Document:

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EXHIBIT 10.27

                       NOTE AND WARRANT PURCHASE AGREEMENT

         This NOTE AND WARRANT PURCHASE AGREEMENT is dated as of April 1, 2002
(this "AGREEMENT") by and between Telenetics Corporation, a California
corporation (the "COMPANY"), and the entity or entities listed on EXHIBIT A
hereto (each a "PURCHASER" and collectively, the "PURCHASERS").

         The parties hereto agree as follows:

                                   ARTICLE I

                     PURCHASE AND SALE OF NOTES AND WARRANTS

         Section 1.1 PURCHASE AND SALE OF NOTES AND WARRANTS. Upon the following
terms and conditions, the Company shall issue and sell to the Purchasers, and
the Purchasers shall purchase from the Company, secured convertible promissory
notes in the aggregate principal amount of Two Million One Hundred Fifteen
Thousand Dollars ($2,115,000) bearing interest at the rate of six percent (6%)
per annum, convertible into shares of the Company's common stock, no par value
per share (the "COMMON STOCK"), in substantially the form attached hereto as
EXHIBIT B (the "NOTES"), and warrants to purchase shares of Common Stock, in
substantially the form attached hereto as EXHIBIT C (the "WARRANTS"), set forth
with respect to such Purchaser on EXHIBIT A hereto. The Company and the
Purchasers are executing and delivering this Agreement in accordance with and in
reliance upon the exemption from securities registration afforded by Section
4(2) of the U.S. Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder (the "SECURITIES ACT"), including Regulation
D ("REGULATION D"), and/or upon such other exemption from the registration
requirements of the Securities Act as may be available with respect to any or
all of the investments to be made hereunder.

         Section 1.2 PURCHASE PRICE AND CLOSING. The Company agrees to issue and
sell to the Purchasers and, in consideration of and in express reliance upon the
representations, warranties, covenants, terms and conditions of this Agreement,
the Purchasers agree to purchase the Notes and Warrants for an aggregate
purchase price of Two Million One Hundred Fifteen Thousand Dollars ($2,115,000)
(the "PURCHASE PRICE"). The closing (the "CLOSING") of the execution and
delivery of this Agreement shall occur at the offices of Rutan & Tucker, LLP,
611 Anton Boulevard, Suite 1400, Costa Mesa, CA 92626 at 5:00 p.m. (California
time) upon the satisfaction or waiver of each of the conditions set forth in
ARTICLE IV hereof (the "CLOSING DATE").

         Section 1.3 WARRANTS. At the Closing, the Company shall have issued to
the Purchasers Warrants to purchase an aggregate of 3,599,878 shares of Common
Stock. The Warrants shall be exercisable for five (5) years from the date of
issuance and shall have an exercise price equal to the Warrant Price (as defined
in the Warrants).

         Section 1.4 CONVERSION SHARES / WARRANT SHARES. The Company has
authorized and has reserved and covenants to continue to reserve (subject to
Shareholder Approval (as defined in SECTION 3.17 hereof)), free of preemptive
rights and other similar contractual rights of stockholders, a number of its
authorized but unissued shares of Common Stock equal to at least 100% of the
aggregate number of shares of Common Stock issuable at a conversion price equal
to the Conversion Price Floor (as defined in the Notes). Any shares of Common

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Stock issuable upon conversion of the Notes and exercise of the Warrants (and
such shares when issued) are herein referred to as the "CONVERSION SHARES" and
the "WARRANT SHARES," respectively. The Notes, the Warrants, the Conversion
Shares and the Warrant Shares are sometimes collectively referred to herein as
the "SECURITIES."

                                   ARTICLE II

                         REPRESENTATIONS AND WARRANTIES

         Section 2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. In order to
induce the Purchasers to enter into this Agreement and to purchase the Notes and
the Warrants, the Company hereby makes the following representations and
warranties to the Purchasers:

                  (a) ORGANIZATION, GOOD STANDING AND POWER. The Company is a
         corporation duly incorporated, validly existing and in good standing
         under the laws of the State of California and has the requisite
         corporate power to own, lease and operate its properties and assets and
         to conduct its business as it is now being conducted. The Company does
         not have any Subsidiaries (as defined in SECTION 2.1(g)) or own
         securities of any kind in any other entity except as set forth on
         SCHEDULE 2.1(g) hereto. The Company and each such Subsidiary is duly
         qualified as a foreign corporation to do business and is in good
         standing in every jurisdiction in which the nature of the business
         conducted or property owned by it makes such qualification necessary
         except for any jurisdiction(s) (alone or in the aggregate) in which the
         failure to be so qualified will not have a Material Adverse Effect. For
         the purposes of this Agreement, "MATERIAL ADVERSE EFFECT" means any
         adverse effect on the business, operations, properties, prospects or
         financial condition of the Company or its Subsidiaries and which is
         material to such entity or other entities controlling or controlled by
         such entity or which is likely to materially hinder the performance by
         the Company of its obligations hereunder and under the other
         Transaction Documents (as defined in SECTION 2.1(b) hereof).

                  (b) AUTHORIZATION; ENFORCEMENT. The Company has the requisite
         corporate power and authority to enter into and, subject to Shareholder
         Approval, perform this Agreement, the Registration Rights Agreement,
         the Security Agreement, the Notes, the Warrants and the Irrevocable
         Transfer Agent Instructions (as defined in SECTION 3.12) (collectively,
         the "TRANSACTION DOCUMENTS") and to issue and sell the Securities in
         accordance with the terms hereof and the Notes and the Warrants, as
         applicable. The execution, delivery and performance of the Transaction
         Documents by the Company and the consummation by it of the transactions
         contemplated thereby have been duly and validly authorized by all
         necessary corporate action, and, subject to Shareholder Approval, no
         further consent or authorization of the Company or its Board of
         Directors or stockholders is required. This Agreement has been duly
         executed and delivered by the Company. The other Transaction Documents
         will have been duly executed and delivered by the Company at the
         Closing. Each of the Transaction Documents constitutes, or shall
         constitute when executed and delivered, a valid and binding obligation
         of the Company enforceable against the Company in accordance with its
         terms, except as such enforceability may be limited by applicable

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         bankruptcy, insolvency, reorganization, moratorium, liquidation,
         conservatorship, receivership or similar laws relating to, or affecting
         generally the enforcement of, creditor's rights and remedies or by
         other equitable principles of general application.

                  (c) CAPITALIZATION. The authorized capital stock of the
         Company and the shares thereof currently issued and outstanding as of
         April 1, 2002 are set forth on SCHEDULE 2.1(c) hereto. All of the
         outstanding shares of the Company's Common Stock and any other security
         of the Company have been duly and validly authorized. Except as set
         forth in this Agreement or on SCHEDULE 2.1(c) hereto, no shares of
         Common Stock or any other security of the Company are entitled to
         preemptive rights or registration rights and there are no outstanding
         options, warrants, scrip, rights to subscribe to, call or commitments
         of any character whatsoever relating to, or securities or rights
         convertible into, any shares of capital stock of the Company.
         Furthermore, except as set forth in this Agreement or on SCHEDULE
         2.1(c) hereto, there are no contracts, commitments, understandings, or
         arrangements by which the Company is or may become bound to issue
         additional shares of the capital stock of the Company or options,
         securities or rights convertible into shares of capital stock of the
         Company. Except for customary transfer restrictions contained in
         agreements entered into by the Company in order to sell restricted
         securities or as provided on SCHEDULE 2.1(c) hereto, the Company is not
         a party to or bound by any agreement or understanding granting
         registration or anti-dilution rights to any person with respect to any
         of its equity or debt securities. Except as set forth on SCHEDULE
         2.1(c), the Company is not a party to, and it has no knowledge of, any
         agreement or understanding restricting the voting or transfer of any
         shares of the capital stock of the Company. Except as set forth on
         SCHEDULE 2.1(c) hereto, the offer and sale of all capital stock,
         convertible securities, rights, warrants, or options of the Company
         issued prior to the Closing complied with all applicable federal and
         state securities laws, and no holder of such securities has a right of
         rescission or claim for damages with respect thereto which could have a
         Material Adverse Effect. The Company has furnished or made available to
         the Purchasers true and correct copies of the Company's Articles of
         Incorporation as in effect on the date hereof (the "ARTICLES"), and the
         Company's Bylaws as in effect on the date hereof (the "BYLAWS").

                  (d) ISSUANCE OF SECURITIES. The Notes and the Warrants to be
         issued at the Closing have been duly authorized by all necessary
         corporate action and, when paid for and issued in accordance with the
         terms hereof, the Notes shall be validly issued and outstanding, free
         and clear of all liens, encumbrances and rights of refusal of any kind
         (other than federal and state securities law restrictions). When the
         Conversion Shares and Warrant Shares are issued and paid for in
         accordance with the terms of this Agreement and as set forth in the
         Notes and Warrants, such shares will be duly authorized by all
         necessary corporate action and validly issued and outstanding, fully
         paid and nonassessable, free and clear of all liens, encumbrances and
         rights of refusal of any kind (other than federal and state securities
         law restrictions) and the holders shall be entitled to all rights
         accorded to a holder of Common Stock.

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                  (e) NO CONFLICTS. Except as disclosed on SCHEDULE 2.1(e), the
         execution, delivery and performance of the Transaction Documents by the
         Company and the consummation by the Company of the transactions
         contemplated hereby and thereby do not and will not (i) violate any
         provision of the Company's Articles or Bylaws or any Subsidiary's
         comparable charter documents, (ii) conflict with, or constitute a
         default (or an event which with notice or lapse of time or both would
         become a default) under, or give to others any rights of termination,
         amendment, acceleration or cancellation of, any agreement, mortgage,
         deed of trust, indenture, note, bond, license, lease agreement,
         instrument or obligation to which the Company or any of its
         Subsidiaries is a party or by which the Company or any of its
         Subsidiaries' respective properties or assets are bound (other than as
         expressly contemplated by the Transaction Documents), (iii) create or
         impose a lien, mortgage, security interest, charge or encumbrance of
         any nature on any property or asset of the Company or any of its
         Subsidiaries under any agreement or any commitment to which the Company
         or any of its Subsidiaries is a party or by which the Company or any of
         its Subsidiaries is bound or by which any of their respective
         properties or assets are bound, or (iv) result in a violation of any
         federal, state, local or foreign statute, rule, regulation, order,
         judgment or decree (including federal and state securities laws and
         regulations) applicable to the Company or any of its Subsidiaries or by
         which any property or asset of the Company or any of its Subsidiaries
         are bound or affected, except, in all cases other than violations
         pursuant to clauses (i) or (iv) above, for such conflicts, defaults,
         terminations, amendments, acceleration, cancellations and violations as
         would not, individually or in the aggregate, have a Material Adverse
         Effect. The business of the Company and its Subsidiaries is not being
         conducted in violation of any laws, ordinances or regulations of any
         governmental entity, except for possible violations which singularly or
         in the aggregate do not and will not have a Material Adverse Effect.
         Neither the Company nor any of its Subsidiaries is required under
         federal, state, foreign or local law, rule or regulation to obtain any
         consent, authorization or order of, or make any filing or registration
         with, any court or governmental agency in order for it to execute,
         deliver or perform any of its obligations under the Transaction
         Documents or issue and sell the Notes, the Warrants, the Conversion
         Shares and the Warrant Shares in accordance with the terms hereof or
         thereof (other than any filings which may be required to be made by the
         Company with the Commission, the OTCBB prior to or subsequent to the
         Closing, or state securities administrators subsequent to the Closing,
         or any registration statement which may be filed pursuant hereto).

                  (f) COMMISSION DOCUMENTS, FINANCIAL STATEMENTS. The Common
         Stock of the Company is registered pursuant to Section 12(b) or 12(g)
         of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
         ACT"), and, except as disclosed on SCHEDULE 2.1(f) hereto, the Company
         has timely filed all reports, schedules, forms, statements and other
         documents required to be filed by it with the Commission pursuant to
         the reporting requirements of the Exchange Act, including material
         filed pursuant to Section 13(a) or 15(d) of the Exchange Act (all of
         the foregoing including filings incorporated by reference therein being
         referred to herein as the "COMMISSION DOCUMENTS"). The Company has
         delivered or made available to the Purchasers true and complete copies
         of the Commission Documents filed with the Commission since September
         30, 2001. The Company has not provided to the Purchasers any material
         non-public information or other information which, according to
         applicable law, rule or regulation, should have been disclosed publicly
         by the Company but which has not been so disclosed, other than with
         respect to the transactions contemplated by this Agreement. At the time

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         of its filing, the Form 10-QSB for the fiscal quarter ended September
         30, 2001 (the "FORM 10-QSB") complied in all material respects with the
         requirements of the Exchange Act and the rules and regulations of the
         Commission promulgated thereunder and other federal, state and local
         laws, rules and regulations applicable to such documents, and the Form
         10-QSB did not contain any untrue statement of a material fact or omit
         to state a material fact required to be stated therein or necessary in
         order to make the statements therein, in light of the circumstances
         under which they were made, not misleading. As of their respective
         dates, the financial statements of the Company included in the
         Commission Documents complied as to form in all material respects with
         applicable accounting requirements and the published rules and
         regulations of the Commission or other applicable rules and regulations
         with respect thereto. Such financial statements have been prepared in
         accordance with generally accepted accounting principles ("GAAP")
         applied on a consistent basis during the periods involved (except (i)
         as may be otherwise indicated in such financial statements or the notes
         thereto or (ii) in the case of unaudited interim statements, to the
         extent they may not include footnotes or may be condensed or summary
         statements), and fairly present in all material respects the financial
         position of the Company and its Subsidiaries as of the dates thereof
         and the results of operations and cash flows for the periods then ended
         (subject, in the case of unaudited statements, to normal year-end audit
         adjustments).

                  (g) SUBSIDIARIES. SCHEDULE 2.1(g) hereto sets forth each
         Subsidiary of the Company, showing the jurisdiction of its
         incorporation or organization and showing the percentage of each
         person's ownership of the outstanding stock or other interests of such
         Subsidiary. For the purposes of this Agreement, "SUBSIDIARY" shall mean
         any corporation or other entity of which at least a majority of the
         securities or other ownership interest having ordinary voting power
         (absolutely or contingently) for the election of directors or other
         persons performing similar functions are at the time owned directly or
         indirectly by the Company and/or any of its other Subsidiaries. All of
         the outstanding shares of capital stock of each Subsidiary have been
         duly authorized and validly issued, and are fully paid and
         nonassessable. There are no outstanding preemptive, conversion or other
         rights, options, warrants or agreements granted or issued by or binding
         upon any Subsidiary for the purchase or acquisition of any shares of
         capital stock of any Subsidiary or any other securities convertible
         into, exchangeable for or evidencing the rights to subscribe for any
         shares of such capital stock. Neither the Company nor any Subsidiary is
         subject to any obligation (contingent or otherwise) to repurchase or
         otherwise acquire or retire any shares of the capital stock of any
         Subsidiary or any convertible securities, rights, warrants or options
         of the type described in the preceding sentence except as set forth on
         SCHEDULE 2.1(g) hereto. Neither the Company nor any Subsidiary is party
         to, nor has any knowledge of, any agreement restricting the voting or
         transfer of any shares of the capital stock of any Subsidiary.

                  (h) NO MATERIAL ADVERSE CHANGE. Since September 30, 2001, the
         Company has not experienced or suffered any Material Adverse Effect,
         except as disclosed on SCHEDULE 2.1(h) hereto.

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                  (i) NO UNDISCLOSED LIABILITIES. Except as disclosed in the
         Commission Documents, neither the Company nor any of its Subsidiaries
         has any liabilities, obligations, claims or losses (whether liquidated
         or unliquidated, secured or unsecured, absolute, accrued, contingent or
         otherwise) other than those incurred in the ordinary course of the
         Company's or its Subsidiaries respective businesses since September 30,
         2001 and which, individually or in the aggregate, do not or would not
         have a Material Adverse Effect on the Company or its Subsidiaries.

                  (j) NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. Since September
         30, 2001, except as disclosed on SCHEDULE 2.1(j) hereto, no event or
         circumstance has occurred or exists with respect to the Company or its
         Subsidiaries or their respective businesses, properties, prospects,
         operations or financial condition, which, under applicable law, rule or
         regulation, requires public disclosure or announcement by the Company
         but which has not been so publicly announced or disclosed.

                  (k) INDEBTEDNESS. SCHEDULE 2.1(k) hereto sets forth as of the
         date hereof all outstanding secured and unsecured Indebtedness of the
         Company or any Subsidiary, or for which the Company or any Subsidiary
         has commitments. For the purposes of this Agreement, "INDEBTEDNESS"
         shall mean (a) any liabilities for borrowed money or amounts owed in
         excess of $25,000 (other than trade accounts payable incurred in the
         ordinary course of business), (b) all guaranties, endorsements and
         other contingent obligations in respect of Indebtedness of others,
         whether or not the same are or should be reflected in the Company's
         balance sheet (or the notes thereto), except guaranties by endorsement
         of negotiable instruments for deposit or collection or similar
         transactions in the ordinary course of business; and (c) the present
         value of any lease payments in excess of $25,000 due under leases
         required to be capitalized in accordance with GAAP. Except as disclosed
         on SCHEDULE 2.1(k), neither the Company nor any Subsidiary is in
         default with respect to any Indebtedness.

                  (l) TITLE TO ASSETS. Each of the Company and the Subsidiaries
         has good and marketable title to all of its real and personal property,
         free and clear of any mortgages, pledges, charges, liens, security
         interests or other encumbrances of any nature whatsoever, except for
         those indicated on SCHEDULE 2.1(l) hereto or such that, individually or
         in the aggregate, would not have a Material Adverse Effect as of the
         Closing Date. All said leases of the Company and each of its
         Subsidiaries are valid and subsisting and in full force and effect.

                  (m) ACTIONS PENDING. There is no action, suit, claim,
         investigation, arbitration, alternative dispute resolution proceeding
         or other proceeding pending or, to the knowledge of the Company,
         threatened against the Company or any Subsidiary which questions the
         validity of this Agreement or any of the other Transaction Documents or
         any of the transactions contemplated hereby or thereby or any action
         taken or to be taken pursuant hereto or thereto. Except as set forth on
         SCHEDULE 2.1(m) hereto, there is no action, suit, claim, investigation,
         arbitration, alternative dispute resolution proceeding or other
         proceeding pending or, to the knowledge of the Company, threatened,
         against or involving the Company, any Subsidiary or any of their
         respective properties or assets, which individually or in the
         aggregate, would have a Material Adverse Effect as of the Closing Date.
         There are no outstanding orders, judgments, injunctions, awards or
         decrees of any court, arbitrator or governmental or regulatory body
         against the Company or any Subsidiary or any officers or directors of
         the Company or Subsidiary in their capacities as such, which
         individually or in the aggregate, would have a Material Adverse Effect
         as of the Closing Date.

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                  (n) COMPLIANCE WITH LAW. The business of the Company and the
         Subsidiaries has been and is presently being conducted in accordance
         with all applicable federal, state and local governmental laws, rules,
         regulations and ordinances, except as set forth on SCHEDULE 2.1(n)
         hereto or such that, individually or in the aggregate, the
         noncompliance therewith would not have a Material Adverse Effect. The
         Company and each of its Subsidiaries have all franchises, permits,
         licenses, consents and other governmental or regulatory authorizations
         and approvals necessary for the conduct of its business as now being
         conducted by it unless the failure to possess such franchises, permits,
         licenses, consents and other governmental or regulatory authorizations
         and approvals, individually or in the aggregate, could not reasonably
         be expected to have a Material Adverse Effect.

                  (o) TAXES. Except as set forth on SCHEDULE 2.1(o) hereto, the
         Company and each of the Subsidiaries has accurately prepared and filed
         all federal, state and other tax returns required by law to be filed by
         it, has paid or made provisions for the payment of all taxes shown to
         be due and all additional assessments, and adequate provisions have
         been and are reflected in the financial statements of the Company and
         the Subsidiaries for all current taxes and other charges to which the
         Company or any Subsidiary is subject and which are not currently due
         and payable. Except as disclosed on SCHEDULE 2.1(o) hereto, none of the
         federal income tax returns of the Company or any Subsidiary have been
         audited by the Internal Revenue Service. The Company has no knowledge
         of any additional assessments, adjustments or contingent tax liability
         (whether federal or state) of any nature whatsoever, whether pending or
         threatened against the Company or any Subsidiary for any period, nor of
         any basis for any such assessment, adjustment or contingency.

                  (p) CERTAIN FEES. Except as set forth on SCHEDULE 2.1(p)
         hereto, the Company has not employed any broker or finder or incurred
         any liability for any brokerage or investment banking fees,
         commissions, finders' structuring fees, financial advisory fees or
         other similar fees in connection with the Transaction Documents.

                  (q) DISCLOSURE. To the best of the Company's knowledge,
         neither this Agreement or the Schedules hereto nor any other documents,
         certificates or instruments furnished to the Purchasers by or on behalf
         of the Company or any Subsidiary in connection with the transactions
         contemplated by this Agreement contain any untrue statement of a
         material fact or omit to state a material fact necessary in order to
         make the statements made herein or therein, in the light of the
         circumstances under which they were made herein or therein, not
         misleading.

                  (r) OPERATION OF BUSINESS. Except as disclosed on SCHEDULE
         2.1(r), the Company and each of the Subsidiaries owns or possesses all
         patents, trademarks, domain names (whether or not registered) and any
         patentable improvements or copyrightable derivative works thereof,
         websites and intellectual property rights relating thereto, service

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         marks, trade names, copyrights, licenses and authorizations, including,
         but not limited to, those listed on SCHEDULE 2.1(R) hereto, and all
         rights with respect to the foregoing, which are necessary for the
         conduct of its business as now conducted without any conflict with the
         rights of others.

                  (s) ENVIRONMENTAL COMPLIANCE. Except as disclosed on SCHEDULE
         2.1(s) hereto, the Company and each of its Subsidiaries have obtained
         all material approvals, authorization, certificates, consents,
         licenses, orders and permits or other similar authorizations of all
         governmental authorities, or from any other person, that are required
         under any Environmental Laws. SCHEDULE 2.1(s) hereto sets forth all
         material permits, licenses and other authorizations issued under any
         Environmental Laws to the Company or its Subsidiaries. "ENVIRONMENTAL
         LAWS" shall mean all applicable laws relating to the protection of the
         environment including, without limitation, all requirements pertaining
         to reporting, licensing, permitting, controlling, investigating or
         remediating emissions, discharges, releases or threatened releases of
         hazardous substances, chemical substances, pollutants, contaminants or
         toxic substances, materials or wastes, whether solid, liquid or gaseous
         in nature, into the air, surface water, groundwater or land, or
         relating to the manufacture, processing, distribution, use, treatment,
         storage, disposal, transport or handling of hazardous substances,
         chemical substances, pollutants, contaminants or toxic substances,
         material or wastes, whether solid, liquid or gaseous in nature. Except
         as set forth on SCHEDULE 2.1(s) hereto, the Company has all necessary
         governmental approvals required under all Environmental Laws and used
         in its business or in the business of any of its Subsidiaries. The
         Company and each of its Subsidiaries are also in compliance with all
         other limitations, restrictions, conditions, standards, requirements,
         schedules and timetables required or imposed under all Environmental
         Laws. Except for such instances as would not individually or in the
         aggregate have a Material Adverse Effect, there are no past or present
         events, conditions, circumstances, incidents, actions or omissions
         relating to or in any way affecting the Company or its Subsidiaries
         that violate or may violate any Environmental Law after the Closing or
         that may give rise to any environmental liability, or otherwise form
         the basis of any claim, action, demand, suit, proceeding, hearing,
         study or investigation (i) under any Environmental Law, or (ii) based
         on or related to the manufacture, processing, distribution, use,
         treatment, storage (including, without limitation, underground storage
         tanks), disposal, transport or handling, or the emission, discharge,
         release or threatened release of any hazardous substance.
         "ENVIRONMENTAL LIABILITIES" means all liabilities of a person (whether
         such liabilities are owed by such person to governmental authorities,
         third parties or otherwise) whether currently in existence or arising
         hereafter which arise under or relate to any Environmental Law.

                  (t) BOOKS AND RECORDS; INTERNAL ACCOUNTING CONTROLS. The
         records and documents of the Company and its Subsidiaries accurately
         reflect in all material respects the information relating to the
         business of the Company and the Subsidiaries, the location and
         collection of their assets, and the nature of all transactions giving
         rise to the obligations or accounts receivable of the Company or any
         Subsidiary. The Company and each of its Subsidiaries maintain a system
         of internal accounting controls sufficient, in the judgment of the
         Company's board of directors, to provide reasonable assurance that (i)
         transactions are executed in accordance with management's general or
         specific authorizations, (ii) transactions are recorded as necessary to
         permit preparation of financial statements in conformity with generally
         accepted accounting principles and to maintain asset accountability,
         (iii) access to assets is permitted only in accordance with

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         management's general or specific authorization and (iv) the recorded
         accountability for assets is compared with the existing assets at
         reasonable intervals and appropriate actions are taken with respect to
         any differences.

                  (u) MATERIAL AGREEMENTS. Except for the Transaction Documents
         and as set forth on SCHEDULE 2.1(u) hereto, neither the Company nor any
         Subsidiary is a party to any written or oral contract, instrument,
         agreement, commitment, obligation, plan or arrangement, a copy of which
         would be required to be filed with the Commission (collectively,
         "MATERIAL AGREEMENTS") if the Company or any Subsidiary were
         registering securities under the Securities Act. Except as disclosed on
         SCHEDULED 2.1(u), to the best of the Company's knowledge neither the
         Company nor any subsidiary is in default under any Material Agreement
         now in effect, the result of which could cause a Material Adverse
         Effect. Except as disclosed on SCHEDULE 2.1(u), no written or oral
         contract, instrument, agreement, commitment, obligation, plan or
         arrangement of the Company or of any Subsidiary limits or shall limit
         the payment of interest on the Notes, or dividends on its Common Stock.

                  (v) TRANSACTIONS WITH AFFILIATES. Except as set forth on
         SCHEDULE 2.1(v) hereto, there are no loans, leases, agreements,
         contracts, royalty agreements, management contracts or arrangements or
         other continuing transactions exceeding $50,000 individually or in the
         aggregate between (a) the Company, any Subsidiary or any of their
         respective customers or suppliers on the one hand, and (b) on the other
         hand, any officer, employee, consultant or director of the Company, or
         any of its Subsidiaries, or any person owning any capital stock of the
         Company or any Subsidiary or any member of the immediate family of such
         officer, employee, consultant, director or stockholder or any
         corporation or other entity controlled by such officer, employee,
         consultant, director or stockholder, or a member of the immediate
         family of such officer, employee, consultant, director or stockholder.

                  (w) SECURITIES ACT OF 1933. The Company has complied and will
         comply with all applicable federal and state securities laws in
         connection with the offer, issuance and sale of the Notes, the
         Warrants, the Conversion Shares and the Warrant Shares hereunder.
         Neither the Company nor anyone acting on its behalf, directly or
         indirectly, has or will sell, offer to sell or solicit offers to buy
         any of the Securities, or similar securities to, or solicit offers with
         respect thereto from, or enter into any preliminary conversations or
         negotiations relating thereto with, any person, or has taken or will
         take any action so as to bring the issuance and sale of any of the
         Securities under the registration provisions of the Securities Act and
         applicable state securities laws. Neither the Company nor any of its
         affiliates, nor any person acting on its or their behalf, has engaged
         in any form of general solicitation or general advertising (within the
         meaning of Regulation D under the Securities Act) in connection with
         the offer or sale of any of the Securities.

                  (x) GOVERNMENTAL APPROVALS. Except as set forth on SCHEDULE
         2.1(x) hereto, and except for the filing of any notice prior or
         subsequent to the Closing that may be required under applicable state
         and/or federal securities laws (which if required, shall be filed on a
         timely basis), no authorization, consent, approval, license, exemption
         of, filing or registration with any court or governmental department,

                                      -9-
<PAGE>

         commission, board, bureau, agency or instrumentality, domestic or
         foreign, is or will be necessary for, or in connection with, the
         execution or delivery of the Notes and the Warrants, or for the
         performance by the Company of its obligations under the Transaction
         Documents.

                  (y) EMPLOYEES. Neither the Company nor any Subsidiary has any
         collective bargaining arrangements or agreements covering any of its
         employees. Except as set forth on SCHEDULE 2.1(y) hereto, neither the
         Company nor any Subsidiary has any employment contract, agreement
         regarding proprietary information, non-competition agreement,
         non-solicitation agreement, confidentiality agreement, or any other
         similar contract or restrictive covenant, relating to the right of any
         officer, employee or consultant to be employed or engaged by the
         Company or such Subsidiary. Since September 30, 2001, no officer,
         consultant or key employee of the Company or any Subsidiary whose
         termination, either individually or in the aggregate, could have a
         Material Adverse Effect, has terminated or, to the knowledge of the
         Company, has any present intention of terminating his or her employment
         or engagement with the Company or any Subsidiary.

                  (z) ABSENCE OF CERTAIN DEVELOPMENTS. Except as set forth on
         SCHEDULE 2.1(z) hereto, since September 30, 2001, neither the Company
         nor any Subsidiary has:

                           (i) issued any stock, bonds or other corporate
                  securities or any rights, options or warrants with respect
                  thereto;

                           (ii) borrowed any amount or incurred or become
                  subject to any liabilities (absolute or contingent) except
                  current liabilities incurred in the ordinary course of
                  business which are comparable in nature and amount to the
                  current liabilities incurred in the ordinary course of
                  business during the comparable portion of its prior fiscal
                  year, as adjusted to reflect the current nature and volume of
                  the Company's or such Subsidiary's business;

                           (iii) discharged or satisfied any lien or encumbrance
                  or paid any obligation or liability (absolute or contingent),
                  other than current liabilities paid in the ordinary course of
                  business;

                           (iv) declared or made any payment or distribution of
                  cash or other property to stockholders with respect to its
                  stock, or purchased or redeemed, or made any agreements so to
                  purchase or redeem, any shares of its capital stock;

                           (v) sold, assigned or transferred any other tangible
                  assets, or canceled any debts or claims, except in the
                  ordinary course of business;

                           (vi) sold, assigned or transferred any patent rights,
                  trademarks, trade names, copyrights, trade secrets or other
                  intangible assets or intellectual property rights, or
                  disclosed any proprietary confidential information to any
                  person except in the ordinary course of business or to the
                  Purchasers or its representatives;

                                      -10-
<PAGE>

                           (vii) suffered any substantial losses or waived any
                  rights of material value, whether or not in the ordinary
                  course of business, or suffered the loss of any material
                  amount of prospective business;

                           (viii) made any changes in employee compensation
                  except in the ordinary course of business and consistent with
                  past practices;

                           (ix) made capital expenditures or commitments
                  therefor that aggregate in excess of $25,000;

                           (x) entered into any other transaction other than in
                  the ordinary course of business, or entered into any other
                  material transaction, whether or not in the ordinary course of
                  business;

                           (xi) made charitable contributions or pledges in
                  excess of $25,000;

                           (xii) suffered any material damage, destruction or
                  casualty loss, whether or not covered by insurance;

                           (xiii) experienced any material problems with labor
                  or management in connection with the terms and conditions of
                  their employment;

                           (xiv) effected any two or more events of the
                  foregoing kind which in the aggregate would cause a Material
                  Adverse Effect; or

                           (xv) entered into an agreement, written or otherwise
                  (other than the Transaction Documents), to take any of the
                  foregoing actions.

                  (aa) USE OF PROCEEDS. The proceeds from the sale of the Notes
         and the Warrant Shares will be used by the Company for working capital
         purposes and shall not be used to prepay any outstanding Indebtedness
         or make any loans to any officer, director, affiliate or insider of the
         Company.

                  (bb) PUBLIC UTILITY HOLDING COMPANY ACT AND INVESTMENT COMPANY
         ACT STATUS. The Company is not a "HOLDING COMPANY" or a "PUBLIC UTILITY
         COMPANY" as such terms are defined in the Public Utility Holding
         Company Act of 1935, as amended. The Company is not, and as a result of
         and immediately upon Closing will not be, an "INVESTMENT COMPANY" or a
         company "CONTROLLED" by an "INVESTMENT COMPANY," within the meaning of
         the Investment Company Act of 1940, as amended.

                  (cc) ERISA. No liability to the Pension Benefit Guaranty
         Corporation has been incurred with respect to any Plan by the Company
         or any of its Subsidiaries which is or would cause a Material Adverse
         Effect. The execution and delivery of this Agreement and the issue and
         sale of the Notes, the Conversion Shares and the Warrant Shares will
         not involve any transaction which is subject to the prohibitions of
         Section 406 of ERISA or in connection with which a tax could be imposed
         pursuant to Section 4975 of the Internal Revenue Code of 1986, as
         amended, provided that, if any Purchaser, or any person or entity that
         owns a beneficial interest in any Purchaser, is an "EMPLOYEE PENSION
         BENEFIT PLAN" (within the meaning of Section 3(2) of ERISA) with
         respect to which the Company is a "PARTY IN INTEREST" (within the
         meaning of Section 3(14) of ERISA), the requirements of Sections

                                      -11-
<PAGE>

         407(d)(5) and 408(e) of ERISA, if applicable, are met. As used in this
         SECTION 2.1(cc), the term "PLAN" shall mean an "EMPLOYEE PENSION
         BENEFIT PLAN" (as defined in Section 3 of ERISA) which is or has been
         established or maintained, or to which contributions are or have been
         made, by the Company or any Subsidiary or by any trade or business,
         whether or not incorporated, which, together with the Company or any
         Subsidiary, is under common control, as described in Section 414(b) or
         (c) of the Code.

                  (dd) DILUTIVE EFFECT. The Company understands and acknowledges
         that the number of Conversion Shares issuable upon conversion of the
         Notes and the Warrant Shares issuable upon exercise of the Warrants
         will increase in certain circumstances. The Company further
         acknowledges that its obligation to issue Conversion Shares upon
         conversion of the Notes in accordance with this Agreement and its
         obligations to issue the Warrant Shares upon the exercise of the
         Warrants in accordance with this Agreement and the Warrants, is, in
         each case, absolute and unconditional regardless of the dilutive effect
         that such issuance may have on the ownership interest of other
         stockholders of the Company.

         Section 2.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each of
the Purchasers hereby makes the following representations and warranties to the
Company with respect solely to itself and not with respect to any other
Purchaser:

                  (a) ORGANIZATION AND STANDING OF THE PURCHASERS. If the
         Purchaser is an entity, such Purchaser is a corporation, limited
         liability company or partnership duly incorporated or organized,
         validly existing and in good standing under the laws of the
         jurisdiction of its incorporation or organization.

                  (b) AUTHORIZATION AND POWER. Each Purchaser has the requisite
         power and authority to enter into and perform the Transaction Documents
         and to purchase the Notes and Warrants being sold to it hereunder. The
         execution, delivery and performance of the Transaction Documents by
         each Purchaser and the consummation by it of the transactions
         contemplated hereby have been duly authorized by all necessary
         corporate or partnership action, and no further consent or
         authorization of such Purchaser or its Board of Directors,
         stockholders, or partners, as the case may be, is required. This
         Agreement has been duly authorized, executed and delivered by each
         Purchaser. The other Transaction Documents constitute, or shall
         constitute when executed and delivered, a valid and binding obligations
         of each Purchaser enforceable against such Purchaser in accordance with
         their terms, except as such enforceability may be limited by applicable
         bankruptcy, insolvency, reorganization, moratorium, liquidation,
         conservatorship, receivership or similar laws relating to, or affecting
         generally the enforcement of, creditor's rights and remedies or by
         other equitable principles of general application.

                  (c) ACQUISITION FOR INVESTMENT. Each Purchaser is purchasing
         the Notes and acquiring the Warrants solely for its own account for the
         purpose of investment and not with a view to or for sale in connection
         with a distribution. Each Purchaser does not have a present intention
         to sell any of the Securities, nor a present arrangement (whether or
         not legally binding) or intention to effect any distribution of any of

                                      -12-
<PAGE>

         the Securities to or through any person or entity; provided, however,
         that by making the representations herein and subject to SECTION 2.2(e)
         below, each Purchaser does not agree to hold any of the Securities for
         any minimum or other specific term and reserves the right to dispose of
         any of the Securities at any time in accordance with federal and state
         securities laws applicable to such disposition. Each Purchaser
         acknowledges that it (i) has such knowledge and experience in financial
         and business matters such that Purchaser is capable of evaluating the
         merits and risks of Purchaser's investment in the Company and is (ii)
         able to bear the financial risks associated with an investment in the
         Securities and (iii) that it has been given full access to such records
         of the Company and the Subsidiaries and to the officers of the Company
         and the Subsidiaries as it has deemed necessary or appropriate to
         conduct its due diligence investigation.

                  (d) RULE 144. Each Purchaser understands that the Securities
         must be held indefinitely unless such Securities are registered under
         the Securities Act or an exemption from registration is available. Each
         Purchaser acknowledges that such person is familiar with Rule 144 of
         the rules and regulations of the Commission, as amended, promulgated
         pursuant to the Securities Act ("RULE 144"), and that such Purchaser
         has been advised that Rule 144 permits resales only under certain
         circumstances. Each Purchaser understands that to the extent that Rule
         144 is not available, such Purchaser will be unable to sell any
         Securities without either registration under the Securities Act or the
         existence of another exemption from such registration requirement.

                  (e) GENERAL. Each Purchaser understands that the Securities
         are being offered and sold in reliance on a transactional exemption
         from the registration requirements of federal and state securities laws
         and the Company is relying upon the truth and accuracy of the
         representations, warranties, agreements, acknowledgments and
         understandings of such Purchaser set forth herein in order to determine
         the applicability of such exemptions and the suitability of such
         Purchaser to acquire the Securities. Each Purchaser understands that no
         United States federal or state agency or any government or governmental
         agency has passed upon or made any recommendation or endorsement of the
         Securities.

                  (f) OPPORTUNITIES FOR ADDITIONAL INFORMATION. Each Purchaser
         acknowledges that such Purchaser has had the opportunity to ask
         questions of and receive answers from, or obtain additional information
         from, the executive officers of the Company concerning the financial
         and other affairs of the Company, and to the extent deemed necessary in
         light of such Purchaser's personal knowledge of the Company's affairs,
         such Purchaser has asked such questions and received answers to the
         full satisfaction of such Purchaser, and such Purchaser desires to
         invest in the Company.

                  (g) NO GENERAL SOLICITATION. Each Purchaser acknowledges that
         the Securities were not offered to such Purchaser by means of any form
         of general or public solicitation or general advertising, or publicly
         disseminated advertisements or sales literature, including (i) any
         advertisement, article, notice or other communication published in any
         newspaper, magazine, or similar media, or broadcast over television or
         radio, or (ii) any seminar or meeting to which such Purchaser was
         invited by any of the foregoing means of communications.

                                      -13-
<PAGE>

                  (h) ACCREDITED INVESTOR. Each Purchaser is an accredited
         investor (as defined in Rule 501 of Regulation D), and such Purchaser
         has such experience in business and financial matters that it is
         capable of evaluating the merits and risks of an investment in the
         Securities. Each Purchaser acknowledges that an investment in the
         Securities is speculative and involves a high degree of risk.

                  (i) LIMITATIONS ON SHORT SALES. So long as no Event of Default
         (as defined in the Notes) has occurred and is continuing, neither the
         Purchasers nor their affiliates will undertake any special selling
         activities with respect to the Common Stock, which includes, without
         limitation, any short sale.

                                  ARTICLE III

                                    COVENANTS

         The Company covenants with each Purchaser as follows, which covenants
are for the benefit of each Purchaser and their respective permitted assignees:

         Section 3.1 SECURITIES COMPLIANCE. The Company shall notify the
Commission in accordance with their rules and regulations, of the transactions
contemplated by any of the Transaction Documents and shall take all other
necessary action and proceedings as may be required and permitted by applicable
law, rule and regulation, for the legal and valid issuance of the Securities to
the Purchasers, or their respective subsequent holders.

         Section 3.2 REGISTRATION AND LISTING. The Company will cause its Common
Stock to continue to be registered under Sections 12(b) or 12(g) of the Exchange
Act, will comply in all respects with its reporting and filing obligations under
the Exchange Act, will comply with all requirements related to any registration
statement filed pursuant to this Agreement, and will not take any action or file
any document (whether or not permitted by the Securities Act or the rules
promulgated thereunder) to terminate or suspend such registration or to
terminate or suspend its reporting and filing obligations under the Exchange Act
or Securities Act, except as permitted herein. The Company shall take all action
necessary to continue the listing or trading of its Common Stock on the OTCBB or
any successor market. The Company will promptly file the "LISTING APPLICATION,"
if required, for, or in connection with, the issuance and delivery of the
Conversion Shares and the Warrant Shares.

         Section 3.3 INSPECTION RIGHTS. Subject to SECTION 3.15 hereof, the
Company shall permit, during normal business hours and upon reasonable request
and reasonable notice, a Purchaser or any employees, agents or representatives
thereof, so long as a Purchaser shall be obligated hereunder to purchase the
Notes or shall beneficially own the Notes, or shall own Conversion Shares,
Warrant Shares or the Warrants to purchase Warrant Shares which, in the
aggregate, represent more than two percent (2%) of the total combined voting
power of all voting securities then outstanding, to examine and make reasonable
copies of and extracts from the records and books of account of, and visit and
inspect, during the term of the Notes and Warrants, the properties, assets,
operations and business of the Company and any Subsidiary, and to discuss the
affairs, finances and accounts of the Company and any Subsidiary with any of its
officers, consultants, directors, and key employees.

                                      -14-
<PAGE>

         Section 3.4 COMPLIANCE WITH LAWS. The Company shall comply, and cause
each Subsidiary to comply, with all applicable laws, rules, regulations and
orders, noncompliance with which the Company reasonably expects would have a
Material Adverse Effect.

         Section 3.5 KEEPING OF RECORDS AND BOOKS OF ACCOUNT. The Company shall
keep and cause each Subsidiary to keep adequate records and books of account, in
which complete entries will be made in accordance with GAAP consistently
applied, reflecting all financial transactions of the Company and its
Subsidiaries, and in which, for each fiscal year, all proper reserves for
depreciation, depletion, obsolescence, amortization, taxes, bad debts and other
purposes in connection with its business shall be made.

         Section 3.6 REPORTING REQUIREMENTS. The Company shall furnish three (3)
copies of the following to the Purchasers in a timely manner so long as the
Purchasers shall be obligated hereunder to purchase the Notes or shall
beneficially own the Notes or Warrants, or shall own Conversion Shares or
Warrant Shares which, in the aggregate, represent more than one percent (1%) of
the total combined voting power of all voting securities then outstanding:

                  (a) Quarterly Reports filed with the Commission on Form 10-QSB
         as soon as available, and in any event within fifty-one (51) days after
         the end of each of the first three (3) fiscal quarters of the Company;

                  (b) Annual Reports filed with the Commission on Form 10-KSB as
         soon as available, and in any event within one hundred six (106) days
         after the end of each fiscal year of the Company; and

                  (c) Copies of all notices and information, including without
         limitation notices and proxy statements in connection with any
         meetings, that are provided to holders of shares of Common Stock,
         contemporaneously with the delivery of such notices or information to
         such holders of Common Stock.

         Section 3.7 AMENDMENTS. The Company shall not amend or waive any
provision of the Articles or Bylaws of the Company in any way that would
adversely affect the exercise rights, voting rights, prepayment rights or
redemption rights of the holder of the Notes or the Warrants; provided, however,
that the Company shall not be prohibited from amending its Articles to increase
its authorized capital stock.

         Section 3.8 OTHER AGREEMENTS. The Company shall not enter into any
agreement in which the terms of such agreement would restrict or impair the
right or ability to perform of the Company or any Subsidiary under any
Transaction Document.

         Section 3.9 DISTRIBUTIONS. Except as set forth on SCHEDULE 3.9 hereto,
so long as any Notes remain outstanding, the Company agrees that it shall not,
without the prior written consent of the holders of a majority of the principal
amount of the Notes outstanding at the time consent is required, which consent
may be granted or denied in the sole discretion of the Purchasers (i) declare or
pay any dividends (other than a stock dividend or stock split) or make any
distributions to any holder(s) of Common Stock or (ii) purchase or otherwise
acquire for value, directly or indirectly, any Common Stock or other equity
security of the Company.

                                      -15-
<PAGE>

         Section 3.10 SUBSEQUENT FINANCINGS. (a) During the period commencing on
the Closing Date and ending on the earlier of (i) the two hundred seventieth
(270th) day after the Effectiveness Date or (ii) the date all of the Notes are
no longer outstanding, the Company covenants and agrees that it will not,
without the prior written consent of the holders of a majority of the principal
amount of the Notes outstanding at the time consent is required, enter into any
subsequent offer or sale to, or exchange with (or other type of distribution
to), any third party, of Common Stock or any securities convertible, exercisable
or exchangeable into Common Stock, including convertible and non-convertible
debt securities (collectively, the "Financing Securities"), the primary purpose
of which would be to obtain financing for the Company (a "Subsequent
Financing"). For purposes of this Agreement, a Permitted Financing (as defined
hereinafter) shall not be considered a Subsequent Financing. A "Permitted
Financing" shall mean (1) shares of Common Stock to be issued to strategic
partners and/or in connection with a strategic merger or acquisition; (2) shares
of Common Stock or the issuance of options to purchase shares of Common Stock to
employees, officers, directors, consultants and vendors in accordance with the
Company's equity incentive policies; (3) the issuance of securities pursuant to
the conversion or exercise of convertible or exercisable securities issued or
outstanding on or prior to the Closing Date; (4) the issuance of securities in a
public offering; (5) the issuance of up to 100,000 warrants or options to
purchase shares of Common Stock in connection with debt financing for the
Company; and (6) the issuance of securities in which the proceeds received by
the Company in connection with such issuance would be used to prepay the
outstanding principal balance of the Notes and all accrued interest thereon.

         (b) For a period of two (2) years following the Closing Date, if the
Company enters into any Subsequent Financing on terms more favorable than the
terms governing the Notes and Warrants, then, subject to applicable securities
laws, the Purchasers in their sole discretion may exchange the Notes and
Warrants together with accrued but unpaid interest (which interest shall be
payable, at the sole option of the Purchasers, in cash or in the form of the new
securities to be issued in the Subsequent Financing) for the securities issued
or to be issued in the Subsequent Financing. The Company covenants and agrees to
promptly notify in writing the Purchasers of the terms and conditions of any
such proposed Subsequent Financing.

         Section 3.11 RESERVATION OF SHARES. So long as the Notes or Warrants
remain outstanding, the Company shall take all action necessary to at all times
have authorized, and reserved for the purpose of issuance (subject to
Shareholder Approval), 100% of the aggregate number of shares of Common Stock
issuable at a conversion price equal to the Conversion Price Floor (as defined
in the Notes). If at any time the number of shares of Common Stock authorized
and reserved for issuance is below 100% of the Conversion Price Floor (as
defined in the Notes), the Company will promptly take all corporate action
necessary to authorize and reserve a sufficient number of shares, including
without limitation, calling a special meeting of shareholders to authorize
additional shares to meet the Company's obligations under this SECTION 3.11, in
the case of an insufficient number of authorized shares, and using its best
efforts to obtain shareholders approval of an increase in such authorized number
of shares.

                                      -16-
<PAGE>

         Section 3.12 TRANSFER AGENT INSTRUCTIONS. The Company shall issue
irrevocable instructions to its transfer agent, and any subsequent transfer
agent, to issue certificates, registered in the name of the Purchasers or their
respective nominee(s), for the Conversion Shares and the Warrant Shares in such
amounts as specified from time to time by the Purchasers to the Company upon
conversion of the Notes or exercise of the Warrants, in the form of EXHIBIT D
attached hereto (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). Prior to
registration of the Conversion Shares and the Warrant Shares under the
Securities Act, all such certificates shall bear the restrictive legend
specified in SECTION 5.1 of this Agreement. The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this SECTION 3.12 will be given by the Company to its transfer agent other
than as contemplated by the Irrevocable Transfer Agent Instructions and that the
Securities shall otherwise be freely transferable on the books and records of
the Company as and to the extent provided in this Agreement. Nothing in this
SECTION 3.12 shall affect in any way the Purchasers' obligations and agreements
set forth in SECTION 5.1 to comply with all applicable prospectus delivery
requirements, if any, upon the resale of the Conversion Shares and the Warrant
Shares. If a Purchaser provides the Company with an opinion of counsel, in form,
substance and scope generally acceptable to the Company, to the effect that a
public sale, assignment or transfer of the Securities may be made without
registration under the Securities Act or the Purchasers provide the Company with
reasonable assurances that the Securities can be sold pursuant to Rule 144
without any restriction as to the number of securities acquired as of a
particular date that can then be immediately sold, the Company shall permit the
transfer, and, in the case of the Conversion Shares and the Warrant Shares,
promptly instruct its transfer agent to issue one or more certificates in such
name and in such denominations as specified by the Purchasers and without any
restrictive legend. The Company acknowledges that a breach by it of its
obligations under this SECTION 3.12 will cause irreparable harm to the
Purchasers by vitiating the intent and purpose of the transaction contemplated
hereby. Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this SECTION 3.12 will be inadequate and agrees,
in the event of a breach or threatened breach by the Company of the provisions
of this SECTION 3.12, that the Purchasers shall be entitled, in addition to all
other available remedies, to an order and/or injunction restraining any breach
and requiring immediate issuance and transfer, without the necessity of showing
economic loss and without any bond or other security being required.

         Section 3.13 DISPOSITION OF ASSETS. So long as the Notes remain
outstanding, neither the Company nor any Subsidiary shall sell, transfer or
otherwise dispose of any material amount of its properties, assets and rights
including, without limitation, its software and intellectual property, to any
person except for sales to customers in the ordinary course of business, sales
of inventory to subcontractors, sales or assignments of accounts receivable to
the Company's contract manufacturers or their lenders, without the prior written
consent of the holders of a majority of the principal amount of the Notes then
outstanding.

         Section 3.14 REPAYMENT OF OTHER INDEBTEDNESS. So long as the Notes
remain outstanding, the Company shall not prepay any Indebtedness for borrowed
money owed by the Company to any officer, director, affiliate or insider of the
Company.

         Section 3.15 NON-PUBLIC INFORMATION. Neither the Company nor any of its
officers or agents shall disclose any material non-public information about the
Company to the Purchasers and neither the Purchasers nor any of their
affiliates, officers or agents will solicit any material non-public information
from the Company.

                                      -17-
<PAGE>

         Section 3.16 ANNUAL REPORT ON FORM 10-KSB. The Company shall file its
Annual Report on Form 10-KSB for the year ended December 31, 2001 (including
audited financial statements) with the Commission no later than April 16, 2002.
Section

         Section 3.17 SHAREHOLDER APPROVAL. The Company shall obtain the vote of
its shareholders no later than May 20, 2002 to approve an amendment to the
Articles to increase the authorized capital stock of the Company to permit the
Company to reserve at least 100% of the aggregate number of shares of Common
Stock to effect the conversion of the Notes and exercise of the Warrants (the
"SHAREHOLDER APPROVAL").

         Section 3.18 INTENTIONALLY OMITTED.

                                   ARTICLE IV

                                   CONDITIONS

         Section 4.1 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO
CLOSE AND TO SELL THE NOTES AND WARRANTS. The obligation hereunder of the
Company to close and issue and sell the Notes and the Warrants to the Purchasers
at the Closing Date is subject to the satisfaction or waiver, at or before the
Closing of the conditions set forth below. These conditions are for the
Company's sole benefit and may be waived by the Company in writing at any time
in its sole discretion.

                  (a) ACCURACY OF THE PURCHASERS' REPRESENTATIONS AND
         WARRANTIES. The representations and warranties of each Purchaser shall
         be true and correct in all material respects as of the date when made
         and as of the Closing Date as though made at that time, except for
         representations and warranties that are expressly made as of a
         particular date, which shall be true and correct in all material
         respects as of such date.

                  (b) PERFORMANCE BY THE PURCHASERS. Each Purchaser shall have
         performed, satisfied and complied in all respects with all covenants,
         agreements and conditions required by this Agreement to be performed,
         satisfied or complied with by the Purchasers at or prior to the Closing
         Date.

                  (c) NO INJUNCTION. No statute, rule, regulation, executive
         order, decree, ruling or injunction shall have been enacted, entered,
         promulgated or endorsed by any court or governmental authority of
         competent jurisdiction which prohibits the consummation of any of the
         transactions contemplated by this Agreement.

                  (d) DELIVERY OF PURCHASE PRICE. The Purchase Price for the
         Notes and Warrants has been delivered to the Company at the Closing
         Date.

                                      -18-
<PAGE>

                  (e) DELIVERY OF TRANSACTION DOCUMENTS. The Transaction
         Documents have been duly executed and delivered by the Purchasers to
         the Company, and the Company shall have received such other
         certificates and documents as the Company or its counsel shall
         reasonably require incident to the Closing.

         Section 4.2 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE PURCHASERS TO
CLOSE AND TO PURCHASE THE NOTES AND WARRANTS. The obligation hereunder of the
Purchasers to purchase the Notes and Warrants and consummate the transactions
contemplated by this Agreement is subject to the satisfaction or waiver, at or
before the Closing Date, of each of the conditions set forth below. These
conditions are for the Purchasers' sole benefit and may be waived by the
Purchasers at any time in their sole discretion.

                  (a) ACCURACY OF THE COMPANY'S REPRESENTATIONS AND WARRANTIES.
         Each of the representations and warranties of the Company in this
         Agreement, the Registration Rights Agreement, the Security Agreement
         and the Notes shall be true and correct in all material respects as of
         the Closing Date, except for representations and warranties that speak
         as of a particular date, which shall be true and correct in all
         material respects as of such date.

                  (b) PERFORMANCE BY THE COMPANY. The Company shall have
         performed, satisfied and complied in all respects with all covenants,
         agreements and conditions required by this Agreement to be performed,
         satisfied or complied with by the Company at or prior to the Closing
         Date.

                  (c) NO SUSPENSION, ETC. Trading in the Company's Common Stock
         shall not have been suspended by the Commission (except for any
         suspension of trading of limited duration agreed to by the Company,
         which suspension shall be terminated prior to the Closing), and, at any
         time prior to the Closing Date, trading in securities generally as
         reported by Bloomberg Financial Markets ("BLOOMBERG") shall not have
         been suspended or limited, or minimum prices shall not have been
         established on securities whose trades are reported by Bloomberg, or on
         the New York Stock Exchange, nor shall a banking moratorium have been
         declared either by the United States or New York State authorities, nor
         shall there have occurred any national or international calamity or
         crisis of such magnitude in its effect on any financial market which,
         in each case, in the reasonable judgment of the Purchasers, makes it
         impracticable or inadvisable to purchase the Notes.

                  (d) NO INJUNCTION. No statute, rule, regulation, executive
         order, decree, ruling or injunction shall have been enacted, entered,
         promulgated or endorsed by any court or governmental authority of
         competent jurisdiction which prohibits the consummation of any of the
         transactions contemplated by this Agreement.

                  (e) NO PROCEEDINGS OR LITIGATION. No action, suit or
         proceeding before any arbitrator or any governmental authority shall
         have been commenced, and no investigation by any governmental authority
         shall have been threatened, against the Company or any Subsidiary, or
         any of the officers, directors or affiliates of the Company or any
         Subsidiary seeking to restrain, prevent or change the transactions
         contemplated by this Agreement, or seeking damages in connection with
         such transactions.

                                      -19-
<PAGE>

                  (f) OPINION OF COUNSEL, ETC. The Purchasers shall have
         received an opinion of counsel to the Company, dated the Closing Date,
         in the form of EXHIBIT E hereto and such other certificates and
         documents as the Purchasers or their counsel shall reasonably require
         incident to the Closing.

                  (g) WARRANTS AND NOTES. The Company shall have delivered the
         originally executed Warrants (in such denominations as each Purchaser
         may request) to the Purchasers and shall have delivered the originally
         executed Notes (in such denominations as each Purchaser may request) to
         the Purchasers that are being acquired by the Purchasers at the
         Closing.

                  (h) RESOLUTIONS. The Board of Directors of the Company shall
         have adopted resolutions consistent with SECTION 2.1(b) hereof in a
         form reasonably acceptable to the Purchasers (the "RESOLUTIONS").

                  (i) RESERVATION OF SHARES. As of the Closing Date, the Company
         shall have reserved out of its authorized and unissued shares of Common
         Stock, subject to Shareholder Approval, solely for the purpose of
         effecting the conversion of the Notes and the exercise of the Warrants,
         a number of shares of Common Stock equal to at least 100% of the
         aggregate number of shares of Common Stock issuable at a conversion
         price equal to the Conversion Price Floor (as defined in the Notes).

                  (j) TRANSFER AGENT INSTRUCTIONS. The Irrevocable Transfer
         Agent Instructions, in the form of EXHIBIT D attached hereto, shall
         have been delivered to and acknowledged in writing by the Company's
         transfer agent.

                  (k) SECRETARY'S CERTIFICATE. The Company shall have delivered
         to the Purchasers a secretary's certificate, dated as of the Closing
         Date, as to (i) the Resolutions, (ii) the Articles, (iii) the Bylaws,
         each as in effect at the Closing, and (iv) the authority and incumbency
         of the officers of the Company executing the Transaction Documents and
         any other documents required to be executed or delivered in connection
         therewith.

                  (l) OFFICER'S CERTIFICATE. On the Closing Date, the Company
         shall have delivered to the Purchasers a certificate of an executive
         officer of the Company, dated as of the Closing Date, confirming the
         accuracy of the Company's representations, warranties and covenants as
         of the Closing Date and confirming the compliance by the Company with
         the conditions precedent set forth in this SECTION 4.2 as of the
         Closing Date.

                  (m) SECURITY AGREEMENT. As of the Closing Date, the parties
         shall have entered into the security agreement in the form of EXHIBIT F
         attached hereto.

                  (n) UCC-1 FINANCING STATEMENTS. The Company shall have filed
         all UCC-1 financing statements in form and substance satisfactory to
         the Purchasers at the appropriate offices to create a valid and
         perfected security interest in the Collateral (as defined in the
         Security Agreement).

                  (o) JUDGMENT, LIEN AND UCC SEARCH. A judgment, lien and UCC
         financing statement search shall have been completed by the Purchasers.

                                      -20-
<PAGE>

                  (p) FEES AND EXPENSES. As of the Closing Date, all fees and
         expenses required to be paid by the Company shall have been or
         authorized to be paid by the Company as of the Closing Date.

                  (q) REGISTRATION RIGHTS AGREEMENT. As of the Closing Date, the
         parties shall have entered into the Registration Rights Agreement in
         the Form of EXHIBIT G attached hereto.

                  (r) MATERIAL ADVERSE EFFECT. No Material Adverse Effect shall
         have occurred.

                                   ARTICLE V

                               CERTIFICATE LEGEND

         Section 5.1 LEGEND. Each certificate representing the Notes, the
Conversion Shares, the Warrants and the Warrant Shares shall be stamped or
otherwise imprinted with a legend substantially in the following form (in
addition to any legend required by applicable state securities or "BLUE SKY"
laws):

         THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES") HAVE
         NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
         "SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD,
         TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE
         SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR TELENETICS
         CORPORATION SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT
         REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
         PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.

         The Company agrees to reissue certificates representing any of the
Securities, without the legend set forth above if at such time, prior to making
any transfer of any such Securities, such holder thereof shall give written
notice to the Company describing the manner and terms of such transfer and
removal as the Company may reasonably request. Such proposed transfer will not
be effected until: (a) the Company has notified such holder that either (i) in
the opinion of Company counsel, the registration of the Notes, Conversion
Shares, Warrants or Warrant Shares under the Securities Act is not required in
connection with such proposed transfer; or (ii) a registration statement under
the Securities Act covering such proposed disposition has been filed by the
Company with the Commission and has become effective under the Securities Act;
and (b) the Company has notified such holder that either: (i) in the opinion of
Company counsel, the registration or qualification under the securities or "BLUE
SKY" laws of any state is not required in connection with such proposed
disposition, or (ii) compliance with applicable state securities or "BLUE SKY"
laws has been effected. The Company will use its best efforts to respond to any
such notice from a holder within five (5) days. In the case of any proposed
transfer under this SECTION 5, the Company will use reasonable efforts to comply
with any such applicable state securities or "BLUE SKY" laws, but shall in no
event be required, in connection therewith, to qualify to do business in any
state where it is not then qualified or to take any action that would subject it

                                      -21-
<PAGE>

to tax or to the general service of process in any state where it is not then
subject. The restrictions on transfer contained in SECTION 5.1 shall be in
addition to, and not by way of limitation of, any other restrictions on transfer
contained in any other section of this Agreement.

                                   ARTICLE VI

                                   TERMINATION

         Section 6.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be
terminated at any time prior to the Closing Date by the mutual written consent
of the Company and the Purchasers.

         Section 6.2 EFFECT OF TERMINATION. If this Agreement is terminated as
provided in SECTION 6.1 herein, this Agreement shall become void and of no
further force and effect, except for SECTIONS 8.1 AND 8.2, and ARTICLE VII
herein. Nothing in this SECTION 6.2 shall be deemed to release the Company or
any Purchaser from any liability for any breach under this Agreement, or to
impair the rights of the Company and such Purchaser to compel specific
performance by the other party of its obligations under this Agreement.

                                  ARTICLE VII

                                 INDEMNIFICATION

         Section 7.1 GENERAL INDEMNITY. The Company agrees to indemnify and hold
harmless each Purchaser (and its respective directors, officers, affiliates,
agents, successors and assigns) from and against any and all losses,
liabilities, deficiencies, costs, damages and expenses (including, without
limitation, reasonable attorneys' fees, charges and disbursements) incurred by
each Purchaser as a result of any inaccuracy in or breach of the
representations, warranties or covenants made by the Company herein. The
Purchasers severally but not jointly agree to indemnify and hold harmless the
Company and its directors, officers, affiliates, agents, successors and assigns
from and against any and all losses, liabilities, deficiencies, costs, damages
and expenses (including, without limitation, reasonable attorneys' fees, charges
and disbursements) incurred by the Company as result of any inaccuracy in or
breach of the representations, warranties or covenants made by the Purchasers
herein.

         Section 7.2 INDEMNIFICATION PROCEDURE. Any party entitled to
indemnification under this ARTICLE VII (an "INDEMNIFIED PARTY") will give
written notice to the indemnifying party of any matters giving rise to a claim
for indemnification; provided, that the failure of any party entitled to
indemnification hereunder to give notice as provided herein shall not relieve
the indemnifying party of its obligations under this ARTICLE VII except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice. In case any action, proceeding or claim is brought against an
indemnified party in respect of which indemnification is sought hereunder, the
indemnifying party shall be entitled to participate in and, unless in the
reasonable judgment of the indemnified party a conflict of interest between it
and the indemnifying party may exist with respect to such action, proceeding or
claim, to assume the defense thereof with counsel reasonably satisfactory to the
indemnified party. In the event that the indemnifying party advises an
indemnified party that it will contest such a claim for indemnification
hereunder, or fails, within thirty (30) days of receipt of any indemnification
notice to notify, in writing, such person of its election to defend, settle or

                                      -22-
<PAGE>

compromise, at its sole cost and expense, any action, proceeding or claim (or
discontinues its defense at any time after it commences such defense), then the
indemnified party may, at its option, defend, settle or otherwise compromise or
pay such action or claim. In any event, unless and until the indemnifying party
elects in writing to assume and does so assume the defense of any such claim,
proceeding or action, the indemnified party's costs and expenses arising out of
the defense, settlement or compromise of any such action, claim or proceeding
shall be losses subject to indemnification hereunder. The indemnified party
shall cooperate fully with the indemnifying party in connection with any
negotiation or defense of any such action or claim by the indemnifying party and
shall furnish to the indemnifying party all information reasonably available to
the indemnified party which relates to such action or claim. The indemnifying
party shall keep the indemnified party fully apprised at all times as to the
status of the defense or any settlement negotiations with respect thereto. If
the indemnifying party elects to defend any such action or claim, then the
indemnified party shall be entitled to participate in such defense with counsel
of its choice at its sole cost and expense. The indemnifying party shall not be
liable for any settlement of any action, claim or proceeding effected without
its prior written consent. Notwithstanding anything in this ARTICLE VII to the
contrary, the indemnifying party shall not, without the indemnified party's
prior written consent, settle or compromise any claim or consent to entry of any
judgment in respect thereof which imposes any future obligation on the
indemnified party or which does not include, as an unconditional term thereof,
the giving by the claimant or the plaintiff to the indemnified party of a
release from all liability in respect of such claim. The indemnification
required by this ARTICLE VII shall be made by periodic payments of the amount
thereof during the course of investigation or defense, as and when bills are
received or expense, loss, damage or liability is incurred, so long as the
indemnified party irrevocably agrees to refund such moneys if it is ultimately
determined by a court of competent jurisdiction that such party was not entitled
to indemnification. The indemnity agreements contained herein shall be in
addition to (a) any cause of action or similar rights of the indemnified party
against the indemnifying party or others, and (b) any liabilities the
indemnifying party may be subject to pursuant to the law.

                                  ARTICLE VIII

                                  MISCELLANEOUS

         Section 8.1 FEES AND EXPENSES. Each party shall pay the fees and
expenses of its advisors, counsel, accountants and other experts, if any, and
all other expenses, incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement, provided,
however, that the Company shall pay such fees and expenses set forth on SCHEDULE
2.1(p) hereto. The Company shall pay all reasonable attorneys' fees,
disbursements and expenses incurred by the Purchasers to one attorney for the
Purchasers in connection with any amendments, modifications or waivers of this
Agreement or any of the other Transaction Documents or incurred in connection
with the enforcement of this Agreement and any of the other Transaction
Documents.

                                      -23-
<PAGE>

         Section 8.2 SPECIFIC ENFORCEMENT; CONSENT TO JURISDICTION.

                  (a) The Company and the Purchasers acknowledge and agree that
         irreparable damage would occur in the event that any of the provisions
         of this Agreement or the other Transaction Documents were not performed
         in accordance with their specific terms or were otherwise breached. It
         is accordingly agreed that the parties shall be entitled to an
         injunction or injunctions to prevent or cure breaches of the provisions
         of this Agreement or the other Transaction Documents and to enforce
         specifically the terms and provisions hereof or thereof, this being in
         addition to any other remedy to which any of them may be entitled by
         law or equity.

                  (b) The Company and each Purchaser (i) hereby irrevocably
         submit to the exclusive jurisdiction of the United States District
         Court sitting in the Southern District of New York and the courts of
         the State of New York located in New York county for the purposes of
         any suit, action or proceeding arising out of or relating to this
         Agreement or any of the other Transaction Documents or the transactions
         contemplated hereby or thereby and (ii) hereby waive, and agree not to
         assert in any such suit, action or proceeding, any claim that it is not
         personally subject to the jurisdiction of such court, that the suit,
         action or proceeding is brought in an inconvenient forum or that the
         venue of the suit, action or proceeding is improper. The Company and
         each Purchaser consent to process being served in any such suit, action
         or proceeding by mailing via certified mail, return receipt requested,
         a copy thereof to such party at the address in effect for notices to it
         under this Agreement and agrees that such service shall constitute good
         and sufficient service of process and notice thereof. Nothing in this
         SECTION 8.2 shall affect or limit any right to serve process in any
         other manner permitted by law.

         Section 8.3 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the
Transaction Documents contain the entire understanding and agreement of the
parties with respect to the matters covered hereby and, except as specifically
set forth herein or in the other Transaction Documents, neither the Company nor
any Purchaser make any representation, warranty, covenant or undertaking with
respect to such matters, and they supersede all prior understandings and
agreements with respect to said subject matter, all of which are merged herein.
No provision of this Agreement may be waived or amended other than by a written
instrument signed by the Company and the holders of at least a majority of the
principal amount of the Notes then outstanding, and no provision hereof may be
waived other than by a written instrument signed by the party against whom
enforcement of any such amendment or waiver is sought. No such amendment shall
be effective to the extent that it applies to less than all of the holders of
the Notes then outstanding. No consideration shall be offered or paid to any
person to amend or consent to a waiver or modification of any provision of any
of the Transaction Documents unless the same consideration is also offered to
all of the parties to the Transaction Documents or holders of Notes, as the case
may be.

         Section 8.4 NOTICES. Any notice, demand, request, waiver or other
communication required or permitted to be given hereunder shall be in writing
and shall be effective (a) upon hand delivery by telecopy or facsimile at the
address or number designated below (if delivered on a business day during normal
business hours where such notice is to be received), or the first business day
following such delivery (if delivered other than on a business day during normal

                                      -24-
<PAGE>

business hours where such notice is to be received) or (b) on the second
business day following the date of mailing by express courier service, fully
prepaid, addressed to such address, or upon actual receipt of such mailing,
whichever shall first occur. The addresses for such communications shall be:

         If to the Company:                Telenetics Corporation
                                           25111 Arctic Ocean
                                           Lake Forest, California 92630
                                           Attention:  President
                                           Attention:  Chief Financial Officer
                                           Telecopier: (949) 455-9324
                                           Telephone:  (949) 455-4000

         with a copy (which copy
         shall not constitute notice
         to the Company) to:               Larry A. Cerutti, Esq.
                                           Rutan & Tucker, LLP
                                           611 Anton Boulevard, Suite 1400
                                           Costa Mesa, California  92626
                                           Telecopier: (714) 546-9035
                                           Telephone:  (714) 641-5100

         If to any Purchaser:              At the address of such Purchaser set
                                           forth on EXHIBIT A to this Agreement.

         Any party hereto may from time to time change its address for notices
by giving at least ten (10) days written notice of such changed address to the
other parties hereto.

         Section 8.5 WAIVERS. No waiver by either party of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
any party to exercise any right hereunder in any manner impair the exercise of
any such right accruing to it thereafter.

         Section 8.6 HEADINGS. The article, section and subsection headings in
this Agreement are for convenience only and shall not constitute a part of this
Agreement for any other purpose and shall not be deemed to limit or affect any
of the provisions hereof.

         Section 8.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties and their successors and assigns.
After the Closing, the assignment by a party to this Agreement of any rights
hereunder shall not affect the obligations of such party under this Agreement.
Subject to applicable federal and state securities laws, the Purchasers may
assign the Notes, the Warrants and their rights under this Agreement and the
other Transaction Documents and any other rights hereto and thereto without the
consent of the Company; provided, however, that any assignee shall first provide
the Company with duly executed representations and warranties in the form
contained in SECTION 2.2 of this Agreement.

                                      -25-
<PAGE>

         Section 8.8 NO THIRD PARTY BENEFICIARIES. This Agreement is intended
for the benefit of the parties hereto and their respective permitted successors
and assigns and is not for the benefit of, nor may any provision hereof be
enforced by, any other person.

         Section 8.9 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York, without
giving effect to the choice of law provisions. This Agreement shall not be
interpreted or construed with any presumption against the party causing this
Agreement to be drafted.

         Section 8.10 SURVIVAL. The representations and warranties of the
Company and the Purchasers contained in SECTIONS 2.1(o) AND 2.1(s) should
survive until the expiration of the applicable statutes of limitation, and those
contained in ARTICLE II, with the exception of SECTIONS 2.1(o) AND 2.1(s), shall
survive the execution and delivery hereof and the Closing until the date three
(3) years from the Closing Date, and the agreements and covenants set forth in
ARTICLES I, III, V, VII AND VIII of this Agreement shall survive the execution
and delivery hereof and the Closing hereunder.

         Section 8.11 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one and the same
instrument and shall become effective when counterparts have been signed by each
party and delivered to the other parties hereto, it being understood that all
parties need not sign the same counterpart.

         Section 8.12 PUBLICITY. The Company agrees that it will not disclose,
and will not include in any public announcement, the names of the Purchasers
without the consent of the Purchasers in accordance with SECTION 8.3, which
consent shall not be unreasonably withheld or delayed, or unless and until such
disclosure is required by law, rule or applicable regulation, and then only to
the extent of such requirement.

         Section 8.13 SEVERABILITY. The provisions of this Agreement are
severable and, in the event that any court of competent jurisdiction shall
determine that any one or more of the provisions or part of the provisions
contained in this Agreement shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision or part of a provision of
this Agreement and this Agreement shall be reformed and construed as if such
invalid or illegal or unenforceable provision, or part of such provision, had
never been contained herein, so that such provisions would be valid, legal and
enforceable to the maximum extent possible.

         Section 8.14 FURTHER ASSURANCES. From and after the date of this
Agreement, upon the request of the Purchasers or the Company, the Company and
each Purchaser shall execute and deliver such instruments, documents and other
writings as may be reasonably necessary or desirable to confirm and carry out
and to effectuate fully the intent and purposes of this Agreement, the Notes,
the Warrants, the Security Agreement and the Registration Rights Agreement.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                      -26-
<PAGE>

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the date first above
written.

COMPANY:                                      TELENETICS CORPORATION

                                              By:  /S/ Shala Shashani Lutz
                                                   -----------------------------
                                                   Name:  Shala Shashani Lutz
                                                   Title: President

PURCHASERS:                                   DOLPHIN OFFSHORE PARTNERS, L.P.

                                              By:  /S/ Peter E. Salas
                                                   -----------------------------
                                                   Name:  Peter E. Salas
                                                   Title: General Partner

                                      -27-
<PAGE>

<TABLE>

                                    EXHIBIT A
                                LIST OF INVESTORS
<CAPTION>

---------------------------------- ----------------------------------- --------------------------------

NAMES AND ADDRESSES OF PURCHASERS  NUMBER OF WARRANTS PURCHASED        DOLLAR AMOUNT OF INVESTMENT
---------------------------------- ----------------------------------- --------------------------------
<S>                                              <C>                   <C>
Dolphin Offshore Partners, L.P.                  3,599,878             $2,115,000 cancellation of
129 East 17th Street                                                   indebtedness (comprising the
New York, N.Y.  10003                                                  remaining balance of the 7.0%
                                                                       Convertible Subordinated
                                                                       Debenture due January 2, 2003)
---------------------------------- ----------------------------------- --------------------------------
</TABLE>

<PAGE>

                                    EXHIBIT B
                                  FORM OF NOTE

<PAGE>

                                    EXHIBIT C
                                 FORM OF WARRANT

<PAGE>

                                    EXHIBIT D
                 FORM OF IRREVOCABLE TRANSFER AGENT INSTRUCTIONS

                             TELENETICS CORPORATION

                                                             as of April 1, 2002

[NAME AND ADDRESS OF COMPANY'S TRANSFER AGENT]

Ladies and Gentlemen:

         Reference is made to that certain Note and Warrant Purchase Agreement,
dated as of April 1, 2002, by and among Telenetics Corporation, a California
corporation (the "COMPANY"), and the purchasers named therein (the "PURCHASERS")
pursuant to which the Company is issuing to the Purchasers secured convertible
promissory notes, (the "NOTES") and warrants (the "WARRANTS") to purchase shares
of the Company's common stock, no par value per share (the "COMMON STOCK"). This
letter shall serve as our irrevocable authorization and direction to you
(provided that you are the transfer agent of the Company at such time) to issue
shares of Common Stock upon conversion of the Notes (the "CONVERSION SHARES")
and exercise of the Warrants (the "WARRANT SHARES") to or upon the order of a
Purchaser as of the date specified by the Purchaser from time to time upon (i)
surrender to you of a properly completed and duly executed Conversion Notice or
Exercise Notice, as the case may be, in the form attached hereto as Exhibit I
and Exhibit II, respectively, and (ii) in the case of the conversion of a Note,
a copy of the Note (with the originals delivered to the Company) or, in the case
of a Warrant being exercised, a copy of the Warrant (with the original Warrant
delivered to the Company) being exercised (or, in each case, an indemnification
undertaking with respect to such Note or the Warrants in the case of their loss,
theft or destruction). So long as you have previously received (x) written
confirmation from counsel to the Company that a registration statement covering
resales of the Conversion Shares or Warrant Shares, as applicable, has been
declared effective by the Securities and Exchange Commission (the "SEC") under
the Securities Act of 1933, as amended (the "1933 ACT"), and no subsequent
notice by the Company or its counsel of the suspension or termination of its
effectiveness and (y) a copy of such registration statement, and if the
Purchasers represent in writing that the Conversion Shares or the Warrant
Shares, as the case may be, were sold pursuant to the Registration Statement,
then certificates representing the Conversion Shares and the Warrant Shares, as
the case may be, shall not bear any legend restricting transfer of the
Conversion Shares and the Warrant Shares, as the case may be, and should not be
subject to any stop-transfer restriction. Provided, however, that if you have
not previously received (i) written confirmation from counsel to the Company
that a registration statement covering resales of the Conversion Shares or
Warrant Shares, as applicable, has been declared effective by the SEC under the
1933 Act, and (ii) a copy of such registration statement, then the certificates
for the Conversion Shares and the Warrant Shares shall bear the following
legend:

<PAGE>

                           "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
                  NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
                  AMENDED (THE SECURITIES ACT"), OR ANY STATE SECURITIES LAWS
                  AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
                  UNLESS REGISTERED UNDER THE SECURITIES ACT OR APPLICABLE STATE
                  SECURITIES LAWS, OR TELENETICS CORPORATION SHALL HAVE RECEIVED
                  AN OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES
                  UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF
                  APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED."

and, provided further, that the Company may from time to time notify you to
place transfer restrictions on the certificates for the Conversion Shares and
the Warrant Shares in the event a registration statement covering the Conversion
Shares and the Warrant Shares is subject to amendment for events then current.

         A form of written confirmation from counsel to the Company that a
registration statement covering resales of the Conversion Shares and the Warrant
Shares has been declared effective by the SEC under the 1933 Act is attached
hereto as Exhibit III.

         Please be advised that each Purchaser is relying upon this letter as an
inducement to enter into the Purchase Agreement and, accordingly, each Purchaser
is a third party beneficiary to these instructions.

         Please execute this letter in the space indicated to acknowledge your
agreement to act in accordance with these instructions. Should you have any
questions concerning this matter, please contact me at ___________.

                                             Very truly yours,

                                             TELENETICS CORPORATION

                                             By:
                                                --------------------------------
                                             Name:
                                                  ------------------------------
                                             Title:
                                                   -----------------------------

ACKNOWLEDGED AND AGREED:

[TRANSFER AGENT]

By:
   --------------------------------------------------
Name:
     ------------------------------------------------
Title:
      -----------------------------------------------
Date:
     ------------------------------------------------

cc: List of Purchasers

                                      -2-
<PAGE>

                                    EXHIBIT I
                                    ---------
                                CONVERSION NOTICE

                             TELENETICS CORPORATION

     (To be Executed by the Registered Holder in order to Convert the Note)

The undersigned hereby irrevocably elects to convert $ ________________ of the
principal amount of the above Note No. ___ into shares of Common Stock of
TELENETICS CORPORATION (the "MAKER") according to the conditions hereof, as of
the date written below.

Date of Conversion
                   -------------------------------------------------------------

Applicable Conversion Price
                            ----------------------------------------------------

Signature
          ----------------------------------------------------------------------

                                                                          [NAME]

Address: -----------------------------------------------------------------------

         -----------------------------------------------------------------------

<PAGE>

                                   EXHIBIT II
                                   ----------
                             FORM OF EXERCISE NOTICE

                                  EXERCISE FORM

                             TELENETICS CORPORATION

The undersigned _______________, pursuant to the provisions of the within
Warrant, hereby elects to purchase _____ shares of Common Stock of Telenetics
Corporation covered by the within Warrant.

Dated: _________________                    Signature
                                                      --------------------------

                                            Address   --------------------------

                                                      --------------------------

                                   ASSIGNMENT

FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the within Warrant and all rights evidenced thereby and does
irrevocably constitute and appoint _____________, attorney, to transfer the said
Warrant on the books of the within named corporation.

Dated: _________________                    Signature
                                                      --------------------------

                                            Address   --------------------------

                                                      --------------------------

                               PARTIAL ASSIGNMENT

FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the right to purchase _________ shares of Warrant Stock
evidenced by the within Warrant together with all rights therein, and does
irrevocably constitute and appoint ___________________, attorney, to transfer
that part of the said Warrant on the books of the within named corporation.

Dated: _________________                    Signature
                                                      --------------------------

                                            Address   --------------------------

                                                      --------------------------

                           FOR USE BY THE ISSUER ONLY:

This Warrant No. W-_____ canceled (or transferred or exchanged) this _____ day
of ___________, _____, shares of Common Stock issued therefor in the name of
_______________, Warrant No. W-_____ issued for ____ shares of Common Stock in
the name of _______________.

<PAGE>

                                   EXHIBIT III
                                   -----------
                         FORM OF NOTICE OF EFFECTIVENESS
                            OF REGISTRATION STATEMENT

[NAME AND ADDRESS OF COMPANY'S TRANSFER AGENT]

         Re:      TELENETICS CORPORATION
         ---      ----------------------

Ladies and Gentlemen:

         We are counsel to Telenetics Corporation, a California corporation (the
"COMPANY"), and have represented the Company in connection with that certain
Note and Warrant Purchase Agreement (the "PURCHASE AGREEMENT"), dated as of
April 1, 2002, by and among the Company and the purchasers named therein
(collectively, the "PURCHASERS") pursuant to which the Company issued to the
Purchasers secured convertible promissory notes (the "NOTES") and warrants (the
"WARRANTS") to purchase shares of the Company's common stock, no par value per
share (the "COMMON STOCK"). Pursuant to the Purchase Agreement, the Company has
also entered into a Registration Rights Agreement with the Purchasers (the
"REGISTRATION RIGHTS AGREEMENT"), dated as of April 1, 2002, pursuant to which
the Company agreed, among other things, to register the Registrable Securities
(as defined in the Registration Rights Agreement), including the shares of
Common Stock issuable upon conversion of the principal amount of the Notes and
exercise of the Warrants, under the Securities Act of 1933, as amended (the
"1933 ACT"). In connection with the Company's obligations under the Registration
Rights Agreement, on ________________, 2002, the Company filed a Registration
Statement on Form SB-2 (File No. 333-________) (the "REGISTRATION STATEMENT")
with the Securities and Exchange Commission (the "SEC") relating to the resale
of the Registrable Securities which names the Purchasers as selling stockholders
thereunder.

         In connection with the foregoing, we advise you that a member of the
SEC's staff has advised us by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge,
after telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and accordingly, the
Registrable Securities are available for resale under the 1933 Act pursuant to
the Registration Statement.

                                          Very truly yours,

                                          [COMPANY COUNSEL]

                                          By:
                                             -----------------------------------

cc:      [LIST NAME OF PURCHASERS]

<PAGE>

                                    EXHIBIT E
                                 FORM OF OPINION

<PAGE>

                                    EXHIBIT F
                           FORM OF SECURITY AGREEMENT

<PAGE>

                                    EXHIBIT G
                      FORM OF REGISTRATION RIGHTS AGREEMENT<PAGE>
Exhibit 10.28

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR
RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE REASONABLY
ACCEPTABLE TO THE MAKER) IN THE FORM, SUBSTANCE AND SCOPE REASONABLY
SATISFACTORY TO THE MAKER THAT THIS NOTE MAY BE SOLD, TRANSFERRED, OR OTHERWISE
DISPOSED OF, UNDER AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH STATE
SECURITIES LAWS.

                             TELENETICS CORPORATION

                       Secured Convertible Promissory Note
                                due April 1, 2005

No. CN-1                                                           $2,115,000.00
Dated: April 1, 2002

         For value received, TELENETICS CORPORATION, a California corporation
(the "MAKER"), hereby promises to pay to the order of DOLPHIN OFFSHORE PARTNERS,
L.P. (together with its successors, representatives, and permitted assigns, the
"HOLDER"), in accordance with the terms hereinafter provided, the principal
amount of Two Million One Hundred Fifteen Thousand Dollars ($2,115,000.00),
together with interest thereon.

         All payments under or pursuant to this Note shall be made in United
States Dollars in immediately available funds to the Holder at the address of
the Holder first set forth above or at such other place as the Holder may
designate from time to time in writing to the Maker or by wire transfer of funds
to the Holder's account, instructions for which are attached hereto as EXHIBIT
A. The outstanding principal balance of this Note shall be due and payable on
April 1, 2005 (the "MATURITY DATE") or at such earlier time as provided herein.

                                   ARTICLE I

         Section 1.1 PURCHASE AGREEMENT. This Note has been executed and
delivered pursuant to the Note and Warrant Purchase Agreement, dated as of April
1, 2002 (the "PURCHASE AGREEMENT"), by and between the Maker and the purchasers
listed therein. Capitalized terms used and not otherwise defined herein shall
have the meanings set forth for such terms in the Purchase Agreement.

         Section 1.2 INTEREST. Beginning on the date hereof, the outstanding
principal balance of this Note shall bear interest, in arrears, at a rate per
annum equal to six percent (6%), payable quarterly or upon conversion unless
prepaid as provided herein; provided, however, if the Market Price (as defined

<PAGE>

in Section 3.2 hereof) is below the Conversion Price Floor (as defined in
Section 3.2 hereof) for a period of twenty (20) consecutive Trading Days, (the
"LOW PERIOD"), the outstanding principal balance of this Note shall bear
interest, in arrears, at a rate per annum equal to sixteen percent (16%) for the
period beginning on the day after the Low Period and ending on the day before
the Market Price exceeds an amount equal to 120% of the Conversion Price Floor
for a period of twenty (20) consecutive Trading Days. Interest shall be computed
on the basis of a 360-day year of twelve (12) 30-day months and shall accrue
commencing on the issuance date of this Note (the "ISSUANCE DATE"). The interest
shall be payable in cash. Upon the occurrence of an Event of Default (as defined
in Section 2.1 hereof), then to the extent permitted by law, the Maker will pay
interest to the Holder, payable on demand, on the outstanding principal balance
of the Note from the date of the Event of Default until such Event of Default is
cured at the rate of the lesser of nine percent (9%) above the interest rate
then in effect and the maximum applicable legal rate per annum.

         Section 1.3 SECURITY AGREEMENT. The obligations of the Maker hereunder
shall be secured by, and the Holder shall be entitled to the rights and security
granted by the Maker pursuant to, the Security Agreement dated as of the date
hereof by the Maker for the benefit of the Holder (the "SECURITY AGREEMENT").

         Section 1.4 SENIORITY OF THIS NOTE. This Note shall be senior to all
other indebtedness of the Maker other than the senior secured convertible
promissory notes in the aggregate principal amount of $2,087,500 issued by the
Maker as of January 23, 2002 and the secured promissory notes in the aggregate
principal amount of $162,500 issued by the Maker as of March 1, 2002.

         Section 1.5 PAYMENT ON NON-BUSINESS DAYS. Whenever any payment to be
made shall be due on a Saturday, Sunday or a public holiday under the laws of
the State of New York, such payment may be due on the next succeeding business
day and such next succeeding day shall be included in the calculation of the
amount of accrued interest payable on such date.

         Section 1.6 TRANSFER. This Note may be transferred or sold, subject to
the provisions of Section 4.8 of this Note and the provisions of the other
Transaction Documents (as defined in the Purchase Agreement), or pledged,
hypothecated or otherwise granted as security by the Holder.

         Section 1.7 REPLACEMENT. Upon receipt of a duly executed, notarized and
unsecured written statement from the Holder with respect to the loss, theft or
destruction of this Note (or any replacement hereof), and without requiring an
indemnity bond or other security, or, in the case of a mutilation of this Note,
upon surrender and cancellation of such Note, the Maker shall issue a new Note,
of like tenor and amount, in lieu of such lost, stolen, destroyed or mutilated
Note.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]

                                      -2-
<PAGE>

                                   ARTICLE II

                           EVENTS OF DEFAULT; REMEDIES
                           ---------------------------

         Section 2.1 EVENTS OF DEFAULT. The occurrence of any of the following
events shall be an "EVENT OF DEFAULT" under this Note:

                  (a) the Maker shall fail to make the payment of any amount of
principal outstanding for a period of three (3) days after the date such payment
is due hereunder; or

                  (b) the Maker shall fail to make any payment of interest in
cash for a period of five (5) days after the date such interest is due; or

                  (c) the failure of the Registration Statement to be declared
effective by the Securities and Exchange Commission ("SEC") on or prior to the
one hundred --- twentieth day following the Closing Date; or

                  (d) the suspension from listing or the failure of the Maker's
common stock, no par value per share (the "COMMON STOCK"), to be listed on the
OTC Bulletin Board for a period of five (5) consecutive Trading Days; or

                  (e) the Maker's notice to the Holder, including by way of
public announcement, at any time, of its inability to comply (including for any
of the reasons described in Section 3.8(a) hereof) or its intention not to
comply with proper requests for conversion of this Note into shares of Common
Stock; or

                  (f) the Maker shall fail to (i) timely delivery the shares of
Common Stock upon conversion of this Note, (ii) timely file the Registration
Statement (as defined in the Registration Rights Agreement) or (iii) make the
payment of any fees and/or liquidated damages under this Note, the Purchase
Agreement or the Registration Rights Agreement, which failure in the case of
items (i) and (iii) of this Section 2.1(f) is not remedied within seven (7)
business days after the incurrence thereof; or

                  (g) while the Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights Agreement,
the effectiveness of the Registration Statement lapses for any reason
(including, without limitation, the issuance of a stop order) or is unavailable
to the Holder for sale of the Registrable Securities (as defined in the
Registration Rights Agreement) in accordance with the terms of the Registration
Rights Agreement, and such lapse or unavailability continues for a period of
fifteen (15) consecutive Trading Days, PROVIDED that the cause of such lapse or
unavailability is not due to factors primarily within the control of Holder; and
PROVIDED, FURTHER, that such period may be extended for an additional ten (10)
Trading Days if such lapse or unavailability is a result of comments received
from the Commission with respect to the Company filing a post-effective
amendment to the Registration Statement; or

                                      -3-
<PAGE>

                  (h) default shall be made in the performance or observance by
the Maker of (i) any material covenant, condition or agreement contained in this
Note (other than as set forth in Section 3.7(m) hereof and clause (f) of this
Section 2.1) and such default is not fully cured within five (5) business days
after the occurrence thereof or (ii) any material covenant, condition or
agreement contained in the Purchase Agreement (other than Sections 3.17 and 3.18
thereof), the Security Agreement or the Registration Rights Agreement which is
not covered by any other provisions of this Section 2.1 and such default is not
fully cured within seven (7) business days after the occurrence thereof; or

                  (i) any material representation or warranty made by the Maker
herein or in the Purchase Agreement, the Security Agreement or the Registration
Rights Agreement shall prove to have been false or incorrect or breached in a
material respect on the date as of which made; or

                  (j) the Maker shall issue any debt securities which are not
subordinate to this Note and are not on such terms as are acceptable to the
Holders; or

                  (k) the consummation of any of the following transactions: (i)
the consolidation, merger or other business combination of the Maker with or
into a person or entity (other than (A) pursuant to a migratory merger effected
solely for the purpose of changing the jurisdiction of incorporation of the
Maker or (B) a consolidation, merger or other business combination in which
holders of the Maker's voting power immediately prior to the transaction
continue after the transaction to hold, directly or indirectly, the voting power
of the surviving entity or entities necessary to elect a majority of the members
of the board of directors (or their equivalent if other than a corporation) of
such entity or entities), except if in the case of a consolidation, merger or
other business combination of the Maker, the Maker shall have given the Holder
not less than fifteen (15) business days prior written notice thereof (the
"TRANSACTION NOTICE") and shall have furnished the Holder with such information
regarding the consolidation, merger or other business combination (including,
without limitation, the counterparties thereto) as the Holder may reasonably
request in order for the Holder to determine if it will exercise its conversion
rights hereunder prior to the consummation of such consolidation, merger or
other business combination; (ii) the sale or transfer of all or substantially
all of the Maker's assets; or (iii) the consummation of a purchase, tender or
exchange offer made to the holders of more than 30% of the outstanding shares of
Common Stock; or

                  (l) if required by applicable law, rule or regulation, the
stockholders of the Maker shall fail to approve the proposal presented and
recommended by the Board of Directors of the Maker to approve the Holder
acquiring in excess of 19.99% of the issued and outstanding shares of Common
Stock upon conversion of this Note and/or exercise of the Warrants; or

                  (m) the Maker shall (i) default in any payment of any amount
or amounts of principal of or interest on any payment (other than the
Indebtedness hereunder) the aggregate principal amount of which payment is in
excess of $100,000 or (ii) default in the observance or performance of any other
agreement or condition relating to any Indebtedness or contained in any
instrument or agreement evidencing, securing or relating thereto, or any other
event shall occur or condition exist, the effect of which default or other event
or condition is to cause, or to permit the holder or holders or beneficiary or
beneficiaries of such Indebtedness to cause with the giving of notice if
required, such Indebtedness to become due prior to its stated maturity; or

                                      -4-
<PAGE>

                  (n) the Maker shall (i) apply for or consent to the
appointment of, or the taking of possession by, a receiver, custodian, trustee
or liquidator of itself or of all or a substantial part of its property or
assets, (ii) make a general assignment for the benefit of its creditors, (iii)
commence a voluntary case under the United States Bankruptcy Code (as now or
hereafter in effect) or under the comparable laws of any jurisdiction (foreign
or domestic), (iv) file a petition seeking to take advantage of any bankruptcy,
insolvency, moratorium, reorganization or other similar law affecting the
enforcement of creditors' rights generally, (v) acquiesce in writing to any
petition filed against it in an involuntary case under United States Bankruptcy
Code (as now or hereafter in effect) or under the comparable laws of any
jurisdiction (foreign or domestic), or (vi) take any action under the laws of
any jurisdiction (foreign or domestic) analogous to any of the foregoing; or

                  (o) a proceeding or case shall be commenced in respect of the
Maker, without its application or consent, in any court of competent
jurisdiction, seeking (i) the liquidation, reorganization, moratorium,
dissolution, winding up, or composition or readjustment of its debts, (ii) the
appointment of a trustee, receiver, custodian, liquidator or the like of it or
of all or any substantial part of its assets in connection with the liquidation
or dissolution of the Maker or (iii) similar relief in respect of it under any
law providing for the relief of debtors, and such proceeding or case described
in clause (i), (ii) or (iii) shall continue undismissed, or unstayed and in
effect, for a period of sixty (60) days or any order for relief shall be entered
in an involuntary case under United States Bankruptcy Code (as now or hereafter
in effect) or under the comparable laws of any jurisdiction (foreign or
domestic) against the Maker or action under the laws of any jurisdiction
(foreign or domestic) analogous to any of the foregoing shall be taken with
respect to the Maker and shall continue undismissed, or unstayed and in effect
for a period of sixty (60) days;

                  (p) intentionally omitted;

                  (q) a breach of Section 3.17 of the Purchase Agreement; or

                  (r) a breach of Section 3.18 of the Purchase Agreement.

         Section 2.2 REMEDIES UPON AN EVENT OF DEFAULT. If an Event of Default
shall have occurred and shall be continuing, the Holder of this Note may at any
time at its option (a) declare the entire unpaid principal balance of this Note,
together with all interest accrued hereon, due and payable, and thereupon, the
same shall be accelerated and so due and payable, without presentment, demand,
protest, or notice, all of which are hereby expressly unconditionally and
irrevocably waived by the Maker; PROVIDED, HOWEVER, that upon the occurrence of
an Event of Default described in (i) Sections 2.1 (m), (n) or (o), the
outstanding principal balance and accrued interest hereunder shall be
automatically due and payable and (ii) Sections 2.1 (c)-(l), demand the
prepayment of this Note pursuant to Section 3.7 hereof, (b) demand that the
principal amount of this Note then outstanding shall be converted into shares of
Common Stock at a Conversion Price per share calculated pursuant to Section 3.1
hereof assuming that the date that the Event of Default occurs is the Conversion
Date (as defined in Section 3.2(a) hereof), or (c) exercise or otherwise enforce
any one or more of the Holder's rights, powers, privileges, remedies and
interests under this Note, the Purchase Agreement, the Security Agreement, the

                                      -5-
<PAGE>

Registration Rights Agreement or applicable law. An Event of Default under
Section 2.1(r) may only be waived by the Holder. No course of delay on the part
of the Holder shall operate as a waiver thereof or otherwise prejudice the right
of the Holder. No remedy conferred hereby shall be exclusive of any other remedy
referred to herein or now or hereafter available at law, in equity, by statute
or otherwise.

                                  ARTICLE III

                      CONVERSION; ANTIDILUTION; PREPAYMENT
                      ------------------------------------

         Section 3.1 CONVERSION OPTION. At any time on or after the Issuance
Date, this Note shall be convertible (in whole or in part), at the option of the
Holder (the "CONVERSION OPTION"), into such number of fully paid and
non-assessable shares of Common Stock (the "CONVERSION RATE") as is determined
by dividing (x) that portion of the outstanding principal balance under this
Note as of such date that the Holder elects to convert by (y) the Conversion
Price (as hereinafter defined) then in effect on the date on which the Holder
faxes prior to 5:00 p.m. pacific time a notice of conversion (the "CONVERSION
Notice"), duly executed, to the Maker (facsimile number (949) 455-9324, Attn.:
Chief Financial Officer and Attn.: President) (the "CONVERSION DATE"), provided,
however, that the Conversion Price shall be subject to adjustment as described
in Section 3.6 below.

         Section 3.2 CONVERSION PRICE.

                  (a) Subject to the provisions of subsection (b) below, the
term "CONVERSION PRICE" shall mean $.44064, except that if during any period (a
"BLACK-OUT PERIOD"), a Holder is unable to trade any Common Stock issued or
issuable upon conversion of the Notes immediately due to the postponement of
filing or delay or suspension of effectiveness of a registration statement or
because the Maker has otherwise informed such Holder that an existing prospectus
cannot be used at that time in the sale or transfer of such Common Stock, such
Holder shall have the option but not the obligation on any Conversion Date
within ten (10) Trading Days following the expiration of the Black-out Period of
using the Conversion Price applicable on such Conversion Date or any Conversion
Price selected by such Holder that would have been applicable had such
Conversion Date been at any earlier time during the Black-out Period or within
the ten (10) Trading Days thereafter.

                  (b) The Holder may elect to convert this Note at the Alternate
Conversion Price (as defined below) at the earlier of the effective date of the
Registration Statement or one hundred twenty (120) days following the Closing
Date; provided, however, that the Alternate Conversion Price may only be used if
the Market Price (as defined below) at the time of the conversion is less than
$0.55. The "ALTERNATE CONVERSION PRICE" shall mean an amount equal to the Market
Price (as defined below) multiplied by the Discount Percentage (as defined
below), subject to a ceiling of $.44064 and subject to a floor of $.10 (the
"CONVERSION PRICE FLOOR"). The term "MARKET PRICE" means the average of the
three (3) lowest Volume Weighted Average Prices (as defined below) for the
Maker's Common Stock during the twenty-five (25) Trading Days immediately prior
to the Conversion Date, subject to adjustment under Section 3.6 hereof.

                                      -6-
<PAGE>

                  (c) The term "DISCOUNT PERCENTAGE" shall initially mean
eighty-five percent (85%); PROVIDED, HOWEVER, if the Registration Statement is
not declared effective within one hundred twenty (120) days following the
Closing Date, the Discount Percentage shall decrease by 0.1% for each day that
the Registration Statement is not effective beyond such one hundred twenty (120)
day period. The term "VOLUME WEIGHTED AVERAGE PRICE" shall mean the daily volume
weighted average price (based on a Trading Day from 9:30 a.m. to 4:00 p.m.,
eastern time) of the Common Stock of the Maker on the OTC Bulletin Board (or any
successor thereto) as reported by Bloomberg Financial LP using the AQR function.

         Section 3.3 MECHANICS OF CONVERSION.

                  (a) Not later than three (3) Trading Days after any Conversion
Date, the Maker will deliver to the applicable Holder by express courier (A) a
certificate or certificates which shall be free of restrictive legends and
trading restrictions (other than those required by Section 5.1 of the Purchase
Agreement) representing the number of shares of Common Stock being acquired upon
the conversion of this Note and (B) one or more new promissory notes
representing the amount of this Note not converted. If in the case of any
Conversion Notice such certificate or certificates are not delivered to or as
directed by the applicable Holder by the third Trading Day after the Conversion
Date (the "DELIVERY DATE"), the Holder shall be entitled by written notice to
the Maker at any time before its receipt of such certificate or certificates
thereafter, to rescind such conversion, in which event the Maker shall
immediately return this Note tendered for conversion, whereupon the Maker and
the Holder shall each be restored to their respective positions immediately
prior to the delivery of such notice of revocation, except that any amounts
described in Sections 3.3(b) and (c) shall be payable through the date notice of
rescission is given to the Maker.

                  (b) The Maker understands that a delay in the delivery of the
shares of Common Stock upon conversion of this Note and failure to deliver one
or more new promissory notes representing the unconverted principal amount of
this Note beyond the Delivery Date could result in economic loss to the Holder.
If the Maker fails to deliver to the Holder such certificate or certificates
pursuant to this Section hereunder by the Delivery Date, the Maker shall pay to
such Holder, in cash, an amount per Trading Day for each Trading Day until such
certificates are delivered, together with interest on such amount at a rate of
10% per annum, accruing until such amount and any accrued interest thereon is
paid in full, equal to the greater of (A) (i) 1% of the aggregate principal
amount requested to be converted for the first five (5) Trading Days after the
Delivery Date and (ii) 2% of the aggregate principal amount requested to be
converted for each Trading Day thereafter and (B) $2,000 per day (which amount
shall be paid as liquidated damages and not as a penalty). Nothing herein shall
limit a Holder's right to pursue actual damages for the Maker's failure to
deliver certificates representing shares of Common Stock upon conversion within
the period specified herein (including, without limitation, damages relating to
any purchase of shares of Common Stock by such Holder to make delivery on a sale
effected in anticipation of receiving certificates representing shares of Common
Stock upon conversion, such damages to be in an amount equal to (A) the
aggregate amount paid by such Holder for the shares of Common Stock so purchased
minus (B) the aggregate amount of net proceeds received by such Holder from the
sale of the shares of Common Stock issued by the Maker pursuant to such
conversion), and such Holder shall have the right to pursue all remedies
available to it at law or in equity (including, without limitation, a decree of
specific performance and/or injunctive relief). Notwithstanding anything to the
contrary contained herein, the Holder shall be entitled to withdraw a Conversion
Notice in accordance with Section 3.3(a), and upon such withdrawal the Maker
shall only be obligated to pay the liquidated damages accrued in accordance with
this Section 3.3(b) through the date the Conversion Notice is withdrawn.

                                      -7-
<PAGE>

                  (c) In addition to any other rights available to the Holder,
if the Maker fails to deliver to the Holder such certificate or certificates
pursuant to Section 3.3(a) by the Delivery Date and if after the Delivery Date
the Holder purchases (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by such Holder of the
Conversion Shares which the Holder anticipated receiving upon such conversion (a
"BUY-IN"), then the Maker shall pay in cash to the Holder (in addition to any
remedies available to or elected by the Holder) the amount by which (A) the
Holder's total purchase price (including brokerage commissions, if any) for the
shares of Common Stock so purchased exceeds (B) the aggregate principal amount
of this Note for which such conversion was not timely honored, together with
interest thereon at a rate of the lesser of 15% and the maximum applicable legal
rate per annum, accruing until such amount and any accrued interest thereon is
paid in full (which amount shall be paid as liquidated damages and not as a
penalty). For example, if the Holder purchases shares of Common Stock having a
total purchase price of $11,000 to cover a Buy-In with respect to an attempted
conversion of $10,000 aggregate principal amount of this Note, the Maker shall
be required to pay the Holder $1,000, plus interest. The Holder shall provide
the Maker written notice indicating the amounts payable to the Holder in respect
of the Buy-In.

         Section 3.4 OWNERSHIP CAP AND CERTAIN CONVERSION RESTRICTIONS.

                  (a) Notwithstanding anything to the contrary set forth in
Section 3 of this Note, at no time may a holder of this Note convert this Note
if the number of shares of Common Stock to be issued pursuant to such conversion
would exceed, when aggregated with all other shares of Common Stock owned by
such holder at such time, the number of shares of Common Stock which would
result in such holder owning more than 4.999% of all of the Common Stock
outstanding at such time; PROVIDED, HOWEVER, that upon a holder of this Note
providing the Maker with sixty (60) days notice (pursuant to Section 4.1 hereof)
(the "WAIVER Notice") that such holder would like to waive this Section 3.4 with
regard to any or all shares of Common Stock issuable upon conversion of this
Note, this Section 3.4 will be of no force or effect with regard to all or the
portion of the Note referenced in the Waiver Notice.

                  (b) The Holder may not convert any Note hereunder to the
extent such conversion would result in the Holder beneficially owning (as
determined in accordance with Section 13(d) of the Exchange Act and the rules
thereunder) in excess of 9.999% of the then issued and outstanding shares of
Common Stock, including shares issuable upon conversion of the Note held by the
Holder after application of this Section.

         Section 3.5 INTENTIONALLY OMITTED.

         Section 3.6 ADJUSTMENT OF CONVERSION PRICE.

                  (a) The Conversion Price shall be subject to adjustment from
time to time as follows:

                                      -8-
<PAGE>

                           (i) ADJUSTMENTS FOR STOCK SPLITS AND COMBINATIONS. If
the Maker shall at any time or from time to time after the Issuance Date, effect
a stock split of the outstanding Common Stock, the applicable Conversion Price
in effect immediately prior to the stock split shall be proportionately
decreased. If the Maker shall at any time or from time to time after the
Issuance Date, combine the outstanding shares of Common Stock, the applicable
Conversion Price in effect immediately prior to the combination shall be
proportionately increased. Any adjustments under this Section 3.6(a)(i) shall be
effective at the close of business on the date the stock split or combination
occurs.

                           (ii) ADJUSTMENTS FOR CERTAIN DIVIDENDS AND
DISTRIBUTIONS. If the Maker shall at any time or from time to time after the
Issuance Date, make or issue or set a record date for the determination of
holders of Common Stock entitled to receive a dividend or other distribution
payable in shares of Common Stock, then, and in each event, the applicable
Conversion Price in effect immediately prior to such event shall be decreased as
of the time of such issuance or, in the event such record date shall have been
fixed, as of the close of business on such record date, by multiplying, as
applicable, the applicable Conversion Price then in effect by a fraction:

                           (1) the numerator of which shall be the total number
of shares of Common Stock issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date; and

                           (2) the denominator of which shall be the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date plus the
number of shares of Common Stock issuable in payment of such dividend or
distribution.

                           (iii) ADJUSTMENT FOR OTHER DIVIDENDS AND
DISTRIBUTIONS. If the Maker shall at any time or from time to time after the
Issuance Date, make or issue or set a record date for the determination of
holders of Common Stock entitled to receive a dividend or other distribution
payable in other than shares of Common Stock, then, and in each event, an
appropriate revision to the applicable Conversion Price shall be made and
provision shall be made (by adjustments of the Conversion Price or otherwise) so
that the holders of this Note shall receive upon conversions thereof, in
addition to the number of shares of Common Stock receivable thereon, the number
of securities of the Maker which they would have received had this Note been
converted into Common Stock on the date of such event and had thereafter, during
the period from the date of such event to and including the Conversion Date,
retained such securities (together with any distributions payable thereon during
such period), giving application to all adjustments called for during such
period under this Section 3.6(a)(iii) with respect to the rights of the holders
of this Note.

                           (iv) ADJUSTMENTS FOR RECLASSIFICATION, EXCHANGE OR
SUBSTITUTION. If the Common Stock issuable upon conversion of this Note at any
time or from time to time after the Issuance Date shall be changed to the same
or different number of shares of any class or classes of stock, whether by
reclassification, exchange, substitution or otherwise (other than by way of a
stock split or combination of shares or stock dividends provided for in Sections
3.6(a)(i), (ii) and (iii), or a reorganization, merger, consolidation, or sale
of assets provided for in Section 3.6(a)(v)), then, and in each event, an
appropriate revision to the Conversion Price shall be made and provisions shall

                                      -9-
<PAGE>

be made (by adjustments of the Conversion Price or otherwise) so that the holder
of this Note shall have the right thereafter to convert this Note into the kind
and amount of shares of stock and other securities receivable upon
reclassification, exchange, substitution or other change, by holders of the
number of shares of Common Stock into which such Note might have been converted
immediately prior to such reclassification, exchange, substitution or other
change, all subject to further adjustment as provided herein.

                           (v) ADJUSTMENTS FOR REORGANIZATION, MERGER,
CONSOLIDATION OR SALES OF ASSETS. If at any time or from time to time after the
Issuance Date there shall be a capital reorganization of the Maker (other than
by way of a stock split or combination of shares or stock dividends or
distributions provided for in Section 3.6(a)(i), (ii) and (iii), or a
reclassification, exchange or substitution of shares provided for in Section
3.6(a)(iv)), or a merger or consolidation of the Maker with or into another
corporation, or the sale of all or substantially all of the Maker's properties
or assets to any other person (an "ORGANIC CHANGE"), then as a part of such
Organic Change an appropriate revision to the Conversion Price shall be made and
provision shall be made (by adjustments of the Conversion Price or otherwise) so
that the holder of this Note shall have the right thereafter to convert such
Note into the kind and amount of shares of stock and other securities or
property of the Maker or any successor corporation resulting from Organic
Change. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 3.6(a)(v) with respect to the
rights of the holder of this Note after the Organic Change to the end that the
provisions of this Section 3.6(a)(v) (including any adjustment in the applicable
Conversion Price then in effect and the number of shares of stock or other
securities deliverable upon conversion of this Note) shall be applied after that
event in as nearly an equivalent manner as may be practicable.

                           (vi) ADJUSTMENTS FOR ISSUANCE OF ADDITIONAL SHARES OF
COMMON STOCK.

                           (1) In the event the Maker, shall, at any time, from
time to time, issue or sell any Additional Shares of Common Stock to a third
party other than the Holder for a consideration per share less than the
Conversion Price then in effect for the Note immediately prior to the time of
such issue or sale, then, forthwith upon such issue or sale, the Conversion
Price then in effect for the Notes shall be reduced to a price equal to the
consideration per share paid for such Common Stock.

                           (2) If the Maker, at any time after the Issuance
Date, shall issue any Additional Shares of Common Stock to the Holder, at a
price per share less than the applicable Conversion Price then in effect or
without consideration, then the applicable Conversion Price upon each such
issuance shall be adjusted to that price (rounded to the nearest cent)
determined by multiplying the applicable Conversion Price then in effect by a
fraction:

                                (A) the numerator of which shall be equal to the
sum of (x) the number of shares of Common Stock outstanding immediately prior to
the issuance of such Additional Shares of Common Stock PLUS (y) the number of
shares of Common Stock (rounded to the nearest whole share) which the aggregate
consideration for the total number of such Additional Shares of Common Stock so
issued would purchase at a price per share equal to the applicable Conversion
Price then in effect, and

                                      -10-
<PAGE>

                                (B) the denominator of which shall be equal to
the number of shares of Common Stock outstanding immediately after the issuance
of such Additional Shares of Common Stock.

                  No adjustment of the applicable Conversion Price shall be made
under this subsection (a)(vi) upon the issuance of any Additional Shares of
Common Stock which are issued pursuant to any Common Stock Equivalent (as
defined below) if upon the issuance of such Common Stock Equivalent (x) any
adjustment shall have been made pursuant to subsection (vii) of this Section
3.6(a) or (y) no adjustment was required pursuant to subsection (vii) of this
Section 3.6(a). No adjustment of the applicable Conversion Price shall be made
under this subsection (vi) in an amount less than $.01 per share, but any such
lesser adjustment shall be carried forward and shall be made at the time and
together with the next subsequent adjustment, if any, which together with any
adjustments so carried forward shall amount to $.01 per share or more; PROVIDED
that upon any adjustment of the applicable Conversion Price as a result of any
dividend or distribution payable in Common Stock or Convertible Securities (as
defined below) or the reclassification, subdivision or combination of Common
Stock into a greater or smaller number of shares, the foregoing figure of $.01
per share (or such figure as last adjusted) shall be adjusted (to the nearest
one-half cent) in proportion to the adjustment in the applicable Conversion
Price.

                           (vii) ISSUANCE OF COMMON STOCK EQUIVALENTS. If the
Maker, at any time after the Issuance Date, shall issue any securities
convertible into or exchangeable for, directly or indirectly, Common Stock
("CONVERTIBLE SECURITIES"), other than this Note, or any rights or warrants or
options to purchase any such Common Stock or Convertible Securities, shall be
issued or sold (collectively, the "COMMON STOCK EQUIVALENTS") and the price per
share for which Additional Shares of Common Stock may be issuable thereafter
pursuant to such Common Stock Equivalent shall be less than the applicable
Conversion Price then in effect, or if, after any such issuance of Common Stock
Equivalents, the price per share for which Additional Shares of Common Stock may
be issuable thereafter is amended or adjusted, and such price as so amended
shall be less than the applicable Conversion Price in effect at the time of such
amendment, then the applicable Conversion Price upon each such issuance or
amendment shall be adjusted as provided in the first sentence of subsection (vi)
of this Section 3.6(a) on the basis that (1) the maximum number of Additional
Shares of Common Stock issuable pursuant to all such Common Stock Equivalents
shall be deemed to have been issued (whether or not such Common Stock
Equivalents are actually then exercisable, convertible or exchangeable in whole
or in part) as of the earlier of (A) the date on which the Maker shall enter
into a firm contract for the issuance of such Common Stock Equivalent, or (B)
the date of actual issuance of such Common Stock Equivalent, and (2) the
aggregate consideration for such maximum number of Additional Shares of Common
Stock shall be deemed to be the minimum consideration received or receivable by
the Maker for the issuance of such Additional Shares of Common Stock pursuant to
such Common Stock Equivalent. No adjustment of the applicable Conversion Price
shall be made under this subsection (vii) upon the issuance of any Convertible
Security which is issued pursuant to the exercise of any warrants or other
subscription or purchase rights therefor, if any adjustment shall previously
have been made to the exercise price of such warrants then in effect upon the
issuance of such warrants or other rights pursuant to this subsection (vii). If
no adjustment is required under this subsection (vii) upon issuance of any
Common Stock Equivalent or once an adjustment is made under this subsection
(vii) no further adjustments shall be made upon the actual issue of Common Stock
upon conversion or exchange of the Common Stock Equivalent.

                                      -11-
<PAGE>

                           (viii) CONSIDERATION FOR STOCK. In case any shares of
Common Stock or any Common Stock Equivalents shall be issued or sold:

                           (1) in connection with any merger or consolidation in
which the Maker is the surviving corporation (other than any consolidation or
merger in which the previously outstanding shares of Common Stock of the Maker
shall be changed to or exchanged for the stock or other securities of another
corporation), the amount of consideration therefore shall be, deemed to be the
fair value, as determined reasonably and in good faith by the Board of Directors
of the Maker, of such portion of the assets and business of the nonsurviving
corporation as such Board may determine to be attributable to such shares of
Common Stock, Convertible Securities, rights or warrants or options, as the case
may be; or

                           (2) in the event of any consolidation or merger of
the Maker in which the Maker is not the surviving corporation or in which the
previously outstanding shares of Common Stock of the Maker shall be changed into
or exchanged for the stock or other securities of another corporation, or in the
event of any sale of all or substantially all of the assets of the Maker for
stock or other securities of any corporation, the Maker shall be deemed to have
issued a number of shares of its Common Stock for stock or securities or other
property of the other corporation computed on the basis of the actual exchange
ratio on which the transaction was predicated, and for a consideration equal to
the fair market value on the date of such transaction of all such stock or
securities or other property of the other corporation. If any such calculation
results in adjustment of the applicable Conversion Price, or the number of
shares of Common Stock issuable upon conversion of the Notes, the determination
of the applicable Conversion Price or the number of shares of Common Stock
issuable upon conversion of the Notes immediately prior to such merger,
consolidation or sale, shall be made after giving effect to such adjustment of
the number of shares of Common Stock issuable upon conversion of the Notes.

                           (ix) SUPERSEDING ADJUSTMENT. If, at any time after
any adjustment of the Conversion Price shall have been made pursuant to Section
3.6(a)(vii) as the result of any Common Stock Equivalents, any (i) such Common
Stock Equivalents shall expire, and the right of conversion or exchange with
respect to all or a portion of such other Common Stock Equivalents shall not
have been exercised, or (ii) the consideration per share for which shares of
Common Stock are issuable pursuant to such Common Stock Equivalents, shall be
increased solely by virtue of provisions therein contained for an automatic
increase in such consideration per share upon the occurrence of a specified date
or event, then for each outstanding Note such previous adjustment shall be
rescinded and annulled and the Additional Shares of Common Stock which were
deemed to have been issued by virtue of the computation made in connection with
the adjustment so rescinded and annulled shall no longer be deemed to have been
issued by virtue of such computation. Upon the occurrence of an event set forth
in this Section 3.6(a)(ix) above, there shall be a recomputation made of the
effect of such Common Stock Equivalents on the basis of: (i) treating the number
of Additional Shares of Common Stock or other property, if any, theretofore
actually issued or issuable pursuant to the previous exercise of any such right
of conversion or exchange, as having been issued on the date or dates of any

                                      -12-
<PAGE>

such exercise and for the consideration actually received and receivable
therefor, and (ii) treating any such Common Stock Equivalents which then remain
outstanding as having been granted or issued immediately after the time of such
increase of the consideration per share for which shares of Common Stock or
other property are issuable under such Common Stock Equivalents; whereupon a new
adjustment of the Conversion Price then in effect shall be made, which new
adjustment shall supersede the previous adjustment so rescinded and annulled.

                  (b) RECORD DATE. In case the Maker shall take record of the
holders of its Common Stock for the purpose of entitling them to subscribe for
or purchase Common Stock or Convertible Securities, then the date of the issue
or sale of the shares of Common Stock shall be deemed to be such record date.

                  (c) CERTAIN ISSUES EXCEPTED. Anything herein to the contrary
notwithstanding, the Maker shall not be required to make any adjustment of the
number of shares of Common Stock issuable upon conversion of the Notes upon the
grant after the Issuance Date of, or the exercise after the Issuance Date of,
options or warrants or rights to purchase stock under the Maker's existing stock
option and stock purchase plans or upon the issuance to the Holder or its
successors or assigns of replacement securities pursuant to Section 3.10(b) of
the Purchase Agreement.

                  (d) NO IMPAIRMENT. The Maker shall not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Maker, but will at all
times in good faith, assist in the carrying out of all the provisions of this
Section 3.6 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the Holder against
impairment. In the event a Holder shall elect to convert any Notes as provided
herein, the Maker cannot refuse conversion based on any claim that such Holder
or any one associated or affiliated with such Holder has been engaged in any
violation of law, violation of an agreement to which such Holder is a party or
for any reason whatsoever, unless, an injunction from a court, or notice,
restraining and or adjoining conversion of all or of said Notes shall have
issued and the Maker posts a surety bond for the benefit of such Holder in an
amount equal to 130% of the amount of the Notes the Holder has elected to
convert, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be payable
to such Holder in the event it obtains judgment.

                  (e) CERTIFICATES AS TO ADJUSTMENTS. Upon occurrence of each
adjustment or readjustment of the Conversion Price or number of shares of Common
Stock issuable upon conversion of this Note pursuant to this Section 3.6, the
Maker at its expense shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and furnish to the Holder a certificate setting
forth such adjustment and readjustment, showing in detail the facts upon which
such adjustment or readjustment is based. The Maker shall, upon written request
of the Holder, at any time, furnish or cause to be furnished to such holder a
like certificate setting forth such adjustments and readjustments, the
applicable Conversion Price in effect at the time, and 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 the conversion of this Note. Notwithstanding the
foregoing, the Maker shall not be obligated to deliver a certificate unless such
certificate would reflect an increase or decrease of at least one percent (1%)
of such adjusted amount.

                                      -13-
<PAGE>

                  (f) ISSUE TAXES. The Maker shall pay any and all issue and
other taxes, excluding federal, state or local income taxes, that may be payable
in respect of any issue or delivery of shares of Common Stock on conversion of
this Note pursuant thereto; PROVIDED, HOWEVER, that the Maker shall not be
obligated to pay any transfer taxes resulting from any transfer requested by any
holder in connection with any such conversion.

                  (g) FRACTIONAL SHARES. No fractional shares of Common Stock
shall be issued upon conversion of this Note. In lieu of any fractional shares
to which the Holder would otherwise be entitled, the Maker shall pay cash equal
to the product of such fraction multiplied by the average of the Volume Weighted
Average Prices of the Common Stock for the five (5) consecutive Trading Days
immediately preceding the Conversion Date.

                  (h) RESERVATION OF COMMON STOCK. The Maker shall at all times
when this Note shall be outstanding, reserve and keep available out of its
authorized but unissued Common Stock, subject to Shareholder Approval, such
number of shares of Common Stock as shall from time to time be sufficient to
effect the conversion of this Note; PROVIDED that the number of shares of Common
Stock so reserved shall at no time be less than 100% of the aggregate number of
shares of Common Stock issuable at a Conversion Price equal to the Conversion
Price Floor. The Maker shall, from time to time in accordance with the
California General Corporation Law, as amended, increase the authorized number
of shares of Common Stock if at any time the unissued number of authorized
shares shall not be sufficient to satisfy the Maker's obligations under this
Section 3.6(h).

                  (i) REGULATORY COMPLIANCE. If any shares of Common Stock to be
reserved for the purpose of conversion of this Note require registration or
listing with or approval of any governmental authority, stock exchange or other
regulatory body under any federal or state law or regulation or otherwise before
such shares may be validly issued or delivered upon conversion, the Maker shall,
at its sole cost and expense, in good faith and as expeditiously as possible,
endeavor to secure such registration, listing or approval, as the case may be.

                  (j) WHEN ADJUSTMENT NOT REQUIRED. If the Maker shall take a
record of the holders of its Common stock for the purpose of entitling them to
receive a dividend or distribution or subscription or purchase rights and shall,
thereafter and before the distribution to stockholders thereof, legally abandon
its plan to pay or deliver such dividend, distribution, subscription or purchase
rights, then thereafter no adjustment shall be required by reason of the taking
of such record and any such adjustment previously made in respect thereof shall
be rescinded and annulled. Further, anything herein to the contrary
notwithstanding, the Maker shall not be required to make any adjustment of the
number of shares of Common Stock issuable upon conversion of this Note upon the
grant or the exercise of, options or warrants or rights to purchase stock under
the Maker's existing stock option and stock purchase plans or upon the issuance
to the Holder or its successors or assigns of replacement securities pursuant to
Section 3.10(b) of the Purchase Agreement.

                                      -14-
<PAGE>

         Section 3.7 PREPAYMENT.

                  (a) PREPAYMENT UPON AN EVENT OF DEFAULT. Notwithstanding
anything to the contrary contained herein, upon the occurrence of an Event of
Default described in Sections 2.1(c)-(k) hereof, the Holder shall have the
right, at such Holder's option, to require the Maker to prepay all or a portion
of this Note at a price equal to the Triggering Event Prepayment Price (as
defined in Section 3.7(c) below) applicable at the time of such request. Nothing
in this Section 3.7(a) shall limit the Holder's rights under Section 2.2 hereof.

                  (b) PREPAYMENT OPTION UPON MAJOR TRANSACTION. In addition to
all other rights of the holder of this Note contained herein, simultaneous with
the occurrence of a Major Transaction (as defined below), the holder of this
Note shall have the right, at such holder's option, to require the Maker to
prepay all or a portion of such holder's Notes at a price equal to the greater
of (i) 130% of the aggregate principal amount of the Notes and (ii) the product
of (A) the Conversion Rate and (B) the Volume Weighted Average Price of the
Common Stock on the Trading Day immediately preceding such Major Transaction
("Major Transaction Prepayment Price").

                  (c) PREPAYMENT OPTION UPON TRIGGERING EVENT. In addition to
all other rights of the holder of this Note contained herein, after a Triggering
Event (as defined below), the holder of this Note shall have the right, at such
holder's option, to require the Maker to prepay all or a portion of such
holder's Notes at a price equal to the greater of (i) 130% of the aggregate
principal amount of this Note and (ii) the product of (A) the Conversion Rate at
such time and (B) the Volume Weighted Average Price of the Common Stock
calculated as of the date immediately preceding such Triggering Event on which
the exchange or market on which the Common Stock is traded is open ("Triggering
Event Prepayment Price").

                  (d) PREPAYMENT OPTION IN CONNECTION WITH CONVERSION PRICE
FLOOR. In addition to all other rights of the holder of this Note contained
herein, if the Market Price of the Maker's Common Stock is below the Conversion
Price Floor for ninety (90) consecutive days, the holder of this Note shall have
the right, at such holder's option and upon ninety (90) days prior written
notice to the Maker, to require the Maker to prepay all or a portion of such
holder's Notes at a price equal to the aggregate principal amount of this Note
plus all accrued and unpaid interest.

                  (e) "MAJOR TRANSACTION." A "Major Transaction" shall be deemed
to have occurred at such time as any of the following events:

                           (i) the consolidation, merger or other business
combination of the Maker with or into another Person (as defined in Section 4.13
hereof) (other than (A) pursuant to a migratory merger effected solely for the
purpose of changing the jurisdiction of incorporation of the Maker or (B) a
consolidation, merger or other business combination in which holders of the
Maker's voting power immediately prior to the transaction continue after the
transaction to hold, directly or indirectly, the voting power of the surviving
entity or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities).

                                      -15-
<PAGE>

                           (ii) the sale or transfer of all or substantially all
of the Maker's assets; or

                           (iii) consummation of a purchase, tender or exchange
offer made to the holders of more than 30% of the outstanding shares of Common
Stock.

                  (f) "TRIGGERING EVENT." A "Triggering Event" shall be deemed
to have occurred at such time as any of the following events:

                           (i) the failure of the Registration Statement to be
declared effective by the SEC on or prior to the date which is one hundred fifty
(150) days after the Closing Date;

                           (ii) while the Registration Statement is required to
be maintained effective pursuant to the terms of the Registration Rights
Agreement, the effectiveness of the Registration Statement lapses for any reason
(including, without limitation, the issuance of a stop order) or is unavailable
to the holder of this Note for sale of the Registrable Securities (as defined in
the Registration Rights Agreement) in accordance with the terms of the
Registration Rights Agreement, and such lapse or unavailability continues for a
period of fifteen (15) consecutive Trading Days, PROVIDED that the cause of such
lapse or unavailability is due to factors within the control of the Maker and
not due to factors solely within the control of the holder of this Note; and
PROVIDED, FURTHER, that such period may be extended for an additional ten (10)
Trading Days if such lapse or unavailability is a result of comments received
from the Commission with respect to the Company filing a post-effective
amendment to the Registration Statement;

                           (iii) the suspension from trading or the failure of
the Common Stock to be traded on the OTC Bulletin Board for a period of five (5)
consecutive days, PROVIDED, that such suspension from listing or failure to be
listed is due to factors within the control of the Maker, including, but not
limited to, failure to timely file all reports required to be filed with the SEC
or to meet the net tangible assets requirements for listing, if any;

                           (iv) the Maker's notice to any holder of the Notes,
including by way of public announcement, at any time, of its inability to comply
(including for any of the reasons described in Section 3.8) or its intention not
to comply with proper requests for conversion of any of the Notes into shares of
Common Stock;

                           (v) the Maker's failure to comply with a Conversion
Notice tendered within ten (10) business days after the receipt by the Maker of
the Conversion Notice and the original Note;

                           (vi) any material representation, warranty or
covenant made by the Maker herein or in the Purchase Agreement, the Security
Agreement or the Registration Rights Agreement shall prove to have been false or
incorrect or breached in a material respect on the date as of which made; or

                  (g) INTENTIONALLY OMITTED.

                                      -16-
<PAGE>

                  (h) MECHANICS OF PREPAYMENT AT OPTION OF HOLDER UPON MAJOR
TRANSACTION. No sooner than fifteen (15) days nor later than ten (10) days prior
to the consummation of a Major Transaction, but not prior to the public
announcement of such Major Transaction, the Maker shall deliver written notice
thereof via facsimile and overnight courier ("Notice of Major Transaction") to
the holder of this Note. At any time after receipt of a Notice of Major
Transaction (or, in the event a Notice of Major Transaction is not delivered at
least ten (10) days prior to a Major Transaction, at any time within ten (10)
days prior to a Major Transaction), any holder of the Notes then outstanding may
require the Maker to prepay, effective immediately prior to the consummation of
such Major Transaction, all of the holder's Notes then outstanding by delivering
written notice thereof via facsimile and overnight courier ("Notice of
Prepayment at Option of Holder Upon Major Transaction") to the Maker, which
Notice of Prepayment at Option of Holder Upon Major Transaction shall indicate
(i) the number of Notes that such holder is electing to prepay and (ii) the
applicable Major Transaction Prepayment Price, as calculated pursuant to Section
3.7(b) above.

                  (i) MECHANICS OF PREPAYMENT AT OPTION OF HOLDER UPON
TRIGGERING EVENT. Within one (1) day after the occurrence of a Triggering Event,
the Maker shall deliver written notice thereof via facsimile and overnight
courier ("Notice of Triggering Event") to each holder of the Note. At any time
after the earlier of a holder's receipt of a Notice of Triggering Event and such
holder becoming aware of a Triggering Event, any holder of this Note may require
the Maker to prepay all of the Notes on a pro rata basis by delivering written
notice thereof via facsimile and overnight courier ("Notice of Prepayment at
Option of Holder Upon Triggering Event") to the Maker, which Notice of
Prepayment at Option of Holder Upon Triggering Event shall indicate (i) the
number of Notes that such holder is electing to prepay and (ii) the applicable
Triggering Event Prepayment Price, as calculated pursuant to Section 3.7(c)
above.

                  (j) INTENTIONALLY OMITTED.

                  (k) PAYMENT OF PREPAYMENT PRICE. Upon the Maker's receipt of a
Notice(s) of Prepayment at Option of Holder Upon Triggering Event or a Notice(s)
of Prepayment at Option of Holder Upon Major Transaction from any holder of the
Notes, the Maker shall immediately notify each holder of the Notes by facsimile
of the Maker's receipt of such Notice(s) of Prepayment at Option of Holder Upon
Triggering Event or Notice(s) of Prepayment at Option of Holder Upon Major
Transaction and each holder which has sent such a notice shall promptly submit
to the Maker such holder's certificates representing the Notes which such holder
has elected to have prepaid. The Maker shall deliver the applicable Triggering
Event Prepayment Price, in the case of a prepayment pursuant to Section 3.7(i),
to such holder within five (5) business days after the Maker's receipt of a
Notice of Prepayment at Option of Holder Upon Triggering Event and, in the case
of a prepayment pursuant to Section 3.7(k), the Maker shall deliver the
applicable Major Transaction Prepayment Price immediately prior to the
consummation of the Major Transaction; provided that a holder's original Note
shall have been so delivered to the Maker; provided further that if the Maker is
unable to prepay all of the Notes to be prepaid, the Maker shall prepay an
amount from each holder of the Notes being prepaid equal to such holder's
pro-rata amount (based on the number of Notes held by such holder relative to
the number of Notes outstanding) of all Notes being prepaid. If the Maker shall
fail to prepay all of the Notes submitted for prepayment (other than pursuant to
a dispute as to the arithmetic calculation of the prepayment price), in addition

                                      -17-
<PAGE>

to any remedy such holder of the Notes may have under this Note, the Security
Agreement and the Purchase Agreement, the applicable prepayment price payable in
respect of such Notes not prepaid shall bear interest at the rate of 2.0% per
month (prorated for partial months) until paid in full. Until the Maker pays
such unpaid applicable prepayment price in full to a holder of the Notes
submitted for prepayment, such holder shall have the option (the "Void Optional
Prepayment Option") to, in lieu of prepayment, require the Maker to promptly
return to such holder(s) all of the Notes that were submitted for prepayment by
such holder(s) under this Section 3.7 and for which the applicable prepayment
price has not been paid, by sending written notice thereof to the Maker via
facsimile (the "Void Optional Prepayment Notice"). Upon the Maker's receipt of
such Void Optional Prepayment Notice(s) and prior to payment of the full
applicable prepayment price to such holder, (i) the Notice(s) of Prepayment at
Option of Holder Upon Triggering Event or the Notice(s) of Prepayment at Option
of Holder Upon Major Transaction, as the case may be, shall be null and void
with respect to those Notes submitted for prepayment and for which the
applicable prepayment price has not been paid, (ii) the Maker shall immediately
return any Notes submitted to the Maker by each holder for prepayment under this
Section 3.7(h) and for which the applicable prepayment price has not been paid
and (iii) the Conversion Price of such returned Notes shall be adjusted to the
lesser of (A) the Conversion Price as in effect on the date on which the Void
Optional Prepayment Notice(s) is delivered to the Maker and (B) the lowest
Volume Weighted Average Price during the period beginning on the date on which
the Notice(s) of Prepayment of Option of Holder Upon Major Transaction or the
Notice(s) of Prepayment at Option of Holder Upon Triggering Event, as the case
may be, is delivered to the Maker and ending on the date on which the Void
Optional Prepayment Notice(s) is delivered to the Maker; provided that no
adjustment shall be made if such adjustment would result in an increase of the
Conversion Price then in effect. A holder's delivery of a Void Optional
Prepayment Notice and exercise of its rights following such notice shall not
effect the Maker's obligations to make any payments which have accrued prior to
the date of such notice. Payments provided for in this Section 3.7 shall have
priority to payments to other stockholders in connection with a Major
Transaction.

                  (l) HOLDER PREPAYMENT OPTION. At the sole option of the
Holder, the Holder may grant the Maker the option to prepay all or any portion
of the outstanding principal amount of this Note together with all accrued and
unpaid interest thereon within ten (10) days of the Holder granting the option
to the Maker. If the Maker elects to exercise the prepayment option, the Maker
shall upon five (5) days prior written notice to the Holder (the "MAKER'S
PREPAYMENT NOTICE") prepay all or a portion of the outstanding Notes equal to
130% of the aggregate principal amount of this Note plus any accrued but unpaid
interest (the "MAKER'S PREPAYMENT PRICE"); PROVIDED, HOWEVER, that if a holder
has delivered a Conversion Notice to the Maker or delivers a Conversion Notice
after receipt of the Maker's Prepayment Notice, the Notes designated to be
converted may not be prepaid by the Maker; PROVIDED FURTHER that if during the
period between delivery of the Maker's Prepayment Notice and the Maker's
Prepayment Date (as defined below), a holder shall become entitled to deliver a
Notice of Prepayment at Option of Holder Upon Major Transaction or Notice of
Prepayment at Option of Holder upon Triggering Event, then the such rights of
the holders shall take precedence over the previously delivered Maker Prepayment
Notice. The Maker's Prepayment Notice shall state the date of prepayment which
date shall be the sixth (6th) day after the Maker has delivered the Maker's
Prepayment Notice (the "MAKER'S PREPAYMENT DATE"), the Maker's Prepayment Price

                                      -18-
<PAGE>

and the amount of Notes to be prepaid by the Maker. The Maker shall deliver the
Maker's Prepayment Price to the Holder within five (5) business days after the
Maker has delivered the Maker's Prepayment Notice, PROVIDED, that if the
holder(s) delivers a Conversion Notice before the Maker's Prepayment Date, then
the portion of the Maker's Prepayment Price which would be paid to prepay the
Notes covered by such Conversion Notice shall be returned to the Maker upon
delivery of the Common Stock issuable in connection with such Conversion Notice
to the holder(s). On the Maker's Prepayment Date, the Maker shall pay the
Maker's Prepayment Price, subject to any adjustment pursuant to the immediately
preceding sentence, to the holder(s) on a pro rata basis, PROVIDED, however,
that upon receipt by Maker of the certificates representing the Notes to be
prepaid pursuant to this Section 3.7(l), the Maker shall, on the next business
day following the date of receipt by the Maker of the original Note, pay the
Maker's Prepayment Price to the holder(s) on a pro rata basis. If the Maker
fails to pay the Maker's Prepayment Price by the sixth (6th) business day after
the Maker has delivered the Maker's Prepayment Notice, the prepayment will be
declared null and void and the Maker shall lose its right to serve a Maker 's
Prepayment Notice pursuant to this Section 3.7(l) in the future.

                  (m) MAKER PREPAYMENT OPTION. The Maker may prepay all or a
portion of this Note after the earlier of the effective date of the Registration
Statement or one hundred fifty (150) days following the Closing Date at a price
equal to 110% of the aggregate principal amount of the Notes plus all accrued
and unpaid interest by providing twenty (20) days written notice to the Holder.
Nothing contained in this Section 3.7(m) shall preclude the Holder from
converting its Note within such twenty (20) day period. Additionally, if the
Holder elects to convert this Note at a Conversion Price less than $.23 per
share, the Maker may prepay, at the option of its Board of Directors, such
principal amount of this Note that the Holder seeks to convert at a Conversion
Price less than $.23 per share, upon one (1) Trading Day prior written notice to
the Holder (the "MAKER PREPAYMENT NOTICE") at a cash price equal to 110% of the
sum of the outstanding principal amount and any interest accrued and outstanding
(the "MAKER PREPAYMENT PRICE"). The Maker may not deliver a Maker Prepayment
Notice to the Holder unless the Maker has clear and good funds for a minimum of
the amount it intends to prepay in a bank account controlled by the Maker. The
Maker Prepayment Notice shall state the date of prepayment (the "MAKER
PREPAYMENT DATE"), the Maker Prepayment Price, the amount of the Note of such
Holder to be prepaid, the amount of accrued and unpaid interest through the
Maker Prepayment Date and shall call upon the Holder to surrender to the Maker
on the Maker Prepayment Date at the place designated in the Maker Prepayment
Notice such Holder's Note. The Maker Prepayment Date shall be no more than six
(6) Trading Days after the date on which the Holder is notified of the Maker's
intent to prepay the Note (the "MAKER PREPAYMENT NOTICE DATE"). If the Maker
fails to pay the Maker Prepayment Price by the sixth (6th) trading day following
the Maker Prepayment Notice Date, the prepayment will be declared null and void,
the Maker shall lose its right to deliver a Maker Prepayment Notice to the
Holder in the future and the Holder shall be entitled to liquidated damages,
payable on demand, in an amount equal to forty percent (40%) of the principal
amount that was to be prepaid pursuant to the Maker Prepayment Notice pursuant
to this Section 3.7(m) in addition to the Common Stock issuable upon conversion
of this Note. If the Maker fails to pay the liquidated damages on demand, such
liquidated damages shall accrue at the rate of one percent (1%) per month until
paid in full. On or after the Maker Prepayment Date, the Holder shall surrender
the Notes called for prepayment to the Maker at the place designated in the
Maker Prepayment Notice and shall thereupon be entitled to receive payment of
the Maker Prepayment Price.

                                      -19-
<PAGE>

         Section 3.8 INABILITY TO FULLY CONVERT.

                  (a) HOLDER'S OPTION IF MAKER CANNOT FULLY CONVERT. If, upon
the Maker's receipt of a Conversion Notice, the Maker cannot issue shares of
Common Stock registered for resale under the Registration Statement for any
reason, including, without limitation, because the Maker (w) does not have a
sufficient number of shares of Common Stock authorized and available, (x) is
otherwise prohibited by applicable law or by the rules or regulations of any
stock exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Maker or any of its securities from
issuing all of the Common Stock which is to be issued to the Holder pursuant to
a Conversion Notice or (y) fails to have a sufficient number of shares of Common
Stock registered for resale under the Registration Statement, then the Maker
shall issue as many shares of Common Stock as it is able to issue in accordance
with the Holder's Conversion Notice and, with respect to the unconverted portion
of this Note, the Holder, solely at Holder's option, can elect to:

                           (i) require the Maker to prepay that portion of this
Note for which the Maker is unable to issue Common Stock in accordance with the
Holder's Conversion Notice (the "MANDATORY PREPAYMENT") at a price per share
equal to the prepayment price as of such Conversion Date (the "MANDATORY
PREPAYMENT PRICE");

                           (ii) if the Maker's inability to fully convert is
pursuant to Section 3.8(a)(y) above, require the Maker to issue restricted
shares of Common Stock equal to one hundred twenty percent (120%) of the number
of shares of Common Stock the Maker is unable to deliver in accordance with such
holder's Conversion Notice;

                           (iii) void its Conversion Notice and retain or have
returned, as the case may be, this Note that was to be converted pursuant to the
Conversion Notice (provided that the Holder's voiding its Conversion Notice
shall not effect the Maker's obligations to make any payments which have accrued
prior to the date of such notice).

                  (b) MECHANICS OF FULFILLING HOLDER'S ELECTION. The Maker shall
immediately send via facsimile to the Holder, upon receipt of a facsimile copy
of a Conversion Notice from the Holder which cannot be fully satisfied as
described in Section 3.8(a) above, a notice of the Maker's inability to fully
satisfy the Conversion Notice (the "INABILITY TO FULLY CONVERT NOTICE"). Such
Inability to Fully Convert Notice shall indicate (i) the reason why the Maker is
unable to fully satisfy such holder's Conversion Notice, (ii) the amount of this
Note which cannot be converted and (iii) the applicable Mandatory Prepayment
Price. The Holder shall notify the Maker of its election pursuant to Section
3.8(a) above by delivering written notice via facsimile to the Maker ("NOTICE IN
RESPONSE TO INABILITY TO CONVERT").

                  (c) PAYMENT OF PREPAYMENT PRICE. If the Holder shall elect to
require the Maker to make a Mandatory Prepayment pursuant to Section 3.8(a)(i)
above, the Maker shall pay the Mandatory Prepayment Price in cash to the Holder
within five (5) days of the Maker's receipt of the Holder's Notice in Response
to Inability to Convert, PROVIDED that prior to the Maker's receipt of the

                                      -20-
<PAGE>

Holder's Notice in Response to Inability to Convert the Maker has not delivered
a notice to the Holder stating, to the satisfaction of the Holder, that the
event or condition resulting in the Mandatory Prepayment has been cured and all
Conversion Shares issuable to the Holder can and will be delivered to the Holder
in accordance with the terms of this Note. If the Maker shall fail to pay the
applicable Mandatory Prepayment Price to the Holder on a timely basis as
described in this Section 3.8(c) (other than pursuant to a dispute as to the
determination of the arithmetic calculation of the prepayment price), in
addition to any remedy the Holder may have under this Note and the Purchase
Agreement, such unpaid amount shall bear interest at the rate of 2.0% per month
(prorated for partial months) until paid in full. Until the full Mandatory
Prepayment Price is paid in full to the Holder, the Holder may (i) void the
Mandatory Prepayment with respect to that portion of the Note for which the full
Mandatory Prepayment Price has not been paid, (ii) receive back such Note, and
(iii) require that the Conversion Price of such returned Note be adjusted to the
lesser of (A) the Conversion Price as in effect on the date on which the Holder
voided the Mandatory Prepayment and (B) the lowest Volume Weighted Average Price
during the period beginning on the Conversion Date and ending on the date the
Holder voided the Mandatory Prepayment.

         Section 3.9 NO RIGHTS AS SHAREHOLDER. Nothing contained in this Note
shall be construed as conferring upon the Holder, prior to the conversion of
this Note, the right to vote or to receive dividends or to consent or to receive
notice as a shareholder in respect of any meeting of shareholders for the
election of directors of the Maker or of any other matter, or any other rights
as a shareholder of the Maker.

                                   ARTICLE IV

                                  MISCELLANEOUS
                                  -------------

         Section 4.1 NOTICES. Any notice, demand, request, waiver or other
communication required or permitted to be given hereunder shall be in writing
and shall be effective (a) upon hand delivery by telex (with correct answer back
received), telecopy or facsimile at the address or number designated in the
Purchase Agreement (if delivered on a business day during normal business hours
where such notice is to be received), or the first business day following such
delivery (if delivered other than on a business day during normal business hours
where such notice is to be received) or (b) on the second business day following
the date of mailing by express courier service, fully prepaid, addressed to such
address, or upon actual receipt of such mailing, whichever shall first occur.
The Maker will give written notice to the Holder at least ten (10) days prior to
the date on which the Maker closes its books or takes a record (x) with respect
to any dividend or distribution upon the Common Stock, (y) with respect to any
pro rata subscription offer to holders of Common Stock or (z) for determining
rights to vote with respect to any Organic Change, dissolution, liquidation or
winding-up and in no event shall such notice be provided to such holder prior to
such information being made known to the public. The Maker will also give
written notice to the Holder at least ten (10) days prior to the date on which
any Organic Change, dissolution, liquidation or winding-up will take place but
in no event shall such notice be provided to the Holder prior to such
information being made known to the public.

                                      -21-
<PAGE>

         Section 4.2 GOVERNING LAW. This Note shall be governed by and construed
in accordance with the internal laws of the State of New York, without giving
effect to the choice of law provisions. This Note shall not be interpreted or
construed with any presumption against the party causing this Note to be
drafted.

         Section 4.3 HEADINGS. Article and section headings in this Note are
included herein for purposes of convenience of reference only and shall not
constitute a part of this Note for any other purpose.

         Section 4.4 REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES
AND INJUNCTIVE RELIEF. The remedies provided in this Note shall be cumulative
and in addition to all other remedies available under this Note, at law or in
equity (including, without limitation, a decree of specific performance and/or
other injunctive relief), no remedy contained herein shall be deemed a waiver of
compliance with the provisions giving rise to such remedy and nothing herein
shall limit a holder's right to pursue actual damages for any failure by the
Maker to comply with the terms of this Note. Amounts set forth or provided for
herein with respect to payments, conversion and the like (and the computation
thereof) shall be the amounts to be received by the holder thereof and shall
not, except as expressly provided herein, be subject to any other obligation of
the Maker (or the performance thereof). The Maker acknowledges that a breach by
it of its obligations hereunder will cause irreparable and material harm to the
Holder and that the remedy at law for any such breach may be inadequate.
Therefore the Maker agrees that, in the event of any such breach or threatened
breach, the Holder shall be entitled, in addition to all other available rights
and remedies, at law or in equity, to seek and obtain such equitable relief,
including but not limited to an injunction restraining any such breach or
threatened breach, without the necessity of showing economic loss and without
any bond or other security being required.

         Section 4.5 ENFORCEMENT EXPENSES. The Maker agrees to pay all costs and
expenses of enforcement of this Note, including, without limitation, reasonable
attorneys' fees and expenses.

         Section 4.6 BINDING EFFECT. The obligations of the Maker and the Holder
set forth herein shall be binding upon the successors and assigns of each such
party, whether or not such successors or assigns are permitted by the terms
hereof.

         Section 4.7 AMENDMENTS. This Note may not be modified or amended in any
manner except in writing executed by the Maker and the Holder.

         Section 4.8 COMPLIANCE WITH SECURITIES LAWS. The Holder of this Note
acknowledges that this Note is being acquired solely for the Holder's own
account and not as a nominee for any other party, and for investment, and that
the Holder shall not offer, sell or otherwise dispose of this Note. This Note
and any Note issued in substitution or replacement therefore shall be stamped or
imprinted with a legend in substantially the following form:

                                      -22-
<PAGE>

         "THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
         AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT
         BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT
         BY THE MAKER OF AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE
         REASONABLY ACCEPTABLE TO THE MAKER) IN THE FORM, SUBSTANCE AND SCOPE
         REASONABLY SATISFACTORY TO THE MAKER THAT THIS NOTE MAY BE SOLD,
         TRANSFERRED, HYPOTHECATED OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION
         FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS."

         Section 4.9 CONSENT TO JURISDICTION. Each of the Maker and the Holder
(i) hereby irrevocably submits to the exclusive jurisdiction of the United
States District Court sitting in the Southern District of New York and the
courts of the State of New York located in New York County for the purposes of
any suit, action or proceeding arising out of or relating to this Note and (ii)
hereby waives, and agrees not to assert in any such suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction of such court,
that the suit, action or proceeding is brought in an inconvenient forum or that
the venue of the suit, action or proceeding is improper. Each of the Maker and
the Holder consents to process being served in any such suit, action or
proceeding by mailing a copy thereof via certified mail, return receipt
requested, to such party at the address in effect for notices to it under the
Purchase Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing in this Section 4.9
shall affect or limit any right to serve process in any other manner permitted
by law.

         Section 4.10 PARTIES IN INTEREST. This Note shall be binding upon,
inure to the benefit of and be enforceable by the Maker, the Holder and their
respective successors and permitted assigns.

         Section 4.11 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 privilege.

         Section 4.12 MAKER WAIVERS. Except as otherwise specifically provided
herein, the Maker and all others that may become liable for all or any part of
the obligations evidenced by this Note, hereby waive presentment, demand, notice
of nonpayment, protest and all other demands' and notices in connection with the
delivery, acceptance, performance and enforcement of this Note, and do hereby
consent to any number of renewals of extensions of the time or payment hereof
and agree that any such renewals or extensions may be made without notice to any
such persons and without affecting their liability herein and do further consent
to the release of any person liable hereon, all without affecting the liability
of the other persons, firms or Maker liable for the payment of this Note, AND DO
HEREBY WAIVE TRIAL BY JURY.

                  (a) No delay or omission on the part of the Holder in
exercising its rights under this Note, or course of conduct relating hereto,
shall operate as a waiver of such rights or any other right of the Holder, nor
shall any waiver by the Holder of any such right or rights on any one occasion
be deemed a waiver of the same right or rights on any future occasion.

                  (b) THE MAKER ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS
NOTE IS A PART IS A COMMERCIAL TRANSACTION, AND TO THE EXTENT ALLOWED BY
APPLICABLE LAW, HEREBY WAIVES ITS RIGHT TO NOTICE AND HEARING WITH RESPECT TO
ANY PREJUDGMENT REMEDY WHICH THE HOLDER OR ITS SUCCESSORS OR ASSIGNS MAY DESIRE
TO USE.

                                      -23-
<PAGE>

         Section 4.13 DEFINITIONS. For the purposes hereof, the following terms
shall have the following meanings:

         "ADDITIONAL SHARES OF COMMON STOCK" means all shares of Common Stock
issued by the Maker after the date hereof, except (i) shares of Common Stock
issuable upon exercise of the Warrants; (ii) shares of Common Stock issuable
upon conversion of the Notes; (iii) shares of Common Stock to be issued to
strategic partners and/or in connection with a strategic merger or acquisition;
(iv) shares of Common Stock or the issuance of options to purchase shares of
Common Stock to employees, officers, directors, consultants and vendors in
accordance with the Maker's equity incentive policies; (v) the issuance of
Securities pursuant to the conversion or exercise of convertible or exercisable
securities issued or outstanding on or prior to the date hereof; (vi) shares of
Common Stock issued or issuable as replacement securities or upon exercise or
conversion of replacement securities pursuant to Section 3.10(b) of the Purchase
Agreement; and (vii) shares of Common Stock issued or issuable upon conversion
of shares of the Maker's Series A Convertible Preferred Stock.

         "PERSON" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.

         "TRADING DAY" means (a) a day on which the Common Stock is traded on
the OTC Bulletin Board, Nasdaq SmallCap Market, The Nasdaq National Market,
American Stock Exchange or other registered national stock exchange on which the
Common Stock has been listed, or (b) if the Common Stock is not listed on the
OTC Bulletin Board, Nasdaq SmallCap Market, The Nasdaq National Market, American
Stock Exchange or any registered national stock exchange, a day on which the
Common Stock is quoted in the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or agency
succeeding its functions of reporting prices); PROVIDED, HOWEVER, that in the
event that the Common Stock is not listed or quoted as set forth in (a) and (b)
hereof, then Trading Day shall mean any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]

                                      -24-
<PAGE>

         IN WITNESS WHEREOF, the Maker has executed this Note as of the day and
year first above written.

                                               TELENETICS CORPORATION

                                               By: /S/ Shala Shashani Lutz
                                                  ------------------------------
                                                   Name: Shala Shashani Lutz
                                                   Title:  President

                                      -25-
<PAGE>

                                    EXHIBIT A

                               WIRE INSTRUCTIONS.

Payee: ________________________________________________________

Bank: _________________________________________________________

Address: ______________________________________________________

         ______________________________________________________

Bank No.: _____________________________________________________

Account No.: __________________________________________________

Account Name: _________________________________________________

                                      -26-
<PAGE>

                                     FORM OF

                              NOTICE OF CONVERSION

     (To be Executed by the Registered Holder in order to Convert the Note)

         The undersigned hereby irrevocably elects to convert $ ________________
of the principal amount of the above Note No. ___ into shares of Common Stock of
TELENETICS CORPORATION (the "Maker") according to the conditions hereof, as of
the date written below.

Date of Conversion _____________________________________________________

Applicable Conversion Price ____________________________________________

Signature_______________________________________________________________

         [Name]

Address:________________________________________________________________

        ________________________________________________________________

                                      -27-

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