CALLABLE SECURED CONVERTIBLE NOTE

 

          THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN

          REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE

          "ACT").   THE   SECURITIES   MAY NOT BE   SOLD,   TRANSFERRED   OR

          ASSIGNED   IN   THE   ABSENCE   OF   AN   EFFECTIVE    REGISTRATION

          STATEMENT FOR THE   SECURITIES   UNDER SAID ACT, OR AN OPINION

          OF   COUNSEL   IN FORM,   SUBSTANCE   AND   SCOPE   CUSTOMARY   FOR

          OPINIONS   OF   COUNSEL   IN    COMPARABLE    TRANSACTIONS    THAT

          REGISTRATION   IS NOT REQUIRED   UNDER SAID ACT OR UNLESS SOLD

          PURSUANT TO RULE 144 OR REGULATION S UNDER SAID ACT.

 

 

                        CALLABLE SECURED CONVERTIBLE NOTE

 

Seattle, Washington

August 16, 2005                                                          $[______]

 

      FOR VALUE RECEIVED, VERIDICOM INTERNATIONAL,   INC., a Delaware corporation

(hereinafter   called the   "Borrower"),   hereby   promises   to pay to the order of

[______] or   registered   assigns   (the   "Holder")   the sum of   [______]   Dollars

$[______])   payable   $[______]   (the "Monthly   Amount") on the first day of each

month commencing on November 16, 2005 (each, a "Repayment Date") with any unpaid

principal   balance   due on August 16,   2008 (the   "Maturity   Date"),   and to pay

interest on the unpaid principal balance hereof at the rate of ten percent (10%)

(the   "Interest   Rate") per annum from August 16, 2005 (the "Issue   Date") until

the same becomes due and payable, whether at maturity or upon acceleration or by

prepayment or   otherwise;   provided,   however,   that on the last business day of

each month after the Issue Date (each, a "Determination   Date"),   if the Average

Daily Price (as defined herein) of the common stock,   $.001 par value per share,

of the   Borrower   (the   "Common   Stock") for each day of the month ending on the

applicable   Determination Date exceeds one hundred twenty five percent (125%) of

the Initial Market Price (as defined   herein),   the Interest Rate for such month

shall   automatically be reduced to zero percent (0.0%).   Any amount of principal

or interest   on this Note which is not paid when due shall bear   interest at the

rate of fifteen percent (15%) per annum from the due date thereof until the same

is paid ("Default   Interest").   Interest   shall   commence   accruing on the Issue

Date,   shall be computed on the basis of a 365-day year and the actual number of

days elapsed and shall be payable monthly in arrears. All payments due hereunder

(to the extent not   converted   into Common   Stock in   accordance   with the terms

hereof)   shall be made in lawful   money of the   United   States of   America.   All

payments shall be made at such address as the Holder shall hereafter give to the

Borrower by written notice made in accordance   with the provisions of this Note.

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   payment

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.   As used in this   Note,   the   term

"business   day"   shall mean any day other   than a   Saturday,   Sunday or a day on

which   commercial   banks in the city of New   York,   New York are   authorized   or

required by law or executive order to remain closed.   Each capitalized term used

herein,   and not otherwise   defined,   shall have the meaning ascribed thereto in

that certain Securities Purchase Agreement, dated February 25, 2005, pursuant to

which this Note was originally issued (the "Purchase Agreement").

 

<PAGE>

 

      This Note is free from all   taxes,   liens,   claims and   encumbrances   with

respect to the issue   thereof and shall not be subject to   preemptive   rights or

other   similar   rights   of   shareholders   of the   Borrower   and will not   impose

personal   liability   upon the holder   thereof.   The   obligations of the Borrower

under   this   Note   shall   be   secured   by   that   certain   Intellectual   Security

Agreement,   dated   February 25, 2005, by and among the Borrower,   the Holder and

the other parties thereto (the "IP Security Agreement").

 

      The following terms shall apply to this Note:

 

                                   ARTICLE I.

                           CONVERSION REPAYMENT OPTION

 

      1.1   Payment of   Monthly   Amount in Cash or Common   Stock.   Subject to the

terms hereof, the Holder shall have the option to elect to accept payment of the

Monthly   Amount   on each   Repayment   Date   either in cash or in shares of Common

Stock,   or a   combination   of both.   Each month by the fifth (5th)   business day

prior to each   Repayment Date (the "Notice   Date"),   the Holder shall deliver to

Borrower a written notice in the form of Exhibit B attached   hereto   electing to

convert the Monthly   Amount payable on the next Repayment Date in either cash or

Common Stock, or a combination of both (each, a "Repayment Election Notice"). If

a   Repayment   Election   Notice is not   delivered   by the Holder on or before the

applicable   Notice Date for such Repayment Date, then the Borrower shall pay the

Monthly   Amount due on such   Repayment   Date in cash. Any portion of the Monthly

Amount paid in cash on a Repayment   Date,   shall be paid to the Holder an amount

equal to the   portion   of the   Monthly   Amount   due and   owing to   Holder on the

Repayment Dale. If the Holder converts all or a portion of the Monthly Amount in

shares of Common   Stock,   the number of such shares to be issued by the Borrower

to the Holder on such Repayment Date shall be the number   determined by dividing

(x) the portion of the Monthly   Amount to be paid in shares of Common Stock,   by

(y) the then applicable Conversion Price.

 

      1.2 Credit Against   Monthly   Amount.   Any amounts   converted by the Holder

pursuant to Section 2.1 shall be deemed to   constitute   payments of   outstanding

principal   applying to Monthly   Amounts   for the   remaining   Repayment   Dates in

chronological order.

 

 

                                       2

<PAGE>

 

                         ARTICLE II. CONVERSION RIGHTS

 

      2.1   Conversion   Right.   If the   average of the Average   Daily   Prices (as

defined in Section   2.2(a)) for the   preceding   five (5) trading days is greater

than the Initial Market Price (as defined in Section   2.2(a)),   the Holder shall

have the right from time to time,   and at any time on or prior to the earlier of

(i) the   Maturity   Date and (ii) the date of payment of the   Default   Amount (as

defined in Article IV)   pursuant to Section   2.6(a) or Article IV, the   Optional

Prepayment Amount (as defined in Section 6.1 or any payments pursuant to Section

2.7, each in respect of the remaining   outstanding principal amount of this Note

to convert all or any part of the outstanding principal amount of this Note into

fully paid and   non-assessable   shares of Common   Stock,   as such   Common   Stock

exists on the Issue Date, or any shares of capital stock or other   securities of

the   Borrower   into   which   such   Common   Stock   shall   hereafter   be changed or

reclassified   at the conversion   price (the   "Conversion   Price")   determined as

provided herein (a "Conversion"); provided, however, that if an Event of Default

shall   have   occurred   and be   continuing,   the   Holder   shall have the right to

convert all or any part of the   outstanding   principal   amount of this Note into

fully   paid   and   non-assessable   shares   of   Common   Stock   at any   time at the

Conversion   Price;   provided,   further   that in no event   shall   the   Holder   be

entitled to convert   any portion of this Note in excess of that   portion of this

Note   upon   conversion   of which   the sum of (1) the   number of shares of Common

Stock   beneficially owned by the Holder and its affiliates (other than shares of

Common Stock which may be deemed beneficially owned through the ownership of the

unconverted   portion of the Notes or the   unexercised or unconverted   portion of

any other security of the Borrower (including,   without limitation, the warrants

issued   by   the   Borrower   pursuant   to the   Purchase   Agreement)   subject   to a

limitation   on   conversion or exercise   analogous to the   limitations   contained

herein)   and (2) the   number   of   shares   of   Common   Stock   issuable   upon   the

conversion   of the portion of this Note with respect to which the   determination

of this   proviso is being made,   would   result in   beneficial   ownership   by the

Holder and its affiliates of more than 4.9% of the outstanding   shares of Common

Stock.   For   purposes   of the   proviso to the   immediately   preceding   sentence,

beneficial ownership shall be determined in accordance with Section 13(d) of the

Securities   Exchange Act of 1934, as amended,   and Regulations 13D-G thereunder,

except as otherwise provided in clause (1) of such proviso. The number of shares

of   Common   Stock to be   issued   upon   each   conversion   of this   Note   shall be

determined   by   dividing   the   Conversion   Amount   (as   defined   below)   by   the

applicable   Conversion   Price then in effect on the date specified in the notice

of   conversion,   in the form   attached   hereto   as   Exhibit   A (the   "Notice   of

Conversion"), delivered to the Borrower by the Holder in accordance with Section

2.4 below;   provided that the Notice of Conversion is submitted by facsimile (or

by other means resulting in, or reasonably expected to result in, notice) to the

Borrower   before 6:00 p.m., New York, New York time on such conversion date (the

"Conversion   Date").   The term   "Conversion   Amount" means,   with respect to any

conversion of this Note, the sum of (1) the principal   amount of this Note to be

converted in such   conversion plus (2) accrued and unpaid   interest,   if any, on

such   principal   amount   at the   interest   rates   provided   in this   Note to the

Conversion Date plus (3) Default Interest, if any, on the amounts referred to in

the   immediately   preceding   clauses   (1)   and/or   (2) plus (4) at the   Holder's

option,   any amounts   owed to the Holder   pursuant   to   Sections   2.3 and 2.4(g)

hereof   or   pursuant   to   Section   2(c)   of   that   certain   Registration   Rights

Agreement,   dated as of   February   25,   2005,   executed in   connection   with the

initial   issuance of this Note and the other Notes issued on the Issue Date (the

"Registration Rights Agreement").

 

 

                                       3

<PAGE>

 

      2.2 Conversion Price.

 

            (a) Calculation of Conversion   Price.   The Conversion Price shall be

equal to seventy   percent (70%) of the Initial Market Price (as defined   herein)

(subject,   in each   case,   to   equitable   adjustments   for stock   splits,   stock

dividends   or   rights   offerings   by the   Borrower   relating   to the   Borrower's

securities or the   securities of any   subsidiary of the Borrower,   combinations,

recapitalization,   reclassifications,   extraordinary   distributions   and similar

events);   provided however,   that if an Event of Default shall have occurred and

be continuing,   the   Conversion   Price shall be equal to the lesser of (i) fifty

percent (50%) of the Initial Market Price or (ii) the Variable Conversion Price.

The "Initial   Market Price" shall mean $1.81.   The "Variable   Conversion   Price"

shall mean the   Applicable   Percentage   (as defined   herein)   multiplied   by the

Market   Price (as   defined   herein).   "Market   Price"   means the   average of the

Average   Daily Prices (as defined   herein) for the Common Stock for the five (5)

days   prior to the date   the   Conversion   Notice   is sent by the   Holder   to the

Borrower via facsimile (the "Conversion Date"). "Average Daily Price" means, for

any security as of any date, the price based on the VWAP.   "VWAP" shall mean the

daily volume weighted average price of the Common Stock on the principal trading

market for such security as reported by Bloomberg, L.P. using the VWAP function.

If the Average Daily Price cannot be   calculated   for such security on such date

in the manner provided   above,   the Average Daily Price shall be the fair market

value as mutually   determined   by the   Borrower and the holders of a majority in

interest of the Notes being   converted for which the   calculation of the Average

Daily Price is   required   in order to   determine   the   Conversion   Price of such

Notes.   "Trading Day" shall mean any day on which the Common Stock is traded for

any   period on the   OTCBB,   or on the   principal   securities   exchange   or other

securities   market on which the Common Stock is then being   traded.   "Applicable

Percentage" shall mean 50.0%.

 

            (b)   Conversion   Price During Major   Announcements.   Notwithstanding

anything contained in Section 2.2(a) to the contrary,   in the event the Borrower

(i) makes a public announcement that it intends to consolidate or merge with any

other corporation (other than a merger in which the Borrower is the surviving or

continuing   corporation   and its capital stock is unchanged) or sell or transfer

all or substantially all of the assets of the Borrower or (ii) any person, group

or entity (including the Borrower) publicly announces a tender offer to purchase

50% or more of the Borrower's   Common Stock (or any other takeover   scheme) (the

date of the   announcement   referred   to in   clause   (i) or   (ii) is   hereinafter

referred   to as the   "Announcement   Date"),   then the   Conversion   Price   shall,

effective   upon   the   Announcement   Date and   continuing   through   the   Adjusted

Conversion Price   Termination Date (as defined below),   be equal to the lower of

(x) the   Conversion   Price which   would have been   applicable   for a   Conversion

occurring   on the   Announcement   Date and (y) the   Conversion   Price   that would

otherwise be in effect. From and after the Adjusted Conversion Price Termination

Date, the Conversion   Price shall be determined as set forth in Section   2.2(a).

For purposes hereof,   "Adjusted   Conversion Price   Termination Date" shall mean,

with respect to any proposed   transaction   or tender offer (or takeover   scheme)

for which a public   announcement as contemplated by this Section 2.2(b) has been

made,   the date upon which the Borrower (in the case of clause (i) above) or the

person,   group or   entity   (in the case of clause   (ii)   above)   consummates   or

publicly announces the termination or abandonment of the proposed transaction or

tender offer (or   takeover   scheme)   which caused this Section   2.2(b) to become

operative.

 

 

                                       4

<PAGE>

 

      2.3 Authorized   Shares.   The Borrower covenants that during the period the

conversion   right   exists,   the Borrower   will reserve from its   authorized   and

unissued   Common   Stock a   sufficient   number of   shares,   free from   preemptive

rights,   to provide for the issuance of Common Stock upon the full conversion of

this Note and the other Notes   issued   pursuant to the Purchase   Agreement.   The

Borrower is required at all times to have   authorized and reserved two times the

number of shares that is actually   issuable   upon full   conversion   of the Notes

(based   on the   Conversion   Price   of the   Notes   or the   Exercise   Price of the

Warrants   in effect from time to time) (the   "Reserved   Amount").   The   Reserved

Amount shall be increased   from time to time in accordance   with the   Borrower's

obligations   pursuant to Section   4(h) of the Purchase   Agreement.   The Borrower

represents   that upon   issuance,   such shares   will be duly and validly   issued,

fully paid and   non-assessable.   In addition,   if the   Borrower   shall issue any

securities   or make any change to its capital   structure   which would change the

number of shares of Common   Stock into which the Notes shall be   convertible   at

the then current   Conversion   Price,   the   Borrower   shall at the same time make

proper provision so that thereafter there shall be a sufficient number of shares

of Common Stock   authorized   and   reserved,   free from   preemptive   rights,   for

conversion of the outstanding   Notes. The Borrower (i) acknowledges   that it has

irrevocably   instructed its transfer agent to issue   certificates for the Common

Stock   issuable upon   conversion of this Note, and (ii) agrees that its issuance

of this Note shall   constitute full authority to its officers and agents who are

charged with the duty of executing   stock   certificates to execute and issue the

necessary   certificates   for shares of Common Stock in accordance with the terms

and conditions of this Note.

 

       If, at any time a Holder of this Note submits a Notice of Conversion,   and

the Borrower does not have   sufficient   authorized but unissued shares of Common

Stock   available to effect such   conversion in accordance with the provisions of

this Article II (a "Conversion   Default"),   subject to Section 5.8, the Borrower

shall   issue to the   Holder   all of the   shares of Common   Stock   which are then

available to effect such   conversion.   The portion of this Note which the Holder

included in its   Conversion   Notice and which   exceeds the amount   which is then

convertible   into available   shares of Common Stock (the "Excess Amount") shall,

notwithstanding   anything to the contrary   contained herein,   not be convertible

into Common Stock in accordance with the terms hereof until (and at the Holder's

option   at any time   after)   the date   additional   shares   of   Common   Stock are

authorized   by the   Borrower   to   permit   such   conversion,   at   which   time the

Conversion   Price in respect   thereof shall be the lesser of (i) the   Conversion

Price on the Conversion   Default Date (as defined below) and (ii) the Conversion

Price on the   Conversion   Date   thereafter   elected   by the   Holder   in   respect

thereof. In addition, the Borrower shall pay to the Holder payments ("Conversion

Default   Payments") for a Conversion Default in the amount of (x) the sum of (1)

the then   outstanding   principal amount of this Note plus (2) accrued and unpaid

interest on the unpaid principal   amount of this Note through the   Authorization

Date (as   defined   below)   plus (3)   Default   Interest,   if any,   on the amounts

referred to in clauses (1) and/or (2),   multiplied by (y) .24, multiplied by (z)

(N/365),   where N = the number of days from the day the holder   submits a Notice

of   Conversion   giving rise to a   Conversion   Default (the   "Conversion   Default

Date") to the date (the   "Authorization   Date") that the   Borrower   authorizes a

sufficient   number of shares of Common   Stock to effect   conversion   of the full

outstanding   principal   balance of this Note.   The   Borrower   shall use its best

efforts to   authorize a   sufficient   number of shares of Common Stock as soon as

practicable   following the earlier of (i) such time that the Holder notifies the

Borrower or that the Borrower   otherwise   becomes aware that there are or likely

will be   insufficient   authorized and unissued   shares to allow full   conversion

thereof and (ii) a Conversion   Default.   The   Borrower   shall send notice to the

Holder   of   the    authorization   of   additional   shares   of   Common   Stock,   the

Authorization   Date   and the   amount   of   Holder's   accrued   Conversion   Default

Payments.   The accrued Conversion Default Payments for each calendar month shall

be paid in cash or shall be convertible into Common Stock (at such time as there

are sufficient   authorized shares of Common Stock) at the applicable   Conversion

Price, at the Borrower's option, as follows:

 

 

                                       5

<PAGE>

 

            (a) In the event Holder   elects to take such   payment in cash,   cash

payment   shall be made to Holder by the fifth   (5th) day of the month   following

the month in which it has accrued; and

 

            (b) In the event Holder elects to take such payment in Common Stock,

the Holder may convert such payment   amount into Common Stock at the   Conversion

Price (as in effect at the time of   conversion)   at any time after the fifth day

of the month   following the month in which it has accrued in accordance with the

terms   of this   Article   II (so long as there   is then a   sufficient   number   of

authorized shares of Common Stock).

 

      The Holder's election shall be made in writing to the Borrower at any time

prior to 6:00   p.m.,   New   York,   New York   time,   on the third day of the month

following the month in which   Conversion   Default   payments have accrued.   If no

election is made,   the Holder shall be deemed to have   elected to receive   cash.

Nothing   herein shall limit the Holder's   right to pursue actual damages (to the

extent in excess of the Conversion   Default Payments) for the Borrower's failure

to maintain a sufficient   number of authorized   shares of Common Stock, and each

holder shall have the right to pursue all remedies available at law or in equity

(including degree of specific performance and/or injunctive relief).

 

      2.4 Method of Conversion.

 

            (a) Mechanics of   Conversion.   Subject to Section 2.1, this Note may

be   converted   by the   Holder   in whole or in part at any time from time to time

after the Issue Date,   by (A)   submitting to the Borrower a Notice of Conversion

(by   facsimile or other   reasonable   means of   communication   dispatched   on the

Conversion   Date prior to 6:00 p.m., New York, New York time) and (B) subject to

Section 2.4(b), surrendering this Note at the principal office of the Borrower.

 

            (b) Surrender of Note Upon Conversion.   Notwithstanding   anything to

the contrary set forth herein,   upon   conversion of this Note in accordance with

the terms hereof, the Holder shall not be required to physically   surrender this

Note to the Borrower unless the entire unpaid   principal   amount of this Note is

so converted.   The Holder and the Borrower   shall maintain   records   showing the

principal   amount so converted   and the dates of such   conversions   or shall use

such other method, reasonably satisfactory to the Holder and the Borrower, so as

not to require physical surrender of this Note upon each such conversion. In the

event of any   dispute or   discrepancy,   such   records of the   Borrower   shall be

controlling and determinative in the absence of manifest error.   Notwithstanding

the foregoing, if any portion of this Note is converted as aforesaid, the Holder

may not transfer this Note unless the Holder first   physically   surrenders   this

Note to the Borrower,   whereupon the Borrower will   forthwith   issue and deliver

upon the order of the Holder a new Note of like tenor,   registered as the Holder

(upon   payment   by the Holder of any   applicable   transfer   taxes) may   request,

representing   in the   aggregate the remaining   unpaid   principal   amount of this

Note. The Holder and any assignee,   by acceptance of this Note,   acknowledge and

agree that, by reason of the provisions of this paragraph,   following conversion

of a portion of this Note, the unpaid and unconverted   principal   amount of this

Note   represented   by this Note may be less than the   amount   stated on the face

hereof.

 

 

                                       6

<PAGE>

 

            (c) Payment of Taxes.   The Borrower shall not be required to pay any

tax which may be payable in respect of any   transfer   involved   in the issue and

delivery of shares of Common Stock or other securities or property on conversion

of this Note in a name other than that of the   Holder (or in street   name),   and

the Borrower   shall not be required to issue or deliver any such shares or other

securities   or property   unless and until the person or persons   (other than the

Holder or the   custodian in whose street name such shares are to be held for the

Holder's   account)   requesting   the   issuance   thereof   shall   have   paid to the

Borrower   the   amount   of   any   such   tax   or   shall   have   established   to   the

satisfaction of the Borrower that such tax has been paid.

 

            (d)   Delivery of Common Stock Upon   Conversion.   Upon receipt by the

Borrower from the Holder of a facsimile   transmission (or other reasonable means

of   communication)   of a Notice   of   Conversion   meeting   the   requirements   for

conversion as provided in this Section 2.4, the Borrower shall issue and deliver

or   cause   to be   issued   and   delivered   to or upon   the   order   of the   Holder

certificates   for the Common Stock issuable upon such conversion   within two (2)

business days after such receipt   (and,   solely in the case of conversion of the

entire   unpaid   principal   amount   hereof,   surrender of this Note) (such second

business day being hereinafter referred to as the "Deadline") in accordance with

the terms hereof and the Purchase Agreement (including,   without limitation,   in

accordance with the requirements of Section 2(g) of the Purchase   Agreement that

certificates for shares of Common Stock issued on or after the effective date of

the   Registration   Statement   upon   conversion   of this Note   shall not bear any

restrictive legend).

 

            (e) Obligation of Borrower to Deliver Common Stock.   Upon receipt by

the   Borrower of a Notice of   Conversion,   the Holder   shall be deemed to be the

holder   of   record of the   Common   Stock   issuable   upon   such   conversion,   the

outstanding   principal   amount and the amount of accrued and unpaid   interest on

this Note shall be reduced to reflect such conversion,   and, unless the Borrower

defaults on its   obligations   under this   Article II, all rights with respect to

the portion of this Note being so converted shall forthwith terminate except the

right to receive the Common Stock or other securities,   cash or other assets, as

herein provided, on such conversion.   If the Holder shall have given a Notice of

Conversion as provided   herein,   the Borrower's   obligation to issue and deliver

the   certificates   for   Common   Stock   shall   be   absolute   and    unconditional,

irrespective of the absence of any action by the Holder to enforce the same, any

waiver or consent with   respect to any   provision   thereof,   the recovery of any

judgment   against any person or any action to enforce   the same,   any failure or

delay in the   enforcement of any other   obligation of the Borrower to the holder

of record, or any setoff, counterclaim,   recoupment,   limitation or termination,

or any breach or alleged breach by the Holder of any obligation to the Borrower,

and   irrespective   of any other   circumstance   which might   otherwise limit such

obligation of the Borrower to the Holder in connection with such conversion. The

Conversion   Date   specified in the Notice of Conversion   shall be the Conversion

Date so long as the Notice of Conversion is received by the Borrower before 6:00

p.m., New York, New York time, on such date.

 

 

                                       7

<PAGE>

 

             (f)   Delivery of Common   Stock by   Electronic   Transfer.   In lieu of

delivering   physical   certificates   representing   the Common Stock issuable upon

conversion,   provided the   Borrower's   transfer   agent is   participating   in the

Depository   Trust Company ("DTC") Fast Automated   Securities   Transfer   ("FAST")

program,   upon   request   of the Holder and its   compliance   with the   provisions

contained in Section 2.1 and in this   Section   2.4,   the Borrower   shall use its

best efforts to cause its transfer agent to   electronically   transmit the Common

Stock   issuable   upon   conversion   to the   Holder by   crediting   the   account of

Holder's Prime Broker with DTC through its Deposit   Withdrawal   Agent Commission

("DWAC") system.

 

            (g) Failure to Deliver   Common Stock Prior to   Deadline.   Without in

any way limiting the Holder's right to pursue other remedies,   including   actual

damages   and/or   equitable   relief,   the   parties   agree that if delivery of the

Common Stock   issuable upon   conversion of this Note is more than three (3) days

after the Deadline (other than a failure due to the   circumstances   described in

Section 2.3 above, which failure shall be governed by such Section) the Borrower

shall pay to the Holder $2,000 per day in cash, for each day beyond the Deadline

that the Borrower fails to deliver such Common Stock.   Such cash amount shall be

paid to Holder by the fifth day of the month following the month in which it has

accrued   or, at the option of the Holder (by written   notice to the   Borrower by

the first day of the month   following the month in which it has accrued),   shall

be added to the   principal   amount of this Note, in which event   interest   shall

accrue   thereon in   accordance   with the terms of this Note and such   additional

principal   amount shall be convertible   into Common Stock in accordance with the

terms of this Note.

 

      2.5   Concerning   the   Shares.   The shares of Common   Stock   issuable   upon

conversion   of this Note may not be sold or   transferred   unless (i) such shares

are sold pursuant to an effective   registration   statement under the Act or (ii)

the Borrower or its transfer   agent shall have been furnished with an opinion of

counsel   (which   opinion   shall be in form,   substance   and scope   customary for

opinions of counsel in comparable transactions) to the effect that the shares to

be sold or transferred may be sold or transferred   pursuant to an exemption from

such registration or (iii) such shares are sold or transferred   pursuant to Rule

144 under the Act (or a   successor   rule)   ("Rule   144") or (iv) such shares are

transferred   to an   "affiliate"   (as   defined in Rule 144) of the   Borrower   who

agrees to sell or   otherwise   transfer the shares only in   accordance   with this

Section   2.5 and who is an   Accredited   Investor   (as   defined   in the   Purchase

Agreement).   Except as otherwise provided in the Purchase Agreement (and subject

to the removal   provisions   set forth   below),   until such time as the shares of

Common Stock issuable upon   conversion of this Note have been   registered   under

the Act as contemplated by the Registration Rights Agreement or otherwise may be

sold pursuant to Rule 144 without any restriction as to the number of securities

as of a particular date that can then be immediately   sold, each certificate for

shares of Common Stock   issuable upon   conversion of this Note that has not been

so included in an   effective   registration   statement   or that has not been sold

pursuant to an effective   registration   statement   or an exemption   that permits

removal of the legend,   shall bear a legend substantially in the following form,

as appropriate:

 

          "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT

          BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS

          AMENDED. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR

          ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION

          STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION

          OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR

          OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT

          REGISTRATION IS NOT REQUIRED UNDER SAID ACT UNLESS SOLD

          PURSUANT TO RULE 144 OR REGULATION S UNDER SAID ACT."

 

 

                                       8

<PAGE>

 

      The legend set forth above shall be removed and the   Borrower   shall issue

to the Holder a new certificate   therefor free of any transfer legend if (i) the

Borrower or its   transfer   agent shall have   received an opinion of counsel,   in

form,   substance   and scope   customary   for   opinions   of counsel in   comparable

transactions,   to the effect that a public sale or transfer of such Common Stock

may be made   without   registration   under the Act and the   shares are so sold or

transferred,   (ii) such Holder   provides the Borrower or its transfer agent with

reasonable   assurances   that the Common Stock   issuable upon   conversion of this

Note (to the extent such securities are deemed to have been acquired on the same

date) can be sold   pursuant to Rule 144 or (iii) in the case of the Common Stock

issuable upon   conversion of this Note,   such security is registered for sale by

t