
          price (including brokerage commissions, if any) for the shares of
          Common Stock so purchased (the "BUY-IN PRICE"), at which point the
          Company's obligation to deliver such certificate (and to issue such
          Common Stock) shall terminate, or (ii) promptly honor its obligation
          to deliver to the Holder a certificate or certificates representing
          such Common Stock and pay cash to the Holder in an amount equal to the
          excess (if any) of the Buy-In Price over the product of (A) such
          number of shares of Common Stock, times (B) the Closing Bid Price on
          the Conversion Date. Notwithstanding the foregoing, the Company shall
          not be required to pay the Initial Penalty in the event that a
          Conversion Failure is caused, directly or indirectly, by acts of God,
          acts of the public enemy, acts of any governmental body in its
          sovereign or contractual capacity, fires, floods, epidemics, strikes,
          labor disputes, inability to obtain labor, material, equipment or
          transportation, freight embargoes, sabotage, civil disturbances, any
          outbreak, attack or escalation of hostilities or declaration of war,
          national emergency, act of terrorism or other national or
          international calamity or crisis or change in economic, financial or
          political conditions, including changes on the financial markets of
          the United States or Israel (any of the foregoing, a "Force Majeure
          Event").

               (iii) BOOK-ENTRY. Notwithstanding anything to the contrary set
          forth herein, upon conversion of any portion of this Note in
          accordance with the terms hereof, the Holder shall not be required to
          physically surrender this Note to the Company unless (A) the full
          Conversion Amount represented by this Note is being converted or (B)
          the Holder has provided the Company with prior written notice (which
          notice may be included in a Conversion Notice) requesting physical
          surrender and reissue of this Note. The Holder and the Company shall
          maintain records showing the Principal, Interest and Late Charges
          converted and the dates of such conversions or shall use such other
          method, reasonably satisfactory to the Holder and the Company, so as
          not to require physical surrender of this Note upon conversion.

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<PAGE>

               (iv) PRO RATA CONVERSION; DISPUTES. In the event that the Company
          receives a Conversion Notice from more than one holder of Notes for
          the same Conversion Date and the Company can convert some, but not
          all, of such portions of the Notes submitted for conversion, the
          Company, subject to Section 3(d), shall convert from each holder of
          Notes electing to have Notes converted on such date a pro rata amount
          of such holder's portion of its Notes submitted for conversion based
          on the principal amount of Notes submitted for conversion on such date
          by such holder relative to the aggregate principal amount of all Notes
          submitted for conversion on such date. In the event of a dispute as to
          the number of shares of Common Stock issuable to the Holder in
          connection with a conversion of this Note, the Company shall issue to
          the Holder the number of shares of Common Stock not in dispute and
          resolve such dispute in accordance with Section 25.

          (d) LIMITATIONS ON CONVERSIONS. The Company shall not effect any
     conversion of this Note, and the Holder of this Note shall not have the
     right to convert any portion of this Note pursuant to Section 3(a), to the
     extent that after giving effect to such conversion, the Holder (together
     with the Holder's affiliates) would beneficially own in excess of 4.99%
     (the "MAXIMUM PERCENTAGE") of the number of shares of Common Stock
     outstanding immediately after giving effect to such conversion. For
     purposes of the foregoing sentence, the number of shares of Common Stock
     beneficially owned by the Holder and its affiliates shall include the
     number of shares of Common Stock issuable upon conversion of this Note with
     respect to which the determination of such sentence is being made, but
     shall exclude the number of shares of Common Stock which would be issuable
     upon (A) conversion of the remaining, nonconverted portion of this Note
     beneficially owned by the Holder or any of its affiliates and (B) exercise
     or conversion of the unexercised or nonconverted portion of any other
     securities of the Company (including, without limitation, any Other Notes
     or warrants) subject to a limitation on conversion or exercise analogous to
     the limitation contained herein beneficially owned by the Holder or any of
     its affiliates. Except as set forth in the preceding sentence, for purposes
     of this Section 3(d)(i), beneficial ownership shall be calculated in
     accordance with Section 13(d) of the Securities Exchange Act of 1934, as
     amended. For purposes of this Section 3(d)(i), in determining the number of
     outstanding shares of Common Stock, the Holder may rely on the number of
     outstanding shares of Common Stock as reflected in (x) the Company's most
     recent Form 10-KSB, Form 10-K, Form 10-QSB, Form 10-Q or Form 8-K, as the
     case may be (y) a more recent public announcement by the Company or (z) any
     other notice by the Company or the Transfer Agent setting forth the number
     of shares of Common Stock outstanding. For any reason at any time, upon the
     written or oral request of the Holder, the Company shall within three (3)
     Business Days confirm orally and in writing to the Holder the number of
     shares of Common Stock then outstanding. In any case, the number of
     outstanding shares of Common Stock shall be determined after giving effect
     to the conversion or exercise of securities of the Company, including this
     Note, by the Holder or its affiliates since the date as of which such
     number of outstanding shares of Common Stock was reported. By written
     notice to the Company, the Holder may increase or decrease the Maximum
     Percentage to any other percentage not in excess of 9.99% specified in such
     notice; provided that (i) any such increase will not be effective until the
     sixty-first (61st) day after such notice is delivered to the Company, and
     (ii) any such increase or decrease will apply only to the Holder and not to
     any other holder of Notes.

     (4) RIGHTS UPON EVENT OF DEFAULT.

          (a) EVENT OF DEFAULT. Each of the following events shall constitute an
     "EVENT OF DEFAULT":

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               (i) the failure of the applicable Registration Statement required
          to be filed pursuant to the Registration Rights Agreement to be
          declared effective by the SEC on or prior to the date that is sixty
          (60) days after the applicable Effectiveness Deadline (as defined in
          the Registration Rights Agreement), or, while the applicable
          Registration Statement is required to be maintained effective pursuant
          to the terms of the Registration Rights Agreement, the effectiveness
          of the applicable Registration Statement lapses for any reason
          (including, without limitation, the issuance of a stop order) or is
          unavailable to any holder of the Notes for sale of all of such
          holder's Registrable Securities (as defined in the Registration Rights
          Agreement) in accordance with the terms of the Registration Rights
          Agreement, and such lapse or unavailability continues for a period of
          ten (10) consecutive days or for more than an aggregate of thirty (30)
          days in any 365-day period (other than days during an Allowable Grace
          Period (as defined in the Registration Rights Agreement));

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

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

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

               (v) the Company's failure to pay to the Holder any amount of
          Principal, Interest, Late Charges or other amounts when and as due
          under this Note or any other Transaction Document (as defined in the
          Securities Purchase Agreement), except, in the case of a failure to
          pay Interest and Late Charges when and as due, in which case only if
          such failure continues for a period of at least ten (10) Business
          Days;

               (vi) (A) any payment default under any Indebtedness (as defined
          in Section 3(s) of the Securities Purchase Agreement) of the Company
          or any of its Subsidiaries (as defined in Section 3(a) of the
          Securities Purchase Agreement) having an aggregate principal amount
          equal to or greater than $500,000, (B) any default (other than a
          payment default) occurs under any Indebtedness of the Company or any
          of its Subsidiaries having an aggregate principal amount equal to or
          greater than $500,000 that results in the redemption of or
          acceleration prior to maturity of such Indebtedness, in each case
          other than with respect to any Other Notes;

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<PAGE>

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

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

               (ix) a final judgment or judgments for the payment of money
          aggregating in excess of $500,000 are rendered against the Company or
          any of its Subsidiaries and which judgments are not, within ninety
          (90) days after the entry thereof, bonded, discharged or stayed
          pending appeal, or are not discharged within ninety (90) days after
          the expiration of such stay; provided, however, that any judgment
          which is covered by insurance or an indemnity from a credit worthy
          party shall not be included in calculating the $500,000 amount set
          forth above so long as the Company provides the Holder a written
          statement from such insurer or indemnity provider (which written
          statement shall be reasonably satisfactory to the Holder) to the
          effect that such judgment is covered by insurance or an indemnity and
          the Company will receive the proceeds of such insurance or indemnity
          within thirty (30) days of the issuance of such judgment;

               (x) the Company breaches, in any material respect, any
          representation, warranty, covenant or other term or condition of any
          Transaction Document, except, in the case of a breach of a covenant
          which is curable, only if such breach continues for a period of at
          least twenty (20) consecutive Business Days;

               (xi) any breach or failure in any respect to comply with Section
          16of this Note; or

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

          (b) REDEMPTION RIGHT. Promptly after the occurrence of an Event of
     Default with respect to this Note or any Other Note, the Company shall
     deliver written notice thereof via facsimile and overnight courier (an
     "EVENT OF DEFAULT NOTICE") to the Holder. At any time during the period
     commencing after the earlier of the Holder's receipt of an Event of Default
     Notice and the Holder becoming aware of an Event of Default and ending
     forty-five (45) days after such applicable Event of Default, the Holder may
     require the Company to redeem all or any portion of this Note by delivering
     written notice thereof (the "EVENT OF DEFAULT REDEMPTION NOTICE") to the
     Company, which Event of Default Redemption Notice shall indicate the
     portion of this Note the Holder is electing to redeem. Each portion of this
     Note subject to redemption by the Company pursuant to this Section 4(b)
     shall be redeemed by the Company at a price equal to the product of (i) the
     Conversion Amount to be redeemed and (ii) the Redemption Premium (the
     "EVENT OF DEFAULT REDEMPTION PRICE"). Redemptions required by this Section
     4(b) shall be made in accordance with the provisions of Section 13.

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     (5) RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.

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

          (b) REDEMPTION RIGHT. No sooner than fifteen (15) days nor later than
     ten (10) days prior to the consummation of a Change of Control, but not
     prior to the public announcement of such Change of Control, the Company
     shall deliver written notice thereof via facsimile and overnight courier to
     the Holder (a "CHANGE OF CONTROL NOTICE"). At any time during the period
     beginning after the Holder's receipt of a Change of Control Notice and
     ending on the date of the consummation of such Change of Control (or, in
     the event a Change of Control Notice is not delivered at least ten (10)
     days prior to a Change of Control, at any time on or after the date which
     is ten (10) days prior to a Change of Control and ending ten (10) days
     after the consummation of such Change of Control), the Holder may require
     the Company to redeem all or any portion of this Note by delivering written
     notice thereof ("CHANGE OF CONTROL REDEMPTION NOTICE") to the Company,
     which Change of Control Redemption Notice shall indicate the Conversion
     Amount the Holder is electing to redeem. The portion of this Note subject
     to redemption pursuant to this Section 5 shall be redeemed by the Company
     at a price equal to 125% of the Conversion Amount being redeemed (the
     "CHANGE OF CONTROL REDEMPTION PRICE"). Notwithstanding anything to the
     contrary in this Section 5(b), but subject to Section 3(d), until the
     Change of Control Redemption Price is paid in full, the Conversion Amount
     submitted for redemption under this Section 5(b) may be converted, in whole
     or in part, by the Holder into Common Stock pursuant to Section 3.
     Redemptions required by this Section 5 shall be made in accordance with the
     provisions of Section 13 and shall have priority to payments to
     shareholders in connection with a Change of Control.

                                     - 8 -
<PAGE>

          (c) REDEMPTION AT THE COMPANY'S ELECTION UPON CASH TRANSACTION. In
     connection with a pending, proposed or intended Cash Transaction, the
     Company shall have the right, in its sole discretion, to require that all,
     but not less than all, of the outstanding Notes be redeemed (a "CASH
     TRANSACTION REDEMPTION ELECTION") at a price equal to the Change of Control
     Redemption Price (such price in connection with a Cash Transaction
     Redemption Election, the "CASH TRANSACTION REDEMPTION PRICE"). The Company
     shall exercise its right to make a Cash Transaction Redemption Election by
     providing each holder of Notes written notice (the "CASH TRANSACTION
     REDEMPTION NOTICE") by facsimile and overnight courier, concurrently with
     the public disclosure of a proposed, pending or intended Cash Transaction
     and at least ten (10) Trading Days prior to the date of consummation of the
     Cash Transaction (the "CASH TRANSACTION ELECTION REDEMPTION DATE"), which
     Cash Transaction Election Redemption Date shall be the date of the
     consummation of the Cash Transaction. The Cash Transaction Redemption
     Notice shall indicate the anticipated Cash Transaction Election Redemption
     Date and such notice shall be irrevocable. If the Company has exercised its
     right of Cash Transaction Redemption Election then all Notes outstanding at
     the time of the consummation of the Cash Transaction shall be redeemed on
     the Cash Transaction Election Redemption Date by payment by or on behalf of
     the Company to each holder of Notes of the Cash Transaction Redemption
     Price for such Notes concurrent with the closing of the Cash Transaction.
     Notwithstanding anything to the contrary in this Section 5(c), but subject
     to Section 3(d), until the Cash Transaction Redemption Price is paid in
     full, the Conversion Amount subject to redemption hereunder may be
     converted, in whole or in part, by the Holder into Common Stock pursuant to
     Section 3. Redemptions required by this Section 5(c) shall be made in
     accordance with the provisions of Section 13 and shall have priority to
     payments to stockholders in connection with a Cash Transaction.

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

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

                                     - 9 -
<PAGE>

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

     (7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

          (a) [IN INITIAL NOTES ONLY: ADJUSTMENT OF CONVERSION PRICE UPON
     ISSUANCE OF COMMON STOCK. If and whenever on or after the Subscription Date
     until this Note is fully converted or paid in full, the Company issues or
     sells, or in accordance with this Section 7(a) is deemed to have issued or
     sold, any shares of Common Stock (including the issuance or sale of shares
     of Common Stock owned or held by or for the account of the Company, but
     excluding shares of Common Stock deemed to have been issued or sold by the
     Company in connection with any Excluded Security and excluding a deemed
     issuance or sale in a transaction for which appropriate adjustments are
     made under Sections 6(a) or 7(b)) for a consideration per share (the "NEW
     ISSUANCE PRICE") less than a price (the "APPLICABLE PRICE") equal to the
     Conversion Price in effect immediately prior to such issue or sale (the
     foregoing a "DILUTIVE ISSUANCE"), then immediately after such Dilutive
     Issuance, the Conversion Price then in effect shall be reduced to an amount
     equal to the New Issuance Price. For purposes of determining the adjusted
     Conversion Price under this Section 7(a), the following shall be
     applicable:

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

                                     - 10 -
<PAGE>

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

               (iii) CHANGE IN OPTION PRICE OR RATE OF CONVERSION. If the
          purchase price provided for in any Options, the additional
          consideration, if any, payable upon the issue, conversion, exchange or
          exercise of any Convertible Securities, or the rate at which any
          Convertible Securities are convertible into or exchangeable or
          exercisable for Common Stock changes at any time, the Conversion Price
          in effect at the time of such change shall be adjusted to the
          Conversion Price which would have been in effect at such time had such
          Options or Convertible Securities provided for such changed purchase
          price, additional consideration or changed conversion rate, as the
          case may be, at the time initially granted, issued or sold. For
          purposes of this Section 7(a)(iii), if the terms of any Option or
          Convertible Security that was outstanding as of the Initial Closing
          Date are changed in the manner described in the immediately preceding
          sentence, then such Option or Convertible Security and the Common
          Stock deemed issuable upon exercise, conversion or exchange thereof
          shall be deemed to have been issued as of the date of such change. No
          adjustment shall be made if such adjustment would result in an
          increase of the Conversion Price then in effect.

               (iv) CALCULATION OF CONSIDERATION RECEIVED. In case any Option is
          issued in connection with the issue or sale of other securities of the
          Company, together comprising one integrated transaction in which no
          specific consideration is allocated to such Options by the parties
          thereto, the Options will be deemed to have been issued for a
          consideration of $.01. If any Common Stock, Options or Convertible
          Securities are issued or sold or deemed to have been issued or sold
          for cash, the consideration received therefor will be deemed to be the
          gross amount received by the Company therefor. If any Common Stock,
          Options or Convertible Securities are issued or sold for a
          consideration other than cash, the amount of the consideration other
          than cash received by the Company will be the fair value of such
          consideration, except where such consideration consists of securities,
          in which case the amount of consideration received by the Company will
          be the Closing Sale Price of such securities on the date of receipt or
          the date the agreement for such sale was executed, whichever is
          greater. If any Common Stock, Options or Convertible Securities are
          issued to the owners of the non-surviving entity in connection with
          any merger in which the Company is the surviving entity, the amount of
          consideration therefor will be deemed to be the fair value of such
          portion of the net assets and business of the non-surviving entity as
          is attributable to such Common Stock, Options or Convertible
          Securities, as the case may be. The fair value of any consideration
          other than cash or securities will be determined jointly by the
          Company and the Required Holders. If such parties are unable to reach
          agreement within ten (10) days after the occurrence of an event
          requiring valuation (the "VALUATION EVENT"), the fair value of such
          consideration will be determined within five (5) Business Days after
          the tenth day following the Valuation Event by an independent,
          reputable appraiser jointly selected by the Company and the Required
          Holders. The determination of such appraiser shall be deemed binding
          upon all parties absent manifest error and the fees and expenses of
          such appraiser shall be borne by the Company.

                                     - 11 -
<PAGE>

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

               (vi) TERMINATION UPON CHANGE OF CONTROL EVENT. Adjustments to the
          Conversion Price required to be made pursuant to this Section 7(a)
          shall no longer be required under this Note following the consummation
          of a Change of Control in which (A) the Company is acquired by a
          Public Successor Entity having an equity market capitalization
          exceeding $150 million (as of the day immediately prior to the day the
          Change of Control is announced) held by Persons who are not (or are
          not deemed to be) "affiliates" of the Company under the Securities Act
          of 1933, as amended and (B) the Persons who held the outstanding
          shares of Common Stock of the Company prior to such Change of Control
          do not hold at least 50% of the voting and economic interests in the
          Public Successor Entity following such Change of Control.

               (b) ADJUSTMENT OF CONVERSION PRICE UPON SUBDIVISION OR
          COMBINATION OF COMMON STOCK. If the Company at any time on or after
          the Subscription Date subdivides (by any stock split, stock dividend,
          recapitalization or otherwise) one or more classes of its outstanding
          shares of Common Stock into a greater number of shares, the Conversion
          Price in effect immediately prior to such subdivision will be
          proportionately reduced. If the Company at any time on or after the
          Subscription Date combines (by combination, reverse stock split or
          otherwise) one or more classes of its outstanding shares of Common
          Stock into a smaller number of shares, the Conversion Price in effect
          immediately prior to such combination will be proportionately
          increased.

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

                                     - 12 -
<PAGE>

     (8) [RESERVED]

     (9) COMPANY'S RIGHT OF MANDATORY CONVERSION.

          (a) MANDATORY CONVERSION. If at any time from and after the one (1)
     year anniversary of the Issuance Date (the "MANDATORY CONVERSION
     ELIGIBILITY DATE"), (i) the Weighted Average Price of the Common Stock
     exceeds for each of any twenty (20) out of thirty (30) consecutive Trading
     Days following the Mandatory Conversion Eligibility Date (the "MANDATORY
     CONVERSION MEASURING PERIOD") (x) from the Mandatory Conversion Eligibility
     Date through the second (2nd) anniversary of the Issuance Date, $6.50 (as
     adjusted for any stock dividend, stock split, stock combination or other
     similar transaction) or (y) during any Mandatory Conversion Measuring
     Period following the second (2nd) anniversary of the Issuance Date, $5.50
     (as adjusted for any stock dividend, stock split, stock combination or
     other similar transaction) and (ii) the Equity Conditions shall have been
     satisfied or waived in writing by the Holder as of both the Mandatory
     Conversion Notice Date and the Mandatory Conversion Date (each, as defined
     below), the Company shall have the right to require the Holder to convert
     all, or any portion, of the Conversion Amount then remaining under this
     Note as designated in the Mandatory Conversion Notice into fully paid,
     validly issued and nonassessable shares of Common Stock in accordance with
     Section 3(c) hereof at the Conversion Rate as of the Mandatory Conversion
     Date (as defined below) (a "MANDATORY CONVERSION"). The Company may
     exercise its right to require conversion under this Section 9(a) by
     delivering within not more than two (2) Trading Days following the end of
     any such Mandatory Conversion Measuring Period a written notice thereof by
     facsimile and overnight courier to all, but not less than all, of the
     holders of Notes and the Transfer Agent (the "MANDATORY CONVERSION NOTICE"
     and the date all of the holders received such notice is referred to as the
     "MANDATORY CONVERSION NOTICE DATE"). The Mandatory Conversion Notice shall
     be irrevocable. The Mandatory Conversion Notice shall state (i) the Trading
     Day selected for the Mandatory Conversion in accordance with Section 9(a),
     which Trading Day shall be at least twenty (20) Business Days but not more
     than sixty (60) Business Days following the Mandatory Conversion Notice
     Date (the "MANDATORY CONVERSION DATE"), (ii) the aggregate Conversion
     Amount of the Notes subject to mandatory conversion from all of the holders
     of the Notes pursuant to this Section 9 (and analogous provisions under the
     Other Notes) and (iii) the number of shares of Common Stock to be issued to
     such Holder on the Mandatory Conversion Date. All Conversion Amounts
     converted by the Holder after the Mandatory Conversion Notice Date shall
     reduce the Conversion Amount of this Note required to be converted on the
     Mandatory Conversion Date. The mechanics of conversion set forth in Section
     3(c) shall apply to any Mandatory Conversion as if the Company and the
     Transfer Agent had received from the Holder on the Mandatory Conversion
     Date a Conversion Notice with respect to the Conversion Amount being
     converted pursuant to the Mandatory Conversion.

                                     - 13 -
<PAGE>

          (b) PRO RATA CONVERSION REQUIREMENT. If the Company elects to cause a
     conversion of any Conversion Amount of this Note pursuant to Section 9(a),
     then it must simultaneously take the same action in the same proportion
     with respect to the Other Notes. If the Company elects a Mandatory
     Conversion of this Note pursuant to Section 9(a) (or similar provisions
     under the Other Notes) with respect to less than all of the Conversion
     Amounts of the Notes then outstanding, then the Company shall require
     conversion of a Conversion Amount from each of the holders of the Notes
     equal to the product of (I) the aggregate Conversion Amount of Notes which
     the Company has elected to cause to be converted pursuant to Section 9(a),
     multiplied by (II) the fraction, the numerator of which is the sum of the
     aggregate Original Principal Amount of the Notes purchased by such holder
     of outstanding Notes and the denominator of which is the sum of the
     aggregate Original Principal Amount of the Notes purchased by all holders
     holding outstanding Notes (such fraction with respect to each holder is
     referred to as its "CONVERSION ALLOCATION PERCENTAGE," and such amount with
     respect to each holder is referred to as its "PRO RATA CONVERSION AMOUNT");
     provided, however, that in the event that any holder's Pro Rata Conversion
     Amount exceeds the outstanding Principal amount of such holder's Note, then
     such excess Pro Rata Conversion Amount shall be allocated amongst the
     remaining holders of Notes in accordance with the foregoing formula. In the
     event that the initial holder of any Notes shall sell or otherwise transfer
     any of such holder's Notes, the transferee shall be allocated a pro rata
     portion of such holder's Conversion Allocation Percentage and the Pro Rata
     Conversion Amount.

     (10) HOLDER'S RIGHT OF MANDATORY REDEMPTION. At any time from and after the
fourth (4th) anniversary of the Issuance Date, the Holder shall have the right,
in its sole discretion to require that the Company redeem all or any portion of
the Conversion Amount then remaining under this Note (a "HOLDER MANDATORY
REDEMPTION") by delivering written notice thereof (a "HOLDER MANDATORY
REDEMPTION NOTICE" and, collectively with the Event of Default Redemption
Notice, the Change of Control Redemption Notice and the Cash Transaction
Redemption Notice, the "REDEMPTION NOTICES" and each a "REDEMPTION NOTICE") to
the Company. The Holder Mandatory Redemption Notice shall indicate the
Conversion Amount the Holder is electing to have redeemed (the "HOLDER MANDATORY
REDEMPTION AMOUNT") on the Holder Mandatory Redemption Date (as defined in
Section 13). The portion of this Note subject to redemption pursuant to this
Section 10 shall be redeemed by the Company in cash at a price equal to the
Conversion Amount being redeemed (the "HOLDER MANDATORY REDEMPTION PRICE" and,
collectively with the Event of Default Redemption Price, the Change of Control
Redemption Price and the Cash Transaction Redemption Price, the "REDEMPTION
PRICES" and, each a "REDEMPTION PRICE"). Redemptions required by this Section 10
shall be made in accordance with the provisions of Section 13. Notwithstanding
anything to the contrary in this Section 10, but subject to Section 3(d), until
the Holder receives the Holder Mandatory Redemption Price the Holder Mandatory
Redemption Amount may be converted, in whole or in part, by the Holder into
Common Stock pursuant to Section 3, and any such conversion shall reduce the
Holder Mandatory Redemption Amount in the manner set forth by the Holder in the
applicable Conversion Notice.

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

                                     - 14 -
<PAGE>

     (12) RESERVATION OF AUTHORIZED SHARES.

          (a) RESERVATION. The Company initially shall reserve out of its
     authorized and unissued Common Stock a number of shares of Common Stock for
     each of the Notes equal to 130% of the Conversion Rate with respect to the
     Conversion Amount of each such Note as of the Issuance Date. So long as any
     of the Notes are outstanding, the Company shall take all action necessary
     to reserve and keep available out of its authorized and unissued Common
     Stock, solely for the purpose of effecting the conversion of the Notes,
     130% of the number of shares of Common Stock as shall from time to time be
     necessary to effect the conversion of all of the Notes then outstanding
     (without regard to any limitations on conversions) (the "REQUIRED RESERVE
     AMOUNT"). The number of shares of Common Stock reserved for conversions of
     the Notes shall be allocated pro rata among the remaining holders of the
     Notes based on the principal amount of the Notes held by each holder at the
     Closing (as defined in the Securities Purchase Agreement) (the "AUTHORIZED
     SHARE ALLOCATION"). In the event that a holder shall sell or otherwise
     transfer any of such holder's Notes, each transferee shall be allocated a
     pro rata portion of such holder's Authorized Share Allocation. Any shares
     of Common Stock reserved and allocated to any Person which ceases to hold
     any Notes shall be allocated to the remaining holders of Notes, pro rata
     based on the principal amount of the Notes then held by such holders.

          (b) INSUFFICIENT AUTHORIZED SHARES. If at any time while any of the
     Notes remain outstanding the Company does not have a sufficient number of
     authorized and unreserved shares of Common Stock to satisfy its obligation
     to reserve for issuance upon conversion of the Notes at least a number of
     shares of Common Stock equal to the Required Reserve Amount (an "AUTHORIZED
     SHARE FAILURE"), then the Company shall immediately take all action
     necessary to increase the Company's authorized shares of Common Stock to an
     amount sufficient to allow the Company to reserve the Required Reserve
     Amount for the Notes then outstanding. Without limiting the generality of
     the foregoing sentence, as soon as practicable after the date of the
     occurrence of an Authorized Share Failure, but in no event later than
     ninety (90) days after the occurrence of such Authorized Share Failure, the
     Company shall hold a meeting of its shareholders for the approval of an
     increase in the number of authorized shares of Common Stock. In connection
     with such meeting, the Company shall provide each shareholder with a proxy
     statement and shall use its best efforts to solicit its shareholders'
     approval of such increase in authorized shares of Common Stock and to cause
     its board of directors to recommend to the shareholders that they approve
     such proposal.

                                     - 15 -
<PAGE>

     (13) HOLDER'S REDEMPTIONS.

          (a) MECHANICS. The Company shall deliver the applicable Event of
     Default Redemption Price to the Holder within five (5) Business Days after
     the Company's receipt of the Holder's Event of Default Redemption Notice.
     If the Holder has timely submitted a Change of Control Redemption Notice in
     accordance with Section 5(b), the Company shall deliver the applicable
     Change of Control Redemption Price to the Holder concurrently with the
     consummation of such Change of Control if such notice is received prior to
     the consummation of such Change of Control and within ten (10) Business
     Days after the Company's receipt of such notice otherwise. The Company
     shall deliver the applicable Holder Mandatory Redemption Price to the
     Holder within ten (10) Business Days (the "HOLDER MANDATORY REDEMPTION
     DATE") after the Company's receipt of the applicable Holder Mandatory
     Redemption Notice. In the event of a redemption of less than all of the
     Conversion Amount of this Note, the Company shall promptly cause to be
     issued and delivered to the Holder a new Note (in accordance with Section
     20(d)) representing the outstanding Principal which has not been redeemed.
     In the event that the Company does not pay the Redemption Price to the
     Holder within the time period required, at any time thereafter and until
     the Company pays such unpaid Redemption Price in full, the Holder shall
     have the option, in lieu of redemption, to require the Company to promptly
     return to the Holder all or any portion of this Note representing the
     Conversion Amount that was submitted for redemption and for which the
     applicable Redemption Price (together with any Late Charges thereon) has
     not been paid. Upon the Company's receipt of such notice, (x) the
     Redemption Notice shall be null and void with respect to such Conversion
     Amount, (y) the Company shall immediately return this Note, or issue a new
     Note (in accordance with Section 20(d)) to the Holder representing such
     Conversion Amount and (z) the Conversion Price of this Note or such new
     Notes shall be adjusted to the Conversion Price as in effect on the date on
     which the Redemption Notice is voided. The Holder's delivery of a notice
     voiding a Redemption Notice and exercise of its rights following such
     notice shall not affect the Company's obligations to make any payments of
     Late Charges which have accrued prior to the date of such notice with
     respect to the Conversion Amount subject to such notice.

          (b) REDEMPTION BY OTHER HOLDERS. Upon the Company's receipt of notice
     from any of the holders of the Other Notes for redemption or repayment as a
     result of an event or occurrence substantially similar to the events or
     occurrences described in Section 4(b), Section 5(b) or Section 10 (each, an
     "OTHER REDEMPTION NOTICE"), the Company shall immediately forward to the
     Holder by facsimile a copy of such notice. If the Company receives a
     Redemption Notice and one or more Other Redemption Notices, during the
     period beginning on and including the date which is three (3) Business Days
     prior to the Company's receipt of the Holder's Redemption Notice and ending
     on and including the date which is three (3) Business Days after the
     Company's receipt of the Holder's Redemption Notice and the Company is
     unable to redeem all principal, interest and other amounts designated in
     such Redemption Notice and such Other Redemption Notices received during
     such seven (7) Business Day period, then the Company shall redeem a pro
     rata amount from each holder of the Notes (including the Holder) based on
     the principal amount of the Notes submitted for redemption pursuant to such
     Redemption Notice and such Other Redemption Notices received by the Company
     during such seven (7) Business Day period.

                                     - 16 -
<PAGE>

     (14) RESTRICTION ON REDEMPTION AND CASH DIVIDENDS. Until all of the Notes
have been converted, redeemed or otherwise satisfied in accordance with their
terms, the Company shall not, directly or indirectly, redeem, repurchase or
declare or pay any cash dividend or distribution (for these purposes, cashless
exercise of an option or warrant shall not be deemed a redemption) on its
capital stock without the prior express written consent of the Required Holders.

     (15) VOTING RIGHTS. The Holder shall have no voting rights as the holder of
this Note, except as required by law, including but not limited to the General
Corporate Law of the State of Delaware, and as expressly provided in this Note.

     (16) COVENANTS.

          (a) RANK. All payments due under this Note (a) shall rank PARI PASSU
     with all Other Notes and, other than Permitted Senior Indebtedness or as
     set forth in Schedule 3(cc) or the Securities Purchase Agreement no
     Indebtedness of the Company or its Subsidiaries shall be senior to any such
     payments due under this Note.

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

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

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

     (17) PARTICIPATION. The Holder, as the holder of this Note, shall be
entitled to such dividends paid and distributions made to the holders of Common
Stock to the same extent as if the Holder had converted this Note into Common
Stock (without regard to any limitations on conversion herein or elsewhere) and
had held such shares of Common Stock on the record date for such dividends and
distributions. Payments under the preceding sentence shall be made concurrently
with the dividend or distribution to the holders of Common Stock.

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

                                     - 17 -
<PAGE>

     (19) TRANSFER. This Note may be offered, sold, assigned or transferred by
the Holder without the consent of the Company, subject only to the provisions of
Section 2(f) of the Securities Purchase Agreement.

     (20) REISSUANCE OF THIS NOTE.

          (a) TRANSFER. If this Note is to be transferred, the Holder shall
     surrender this Note to the Company, whereupon the Company will forthwith
     issue and deliver upon the order of the Holder a new Note (in accordance
     with Section 20(d)), registered as the Holder may request, representing the
     outstanding Principal being transferred by the Holder and, if less then the
     entire outstanding Principal is being transferred, a new Note (in
     accordance with Section 20(d)) to the Holder representing the outstanding
     Principal not being transferred. The Holder and any assignee, by acceptance
     of this Note, acknowledge and agree that, by reason of the provisions of
     Section 3(c)(iii) and this Section 20(a), following conversion or
     redemption of any portion of this Note, the outstanding Principal
     represented by this Note may be less than the Principal stated on the face
     of this Note.

          (b) LOST, STOLEN OR MUTILATED NOTE. Upon receipt by the Company of
     evidence reasonably satisfactory to the Company of the loss, theft,
     destruction or mutilation of this Note, and, in the case of loss, theft or
     destruction, of any indemnification undertaking by the Holder to the
     Company in customary form and, in the case of mutilation, upon surrender
     and cancellation of this Note, the Company shall execute and deliver to the
     Holder a new Note (in accordance with Section 20(d)) representing the
     outstanding Principal.

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

          (d) ISSUANCE OF NEW NOTES. Whenever the Company is required to issue a
     new Note pursuant to the terms of this Note, such new Note (i) shall be of
     like tenor with this Note, (ii) shall represent, as indicated on the face
     of such new Note, the Principal remaining outstanding (or in the case of a
     new Note being issued pursuant to Section 20(a) or Section 20(c), the
     Principal designated by the Holder which, when added to the principal
     represented by the other new Notes issued in connection with such issuance,
     does not exceed the Principal remaining outstanding under this Note
     immediately prior to such issuance of new Notes), (iii) shall have an
     issuance date, as indicated on the face of such new Note, which is the same
     as the Issuance Date of this Note, (iv) shall have the same rights and
     conditions as this Note, and (v) shall represent accrued Interest and Late
     Charges on the Principal and Interest of this Note, from the Issuance Date.

                                     - 18 -
<PAGE>

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

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

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

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

     (25) DISPUTE RESOLUTION. In the case of a dispute as to the determination
of the Closing Bid Price, the Closing Sale Price or the Weighted Average Price
or the arithmetic calculation of the applicable Conversion Rate or a Redemption
Price, the Company shall submit the disputed determinations or arithmetic
calculations via facsimile within five (5) Business Days of receipt of the
Conversion Notice or Redemption Notice or other event giving rise to such
dispute, as the case may be, to the Holder. If the Holder and the Company are
unable to agree upon such determination or calculation within three (3) Business
Days of such disputed determination or arithmetic calculation being submitted to
the Holder, then the Company shall, within one (1) Business Day submit via
facsimile (a) the disputed determination of the Closing Bid Price, the Closing
Sale Price or the Weighted Average Price to an independent, reputable investment
bank selected by the Company and approved by the Holder or (b) the disputed
arithmetic calculation of the Conversion Rate or such Redemption Price to the
Company's independent, outside accountant. The Company, at the Company's
expense, shall cause the investment bank or the accountant, as the case may be,
to perform the determinations or calculations and notify the Company and the
Holder of the results no later than five (5) Business Days from the time it
receives the disputed determinations or calculations. Such investment bank's or
accountant's determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error.

                                     - 19 -
<PAGE>

     (26) NOTICES; PAYMENTS.

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

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

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

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

                                     - 20 -
<PAGE>

     (29) GOVERNING LAW. This Note shall be construed and enforced in accordance
with, and all questions concerning the construction, validity, interpretation
and performance of this Note shall be governed by, the internal laws of the
State of New York, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of New York or any other jurisdictions)
that would cause the application of the laws of any jurisdictions other than the
State of New York.

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

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

          (b) "BLOOMBERG" means Bloomberg Financial Markets.

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

          (d) "CALENDAR QUARTER" means each of: the period beginning on and
     including January 1 and ending on and including March 31; the period
     beginning on and including April 1 and ending on and including June 30; the
     period beginning on and including July 1 and ending on and including
     September 30; and the period beginning on and including October 1 and
     ending on and including December 31.

          (e) "CASH TRANSACTION" means any Change of Control with a Successor
     Entity that is (i) unaffiliated with the Company at the time of the
     proposed Change of Control and (ii) not a Public Successor Entity, which
     Cash Transaction is consummated on an arm's length basis at a time that the
     Equity Conditions are satisfied and pursuant to which the holders of the
     Common Stock are to receive consideration consisting solely of cash.

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

                                     - 21 -
<PAGE>

          (g) "CLOSING BID PRICE" and "CLOSING SALE PRICE" means, for any
     security as of any date, the last closing bid price and last closing trade
     price, respectively, for such security on the Principal Market, as reported
     by Bloomberg, or, if the Principal Market begins to operate on an extended
     hours basis and does not designate the closing bid price or the closing
     trade price, as the case may be, then the last bid price or last trade
     price, respectively, of such security prior to 4:00:00 p.m., New York Time,
     as reported by Bloomberg, or, if the Principal Market is not the principal
     securities exchange or trading market for such security, the last closing
     bid price or last trade price, respectively, of such security on the
     principal securities exchange or trading market where such security is
     listed or traded as reported by Bloomberg, or if the foregoing do not
     apply, the last closing bid price or last trade price, respectively, of
     such security in the over-the-counter market on the electronic bulletin
     board for such security as reported by Bloomberg, or, if no closing bid
     price or last trade price, respectively, is reported for such security by
     Bloomberg, the average of the bid prices, or the ask prices, respectively,
     of any market makers for such security as reported in the "pink sheets" by
     Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the
     Closing Bid Price or the Closing Sale Price cannot be calculated for a
     security on a particular date on any of the foregoing bases, the Closing
     Bid Price or the Closing Sale Price, as the case may be, of such security
     on such date shall be the fair market value as mutually determined by the
     Company and the Holder. If the Company and the Holder are unable to agree
     upon the fair market value of such security, then such dispute shall be
     resolved pursuant to Section 25. All such determinations to be
     appropriately adjusted for any stock dividend, stock split, stock
     combination or other similar transaction during the applicable calculation
     period.

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

          (i) "ELIGIBLE MARKET" means The New York Stock Exchange, Inc., the
     American Stock Exchange, the Nasdaq National Market or The Nasdaq SmallCap
     Market.

          (j) "EQUITY CONDITIONS" means: (i) on each day during the period
     beginning six (6) months prior to the applicable date of determination and
     ending on and including the applicable date of determination (the "EQUITY
     CONDITIONS MEASURING PERIOD"), either (x) the Registration Statement filed
     pursuant to the Registration Rights Agreement shall be effective and
     available for the resale of all remaining Registrable Securities in
     accordance with the terms of the Registration Rights Agreement and there
     shall not have been any Grace Periods (as defined in the Registration
     Rights Agreement) or (y) all shares of Common Stock issuable upon
     conversion of the Notes shall be eligible for sale without restriction and
     without the need for registration under any applicable federal or state
     securities laws; (ii) on each day during the Equity Conditions Measuring
     Period, the Common Stock is designated for quotation on the Principal
     Market or an Eligible Market and shall not have been suspended from trading
     on such exchange or market (other than suspensions of not more than two (2)
     days and occurring prior to the applicable date of determination due to
     business announcements by the Company) nor shall delisting or suspension by
     such exchange or market been threatened or pending either (A) in writing by
     such exchange or market or (B) by falling below the minimum listing
     maintenance requirements of such exchange or market; (iii) during, the
     Equity Conditions Measuring Period the Company shall have delivered
     Conversion Shares upon conversion of the Notes to the holders on a timely
     basis as set forth in Section 3(c)(ii) hereof (and analogous provisions
     under the Other Notes); (iv) any applicable shares of Common Stock to be
     issued in connection with the event requiring determination may be issued
     in full without violating Section 3(d) hereof and the rules or regulations
     of the Principal Market or any applicable Eligible Market; (v) during the
     Equity Conditions Measuring Period, the Company shall not have failed to
     timely make any payments within five (5) Business Days of when such payment
     is due pursuant to any Transaction Document; (vi) during the Equity
     Conditions Measuring Period, there shall not have occurred either (A) the
     public announcement of a pending, proposed or intended Fundamental
     Transaction which has not been abandoned, terminated or consummated or (B)
     an Event of Default or an event that with the passage of time or giving of
     notice would constitute an Event of Default; (vii) the Company shall have
     no knowledge of any fact that would cause (x) the Registration Statements
     required pursuant to the Registration Rights Agreement not to be effective
     and available for the resale of all remaining Registrable Securities in
     accordance with the terms of the Registration Rights Agreement or (y) any
     shares of Common Stock issuable upon conversion of the Notes not to be
     eligible for sale without restriction pursuant to Rule 144(k) and any
     applicable state securities laws; and (viii) the Company otherwise shall
     have been in material compliance with and shall not have materially
     breached any provision, covenant, representation or warranty of any
     Transaction Document.

                                     - 22 -
<PAGE>

          (k) "EXCLUDED SECURITIES" means any Common Stock issued or issuable:
     (i) in connection with any Approved Stock Plan; (ii) upon conversion of the
     Notes; (iii) in connection with strategic alliances, acquisitions and as
     equity kickers in lease and financing transactions, the primary purpose of
     which is not to raise equity capital and in an amount not to exceed
     750,000; (iv) pursuant to a bona fide firm commitment underwritten public
     offering with a nationally recognized underwriter which generates gross
     proceeds to the Company in excess of $17,500,000 (other than an
     "at-the-market offering" as defined in Rule 415(a)(4) under the 1933 Act
     and "equity lines"); (v) upon conversion of any Options or Convertible
     Securities which are outstanding on the day immediately preceding the
     Subscription Date, provided that the terms of such Options or Convertible
     Securities are not amended, modified or changed on or after the
     Subscription Date; and (vi) in an amount not to exceed 250,000 shares (as
     adjusted for stock splits, stock dividends and similar events) in
     connection with issuances covered by (i) through (v) above.

          (l) "FUNDAMENTAL TRANSACTION" means that the Company shall, directly
     or indirectly, in one or more related transactions, (i) consolidate or
     merge with or into (whether or not the Company is the surviving
     corporation) another Person, or (ii) sell, assign, transfer, convey or
     otherwise dispose of all or substantially all of the properties or assets
     of the Company to another Person, or (iii) allow another Person to make a
     purchase, tender or exchange offer that is accepted by the holders of more
     than the 50% of the outstanding shares of Common Stock (not including any
     shares of Common Stock held by the Person or Persons making or party to, or
     associated or affiliated with the Persons making or party to, such
     purchase, tender or exchange offer), or (iv) consummate a stock purchase
     agreement or other business combination (including, without limitation, a
     reorganization, recapitalization, spin-off or scheme of arrangement) with
     another Person whereby such other Person acquires more than 50% of the
     outstanding shares of Common Stock (not including any shares of Common
     Stock held by the other Person or other Persons making or party to, or
     associated or affiliated with the other Persons making or party to, such
     stock purchase agreement or other business combination), or (v) reorganize,
     recapitalize or reclassify its Common Stock.

                                     - 23 -
<PAGE>

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

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

          (o) "LTM EBITDA" means the Net Income of the Company and its
     Subsidiaries for the twelve month period for which financials are publicly
     available, PLUS without duplication, the sum of the following amounts of
     the Company and its subsidiaries for such period and to the extent deducted
     in determining Net Income of such Persons for such period: (i) Net Interest
     Expense, (ii) income tax expense, (iii) depreciation expense, (iv)
     amortization expense, and MINUS, onetime or non-cash gains, including but
     not limited to (A) gains generated from disposition of assets, (B) gains
     resulting from reversal of charges, (C) gains resulting from change of
     estimates, (D) gains resulting from change of actuarial assumptions, or (E)
     extraordinary gains.

          (p) "NET INCOME" means, with respect for any applicable period, the
     net income of the Company and its Subsidiaries for such period, determined
     on a consolidated basis and in accordance with GAAP.

          (q) "NET INTEREST EXPENSE" means, with respect to any applicable
     period, gross interest expense of the Company and its Subsidiaries for such
     period determined on a non-consolidated basis and in accordance with GAAP,
     plus any amount of interest capitalization as an asset during the same
     period.

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

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

          (t) "PERMITTED INDEBTEDNESS" means (A) Permitted Senior Indebtedness,
     (B) Indebtedness incurred by the Company that is made expressly subordinate
     in right of payment to the Indebtedness evidenced by this Note, as
     reflected in a written agreement acceptable to the Holder and approved by
     the Holder in writing, and which Indebtedness does not provide at any time
     for (1) the payment, prepayment, repayment, repurchase or defeasance,
     directly or indirectly, of any principal or premium, if any, thereon until
     ninety-one (91) days after the Maturity Date or later and (2) total
     interest and fees at a rate in excess of six percent (6.0%), (C)
     Indebtedness secured by Permitted Liens, (D) Indebtedness to trade
     creditors incurred in the ordinary course of business, and (E) extensions,
     refinancings and renewals of any items of Permitted Indebtedness, provided
     that the principal amount is not increased or the terms modified to impose
     more burdensome terms upon the Company or its Subsidiary, as the case may
     be.

                                     - 24 -
<PAGE>

          (u) "PERMITTED LIENS" means (i) any Lien for taxes not yet due or
     delinquent or being contested in good faith by appropriate proceedings for
     which adequate reserves have been established in accordance with GAAP, (ii)
     any statutory Lien arising in the ordinary course of business by operation
     of law with respect to a liability that is not yet due or delinquent, (iii)
     any Lien created by operation of law, such as materialmen's liens,
     mechanics' liens and other similar liens, arising in the ordinary course of
     business with respect to a liability that is not yet due or delinquent or
     that are being contested in good faith by appropriate proceedings, (iv)
     Liens securing the Company's obligations under Permitted Senior
     Indebtedness, (v) Liens (A) upon or in any personal property or equipment
     acquired or held by the Company or any of its Subsidiaries to secure the
     purchase price of such personal property or equipment or indebtedness
     incurred solely for the purpose of financing the acquisition or lease of
     such personal property or equipment, or (B) existing on such personal
     property or equipment at the time of its acquisition, provided that the
     Lien is confined solely to the property so acquired and improvements
     thereon, and the proceeds of such personal property or equipment, (vi)
     Liens incurred in connection with the extension, renewal or refinancing of
     the indebtedness secured by Liens of the type described in clauses (i) and
     (v) above, provided that any extension, renewal or replacement Lien shall
     be limited to the property encumbered by the existing Lien and the
     principal amount of the Indebtedness being extended, renewed or refinanced
     does not increase, (vii) leases or subleases and licenses and sublicenses
     granted to others in the ordinary course of the Company's business, not
     interfering in any material respect with the business of the Company and
     its Subsidiaries taken as a whole, (viii) Liens in favor of customs and
     revenue authorities arising as a matter of law to secure payments of custom
     duties in connection with the importation of goods and (ix) Liens arising
     from judgments, decrees or attachments in circumstances not constituting an
     Event of Default under Section 4(a)(ix).

          (v) "PERMITTED SENIOR INDEBTEDNESS" means the principal of (and
     premium, if any), interest on, and all fees and other amounts (including,
     without limitation, any reasonable out-of-pocket costs, enforcement
     expenses (including reasonable out-of-pocket legal fees and disbursements),
     collateral protection expenses and other reimbursement or indemnity
     obligations relating thereto) payable by Company and/or its Subsidiaries
     under or in connection with any credit facility to be entered into by the
     Company and/or its Subsidiaries with one or more financial institutions
     (together with any amendments, restatements, renewals, refundings,
     refinancings or other extensions thereof); PROVIDED, HOWEVER, that the
     aggregate outstanding amount of such Permitted Senior Indebtedness (taking
     into account the maximum amounts which may be advanced under the loan
     documents evidencing such Permitted Senior Indebtedness) does not as of the
     date on which any such Permitted Senior Indebtedness is incurred exceed
     three (3) times LTM EBITDA, with respect to the unpaid principal balance of
     loans thereunder.

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

          (x) "PRINCIPAL MARKET" means the OTC Bulletin Board.

          (y) "REDEMPTION PREMIUM" means (i) in the case of the Events of
     Default described in Section 4(a)(i) - (vi) and (x) - (xiii), 125% or (ii)
     in the case of the Events of Default described in Section 4(a)(vii) -
     (viii), 100%.

                                     - 25 -
<PAGE>

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

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

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

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

          (dd) "SUBSCRIPTION DATE" means September ___, 2005.

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

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

                                     - 26 -
<PAGE>

          (gg) "WEIGHTED AVERAGE PRICE" means, for any security as of any date,
     the dollar volume-weighted average price for such security on the Principal
     Market during the period beginning at 9:30:01 a.m., New York Time (or such
     other time as the Principal Market publicly announces is the official open
     of trading), and ending at 4:00:00 p.m., New York Time (or such other time
     as the Principal Market publicly announces is the official close of
     trading) as reported by Bloomberg through its "Volume at Price" functions,
     or, if the foregoing does not apply, the dollar volume-weighted average
     price of such security in the over-the-counter market on the electronic
     bulletin board for such security during the period beginning at 9:30:01
     a.m., New York Time (or such other time as such market publicly announces
     is the official open of trading), and ending at 4:00:00 p.m., New York Time
     (or such other time as such market publicly announces is the official close
     of trading) as reported by Bloomberg, or, if no dollar volume-weighted
     average price is reported for such security by Bloomberg for such hours,
     the average of the highest closing bid price and the lowest closing asked
     price of any of the market makers for such security as reported in the
     "pink sheets" by Pink Sheets LLC (formerly the National Quotation Bureau,
     Inc.). If the Weighted Average Price cannot be calculated for a security on
     a particular date on any of the foregoing bases, the Weighted Average Price
     of such security on such date shall be the fair market value as mutually
     determined by the Company and the Holder. If the Company and the Holder are
     unable to agree upon the fair market value of such security, then such
     dispute shall be resolved pursuant to Section 25. All such determinations
     to be appropriately adjusted for any stock dividend, stock split, stock
     combination or other similar transaction during the applicable calculation
     period.

                            [Signature Page Follows]

                                     - 27 -
<PAGE>

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

                                                      INKSURE TECHNOLOGIES INC.

                                                      By:______________________
                                                      Name:
                                                      Title:

<PAGE>

                                    EXHIBIT I

                            INKSURE TECHNOLOGIES INC.
                                CONVERSION NOTICE

Reference is made to the Convertible Note (the "NOTE") issued to the undersigned
by InkSure Technologies Inc. (the "COMPANY"). In accordance with and pursuant to
the Note, the undersigned hereby elects to convert the Conversion Amount (as
defined in the Note) of the Note indicated below into shares of Common Stock,
par value $0.01 per share (the "COMMON STOCK"), as of the date specified below.

     Date of Conversion: _______________________________________________________

     Aggregate Conversion Amount to be converted: ______________________________

Please confirm the following information:

     Conversion Price: _________________________________________________________

     Number of shares of Common Stock to
     be issued:                          _______________________________________

Please issue the Common Stock into which the Note is being converted in the
following name and to the following address:

     Issue to: _________________________________________________________________

               _________________________________________________________________

               _________________________________________________________________

     Facsimile Number: _________________________________________________________

     Authorization: ____________________________________________________________

          By: __________________________________________________________________

               Title: __________________________________________________________

Dated: _________________________________________________________________________

     Account Number: ___________________________________________________________
     (if electronic book entry transfer)

     Transaction Code Number: __________________________________________________
     (if electronic book entry transfer)

<PAGE>

                                 ACKNOWLEDGMENT

     The Company hereby acknowledges this Conversion Notice and hereby directs
Pacific Stock Transfer Co. to issue the above indicated number of shares of
Common Stock in accordance with the Transfer Agent Instructions dated ______ __,
2005 from the Company and acknowledged and agreed to by Pacific Stock Transfer
Co.

                                                      INKSURE TECHNOLOGIES INC.

                                                      By:_______________________
                                                      Name:
                                                      Title:

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