EX-10..5






THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS NOTE AND THE
COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT
AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
PACIFIC BIOMETRICS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.



SECURED CONVERTIBLE TERM NOTE




FOR VALUE RECEIVED, PACIFIC BIOMETRICS, INC., a Delaware corporation (the “Borrower”), hereby
promises to pay to LAURUS MASTER FUND, LTD., c/o Ironshore Corporate Services Ltd., P.O. Box 1234
G.T., Queensgate House, South Church Street, Grand Cayman, Cayman Islands, Fax: 345-949-9877 (the
“Holder”) or its registered assigns or successors in interest, on order, the sum of One Million
Five Hundred Thousand Dollars ($1,500,000.00), together with any accrued and unpaid interest
hereon, on January 31, 2008 (the “Maturity Date”) if not sooner paid.



Capitalized terms used herein without definition shall have the meanings ascribed to such
terms in that certain Securities Purchase Agreement dated as of the date hereof between the
Borrower and the Holder (the “Purchase Agreement”).



The following terms shall apply to this Note:



ARTICLE I

INTEREST & AMORTIZATION




1.1(a) Interest Rate. Subject to Sections 4.11 and 5.6 hereof, interest payable on
this Note shall accrue from the date hereof to the Maturity Date at a rate per annum (the “Interest
Rate”) equal to the “prime rate” published in The Wall Street Journal from time to time,
plus two percent (2%). The prime rate shall be increased or decreased as the case may be for each
increase or decrease in the prime rate in an amount equal to such increase or decrease in the prime
rate; each change to be effective as of the day of the change in such rate. Interest shall be (i)
calculated on the basis of a 360 day year, and (ii) payable monthly, in arrears, commencing on
March 1, 2005 and on the first business day of each consecutive calendar month thereafter until the
Maturity Date (and on the Maturity Date), whether by acceleration or otherwise (each, a “Repayment
Date”).



1.1 (b) Interest Rate Adjustment. The Interest Rate shall be calculated on the last
business day of each month hereafter until the Maturity Date (each a “Determination Date”) and
shall be subject to adjustment as set forth herein. If (i) the Borrower shall have registered the
shares of the Borrower’s common stock underlying each of the conversion of the Note and that
certain warrant issued to Holder on a registration statement declared effective by the Securities
and Exchange Commission (the “SEC”), and (ii) the market price (the “Market Price”) of the Common
Stock as reported by Bloomberg, L.P. on the Principal Market (as defined below) for the five (5)
trading days immediately preceding a Determination Date exceeds the then applicable Fixed
Conversion Price by at least twenty five percent (25%), the Interest Rate for the succeeding
calendar month shall automatically be reduced by 200 basis points (200 b.p.) (2.0.%) for each
incremental twenty five percent (25%) increase in the Market Price of the Common Stock above the
then applicable Fixed Conversion Price. If (i) the Borrower shall not have registered the shares of
the Borrower’s common stock underlying the conversion of the Note and that certain warrant issued
to Holder on a registration statement declared effective by the SEC and which remains effective,
and (ii) the Market Price of the Common Stock as reported by Bloomberg, L.P. on the principal
market for the five (5) trading days immediately preceding a Determination Date exceeds the then
applicable Fixed Conversion Price by at least twenty five percent (25%), the Interest Rate for the
succeeding calendar month shall automatically be decreased by 100 basis points (100 b.p.) (1.0.%)
for each incremental twenty five percent (25%) increase in the Market Price of the Common Stock
above the then applicable Fixed Conversion Price. Notwithstanding the foregoing (and anything to
the contrary contained in herein), in no event shall the Interest Rate be less than zero percent
(0%).



1.2 Minimum Monthly Principal Payments. Amortizing payments of the aggregate
principal amount outstanding under this Note at any time (the “Principal Amount”) shall begin on
August 1, 2005 and shall recur on the first business day of each succeeding month thereafter until
the Maturity Date (each, an “Amortization Date”). Subject to Article 3 below, beginning on the
first Amortization Date, the Borrower shall make monthly payments to the Holder on each Repayment
Date, each in the amount of $50,000.00, together with any accrued and unpaid interest to date on
such portion of the Principal Amount plus any and all other amounts which are then owing under this
Note, the Purchase Agreement or any other Related Agreement but have not been paid (collectively,
the “Monthly Amount”). Any Principal Amount that remains outstanding on the Maturity Date shall be
due and payable on the Maturity Date.



ARTICLE II

CONVERSION REPAYMENT




2.1 (a) Payment of Monthly Amount in Cash or Common Stock. Each month by the fifth
(5th) business day prior to each Amortization Date (the “Notice Date”), the Holder shall
deliver to Borrower a written notice in the form of Exhibit B attached hereto converting the
Monthly Amount payable on the next Repayment Date in either cash or Common Stock, or a combination
of both (each, a “Repayment Notice”). If a Repayment 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 102% of the principal portion of the
Monthly Amount due and owing to Holder on the Repayment Date. If the Holder converts all or a
portion of the Monthly Amount in shares of Common Stock as provided herein, 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 Fixed Conversion Price. For purposes hereof, the initial “Fixed
Conversion Price” means $1.17 (which has been determined on the date of this Note as an amount
equal to 102% of the average closing price for the ten (10) trading days immediately prior to the
date of this Note).



(b) Monthly Amount Conversion Guidelines. Subject to Sections 2.1(a), 2.2, and 3.2
hereof, the Holder shall convert all or a portion of the Monthly Amount due on each Repayment Date
in shares of Common Stock if the average closing price of the Common Stock as reported by
Bloomberg, L.P. on the Principal Market for the five (5) trading days immediately preceding such
Repayment Date was greater than or equal to 115% of the Fixed Conversion Price, provided, however,
that such conversions shall not exceed twenty five percent (25%) of the aggregate dollar trading
volume of the Common Stock for the five (5) day trading period immediately preceding delivery of a
Notice of Conversion to the Borrower. Any part of the Monthly Amount due on a Repayment Date that
the Holder has not converted into shares of Common Stock shall be paid by the Borrower in cash on
such Repayment Date. Any part of the Monthly Amount due on such Repayment Date which must be paid
in cash (as a result of the closing price of the Common Stock on one or more of the five (5)
trading days preceding the applicable Repayment Date being less than 115% of the Fixed Conversion
Price) shall be paid in cash, within three (3) business days of the applicable Repayment Date.



2.2 No Effective Registration. Notwithstanding anything to the contrary herein, none
of the Borrower’s obligations to the Holder may be converted into Common Stock unless (i) either
(x) an effective current Registration Statement (as defined in the Registration Rights Agreement)
covering the shares of Common Stock to be issued in connection with satisfaction of such
obligations exists or (y) an exemption from registration of the Common Stock is available to
pursuant to Rule 144 of the Securities Act and (ii) no Event of Default hereunder exists and is
continuing, unless such Event of Default is cured within any applicable cure period or is
otherwise waived in writing by the Holder in whole or in part at the Holder’s option.



Any amounts converted by the Holder pursuant to this Section 2.2 shall be deemed to constitute
payments of outstanding fees, interest and principal arising in connection with Monthly Amounts for
the remaining Repayment Dates, in chronological order.



2.3 Optional Redemption in Cash. The Borrower will have the option of prepaying this
Note (“Optional Redemption”) by paying to the Holder a sum of money equal to one hundred thirty
percent (130%) of the then outstanding principal amount of this Note together with accrued but
unpaid interest thereon and any and all other sums due, accrued or payable to the Holder arising
under this Note, the Purchase Agreement, or any Related Agreement (the “Redemption Amount”)
outstanding on the day written notice of redemption (the “Notice of Redemption”) is given to the
Holder. The Notice of Redemption shall specify the date for such Optional Redemption (the
“Redemption Payment Date”) which date shall be seven (7) business days after the date of the Notice
of Redemption (the “Redemption Period”). A Notice of Redemption shall not be effective with respect
to any portion of this Note for which the Holder has a pending election to convert pursuant to
Section 3.1, or for conversions initiated or made by the Holder pursuant to Section 3.1 during the
Redemption Period. The Redemption Amount shall be determined as if such Holder’s conversion
elections had been completed immediately prior to the date of the Notice of Redemption. On the
Redemption Payment Date, the Redemption Amount must be paid in good funds to the Holder. In the
event the Borrower fails to pay the Redemption Amount on the Redemption Payment Date as set forth
herein, then such Redemption Notice will be null and void.



ARTICLE III

CONVERSION RIGHTS




3.1. Holder’s Conversion Rights. The Holder shall have the right, but not the
obligation, to convert all or any portion of the then aggregate outstanding principal amount of
this Note, together with interest and fees due hereon, into shares of Common Stock subject to the
terms and conditions set forth in this Article III. The Holder may exercise such right by delivery
to the Borrower of a written notice of conversion not less than one (1) day prior to the date upon
which such conversion shall occur.



3.2 Conversion Limitation. Notwithstanding anything contained herein to the contrary,
the Holder shall not be entitled to convert pursuant to the terms of this Note an amount that would
be convertible into that number of Conversion Shares which would exceed the difference between the
number of shares of Common Stock beneficially owned by such Holder or issuable upon exercise of
warrants held by such Holder and 4.99% of the outstanding shares of Common Stock of the Borrower.
For the purposes of the immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Exchange Act and Regulation 13d-3 thereunder. The Holder may
void the Conversion Share limitation described in this Section 3.2 upon 75 days prior notice to the
Borrower or without any notice requirement upon an Event of Default.



3.3 Mechanics of Holder’s Conversion. (a) In the event that the Holder elects to
convert this Note into Common Stock, the Holder shall give notice of such election by delivering an
executed and completed notice of conversion (“Notice of Conversion”) to the Borrower and such
Notice of Conversion shall provide a breakdown in reasonable detail of the Principal Amount,
accrued interest and fees being converted. On each Conversion Date (as hereinafter defined) and in
accordance with its Notice of Conversion, the Holder shall make the appropriate reduction to the
Principal Amount, accrued interest and fees as entered in its records and shall provide written
notice thereof to the Borrower within two (2) business days after the Conversion Date. Each date on
which a Notice of Conversion is delivered or telecopied to the Borrower in accordance with the
provisions hereof shall be deemed a Conversion Date (the “Conversion Date”). A form of Notice of
Conversion to be employed by the Holder is annexed hereto as Exhibit A.



(b) Pursuant to the terms of the Notice of Conversion, the Borrower will issue instructions to
the transfer agent accompanied by an opinion of counsel within one (1) business day of the date of
the delivery to Borrower of the Notice of Conversion and 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
Borrower of the Notice of Conversion (the “Delivery Date”). In the case of the exercise of the
conversion rights set forth herein the conversion privilege shall be deemed to have been exercised
and the Conversion Shares issuable upon such conversion shall be deemed to have been issued upon
the date of receipt by the Borrower of the Notice of Conversion. The Holder shall be treated for
all purposes as the record holder of such Common Stock, unless the Holder provides the Borrower
written instructions to the contrary.




3.4 Conversion Mechanics.



(a) The number of shares of Common Stock to be issued upon each conversion of this Note shall
be determined by dividing that portion of the principal and interest and fees to be converted, if
any, by the then applicable Fixed Conversion Price. In the event of any conversions of outstanding
principal amount under this Note in part pursuant to this Article III, such conversions shall be
deemed to constitute conversions of outstanding principal amount applying to Monthly Amounts for
the remaining Repayment Dates in chronological order. By way of example, if the original principal
amount of this Note is $1,500,000 and the Holder converted $100,000 of such original principal
amount prior to the first Repayment Date, then (1) the principal amount of the Monthly Amount due
on the first Repayment Date would equal $0, (2) the principal amount of the Monthly Amount due on
the second Repayment Date would equal $0 and (3) the principal amount of the Monthly Amount due on
the third Repayment Dates would be $50,000.00.



(b) The Fixed Conversion Price and number and kind of shares or other securities to be issued
upon conversion is subject to adjustment from time to time upon the occurrence of certain events,
as follows:



A. Stock Splits, Combinations and Dividends. If the shares of Common Stock are
subdivided or combined into a greater or smaller number of shares of Common Stock, or if a dividend
is paid on the Common Stock in shares of Common Stock, the Fixed Conversion Price or the Conversion
Price, as the case may be, shall be proportionately reduced in case of subdivision of shares or
stock dividend or proportionately increased in the case of combination of shares, in each such case
by the ratio which the total number of shares of Common Stock outstanding immediately after such
event bears to the total number of shares of Common Stock outstanding immediately prior to such
event.



B. Borrower Covenants. During the period the conversion right exists, the Borrower will
reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for
the issuance of Common Stock upon the full conversion of this Note. The Borrower represents that
upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. The
Borrower agrees that its issuance of this Note shall constitute full authority to its officers,
agents, and transfer agents who are charged with the duty of executing and issuing stock
certificates to execute and issue the necessary certificates for shares of Common Stock upon the
conversion of this Note.



C. Share Issuances. Subject to the provisions of this Section 3.4, if the Borrower
shall at any time prior to the conversion or repayment in full of the Principal Amount issue any
shares of Common Stock or securities convertible into Common Stock to a person other than
the Holder (except (i) pursuant to Subsections A or B above; (ii) pursuant to currently outstanding
options, warrants, or other rights to acquire the Common Stock of the Borrower outstanding on the
date hereof as disclosed in the Borrower’s Securities Exchange Act of 1934 filings or as disclosed
to to Holder in writing; or (iii) pursuant to securities that may be issued under any employee
stock option and/or any stock plan adopted by the Borrower) (iv) pursuant to stock options and/or
stock granted under the Borrower’s stock option plan for Borrower’s officers, directors, employees
and advisors pursuant to arrangements, plans or contracts approved by the Borrower’s board of
directors; (v) upon conversion of any preferred stock of the Borrower outstanding on the date
hereof, or (vi) in connection with acquisition transactions approved by the Borrower’s board of
directors provided, however, that the aggregate consideration for any individual acquisition f
shall not exceed $2,500,000 in the aggregate, without the prior written consent of Laurus, which
consent shall not be unreasonably withheld) for a consideration per share (the “Offer Price”) less
than the Fixed Conversion Price in effect at the time of such issuance, then the Fixed Conversion
Price shall be immediately reset to such lower Offer Price. For purposes hereof, the issuance of
any security of the Borrower convertible into or exercisable or exchangeable for Common Stock shall
result in an adjustment to the Fixed Conversion Price at the time of issuance of such securities.



D. Reclassification, etc. If the Borrower at any time shall, by reclassification or
otherwise, change the Common Stock into the same or a different number of securities of any class
or classes, this Note, as to the unpaid Principal Amount and accrued interest thereon, shall
thereafter be deemed to evidence the right to purchase an adjusted number of such securities and
kind of securities as would have been issuable as the result of such change with respect to the
Common Stock immediately prior to such reclassification or other change.



3.5 Issuance of New Note. Upon any partial conversion of this Note, a new Note
containing the same date and provisions of this Note shall, at the request of the Holder, be issued
by the Borrower to the Holder for the principal balance of this Note and interest which shall not
have been converted or paid. The Borrower will pay no costs, fees or any other consideration to the
Holder for the production and issuance of a new Note.



ARTICLE IV

EVENTS OF DEFAULT




Upon the occurrence and continuance of an Event of Default beyond any applicable grace period,
the Holder may make all sums of principal, interest and other fees then remaining unpaid hereon and
all other amounts payable hereunder immediately due and payable. In the event of such an
acceleration, within five (5) days after written notice from Holder to Borrower (each occurrence
being a “Default Notice Period”) the amount due and owing to the Holder shall be 130% of the
outstanding principal amount of the Note (plus accrued and unpaid interest and fees, if any) (the
“Default Payment”). If, with respect to any Event of Default, the Borrower cures the Event of
Default, the Event of Default will be deemed to no longer exist and any rights and remedies of
Holder pertaining to such Event of Default will be of no further force or effect. The Default
Payment shall be applied first to any fees due and payable to Holder pursuant to the Note or the
Related Agreements, then to accrued and unpaid interest due on the Note and then to outstanding
principal balance of the Note.



The occurrence of any of the following events set forth in Sections 4.1 through 4.10,
inclusive, is an “Event of Default”:



4.1 Failure to Pay Principal, Interest or other Fees. The Borrower fails to pay when
due any installment of principal, interest or other fees hereon in accordance herewith, or the
Borrower fails to pay when due any amount due under any other promissory note issued by Borrower,
and in any such case, such failure shall continue for a period of three (3) days following the date
upon which any such payment was due.



4.2 Breach of Covenant. The Borrower breaches any covenant or any other term or
condition of this Note or the Purchase Agreement in any material respect, or the Borrower or any of
its Subsidiaries breaches any covenant or any other term or condition of any Related Agreement in
any material respect and, any such case, such breach, if subject to cure, continues for a period of
thirty (30) days after the occurrence thereof.



4.3 Breach of Representations and Warranties. Any representation or warranty made by
the Borrower in this Note or the Purchase Agreement, or by the Borrower or any of its Subsidiaries
in any Related Agreement, shall, in any such case, be false or misleading in any material respect
on the date that such representation or warranty was made or deemed made.



4.4 Receiver or Trustee. The Borrower or any of its Subsidiaries shall make an
assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver
or trustee for it or for a substantial part of its property or business; or such a receiver or
trustee shall otherwise be appointed.



4.5 Judgments. Any money judgment, writ or similar final process shall be entered or
filed against the Borrower or any of its Subsidiaries or any of their respective property or other
assets for more than $250,000, and shall remain unvacated, unbonded or unstayed for a period of
forty four (44) days.



4.6 Bankruptcy. Borrower shall (i) apply for, consent to, or suffer to exist the
appointment of, or the taking of possession by, a receiver, custodian, trustee, liquidator or other
fiduciary of itself or of all or a substantial part of its property, (ii) make a general assignment
for the benefit of creditors, (iii) commence a voluntary case under any state or federal bankruptcy
laws (as now or hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a
petition seeking to take advantage of any other law providing for the relief of debtors, (vi)
acquiesce to, or fail to have dismissed, within sixty (60) days, any petition filed against it in
any involuntary case under such bankruptcy laws, or (vii) take any action for the purpose of
effecting any of the.



4.7 Stop Trade. An SEC stop trade order or Principal Market trading suspension of the
Common Stock shall be in effect for five (5) consecutive days or five (5) days during a period of
ten (10) consecutive days, excluding in all cases a suspension of all trading on a Principal
Market, provided that the Borrower shall not have been able to cure such trading suspension
within thirty (30) days of the notice thereof or list the Common Stock on another Principal Market
within sixty (60) days of such notice. The “Principal Market” for the Common Stock shall include
the NASD OTC Bulletin Board, NASDAQ SmallCap Market, NASDAQ National Market System, American Stock
Exchange, or New York Stock Exchange (whichever of the foregoing is at the time the principal
trading exchange or market for the Common Stock, or any securities exchange or other securities
market on which the Common Stock is then being listed or traded.



4.8 Failure to Deliver Common Stock or Replacement Note. The Borrower shall fail
(i) to timely deliver Common Stock to the Holder pursuant to and in the form required by this Note,
and Section 9 of the Purchase Agreement, if such failure to timely deliver Common Stock shall not
be cured within two (2) business days or (ii) to deliver a replacement Note to Holder within seven
(7) business days following receipt by Borrower of notice from Holder of the required date of such
issuance pursuant to this Note, the Purchase Agreement or any Related Agreement (to the extent
required under such agreements).



4.9 Default Under Related Agreements or Other Agreements. The occurrence and
continuance of any Event of Default (as defined in any Related Agreement) or any event of default
(or similar term) under any other indebtedness.



DEFAULT RELATED PROVISIONS




4.11 Payment Grace Period. Following the occurrence and continuance of an Event of
Default beyond any applicable cure period hereunder, the Borrower shall pay the Holder a default
interest rate of one and one half percent (1.5%) per month on all amounts due and owing under the
Note, which default interest shall be payable upon demand.



4.12 Conversion Privileges. The conversion privileges set forth in Article III shall
remain in full force and effect immediately from the date hereof and until this Note is paid in
full.




4.13 Cumulative Remedies. The remedies under this Note shall be cumulative.



ARTICLE V

MISCELLANEOUS




5.1 Failure or Indulgence Not Waiver. No failure or delay on the part of the Holder
hereof 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. All rights and
remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.



5.2 Notices. Any notice herein required or permitted to be given shall be in writing
and shall be deemed effectively given: (a) upon personal delivery to the party notified, (b) when
sent by confirmed telex or facsimile if sent during normal business hours of the recipient, if not,
then on the next business day, (c) five days after having been sent by registered or certified
mail, return receipt requested, postage prepaid, or (d) one day after deposit with a nationally
recognized overnight courier, specifying next day delivery, with written verification of receipt.
All communications shall be sent to the Borrower at the address provided in the Purchase Agreement
executed in connection herewith with a copy to Cairncross and Hempleman, P.S. 254 Second Avenue
#500 Seattle, WA 98104 Attn: Tim Woodland, and to the Holder at the address provided in the
Purchase Agreement for such Holder, with a copy to John E. Tucker, Esq., 825 Third Avenue,
14th Floor, New York, New York 10022, facsimile number (212) 541-4434, or at such other
address as the Borrower or the Holder may designate by ten days advance written notice to the other
parties hereto. A Notice of Conversion shall be deemed given when made to the Borrower pursuant to
the Purchase Agreement.



5.3 Amendment Provision. The term “Note” and all reference thereto, as used
throughout this instrument, shall mean this instrument as originally executed, or if later amended
or supplemented, then as so amended or supplemented, and any successor instrument issued pursuant
to Section 3.5 hereof, as it may be amended or supplemented.



5.4 Assignability. This Note shall be binding upon the Borrower and its successors
and assigns, and shall inure to the benefit of the Holder and its successors and assigns, and may
be assigned by the Holder so long as (i) no assignment may be made to a competitor of the Borrower
and (ii) the Holder shall make no more than two (2) assignments hereof in the aggregate . This Note
shall not be assigned by the Borrower without the consent of the Holder.



5.5 Governing Law. This Note shall be governed by and construed in accordance with
the laws of the State of New York, without regard to principles of conflicts of laws. Any action
brought by either party against the other concerning the transactions contemplated by this
Agreement shall be brought only in the state courts of New York or in the federal courts located in
the state of New York. Both parties and the individual signing this Note on behalf of the Borrower
agree to submit to the jurisdiction of such courts. The prevailing party shall be entitled to
recover from the other party its reasonable attorney’s fees and costs. In the event that any
provision of this Note is invalid or unenforceable under any applicable statute or rule of law,
then such provision shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law. Any such provision which may
prove invalid or unenforceable under any law shall not affect the validity or unenforceability of
any other provision of this Note. Nothing contained herein shall be deemed or operate to preclude
the Holder from bringing suit or taking other legal action against the Borrower in any other
jurisdiction to collect on the Borrower’s obligations to Holder, to realize on any collateral or
any other security for such obligations, or to enforce a judgment or other court in favor of the
Holder.



5.6 Maximum Payments. Nothing contained herein shall be deemed to establish or
require the payment of a rate of interest or other charges in excess of the maximum permitted by
applicable law. In the event that the rate of interest required to be paid or other charges
hereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be
credited against amounts owed by the Borrower to the Holder and thus refunded to the Borrower.



5.7 Security Interest and Guarantee. The Holder has been granted a security interest
(i) in certain assets of the Borrower and its Subsidiaries as more fully described in the Master
Security Agreement dated as of the date hereof and (ii) pursuant to the Stock Pledge Agreement
dated as of the date hereof. The obligations of the Borrower under this Note are guaranteed by
certain Subsidiaries of the Borrower pursuant to the Subsidiary Guaranty dated as of the date
hereof.



5.8 Construction. Each party acknowledges that its legal counsel participated in the
preparation of this Note and, therefore, stipulates that the rule of construction that ambiguities
are to be resolved against the drafting party shall not be applied in the interpretation of this
Note to favor any party against the other.



5.9 Cost of Collection. If default is made in the payment of this Note, the Borrower
shall pay to Holder reasonable costs of collection, including reasonable attorney’s fees.



[Balance of page intentionally left blank; signature page follows.]






1






IN WITNESS WHEREOF, the Borrower has caused this Convertible Term Note to be signed in its
name effective as of this 31st day of January, 2005.



	 	 	 
	PACIFIC BIOMETRICS, INC.
	By:

Name:

Title:

	 	/s/ Ronald R. Helm

Ronald R. Helm

Chief Executive Officer







WITNESS:



     



2



EXHIBIT A




NOTICE OF CONVERSION




(To be executed by the Holder in order to convert all or part of the Note into Common Stock



[Name and Address of Holder]



The Undersigned hereby converts $     of the principal due on [specify applicable Repayment
Date] under the Convertible Term Note issued by PACIFIC BIOMETRICS, INC. dated January 31, 2005 by
delivery of Shares of Common Stock of PACIFIC BIOMETRICS, INC. on and subject to the conditions set
forth in Article III of such Note.



	 	 	 	 	 	 	 	 	 
	1.
	 	Date of Conversion                 
	 	 	—	 
	2.
	 	Shares To Be Delivered:            
	 	 	—	 








By:     


Name:     


Title:     



3




EXHIBIT B




CONVERSION NOTICE




(To be executed by the Holder in order to convert all or part of a Monthly Amount into Common
Stock)



[Name and Address of Holder]



Holder hereby converts $     of the Monthly Amount due on [specify applicable Repayment Date]
under the Convertible Term Note issued by PACIFIC BIOMETRICS, INC. dated January 31, 2005 by
delivery of Shares of Common Stock of PACIFIC BIOMETRICS, INC. on and subject to the conditions set
forth in Article III of such Note.



	 	 	 	 	 
	1.Fixed Conversion Price:
	 	$	—	 
	2.Amount to be paid:
	 	$	—	 
	3.Shares To Be Delivered (2 divided by 1):__________________

	4. Cash payment to be made by Borrower :$_____________________

	Date: ____________
	 	LAURUS  MASTER FUND, LTD.








By:     


Name:     


Title:     




4