Exhibit 10.2

 

SENIOR SECURED CONVERTIBLE PROMISSORY NOTE

 

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE “SECURITIES ACT”), OR ANY APPLICABLE STATE SECURITIES LAWS.  IT MAY NOT BE
SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND COMPLIANCE WITH SUCH STATE SECURITIES LAWS, IN
COMPLIANCE WITH RULE 144 UNDER THE SECURITIES ACT, OR AN OPINION OF COUNSEL OR
OTHER EVIDENCE SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION AND/OR
COMPLIANCE IS NOT REQUIRED.

 

$2,650,000.00

 

June 13, 2003

 

 

San Diego, California

 

FOR VALUE RECEIVED, IMAGEWARE SYSTEMS, INC., a California corporation (the
“Company”), promises to pay to the order of L.F. Global Holdings, LLC (the
“Lender”) or its registered assigns (the “Holder”), the principal sum of Two
Million Six Hundred Fifty Thousand Dollars ($2,650,000.00), or such lesser
amount as shall then equal the outstanding principal amount hereof, together
with interest thereon at a rate equal to 12.5% per annum, compounding quarterly
and computed on the basis of a year consisting of 360 days and four quarterly
periods each consisting of 90 days.  All unpaid principal, together with any
accrued but unpaid interest and other amounts payable hereunder, shall be due
and payable on the earlier of (i) May 22, 2005 (the “Maturity Date”); or
(ii) when such amounts are declared due and payable by the Holder or made
automatically due and payable upon or after (A) the occurrence of an Event of
Default (as defined below), (B) the liquidation or dissolution of the Company,
(C) any merger, consolidation, reorganization or other business combination
involving the Company, in which the stockholders of the Company immediately
prior thereto do not own, directly or indirectly, outstanding voting securities
representing more than fifty percent (50%) of the combined outstanding voting
power of the surviving entity in such merger, consolidation or similar
transaction, (D) the sale of all, or substantially all, of the assets of the
Company, or (E) the sale of voting securities of the Company to any person (or
group of persons acting in concert) that results in such person (or group of
persons) (together with their affiliates) owning more than 50% of the
outstanding voting securities of the Company.  Interest on this Note shall be
payable in arrears on each January 1, April 1, July 1, and October 1 after the
date of issuance of this Note as follows:  (a) through the payment due January
1, 2004, and so long as no uncured Event of Default exists, interest, at the
election of the Company and subject to shareholder approval as provided in this
Note, may be paid by the issuance of an additional senior secured convertible
promissory note identical in all respects to this Note except that it shall have
a principal amount equal to such interest payment; or if not so paid shall be
payable in lawful money of the United States of America and (b) thereafter shall
be payable in lawful money of the United States of America.

 

This Note, along with the Senior Secured Convertible Promissory Note dated June
13, 2003, between Company and Laurus Master Fund, Ltd. (“Laurus”) (the “Laurus

 

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Note”), shall amend and restate the note issued pursuant to the Note and Warrant
Purchase Agreement (the ”Purchase Agreement”) dated as of May 22, 2002 by and
between the Company and Perseus 2000, L.L.C.  This Note is amended and restated
pursuant to the Consent to Assignment and Amendment Agreement dated as of June
13, 2003, by and between Company, Lender and Laurus (“Consent Agreement”).

 

The following is a statement of the rights of the Holder and the conditions to
which this Note is subject, and to which the Holder hereof, by the acceptance of
this Note, agrees:

 

1.                                       DEFINITIONS.  CAPITALIZED TERMS DEFINED
IN THE PURCHASE AGREEMENT AND USED HEREIN WITHOUT DEFINITION HAVE THE SAME
MEANING HEREIN AS IN THE PURCHASE AGREEMENT.  IN ADDITION, AS USED IN THIS NOTE,
THE FOLLOWING CAPITALIZED TERMS HAVE THE FOLLOWING MEANINGS:

 

(A)                                  “BUSINESS DAY” MEANS ANY DAY OTHER THAN A
SATURDAY, SUNDAY OR OTHER DAY ON WHICH THE NATIONAL OR STATE BANKS LOCATED IN
THE STATE OF NEW YORK, STATE OF CALIFORNIA OR THE DISTRICT OF COLUMBIA ARE
AUTHORIZED TO BE CLOSED.

 

(B)                                 “COMMON STOCK” MEANS THE COMMON STOCK, PAR
VALUE $0.01 PER SHARE, OF THE COMPANY.

 

(C)                                  “COMPANY NOTES” MEANS ANY OF THIS NOTE, THE
LAURUS NOTE OR ANY NOTE ISSUED IN PAYMENT OF CLOSING FEES (AS DEFINED IN THE
CONSENT AGREEMENT) OR INTEREST ON ANY COMPANY NOTE.

 

(D)                                 “OBLIGATIONS” MEANS THE PRINCIPAL, INTEREST
AND OTHER AMOUNTS PAYABLE UNDER THIS NOTE.

 

(E)                                  “TRANSACTION DOCUMENTS” SHALL MEAN EACH OF
THE COMPANY NOTES, THE PURCHASE AGREEMENT, THE REGISTRATION RIGHTS AGREEMENT,
THE PLEDGE AND SECURITY AGREEMENTS SECURING THE COMPANY NOTES, AS AMENDED, THE
COMPANY’S OFFICER’S CERTIFICATE DATED JUNE 13, 2003, THE PURCHASER’S WARRANTS
(AS DEFINED IN THE CONSENT AGREEMENT) AND  THE CONSENT AGREEMENT.

 

2.                                       EVENTS OF DEFAULT.  THE OCCURRENCE OF
ANY OF THE FOLLOWING SHALL CONSTITUTE AN “EVENT OF DEFAULT” UNDER THIS NOTE:

 

(A)                                  FAILURE TO PAY.  THE COMPANY SHALL FAIL TO
PAY WHEN DUE ANY PRINCIPAL PAYMENT ON THIS NOTE OR ANY INTEREST OR OTHER PAYMENT
REQUIRED UNDER THE TERMS OF THIS NOTE OR ANY OTHER TRANSACTION DOCUMENT IF SUCH
NONPAYMENT IS NOT CURED BY THE COMPANY WITHIN FIVE (5) DAYS IMMEDIATELY AFTER
THE DATE ON WHICH SUCH PAYMENT BECAME DUE AND PAYABLE; OR

 

(B)                                 BREACHES OF REPRESENTATIONS AND WARRANTIES. 
ANY REPRESENTATION OR WARRANTY MADE BY THE COMPANY HEREIN OR IN ANY OF THE OTHER
TRANSACTION DOCUMENTS SHALL PROVE FALSE OR MISLEADING IN ANY MATERIAL RESPECT
WHEN MADE OR DEEMED MADE; OR

 

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(C)                                  BREACHES OF OTHER COVENANTS.  THE COMPANY
SHALL FAIL TO OBSERVE OR TO PERFORM ANY OTHER MATERIAL COVENANT, OBLIGATION,
CONDITION OR AGREEMENT CONTAINED IN THIS NOTE OR THE OTHER TRANSACTION
DOCUMENTS, OTHER THAN THOSE SPECIFIED IN SECTION 2(A) HEREOF, AND SUCH FAILURE
SHALL CONTINUE FOR THIRTY (30) DAYS AFTER WRITTEN NOTICE THEREOF IS DELIVERED TO
THE COMPANY; OR

 

(D)                                 CROSS-DEFAULT.  THE COMPANY OR ANY OF ITS
SUBSIDIARIES SHALL DEFAULT UNDER (I) ANY COMPANY NOTE OR (II) ANY OTHER BOND,
DEBENTURE, NOTE OR OTHER EVIDENCE OF INDEBTEDNESS FOR MONEY BORROWED, UNDER ANY
GUARANTEE OR UNDER ANY MORTGAGE, OR INDENTURE PURSUANT TO WHICH THERE SHALL BE
ISSUED OR BY WHICH THERE SHALL BE SECURED OR EVIDENCED ANY INDEBTEDNESS FOR
MONEY BORROWED BY THE COMPANY OR ANY OF ITS SUBSIDIARIES, WHETHER SUCH
INDEBTEDNESS NOW EXISTS OR SHALL HEREAFTER BE CREATED, WHICH DEFAULT (OTHER THAN
A DEFAULT UNDER A COMPANY NOTE) SHALL HAVE RESULTED IN INDEBTEDNESS OF AT LEAST
$100,000 BEING DUE AND PAYABLE PRIOR TO THE DATE ON WHICH IT WOULD OTHERWISE
BECOME DUE AND PAYABLE AND SHALL NOT HAVE BEEN CURED BY THE COMPANY OR WAIVED BY
THE LENDER; OR

 

(E)                                  UNDISCHARGED JUDGMENT.  ONE OR MORE
JUDGMENTS FOR THE PAYMENT OF MONEY IN AN AMOUNT IN EXCESS OF $100,000 IN THE
AGGREGATE, OUTSTANDING AT ANY ONE TIME, SHALL BE RENDERED AGAINST THE COMPANY OR
ANY OF ITS SUBSIDIARIES (OR ANY COMBINATION THEREOF) AND SHALL REMAIN
UNDISCHARGED FOR A PERIOD OF THIRTY (30) CONSECUTIVE DAYS DURING WHICH EXECUTION
SHALL NOT BE EFFECTIVELY STAYED, OR ANY ACTION IS LEGALLY TAKEN BY A JUDGMENT
CREDITOR TO LEVY UPON ANY SUCH JUDGMENT; OR

 

(F)                                    VOLUNTARY BANKRUPTCY OR INSOLVENCY
PROCEEDINGS.  THE COMPANY (AND ANY SUBSIDIARY THEREOF) SHALL (I) APPLY FOR OR
CONSENT TO THE APPOINTMENT OF A RECEIVER, TRUSTEE, LIQUIDATOR OR CUSTODIAN OF
ITSELF OR OF ALL OR A SUBSTANTIAL PART OF ITS PROPERTY, (II) BE UNABLE, OR ADMIT
IN WRITING ITS INABILITY, TO PAY ITS DEBTS GENERALLY AS THEY MATURE, (III) MAKE
A GENERAL ASSIGNMENT FOR THE BENEFIT OF ITS OR ANY OF ITS CREDITORS, (IV) BE
DISSOLVED OR LIQUIDATED IN FULL OR IN PART, (V) BECOME INSOLVENT (AS SUCH TERM
MAY BE DEFINED OR INTERPRETED UNDER ANY APPLICABLE STATUTE), (VI) COMMENCE A
VOLUNTARY CASE OR OTHER PROCEEDING SEEKING LIQUIDATION, REORGANIZATION OR OTHER
RELIEF WITH RESPECT TO ITSELF OR ITS DEBTS UNDER ANY BANKRUPTCY, INSOLVENCY OR
OTHER SIMILAR LAW NOW OR HEREAFTER IN EFFECT OR CONSENT TO ANY SUCH RELIEF OR TO
THE APPOINTMENT OF OR TAKING POSSESSION OF ITS PROPERTY BY ANY OFFICIAL IN AN
INVOLUNTARY CASE OR OTHER PROCEEDING COMMENCED AGAINST IT OR (VII) TAKE ANY
ACTION FOR THE PURPOSE OF EFFECTING ANY OF THE FOREGOING; OR

 

(G)                                 INVOLUNTARY BANKRUPTCY OR INSOLVENCY
PROCEEDINGS.  PROCEEDINGS FOR THE APPOINTMENT OF A RECEIVER, TRUSTEE, LIQUIDATOR
OR CUSTODIAN OF THE COMPANY (AND ANY SUBSIDIARY THEREOF) OR OF ALL OR A
SUBSTANTIAL PART OF THE PROPERTY THEREOF, OR AN INVOLUNTARY CASE OR OTHER
PROCEEDINGS SEEKING LIQUIDATION, REORGANIZATION OR OTHER RELIEF WITH RESPECT TO
THE COMPANY (AND ANY SUBSIDIARY THEREOF) OR THE DEBTS THEREOF UNDER ANY
BANKRUPTCY, INSOLVENCY OR OTHER SIMILAR LAW NOW OR HEREAFTER IN EFFECT SHALL BE
COMMENCED AND AN ORDER FOR RELIEF ENTERED, OR SUCH CASE OR PROCEEDING SHALL NOT
BE DISMISSED, DISCHARGED OR STAYED WITHIN NINETY (90) DAYS OF COMMENCEMENT.

 

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3.                                       Rights of Holder Upon Default.

 

(A)                                  UPON THE OCCURRENCE OR EXISTENCE OF ANY
EVENT OF DEFAULT (OTHER THAN AN EVENT OF DEFAULT REFERRED TO IN SECTIONS 2(F) OR
2(G) HEREOF) AND AT ANY TIME THEREAFTER DURING THE CONTINUANCE OF SUCH EVENT OF
DEFAULT, THE HOLDER MAY DECLARE ALL OUTSTANDING OBLIGATIONS PAYABLE BY THE
COMPANY HEREUNDER TO BE IMMEDIATELY DUE AND PAYABLE WITHOUT PRESENTMENT, DEMAND,
PROTEST OR ANY OTHER NOTICE OF ANY KIND, ALL OF WHICH ARE HEREBY EXPRESSLY
WAIVED, ANYTHING CONTAINED HEREIN OR IN THE OTHER TRANSACTION DOCUMENTS TO THE
CONTRARY NOTWITHSTANDING. UPON THE OCCURRENCE OR EXISTENCE OF ANY EVENT OF
DEFAULT DESCRIBED IN SECTIONS 2(F) OR 2(G) HEREOF, IMMEDIATELY AND WITHOUT
NOTICE, ALL OUTSTANDING OBLIGATIONS PAYABLE BY THE COMPANY HEREUNDER SHALL
AUTOMATICALLY BECOME IMMEDIATELY DUE AND PAYABLE, WITHOUT PRESENTMENT, DEMAND,
PROTEST OR ANY OTHER NOTICE OF ANY KIND, ALL OF WHICH ARE HEREBY EXPRESSLY
WAIVED, ANYTHING CONTAINED HEREIN OR IN THE OTHER TRANSACTION DOCUMENTS TO THE
CONTRARY NOTWITHSTANDING.  IN ADDITION TO THE FOREGOING REMEDIES, UPON THE
OCCURRENCE OR EXISTENCE OF ANY EVENT OF DEFAULT, THE HOLDER MAY EXERCISE ANY
OTHER RIGHT, POWER OR REMEDY GRANTED TO IT BY THE TRANSACTION DOCUMENTS OR
OTHERWISE PERMITTED TO IT BY LAW, EITHER BY SUIT IN EQUITY OR BY ACTION AT LAW,
OR BOTH.

 

(B)                                 IN ADDITION TO THE RIGHTS OF THE HOLDER
SPECIFIED IN SUBSECTION (A) OF THIS SECTION 3, ON THE DATE AN EVENT OF DEFAULT
UNDER THIS NOTE OCCURS, THE INTEREST RATE ON THIS NOTE SHALL INCREASE, FROM THAT
DATE FORWARD, TO THE LESSER OF 15% AND THE MAXIMUM LEGALLY PERMISSIBLE INTEREST
RATE, WITH SUCH INTEREST PAYABLE SOLELY IN LAWFUL MONEY OF THE UNITED STATES.

 

4.                                       SENIORITY; COLLATERAL.  TO SECURE THE
COMPANY’S PAYMENT AND PERFORMANCE OF THE OBLIGATIONS AND TO SECURE THE COMPANY’S
PROMPT, FULL AND FAITHFUL PERFORMANCE AND OBSERVANCE OF ALL OF THE PROVISIONS
UNDER THIS NOTE AND THE OTHER TRANSACTION DOCUMENTS, THE COMPANY HEREBY GRANTS
THE HOLDER THE RIGHTS SET FORTH IN THE PLEDGE AND SECURITY AGREEMENT.  THE
SECURITY INTEREST GRANTED BY THE COMPANY UNDER THE PLEDGE AND SECURITY AGREEMENT
SECURING THE INDEBTEDNESS EVIDENCED BY THIS NOTE, INCLUDING ALL OBLIGATIONS, IS
SENIOR TO ALL OTHER LIENS, SECURITY INTERESTS OR ENCUMBRANCES SECURING ANY OTHER
INDEBTEDNESS OF THE COMPANY, SUBJECT ONLY TO PERMITTED LIENS (AS DEFINED IN THE
PLEDGE AND SECURITY AGREEMENT) TO THE EXTENT SUCH PERMITTED LIENS BY THEIR
EXPRESS TERMS OR APPLICABLE LAW HAVE PRIORITY EQUAL OR SUPERIOR TO SUCH SECURITY
INTEREST.

 

5.                                       PREPAYMENT AND EFFECT ON CONVERSION
RIGHTS.  THIS NOTE MAY BE PREPAID AS A WHOLE OR IN PART AT ANY TIME PRIOR TO THE
MATURITY DATE AT THE ELECTION OF THE COMPANY UPON AT LEAST THIRTY (30) DAYS
PRIOR WRITTEN NOTICE TO THE HOLDER (THE “PREPAYMENT NOTICE PERIOD”); PROVIDED
THAT ANY SUCH PREPAYMENT SHALL INCLUDE A PREPAYMENT PREMIUM EQUAL TO A
PERCENTAGE OF THE AMOUNT OF PRINCIPAL SO PREPAID, AS DETERMINED BY THE DATE OF
SUCH PREPAYMENT, AS FOLLOWS:

 

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Prepayment Date

 

Prepayment Premium %

 

May 22, 2003 – August 22, 2003

 

5%

 

August 22, 2003 – November 22, 2003

 

4%

 

November 22, 2003 – February 22, 2004

 

3%

 

February 22, 2004 – May 22, 2004

 

2%

 

May 22, 2004 – August 22, 2004

 

1%

 

August 22, 2004 or later

 

0%

 

 

ANY SUCH PREPAYMENT SHALL BE APPLIED FIRST TO THE PAYMENT OF EXPENSES DUE UNDER
THIS NOTE, SECOND TO ANY PREPAYMENT PREMIUM, THIRD TO INTEREST ACCRUED ON THE
PORTION OF THIS NOTE SO PREPAID AND FOURTH, IF THE AMOUNT OF PREPAYMENT EXCEEDS
THE AMOUNT OF ALL SUCH EXPENSES, PREPAYMENT PENALTIES AND ACCRUED INTEREST, TO
THE PAYMENT OF PRINCIPAL OF THIS NOTE.  NOTWITHSTANDING THE FOREGOING OR
ANYTHING TO THE CONTRARY HEREIN, ANY SUCH ELECTION TO PREPAY THE NOTE SHALL NOT
EXTINGUISH OR OTHERWISE EFFECT THE CONVERSION RIGHTS SET FORTH IN SECTION 6
HEREOF WITH RESPECT TO THE AMOUNT OF PRINCIPAL SO ELECTED TO PREPAID UNTIL AFTER
THE EXPIRATION OF THE PREPAYMENT NOTICE PERIOD.

 

6.                                       Conversion.

 

(A)                                  CONVERSION BY HOLDER.  AT ANY TIME, AND
FROM TIME TO TIME, THE HOLDER MAY, AT ITS SOLE AND EXCLUSIVE OPTION, CONVERT ALL
OR ANY PART OF THE PRINCIPAL AND ACCRUED INTEREST OUTSTANDING UNDER THIS NOTE
INTO SHARES OF COMMON STOCK AT A CONVERSION PRICE PER SHARE OF COMMON STOCK
EQUAL TO $2.11 (“CONVERSION SHARES”), SUBJECT TO ADJUSTMENT AS PROVIDED IN
SECTION 7 HEREOF (THE ”CONVERSION PRICE”).

 

(B)                                 TRANSFER OF SHARES.  THE COMPANY SHALL CAUSE
THE TRANSFER AGENT TO TRANSMIT THE CERTIFICATES REPRESENTING THE CONVERSION
SHARES TO THE HOLDER BY CREDITING THE ACCOUNT OF THE HOLDER’S DESIGNATED BROKER
WITH THE DEPOSITORY TRUST CORPORATION (“DTC”) THROUGH ITS DEPOSIT WITHDRAWAL
AGENT COMMISSION (“DWAC”) SYSTEM WITHIN THREE (3) BUSINESS DAYS AFTER RECEIPT BY
THE COMPANY OF THE NOTICE OF CONVERSION (AS DEFINED BELOW) (THE “DELIVERY
DATE”), UNLESS IN THE REASONABLE OPINION OF COMPANY’S COUNSEL SUCH CONVERSION
SHARES MUST BEAR A RESTRICTIVE LEGEND TO BE ISSUED IN COMPLIANCE WITH THE
SECURITIES ACT OF 1933, AS AMENDED, IN WHICH CASE, CERTIFICATES SHALL BE
DELIVERED TO HOLDER ON OR BEFORE THE DELIVERY DATE.

 

(C)                                  CONVERSION BY COMPANY.  AT ANY TIME
FOLLOWING THE DATE HEREOF, THE COMPANY MAY, AT ITS SOLE AND EXCLUSIVE OPTION,
CONVERT ALL OF THE PRINCIPAL AND ACCRUED INTEREST OUTSTANDING UNDER THIS NOTE
INTO SHARES OF COMMON STOCK AT A CONVERSION PRICE PER SHARE OF COMMON STOCK
EQUAL TO THE CONVERSION PRICE, PROVIDED THAT EACH OF THE FOLLOWING TWO
CONDITIONS IS SATISFIED:  (I) THE VOLUME WEIGHTED AVERAGE PRICE OF THE COMPANY’S
COMMON STOCK, AS REPORTED BY BLOOMBERG FINANCIAL LP (OR, IN THE EVENT THAT SUCH
PRICE IS NOT AVAILABLE FROM BLOOMBERG FINANCIAL LP, A COMPARABLE NATIONALLY
RECOGNIZED FINANCIAL REPORTING SERVICE), USING THE VAP FUNCTION FOR THE FIFTEEN
TRADING DAYS IMMEDIATELY PRIOR TO THE DATE ON WHICH THE COMPANY PROVIDES THE
CONVERSION NOTICE (AS DEFINED BELOW), IS EQUAL TO OR GREATER THAN $12.93 AND
(II) THE

 

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Company’s aggregate EBITDA for the two full calendar quarters immediately
preceding the date on which the Company provides the Conversion Notice, as set
forth in the Company’s Forms 10-QSB or 10-Q and/or 10-KSB or 10-K filed with the
United States Securities and Exchange Commission for such calendar quarters, is
equal to or greater than $3,750,000.  If the Company elects to exercise its
conversion right pursuant to this Section 6(b), it shall provide the Holder with
written notice of such election at least five (5) but no more than ten (10)
Business Days prior to the date of such conversion (the “Conversion Notice”)
together with evidence reasonably establishing that all conditions precedent to
such conversion have been satisfied.

 

(D)                                 MECHANICS AND EFFECT OF CONVERSION.  NO
FRACTIONAL SHARES OF COMMON STOCK SHALL BE ISSUED UPON CONVERSION OF THIS NOTE. 
UPON THE CONVERSION OF ALL OF THE PRINCIPAL OUTSTANDING UNDER THIS NOTE, IN LIEU
OF THE COMPANY ISSUING ANY FRACTIONAL SHARES TO THE HOLDER, THE COMPANY SHALL
PAY TO THE HOLDER THE AMOUNT OF OUTSTANDING PRINCIPAL THAT IS NOT SO CONVERTED
IN CASH.  ON PARTIAL CONVERSION OF THIS NOTE, THE COMPANY SHALL ISSUE TO THE
HOLDER (I) THE SHARES OF COMMON STOCK INTO WHICH A PORTION OF THIS NOTE IS
CONVERTED AND (II) A NEW SENIOR SECURED CONVERTIBLE PROMISSORY NOTE HAVING
IDENTICAL TERMS TO THIS NOTE, EXCEPT THAT THE PRINCIPAL AMOUNT THEREOF SHALL
EQUAL THE DIFFERENCE BETWEEN (A) THE PRINCIPAL AMOUNT OF THIS NOTE IMMEDIATELY
PRIOR TO SUCH CONVERSION MINUS (B) THE PORTION OF SUCH PRINCIPAL AMOUNT
CONVERTED INTO COMMON STOCK.  UPON CONVERSION OF THIS NOTE PURSUANT TO THIS
SECTION 6, THE HOLDER SHALL SURRENDER THIS NOTE, DULY ENDORSED, AT THE PRINCIPAL
OFFICE OF THE COMPANY.  AT ITS EXPENSE, THE COMPANY SHALL, AS SOON AS
PRACTICABLE THEREAFTER, ISSUE AND DELIVER TO SUCH HOLDER AT SUCH PRINCIPAL
OFFICE A CERTIFICATE OR CERTIFICATES FOR THE NUMBER OF SHARES OF COMMON STOCK,
TO WHICH THE HOLDER SHALL BE ENTITLED UPON SUCH CONVERSION (BEARING SUCH LEGENDS
AS ARE REQUIRED BY THE PURCHASE AGREEMENT AND APPLICABLE STATE AND FEDERAL
SECURITIES LAWS IN THE OPINION OF COUNSEL TO THE COMPANY), TOGETHER WITH ANY
OTHER SECURITIES AND PROPERTY TO WHICH THE HOLDER IS ENTITLED UPON SUCH
CONVERSION UNDER THE TERMS OF THIS NOTE.  UPON FULL CONVERSION OF THIS NOTE, THE
COMPANY SHALL BE FOREVER RELEASED FROM ALL ITS OBLIGATIONS AND LIABILITIES UNDER
THIS NOTE.

 

(E)                                  RESERVATION OF STOCK ISSUABLE UPON
CONVERSION.  THE COMPANY SHALL AT ALL TIMES RESERVE AND KEEP AVAILABLE OUT OF
ITS AUTHORIZED BUT UNISSUED SHARES OF CAPITAL STOCK, SOLELY FOR THE PURPOSE OF
EFFECTING THE CONVERSION OF THIS NOTE, SUCH NUMBER OF ITS SHARES OF CAPITAL
STOCK OF THE COMPANY AS SHALL FROM TIME TO TIME BE SUFFICIENT TO EFFECT THE
CONVERSION OF THIS NOTE; AND IF AT ANY TIME THE NUMBER OF AUTHORIZED BUT
UNISSUED SHARES OF CAPITAL STOCK OF THE COMPANY SHALL NOT BE SUFFICIENT TO
EFFECT THE CONVERSION OF THIS NOTE, THE COMPANY HEREBY COVENANTS AND AGREES TO
TAKE SUCH CORPORATE ACTION AS MAY, IN THE OPINION OF ITS COUNSEL, BE NECESSARY
TO INCREASE ITS AUTHORIZED BUT UNISSUED SHARES OF CAPITAL STOCK TO SUCH NUMBER
OF SHARES AS SHALL BE SUFFICIENT FOR SUCH PURPOSE.

 

(F)                                    PAYMENT OF EXPENSES AND TAXES ON
CONVERSION.  THE COMPANY SHALL PAY ALL EXPENSES, TAXES AND OTHER CHARGES PAYABLE
IN CONNECTION WITH THE PREPARATION, EXECUTION, ISSUANCE AND DELIVERY OF STOCK
CERTIFICATES AND NEW PROMISSORY NOTES PURSUANT TO THIS SECTION 6 HEREOF, EXCEPT
THAT, IN THE EVENT SUCH STOCK CERTIFICATES OR NEW PROMISSORY NOTES SHALL BE
REGISTERED IN A NAME OR NAMES OTHER THAN THE NAME OF THE

 

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holder of this Note, funds sufficient to pay all stock transfer fees, which
shall be payable upon the execution and delivery of such stock certificate or
certificates or new promissory notes, shall be paid by the holder hereof to the
Company at the time of delivering this Note to the Company upon conversion.

 

7.                                       Conversion Price Adjustments.

 

(A)                                  ADJUSTMENT FOR STOCK SPLITS AND
COMBINATIONS.  IF THE COMPANY SHALL AT ANY TIME OR FROM TIME TO TIME AFTER JUNE
13, 2003 EFFECT A STOCK SPLIT OR SUBDIVISION OF THE OUTSTANDING COMMON STOCK,
THE CONVERSION PRICE IN EFFECT IMMEDIATELY BEFORE THAT SUBDIVISION SHALL BE
PROPORTIONATELY DECREASED, AND, CONVERSELY, IF THE COMPANY SHALL AT ANY TIME OR
FROM TIME TO TIME AFTER JUNE 13, 2003 COMBINE THE OUTSTANDING SHARES OF COMMON
STOCK INTO A SMALLER NUMBER OF SHARES, THE CONVERSION PRICE IN EFFECT
IMMEDIATELY BEFORE THE COMBINATION SHALL BE PROPORTIONATELY INCREASED.  ANY
ADJUSTMENT UNDER THIS SECTION 7(A) SHALL BECOME EFFECTIVE AT THE CLOSE OF
BUSINESS ON THE DATE THE STOCK SPLIT, SUBDIVISION OR COMBINATION BECOMES
EFFECTIVE.

 

(B)                                 ADJUSTMENT FOR COMMON STOCK DIVIDENDS AND
DISTRIBUTIONS.  IF THE COMPANY AT ANY TIME OR FROM TIME TO TIME AFTER JUNE 13,
2003 ISSUES, OR FIXES A RECORD DATE FOR THE DETERMINATION OF HOLDERS OF COMMON
STOCK ENTITLED TO RECEIVE, A DIVIDEND OR OTHER DISTRIBUTION PAYABLE SOLELY IN
ADDITIONAL SHARES OF COMMON STOCK, THE CONVERSION PRICE THAT IS THEN IN EFFECT
SHALL BE DECREASED AS OF THE TIME OF SUCH ISSUANCE OR, IN THE EVENT SUCH RECORD
DATE IS FIXED, AS OF THE CLOSE OF BUSINESS ON SUCH RECORD DATE, BY MULTIPLYING
THE CONVERSION PRICE BY A FRACTION (I) THE NUMERATOR OF WHICH IS THE TOTAL
NUMBER OF SHARES OF COMMON STOCK ISSUED AND OUTSTANDING IMMEDIATELY PRIOR TO THE
TIME OF SUCH ISSUANCE OR THE CLOSE OF BUSINESS ON SUCH RECORD DATE, AND (II) THE
DENOMINATOR OF WHICH IS THE SUM OF THE TOTAL NUMBER OF SHARES OF COMMON STOCK
ISSUED AND OUTSTANDING IMMEDIATELY PRIOR TO THE TIME OF SUCH ISSUANCE OR THE
CLOSE OF BUSINESS ON SUCH RECORD DATE PLUS THE NUMBER OF SHARES OF COMMON STOCK
ISSUABLE IN PAYMENT OF SUCH DIVIDEND OR DISTRIBUTION; PROVIDED, HOWEVER, THAT IF
SUCH RECORD DATE IS FIXED AND SUCH DIVIDEND IS NOT FULLY PAID OR IF SUCH
DISTRIBUTION IS NOT FULLY MADE ON THE DATE FIXED THEREFOR, THE CONVERSION PRICE
SHALL BE RECOMPUTED ACCORDINGLY AS OF THE CLOSE OF BUSINESS ON SUCH RECORD DATE
AND THEREAFTER THE CONVERSION PRICE SHALL BE ADJUSTED PURSUANT TO THIS
SECTION 7(B) TO REFLECT THE ACTUAL PAYMENT OF SUCH DIVIDEND OR DISTRIBUTION.

 

(C)                                  ADJUSTMENTS FOR OTHER DIVIDENDS AND
DISTRIBUTIONS.  IF THE COMPANY AT ANY TIME OR FROM TIME TO TIME AFTER JUNE 13,
2003 ISSUES, OR FIXES A RECORD DATE FOR THE DETERMINATION OF HOLDERS OF COMMON
STOCK ENTITLED TO RECEIVE, A DIVIDEND OR OTHER DISTRIBUTION PAYABLE IN
SECURITIES OF THE COMPANY OTHER THAN SHARES OF COMMON STOCK OR IN OTHER
PROPERTY, IN EACH SUCH EVENT PROVISION SHALL BE MADE SO THAT THE HOLDER OF THIS
NOTE SHALL RECEIVE UPON CONVERSION HEREOF, IN ADDITION TO THE NUMBER OF SHARES
OF COMMON STOCK RECEIVABLE HEREUPON, THE AMOUNT OF SECURITIES OF THE COMPANY OR
OTHER PROPERTY WHICH SUCH HOLDER WOULD HAVE RECEIVED HAD THIS NOTE BEEN
CONVERTED INTO COMMON STOCK ON THE DATE OF SUCH EVENT AND HAD IT THEREAFTER,
DURING THE PERIOD FROM THE DATE OF SUCH EVENT TO AND INCLUDING THE CONVERSION
DATE, RETAINED SUCH SECURITIES OR OTHER PROPERTY RECEIVABLE BY IT AS AFORESAID
DURING SUCH PERIOD, SUBJECT TO ALL OTHER ADJUSTMENTS CALLED FOR DURING SUCH
PERIOD UNDER THIS SECTION 7 WITH RESPECT TO THE RIGHTS OF THE HOLDERS

 

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of this Note or with respect to such other securities or other property by their
terms.  As used herein, the term “other property” does not include cash.

 

(D)                                 ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE
AND SUBSTITUTION.  IF AT ANY TIME OR FROM TIME TO TIME AFTER JUNE 13, 2003, THE
COMMON STOCK ISSUABLE UPON THE CONVERSION OF THIS NOTE IS CHANGED INTO THE SAME
OR A DIFFERENT NUMBER OF SHARES OF ANY CLASS OR SERIES OF STOCK, WHETHER BY
RECAPITALIZATION, RECLASSIFICATION OR OTHERWISE (OTHER THAN A SUBDIVISION OR
COMBINATION OF SHARES OR STOCK DIVIDEND OR A REORGANIZATION, MERGER,
CONSOLIDATION OR SALE OF ASSETS PROVIDED FOR ELSEWHERE IN THIS SECTION 7), THEN
IN ANY SUCH EVENT THE HOLDER SHALL HAVE THE RIGHT THEREAFTER TO CONVERT THIS
NOTE INTO THE KIND AND AMOUNT OF STOCK AND OTHER SECURITIES AND PROPERTY
RECEIVABLE UPON SUCH RECAPITALIZATION, RECLASSIFICATION OR OTHER CHANGE BY
HOLDERS OF THE NUMBER OF SHARES OF COMMON STOCK INTO WHICH THIS NOTE COULD HAVE
BEEN CONVERTED IMMEDIATELY PRIOR TO SUCH RECAPITALIZATION, RECLASSIFICATION OR
CHANGE, ALL SUBJECT TO FURTHER ADJUSTMENT AS PROVIDED HEREIN OR WITH RESPECT TO
SUCH OTHER SECURITIES OR PROPERTY BY THE TERMS THEREOF.

 

(E)                                  SALE OF SHARES BELOW CONVERSION PRICE. 
SUBJECT TO OBTAINING SHAREHOLDER APPROVAL, IF REQUIRED, PURSUANT TO SUBSECTION
(IV) BELOW:

 

(I)                                     IF AT ANY TIME OR FROM TIME TO TIME
AFTER JUNE 13, 2003, THE COMPANY ISSUES OR SELLS, OR IS DEEMED BY THE PROVISIONS
OF CLAUSE (III) OF THIS SECTION 7(E) TO HAVE ISSUED OR SOLD, ADDITIONAL SHARES
OF COMMON STOCK (AS HEREINAFTER DEFINED), OTHER THAN A SUBDIVISION OR
COMBINATION OF SHARES OF COMMON STOCK OR AS A DIVIDEND OR OTHER DISTRIBUTION OF
COMMON STOCK AS PROVIDED FOR ELSEWHERE IN THIS SECTION 7, FOR AN EFFECTIVE PRICE
(AS HEREINAFTER DEFINED) LESS THAN THE THEN EFFECTIVE CONVERSION PRICE, THEN AND
IN EACH SUCH CASE THE THEN EXISTING CONVERSION PRICE SHALL BE REDUCED AS OF THE
CLOSE OF BUSINESS ON THE DATE OF SUCH ISSUE OR SALE TO A PRICE EQUAL TO THE
LOWEST SUCH EFFECTIVE PRICE.

 

(II)                                  FOR THE PURPOSE OF MAKING ANY ADJUSTMENT
REQUIRED UNDER THIS SECTION 7(E):

 

(A)                              “ADDITIONAL SHARES OF COMMON STOCK” MEANS ALL
SHARES OF COMMON STOCK ISSUED BY THE COMPANY, WHETHER OR NOT SUBSEQUENTLY
REACQUIRED OR RETIRED BY THE COMPANY, OR CAPITAL STOCK OF THE COMPANY ISSUED
UPON THE EXERCISE OR CONVERSION OF CONVERTIBLE SECURITIES OUTSTANDING ON JUNE
13, 2003, OTHER THAN SHARES OF COMMON STOCK ISSUED OR ISSUABLE:

 

(1)                                  to employees, officers or directors of the
Company, pursuant to stock purchase or stock option plans or other arrangements
that are approved by the Company’s Board of Directors;

 

(2)                                  pursuant to any rights, agreements, options
or warrants outstanding as of the date hereof and disclosed in writing to the
Holder; and stock issued pursuant to any such rights or agreements granted after
the date hereof;

 

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(3)                                  in connection with any stock split, stock
dividend or recapitalization by the Company;

 

(4)                                  upon conversion of any Company Notes or the
Company’s Series B Preferred Stock or upon exercise or conversion of the
Purchaser’s Warrants or the Warrants issued pursuant to the Purchase Agreement;

 

(5)                                  for consideration other than cash pursuant
to a merger, consolidation, strategic alliance, acquisition or similar business
combination approved by the Board of Directors;

 

(6)                                  pursuant to any equipment leasing, real
property leasing or loan arrangement, or debt financing from a bank or similar
financial or lending institution approved by the Company’s Board of Directors,
the principal purpose of which is not to raise equity capital; or

 

(7)                                  by the Company in connection with joint
ventures, manufacturing, marketing or distribution arrangements or technology
transfer or development arrangements; provided that such strategic transactions
and the issuance of shares in connection therewith have been approved by the
Company’s Board of Directors and the principal purpose thereof is not to raise
equity capital.

 

(B)                                “AGGREGATE CONSIDERATION RECEIVED” BY THE
COMPANY FOR ANY ISSUE OR SALE OF SECURITIES SHALL (1) TO THE EXTENT IT CONSISTS
OF CASH, BE COMPUTED AT THE GROSS AMOUNT OF CASH RECEIVED BY THE COMPANY BEFORE
DEDUCTION OF ANY UNDERWRITING OR SIMILAR COMMISSIONS, COMPENSATION OR
CONCESSIONS PAID OR ALLOWED BY THE COMPANY IN CONNECTION WITH SUCH ISSUE OR SALE
AND WITHOUT DEDUCTION OF ANY EXPENSES PAYABLE BY THE COMPANY, (2) TO THE EXTENT
IT CONSISTS OF PROPERTY OTHER THAN CASH, BE COMPUTED AT THE FAIR VALUE OF THAT
PROPERTY AS DETERMINED IN GOOD FAITH BY THE BOARD OF DIRECTORS OF THE COMPANY,
AND (3) IF ADDITIONAL SHARES OF COMMON STOCK OR CONVERTIBLE SECURITIES ARE
ISSUED OR SOLD TOGETHER WITH OTHER STOCK OR SECURITIES OR OTHER ASSETS OF THE
COMPANY FOR A CONSIDERATION WHICH COVERS BOTH, BE COMPUTED AS THE PORTION OF THE
CONSIDERATION SO RECEIVED THAT MAY BE REASONABLY DETERMINED IN GOOD FAITH BY THE
BOARD OF DIRECTORS OF THE COMPANY TO BE ALLOCABLE TO SUCH ADDITIONAL SHARES OF
COMMON STOCK OR CONVERTIBLE SECURITIES.

 

(C)                                “CONVERTIBLE SECURITIES” MEANS STOCK OR OTHER
SECURITIES (INCLUDING OPTIONS, WARRANTS AND OTHER RIGHTS) OF THE COMPANY
ULTIMATELY CONVERTIBLE INTO SHARES OF COMMON STOCK.

 

(D)                               “EFFECTIVE PRICE” OF ADDITIONAL SHARES OF
COMMON STOCK MEANS THE QUOTIENT DETERMINED BY DIVIDING THE TOTAL NUMBER OF
ADDITIONAL SHARES OF COMMON STOCK ISSUED OR SOLD, OR DEEMED TO HAVE BEEN ISSUED
OR SOLD BY THE COMPANY UNDER THIS SECTION 7(E), INTO THE AGGREGATE CONSIDERATION
RECEIVED, OR DEEMED TO HAVE BEEN RECEIVED BY THE COMPANY FOR SUCH ISSUE UNDER
THIS SECTION 7(E), FOR SUCH ADDITIONAL SHARES OF COMMON STOCK.

 

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(III)                               FOR THE PURPOSE OF MAKING ANY ADJUSTMENT TO
THE CONVERSION PRICE REQUIRED UNDER THIS SECTION 7(E), IF THE COMPANY ISSUES OR
SELLS ANY CONVERTIBLE SECURITIES AND IF THE EFFECTIVE PRICE OF THE SHARES OF
COMMON STOCK ISSUABLE UPON CONVERSION OF THE CONVERTIBLE SECURITIES IS LESS THAN
THE CONVERSION PRICE THEN IN EFFECT, THE COMPANY SHALL BE DEEMED TO HAVE ISSUED
AT THE TIME OF THE ISSUANCE OF SUCH CONVERTIBLE SECURITIES THAT NUMBER OF
ADDITIONAL SHARES OF COMMON STOCK EQUAL TO THE MAXIMUM NUMBER OF SHARES OF
COMMON STOCK ISSUABLE UPON CONVERSION THEREOF AND TO HAVE RECEIVED AS
CONSIDERATION FOR THE ISSUANCE OF SUCH SHARES AN AMOUNT EQUAL TO THE TOTAL
AMOUNT OF THE CONSIDERATION, IF ANY, RECEIVED BY THE COMPANY FOR THE ISSUANCE OF
SUCH CONVERTIBLE SECURITIES, PLUS THE MINIMUM AMOUNTS OF CONSIDERATION, IF ANY,
PAYABLE TO THE COMPANY (OTHER THAN BY CANCELLATION OF LIABILITIES OR OBLIGATIONS
EVIDENCED BY SUCH CONVERTIBLE SECURITIES) UPON THE CONVERSION THEREOF; PROVIDED
THAT:

 

(A)                              IF THE MINIMUM AMOUNTS OF SUCH CONSIDERATION
CANNOT BE ASCERTAINED, BUT ARE A FUNCTION OF ANTIDILUTION OR SIMILAR PROTECTIVE
CLAUSES, THE COMPANY SHALL BE DEEMED TO HAVE RECEIVED THE MINIMUM AMOUNTS OF
CONSIDERATION WITHOUT REFERENCE TO SUCH CLAUSES;

 

(B)                                IF THE MINIMUM AMOUNT OF CONSIDERATION
PAYABLE TO THE COMPANY UPON THE CONVERSION OF CONVERTIBLE SECURITIES IS REDUCED
OVER TIME OR ON THE OCCURRENCE OR NON-OCCURRENCE OF SPECIFIED EVENTS OTHER THAN
BY REASON OF ANTIDILUTION ADJUSTMENTS, THE EFFECTIVE PRICE SHALL BE RECALCULATED
USING THE FIGURE TO WHICH SUCH MINIMUM AMOUNT OF CONSIDERATION IS REDUCED;

 

(C)                                IF THE MINIMUM AMOUNT OF CONSIDERATION
PAYABLE TO THE COMPANY UPON THE CONVERSION OF CONVERTIBLE SECURITIES IS
SUBSEQUENTLY INCREASED, THE EFFECTIVE PRICE SHALL BE AGAIN RECALCULATED USING
THE INCREASED MINIMUM AMOUNT OF CONSIDERATION PAYABLE TO THE COMPANY UPON THE
CONVERSION OF CONVERTIBLE SECURITIES; AND

 

(D)                               NO FURTHER ADJUSTMENT OF THE CONVERSION PRICE,
ADJUSTED OR SUBJECT TO ADJUSTMENT UPON THE ISSUANCE OF SUCH CONVERTIBLE
SECURITIES, SHALL BE MADE AS A RESULT OF THE ACTUAL ISSUANCE OF SHARES OF COMMON
STOCK ON THE CONVERSION OF ANY SUCH CONVERTIBLE SECURITIES.  IF THE CONVERSION
PRIVILEGE REPRESENTED BY ANY SUCH CONVERTIBLE SECURITIES SHALL EXPIRE WITHOUT
HAVING BEEN EXERCISED, THE CONVERSION PRICE ADJUSTED UPON THE ISSUANCE OF SUCH
CONVERTIBLE SECURITIES SHALL BE READJUSTED TO THE CONVERSION PRICE WHICH WOULD
HAVE BEEN IN EFFECT HAD AN ADJUSTMENT BEEN MADE ON THE BASIS THAT THE ONLY
SHARES OF COMMON STOCK SO ISSUED WERE THE SHARES OF COMMON STOCK, IF ANY,
ACTUALLY ISSUED OR SOLD ON THE EXERCISE OF SUCH RIGHTS OF CONVERSION OF SUCH
CONVERTIBLE SECURITIES, AND SUCH SHARES OF COMMON STOCK, IF ANY, WERE ISSUED OR
SOLD FOR THE CONSIDERATION RECEIVED FOR ISSUING OR SELLING THE CONVERTIBLE
SECURITIES ACTUALLY CONVERTED, PLUS THE  CONSIDERATION, IF ANY, ACTUALLY
RECEIVED BY THE COMPANY (OTHER THAN BY CANCELLATION OF LIABILITIES OR
OBLIGATIONS EVIDENCED BY SUCH CONVERTIBLE SECURITIES) ON THE CONVERSION OF SUCH
CONVERTIBLE SECURITIES, PROVIDED THAT SUCH READJUSTMENT SHALL NOT APPLY TO PRIOR
CONVERSIONS OF THIS NOTE.

 

(IV)                              NOTWITHSTANDING ANYTHING TO THE CONTRARY IN
THIS NOTE, UNLESS AND UNTIL THE COMPANY OBTAINS SHAREHOLDER APPROVAL, INTEREST
SHALL NOT BE PAID IN

 

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kind and no adjustment will be made under Subsection 7(e)(i) of this Note if
such adjustment would cause the maximum number of shares of Common Stock
issuable pursuant to this Note, any other Company Note, the Purchaser Warrants
and the warrants issued pursuant to the Purchase Agreement (collectively the
“Convertible Securities”), to exceed the maximum number of shares of Common
Stock that the Company is permitted to issue, without such shareholder approval,
pursuant to and in compliance with the American Stock Exchange Listing
Standards, Policies and Requirements, or any successor provisions so long as the
Common Stock is listed on such Exchange or a successor exchange.

 

(F)                                    CERTIFICATE OF ADJUSTMENT.  IN EACH CASE
OF AN ADJUSTMENT OR READJUSTMENT OF THE CONVERSION PRICE FOR THE NUMBER OF
SHARES OF COMMON STOCK OR OTHER SECURITIES ISSUABLE UPON CONVERSION OF THIS
NOTE, THE COMPANY, AT ITS OWN EXPENSE, SHALL CAUSE ITS TREASURER TO COMPUTE SUCH
ADJUSTMENT OR READJUSTMENT IN ACCORDANCE WITH THE PROVISIONS HEREOF AND PREPARE
A CERTIFICATE SHOWING SUCH ADJUSTMENT OR READJUSTMENT, AND SHALL MAIL SUCH
CERTIFICATE, BY FIRST CLASS MAIL, POSTAGE PREPAID, TO THE HOLDER AT THE HOLDER’S
ADDRESS AS SHOWN IN THE COMPANY’S BOOKS.  THE CERTIFICATE SHALL SET FORTH SUCH
ADJUSTMENT OR READJUSTMENT, SHOWING IN DETAIL THE FACTS UPON WHICH SUCH
ADJUSTMENT OR READJUSTMENT IS BASED.  NO ADJUSTMENT IN THE CONVERSION PRICE
SHALL BE REQUIRED TO BE MADE UNLESS IT WOULD RESULT IN AN INCREASE OR DECREASE
OF AT LEAST ONE CENT, BUT ANY ADJUSTMENTS NOT MADE BECAUSE OF THIS SENTENCE
SHALL BE CARRIED FORWARD AND TAKEN INTO ACCOUNT IN ANY SUBSEQUENT ADJUSTMENT
OTHERWISE REQUIRED HEREUNDER.

 

(G)                                 NOTICES OF RECORD DATE.  UPON (I) THE
ESTABLISHMENT BY THE COMPANY OF A RECORD OF THE HOLDERS OF ANY CLASS OF
SECURITIES FOR THE PURPOSE OF DETERMINING THE HOLDERS THEREOF WHO ARE ENTITLED
TO RECEIVE ANY DIVIDEND OR OTHER DISTRIBUTION, OR (II) ANY CAPITAL
REORGANIZATION OF THE COMPANY, ANY RECLASSIFICATION OR RECAPITALIZATION OF THE
CAPITAL STOCK OF THE COMPANY, ANY MERGER OR CONSOLIDATION OF THE COMPANY WITH OR
INTO ANY OTHER COMPANY, OR ANY TRANSFER OF ALL OR SUBSTANTIALLY ALL THE ASSETS
OF THE COMPANY TO ANY OTHER PERSON OR ANY VOLUNTARY OR INVOLUNTARY DISSOLUTION,
LIQUIDATION OR WINDING UP OF THE COMPANY, THE COMPANY SHALL MAIL TO THE HOLDER
AT LEAST 20 DAYS PRIOR TO THE RECORD DATE SPECIFIED THEREIN A NOTICE SPECIFYING
(A) THE DATE ON WHICH ANY SUCH RECORD IS TO BE TAKEN FOR THE PURPOSE OF SUCH
DIVIDEND OR DISTRIBUTION AND A DESCRIPTION OF SUCH DIVIDEND OR DISTRIBUTION, (B)
THE DATE ON WHICH ANY SUCH REORGANIZATION, RECLASSIFICATION, TRANSFER,
CONSOLIDATION, MERGER, DISSOLUTION, LIQUIDATION OR WINDING UP IS EXPECTED TO
BECOME EFFECTIVE, AND (C) THE DATE, IF ANY, THAT IS TO BE FIXED AS TO WHEN THE
HOLDERS OF RECORD OF COMMON STOCK (OR OTHER SECURITIES), SHALL BE ENTITLED TO
EXCHANGE THEIR SHARES OF COMMON STOCK (OR OTHER SECURITIES), FOR SECURITIES OR
OTHER PROPERTY DELIVERABLE UPON SUCH REORGANIZATION, RECLASSIFICATION TRANSFER,
CONSOLIDATION, MERGER, DISSOLUTION, LIQUIDATION OR WINDING UP.

 

(H)                                 NO IMPAIRMENT.  THE COMPANY SHALL NOT AMEND
ITS ARTICLES OF INCORPORATION OR PARTICIPATE IN ANY REORGANIZATION, TRANSFER OF
ASSETS, CONSOLIDATION, MERGER, DISSOLUTION, ISSUE OR SALE OF SECURITIES OR ANY
OTHER VOLUNTARY ACTION FOR THE PURPOSE OF AVOIDING OR SEEKING TO AVOID THE
OBSERVANCE OR PERFORMANCE OF ANY OF THE TERMS TO BE OBSERVED OR PERFORMED
HEREUNDER BY THE COMPANY, BUT SHALL AT ALL TIMES IN GOOD FAITH ASSIST IN
CARRYING OUT ALL SUCH ACTION AS MAY BE REASONABLY NECESSARY OR

 

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appropriate in order to protect the conversion rights of the Holders of this
Note against dilution or other impairment as provided herein.

 

8.                                       SUCCESSORS AND ASSIGNS.  SUBJECT TO THE
RESTRICTIONS ON TRANSFER DESCRIBED IN SECTIONS 10 AND 11 HEREOF, THE RIGHTS AND
OBLIGATIONS OF THE COMPANY AND THE HOLDER OF THIS NOTE SHALL BE BINDING UPON AND
BENEFIT THE SUCCESSORS, ASSIGNS, HEIRS, ADMINISTRATORS AND TRANSFEREES OF THE
PARTIES.

 

9.                                       WAIVER AND AMENDMENT.  ANY PROVISION OF
THIS NOTE MAY BE AMENDED, WAIVED OR MODIFIED UPON THE WRITTEN CONSENT OF THE
COMPANY AND THE HOLDER.

 

10.                                 TRANSFER OF THIS NOTE OR SECURITIES ISSUABLE
ON CONVERSION HEREOF.  THIS NOTE MAY NOT BE TRANSFERRED IN VIOLATION OF ANY
RESTRICTIVE LEGEND SET FORTH HEREON.  EACH NEW NOTE ISSUED UPON TRANSFER OF THIS
NOTE OR SECURITIES ISSUABLE ON CONVERSION OF THIS NOTE SHALL BEAR A LEGEND AS TO
THE APPLICABLE RESTRICTIONS ON TRANSFERABILITY IN ORDER TO ENSURE COMPLIANCE
WITH THE SECURITIES ACT, UNLESS IN THE OPINION OF COUNSEL FOR THE COMPANY SUCH
LEGEND IS NOT REQUIRED IN ORDER TO ENSURE COMPLIANCE WITH THE SECURITIES ACT. 
THE COMPANY MAY ISSUE STOP TRANSFER INSTRUCTIONS TO ITS TRANSFER AGENT IN
CONNECTION WITH SUCH RESTRICTIONS.  SUBJECT TO THE FOREGOING, TRANSFERS OF THIS
NOTE SHALL BE REGISTERED UPON REGISTRATION BOOKS MAINTAINED FOR SUCH PURPOSE BY
OR ON BEHALF OF THE COMPANY.  PRIOR TO PRESENTATION OF THIS NOTE FOR
REGISTRATION OF TRANSFER, THE COMPANY SHALL TREAT THE REGISTERED HOLDER HEREOF
AS THE OWNER AND HOLDER OF THIS NOTE FOR THE PURPOSE OF RECEIVING ALL PAYMENTS
OF PRINCIPAL AND INTEREST HEREON AND FOR ALL OTHER PURPOSES WHATSOEVER, WHETHER
OR NOT THIS NOTE SHALL BE OVERDUE AND THE COMPANY SHALL NOT BE AFFECTED BY
NOTICE TO THE CONTRARY.

 

11.                                 ASSIGNMENT BY THE COMPANY.  NEITHER THIS
NOTE NOR ANY OF THE RIGHTS, INTERESTS OR OBLIGATIONS HEREUNDER MAY BE ASSIGNED,
BY OPERATION OF LAW OR OTHERWISE, IN WHOLE OR IN PART, BY THE COMPANY, WITHOUT
THE PRIOR WRITTEN CONSENT OF THE HOLDER.

 

12.                                 TREATMENT OF NOTE.  TO THE EXTENT PERMITTED
BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, THE COMPANY WILL TREAT, ACCOUNT AND
REPORT THE NOTE AS DEBT AND NOT EQUITY FOR ACCOUNTING PURPOSES AND WITH RESPECT
TO ANY RETURNS FILED WITH FEDERAL, STATE OR LOCAL TAX AUTHORITIES.

 

13.                                 NOTICES.  ANY NOTICE, REQUEST OR OTHER
COMMUNICATION REQUIRED OR PERMITTED HEREUNDER SHALL BE IN WRITING AND SHALL BE
DEEMED TO HAVE BEEN DULY GIVEN IF PERSONALLY DELIVERED OR MAILED BY REGISTERED
OR CERTIFIED MAIL, POSTAGE PREPAID, OR BY RECOGNIZED OVERNIGHT COURIER, PERSONAL
DELIVERY OR FACSIMILE TRANSMISSION AT THE RESPECTIVE ADDRESSES OR FACSIMILE
NUMBER OF THE PARTIES AS SET FORTH IN OR OTHERWISE DESIGNATED BY EITHER PARTY
PURSUANT TO THE PURCHASE AGREEMENT OR ON THE REGISTER MAINTAINED BY THE
COMPANY.  ANY PARTY HERETO MAY BY NOTICE SO GIVEN CHANGE ITS ADDRESS OR
FACSIMILE NUMBER FOR FUTURE NOTICE HEREUNDER.  NOTICE SHALL CONCLUSIVELY BE
DEEMED TO HAVE BEEN GIVEN WHEN RECEIVED.

 

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14.                                 EXPENSES; WAIVERS.  IF ACTION IS INSTITUTED
TO COLLECT THIS NOTE, THE COMPANY PROMISES TO PAY ALL COSTS AND EXPENSES,
INCLUDING, WITHOUT LIMITATION, REASONABLE ATTORNEYS’ FEES AND COSTS, INCURRED IN
CONNECTION WITH SUCH ACTION.  THE COMPANY HEREBY WAIVES NOTICE OF DEFAULT,
PRESENTMENT OR DEMAND FOR PAYMENT, PROTEST OR NOTICE OF NONPAYMENT OR DISHONOR
AND ALL OTHER NOTICES OR DEMANDS RELATIVE TO THIS INSTRUMENT.

 

15.                                 GOVERNING LAW; EXCLUSIVE JURISDICTION; JURY
WAIVER.  THIS NOTE AND ALL ACTIONS ARISING OUT OF OR IN CONNECTION WITH THIS
NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF NEW YORK.  IN THE EVENT OF ANY DISPUTE AMONG OR BETWEEN ANY OF THE PARTIES TO
THIS NOTE ARISING OUT OF THE TERMS OF THIS NOTE, THE PARTIES HEREBY CONSENT TO
THE EXCLUSIVE JURISDICTION OF THE COURTS LOCATED IN THE COUNTY OF NEW YORK,
STATE OF NEW YORK, OR THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT
OF NEW YORK FOR RESOLUTION OF SUCH DISPUTE, AND AGREE NOT TO CONTEST SUCH
EXCLUSIVE JURISDICTION OR SEEK TO TRANSFER ANY ACTION RELATING TO SUCH DISPUTE
TO ANY OTHER JURISDICTION. THE COMPANY AND THE HOLDER AGREE TO ACCEPT SERVICE OF
PROCESS PURSUANT TO THE PROCEDURES SET FORTH IN SECTION 13.  THE PARTIES HERETO
WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR
DEFEND ANY RIGHTS UNDER THIS NOTE.

 

[signature appears on following page]

 

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IN WITNESS WHEREOF, THE COMPANY HAS CAUSED THIS NOTE TO BE AMENDED AND RESTATED
AS OF THE DATE FIRST WRITTEN ABOVE.

 

 

IMAGEWARE SYSTEMS, INC.

 

 

 

 

 

By:

/s/  S. James Miller, Jr.

 

 

 

 

Name:

S. James Miller, Jr.

 

 

 

Title:

Chairman, CEO and President

 

 

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