Filed by Automated Filing Services Inc. (604) 609-0244 - Snocone Systems Inc. - Exhibit 4.4


 



  
    
       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 

	 San Diego, California  	  
	 April 29, 2005  	  $625,000  




                          FOR
  VALUE RECEIVED, SNOCONE SYSTEMS INC., a Nevada corporation (hereinafter
  called the “Borrower”), hereby promises to pay to the order
  of AJW Offshore, Ltd. or registered assigns (the “Holder”)
  the sum of $625,000, on April 29, 2008 (the “Maturity Date”),
  and to pay interest on the unpaid principal balance hereof at the rate of eight
  percent (8%) (the “Interest Rate”) per annum from April 29,
  2005 (the “Issue Date”) until the same becomes due and payable,
  whether at maturity or upon acceleration or by prepayment or otherwise. 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 quarterly
  provided that no interest shall be due and payable for any month in which the
  Trading Price (as such term is defined below) is greater than $1.3375 for
  each Trading Day (as such term is defined below) of the month. All payments
  due hereunder (to the extent not converted into common stock, $.001 par
  value per share (the “Common Stock”) in accordance with the
  terms hereof) shall be made in lawful money of the United States of America
  provided that interest due and payable for the first six (6) months following
  the Issue Date shall be paid on the date hereof. 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 April 29, 2005, pursuant to which this
  Note was originally issued (the “Purchase Agreement”). 

                          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 Security Agreement and Intellectual Property Security
  Agreement, each dated April 29, 2005 by and between the Borrower and the Holder.


                          The
  following terms shall apply to this Note: 

 ARTICLE I. CONVERSION RIGHTS 

                          1.1          
  Conversion Right. 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
  III) pursuant to Section 1.6(a) or Article III, the Optional Prepayment Amount
  (as defined in Section 5.1 or any payments pursuant to Section 1.7, each in
  respect of the remaining outstanding principal amount of this Note to convert
  all or any part of the outstanding and unpaid 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 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 4.99% of the outstanding shares of Common Stock
  and provided further that the Holder shall not be entitled to
  convert any portion of this Note during any month immediately succeeding a Determination
  Date on which the Borrower exercises its prepayment option pursuant to Section
  5.2 of this Note. 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 




 1.4 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 1.3 and 1.4(g) hereof or
  pursuant to Section 2(c) of that certain Registration Rights Agreement, dated
  as of April 29, 2005, executed in connection with the initial issuance of this
  Note and the other Notes issued on the Issue Date (the “Registration
  Rights Agreement”). The term “Determination Date” means
  the last business day of each month after the Issue Date. 

                          1.2          
  Conversion Price. 

                                                  (a)          
  Calculation of Conversion Price. The Conversion Price
  shall be the lesser of (i) the Variable Conversion Price (as defined herein)
  and (ii) the Fixed Conversion 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). 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 lowest three (3) Trading Prices (as defined below) for the
  Common Stock during the twenty (20) Trading Day period ending one Trading Day
  prior to the date the Conversion Notice is sent by the Holder to the Borrower
  via facsimile (the “Conversion Date”). “Trading
  Price” means, for any security as of any date, the intraday trading
  price on the Over-the-Counter Bulletin Board (the “OTCBB”)
  as reported by a reliable reporting service mutually acceptable to and hereafter
  designated by Holders of a majority in interest of the Notes and the Borrower
  or, if the OTCBB is not the principal trading market for such security, the
  intraday trading price of such security on the principal securities exchange
  or trading market where such security is listed or traded or, if no intraday
  trading price of such security is available in any of the foregoing manners,
  the average of the intraday trading prices of any market makers for such security
  that are listed in the “pink sheets” by the National Quotation Bureau,
  Inc. If the Trading Price cannot be calculated for such security on such date
  in the manner provided above, the Trading 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 Trading 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 60.0% . The “Fixed Conversion Price”
  shall mean $1.00. 

                                                   (b)
            Conversion
  Price During Major Announcements. Notwithstanding anything contained in
  Section 1.2(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 

 3 




 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 this Section 1.2(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 1.2(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 1.2(b) to become
  operative. 

                          1.3          
  Authorized Shares. Subject to the Stockholder Approval
  (as defined in the Agreement), 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
  I (a “Conversion Default”), subject to Section 4.8, 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, 

 4 




 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: 

                                                   (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 I (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).


                          1.4          
  Method of Conversion. 

 5 




                                                   (a)          
  Mechanics of Conversion. Subject to Section 1.1, 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 1.4(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. 

                                                   (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 confirmed
  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 1.4, 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). 

 6 




                                                   (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 I, 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. 

                                                   (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 1.1 and in this Section
  1.4, 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 1.3 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. 

                          1.5          
  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 

 7 




 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 1.5 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.”
    

  



      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 the Holder under an effective
  registration statement filed under the Act 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. Nothing in this Note shall (i) limit
  the Borrower’s obligation under the Registration Rights Agreement or (ii)
  affect in any way the Holder’s obligations to comply with applicable prospectus
  delivery requirements upon the resale of the securities referred to herein.


                          1.6          
  Effect of Certain Events. 

                                                   (a)          
  Effect of Merger, Consolidation, Etc. At the option
  of the Holder, the sale, conveyance or disposition of all or substantially all
  of the assets of the Borrower, the effectuation by the Borrower of a transaction
  or series of related transactions in 

 8 




 which more than 50% of the voting power of the Borrower is
  disposed of, or the consolidation, merger or other business combination of the
  Borrower with or into any other Person (as defined below) or Persons when the
  Borrower is not the survivor shall either: (i) be deemed to be an Event of Default
  (as defined in Article III) pursuant to which the Borrower shall be required
  to pay to the Holder upon the consummation of and as a condition to such transaction
  an amount equal to the Default Amount (as defined in Article III) or (ii) be
  treated pursuant to Section 1.6(b) hereof. “Person” shall
  mean any individual, corporation, limited liability company, partnership, association,
  trust or other entity or organization. 

                                                   (b)          
  Adjustment Due to Merger, Consolidation, Etc. If, at
  any time when this Note is issued and outstanding and prior to conversion of
  all of the Notes, there shall be any merger, consolidation, exchange of shares,
  recapitalization, reorganization, or other similar event, as a result of which
  shares of Common Stock of the Borrower shall be changed into the same or a different
  number of shares of another class or classes of stock or securities of the Borrower
  or another entity, or in case of any sale or conveyance of all or substantially
  all of the assets of the Borrower other than in connection with a plan of complete
  liquidation of the Borrower, then the Holder of this Note shall thereafter have
  the right to receive upon conversion of this Note, upon the basis and upon the
  terms and conditions specified herein and in lieu of the shares of Common Stock
  immediately theretofore issuable upon conversion, such stock, securities or
  assets which the Holder would have been entitled to receive in such transaction
  had this Note been converted in full immediately prior to such transaction (without
  regard to any limitations on conversion set forth herein), and in any such case
  appropriate provisions shall be made with respect to the rights and interests
  of the Holder of this Note to the end that the provisions hereof (including,
  without limitation, provisions for adjustment of the Conversion Price and of
  the number of shares issuable upon conversion of the Note) shall thereafter
  be applicable, as nearly as may be practicable in relation to any securities
  or assets thereafter deliverable upon the conversion hereof. The Borrower shall
  not effect any transaction described in this Section 1.6(b) unless (a) it first
  gives, to the extent practicable, thirty (30) days prior written notice (but
  in any event at least fifteen (15) days prior written notice) of the record
  date of the special meeting of shareholders to approve, or if there is no such
  record date, the consummation of, such merger, consolidation, exchange of shares,
  recapitalization, reorganization or other similar event or sale of assets (during
  which time the Holder shall be entitled to convert this Note) and (b) the resulting
  successor or acquiring entity (if not the Borrower) assumes by written instrument
  the obligations of this Section 1.6(b) . The above provisions shall similarly
  apply to successive consolidations, mergers, sales, transfers or share exchanges.


                                                   (c)          
  Adjustment Due to Distribution. If the Borrower shall
  declare or make any distribution of its assets (or rights to acquire its assets)
  to holders of Common Stock as a dividend, stock repurchase, by way of return
  of capital or otherwise (including any dividend or distribution to the Borrower’s
  shareholders in cash or shares (or rights to acquire shares) of capital stock
  of a subsidiary (i.e., a spin-off)) (a “Distribution”), then
  the Holder of this Note shall be entitled, upon any conversion of this Note
  after the date of record for determining shareholders entitled to such Distribution,
  to receive the amount of such assets which would have been payable to the Holder
  with respect to the shares of Common Stock issuable upon such conversion had
  such Holder been the holder of such shares of Common Stock on the record date
  for the determination of shareholders entitled to such Distribution. 

 9 




                                                   (d)          
  Adjustment Due to Dilutive Issuance. If, at any time
  when any Notes are issued and outstanding, the Borrower issues or sells, or
  in accordance with this Section 1.6(d) hereof is deemed to have issued or sold,
  any shares of Common Stock for no consideration or for a consideration per share
  (before deduction of reasonable expenses or commissions or underwriting discounts
  or allowances in connection therewith) less than the Fixed Conversion Price
  in effect on the date of such issuance (or deemed issuance) of such shares of
  Common Stock (a “Dilutive Issuance”), then immediately upon
  the Dilutive Issuance, the Fixed Conversion Price will be reduced to the amount
  of the consideration per share received by the Borrower in such Dilutive Issuance;
  provided that only one adjustment will be made for each Dilutive Issuance.


                                                   The
  Borrower shall be deemed to have issued or sold shares of Common Stock if the
  Borrower in any manner issues or grants any warrants, rights or options (not
  including employee stock option plans), whether or not immediately exercisable,
  to subscribe for or to purchase Common Stock or other securities convertible
  into or exchangeable for Common Stock (“Convertible Securities”)
  (such warrants, rights and options to purchase Common Stock or Convertible Securities
  are hereinafter referred to as “Options”) and the price per
  share for which Common Stock is issuable upon the exercise of such Options is
  less than the Fixed Conversion Price then in effect, then the Fixed Conversion
  Price shall be equal to such price per share. For purposes of the preceding
  sentence, the “price per share for which Common Stock is issuable upon
  the exercise of such Options” is determined by dividing (i) the total
  amount, if any, received or receivable by the Borrower as consideration for
  the issuance or granting of all such Options, plus the minimum aggregate amount
  of additional consideration, if any, payable to the Borrower upon the exercise
  of all such Options, plus, in the case of Convertible Securities issuable upon
  the exercise of such Options, the minimum aggregate amount of additional consideration
  payable upon the conversion or exchange thereof at the time such Convertible
  Securities first become convertible or exchangeable, by (ii) the maximum total
  number of shares of Common Stock issuable upon the exercise of all such Options
  (assuming full conversion of Convertible Securities, if applicable). No further
  adjustment to the Conversion Price will be made upon the actual issuance of
  such Common Stock upon the exercise of such Options or upon the conversion or
  exchange of Convertible Securities issuable upon exercise of such Options. 

                                                   Additionally,
  the Borrower shall be deemed to have issued or sold shares of Common Stock if
  the Borrower in any manner issues or sells any Convertible Securities, whether
  or not immediately convertible (other than where the same are issuable upon
  the exercise of Options), and the price per share for which Common Stock is
  issuable upon such conversion or exchange is less than the Fixed Conversion
  Price then in effect, then the Fixed Conversion Price shall be equal to such
  price per share. For the purposes of the preceding sentence, the “price
  per share for which Common Stock is issuable upon such conversion or exchange”
  is determined by dividing (i) the total amount, if any, received or receivable
  by the Borrower as consideration for the issuance or sale of all such Convertible
  Securities, plus the minimum aggregate amount of additional consideration, if
  any, payable to the Borrower upon the conversion or exchange thereof at the
  time such Convertible Securities first become convertible or exchangeable, by
  (ii) the maximum total number of shares of Common Stock issuable upon the conversion
  or exchange of all such Convertible Securities. No further adjustment to the
  Fixed Conversion Price will be made upon the actual issuance of such Common
  Stock upon conversion or exchange of such Convertible Securities. 

 10 




                                                   Notwithstanding
  the foregoing, the adjustments due to Dilutive Issuances shall not apply to
  any transaction involving (i) securities issued in a firm commitment underwritten
  public offering (excluding a continuous offering pursuant to Rule 415 under
  the 1933 Act, an equity line of credit or similar financing arrangement) resulting
  in net proceeds to the Borrower of in excess of $1,500,000, (ii) securities
  issued as consideration for a merger, consolidation or purchase of assets, or
  in connection with any strategic partnership or joint venture (the primary purpose
  of which is not to raise equity capital), or in connection with the disposition
  or acquisition of a business, product or license by the Borrower, (iii) securities
  upon exercise or conversion of the Borrower’s options, warrants or other
  convertible securities outstanding as of the date hereof, or (iv) securities
  not to exceed 500,000 shares of Common Stock issued or issuable to directors,
  officers, employees, consultants or vendors (if in transactions with primarily
  non-financing purposes) directly or pursuant to stock option plans, restricted
  stock purchase agreements, employment agreements and the like as approved by
  the Borrower’s board of directors.

                                                   (e)          
  Purchase Rights. If, at any time when any Notes are
  issued and outstanding, the Borrower issues any convertible securities or rights
  to purchase stock, warrants, securities or other property (the “Purchase
  Rights”) pro rata to the record holders of any class of Common Stock,
  then the Holder of this Note will be entitled to acquire, upon the terms applicable
  to such Purchase Rights, the aggregate Purchase Rights which such Holder could
  have acquired if such Holder had held the number of shares of Common Stock acquirable
  upon complete conversion of this Note (without regard to any limitations on
  conversion contained herein) immediately before the date on which a record is
  taken for the grant, issuance or sale of such Purchase Rights or, if no such
  record is taken, the date as of which the record holders of Common Stock are
  to be determined for the grant, issue or sale of such Purchase Rights. 

                                                   (f)          
  Notice of Adjustments. Upon the occurrence of each
  adjustment or readjustment of the Conversion Price as a result of the events
  described in this Section 1.6, the Borrower, at its expense, shall promptly
  compute such adjustment or readjustment and prepare and furnish to the Holder
  of a certificate setting forth such adjustment or readjustment and showing in
  detail the facts upon which such adjustment or readjustment is based. The Borrower
  shall, upon the written request at any time of the Holder, furnish to such Holder
  a like certificate setting forth (i) such adjustment or readjustment, (ii) the
  Conversion Price at the time in effect and (iii) the number of shares of Common
  Stock and the amount, if any, of other securities or property which at the time
  would be received upon conversion of the Note. 

                          1.7          
  Trading Market Limitations.  Unless permitted by the
  applicable rules and regulations of the principal securities market on which
  the Common Stock is then listed or traded, in no event shall the Borrower issue
  upon conversion of or otherwise pursuant to this Note and the other Notes issued
  pursuant to the Purchase Agreement more than the maximum number of shares of
  Common Stock that the Borrower can issue pursuant to any rule of the principal
  United States securities market on which the Common Stock is then traded (the
  “Maximum Share Amount”), which shall be 19.99% of the total
  shares outstanding on the Closing Date (as defined in the Purchase Agreement),
  subject to equitable adjustment from time to time for stock splits, stock dividends,
  combinations, capital reorganizations and similar events 

 11 




 relating to the Common Stock occurring after the date hereof.
  Once the Maximum Share Amount has been issued (the date of which is hereinafter
  referred to as the “Maximum Conversion Date”), if the Borrower
  fails to eliminate any prohibitions under applicable law or the rules or regulations
  of any stock exchange, interdealer quotation system or other self-regulatory
  organization with jurisdiction over the Borrower or any of its securities on
  the Borrower’s ability to issue shares of Common Stock in excess of the
  Maximum Share Amount (a “Trading Market Prepayment Event”),
  in lieu of any further right to convert this Note, and in full satisfaction
  of the Borrower’s obligations under this Note, the Borrower shall pay
  to the Holder, within fifteen (15) business days of the Maximum Conversion Date
  (the “Trading Market Prepayment Date”), an amount equal to
  130% times the sum of (a) the then outstanding principal amount
  of this Note immediately following the Maximum Conversion Date, plus
  (b) accrued and unpaid interest on the unpaid principal amount of this Note
  to the Trading Market Prepayment Date, plus (c) Default Interest, if
  any, on the amounts referred to in clause (a) and/or (b) above, plus
  (d) any optional amounts that may be added thereto at the Maximum Conversion
  Date by the Holder in accordance with the terms hereof (the then outstanding
  principal amount of this Note immediately following the Maximum Conversion Date,
  plus the amounts referred to in clauses (b), (c) and (d) above shall
  collectively be referred to as the “Remaining Convertible Amount”).
  With respect to each Holder of Notes, the Maximum Share Amount shall refer to
  such Holder’s pro rata share thereof determined in accordance
  with Section 4.8 below. In the event that the sum of (x) the aggregate number
  of shares of Common Stock issued upon conversion of this Note and the other
  Notes issued pursuant to the Purchase Agreement plus (y) the aggregate
  number of shares of Common Stock that remain issuable upon conversion of this
  Note and the other Notes issued pursuant to the Purchase Agreement, represents
  at least one hundred percent (100%) of the Maximum Share Amount (the “Triggering
  Event”), the Borrower will use its best efforts to seek and obtain
  Shareholder Approval (or obtain such other relief as will allow conversions
  hereunder in excess of the Maximum Share Amount) as soon as practicable following
  the Triggering Event and before the Maximum Conversion Date. As used herein,
  “Shareholder Approval” means approval by the shareholders
  of the Borrower to authorize the issuance of the full number of shares of Common
  Stock which would be issuable upon full conversion of the then outstanding Notes
  but for the Maximum Share Amount. 

                          1.8          
  Status as Shareholder. Upon submission of a Notice
  of Conversion by a Holder, (i) the shares covered thereby (other than the shares,
  if any, which cannot be issued because their issuance would exceed such Holder’s
  allocated portion of the Reserved Amount or Maximum Share Amount) shall be deemed
  converted into shares of Common Stock and (ii) the Holder’s rights as
  a Holder of such converted portion of this Note shall cease and terminate, excepting
  only the right to receive certificates for such shares of Common Stock and to
  any remedies provided herein or otherwise available at law or in equity to such
  Holder because of a failure by the Borrower to comply with the terms of this
  Note. Notwithstanding the foregoing, if a Holder has not received certificates
  for all shares of Common Stock prior to the tenth (10th) business day after
  the expiration of the Deadline with respect to a conversion of any portion of
  this Note for any reason, then (unless the Holder otherwise elects to retain
  its status as a holder of Common Stock by so notifying the Borrower) the Holder
  shall regain the rights of a Holder of this Note with respect to such unconverted
  portions of this Note and the Borrower shall, as soon as practicable, return
  such unconverted Note to the Holder or, if the Note has not been surrendered,
  adjust its records to reflect that such portion of this Note has not been converted.
  In 

 12 




 all cases, the Holder shall retain all of its rights and remedies
  (including, without limitation, (i) the right to receive Conversion Default
  Payments pursuant to Section 1.3 to the extent required thereby for such Conversion
  Default and any subsequent Conversion Default and (ii) the right to have the
  Conversion Price with respect to subsequent conversions determined in accordance
  with Section 1.3) for the Borrower’s failure to convert this Note. 

 ARTICLE II. CERTAIN COVENANTS 

                          2.1          
  Distributions on Capital Stock. So long as the Borrower
  shall have any obligation under this Note, the Borrower shall not without the
  Holder’s written consent (a) pay, declare or set apart for such payment,
  any dividend or other distribution (whether in cash, property or other securities)
  on shares of capital stock other than dividends on shares of Common Stock solely
  in the form of additional shares of Common Stock or (b) directly or indirectly
  or through any subsidiary make any other payment or distribution in respect
  of its capital stock except for distributions pursuant to any shareholders’
  rights plan which is approved by a majority of the Borrower’s disinterested
  directors. 

                          2.2          
  Restriction on Stock Repurchases. So long as the Borrower
  shall have any obligation under this Note, the Borrower shall not without the
  Holder’s written consent redeem, repurchase or otherwise acquire (whether
  for cash or in exchange for property or other securities or otherwise) in any
  one transaction or series of related transactions any shares of capital stock
  of the Borrower or any warrants, rights or options to purchase or acquire any
  such shares, other than repurchases of stock issued to employees upon the termination
  of their employment 

                          2.3          
  Borrowings. So long as the Borrower shall have any
  obligation under this Note, the Borrower shall not, without the Holder’s
  written consent, create, incur, assume or suffer to exist any liability for
  borrowed money, except (a) borrowings in existence or committed on the date
  hereof and of which the Borrower has informed Holder in writing prior to the
  date hereof, (b) indebtedness to trade creditors or financial institutions incurred
  in the ordinary course of business or (c) borrowings, the proceeds of which
  shall be used to repay this Note. 

                          2.4          
  Sale of Assets. So long as the Borrower shall have
  any obligation under this Note, the Borrower shall not, without the Holder’s
  written consent, sell, lease or otherwise dispose of any significant portion
  of its assets outside the ordinary course of business. Any consent to the disposition
  of any assets may be conditioned on a specified use of the proceeds of disposition.


                          2.5          
  Advances and Loans. So long as the Borrower shall have
  any obligation under this Note, the Borrower shall not, without the Holder’s
  written consent, lend money, give credit or make advances to any person, firm,
  joint venture or corporation, including, without limitation, officers, directors,
  employees, subsidiaries and affiliates of the Borrower, except loans, credits
  or advances (a) in existence or committed on the date hereof and which the Borrower
  has informed Holder in writing prior to the date hereof, (b) made in the ordinary
  course of business or (c) not in excess of $100,000. 

 13 




                          2.6          
  Contingent Liabilities. So long as the Borrower shall
  have any obligation under this Note, the Borrower shall not, without the Holder’s
  written consent, which shall not be unreasonably withheld, assume, guarantee,
  endorse, contingently agree to purchase or otherwise become liable upon the
  obligation of any person, firm, partnership, joint venture or corporation, except
  by the endorsement of negotiable instruments for deposit or collection and except
  assumptions, guarantees, endorsements and contingencies (a) in existence or
  committed on the date hereof and which the Borrower has informed Holder in writing
  prior to the date hereof, and (b) similar transactions in the ordinary course
  of business.

 ARTICLE III. EVENTS OF DEFAULT 

                          If
  any of the following events of default (each, an “Event of Default”)
  shall occur: 

                          3.1          
  Failure to Pay Principal or Interest. The Borrower
  fails to pay the principal hereof or interest thereon when due on this Note,
  whether at maturity, upon a Trading Market Prepayment Event pursuant to Section
  1.7, upon acceleration or otherwise, and such failure shall continue for a period
  of ten (10) days after payment is due 

                          3.2          
  Conversion and the Shares. The Borrower fails to issue
  shares of Common Stock to the Holder (or announces or threatens that it will
  not honor its obligation to do so) upon exercise by the Holder of the conversion
  rights of the Holder in accordance with the terms of this Note (for a period
  of at least sixty (60) days, if such failure is solely as a result of the circumstances
  governed by Section 1.3 and the Borrower is using its best efforts to authorize
  a sufficient number of shares of Common Stock as soon as practicable), fails
  to transfer or cause its transfer agent to transfer (electronically or in certificated
  form) any certificate for shares of Common Stock issued to the Holder upon conversion
  of or otherwise pursuant to this Note as and when required by this Note or the
  Registration Rights Agreement, or fails to remove any restrictive legend (or
  to withdraw any stop transfer instructions in respect thereof) on any certificate
  for any shares of Common Stock issued to the Holder upon conversion of or otherwise
  pursuant to this Note as and when required by this Note or the Registration
  Rights Agreement (or makes any announcement, statement or threat that it does
  not intend to honor the obligations described in this paragraph) and any such
  failure shall continue uncured (or any announcement, statement or threat not
  to honor its obligations shall not be rescinded in writing) for ten (10) days
  after the Borrower shall have been notified thereof in writing by the Holder;


                          3.3          
  Failure to Timely File Registration or Effect Registration.
  The Borrower fails to file the Registration Statement within forty-five (45)
  days following the Closing Date (as defined in the Purchase Agreement) or obtain
  effectiveness with the Securities and Exchange Commission of the Registration
  Statement within one hundred thirty-five (135) days following the Closing Date
  (as defined in the Purchase Agreement) or such Registration Statement lapses
  in effect (or sales cannot otherwise be made thereunder effective, whether by
  reason of the Borrower’s failure to amend or supplement the prospectus
  included therein in accordance with the Registration Rights Agreement or otherwise)
  for more than ten (10) consecutive days or twenty (20) days in any twelve month
  period after the Registration Statement becomes effective; 

 14 




                          3.4          
  Breach of Covenants. The Borrower breaches any material
  covenant or other material term or condition contained in Sections 1.3, 1.6
  or 1.7 of this Note, or Sections 4(c), 4(e), 4(h), 4(i), 4(j) or 5 of the Purchase
  Agreement and such breach continues for a period of ten (10) days after written
  notice thereof to the Borrower from the Holder; 

                          3.5          
  Breach of Representations and Warranties. Any representation
  or warranty of the Borrower made herein or in any agreement, statement or certificate
  given in writing pursuant hereto or in connection herewith (including, without
  limitation, the Purchase Agreement and the Registration Rights Agreement), shall
  be false or misleading in any material respect when made and the breach of which
  has (or with the passage of time will have) a material adverse effect on the
  rights of the Holder with respect to this Note, the Purchase Agreement or the
  Registration Rights Agreement; 

                          3.6          
  Receiver or Trustee. The Borrower or any subsidiary
  of the Borrower shall make an assignment for the benefit of creditors, or apply
  for or consent to the appointment of a receiver or trustee for it or for a substantial
  part of its property or business, or such a receiver or trustee shall otherwise
  be appointed; 

                          3.7          
  Judgments. Any money judgment, writ or similar process
  shall be entered or filed against the Borrower or any subsidiary of the Borrower
  or any of its property or other assets for more than $100,000, and shall
  remain unvacated, unbonded or unstayed for a period of twenty (20) days unless
  otherwise consented to by the Holder, which consent will not be unreasonably
  withheld; 

                          3.8          
  Bankruptcy. Bankruptcy, insolvency, reorganization
  or liquidation proceedings or other proceedings for relief under any bankruptcy
  law or any law for the relief of debtors shall be instituted by or against the
  Borrower or any subsidiary of the Borrower; 

                          3.9          
  Delisting of Common Stock. The Borrower shall fail
  to maintain the listing of the Common Stock on at least one of the OTCBB or
  an equivalent replacement exchange, the Nasdaq National Market, the Nasdaq SmallCap
  Market, the New York Stock Exchange, or the American Stock Exchange; or 

                          3.10         
  Default Under Other Notes. An Event of Default has
  occurred and is continuing under any of the other Notes issued pursuant to the
  Purchase Agreement, then, upon the occurrence and during the continuation of
  any Event of Default specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 3.9,
  or 3.10, at the option of the Holders of a majority of the aggregate principal
  amount of the outstanding Notes issued pursuant to the Purchase Agreement exercisable
  through the delivery of written notice to the Borrower by such Holders (the
  “Default Notice”), and upon the occurrence of an Event of
  Default specified in Section 3.6 or 3.8, the Notes shall become immediately
  due and payable and the Borrower shall pay to the Holder, in full satisfaction
  of its obligations hereunder, an amount equal to the greater of (i) 130% times
  the sum of (w) the then outstanding principal amount of this Note plus
  (x) accrued and unpaid interest on the unpaid principal amount of this Note
  to the date of payment (the “Mandatory Prepayment Date”)
  plus (y) Default Interest, if any, on the amounts referred to in clauses
  (w) and/or (x) plus (z) any amounts owed to the Holder pursuant to Sections
  1.3 and 1.4(g) hereof or 

 15 




 pursuant to Section 2(c) of the Registration Rights Agreement
  (the then outstanding principal amount of this Note to the date of payment plus
  the amounts referred to in clauses (x), (y) and (z) shall collectively be known
  as the “Default Sum”) or (ii) the “parity value”
  of the Default Sum to be prepaid, where parity value means (a) the highest number
  of shares of Common Stock issuable upon conversion of or otherwise pursuant
  to such Default Sum in accordance with Article I, treating the Trading Day immediately
  preceding the Mandatory Prepayment Date as the “Conversion Date”
  for purposes of determining the lowest applicable Conversion Price, unless the
  Default Event arises as a result of a breach in respect of a specific Conversion
  Date in which case such Conversion Date shall be the Conversion Date), multiplied
  by (b) the highest Closing Price for the Common Stock during the period
  beginning on the date of first occurrence of the Event of Default and ending
  one day prior to the Mandatory Prepayment Date (the “Default Amount”)
  and all other amounts payable hereunder shall immediately become due and payable,
  all without demand, presentment or notice, all of which hereby are expressly
  waived, together with all costs, including, without limitation, legal fees and
  expenses, of collection, and the Holder shall be entitled to exercise all other
  rights and remedies available at law or in equity. If the Borrower fails to
  pay the Default Amount within five (5) business days of written notice that
  such amount is due and payable, then the Holder shall have the right at any
  time, so long as the Borrower remains in default (and so long and to the extent
  that there are sufficient authorized shares), to require the Borrower, upon
  written notice, to immediately issue, in lieu of the Default Amount, the number
  of shares of Common Stock of the Borrower equal to the Default Amount divided
  by the Conversion Price then in effect. 

 ARTICLE IV. MISCELLANEOUS 

                          4.1          
  Failure or Indulgence Not Waiver. No failure or delay
  on the part of the Holder in the exercise of any power, right or privilege hereunder
  shall operate as a waiver thereof, nor shall any single or partial exercise
  of any such power, right or privilege preclude other or further exercise thereof
  or of any other right, power or privileges. All rights and remedies existing
  hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise
  available. 

                          4.2          
  Notices. Any notice herein required or permitted to
  be given shall be in writing and may be personally served or delivered by courier
  or sent by United States mail and shall be deemed to have been given upon receipt
  if personally served (which shall include telephone line facsimile transmission)
  or sent by courier or three (3) days after being deposited in the United States
  mail, certified, with postage pre-paid and properly addressed, if sent by mail.
  For the purposes hereof, the address of the Holder shall be as shown on the
  records of the Borrower; and the address of the Borrower shall be 3131 Camino
  del Rio, N, Suite 1650, San Diego, CA 92108, facsimile number: (619)
  284-4344. Both the Holder and the Borrower may change the address for service
  by service of written notice to the other as herein provided. 

                          4.3          
  Amendments. This Note and any provision hereof may
  only be amended by an instrument in writing signed by the Borrower and the Holder.
  The term “Note” and all reference thereto, as used throughout this
  instrument, shall mean this instrument (and the other Notes issued pursuant
  to the Purchase Agreement) as originally executed, or if later amended or supplemented,
  then as so amended or supplemented. 

 16 




                          4.4          
  Assignability. This Note shall be binding upon the
  Borrower and its successors and assigns, and shall inure to be the benefit of
  the Holder and its successors and assigns. Each transferee of this Note must
  be an “accredited investor” (as defined in Rule 501(a) of the 1933
  Act). Notwithstanding anything in this Note to the contrary, this Note may be
  pledged as collateral in connection with a bona fide margin account
  or other lending arrangement. 

                          4.5          
  Cost of Collection. If default is made in the payment
  of this Note, the Borrower shall pay the Holder hereof costs of collection,
  including reasonable attorneys’ fees. 

                          4.6          
  Governing Law. THIS NOTE SHALL BE ENFORCED, GOVERNED
  BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE
  TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD
  TO THE PRINCIPLES OF CONFLICT OF LAWS. THE BORROWER HEREBY SUBMITS TO THE EXCLUSIVE
  JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK
  WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS NOTE, THE AGREEMENTS ENTERED
  INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
  BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE
  OF SUCH SUIT OR PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS
  UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE
  SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN
  SHALL AFFECT EITHER PARTY’S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER
  PERMITTED BY LAW. BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN
  ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER
  JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY
  WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER THIS NOTE SHALL BE RESPONSIBLE
  FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS’ FEES, INCURRED BY THE
  PREVAILING PARTY IN CONNECTION WITH SUCH DISPUTE. 

                          4.7          
  Certain Amounts. Whenever pursuant to this Note the
  Borrower is required to pay an amount in excess of the outstanding principal
  amount (or the portion thereof required to be paid at that time) plus accrued
  and unpaid interest plus Default Interest on such interest, the Borrower and
  the Holder agree that the actual damages to the Holder from the receipt of cash
  payment on this Note may be difficult to determine and the amount to be so paid
  by the Borrower represents stipulated damages and not a penalty and is intended
  to compensate the Holder in part for loss of the opportunity to convert this
  Note and to earn a return from the sale of shares of Common Stock acquired upon
  conversion of this Note at a price in excess of the price paid for such shares
  pursuant to this Note. The Borrower and the Holder hereby agree that such amount
  of stipulated damages is not plainly disproportionate to the possible loss to
  the Holder from the receipt of a cash payment without the opportunity to convert
  this Note into shares of Common Stock. 

 17 




                          4.8          
  Allocations of Maximum Share Amount and Reserved Amount.
  The Maximum Share Amount and Reserved Amount shall be allocated pro rata
  among the Holders of Notes based on the principal amount of such Notes issued
  to each Holder. Each increase to the Maximum Share Amount and Reserved Amount
  shall be allocated pro rata among the Holders of Notes based on the principal
  amount of such Notes held by each Holder at the time of the increase in the
  Maximum Share Amount or Reserved Amount. In the event a Holder shall sell or
  otherwise transfer any of such Holder’s Notes, each transferee shall be
  allocated a pro rata portion of such transferor’s Maximum Share Amount
  and Reserved Amount. Any portion of the Maximum Share Amount or Reserved Amount
  which remains allocated to any person or entity which does not hold any Notes
  shall be allocated to the remaining Holders of Notes, pro rata based on the
  principal amount of such Notes then held by such Holders. 

                          4.9          
  Damages Shares. The shares of Common Stock that may
  be issuable to the Holder pursuant to Sections 1.3 and 1.4(g) hereof and pursuant
  to Section 2(c) of the Registration Rights Agreement (“Damages Shares”)
  shall be treated as Common Stock issuable upon conversion of this Note for all
  purposes hereof and shall be subject to all of the limitations and afforded
  all of the rights of the other shares of Common Stock issuable hereunder, including
  without limitation, the right to be included in the Registration Statement filed
  pursuant to the Registration Rights Agreement. For purposes of calculating interest
  payable on the outstanding principal amount hereof, except as otherwise provided
  herein, amounts convertible into Damages Shares (“Damages Amounts”)
  shall not bear interest but must be converted prior to the conversion of any
  outstanding principal amount hereof, until the outstanding Damages Amounts is
  zero. 

                          4.10         
  Denominations. At the request of the Holder, upon surrender
  of this Note, the Borrower shall promptly issue new Notes in the aggregate outstanding
  principal amount hereof, in the form hereof, in such denominations of at least
  $50,000 as the Holder shall request. 

                          4.11         
  Purchase Agreement. By its acceptance of this Note,
  each Holder agrees to be bound by the applicable terms of the Purchase Agreement.


                          4.12         
  Notice of Corporate Events. Except as otherwise provided
  below, the Holder of this Note shall have no rights as a Holder of Common Stock
  unless and only to the extent that it converts this Note into Common Stock.
  The Borrower shall provide the Holder with prior notification of any meeting
  of the Borrower’s shareholders (and copies of proxy materials and other
  information sent to shareholders). In the event of any taking by the Borrower
  of a record of its shareholders for the purpose of determining shareholders
  who are entitled to receive payment of any dividend or other distribution, any
  right to subscribe for, purchase or otherwise acquire (including by way of merger,
  consolidation, reclassification or recapitalization) any share of any class
  or any other securities or property, or to receive any other right, or for the
  purpose of determining shareholders who are entitled to vote in connection with
  any proposed sale, lease or conveyance of all or substantially all of the assets
  of the Borrower or any proposed liquidation, dissolution or winding up of the
  Borrower, the Borrower shall mail a notice to the Holder, at least twenty (20)
  days prior to the record date specified therein (or thirty (30) days prior to
  the consummation of the transaction or event, whichever is earlier), of the
  date on which any such record is to be taken for the purpose of such dividend,
  distribution, right or 

 18 




 other event, and a brief statement regarding the amount and
  character of such dividend, distribution, right or other event to the extent
  known at such time. The Borrower shall make a public announcement of any event
  requiring notification to the Holder hereunder substantially simultaneously
  with the notification to the Holder in accordance with the terms of this Section
  4.12. 

                          4.13         
  Remedies. The Borrower acknowledges that a breach by
  it of its obligations hereunder will cause irreparable harm to the Holder, by
  vitiating the intent and purpose of the transaction contemplated hereby. Accordingly,
  the Borrower acknowledges that the remedy at law for a breach of its obligations
  under this Note will be inadequate and agrees, in the event of a breach or threatened
  breach by the Borrower of the provisions of this Note, that the Holder shall
  be entitled, in addition to all other available remedies at law or in equity,
  and in addition to the penalties assessable herein, to an injunction or injunctions
  restraining, preventing or curing any breach of this Note and to enforce specifically
  the terms and provisions thereof, without the necessity of showing economic
  loss and without any bond or other security being required. 

 ARTICLE V. CALL OPTION 

                          5.1          
  Call Option. Notwithstanding anything to the contrary
  contained in this Article V, so long as (i) no Event of Default or Trading Market
  Prepayment Event shall have occurred and be continuing, (ii) the Borrower has
  a sufficient number of authorized shares of Common Stock reserved for issuance
  upon full conversion of the Notes, then at any time after the Issue Date, and
  (iii) the Common Stock is trading at or below $1.10 per share, the Borrower
  shall have the right, exercisable on not less than ten (10) Trading Days prior
  written notice to the Holders of the Notes (which notice may not be sent to
  the Holders of the Notes until the Borrower is permitted to prepay the Notes
  pursuant to this Section 5.1), to prepay all or a portion of the outstanding
  Notes in accordance with this Section 5.1. In the event the Common Stock is
  trading above $1.10 per share, the Borrower shall have the right, exercisable
  on not less than ten (10) Trading Days prior written notice to the Holders of
  the Notes to prepay all or a portion of the outstanding Notes as set forth in
  this Section 5.1 provided that Borrower makes an additional payment to the Holders
  equal to the difference between the trading price on the day immediately prior
  to the date of the notice and $1.10 per share for that number of shares
  this Note (or such portion of this Note being prepaid) would have converted
  into pursuant to Section 1.2(a) (the “Additional Payment”). Any
  notice of prepayment hereunder (an “Optional Prepayment”)
  shall be delivered to the Holders of the Notes at their registered addresses
  appearing on the books and records of the Borrower and shall state (1) that
  the Borrower is exercising its right to prepay all or a portion of the Notes
  issued on the Issue Date, (2) the date of prepayment and (3) the amount of the
  prepayment and the amount of any Additional Payment as applicable (the “Optional
  Prepayment Notice”). On the date fixed for prepayment (the “Optional
  Prepayment Date”), the Borrower shall make payment of the Optional
  Prepayment Amount (as defined below) to or upon the order of the Holders as
  specified by the Holders in writing to the Borrower at least one (1) business
  day prior to the Optional Prepayment Date. If the Borrower exercises its right
  to prepay the Notes, the Borrower shall make payment to the holders of an amount
  in cash (the “Optional Prepayment Amount”) equal to either
  (i) 120% (for prepayments occurring within thirty (30) days of the Issue Date),
  (ii) 130% for prepayments 

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 occurring between thirty-one (31) and sixty (60) days of the
  Issue Date, or (iii) 145% (for prepayments occurring after the sixtieth (60th)
  day following the Issue Date), multiplied by the sum of (w) the then outstanding
  principal amount of this Note plus (x) accrued and unpaid interest on
  the unpaid principal amount of this Note to the Optional Prepayment Date plus
  (y) Default Interest, if any, on the amounts referred to in clauses (w) and
  (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3
  and 1.4(g) hereof or pursuant to Section 2(c) of the Registration Rights Agreement
  (the then outstanding principal amount of this Note to the date of payment plus
  the amounts referred to in clauses (x), (y) and (z) shall collectively be known
  as the “Optional Prepayment Sum”). Notwithstanding notice
  of an Optional Prepayment, the Holders shall at all times prior to the Optional
  Prepayment Date maintain the right to convert all or any portion of the Notes
  in accordance with Article I and any portion of Notes so converted after receipt
  of an Optional Prepayment Notice and prior to the Optional Prepayment Date set
  forth in such notice and payment of the aggregate Optional Prepayment Amount
  shall be deducted from the principal amount of Notes which are otherwise subject
  to prepayment pursuant to such notice. If the Borrower delivers an Optional
  Prepayment Notice and fails to pay the Optional Prepayment Amount due to the
  Holders of the Notes within two (2) business days following the Optional Prepayment
  Date, the Borrower shall forever forfeit its right to redeem the Notes pursuant
  to this Section 5.1. 

                          5.2          
  Partial Call Option. Notwithstanding anything to the contrary
  contained in this Article V, in the event that the Average Daily Price of the
  Common Stock, as reported by the Reporting Service, for each day of the month
  ending on any Determination Date is below the Initial Market Price, the Borrower
  may, at its option, prepay a portion of the outstanding principal amount of
  the Notes equal to the principal amount hereof divided by thirty-six (36). The
  term “Initial Market Price” means shall mean the volume weighted
  average price of the Common Stock for the five (5) Trading Days immediately
  preceding the Closing which is $1.07. The term “Reporting Service”
  means a reliable reporting service mutually acceptable to and hereinafter designated
  by the Holder. 

 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 

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                          IN
  WITNESS WHEREOF, Borrower has caused this Note to be signed in its name
  by its duly authorized officer this 29th day of April, 2005. 

	 	 SNOCONE SYSTEMS INC.  
	 	  	 
	 	  	 
	 	  	 
	 	 By:  	
      /s/ Edon Moyal
	 	  	 Edon Moyal  
	 	  	 Chief Executive Officer  




 21 




 EXHIBIT A 

 NOTICE OF CONVERSION 

  (To be Executed by the Registered Holder 

  in order to Convert the Notes) 

                          The
  undersigned hereby irrevocably elects to convert $__________ principal amount
  of the Note (defined below) into shares of common stock, par value $.001
  per share (“Common Stock”), of Snocone Systems Inc., a Nevada
  corporation (the “Borrower”) according to the conditions
  of the convertible Notes of the Borrower dated as of April 29, 2005 (the “Notes”),
  as of the date written below. If securities are to be issued in the name of
  a person other than the undersigned, the undersigned will pay all transfer taxes
  payable with respect thereto and is delivering herewith such certificates. No
  fee will be charged to the Holder for any conversion, except for transfer taxes,
  if any. A copy of each Note is attached hereto (or evidence of loss, theft or
  destruction thereof). 

                          The
  Borrower shall electronically transmit the Common Stock issuable pursuant to
  this Notice of Conversion to the account of the undersigned or its nominee with
  DTC through its Deposit Withdrawal Agent Commission system (“DWAC Transfer”).

Name of DTC Prime Broker: ______________________________________________________

  Account Number: _____________________________________________________________

                          In
  lieu of receiving shares of Common Stock issuable pursuant to this Notice of
  Conversion by way of a DWAC Transfer, the undersigned hereby requests that the
  Borrower issue a certificate or certificates for the number of shares of Common
  Stock set forth below (which numbers are based on the Holder’s calculation
  attached hereto) in the name(s) specified immediately below or, if additional
  space is necessary, on an attachment hereto:

Name:______________________________________________________________________

  Address: ___________________________________________________________________

                          The
  undersigned represents and warrants that all offers and sales by the undersigned
  of the securities issuable to the undersigned upon conversion of the Notes shall
  be made pursuant to registration of the securities under the Securities Act
  of 1933, as amended (the “Act”), or pursuant to an exemption
  from registration under the Act.

Date of Conversion: ___________________________

  Applicable Conversion Price: ____________________

  Number of Shares of Common Stock to be Issued Pursuant to 

  Conversion of the Notes: ______________

  Signature: ___________________________________

  Name: ______________________________________

  Address: ____________________________________



 22 




 The Borrower shall issue and deliver shares of Common Stock
  to an overnight courier not later than three business days following receipt
  of the original Note(s) to be converted, and shall make payments pursuant to
  the Notes for the number of business days such issuance and delivery is late.


 23