Document:

M-GAB 2004 Stock Option Plan

 

 

 

 

 

M-GAB
DEVELOPMENT CORPORATION

 

2004
Omnibus Securities Plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

 

 

	 	 	 	 	Page 
	 	 	 	 	 
	
      Section
      1.
	 	 	
      PURPOSE
	
      1

	 	 	 	 	 
	
      Section
      2.
	 	 	
      DEFINITIONS
	
      1

	 	 	 	 	 
	 	
      (a)
	 	
      “Award”
	
      1

	 	
      (b)
	 	
      “Board
      of Directors”
	
      1

	 	
      (c)
	 	
      “Change
      in Control”
	
      1

	 	
      (d)
	 	
      “Code”
	
      1

	 	
      (e)
	 	
      “Commission”
	
      1

	 	
      (f)
	 	
      “Committee”
	
      1

	 	
      (g)
	 	
      “Common-Law
      Employee”
	
      1

	 	
      (h)
	 	
      “Company”
	
      2

	 	
      (i)
	 	
      “Employee”
	
      2

	 	
      (j)
	 	
      “Exchange
      Act”
	
      2

	 	
      (k)
	 	
      “Exercise
      Price”
	
      2

	 	
      (l)
	 	
      “Fair
      Market Value”
	
      2

	 	
      (m)
	 	
      “Incentive
      Stock Option or “ISO”
	
      2

	 	
      (n)
	 	
      “Non-Employee
      Director or Outside Director”
	
      2

	 	
      (o)
	 	
      “Nonstatutory
      Option or “NSO”
	
      2

	 	
      (p)
	 	
      “Offeree”
	
      3

	 	
      (q)
	 	
      “Option”
	
      3

	 	
      (r)
	 	
      “Optionee”
	
      3

	 	
      (s)
	 	
      “Participant”
	
      3

	 	
      (t)
	 	
      “Plan”
	
      3

	 	
      (u)
	 	
      “Purchase
      Price”
	
      3

	 	
      (v)
	 	
      “Restricted
      Share”
	
      3

	 	
      (w)
	 	
      “Service”
	
      3

	 	
      (x)
	 	
      “Share”
	
      3

	 	
      (y)
	 	
      “Stock”
	
      3

	 	
      (z)
	 	
      “Stock
      Option Agreement”
	
      3

	 	
      (aa)
	 	
      “Stock
      Purchase Agreement”
	
      3

	 	
      (bb)
	 	
      “Subsidiary”
	
      3

	 	
      (cc)
	 	
      “Total
      and Permanent Disability”
	
      3

	 	
      (dd)
	 	
      “W-2
      Payroll”
	
      3

	 	 	 	 	 
	
      Section
      3.
	 	 	
      ADMINISTRATION
	
      3

	 	 	 	 	 
	 	
      (a)
	 	
      Committee
      Membership
	
      3

	 	
      (b)
	 	
      Committee
      Procedures
	
      4

	 	
      (c)
	 	
      Committee
      Responsibilities
	
      4

	 	
      (d)
	 	
      Committee
      Liability
	
      4

	 	
      (e)
	 	
      Financial
      Reports
	
      4

	 	 	 	 	 
	
      Section
      4.
	 	 	
      ELIGIBILITY
	
      4

	 	 	 	 	 
	 	
      (a)
	 	
      General
      Rule
	
      4

	 	
      (b)
	 	
      Non-Employee
      Directors
	
      4

	 	
      (c)
	 	
      Ten-Percent
      Shareholders
	
      4

	 	
      (d)
	 	
      Attribution
      Rules
	
      4

	 	
      (e)
	 	
      Outstanding
      Stock
	
      5

	 	 	 	 	 

 

 

- i
-

 

	 	 	 	 	 
	
      Section
      5.
	 	 	
      STOCK
      SUBJECT TO PLAN
	
      5

	 	 	 	 	 
	 	
      (a)
	 	
      Basic
      Limitation
	
      5

	 	
      (b)
	 	
      Additional
      Shares
	
      5

	 	 	 	 	 
	
      Section
      6.
	 	 	
      TERMS
      AND CONDITIONS OF AWARDS OR SALES
	
      5

	 	 	 	 	 
	 	
      (a)
	 	
      Stock
      Purchase Agreement
	
      5

	 	
      (b)
	 	
      Duration
      of Offers
	
      5

	 	
      (c)
	 	
      Purchase
      Price
	
      5

	 	
      (d)
	 	
      Payment
      for Shares
	
      5

	 	
      (e)
	 	
      Exercise
      of Awards on Termination of Service
	
      6

	 	 	 	 	 
	
      Section
      7.
	 	 	
      TERMS
      AND CONDITIONS OF OPTIONS
	
      6

	 	 	 	 	 
	 	
      (a)
	 	
      Stock
      Option Agreement
	
      6

	 	
      (b)
	 	
      Number
      of Shares
	
      6

	 	
      (c)
	 	
      Exercise
      Price
	
      6

	 	
      (d)
	 	
      Exercisability
	
      6

	 	
      (e)
	 	
      Effect
      of Change in Control
	
      6

	 	
      (f)
	 	
      Term
	
      6

	 	
      (g)
	 	
      Exercise
      of Options on Termination of Service
	
      6

	 	
      (h)
	 	
      Payment
      of Option Shares
	
      7

	 	
      (i)
	 	
      Modification,
      Extension and Assumption of Options
	
      7

	 	 	 	 	 
	
      Section
      8.
	 	 	
      ADJUSTMENT
      OF SHARES
	
      7

	 	 	 	 	 
	 	
      (a)
	 	
      General
	
      7

	 	
      (b)
	 	
      Reorganizations
	
      7

	 	
      (c)
	 	
      Reservation
      of Rights
	
      7

	 	 	 	 	 
	
      Section
      9.
	 	 	
      WITHHOLDING
      TAXES
	
      7

	 	 	 	 	 
	 	
      (a)
	 	
      General
	
      7

	 	
      (b)
	 	
      Share
      Withholding
	
      7

	 	
      (c)
	 	
      Cashless
      Exercise/Pledge
	
      8

	 	
      (d)
	 	
      Other
      Forms of Payment
	
      8

	 	 	 	 	 
	
      Section
      10.
	 	 	
      ASSIGNMENT
      OR TRANSFER OF AWARDS
	
      8

	 	 	 	 	 
	 	
      (a)
	 	
      General
	
      8

	 	
      (b)
	 	
      Trusts
	
      8

	 	 	 	 	 
	
      Section
      11.
	 	 	
      LEGAL
      REQUIREMENTS
	
      8

	 	 	 	 	 
	 	
      (a)
	 	
      Securities
      Act of 1933
	
      8

	 	
      (b)
	 	
      Investment
      Company Act of 1940
	
      8

	 	 	 	 	 
	
      Section
      12.
	 	 	
      NO
      EMPLOYMENT RIGHTS
	
      8

	 	 	 	 	 
	
      Section
      13.
	 	 	
      DURATION
      AND AMENDMENTS
	
      8

	 	 	 	 	 
	 	
      (a)
	 	
      Term
      of the Plan
	
      8

	 	
      (b)
	 	
      Right
      to Amend or Terminate the Plan
	
      9

	 	
      (c)
	 	
      Effect
      of Amendment or Termination
	
      9

	 	 	 	 	 
	 	 	 	 	 

 

 

- ii
-

 

M-GAB DEVELOPMENT CORPORATION

2004 Omnibus Securities Plan

SECTION 1.
PURPOSE.

The purpose of the M-GAB Development Corporation 2004 Omnibus
Securities Plan (the “Plan”) is to offer selected employees and directors an
opportunity to acquire a proprietary interest in the success of the Company, or
to increase such interest, to encourage such selected persons to remain in the
employ of the Company and to attract new employees with outstanding
qualifications. The Plan seeks to achieve this purpose by providing for Awards
in the form of Options (which may constitute Incentive Stock Options or
Nonstatutory Stock Options). Awards may be granted under this Plan in reliance
upon federal and state securities law exemptions.

 

SECTION 2.
DEFINITIONS.

 

(a) “Award” shall mean any award of an Option or other
right under the Plan.

 

(b) “Board of Directors” shall mean the Board of
Directors of the Company, as constituted from time to time.

 

(c) “Change in Control” shall mean:

(i) The consummation of a merger, consolidation, sale of the
Company’s stock, or other reorganization of the Company (other than a
reincorporation of the Company), if after giving effect to such merger,
consolidation or other reorganization of the Company, the stockholders of the
Company immediately prior to such merger, consolidation or other reorganization
do not represent a majority interest of the holders of voting securities (on a
fully diluted basis) with the ordinary voting power to elect directors of the
surviving or resulting entity after such merger, consolidation or other
reorganization; or

(ii) The sale of all or substantially all of the assets of
the Company to a third party who is not an affiliate of the Company.

(iii) The term Change in Control shall not include: (a) a
transaction the sole purpose of which is to change the state of the Company’s
incorporation, or (b) the Company’s initial public offering.

 

(d) “Code” shall mean the Internal Revenue Code
of 1986, as amended.

(e) “Commission” shall mean the Securities and
Exchange Commission.

 

(f) “Committee” shall mean a committee of the Board of
Directors which is authorized to administer the Plan under Section 3.

 

(g) “Common-Law Employee” shall mean an individual
paid from W-2 Payroll of the Company or a Subsidiary. If, during any period, the
Company (or Subsidiary, as applicable) has not treated an individual as a
Common-Law Employee and, for that reason, has not paid such individual in a
manner which results in the issuance of a Form W-2 and withheld taxes with
respect to him or her, then that individual shall not be an eligible Employee
for that period, even if any person, court of law or government agency
determines, retroactively, that that individual is or was a Common-Law Employee
during all or any portion of that period.

 

 

- 1
-

(h) “Company” shall mean M-GAB Development
Corporation, a Florida corporation. 

 

(i) “Employee” shall mean (i) any individual who
is a Common-Law Employee of the Company or of a Subsidiary, (ii) a member
of the Board of Directors, including (without limitation) a Non-Employee
Director, or an affiliate of a member of the Board of Directors, or (iii) a
member of the board of directors of a Subsidiary. Service as a member of the
Board of Directors or a member of the board of directors of a Subsidiary shall
be considered employment for all purposes of the Plan except the second sentence
of Section 4(a).

 

(j) “Exchange Act” means the Securities and Exchange
Act of 1934, as amended.

 

(k) “Exercise Price” shall mean the amount for which
one Share may be purchased upon exercise of an Option, as specified by the
Committee in the applicable Stock Option Agreement.

 

(l) “Fair Market Value” means the market price of
Shares, determined by the Committee as follows:

(i)  If the Shares were traded over-the-counter on the
date in question but were not traded on the NASDAQ Stock Market or the NASDAQ
National Market System, then the Fair Market Value shall be equal to the mean
between the last reported representative bid and asked prices quoted for such
date by the principal automated inter-dealer quotation system on which the
Shares are quoted or, if the Shares are not quoted on any such system, by the
“Pink Sheets” published by the National Quotation Bureau, Inc.;

(ii)  If the Shares were traded over-the-counter on the
date in question and were traded on the NASDAQ Stock Market or the NASDAQ
National Market System, then the Fair Market Value shall be equal to the
last-transaction price quoted for such date by the NASDAQ Stock Market or the
NASDAQ National Market;

(iii)  If the Shares were traded on a stock exchange on
the date in question, then the Fair Market Value shall be equal to the closing
price reported by the applicable composite transactions report for such date;
and

(iv)  If none of the foregoing provisions is applicable,
then the Fair Market Value shall be determined by the Committee in good faith on
such basis as it deems appropriate.

In all cases, the determination of Fair Market Value by the
Committee shall be conclusive and binding on all persons.

 

(m) “Incentive Stock Option” or “ISO” shall mean an
employee incentive stock option described in Code section 422(b).

(n) “Non-Employee Director” or “Outside Director”
shall mean a member of the Company’s Board of Directors who either (i) is not a
current employee or officer of the Company or its parent or a subsidiary, does
not receive compensation (directly or indirectly) from the Company or its parent
or a subsidiary for services rendered as a consultant or in any capacity other
than as a director (except for an amount as to which disclosure would not be
required under Item 404(a) of Regulation S-K promulgated pursuant to the
Securities Act of 1933 (“Regulation S-K”)), does not possess an interest in any
other transactions as to which disclosure would be required under Item 404(a) of
Regulation S-K and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a “non-employee director” for purposes of Rule 16b-3
promulgated pursuant to the Exchange Act.

 

(o) “Nonstatutory Option” or “NSO” shall mean an
employee stock option that is not an ISO.

 

 

- 2
-

(p) “Offeree” shall mean an individual to whom the
Committee has offered the right to acquire Shares under the Plan (other than
upon exercise of an Option).

 (q) “Option”  shall mean an Incentive Stock
Option or Nonstatutory Option granted under the Plan and entitling the holder to
purchase Shares.

 

(r) “Optionee” shall mean an individual or estate who
holds an Option.

 

(s) “Participant” shall mean an individual or estate
who holds an Award.

 

(t) “Plan”  shall mean this 2004 Omnibus
Securities Plan of M-GAB Development Corporation, 

 

(u) “Purchase Price” shall mean the consideration for
which one Share may be acquired under the Plan (other than upon exercise of an
Option), as specified by the Committee.

 

(v) “Restricted Share” shall mean a Share which is
nontransferable and subject to substantial risk of forfeiture until restrictions
lapse.

 

(w) “Service” shall mean service as an Employee.

 

(x) “Share” shall mean one share of Stock, as adjusted
in accordance with Section 8 (if applicable).

 

(y) “Stock” shall mean the common stock of the
Company.

 

(z) “Stock Option Agreement” shall mean the agreement
between the Company and an Optionee which contains the terms, conditions and
restrictions pertaining to his or her Option.

 

(aa) “Stock Purchase Agreement”  shall mean the
agreement between the Company and an Offeree who acquires Shares under the Plan
which contains the terms, conditions and restrictions pertaining to the
acquisition of such Shares.

(bb) “Subsidiary” means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the Company, if
each of the corporations other than the last corporation in the unbroken chain
owns stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain. A corporation
that attains the status of a Subsidiary on a date after the adoption of the Plan
shall be considered a Subsidiary commencing as of such date.

 

(cc) “Total and Permanent Disability” means that the
Optionee is unable to engage in any substantial gainful activity by reason of
any medically determinable physical or mental impairment.

 

(dd) “W-2 Payroll” means whatever mechanism or procedure
that the Company or a Subsidiary utilizes to pay any individual which results in
the issuance of Form W-2 to the individual. “W-2 Payroll” does not include any
mechanism or procedure which results in the issuance of any form other than a
Form W-2 to an individual, including, but not limited to, any Form 1099 which
may be issued to an independent contractor, an agency employee or a consultant.
Whether a mechanism or procedure qualifies as a “W-2 Payroll” shall be
determined in the absolute discretion of the Company (or Subsidiary, as
applicable), and the Company or Subsidiary determination shall be conclusive and
binding on all persons.

 

SECTION 3.
ADMINISTRATION.

 

(a) Committee Membership . The Plan shall be
administered by the Compensation Committee (the “Committee”) appointed by the
Company’s Board of Directors and comprised of at least two or more Outside
Directors (although Committee functions may be delegated to officers to the
extent the awards relate to persons who are not subject to the reporting
requirements of Section 16 of the Exchange Act). If no Committee has been
appointed, the entire Board shall constitute the Committee.

 

 

- 3
-

 

(b) Committee Procedures. The Board of Directors shall
designate one of the members of the Committee as chairperson. The Committee may
hold meetings at such times and places as it shall determine. The acts of a
majority of the Committee members present at meetings at which a quorum exists,
or acts reduced to or approved in writing by all Committee members, shall be
valid acts of the Committee.

 

(c) Committee Responsibilities. The Committee has and
may exercise such power and authority as may be necessary or appropriate for the
Committee to carry out its functions as described in the Plan. The Committee has
authority in its discretion to determine eligible Employees to whom, and the
time or times at which, Awards may be granted and the number of Shares subject
to each Award. Subject to the express provisions of the respective Award
agreements (which need not be identical) and to make all other determinations
necessary or advisable for Plan administration, the Committee has authority to
prescribe, amend, and rescind rules and regulations relating to the Plan. All
interpretations, determinations, and actions by the Committee will be final,
conclusive, and binding upon all persons.

 

(d) Committee Liability. No member of the Board or the
Committee will be liable for any action or determination made in good faith by
the Committee with respect to the Plan or any Award made under the Plan.

 

(e) Financial Reports. To the extent required by
applicable law, and not less often than annually, the Company shall furnish to
Offerees, Optionees and Shareholders who have received Stock under the Plan its
financial statements including a balance sheet regarding the Company’s financial
condition and results of operations, unless such Offerees, Optionees or
Shareholders have duties with the Company that assure them access to equivalent
information. Such financial statements need not be audited.

 

SECTION 4.
ELIGIBILITY.

 

(a) General Rule. Only Employees and Non-Employee
Directors shall be eligible for designation as Participants by the Committee. In
addition, only individuals who are employed as Common-Law Employees by the
Company or a Subsidiary shall be eligible for the grant of ISOs.

(b) Non-Employee Directors. Any Award to a
Non-Employee Director must be approved by an Order of the Commission as provided
by Section 61(a)(3)(B)(I)(II) of the Investment Company Act of 1940, before
being considered a valid Award under the Plan.

 

(c) Ten-Percent Shareholders. An Employee who owns
more than ten percent (10%) of the total combined voting power of all classes of
outstanding stock of the Company or any of its Subsidiaries shall not be
eligible for designation as an Offeree or Optionee unless (i) the Exercise
Price for an ISO (and a NSO to the extent required by applicable law) is at
least one hundred ten percent (110%) of the Fair Market Value of a Share on
the date of grant, (ii) if required by applicable law, the Purchase Price
of Shares is at least one hundred percent (100%) of the Fair Market Value of a
Share on the date of grant, and (iii) in the case of an ISO, such ISO by
its terms is not exercisable after the expiration of five years from the date of
grant.

 

(d) Attribution Rules. For purposes of
Subsection (b) above, in determining stock ownership, an Employee shall be
deemed to own the stock owned, directly or indirectly, by or for his brothers,
sisters, spouse, ancestors and lineal descendants. Stock owned, directly or
indirectly, by or for a corporation, partnership, estate or trust shall be
deemed to be owned proportionately by or for its shareholders, partners or
beneficiaries. Stock with respect to which such Employee holds an Option shall
not be counted.

 

- 4
-

 

(e) Outstanding Stock. For purposes of
Subsection (b) above, “outstanding stock” shall include all stock actually
issued and outstanding immediately after the grant. “Outstanding Stock” shall
not include shares authorized for issuance under outstanding Options held by the
Employee or by any other person. 

 

 

SECTION 5. STOCK SUBJECT TO
PLAN.

 

(a) Basic Limitation Shares offered under the Plan
shall be authorized but unissued Shares. Subject to Sections 5(b) and 8 of the
Plan, the aggregate number of Shares which may be issued or transferred as
common stock pursuant to an Award under the Plan shall not exceed 650,000
Shares.

In any event, the number of Shares which are subject to Awards or
other rights outstanding at any time under the Plan shall not exceed the number
of Shares which then remain available for issuance under the Plan. The Company,
during the term of the Plan, shall at all times reserve and keep available
sufficient Shares to satisfy the requirements of the Plan.

 

(b) Additional Shares. In the event that any
outstanding Option or other right for any reason expires or is canceled or
otherwise terminated, the Shares allocable to the unexercised portion of such
Option or other right shall again be available for the purposes of the Plan. If
a Restricted Share is forfeited before any dividends have been paid with respect
to such Restricted Share, then such Restricted Share shall again become
available for award under the Plan.

 

SECTION 6. TERMS AND CONDITIONS OF
AWARDS OR SALES.

 

(a) Stock Purchase Agreement. Each award or sale of
Shares under the Plan (other than upon exercise of an Option) shall be evidenced
by a Stock Purchase Agreement between the Offeree and the Company. Such award or
sale shall be subject to all applicable terms and conditions of the Plan and may
be subject to any other terms and conditions which are not inconsistent with the
Plan and which the Committee deems appropriate for inclusion in a Stock Purchase
Agreement. The provisions of the various Stock Purchase Agreements entered into
under the Plan need not be identical.

 

(b) Duration of Offers. Any right to acquire Shares
under the Plan (other than an Option) shall automatically expire if not
exercised by the Offeree within 30 days after the grant of such right was
communicated to the Offeree by the Committee.

 

(c) Purchase Price. Unless otherwise permitted by
applicable law, the Purchase Price of Shares to be offered under the Plan shall
not be less than the Fair Market Value of a Share on the date of grant (110% for
10% shareholders, if applicable under Section 4(c), above), except as otherwise
provided in Section 4(b). Subject to the preceding sentence, the Purchase Price
shall be determined by the Committee in its sole discretion. The Purchase Price
shall be payable in a form described in Subsection (d) below.

 

(d) Payment for Shares. The entire Purchase Price of
Shares issued under the Plan shall be payable in lawful money of the United
States of America at the time when such Shares are purchased, except as provided
below:

(i) Surrender of Stock. To the extent that a Stock
Option Agreement so provides, payment may be made all or in part with Shares
which have already been owned by the Optionee or Optionee’s representative for
any time period specified by the Committee and which are surrendered to the
Company in good form for transfer. Such shares shall be valued at their Fair
Market Value on the date when the new Shares are purchased under the Plan.

(ii) Cashless Exercise. To the extent that a Stock
Option Agreement so provides and a public market for the Shares exists, payment
may be made all or in part by delivery (on a form prescribed by the Committee)
of an irrevocable direction to a securities broker to sell shares and to deliver
all or part of the sale proceeds to the Company in payment of the aggregate
Exercise Price.

- 5
-

(iii) Other Forms of Payment. To the extent provided
in the Stock Option Agreement, payment may be made in any other form that is
consistent with applicable laws, regulations and rules.

 

(e) Exercise of Awards on Termination of Service. Each
Stock Award Agreement shall set forth the extent to which the recipient shall
have the right to exercise the Award following termination of the recipient’s
Service with the Company and its Subsidiaries. Such provisions shall be
determined in the sole discretion of the Committee, need not be uniform among
all the Awards issued pursuant to the Plan, and may reflect distinctions based
on the reasons for termination of employment.

 

SECTION 7. TERMS AND CONDITIONS OF
OPTIONS.

 

(a) Stock Option Agreement. Each grant of an Option
under the Plan shall be evidenced by a Stock Option Agreement between the
Optionee and the Company. Such Option shall be subject to all applicable terms
and conditions of the Plan and may be subject to any other terms and conditions
which are not inconsistent with the Plan and which the Committee deems
appropriate for inclusion in a Stock Option Agreement. The provisions of the
various Stock Option Agreements entered into under the Plan need not be
identical.

 

(b) Number of Shares. Each Stock Option Agreement
shall specify the number of Shares that are subject to the Option and shall
provide for the adjustment of such number in accordance with Section 8. The
Stock Option Agreement shall also specify whether the Option is an ISO or a
Nonstatutory Option.

 

(c) Exercise Price. Each Stock Option Agreement shall
specify the Exercise Price. Subject to the 10% Shareholder provisions of Section
4(c) above, the Exercise Price of an ISO or a Nonstatutory Option shall not be
less than one hundred percent (100%) of the Fair Market Value of a Share on the
date of grant. Subject to the preceding sentence, the Exercise Price under any
Option shall be determined by the Committee in its sole discretion. The Exercise
Price shall be payable in a form described in Subsection (h) below. 

 

(d) Exercisability. Each Stock Option Agreement shall
specify the date when all or any installment of the Option is to become
exercisable. To the extent required by applicable law, an Option shall become
exercisable no less rapidly than the rate of 20% per year for each of the first
five years from the date of grant. Subject to the preceding sentence, the
exercisability of any Option shall be determined by the Committee in its sole
discretion.

 

(e) Effect of Change in Control. The Committee may
determine, at the time of granting an Option or thereafter, that such Option
shall become fully exercisable as to all Shares subject to such Option in the
event that a Change in Control occurs with respect to the Company.

 

(f) Term. The Stock Option Agreement shall specify the
term of the Option. The term shall not exceed ten years from the date of grant
(or five (5) years for ten percent (10%) shareholders as provided in Section
4(c)). Subject to the preceding sentence, the Committee at its sole discretion
shall determine when an Option is to expire.

 

(g) Exercise of Options on Termination of Service.
Each Option shall set forth the extent to which the Optionee shall have the
right to exercise the Option following termination of the Optionee’s Service
with the Company and its Subsidiaries. Such provisions shall be determined in
the sole discretion of the Committee, need not be uniform among all Options
issued pursuant to the Plan, and may reflect distinctions based on the reasons
for termination of employment. Notwithstanding the foregoing, to the extent
required by applicable law, each Option shall provide that the Optionee shall
have the right to exercise the vested portion of any Option held at termination
for at least 60 days following termination of Service with the Company for any
reason, and that the Optionee shall have the right to exercise the Option for at
least six months if the Optionee’s Service terminates due to death or
Disability.

 

- 6
-

 

(h) Payment of Option Shares. The entire Exercise
Price of Shares issued under the Plan shall be payable in lawful money of the
United States of America at the time when such Shares are purchased, except as
provided below:

 

(i) Cashless Exercise. To the extent that a Stock
Option Agreement so provides and a public market for the Shares exists, payment
may be made all or in part by delivery (on a form prescribed by the Committee)
of an irrevocable direction to a securities broker to sell shares and to deliver
all or part of the sale proceeds to the Company in payment of the aggregate
Exercise Price.

(ii) Other Forms of Payment. To the extent provided in
the Stock Option Agreement, payment may be made in any other form that is
consistent with applicable laws, regulations and rules.

 

(i) Modification, Extension and Assumption of Options.
Within the limitations of the Plan, the Committee may modify, extend or assume
outstanding Options or may accept the cancellation of outstanding Options
(whether granted by the Company or another issuer) in return for the grant of
new Options for the same or a different number of Shares and at the same or a
different Exercise Price or for other consideration.

 

SECTION 8. ADJUSTMENT OF
SHARES.

 

(a) General. In the event of a subdivision of the
outstanding Stock, , a recapitalization, a reclassification or a similar
occurrence, the Committee shall make appropriate adjustments, subject to the
limitations set forth in Section 8(c), in one or more of (i) the number of
Shares available for future Awards under Section 5, (ii) the number of
Shares covered by each outstanding Option or Purchase Agreement or
(iii) the Exercise Price or Purchase Price under each outstanding Option or
Stock Purchase Agreement.

 

(b) Reorganizations. In the event that the Company is
a party to a merger or reorganization, outstanding Options shall be subject to
the agreement of merger or reorganization, provided however, that the
limitations set forth in Section 8(c) shall apply.

 

(c) Reservation of Rights. Except as provided in this
Section 8, an Optionee or an Offeree shall have no rights by reason of
(i) any subdivision or consolidation of shares of stock of any class,
(ii) the payment of any dividend or (iii) any other increase or
decrease in the number of shares of stock of any class. Any issue by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall not affect, and no adjustment by reason thereof shall be
made with respect to, the number, Exercise Price or Purchase Agreement of Shares
subject to an Option or Stock Purchase Agreement. The grant of an Award pursuant
to the Plan shall not affect in any way the right or power of the Company to
make adjustments, reclassifications, reorganizations or changes of its capital
or business structure, to merge or consolidate or to dissolve, liquidate, sell
or transfer all or any part of its business or assets.

 

SECTION 9. WITHHOLDING
TAXES.

 

(a) General. To the extent required by applicable
federal, state, local or foreign law, a Participant or his or her successor
shall make arrangements satisfactory to the Committee for the satisfaction of
any withholding tax obligations that arise in connection with the Plan. The
Company shall not be required to issue any Shares or make any cash payment under
the Plan until such obligations are satisfied.

 

(b) Share Withholding. The Committee may permit a
Participant to satisfy all or part of his or her withholding or income tax
obligations by having the Company withhold all or a portion of any Shares that
otherwise would be issued to him or her or by surrendering all or a portion of
any Shares that he or she previously acquired. Such Shares shall be valued at
their Fair Market Value on the date when taxes otherwise would be withheld in
cash. Any payment of taxes by assigning Shares to the Company may be subject to
restrictions, including any restrictions required by rules of any federal or
state regulatory body or other authority.

 

 

- 7
-

(c) Cashless Exercise/Pledge. The Committee may
provide that if Company Shares are publicly traded at the time of exercise,
arrangements may be made to meet the Optionee’s withholding obligation by
cashless exercise or pledge.

 

(d) Other Forms of Payment. The Committee may permit
such other means of tax withholding as it deems appropriate.

 

SECTION 10. ASSIGNMENT OR TRANSFER
OF AWARDS.

 

(a) General. An Award granted under the Plan shall not
be anticipated, assigned, attached, garnished, optioned, transferred or made
subject to any creditor’s process, whether voluntarily, involuntarily or by
operation of law, except as approved by the Committee. Notwithstanding the
foregoing, ISOs may not be transferred. Also notwithstanding the foregoing,
Optionees may not transfer their rights hereunder except by will or the laws of
descent and distribution.

 

(b) Trusts. Neither this Section 10 nor any other
provision of the Plan shall preclude a Participant from transferring or
assigning Restricted Shares to (a) the trustee of a trust that is revocable by
such Participant alone, both at the time of the transfer or assignment and at
all times thereafter prior to such Participant’s death, or (b) the trustee of
any other trust to the extent approved by the Committee in writing. A transfer
or assignment of Restricted Shares from such trustee to any other person than
such Participant shall be permitted only to the extent approved in advance by
the Committee in writing, and Restricted Shares held by such trustee shall be
subject to all the conditions and restrictions set forth in the Plan and in the
applicable Stock Award Agreement, as if such trustee were a party to such
Agreement.

 

SECTION 11. LEGAL
REQUIREMENTS.

(a) Securities Act of 1933. Shares shall not be issued
under the Plan unless the issuance and delivery of such Shares complies with (or
is exempt from) all applicable requirements of law, including (without
limitation) the Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, state securities laws and regulations, and the
regulations of any stock exchange on which the Company’s securities may then be
listed.

(b) Investment Company Act of 1940. No provision of
this Plan will contravene any portion of the Investment Company Act of 1940. In
the event of any conflict between the provisions of the Plan and the Investment
Company Act of 1940, the applicable section of the Investment Company Act of
1940 shall control and all Awards under the Plan shall be so modified. All
Offerees and Optionees holding such modified Awards shall be notified of the
change to their Awards and such change shall be binding on such Offerees and
Optionees.

 

SECTION 12. NO EMPLOYMENT
RIGHTS.

No provision of the Plan, nor any right or Option granted under
the Plan, shall be construed to give any person any right to become, to be
treated as, or to remain an Employee. The Company and its Subsidiaries reserve
the right to terminate any person’s Service at any time and for any
reason.

 

SECTION 13. DURATION AND
AMENDMENTS.

 

(a) Term of the Plan. The Plan, as set forth herein,
shall become effective on the date of its adoption by the Board of Directors,
subject to the approval of the Company’s shareholders. In the event that the
shareholders fail to approve the Plan within twelve (12) months after its
adoption by the Board of Directors, any grants already made shall be null and
void, and no additional grants shall be made after such date. The Plan shall
terminate automatically ten (10) years after its adoption by the Board of
Directors and may be terminated on any earlier date pursuant to
Subsection (b) below.

 

 

- 8
-

 

 

 

(b) Right to Amend or Terminate the Plan. The Board of
Directors may amend the Plan at any time and from time to time. Rights and
obligations under any right or Option granted before amendment of the Plan shall
not be materially altered, or impaired adversely, by such amendment, except with
consent of the person to whom the right or Option was granted. An amendment of
the Plan shall be subject to the approval of the Company’s shareholders only to
the extent required by applicable laws, regulations or rules including the rules
of any applicable exchange.

 

(c) Effect of Amendment or Termination. No Shares shall be
issued or sold under the Plan after the termination thereof, except upon
exercise of an Option granted prior to such termination. The termination of the
Plan, or any amendment thereof, shall not affect any Shares previously issued or
any Option previously granted under the Plan.

 

 

- 9
-

THE
SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE, AND MAY BE OFFERED
AND SOLD ONLY IF REGISTERED AND QUALIFIED PURSUANT TO THE RELEVANT PROVISIONS OF
FEDERAL AND STATE SECURITIES LAWS OR IF THE COMPANY IS PROVIDED AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION AND QUALIFICATION UNDER
FEDERAL AND STATE SECURITIES LAWS IS NOT REQUIRED.

M-GAB
Development Corporation

2004
Omnibus Securities Plan

INCENTIVE
STOCK OPTION AGREEMENT

M-GAB
Development Corporation (the “Company”), hereby grants an Option to purchase
shares of its common stock (“Shares”) to the Optionee named below. The terms and
conditions of the Option are set forth in this cover sheet, in the attachment
and in the Company’s 2004 Omnibus Securities Plan (the “Plan”).

Date of Grant: 

Name of Optionee: 

Optionee’s Social Security Number: 

Number of Shares Covered by Option: 

Exercise Price per Share: $

[must be at least 100% fair market value on Date of Grant]

Vesting Start Date: 

	
      ___
	
      Check
      here if Optionee is a 10% owner (so that exercise price must be 110% of
      fair market value and term will not exceed 5
years).

By signing this cover sheet, you agree to all of the
terms and conditions described in the attached Agreement and in the Plan, a copy
of which is also attached.

Optionee: 

(Signature)

Company: 

(Signature)

Title: 

 

- 1
-

 

THE
SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE, AND MAY BE OFFERED
AND SOLD ONLY IF REGISTERED AND QUALIFIED PURSUANT TO THE RELEVANT PROVISIONS OF
FEDERAL AND STATE SECURITIES LAWS OR IF THE COMPANY IS PROVIDED AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION AND QUALIFICATION UNDER
FEDERAL AND STATE SECURITIES LAWS IS NOT REQUIRED.

M-GAB
Development Corporation

2004
Omnibus Securities Plan

INCENTIVE
STOCK OPTION AGREEMENT

	
      Incentive
      Stock Option
	
       

      This
      Option is intended to be an incentive stock option under section 422 of
      the Internal Revenue Code and will be interpreted
    accordingly.

	
      Vesting
	
       

      No
      Shares will vest until you have performed _________ (____) months of
      Service from the commencement of your employment with the Company. Your
      Option shall vest as to ________ of the Shares on the date _______ (____)
      months from the Vesting Start Date as shown on the cover sheet.
      Thereafter, Shares shall vest at the rate of _______ of the Shares at the
      end of each full month thereafter. After you have completed _________
      (____) months of Service, the number of Shares which vest under this
      Option at the Exercise Price shall be equal to the product of the number
      of full months of your continuous employment with the Company (“Service”)
      (including any approved leaves of absence) from the Vesting Start Date
      times the number of Shares covered by this Option times ________. The
      resulting number of Shares will be rounded to the nearest whole number. No
      additional Shares will vest after your Service has terminated for any
      reason.

       

      You
      should note that you may exercise the Option prior to vesting. In that
      case, the Company has a right to repurchase the unvested shares at the
      original exercise price if you terminate employment before vesting in all
      shares you purchased. Also, if you exercise before vesting, you should
      consider making an 83(b) election. Please see the attached Tax Summary.
      The 83(b) election must be filed within 30 days of the date you
      exercise.

	
      Term
	
       

      Your
      Option will expire in any event at the close of business at Company
      headquarters on the day before the tenth anniversary (fifth anniversary
      for a 10% owner) of the Date of Grant, as shown on the cover sheet. (It
      will expire earlier if your Service terminates, as described
      below.)

	
      Regular
      Termination
	
       

      If
      your Service terminates for any reason except death, Disability or for
      “Cause,” your Option will expire at the close of business at Company
      headquarters on the 30th day after your termination date. During that
      30-day period, you may exercise that portion of your Option that was
      vested on your termination date.

 

 

- 2
-

 

	
      Death
	
       

      If
      you die while in Service with the Company, your Option will expire at the
      close of business at Company headquarters on the date six months
      after the date of death. During that six-month period, your estate or
      heirs may exercise that portion of your Option that was vested on the date
      of death.

	
      Disability
	
       

      If
      your Service terminates because of your Disability, your Option will
      expire at the close of business at Company headquarters on the date
      six months after your termination date. (However, if your Disability
      is not expected to result in death or to last for a continuous period of
      at least 12 months, your Option will be eligible for ISO tax treatment
      only if it is exercised within three months following the termination of
      your Service.) During that six-month period, you may exercise that portion
      of your Option that was vested on the date of your
Disability.

       

      “Disability”
      means that you are unable to engage in any substantial gainful activity by
      reason of any medically determinable physical or mental
      impairment.

	
      Leaves
      of Absence
	
       

      For
      purposes of this Option, your Service does not terminate when you go on a
      bona fide leave of absence that was approved by the Company
      in writing, if the terms of the leave provide for continued service
      crediting, or when continued service crediting is required by applicable
      law. However, your Service will be treated as terminating 30 days after
      you went on leave, unless your right to return to active work is
      guaranteed by law or by a contract. Your Service terminates in any event
      when the approved leave ends unless you immediately return to active work.
      The Company determines which leaves count for this purpose, and when your
      Service terminates for all purposes under the Plan. The Company also
      determines the extent to which you may exercise the vested portion of your
      Option during a leave of absence.

	
      Form
      of Payment
	
       

      When
      you submit Exhibit A, you must include payment of the Exercise Price for
      the Shares you are purchasing. Payment may be made in one (or a
      combination) of the following forms at the discretion of the
      committee:

       

      · Your
      personal check, a cashier’s check or a money order.

       

	
      Withholding
      Taxes
	
       

      You
      will not be allowed to exercise this Option unless you make acceptable
      arrangements to pay any withholding or other taxes that may be due as a
      result of the Option exercise or the sale of Shares acquired upon exercise
      of this Option.

 

 

- 3
-

 

	
      Restrictions
      on Resale 
	
       

      By
      signing this Agreement, you agree not to exercise this Option or sell any
      Shares acquired upon exercise of this Option at a time when applicable
      laws, regulations or Company or underwriter trading policies prohibit
      exercise or sale. In particular, the Company shall have the right to
      designate one or more periods of time, each of which shall not exceed 180
      days in length, during which this Option shall not be exercisable if the
      Company determines (in its sole discretion) that such limitation on
      exercise could in any way facilitate a lessening of any restriction on
      transfer pursuant to the Securities Act or any state securities laws with
      respect to any issuance of securities by the Company, facilitate the
      registration or qualification of any securities by the Company under the
      Securities Act or any state securities laws, or facilitate the perfection
      of any exemption from the registration or qualification requirements of
      the Securities Act or any applicable state securities laws for the
      issuance or transfer of any securities. Such limitation on exercise shall
      not alter the vesting schedule set forth in this Agreement other than to
      limit the periods during which this Option shall be
      exercisable.

       

      Furthermore,
      in respect of any underwritten public offering by the Company, you agree
      that you will not sell or otherwise transfer or dispose of any Shares
      covered by this Option during a reasonable and customary period of time as
      agreed to by the Company and the underwriters, not to exceed the greater
      of (a) 180 days following the effective date of the registration statement
      of the Company filed under the Securities Act in respect of such offering
      and (b) such other period of time as agreed to by holders of a majority of
      the then outstanding Shares. By signing this Agreement you agree to
      execute and deliver such other agreements as may be reasonably requested
      by the Company or the underwriter which are consistent with the foregoing
      or which are necessary to give further effect thereto. The Company may
      impose stop-transfer instructions with respect to the Shares subject to
      the foregoing restriction until the end of such period.

       

      If
      the sale of Shares under the Plan is not registered under the Securities
      Act of 1933, as amended (the “Securities Act”), but an exemption is
      available which requires an investment or other representation, you shall
      represent and agree at the time of exercise that the Shares being acquired
      upon exercise of this Option are being acquired for investment, and not
      with a view to the sale or distribution thereof, and shall make such other
      representations as are deemed necessary or appropriate by the Company and
      its counsel. 

       

	
      The
      Company’s Right of First Refusal
	 In
      the event that you propose to sell, pledge or otherwise transfer to a
      third party any Shares acquired under this Agreement, or any interest in
      such Shares, the Company shall have the “Right of First Refusal” with
      respect to all (and not less than all) of such Shares. If you desire to
      transfer Shares acquired under this Agreement, you must give a written
      “Transfer Notice” to the Company describing fully the proposed transfer,
      including the number of Shares proposed to be transferred, the proposed
      transfer price and the name and address of the proposed transferee. The
      Transfer Notice shall be signed both by you and by the proposed transferee
      and must constitute a binding commitment of both parties to the transfer
      of the Shares.

 

 

- 4 -

 

	
       
	
       

       

       

      The Company and its assignees shall have the right to
      purchase all, and not less than all, of the Shares on the terms described
      in the Transfer Notice (subject, however, to any change in such terms
      permitted in the next paragraph) by delivery of a Notice of Exercise of
      the Right of First Refusal within 30 days after the date when the Transfer
      Notice was received by the Company. The Company’s rights under this
      Subsection shall be freely assignable, in whole or in part.

       

      If the Company fails to exercise its Right of First Refusal
      within 30 days after the date when it received the Transfer Notice,
      you may, not later than 60 days following receipt of the Transfer Notice
      by the Company, conclude a transfer of the Shares subject to the Transfer
      Notice on the terms and conditions described in the Transfer Notice. Any
      proposed transfer on terms and conditions different from those described
      in the Transfer Notice, as well as any subsequent proposed transfer by
      you, shall again be subject to the Right of First Refusal and shall
      require compliance with the procedure described in the paragraph above. If
      the Company exercises its Right of First Refusal, you and the Company (or
      its assignees) shall consummate the sale of the Shares on the terms set
      forth in the Transfer Notice.

       

      The Company’s Right of First Refusal shall terminate upon
      the Company’s initial public offering.

       

      The Company’s Right of First Refusal shall inure to the
      benefit of its successors and assigns and shall be binding upon any
      transferee of the Shares.

	
      Right of Repurchase
	
       

      Following termination of your Service for any reason, the
      Company shall have the right to purchase all of those vested Shares that
      you have or will acquire under this Option (unvested Shares which have
      been exercised are subject to a Repurchase Option set forth in Exhibit A).
      If the Company fails to provide you with written notice of its intention
      to purchase such Shares before or within 30 days of the date the Company
      receives written notice from you of your termination of Service, the
      Company’s right to purchase such Shares shall terminate. If the Company
      exercises its right to purchase such Shares, the Company will consummate
      the purchase of such Shares within 60 days of the date of its written
      notice to you. The purchase price for any Shares repurchased shall be the
      higher of the fair market value of the Shares on the date of purchase or
      the aggregate Exercise Price for such Shares and shall be paid in cash.
      The Company’s right of repurchase shall terminate in the event that Stock
      is listed on an established stock exchange or is quoted regularly on the
      NASDAQ National Market. The fair market value shall be determined by the
      Board of Directors in its sole discretion.

	
      Transfer of Option
	
       

      Prior to your death, only you may exercise this Option. You
      cannot transfer or assign this Option. For instance, you may not sell this
      Option or use it as security for a loan. If you attempt to do any of these
      things, this Option will immediately become invalid. You may, however,
      dispose of this Option in your will or by the other laws of descent and
      distribution.

 

 

- 5 -

 

	 	
       

      Regardless of any marital property settlement agreement, the
      Company is not obligated to honor a Notice of Exercise from your spouse or
      former spouse, nor is the Company obligated to recognize such individual’s
      interest in your Option in any other way.

	
      Retention Rights
	
       

      This Agreement does not give you the right to be retained by
      the Company in any capacity. The Company reserves the right to terminate
      your Service at any time and for any reason.

	
      Shareholder Rights
	
       

      Neither you, nor your estate or heirs, have any rights as a
      shareholder of the Company until a certificate for the Shares acquired
      upon exercise of this Option has been issued. No adjustments are made for
      dividends or other rights if the applicable record date occurs before your
      stock certificate is issued, except as described in the Plan.

	
      Adjustments
	
       

      In the event of a stock split, a stock dividend or a similar
      change in the Company’s Stock, the number of Shares covered by this Option
      and the Exercise Price per share may be adjusted pursuant to the Plan.
      Your Option shall be subject to the terms of the agreement of merger,
      liquidation or reorganization in the event the Company is subject to such
      corporate activity.

	
      Legends
	
       

      All certificates representing the Shares issued upon
      exercise of this Option shall, where applicable, have endorsed thereon the
      following legends:

       

      “THE
      SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
      RESTRICTIONS ON TRANSFER AND OPTIONS TO PURCHASE SUCH SHARES SET FORTH IN
      AN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER, OR SUCH
      HOLDER’S PREDECESSOR IN INTEREST. SUCH AGREEMENT IMPOSES CERTAIN TRANSFER
      RESTRICTIONS AND GRANTS CERTAIN REPURCHASE RIGHTS TO THE COMPANY (OR ITS
      ASSIGNS) UPON THE SALE OF THE SHARES OR UPON TERMINATION OF SERVICE WITH
      THE COMPANY. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE
      OF THE COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST TO THE SECRETARY
      OF THE COMPANY BY THE HOLDER OF SHARES REPRESENTED BY THIS
      CERTIFICATE.

	 	
       

      THE
      SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
      THE SECURITIES ACT OF 1933, OR THE SECURITIES LAWS OF ANY STATE, AND MAY
      BE OFFERED AND SOLD ONLY IF REGISTERED AND QUALIFIED PURSUANT TO THE
      RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES LAWS OR IF THE COMPANY
      IS PROVIDED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS
      COUNSEL, THAT REGISTRATION AND QUALIFICATION UNDER FEDERAL AND STATE
      SECURITIES LAWS IS NOT REQUIRED.”

 

 

- 6 -

 

	
      Applicable Law
	
       

      This Agreement will be interpreted and enforced under the
      laws of the State of California (without regard to their choice of law
      provisions).

	
      The Plan and Other Agreements
	
       

      The text of the Plan is incorporated in this Agreement by
      reference. Certain capitalized terms used in this Agreement are defined in
      the Plan.

       

      This Agreement, including its attachments, and the Plan
      constitute the entire understanding between you and the Company regarding
      this Option. Any prior agreements, commitments or negotiations concerning
      this Option are superseded.

	
      Investment Company Act of 1940
	
       

      You acknowledge that the Company is a business development
      company governed by the Investment Company Act of 1940, and therefore, if
      any terms of the Plan or this Agreement conflict with the provisions of
      the Investment Company of 1940, then the conflicting provisions of the
      Plan and this Agreement will automatically be amended to comply with the
      Investment Company Act of
1940.

By
signing the cover sheet of this Agreement, you agree to all of the terms and
conditions described above and in the Plan. You also acknowledge that you have
read Section 10, “Purchaser’s Investment Representations” of Attachment A and
that you can and hereby do make the same representations with respect to the
grant of this Option.

- 7 -

 

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
OR QUALIFIED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY
STATE, AND MAY BE OFFERED AND SOLD ONLY IF REGISTERED AND QUALIFIED PURSUANT TO
THE RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES LAWS OR IF THE COMPANY
IS PROVIDED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION
AND QUALIFICATION UNDER FEDERAL AND STATE SECURITIES LAWS IS NOT
REQUIRED.

M-GAB Development Corporation

2004 Omnibus Securities Plan

NONSTATUTORY STOCK OPTION AGREEMENT

M-GAB Development Corporation (the “Company”), hereby grants an
Option to purchase shares of its common stock (“Shares”) to the Optionee named
below. The terms and conditions of the Option are set forth in this cover sheet,
in the attachment and in the Company’s 2004 Omnibus Securities Plan (the
“Plan”).

Date of Grant: 

Name of Optionee: 

Optionee’s Social Security Number: 

Number of Shares Covered by Option:     

Exercise Price per Share: $

[must be at least 100% fair market value on Date of Grant]

Vesting Start Date: 

___ Check here if Optionee is a 10% owner (so that exercise
price must be 110% of fair market value and term will not exceed 5 years).

By signing this cover sheet, you agree to all of the
terms and conditions described in the attached Agreement and in the Plan, a copy
of which is also attached.

Optionee: 

(Signature)

Company: 

(Signature)

 

Title:
 

 

- 1
-

 

THE
SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE, AND MAY BE OFFERED
AND SOLD ONLY IF REGISTERED AND QUALIFIED PURSUANT TO THE RELEVANT PROVISIONS OF
FEDERAL AND STATE SECURITIES LAWS OR IF THE COMPANY IS PROVIDED AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION AND QUALIFICATION UNDER
FEDERAL AND STATE SECURITIES LAWS IS NOT REQUIRED.

M-GAB
Development Corporation

2004
Omnibus Securities Plan

NONSTATUTORY
STOCK OPTION AGREEMENT

 

 

	
      Nonstatutory
      Stock Option

       
	
      This
      Option is not intended to be an incentive stock option under section 422
      of the Internal Revenue Code and will be interpreted
      accordingly.

       

	
      Vesting

       
	
      No
      Shares will vest until you have performed _______ (____) months of Service
      from the commencement of your employment with the Company. Your Option
      shall vest as to _______ of the Shares on the date _______ (____) months
      from the Vesting Start Date as shown on the cover sheet. Thereafter,
      Shares shall vest at the rate of ________ of the Shares at the end of each
      full month thereafter. After you have completed ________ (____) months of
      Service, the number of Shares which vest under this Option at the Exercise
      Price shall be equal to the product of the number of full months of your
      continuous employment with the Company (“Service”) (including any approved
      leaves of absence) from the Vesting Start Date times the number of Shares
      covered by this Option times ________. The resulting number of Shares will
      be rounded to the nearest whole number. No additional Shares will vest
      after your Service has terminated for any reason.

       

      You
      should note that you may exercise the Option prior to vesting. In that
      case, the Company has a right to repurchase the unvested shares at the
      original exercise price if you terminate employment before vesting in all
      shares you purchased. Also, if you exercise before vesting, you should
      consider making an 83(b) election. Please see the attached Tax Summary.
      The 83(b) election must be filed within 0 days of the date you
      exercise.

       

	
      Term

       
	
      Your
      Option will expire in any event at the close of business at Company
      headquarters on the day before the tenth anniversary (fifth anniversary
      for a 10% owner) of the Date of Grant, as shown on the cover sheet. (It
      will expire earlier if your Service terminates, as described
      below.)

       

	
      Regular
      Termination

       
	
      If
      your Service terminates for any reason except death, Disability, or for
      “Cause” your Option will expire at the close of business at Company
      headquarters on the 30th day after your termination date. During such
      30-day period, you may exercise that portion of your Option that was
      vested on your termination date.

       

	
      Death

       
	
      If
      you die while in Service with the Company, your Option will expire at the
      close of business at Company headquarters on the date six months
      after the date of death. During that six-month period, your estate or
      heirs may exercise that portion of your Option that was vested on your
      date of death.

       

 

 

- 2
-

 

	 	 
	
      Disability

       
	
      If
      your Service terminates because of your Disability, your Option will
      expire at the close of business at Company headquarters on the date
      six months after your termination date. During that six-month period,
      you may exercise that portion of your Option that was vested on your date
      of Disability.

       

      “Disability”
      means that you are unable to engage in any substantial gainful activity by
      reason of any medically determinable physical or mental
      impairment.

       

	
      Leaves
      of Absence

       
	
      For
      purposes of this Option, your Service does not terminate when you go on a
      bona fide
      leave of absence that was approved by the Company in writing, if the terms
      of the leave provide for continued service crediting, or when continued
      service crediting is required by applicable law. However, your Service
      will be treated as terminating 30 days after you went on leave, unless
      your right to return to work is guaranteed by law or by a contract. Your
      service terminates in any event when the approved leave ends unless you
      immediately return to Service. The Company determines which leaves count
      for this purpose, and when your Service terminates for all purposes under
      the Plan. The Company also determines the extent to which you may exercise
      the vested portion of your Option during a leave of absence.

       

	
      Notice
      of Exercise

       
	
      When
      you wish to exercise this Option, you must execute Exhibit A
      (and if exercise is prior to vesting you must also execute Exhibits B
      and D). Your Exercise will be effective when it is received by the
      Company. If someone else wants to exercise this Option after your death,
      that person must prove to the Company’s satisfaction that he or she is
      entitled to do so.

       

	
      Form
      of Payment

       
	
      When
      you submit Exhibit A, you must include payment of the Exercise Price for
      the Shares you are purchasing. Payment may be made in one (or a
      combination) of the following forms at the discretion of the
      committee:

       

      
      ·   Your personal check, a cashier’s check or a money
      order.

       

	
      Withholding
      Taxes

       
	
      You
      will not be allowed to exercise this Option unless you make acceptable
      arrangements to pay any withholding or other taxes that may be due as a
      result of the Option exercise or the sale of Shares acquired upon exercise
      of this Option.

       

	
      Restrictions
      on Resale

       
	
      By
      signing this Agreement, you agree not to exercise this Option or sell any
      Shares acquired upon exercise of this Option at a time when applicable
      laws, regulations or Company or underwriter trading policies prohibit
      exercise or sale. In particular, the Company shall have the right to
      designate one or more periods of time, each of which shall not exceed 180
      days in length, during which this Option shall not be exercisable if the
      Company determines (in its sole discretion) that such limitation on
      exercise could in any way facilitate a lessening of any restriction on
      transfer pursuant to the Securities Act or any state securities laws with
      respect to any issuance of securities by the Company, facilitate the
      registration or qualification of any securities by the Company under the
      Securities Act or any state securities laws, or facilitate the perfection
      of any exemption from the registration or qualification requirements of
      the Securities Act or any applicable state securities laws for the
      issuance or transfer of any securities. Such limitation on exercise shall
      not alter the vesting schedule set forth in this Agreement other than to
      limit the periods during which this Option shall be
      exercisable.

       

       

 

 

 

- 3
-

 

	 	 
      Furthermore,
      in respect of any underwritten public offering by the Company, you agree
      that you will not sell or otherwise transfer or dispose of any Shares
      covered by this Option during a reasonable and customary period of time as
      agreed to by the Company and the underwriters, not to exceed the greater
      of (a) 180 days following the effective date of the registration statement
      of the Company filed under the Securities Act in respect of such offering
      and (b) such other period of time as agreed to by holders of a majority of
      the then outstanding Shares. By signing this Agreement you agree to
      execute and deliver such other agreements as may be reasonably requested
      by the Company or the underwriter which are consistent with the foregoing
      or which are necessary to give further effect thereto. The Company may
      impose stop-transfer instructions with respect to the Shares subject to
      the foregoing restriction until the end of such period.

       

       

      If
      the sale of Shares under the Plan is not registered under the Securities
      Act of 1933, as amended (the “Securities Act”), but an exemption is
      available which requires an investment or other representation, you shall
      represent and agree at the time of exercise that the Shares being acquired
      upon exercise of this Option are being acquired for investment, and not
      with a view to the sale or distribution thereof, and shall make such other
      representations as are deemed necessary or appropriate by the Company and
      its counsel. 

       

	
      The
      Company’s Right of First Refusal

       
	
      In
      the event that you propose to sell, pledge or otherwise transfer to a
      third party any Shares acquired under this Agreement, or any interest in
      such Shares, the Company shall have the “Right of First Refusal” with
      respect to all (and not less than all) of such Shares. If you desire to
      transfer Shares acquired under this Agreement, you must give a written
      “Transfer Notice” to the Company describing fully the proposed transfer,
      including the number of Shares proposed to be transferred, the proposed
      transfer price and the name and address of the proposed transferee. The
      Transfer Notice shall be signed both by you and by the proposed transferee
      and must constitute a binding commitment of both parties to the transfer
      of the Shares.

       

      The
      Company and its assignees shall have the right to purchase all, and not
      less than all, of the Shares on the terms described in the Transfer Notice
      (subject, however, to any change in such terms permitted in the next
      paragraph) by delivery of a notice of exercise of the Right of First
      Refusal within 30 days after the date when the Transfer Notice was
      received by the Company. 

       

       

 

 

- 4
-

 

	 	 
      The
      Company’s rights under this Subsection shall be freely assignable, in
      whole or in part.

       

      If
      the Company fails to exercise its Right of First Refusal within 30 days
      after the date when it received the Transfer Notice, you may, not later
      than 60 days following receipt of the Transfer Notice by the Company,
      conclude a transfer of the Shares subject to the Transfer Notice on the
      terms and conditions described in the Transfer Notice. Any proposed
      transfer on terms and conditions different from those described in the
      Transfer Notice, as well as any subsequent proposed transfer by you, shall
      again be subject to the Right of First Refusal and shall require
      compliance with the procedure described in the paragraph above. If the
      Company exercises its Right of First Refusal, you and the Company (or its
      assignees) shall consummate the sale of the Shares on the terms set forth
      in the Transfer Notice.

       

      The
      Company’s Right of First Refusal shall terminate upon the Company’s
      initial public offering.

       

      The
      Company’s Right of First Refusal shall inure to the benefit of its
      successors and assigns and shall be binding upon any transferee of the
      Shares. 

       

	
      Right
      of Repurchase

       
	
      Following
      termination of your Service for any reason, the Company shall have the
      right to purchase all of those vested Shares that you have or will acquire
      under this Option (unvested Shares which have been exercised are subject
      to a Repurchase Option set forth in Exhibit A). If the Company fails to
      provide you with written notice of its intention to purchase such Shares
      before or within 30 days of the date the Company receives written notice
      from you of your termination of Service, the Company’s right to purchase
      such Shares shall terminate. If the Company exercises its right to
      purchase such Shares, the Company will consummate the purchase of such
      Shares within 60 days of the date of its written notice to you. The
      purchase price for any Shares repurchased shall be the higher of the fair
      market value of the Shares on the date of purchase or the aggregate
      Exercise Price for such Shares and shall be paid in cash. The Company’s
      right of repurchase shall terminate in the event that Stock is listed on
      an established stock exchange or is quoted regularly on the NASDAQ
      National Market. The fair market value shall be determined by the Board of
      Directors in its sole discretion.

       

	
      Transfer
      of Option

       
	
      Prior
      to your death, only you may exercise this Option. You cannot transfer or
      assign this Option. For instance, you may not sell this Option or use it
      as security for a loan. If you attempt to do any of these things, this
      Option will immediately become invalid. You may, however, dispose of this
      Option in your will or by other laws of descent and
      distribution.

       

      Regardless
      of any marital property settlement agreement, the Company is not obligated
      to honor a Notice of Exercise from your spouse or former spouse, nor is
      the Company obligated to recognize such individual’s interest in your
      Option in any other way. 

       

 

 

- 5
-

 

	
      Retention
      Rights

       
	
      This
      Agreement does not give you the right to be retained by the Company in any
      capacity. The Company reserves the right to terminate your Service at any
      time and for any reason.

       

	
      Shareholder
      Rights

       
	
      Neither
      you, nor your estate or heirs, have any rights as a shareholder of the
      Company until a certificate for the Shares acquired upon exercise of this
      Option has been issued. No adjustments are made for dividends or other
      rights if the applicable record date occurs before your stock certificate
      is issued, except as described in the Plan.

       

	
      Adjustments

       
	
      In
      the event of a stock split, a stock dividend or a similar change in the
      Company Stock, the number of Shares covered by this Option and the
      Exercise Price per share may be adjusted pursuant to the Plan. Your Option
      shall be subject to the terms of the agreement of merger, liquidation or
      reorganization in the event the Company is subject to such corporate
      activity.

       

	
      Legends

       
	
      All
      certificates representing the Shares issued upon exercise of this Option
      shall, where applicable, have endorsed thereon the following
      legends:

       

      “THE
      SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
      RESTRICTIONS ON TRANSFER AND OPTIONS TO PURCHASE SUCH SHARES SET FORTH IN
      AN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER, OR SUCH
      HOLDER’S PREDECESSOR IN INTEREST. SUCH AGREEMENT IMPOSES CERTAIN TRANSFER
      RESTRICTIONS AND GRANTS CERTAIN REPURCHASE RIGHTS TO THE COMPANY (OR ITS
      ASSIGNS) UPON THE SALE OF THE SHARES OR UPON TERMINATION OF SERVICE WITH
      THE COMPANY. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE
      OF THE COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST TO THE SECRETARY
      OF THE COMPANY BY THE HOLDER OF SHARES REPRESENTED BY THIS
      CERTIFICATE.

       

      THE
      SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
      THE SECURITIES ACT OF 1933, OR THE SECURITIES LAWS OF ANY STATE, AND MAY
      BE OFFERED AND SOLD ONLY IF REGISTERED AND QUALIFIED PURSUANT TO THE
      RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES LAWS OR IF THE COMPANY
      IS PROVIDED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS
      COUNSEL, THAT REGISTRATION AND QUALIFICATION UNDER FEDERAL AND STATE
      SECURITIES LAWS IS NOT REQUIRED.” 

       

	
      Applicable
      Law

       
	
      This
      Agreement will be interpreted and enforced under the laws of the State of
      California (without regard to their choice of law
provisions).

       

 

 

- 6
-

 

	
      The
      Plan and Other Agreements

       
	
      The
      text of the Plan is incorporated in this Agreement by reference. Certain
      capitalized terms used in this Agreement are defined in the
      Plan.

       

      This
      Agreement and the Plan constitute the entire understanding between you and
      the Company regarding this Option. Any prior agreements, commitments or
      negotiations concerning this Option are superseded.

       

	
      Investment
      Company Act of 1940

       
	
      You
      acknowledge that the Company is a business development company governed by
      the Investment Company Act of 1940, and therefore, if any terms of the
      Plan or this Agreement conflict with the provisions of the Investment
      Company of 1940, then the conflicting provisions of the Plan and this
      Agreement will automatically be amended to comply with the Investment
      Company Act of 1940.

       

 

 

By
signing the cover sheet of this Agreement, you agree to all of the terms and
conditions described above and in the Plan. You also acknowledge that you have
read Section10, “Purchaser’s Investment Representations” of Attachment A and
that you can and hereby do make the same representations with respect to the
grant of this Option

- 7
-

 

EXHIBIT
A

 

M-GAB
Development Corporation

 

 

Notice
of Exercise and Common Stock Purchase Agreement

 

THIS
AGREEMENT is dated as of ___________, ____, between M-GAB Development
Corporation, (the “Company”), and _________________ (“Purchaser”).

 

W I T N E
S S E T H:

 

WHEREAS,
the Company and Purchaser are parties to that certain ___ Incentive ___
Nonstatutory Stock Option Agreement dated as of ___________, ____ (the “Option
Agreement”) pursuant to which the Purchaser has the right to purchase up to
______ shares of the Company’s common stock (the “Option Shares”);
and

 

WHEREAS,
the Option is exercisable with respect to certain of the Option Shares as of the
date hereof; and

 

WHEREAS,
pursuant to the Option Agreement, Purchaser desires to purchase shares of the
Company as herein described, on the terms and conditions set forth in this
Agreement, the Option Agreement and the M-GAB Development Corporation 2004
Omnibus Securities Plan (the “Plan”). Certain capitalized terms used in this
Agreement are defined in the Plan.

 

NOW,
THEREFORE, it is agreed between the parties as follows:

 

SECTION
1:   PURCHASE
OF SHARES.

 

(a)  Pursuant
to the terms of the Option Agreement, Purchaser hereby agrees to purchase from
the Company and the Company agrees to sell and issue to Purchaser _________
shares of the Company’s common stock (the “Stock”) for the Exercise Price per
share specified in the Option Agreement payable by personal check, cashier’s
check or money order, if permitted by the Option Agreement, as
follows:
_______________________________. Payment shall be delivered at the Closing, as
such term is hereinafter defined.

 

(b)  The
closing hereunder (the “Closing”) shall occur at the offices of the Company on
__________, ____, or such other time and place as may be designated by the
Company (the “Closing Date”).

 

SECTION
2:   REPURCHASE
OPTION

 

All
unvested shares of the Stock purchased by the Purchaser pursuant to this
Agreement (sometimes referred to as the “Repurchase Option Stock”) shall be
subject to the following option (the “Repurchase Option”):

 

(a)  In the
event the Purchaser terminates service with the Company (“Service”) for any
reason, with or without cause, the Company may exercise the Repurchase
Option.

 

(b)  Purchaser
understands that the Stock is being sold in order to induce Purchaser to become
and/or remain associated with the Company and to work diligently for the success
of the Company and that the Repurchase Option Stock will continue to vest in
accordance with the schedule set forth in the Option Agreement. Accordingly, the
Company shall have the right at any time within 90 days after the termination of
Service to purchase from the Purchaser all shares of Stock purchased hereunder
which have not vested in accordance with the terms of such vesting schedule in
the Option Agreement. The purchase price for such unvested shares of Repurchase
Option Stock shall be the Exercise Price per share paid by Purchaser for such
shares pursuant to the Option (the “Option Price”). The purchase price shall be
paid by certified or cashier’s check or by cancellation of any indebtedness of
Purchaser to the Company.

 

 

- 1
-

 

(c)  Nothing
in this Agreement shall be construed as a right by purchaser to be employed by
Company, or a parent or subsidiary of Company.

 

SECTION
3:   EXERCISE
OF REPURCHASE OPTION

 

The
Repurchase Option shall be exercised by written notice signed by an officer of
the Company and delivered or mailed as provided in Section 16 of this
Agreement and to the Escrow Agent as provided in Section 16 of the Joint
Escrow Instructions attached as Exhibit B to the Option
Agreement.

 

SECTION
4:   WAIVER,
ASSIGNMENT, EXPIRATION OF REPURCHASE OPTION

 

If the
Company waives or fails to exercise the Repurchase Option as to all of the
shares subject thereto, the Company may, in the discretion of its Board of
Directors, assign the Repurchase Option to any other holder or holders of
preferred or common stock of the Company in such proportions as such Board of
Directors may determine. In the event of such an assignment, the assignee shall
pay to the Company in cash an amount equal to the fair market value of the
Repurchase Option. The Company shall promptly, upon expiration of the 90-day
period referred to in Section 2 above, notify Purchaser of the number of
shares subject to the Repurchase Option assigned to such stockholders and shall
notify both the Purchaser and the assignees of the time, place and date for
settlement of such purchase, which must be made within 90 days from the date of
cessation of continuous employment. In the event that the Company and/or such
assignees do not elect to exercise the Repurchase Option as to all or part of
the shares subject to it, the Repurchase Option shall expire as to all shares
which the Company and/or such assignees have not elected to
purchase.

 

SECTION
5:   ESCROW
OF SHARES

 

(a)  As
security for Purchaser’s faithful performance of the terms of this Agreement and
to ensure the availability for delivery of Purchaser’s shares upon exercise of
the Repurchase Option herein provided for, Purchaser agrees at the Closing
hereunder, to deliver to and deposit with the Escrow Agent named in the Joint
Escrow Instructions attached to the Option Agreement as Exhibit B, the
certificate or certificates evidencing the Option Stock subject to the
Repurchase Option and two Assignments Separate from Certificate duly executed
(with date and number of shares in blank) in the form attached to the Option
Agreement as Exhibit D. Such documents are to be held by the Escrow Agent
and delivered by the Escrow Agent pursuant to the Joint Escrow Instructions,
which instructions shall also be delivered to the Escrow Agent at the Closing
hereunder.

 

(b)  Within 30
days after the last day of each successive completed calendar quarter after the
Closing Date, if Purchaser so requests, the Escrow Agent will deliver to
Purchaser certificates representing so many shares of Stock as are no longer
subject to the Repurchase Option (less such shares as have been previously
delivered). Ninety days after cessation of Purchaser’s employment with the
Company the Company will direct the Escrow Agent to deliver to Purchaser a
certificate or certificates representing the number of shares not repurchased by
the Company or its assignees pursuant to exercise of the Repurchase Option (less
such shares as have been previously delivered).

 

 

- 2
-

 

SECTION
6:   ADJUSTMENT
OF SHARES

 

Subject
to the provisions of the Articles of Incorporation of the Company, if, from time
to time during the term of the Repurchase Option:

 

(a)  there is
any stock dividend or liquidating dividend of cash and/or property, stock split
or other change in the character or amount of any of the outstanding securities
of the Company, or

 

(b)  there is
any consolidation, merger or sale of all or substantially all, of the assets of
the Company,

 

then, in
such event, any and all new, substituted or additional securities or other
property to which Purchaser is entitled by reason of Purchaser’s ownership of
the shares shall be immediately subject to such Repurchase Option with the same
force and effect as the shares of Option Stock from time to time subject to the
Repurchase Option. While the total Option Price shall remain the same after each
such event, the Option Price per share of Option Stock upon exercise of the
Repurchase Option shall be appropriately and equitably adjusted as determined by
the Board of Directors of the Company.

 

SECTION
7:   THE
COMPANY’S RIGHT OF FIRST REFUSAL.

 

Before
any shares of Stock registered in the name of Purchaser and not subject to the
Repurchase Option may be sold or transferred, such shares shall first be offered
to the Company as set forth in the Option Agreement.

 

SECTION
8:   PURCHASER’S
RIGHTS AFTER EXERCISE OF REPURCHASE
OPTION OR RIGHT OF FIRST REFUSAL.

 

If the
Company makes available, at the time and place and in the amount and form
provided in this Agreement, the consideration for the Stock to be repurchased in
accordance with the provisions of Sections 2 and 7 of this Agreement, then from
and after such time the person from whom such shares are to be repurchased shall
no longer have any rights as a holder of such shares (other than the right to
receive payment of such consideration in accordance with this Agreement). Such
shares shall be deemed to have been repurchased in accordance with the
applicable provisions hereof, whether or not the certificate(s) therefor have
been delivered as required by this Agreement.

 

SECTION
9:   TRANSFER
BY PURCHASER TO CERTAIN TRUSTS.

 

Purchaser
shall have the right to transfer all or any portion of Purchaser’s interest in
the shares issued under this Agreement which have been delivered to Purchaser
under the provisions of Section 5 of this Agreement, to a trust established
by Purchaser for the benefit of Purchaser, Purchaser’s spouse or Purchaser’s
children, without being subject to the provisions of Section 7 hereof,
provided that the trustee on behalf of the trust shall agree in writing to be
bound by the terms and conditions of this Agreement. The transferee shall
execute a copy of Exhibit C attached to the Option Agreement and file the
same with the Secretary of the Company.

 

SECTION
10:   LEGEND
OF SHARES.

 

All
certificates representing the Stock purchased under this Agreement shall, where
applicable, have endorsed thereon the legends set forth in the Option Agreement
and any other legends required by applicable securities laws.

 

- 3
-

 

 

SECTION
11:   PURCHASER’S
INVESTMENT REPRESENTATIONS.

 

(a)  This
Agreement is made with Purchaser in reliance upon Purchaser’s representation to
the Company, which by Purchaser’s acceptance hereof Purchaser confirms, that the
Stock which Purchaser will receive will be acquired with Purchaser’s own funds
for investment for an indefinite
period for Purchaser’s own account, not as a nominee or agent, and not with a
view to the sale or distribution of any part thereof, and that Purchaser has no
present intention of selling, granting participation in, or otherwise
distributing the same, but subject, nevertheless, to any requirement of law that
the disposition of Purchaser’s property shall at all times be
within Purchaser’s
control. By executing this Agreement, Purchaser further represents that
Purchaser does not have any contract, understanding or agreement with any person
to sell, transfer, or grant participation, to such person or to any third
person, with respect to any of the Stock.

 

(b)  Purchaser
understands that the Stock will not be registered or qualified under federal or
state securities laws on the ground that the sale provided for in this Agreement
is exempt from registration or qualification under federal or state securities
laws and that the Company’s
reliance on such exemption is predicated on Purchaser’s representations set
forth herein.

 

(c)  Purchaser
agrees that in no event will Purchaser make a disposition of any of the Stock
(including a disposition under Section 9 of this Agreement), unless and
until
(i) Purchaser
shall have notified the Company of the proposed disposition and shall have
furnished the Company with a statement of the circumstances surrounding the
proposed disposition and
(ii) Purchaser
shall have furnished the Company with an opinion of counsel satisfactory to the
Company to the effect that
(A) such
disposition will not require registration or qualification of such Stock under
federal or state securities laws or
(B) appropriate
action necessary for compliance with the federal or state securities laws has
been taken or
(iii) the
Company shall have waived, expressly and in writing, its rights under clauses
(i) and (ii) of this section.

 

(d)  With
respect to a transaction occurring prior to such date as the Plan and Stock
thereunder are covered by a valid Form S-8 or similar federal registration
statement, this subsection shall apply unless the transaction is covered by the
exemption in Nevada General Corporation Law or a similar broad based exemption.
In connection with the investment representations made herein, Purchaser
represents that Purchaser is able to fend for himself or herself in the
transactions contemplated by this Agreement, has such knowledge and experience
in financial and business matters as to be capable of evaluating the merits and
risks of Purchaser’s investment, has the ability to bear the economic risks of
Purchaser’s investment and has been furnished with and has had access to such
information as would be made available in the form of a registration statement
together with such additional information as is necessary to verify the accuracy
of the information supplied and to have all questions answered by the
Company.

 

(e)  Purchaser
understands that if the Company does not register with the Securities and
Exchange Commission pursuant to Section 12 of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”) or if a registration statement covering
the Stock (or a filing pursuant to the exemption from registration under
Regulation A of the Securities Act of 1933) under the Securities Act of 1933 is
not in effect when Purchaser desires to sell the Stock, Purchaser may be
required to hold the Stock for an indeterminate period. Purchaser also
acknowledges that Purchaser understands that any sale of the Stock which might
be made by Purchaser in reliance upon Rule 144 under the Securities Act of 1933
may be made only in limited amounts in accordance with the terms and conditions
of that Rule.

 

SECTION
12:   ASSISTANCE
TO PURCHASER UNDER RULE 144.

 

The
Company covenants and agrees that
(a) at
all times after it first becomes subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, it will use its best efforts to
comply with the current public information requirements of Rule 144(c)(1) under
the Securities Act of 1933, and that if prior to becoming subject to such
reporting requirements an over-the-counter market develops for the Stock, it
will make publicly available the information required by
Rule 144(c)(2);
(b) it
will furnish Purchaser, upon request, with all information required for the
preparation and filing of Form 144; and
(c) it
will on a timely basis use its best efforts to file all reports required to be
filed and make all disclosures, including disclosures of materially adverse
information, required to permit Purchaser to make the required representations
in Form 144.

 

 

- 4
-

 

SECTION
13:   NO
DUTY TO TRANSFER IN VIOLATION HEREUNDER.

 

The
Company shall not be required (a) to transfer on its books any shares of
Stock of the Company which shall have been sold or transferred in violation of
any of the provisions set forth in this Agreement or (b) to treat as owner
of such shares or to accord the right to vote as such owner or to pay dividends
to any transferee to whom such shares shall have been so
transferred.

 

SECTION
14:   RIGHTS
OF PURCHASER.

 

Except as
otherwise provided herein, Purchaser shall, during the term of this Agreement,
exercise all rights and privileges of a stockholder of the Company with respect
to the Stock.

 

SECTION
15:   OTHER
NECESSARY ACTIONS.

 

The
parties agree to execute such further instruments and to take such further
action as may reasonably be necessary to carry out the intent of this
Agreement.

 

SECTION
16:   NOTICE.

 

Any
notice required or permitted hereunder shall be given in writing and shall be
deemed effectively given upon the earliest of personal delivery, receipt or the
third full day following deposit in the United States Post Office with postage
and fees prepaid, addressed to the other party hereto at the address last known
or at such other address as such party may designate by 10 days’ advance written
notice to the other party hereto.

 

SECTION
17:   SUCCESSORS
AND ASSIGNS.

 

This
Agreement shall inure to the benefit of the successors and assigns of the
Company and, subject to the restrictions on transfer herein set forth, be
binding upon Purchaser and Purchaser’s heirs, executors, administrators,
successors and assigns. The failure of the Company in any instance to exercise
the Repurchase Option or rights of first offer described herein shall not
constitute a waiver of any other Repurchase Option or right of first offer that
may subsequently arise under the provisions of this Agreement. No waiver of any
breach or condition of this Agreement shall be deemed to be a waiver of any
other or subsequent breach or condition, whether of a like or different
nature.

 

SECTION
18:   APPLICABLE
LAW.

 

This
Agreement shall be governed by, and construed in accordance with, the laws of
the State of California, as such laws are applied to contracts entered into and
performed in such state.

 

 

- 5
-

 

SECTION
19:   NO
STATE QUALIFICATION.

 

THE SALE
OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED
WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF NEVADA AND THE ISSUANCE OF
SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION
THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES
IS EXEMPT FROM THE QUALIFICATION. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT
ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE
SALE IS SO EXEMPT.

 

SECTION
20:   NO
ORAL MODIFICATION.

 

No
modification of this Agreement shall be valid unless made in writing and signed
by the parties hereto.

 

SECTION
21:   ENTIRE
AGREEMENT.

 

This
Agreement and the Option Agreement constitute the entire complete and final
agreement between the parties hereto with regard to the subject matter
hereof.

 

IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day
and year first above written.

 

	
      M-GAB
      Development Corporation

       
	
      Purchaser

       

	 	 
	
      Sign:______________________________________

       

      Print:______________________________________

       

      Title:______________________________________

       
	
      Sign:______________________________________

       

      Print:______________________________________

       

      Title:______________________________________

       

	 	 
	 	 

 

 

- 6
-

EXHIBIT B

Joint
Escrow Instructions

 

 

 _________,
_____

 

Secretary

_____________________

 

 

Dear Sir
or Madam:

 

As Escrow
Agent for both M-GAB Development Corporation, (the “Company”), and
___________________ (“Purchaser”), you are hereby authorized and directed to
hold the documents delivered to you pursuant to the terms of that certain Common
Stock Purchase Agreement (the “Agreement”) of even date herewith, to which a
copy of these Joint Escrow Instructions is attached as Exhibit B to a
certain Stock Option dated ________ (“Option Agreement”), in accordance with the
following instructions:

 

1.  In the
event the Company shall elect to exercise the Repurchase Option set forth in the
Agreement, the Company shall give to Purchaser and you a written notice as
provided in the Agreement. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice,
including prompt delivery of stock certificates.

 

2.  At the
closing, you are directed (a) to date the stock assignment form or forms
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
or certificates evidencing the shares to be transferred, to the Company against
the simultaneous delivery to you of the purchase price (by certified or bank
cashier’s check) for the number of shares being purchased pursuant to the
exercise of the Repurchase Option.

 

3.  Purchaser
irrevocably authorizes the Company to deposit with you any certificates
evidencing shares to be held by you hereunder and any additions and
substitutions to said shares as defined in the Agreement. Purchaser does hereby
irrevocably constitute and appoint you as Purchaser’s attorney-in-fact and agent
for the term of this escrow to execute with respect to such securities all
documents necessary or appropriate to make such securities negotiable and to
complete any transaction herein contemplated. Subject to the provisions of this
Section 3, Purchaser shall exercise all rights and privileges, including
but not limited to, the right to vote and to receive dividends (if any), of a
stockholder of the Company while the shares are held by you.

 

4.  In
accordance with the terms of Section 5 of the Agreement, you may from time
to time deliver to Purchaser a certificate or certificates representing so many
shares as are no longer subject to the Repurchase Option.

 

5.  This
escrow shall terminate upon the release of all shares held under the terms and
provisions hereof.

 

6.  If at the
time of termination of this escrow you should have in your possession any
documents, securities or other property belonging to Purchaser, you shall
deliver all of same to Purchaser and shall be discharged from all further
obligations hereunder.

 

 

- 1
-

 

7.  Your
duties hereunder may be altered, amended, modified or revoked only by a writing
signed by all of the parties hereto.

 

8.  You shall
be obligated only for the performance of such duties as are specifically set
forth herein and may rely and shall be protected in relying or refraining from
acting on any instrument reasonably believed by you to be genuine and to have
been signed or presented by the proper party or parties. You shall not be
personally liable for any act you may do or omit to do hereunder as Escrow Agent
or as attorney-in-fact of Purchaser while acting in good faith and in the
exercise of your own good judgment, and any act done or omitted by you pursuant
to the advice of your own attorneys shall be conclusive evidence of such good
faith.

 

9.  You are
hereby expressly authorized to disregard any and all warnings given by any of
the parties hereto or by any other person or corporation, excepting only orders
or process of courts of law, and are hereby expressly authorized to comply with
and obey orders, judgments or decrees of any court. In case you obey or comply
with any such order, judgment or decree of any court, you shall not be liable to
any of the parties hereto or to any other person, firm or corporation by reason
of such compliance, notwithstanding any such order, judgment or decree being
subsequently reversed, modified, annulled, set aside, vacated or found to have
been entered without jurisdiction.

 

10.  You shall
not be liable in any respect on account of the identity, authority or rights of
the parties executing or delivering or purporting to execute or deliver the
Agreement or any documents or papers deposited or called for
hereunder.

 

11.  You shall
not be liable for the outlawing of any rights under any statute of limitations
with respect to these Joint Escrow Instructions or any documents deposited with
you.

 

12.  You shall
be entitled to employ such legal counsel and other experts as you may deem
necessary properly to advise you in connection with your obligations hereunder
and may rely upon the advice of such counsel.

 

13.  Your
responsibilities as Escrow Agent hereunder shall terminate if you shall cease to
be Secretary of the Company or if you shall resign by written notice of each
party. In the event of any such termination, the Company shall appoint any
officer of the Company as successor Escrow Agent.

 

14.  If you
reasonably require other or further instruments in connection with these Joint
Escrow Instructions or obligations in respect hereto, the necessary parties
hereto shall join in furnishing such instruments.

 

15.  It is
understood and agreed that should any dispute arise with respect to the delivery
and/or ownership or right of possession of the securities held by you hereunder,
you are authorized and directed to retain in your possession without liability
to anyone all or any part of said securities until such dispute shall have been
settled either by mutual written agreement of the parties concerned or by a
final order, decree or judgment of a court of competent jurisdiction after the
time for appeal has expired and no appeal has been perfected, but you shall be
under no duty whatsoever to institute or defend any such
proceedings.

 

16.  Any
notice required or permitted hereunder shall be given in writing and shall be
deemed effectively given upon personal delivery or upon deposit in the United
States Post Office, by registered or certified mail with postage and fees
prepaid, addressed to each of the other parties thereunto entitled.

 

17.  By
signing these Joint Escrow Instructions, you become a party hereto only for the
purpose of said Joint Escrow Instructions; you do not become a party to the
Agreement.

 

18.  This
instrument shall be governed by and construed in accordance with the laws of the
State of California.

 

 

- 2
-

 

19.  This
instrument shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns.

 

 

 

Very
truly yours,

 

M-GAB
Development Corporation

 

Sign:
___________________________

 

Print:____________________________

 

Title:____________________________

 

 

ESCROW
AGENT:     PURCHASER:

 

Sign:
__________________________   Sign:______________________________

 

Print:___________________________   Print:______________________________

 

Title:___________________________   Title:______________________________

 

 

 

- 3
-

 

EXHIBIT C

 

Acknowledgment
of and Agreement to be Bound

 

By
the Notice of Exercise and Common Stock Purchase Agreement
of

 

M-GAB
Development Corporation

 

The
undersigned, as transferee of shares of M-GAB Development Corporation, hereby
acknowledges that he or she has read and reviewed the terms of the Notice of
Exercise and Common Stock Purchase Agreement of M-GAB Development Corporation
and hereby agrees to be bound by the terms and conditions thereof, as if the
undersigned had executed said Agreement as an original party
thereto.

 

Dated:
____________________, ____.

 

Sign:_____________________________

Print:_____________________________

Title:_____________________________

 

 

 

- 4
-

EXHIBIT D

 

ASSIGNMENT
SEPARATE FROM CERTIFICATE

 

FOR VALUE
RECEIVED _________________________________ hereby sells, assigns and transfers
unto _________________________ ________________________ (________) shares of the
Common Stock of M-GAB Development Corporation (the “Company”), standing in
__________ name on the books of the Company represented by Certificate No.
___________ herewith and hereby irrevocably constitutes and appoints
________________ Attorney to transfer said stock on the books of the Company
with full power of substitution in the premises.

 

Dated:
____________________, ____.

 

- 1
-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

Basking Ridge, New Jersey
July 26, 2004                                                            $20,000

            FOR  VALUE  RECEIVED,   STRONGHOLD  TECHNOLOGIES,   INC.,  a  Nevada
corporation  (hereinafter called the "Borrower"),  hereby promises to pay to the
order of NEW  MILLENNIUM  CAPITAL  PARTNERS II, LLC or  registered  assigns (the
"Holder") the sum of Twenty Thousand  Dollars  ($20,000),  on July 26, 2006 (the
"Maturity Date"),  and to pay interest on the unpaid principal balance hereof at
the rate of twelve percent (12%) per annum from July 26, 2004 (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 on March 31, June 30, September 30 and December
31 of each year  beginning on September 30, 2004. All payments due hereunder (to
the extent not converted into common stock,  $.0001 par value per share,  of the
Borrower (the "Common Stock") in accordance with the terms hereof) shall be made
in lawful  money of the  United  States  of  America,  or, at the  option of the
Borrower, in shares of Common Stock of the Borrower at the applicable Conversion
Price,  provided  that the first eight (8)  month's  interest  payment  shall be
payable in cash 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 June 18,  2004,  pursuant  to which  this Note was  originally
issued (the "Purchase Agreement").
<PAGE>

      This Note is free from all  taxes,  liens,  claims and  encumbrances  with
respect to the issue  thereof and shall not be subject to  preemptive  rights or
other  similar  rights  of  stockholders  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,  dated June
18, 2004, 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 4.9% of the outstanding  shares of Common
Stock.  For  purposes  of the  proviso to the  immediately  preceding  sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities  Exchange Act of 1934, as amended,  and Regulations 13D-G thereunder,
except as otherwise provided in clause (1) of such proviso. The number of shares
of  Common  Stock to be  issued  upon  each  conversion  of this  Note  shall be
determined  by  dividing  the  Conversion  Amount  (as  defined  below)  by  the
applicable  Conversion  Price then in effect on the date specified in the notice
of  conversion,  in the form  attached  hereto  as  Exhibit  A (the  "Notice  of
Conversion"), delivered to the Borrower by the Holder in accordance with Section
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 June 18, 2004,  executed in connection  with the initial
issuance  of this  Note and the  other  Notes  issued  on the  Issue  Date  (the
"Registration Rights Agreement").

                                       2
<PAGE>

            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
50.0%. The "Fixed Conversion Price" shall mean $.70.

                  (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 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.

                                       3
<PAGE>

            1.3  Authorized  Shares.  Subject to the  Stockholder  Approval  (as
defined in Section  4(o) of the  Securities  Purchase  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 (2) 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,  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:

                                       4
<PAGE>

                  (a) In the event  Holder  elects to take such payment in cash,
cash  payment  shall be made to  Holder  by the  fifth  (5th)  day of the  month
following the month in which it has accrued; and

                  (b) In the event Holder  elects to take such payment in Common
Stock,  the Holder may convert  such  payment  amount  into Common  Stock at the
Conversion  Price (as in effect at the time of conversion) at any time after the
fifth day of the month following the month in which it has accrued in accordance
with the terms of this Article 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.

                  (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.

                                       5
<PAGE>

                  (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 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).

                  (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.

                                       6
<PAGE>

                  (f) Delivery of Common Stock by Electronic  Transfer.  In lieu
of delivering physical certificates  representing the Common Stock issuable upon
conversion,  provided the  Borrower's  transfer  agent is  participating  in the
Depository  Trust Company ("DTC") Fast Automated  Securities  Transfer  ("FAST")
program,  upon  request  of the Holder and its  compliance  with the  provisions
contained in Section 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 two (2) 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 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:

                                       7
<PAGE>

      "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 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.

                                       8
<PAGE>

                  (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.

                  (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;
provided,  further,  that the issuance of up to an aggregate of 1,000,000 shares
of Common Stock to consultants shall not be considered a Dilutive Issuance.

                                       9
<PAGE>

                  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,  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
<PAGE>

                  (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  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 stockholders
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.

                                       11
<PAGE>

            1.8 Status as Stockholder. 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 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.

                                       12
<PAGE>

                         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.

            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 $50,000.

            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, 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.

                                       13
<PAGE>

                         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;

            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 Effect  Registration.  The  Borrower  fails to 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  twenty  (20)  consecutive  days or forty (40) days in any twelve (12)
month period after the Registration Statement becomes effective;

            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;

                                       14
<PAGE>

            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  $50,000,  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"),  which such Event of Default  continues  for a period of ten (10) days
after  receipt of 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 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.

                                       15
<PAGE>

                           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 106 Allen
Road, Basking Ridge, New Jersey 07920, facsimile number: 908-903-1197 . 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.

            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.

                                       16
<PAGE>

            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.

            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.

                                       17
<PAGE>

            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 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.

                                       18
<PAGE>

                             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 $.57 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 of the  outstanding  Notes in accordance  with
this Section 5.1. 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 of the Notes issued on the Issue
Date and (2) the date of prepayment (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) 130% (for  prepayments  occurring  within sixty (60) days of
the Issue Date or (ii) 140% (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.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       19
<PAGE>

            IN WITNESS  WHEREOF,  Borrower  has caused this Note to be signed in
its name by its duly authorized officer this 26th day of July, 2004.

                                      STRONGHOLD TECHNOLOGIES, INC.

                                      By:
                                           -------------------------------------
                                           Christopher J. Carey
                                           President and Chief Executive Officer

                                       20
<PAGE>

                                    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 $.0001 per share ("Common  Stock"),  of Stronghold  Technologies,  Inc., a
Nevada  corporation  (the  "Borrower")   according  to  the  conditions  of  the
convertible Notes of the Borrower dated as of July 26, 2004 (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:______________________________________________________

                                       21
<PAGE>

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.

                                       22

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00081-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00081-of-00352.parquet"}]]