Document:

<PAGE>
                                                                  EXHIBIT 10(16)

                              AMENDMENT NUMBER TWO
                         TO LOAN AND SECURITY AGREEMENT

                  This AMENDMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT (the
"Amendment") is entered into as of November 26, 2002, between FOOTHILL CAPITAL
CORPORATION, a California corporation ("Agent"), with a place of business
located at 2450 Colorado Avenue, Suite 3000 West, Santa Monica, California
90404, as Agent for the Lenders (as defined herein), and as a Lender, the
lenders identified on the signature pages hereof (such lenders, together with
their respective successors and assigns, are referred to hereinafter each
individually as a "Lender" and collectively as the "Lenders", and together with
Agent, as the "Lender Group"), and THE HOTEL GROUP, INC., a Kansas corporation
("Borrower"), and SHOLODGE, INC., a Tennessee corporation ("Holdings"), with its
chief executive office located at 130 Maple Drive North, Hendersonville, TN
37075, with reference to the following:

                  WHEREAS, Borrower and Holdings previously entered into that
certain Loan and Security Agreement, dated as of August 27, 1999 (as amended,
restated, supplemented, or otherwise modified from time to time, the "Loan
Agreement"), with Agent and Lenders pursuant to which Lenders have made certain
loans and financial accommodations available to Borrower and Holdings, which was
amended pursuant to that certain Amendment Number One to Loan and Security
Agreement dated as of October 3, 2001;

                  WHEREAS, Borrower and Holdings have requested that the Lender
Group consent to the addition of Real Property Collateral located at 123 Plaza
Drive, Hattiesburg, Mississippi and 2500 Menaul Blvd. NE, Albuquerque, New
Mexico (the "Additional Properties") to the Collateral securing the Obligations
and to amend the Loan Agreement in accordance therewith;

                  WHEREAS, subject to the terms and conditions set forth herein,
the Lender Group is willing to consent to the addition of the Additional
Properties to the Collateral and to so amend the Loan Agreement.

                  NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:

         1.       Defined Terms. All terms used herein and not otherwise defined
shall have the meanings ascribed thereto in the Loan Agreement.

         2.       Amendments To The Loan Agreement.

                  (a)      Section 1.1 of the Loan Agreement is hereby amended
as follows:

                                      -1-

<PAGE>

                           (i)      The definition of "Aggregate NOI" is hereby
                                    amended and restated in its entirety to read
                                    as follows:

                                    "Aggregate NOI" means, for any period of
                  determination, the actual total NOI generated by the Real
                  Property Collateral and the Underlying Real Property
                  Collateral securing repayment of Eligible Notes, as set forth
                  in the monthly report delivered to Agent pursuant to Section
                  6.2(e).

                           (ii)     The definition of "Availability" is hereby
                                    amended and restated in its entirety to read
                                    as follows:

                                    "Availability" means, as of the date of the
                  determination thereof, the amount that Borrower is entitled to
                  borrow as Advances under Section 2.1, such amount being the
                  difference derived when (a) the sum of the principal amount of
                  Advances (including Agent Advances and Swing Loans) then
                  outstanding (including any amounts that the Lender Group may
                  have paid for the account of Borrower pursuant to any of the
                  Loan Documents and that have not been reimbursed by Borrower)
                  is subtracted from (b) the lesser of (i) the Maximum Revolver
                  Amount less the Letter of Credit Usage, or (ii) the Borrowing
                  Base, less the Letter of Credit Usage, less the outstanding
                  principal amount of the Term Loan.

                           (iii)    The definition of "Go-forward Reserve" is
                                    hereby amended and restated in its entirety
                                    to read as follows:

                                    "Go-forward Reserve" means a reserve against
                  the Borrowing Base in an amount equal to the product of 5
                  times the Average Quarterly NOI Decline. Schedule 1.1 sets
                  forth an example of the calculation of the Go-forward Reserve.

                           (iv)     The definition of "Minimum NOI Maintenance"
                                    is hereby amended and restated in its
                                    entirety to read as follows:

                                    "Minimum NOI Maintenance" means an
                  obligation on the part of the Obligors to maintain Aggregate
                  NOI for the immediately preceding 12 month period, as reported
                  by the Obligors to Agent in the monthly report delivered
                  pursuant to Section 6.2(e), equal to at least 90% of the
                  Baseline NOI set forth on Schedule A-1.

                           (v)      The following definition is hereby added in
                                    alphabetical order:

                                    "NOI Limit Amount" means an amount equal to
                  the product of (a) the Aggregate NOI for the immediately
                  preceding 12 month period, times (b) the Applicable NOI
                  Multiple.

                  (b)      Section 2.1(a) of the Loan Agreement is hereby
amended and restated in its entirety to read as follows:

                                      -2-

<PAGE>

                           "2.1     REVOLVER ADVANCES. (a) Subject to the terms
                  and conditions of this Agreement, and during the term of this
                  Agreement, each Lender agrees to make advances ("Advances") to
                  Borrower in an amount at any one time outstanding not to
                  exceed such Lender's Pro Rata Share of an amount equal to the
                  lesser of (i) the Maximum Revolver Amount less the Letter of
                  Credit Usage, or (ii) the Borrowing Base less the Letter of
                  Credit Usage, less the outstanding principal amount of the
                  Term Loan. For purposes of this Agreement, "Borrowing Base,"
                  as of any date of determination, shall mean the result of:

                                    (x)      the least of

                                                      (i) (A) 85% of the
                                             aggregate outstanding principal
                                             amount of Pledged Notes that are
                                             Eligible Notes, plus (B) 65% of the
                                             aggregate appraised Market Value of
                                             the Real Property Collateral;

                                                      (ii) 65% of the aggregate
                                             appraised Market Value of the Real
                                             Property Collateral and the
                                             Underlying Real Property Collateral
                                             that secures Pledged Notes that are
                                             Eligible Notes (in each case as
                                             determined by Agent from time to
                                             time in its Permitted Discretion,
                                             and based upon such factors and
                                             information as Agent deems
                                             relevant); and

                                                      (iii) the NOI Limit
                                             Amount;

                                                      minus

                                    (y)      the aggregate amount of reserves,
                                    if any, established by Agent under Section
                                    2.1(b)."

                  (c)      Section 2.1(c) of the Loan Agreement is hereby
amended and restated in its entirety to read as follows:

                           "(c)     In the event that Availability is limited
                  due to any of clauses (i), (ii) or (iii) of part (x) of
                  Section 2.1(a), the Obligors may, with the consent of Agent,
                  pledge additional Real Property Collateral or Eligible Notes,
                  in the manner provided in Section 4.5, to increase the
                  Availability.

                  (d)      Section 4.8 of the Loan Agreement is hereby amended
by deleting the words "set forth in Section 2.1(c)" from the end of the first
proviso to the first sentence of such Section.

                  (e)      Section 7.20 of the Loan Agreement is hereby amended
by deleting from subsection (a) thereof the dollar amount "$75,000,000" and
inserting "$65,000,000" in lieu thereof.

                                      -3-

<PAGE>

                  (f)      Schedule A-1 to the Loan Agreement (Real Estate
Collateral) is hereby deleted in its entirety and the new Schedule A-1 attached
hereto shall be inserted in lieu thereof.

                  (g)      Schedule 1.1 to the Loan Agreement (Go-forward
Reserve) is hereby deleted in its entirety and the new Schedule 1.1 attached
hereto shall be inserted in lieu thereof.

                  (h)      Exhibit B-1 to the Loan Agreement (Borrowing Base
Certificate) is hereby deleted in its entirety and the new Exhibit B-1 attached
hereto shall be inserted in lieu thereof.

         3.       Consent to Addition of Real Property Collateral. The Lender
Group hereby consents to the inclusion of the Additional Properties to the
Collateral securing the Obligations.

         4.       Conditions Precedent to Amendment. The satisfaction of each of
the following, unless waived or deferred by Agent in its sole discretion, shall
constitute conditions precedent to the effectiveness of this Amendment and each
and every provision hereof:

                  (a)      Agent shall have received this Amendment, duly
executed by the parties hereto, and the same shall be in full force and effect.

                  (b)      Agent shall have received a reaffirmation and consent
substantially in the form attached hereto as Exhibit A, duly executed and
delivered by each Guarantor.

                  (c)      The representations and warranties in this Amendment,
the Loan Agreement and the other Loan Documents shall be true and correct in all
respects on and as of the date hereof, as though made on such date (except to
the extent that such representations and warranties relate solely to an earlier
date).

                  (d)      After giving effect to this Amendment, no Event of
Default or event which with the giving of notice or passage of time would
constitute an Event of Default shall have occurred and be continuing on the date
hereof, nor shall result from the consummation of the transactions contemplated
herein.

                  (e)      No injunction, writ, restraining order, or other
order of any nature prohibiting, directly or indirectly, the consummation of the
transactions contemplated herein shall have been issued and remain in force by
any Governmental Authority against Borrower, Holdings, Agent or any Lender, or
any of their respective Affiliates.

                  (f)      Agent shall have received an amendment fee in the
amount of $300,000, which amount the Obligors authorize Agent, for the benefit
of the Lenders, to charge to the Loan Account; provided that if the Obligors
terminate the Loan Agreement and pay the Obligations in full (including
providing cash collateral to Agent, for the benefit of the Lender Group, in an
amount equal to 105% of the maximum amount of the Lender Group's obligations
under outstanding Letters of Credit or causing such Letters of Credit to be
returned to Agent) on or before January 31, 2003, Agent shall refund $100,000 of
such fee to the Obligors.

                  (g)      Agent shall have received an opinion of Obligors'
counsel in form and substance satisfactory to Agent in its Permitted Discretion.

                                      -4-

<PAGE>

                  (h)      The Obligors shall have complied with the following
with respect to the Additional Properties:

                           (1)      Agent shall have received Mortgages with
                  respect to the , Additional Properties, in form and substance
                  satisfactory to Agent, duly executed, and each such Mortgage
                  shall be in full force and effect.

                           (2)      Agent shall have received real estate
                  appraisals, in form and substance, and from real estate
                  appraisers, satisfactory to Agent with respect to each of the
                  Additional Properties.

                           (3)      Agent shall have received title reports and
                  title insurance policies, in form and substance, and from
                  title companies, satisfactory to Agent with respect to each of
                  the Additional Properties.

                           (4)      Agent shall have received such environmental
                  reports with respect to each of the Additional Properties, and
                  the environmental consultants retained for such reports, the
                  scope of the reports, and the results of the reports shall be
                  satisfactory to Agent, in its Permitted Discretion.

         5.       Release. To the extent permitted by applicable law, each
Obligor, and its respective predecessors, successors and assigns, hereby fully,
finally, irrevocably, forever and unconditionally releases, discharges and
acquits each member of the Lender Group and such member of the Lender Group's
officers, employees and agents, from all Released Claims (as hereinafter
defined). As used herein the term "Released Claims" means all claims of an
Obligor against any member of the Lender Group, including but not limited to all
claims, demands, obligations, liabilities, indebtedness, responsibilities,
disputes, breaches of contract, breaches of duty or any relationship, acts,
omissions, misfeasance, malfeasance, cause or causes of action (whether at law
or in equity), debts, sums of money, accounts, compensations, contracts,
controversies, promises, damages, costs, rights of offset, losses and expenses,
of every type, kind, nature, description or character, known and unknown,
whensoever arising and occurring at any time up to and through the date hereof,
whether known or unknown, suspected or unsuspected, liquidated or unliquidated,
matured or unmatured, fixed or contingent, which in any way arise out of, are
connected with or relate to the Loan Documents or the administration of the
lender-borrower relationship provided in the Loan Documents.

         6.       Waiver of Statutory Benefits. The Obligors intend that, to the
extent permitted by applicable law, the foregoing release shall be effective as
a full and final accord and satisfaction of Released Claims, and each Obligor
hereby agrees, represents and warrants that, to the extent permitted by
applicable law, the matters released herein are not limited to matters which are
known or disclosed. In this connection, each Obligor hereby agrees, represents
and warrants that it realizes and acknowledges that (a) factual matters now
existing and unknown to it may have given or may hereafter give rise to Released
Claims which are presently unknown, unsuspected, unliquidated, unmatured and/or
contingent, (b) such Released Claims may be unknown, unsuspected, unliquidated,
unmatured and/or contingent due to ignorance, oversight, error, negligence or
otherwise, and (c) if such Released Claims had been known, suspected,
liquidated, matured and/or unconditional, such Obligor's decision to enter into
this release may have been

                                      -5-

<PAGE>

materially affected. Each Obligor further agrees, represents and warrants that
this release has been negotiated and agreed upon in view of these realizations.
Nevertheless, each Obligor hereby intends, to the extent permitted by applicable
law, to release, discharge, and acquit the Lender Group of and from any such
unknown, unsuspected, unliquidated, unmatured and/or contingent Released Claims
which are in any way set forth in or related to the matters identified
hereinabove. EACH OBLIGOR, TO THE EXTENT PERMITTED BY APPLICABLE LAW, HEREBY
EXPLICITLY WAIVES ALL RIGHTS UNDER AND ANY BENEFITS OF ANY COMMON LAW OR
STATUTORY RULE OR PRINCIPLE WITH RESPECT TO THE RELEASE OF SUCH CLAIMS,
INCLUDING, WITHOUT LIMITATION, SECTION 1542 OF THE CALIFORNIA CIVIL CODE, WHICH
PROVIDES AS FOLLOWS:

                  A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH A
                  CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS
                  FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF
                  KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS
                  SETTLEMENT WITH THE DEBTOR.

EACH OBLIGOR, TO THE EXTENT PERMITTED BY APPLICABLE LAW, AGREES THAT NO SUCH
COMMON LAW OR STATUTORY RULE OR PRINCIPLE, INCLUDING SECTION 1542 OF THE
CALIFORNIA CIVIL CODE, SHALL AFFECT THE VALIDITY OR SCOPE OR ANY OTHER ASPECT OF
THIS RELEASE.

         7.       Representations and Warranties. Each of the Borrower and
Holdings hereby represents and warrants to the Agent that (a) the execution,
delivery, and performance of this Amendment and of the Loan Agreement, as
amended hereby, are within its powers, have been duly authorized by all
necessary action, and are not in contravention of any law, rule, or regulation,
or any order, judgment, decree, writ, injunction, or award of any arbitrator,
court, or Governmental Authority, or of the terms of its Governing Documents, or
of any contract or undertaking to which it is a party or by which any of its
properties may be bound or affected, (b) this Amendment and the Loan Agreement,
as amended hereby, constitute its legal, valid, and binding obligation,
enforceable against it in accordance with its terms, and (c) this Amendment has
been duly executed and delivered by it.

         8.       Choice of Law. The validity of this Amendment, its
construction, interpretation and enforcement, the rights of the parties
hereunder, shall be determined under, governed by, and construed in accordance
with the laws of the State of California.

         9.       Counterparts; Telefacsimile Execution. This Amendment may be
executed in any number of counterparts and by different parties and separate
counterparts, each of which when so executed and delivered, shall be deemed an
original, and all of which, when taken together, shall

                                      -6-

<PAGE>

constitute one and the same instrument. Delivery of an executed counterpart of a
signature page to this Amendment by telefacsimile shall be effective as delivery
of a manually executed counterpart of this Amendment. Any party delivering an
executed counterpart of this Amendment by telefacsimile also shall deliver a
manually executed counterpart of this Amendment, but the failure to deliver a
manually executed counterpart shall not affect the validity, enforceability, and
binding effect of this Amendment.

         10.      Effect on Loan Documents.

                  (a)      The Loan Agreement, as amended hereby, and each of
the other Loan Documents shall be and remain in full force and effect in
accordance with its respective terms and hereby is ratified and confirmed in all
respects. The execution, delivery, and performance of this Amendment shall not,
except as expressly set forth herein, operate as a waiver of or, except as
expressly set forth herein, as an amendment of, any right, power, or remedy of
Agent or any Lender under the Loan Agreement, as in effect prior to the date
hereof. The waivers, consents, and modifications herein are limited to the
specifics hereof, shall not apply with respect to any facts or occurrences other
than those on which the same are based, shall not excuse future non-compliance
with the Loan Agreement, and shall not operate as a consent to any further or
other matter, under the Loan Documents.

                  (b)      Upon and after the effectiveness of this Amendment,
each reference in the Loan Agreement to "this Agreement", "hereunder", "herein",
"hereof" or words of like import referring to the Loan Agreement, and each
reference in the other Loan Documents to "the Agreement", "thereunder",
"therein", "thereof" or words of like import referring to the Loan Agreement,
shall mean and be a reference to the Loan Agreement as modified and amended
hereby.

                  (c)      To the extent that any terms and conditions in any of
the Loan Documents shall contradict or be in conflict with any terms or
conditions of the Loan Agreement, after giving effect to this Amendment, such
terms and conditions are hereby deemed modified or amended accordingly to
reflect the terms and conditions of the Loan Agreement as modified or amended
hereby.

         11.      Further Assurances. Each of Borrower and Holdings shall
execute and deliver all agreements, documents, and instruments, in form and
substance satisfactory to Agent, and take all actions as Agent may reasonably
request from time to time, to perfect and maintain the perfection and priority
of Agent's security interests in the Collateral (for the benefit of the Lenders)
and to fully consummate the transactions contemplated under this Amendment and
the Loan Agreement.

         12.      Entire Agreement. This Amendment, together with all other
instruments, agreements, and certificates executed by the parties in connection
herewith or with reference thereto, embody the entire understanding and
agreement between the parties hereto and thereto with respect to the subject
matter hereof and thereof and supersede all prior agreements, understandings,
and inducements, whether express or implied, oral or written.

                  [Remainder of page intentionally left blank]

                                      -7-

<PAGE>

         IN WITNESS WHEREOF, the parties have entered into this Amendment as of
the date first above written.

                                       SHOLODGE, INC., a Tennessee corporation

                                       By /s/ James M. Grout
                                         ---------------------------------------
                                         Title: Executive Vice President

                                       THE HOTEL GROUP, INC., a Kansas
                                       corporation

                                       By /s/ James M. Grout
                                         ---------------------------------------
                                         Title: Executive Vice President

                                       FOOTHILL CAPITAL CORPORATION,
                                       a California corporation, as Agent and
                                       as a Lender

                                       By /s/ Xavier Gannon
                                         ---------------------------------------
                                         Title: Vice President

                                      -8-

<PAGE>

                                    EXHIBIT A

                            REAFFIRMATION AND CONSENT

                          Dated as of November 26, 2002

         Reference hereby is made to that certain Amendment Number Two to Loan
and Security Agreement, dated as of the date hereof (the "Amendment"), among
ShoLodge, Inc., a Tennessee corporation ("Holdings"), The Hotel Group, Inc., a
Kansas corporation ("Borrower and together with Holdings, the "Obligors"),
Foothill Capital Corporation, a California corporation, as Agent ("Agent") and
as a Lender and the lenders signatory thereto. Capitalized terms used herein
shall have the meanings ascribed to them in that certain Loan and Security
Agreement, dated as of August 27, 1999 (as amended, restated, supplemented, or
otherwise modified from time to time, the "Loan Agreement"), between the
Obligors, Agent and the Lenders signatory thereto. Each of the undersigned
hereby (a) represents and warrants to Agent that the execution, delivery, and
performance of this Reaffirmation and Consent ("Consent") are not in
contravention of any law, rule, or regulation, or any order, judgment, decree,
writ, injunction, or award of any arbitrator, court, or Governmental Authority
or of any contract or undertaking to which it is a party or by which any of its
properties may be bound or affected; (b) consents to the amendment of the Loan
Agreement by the Amendment; (c) acknowledges and reaffirms all obligations owing
by it to the Lender Group under any Loan Document to which it is a party;(d)
agrees that each Loan Document to which it is a party is and shall remain in
full force and effect, and (e) ratifies and confirms its consent to any previous
amendments of the Loan Agreement. Although the undersigned have been informed of
the matters set forth herein and have acknowledged and agreed to same, the
undersigned understand that Agent shall have no obligation to inform the
undersigned of such matters in the future or to seek the undersigned's
acknowledgement or agreement to future amendments or modifications, and nothing
herein shall create such a duty.

         IN WITNESS WHEREOF, the undersigned have executed this Consent as of
the date first set forth above.

                                       SHOLODGE, INC.,
                                       a Tennessee corporation

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

                                      A-1

<PAGE>

                                    SUMNER VENTURES, INC.,
                                    a Tennessee corporation formerly known as
                                    Airport Inn, Inc. and successor by merger to
                                    Shoney's Inn, Inc., Two Seventeen, Inc., Inn
                                    Partners, Inc., Far West Inns, Inc. and
                                    Delaware Inns, Inc.

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

                                    ALABAMA LODGING CORPORATION,
                                    a Tennessee corporation

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

                                    CAROLINA INNS, INC.,
                                    a Tennessee corporation

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

                                    SLI ENTERPRISES INC.,
                                    a Tennessee corporation formerly known as
                                    LAFLA Inn, Inc.

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

                                    MIDWEST INNS, INC.,
                                    a Tennessee corporation

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

                                      A-2

<PAGE>

                                       MOBAT, INC.,
                                       a Tennessee corporation

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

                                       SHONEY'S INN OF LEBANON, INC.,
                                       a Tennessee corporation

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

                                       SOUTHEAST TEXAS INNS, INC.,
                                       a Tennessee corporation

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

                                       SUNSHINE INNS, INC.,
                                       a Tennessee corporation

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

                                       VIRGINIA INNS, INC.,
                                       a Tennessee corporation

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

                                      A-3

<PAGE>

                                       MOORE AND ASSOCIATES, INC.,
                                       a Tennessee Corporation

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

                                       NASHVILLE AIR ASSOCIATES, INC.,
                                       a Tennessee corporation

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

                                      A-4

<PAGE>

                                  SCHEDULE A-1

                                 SHOLODGE, INC.
                  FOOTHILL CAPITAL CORPORATION CREDIT FACILITY
                          AMENDMENT #2 - NOVEMBER, 2002

<TABLE>
<CAPTION>
                                                        10/31/2002
PROPERTIES THE                             TRAILING      BALANCE     MORTGAGE                                         VALUE
SUBJECT OF          PAYEE/                 12 MONTHS     MORTGAGE      NOTE/    ADVANCE    MAXIMUM       VALUE       ESTIMATES
PLEDGED NOTES       OBLIGOR      ROOMS        NOI          NOTE         NOI      RATE      ADVANCE     ESTIMATES*     AT 65%
--------------      --------     -----     ---------    ----------   --------   -------  ----------   -----------   -----------
<S>                 <C>          <C>       <C>          <C>          <C>        <C>      <C>          <C>           <C>
BATON ROUGE, LA     BORROWER      197        401,862     6,252,873     15.56      85%     5,314,942    3,700,000     2,405,000
DELAWARE            BORROWER      142        499,368     5,439,890     10.89      85%     4,623,906    3,500,000     2,275,000
DOUGLASVILLE, GA    BORROWER       92        230,059     4,045,731     17.59      85%     3,438,871    3,200,000     2,080,000
GALLATIN, TN        BORROWER       86             --     1,776,042    #DIV/0!     85%     1,509,635      800,000       520,000
GREENSBORO, NC      BORROWER      115        259,964     4,358,707     16.77      85%     3,704,901    3,000,000     1,950,000
INDEPENDENCE, MO    BORROWER      114        220,501     3,473,634     15.75      85%     2,952,589    2,600,000     1,690,000
NEW ORLEANS, LA     BORROWER      145        737,923     4,668,399      6.33      85%     3,968,139    4,000,000     2,600,000
LAFAYETTE, LA       BORROWER      105        213,738     2,704,420     12.65      85%     2,298,757    1,600,000     1,040,000
PENSACOLA, FL       BORROWER      115        164,175     3,861,874     23.52      85%     3,282,593    2,450,000     1,592,500
TALLAHASSEE, FL     BORROWER      112        250,590     2,699,791     10.77      85%     2,294,822    2,600,000     1,690,000
TUSCALOOSA, AL      BORROWER      113         95,694     1,640,710     17.15      85%     1,394,604    1,500,000       975,000
BOSSIER CITY, LA    BORROWER      121        296,914     4,490,016     15.12      85%     3,816,514    2,400,000     1,560,000
DEMONBREUN, TN      HOLDINGS      147        454,262     6,764,504     14.89      85%     5,749,828    4,300,000     2,795,000
JACKSON, MS         BORROWER      137        202,420     2,688,717     13.28      85%     2,285,410    1,600,000     1,040,000
MURFREESBORO, TN    HOLDINGS      125        221,932     3,040,517     13.70      85%     2,584,440    1,800,000     1,170,000
                                --------------------------------------------             -------------------------------------
   TOTALS                       1,866      4,249,403    57,905,825     13.63      85%    49,219,951   39,050,000    25,382,500
                                --------------------------------------------             -------------------------------------

PROPERTIES THE
SUBJECT OF
PLEDGED MORTGAGES

ALBUQUERQUE, NM     HOLDINGS      125        906,586                                      4,225,000    6,500,000     4,225,000
HATTIESBURG, MS     HOLDINGS       92        501,988                                      2,405,000    3,700,000     2,405,000
                                --------------------------------------------             -------------------------------------
   SUBTOTALS                      217      1,408,574                                      6,630,000   10,200,000     6,630,000
                                --------------------------------------------             -------------------------------------

TOTALS                          2,083      5,657,977    57,905,825     12.60      85%    55,849,951   49,250,000    32,012,500
                                ============================================             =====================================
</TABLE>

NOTE: NOI OF THE PROPERTIES THE SUBJECT OF PLEDGED NOTES IS FOR THE 12 MONTHS
ENDED OCTOBER 31, 2002.

* BASED UPON VALUES ESTIMATED BY TRIGILD CORPORATION PER FOOTHILL CAPITAL
CORPORATION IN 2002.

<PAGE>

                                  SCHEDULE 1.1

                     GO-FORWARD RESERVE CALCULATION EXAMPLE

GO FORWARD RESERVE:

<TABLE>
      <S>                                                    <C>                                         <C>
      Aggregate NOI for 4 quarters ended                     _____________   (Initially 9/30/01)
      minus Aggregate NOI for 4 quarters ended               _____________   (Initially 9/30/02)         -
      = decline in Aggregate NOI                                                                         ==================

      Decline in Aggregate NOI
      divided by Aggregate NOI for 4 quarters ended          _____________   (Initially 9/30/01)         ------------------
                                                                                                         /
                                                                                                         ------------------

      times Aggregate NOI for 4 quarters ended               _____________   (Initially 9/30/02)         X
      = Aggregate NOI percentage decline                                                                 ------------------
      divided by 4                                                                                       /                4
                                                                                                         ------------------
      = Average Quarterly NOI Decline
      times 5                                                                                            x                5
                                                                                                         ------------------
      Equals GO FORWARD RESERVE
                                                                                                         ==================
</TABLE>

<PAGE>

                                   EXHIBIT B-1

                           BORROWING BASE CERTIFICATE

OBLIGORS:         THE HOTEL GROUP, INC.

                  SHOLODGE, INC.

DATE:             ___________________

COMPUTATION OF COLLATERAL PURSUANT TO SECTION 2.1(A)(X)(I)

A.       Aggregate Principal Balance of Pledged Notes (as of _____) ____________

B.       Ineligible Pledged Notes for prior month end ___________________

C.       Eligible Notes (A minus B) _________________

D.       LOAN VALUE OF ELIGIBLE NOTES (85% of C) ______________

E.       Market Value of the Real Property Collateral (as of _______) __________

F.       LOAN VALUE OF REAL PROPERTY COLLATERAL (65% of E) ________________

G.       SUM OF D AND F (Section 2.1(a)(x)(i)) __________________

COMPUTATION OF COLLATERAL PURSUANT TO SECTION 2.1(A)(X)(II)

H.       Market Value of the Underlying Real Property Collateral that secures
         the Pledged Notes that are Eligible Notes (as of _______) _____________

I.       Market Value of the Real Property Collateral (as of _______) __________

J.       Market Value of Real Property Collateral and Underlying Real Property
         Collateral (H plus I) _____________

K.       LOAN VALUE OF REAL PROPERTY COLLATERAL AND UNDERLYING REAL PROPERTY
         COLLATERAL (65% of J) (2.1(A)(X)(II)) __________________

COMPUTATION OF COLLATERAL PURSUANT TO SECTION 2.1(A)(X)(III)

L.       Aggregate NOI for immediately preceding 12 month period (as of _____)
         ____________

M.       Applicable NOI Multiple __________

N.       NOI LIMIT AMOUNT (L times M) (Section 2.1(a)(x)(iii)) _________________

                                     B-1-1

<PAGE>

COMPUTATION OF BORROWING BASE

O.       Least of G, K and N ___________________

P.       Reserves (Section 2.1(a)(y)) ________________

Q.       BORROWING BASE (O minus P) _______________

COMPUTATION OF AVAILABILITY

R.       TOTAL AVAILABILITY (THE LESSER OF: (1) $20,000,000 MINUS LETTER OF
         CREDIT USAGE OR (2) Q MINUS OUTSTANDING PRINCIPAL BALANCE OF THE TERM
         LOAN MINUS LETTER OF CREDIT USAGE) ___________________

S.       Outstanding Advances per previous Borrowing Base Certificate __________

T.       Net Advances/repayments since previous Borrowing Base Certificate
         _______________

U.       Adjusted outstanding Advances (S plus/minus T) _________________

V.       EXCESS AVAILABILITY (R MINUS U) _________________

The undersigned represents and warrants that the foregoing is true, complete,
and correct, and that the information reflected in this Borrowing Base
Certificate complies with the representations, warranties, definitions and
conditions set forth in the Loan and Security Agreement, dated as of August 27,
1999, among the undersigned, the financial institutions identified therein as
"Lenders", and Foothill Capital Corporation, a California corporation, as agent
for the Lenders.

SHOLODGE, INC., for itself and THE HOTEL GROUP, INC.

By:
   -------------------------------------
Name:
     -----------------------------------
Title: Responsible Officer

                                     B-1-2Exhibit 10.1

THE SECURITIES  EVIDENCED  HEREBY HAVE NOT BEEN REGISTERED  UNDER THE SECURITIES
ACT OF 1933,  AS AMENDED  (THE "1933  ACT"),  AND MAY NOT BE SOLD,  TRANSFERRED,
ASSIGNED OR  HYPOTHECATED  UNLESS THERE IS AN EFFECTIVE  REGISTRATION  STATEMENT
UNDER THE 1933 ACT COVERING SUCH  SECURITIES OR THE COMPANY  RECEIVES AN OPINION
OF COUNSEL FOR THE HOLDER OF THESE  SECURITIES,  REASONABLY  SATISFACTORY TO THE
COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT
FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE 1933 ACT.

                          BESTNET COMMUNICATIONS CORP.

                              A NEVADA CORPORATION

                   SENIOR SECURED CONVERTIBLE PROMISSORY NOTE

February 25, 2003

FOR VALUE RECEIVED,  BESTNET  COMMUNICATIONS  CORP., a Nevada  corporation  (the
"Company"),  hereby promises to pay to ___________________ or registered assigns
(hereinafter referred to as the "Holder"), the principal sum of $75,000.

This Senior Secured Convertible  Promissory Note (the "Note") is being issued as
one of a two notes of like  tenor  that are being  issued by the  Company  on or
about  the  date  hereof  to  __________________  and   ________________________
respectively  (collectively,  the "Bridge  Notes").  No payment,  including  any
prepayment, may be made on this Note unless payments are made pari passu on each
of the outstanding  Bridge Notes.  All payments shall be made in lawful money of
the United States of America at the address of the Holder  listed  below,  or at
such  other  place as the  Holder  may  designate  in  writing.  Unless  earlier
converted  pursuant to Section 2 hereof,  the principal  hereof shall be due and
payable  on the  earlier  to occur of (i)  March 27,  2003,  or (ii) an Event of
Default (as defined below). Interest shall accrue on the principal sum at a rate
of 10% per annum,  compounded annually.  Prepayment of principal,  together with
accrued interest,  may be made without penalty, and without the Holder's consent
but upon ten (10)  days  prior  written  notice  to the  Holder,  provided  that
prepayment may only be made on this Note if at the same time  prepayment is made
on all  Bridge  Notes,  with  payment  on each  Bridge  Note  made  pro  rata in
proportion to the original  principal amount of such Bridge Note relative to the
aggregate principal amount of all Bridge Notes. The repayment obligations of the
Company  under the Bridge  Notes are secured by all of the assets of the Company
pursuant to a Security Agreement dated February 25, 2003.
<PAGE>
1.   INITIAL  ISSUANCE  OF  COMMON  STOCK.  Upon  execution  of this Note and as
     compensation  for the issuance of this Note, the Company shall issue to the
     Holder  25,000   shares  of  its  common  voting  stock,   fully  paid  and
     non-assessable ("Shares").

2.   EXTENSION OF THE NOTE AND FURTHER ISSUANCE OF COMMON STOCK. The Company may
     extend the due date of the Bridge Notes by up to thirty (30) days,  upon 10
     days prior  written  notice to the Holder and  issuance and delivery to the
     Holder of 3,750 additional Shares.

3.   LIMITATION ON SOURCE OF  REPAYMENT.  This Note may not be repaid out of the
     proceeds  of the sale of equity in the Company at a price that is less than
     the equivalent of $0.10 per common share as constituted on the date of this
     Note.

4.   DEFAULT.  If any of the  following  events  (hereafter  called  "Events  of
     Default") shall occur:

     (a)  If the  Company  shall  default  in the  payment of any  principal  or
          accrued interest due under this Note on the date the same shall become
          due and payable,  whether at maturity or by acceleration or otherwise;
          or

     (b)  If the  Company  shall make a general  assignment  for the  benefit of
          creditors; or

     (c)  If the Company shall file a voluntary petition in bankruptcy, or shall
          be insolvent or  adjudicated  bankrupt,  or shall file any petition or
          answer   seeking   any   reorganization,   arrangement,   composition,
          readjustment,  liquidation,  dissolution  or similar  relief under the
          present  or any  future  federal  bankruptcy  act or other  applicable
          federal, state or other statute, law or regulation,  or shall file any
          answer  admitting the material  allegation of a petition filed against
          the  Company  in such  proceeding,  or  shall  seek or  consent  to or
          acquiesce in the appointment of any trustee, receiver or liquidator of
          the Company of all or any  substantial  part of the  properties of the
          Company,  or  the  Company  shall  commence  the  winding  up  or  the
          dissolution or liquidation of the Company; or

     (d)  If, within sixty (60) days after the commencement of an action against
          the Company  (and  service of process in  connection  therewith on the
          Company)   seeking   any   bankruptcy,   insolvency,   reorganization,
          liquidation, dissolution or similar relief under any present or future
          statute,  law or regulation,  such action shall not have been resolved
          in  favor of the  Company  or all  orders  or  proceedings  thereunder
          affecting the operations or the business of the Company stayed,  or if
          the  stay of any such  order or  proceeding  shall  thereafter  be set
          aside, or if, within sixty (60) days after the appointment without the
          consent or  acquiescence  of the Company of any  trustee,  receiver or
          liquidator  of the  Company or of all or any  substantial  part of the
          properties  of the  Company,  such  appointment  shall  not have  been
          vacated; or

     (e)  In the event the Company (i) redeems,  purchases or otherwise acquires
          for  value,  any share or shares of its equity  securities  other than
          shares issued to officers, directors, employees and consultants of the
          Company  pursuant to agreements  obligating  the Company to repurchase
          such  shares upon  termination  of  employment  with or service to the
          Company,  (ii)  declares or pays any dividends on or declares or makes
          any other  distribution  (other than a dividend  payable on the common
          stock  solely  in shares of  common  stock) on  account  of any of its
          equity securities or sets apart any sum for any such purpose, or (iii)
          repays any of the Bridge  Notes  other than a  repayment  concurrently
          made on all Bridge  Notes,  with  payment on each Bridge Note made pro
          rata  in  proportion  to the  principal  amount  of such  Bridge  Note
          relative to the aggregate principal amount of all Bridge Notes;

                                       2
<PAGE>
then,  and in each and every such case,  the  Holders of either of these  Bridge
Notes may, by written notice to the Company, declare all amounts under this Note
and all other Bridge Notes to be forthwith due and payable  (except that, in the
case of an Event of Default under either  Section 4(b),  Section 4(c) or Section
4(d), this Note shall become  immediately due and payable without notice, and in
the case of a default  under  Section 4(a) and 4(f)(iii) the Holder of this Note
may by written  notice  declare all amounts  under this Note due and payable and
the balance shall become so due and payable,  without  presentation,  protest or
further demand or notice of any kind, all of which are hereby expressly  waived.
The Company shall give promptly a written notice to the Holder of the occurrence
or the  approval by the Company or its Board of  Directors of any and all of the
foregoing  events.  Upon any such  Event of  Default,  this Note shall no longer
accrue  interest,  provided,  however,  the  Company  shall pay,  as  additional
consideration,  3,750 additional Shares for each month during which such default
continues.  If such issuance  shall result in an illegal rate of interest,  then
the number of Shares  shall be reduced to such number that the fair market value
thereof  shall not exceed the maximum legal rate of interest.  Furthermore,  the
compensation  of the Company's  officers will be reduced by twenty percent (20%)
if the Bridge  Notes are not paid in full within  sixty (60) days of the day the
Company first issues any Bridge Note.

5.   Conversion.

     (a)  GRANT OF RIGHT.  Subject  to the terms of  Section  5(d)  hereof,  any
          Holder of this Note has the right, at the Holder's option, at any time
          prior to  payment  in full of the  principal  balance  of and  accrued
          interest  under  this Note  including  without  limitation  during the
          thirty (30) day period mentioned above, to convert, in accordance with
          the  provisions  of this Section 5, (i) the  principal  amount of this
          Note, in whole but not in part, and at the Holder's  option,  and (ii)
          the  unpaid  interest  under  the  Note  accrued  to the  date of such
          conversion  in (i),  above,  into fully  paid  Units of the  Company's
          securities,  each unit consisting of three (3) shares of the Company's
          Common Stock, $.001 par value, one (1) share of the Company's Series A
          Preferred  Stock and a  three-year  warrant to purchase an  additional
          share of Common  Stock at an  exercise  price of $0.30 per share  (the
          "Units"),  all as more fully set forth in the Company  final  offering
          materials  for an offering of Units based upon the "Term  Sheet" dated
          January 29,  2003,  a copy of which is attached  hereto as Schedule 5.
          The  number  of  Units  which  this  Note  may be  converted  shall be
          determined  by dividing  the  aggregate  principal  amount of the Note
          and/or accrued unpaid interest under the Note by the conversion  price
          in effect at the time of such conversion.

     (b)  NOTICE OF  CONVERSION.  Before the Holder shall be entitled to convert
          this Note into shares of Common Stock, he shall surrender this Note at
          the  office of the  Company  and shall  give  written  notice by mail,
          postage prepaid,  to the Company at its principal corporate office, of
          the election to convert the same, if the Holder is electing to convert
          pursuant to Section  5(a),  and shall  state  therein on the Notice of
          Conversion  annexed  to this Note the entire  principal  amount of the
          Note to be  converted  and the  unpaid  interest  and  accrued on such
          principal amount that is also to be converted.

     (c)  SATISFACTION   WITH   REQUIREMENTS   OF   SECURITIES   ACT  OF   1933.
          Notwithstanding  anything to the contrary  contained herein,  each and
          every  conversion  of this  Note,  is  contingent  upon the  Company's
          satisfaction  that the issuance of Units upon the conversion is exempt

                                       3
<PAGE>
          from the  requirements of the Securities Act of 1933, as amended,  and
          all applicable state securities laws. The Holder agrees to execute any
          and  all  documents  deemed  necessary  by the  Company  to  effect  a
          conversion of this Note.

     (d)  MECHANICS  AND EFFECT OF  CONVERSION.  No  fractional  Units  shall be
          issued upon  conversion of this Note.  In lieu of the Company  issuing
          any  fractional  Units to the Holder upon the conversion of this Note,
          the  Company  shall pay to the Holder,  when it is due,  the amount of
          outstanding principal that is not so converted. Upon the conversion of
          this Note pursuant to Section 5(a) above,  the Holder shall  surrender
          this Note, duly endorsed,  at the principal office of the Company.  At
          its expense,  the Company shall,  as soon as  practicable  thereafter,
          issue  and  deliver  to  such  Holder  at  such  principal   office  a
          certificate  or  certificates   for  the  number  of  shares  of  such
          Securities to which the Holder shall be entitled upon such  conversion
          (bearing  such legends as are required by the Purchase  Agreement  and
          applicable state and federal securities laws in the opinion of counsel
          to the Company),  together with any other  securities  and property to
          which the Holder is entitled upon such  conversion  under the terms of
          this  Note,  including  a check  payable  to the  Holder  for any cash
          amounts  payable for unpaid and accrued  interest  and for  fractional
          shares as described above. In the event of any conversion of this Note
          pursuant to Section  5(a) above,  such  conversion  shall be deemed to
          have been made  immediately  prior to the  closing of the  issuance of
          such Units and on and after such date the Holder of this Note entitled
          to receive the shares of such Securities issuable upon such conversion
          shall be treated for all purposes as the record holder of such shares.
          Upon  conversion of this Note,  the Company shall be forever  released
          from all its obligations and liabilities  under this Note, except that
          the Company  shall be obligated to pay the Holder within ten (10) days
          after the date of such  conversion  any cash  amounts  resulting  from
          fractional  shares as  described  above,  and any unpaid  and  accrued
          interest (not  converted  under the Note) to and including the date of
          such conversion, and no more.

6.   DIVIDENDS. In the event that the Company shall make any distribution of its
     assets  upon or with  respect  to its Common  Stock,  as a  liquidating  or
     partial  liquidating  dividend,  or other than as a dividend payable out of
     earnings or any surplus  legally  available for dividends under the laws of
     the state of  incorporation  of the  Company,  each Holder of any Note then
     outstanding  shall,  upon the  exercise  of his right to convert  after the
     record  date for such  distribution  or, in the  absence of a record  date,
     after the date of such  distribution,  receive,  in  addition to the shares
     subscribed  for,  the  amount  of such  assets  (or,  at the  option of the
     Company,  a sum equal to the value thereof at the time of  distribution  as
     determined  by the Board of  Directors  in good faith which would have been
     distributed  to such  Holder  if he had  exercised  his  right  to  convert
     immediately  prior to the  record  date for such  distribution  or,  in the
     absence  of  a  record  date,   immediately  prior  to  the  date  of  such
     distribution.

                                       4
<PAGE>
7.   REPRESENTATIONS  AND  WARRANTIES OF HOLDER.  Holder hereby  represents  and
     warrants that:

     a.   AUTHORIZATION.  Holder has full power and authority to enter into this
          Note,  and  this  Note  constitutes  the  valid  and  legally  binding
          obligations of Holder, enforceable in accordance with its terms;

     b.   PURCHASE ENTIRELY FOR OWN ACCOUNT.  This Note, the Units issuable upon
          execution  hereof,  the securities  stock issuable upon  conversion of
          this  Note or upon  conversion  of any  instrument  issuable  upon the
          conversion thereof  (collectively,  the "Securities") will be acquired
          for  investment  for Holder's own account,  not as a nominee or agent,
          and not with a view to the resale or distribution of any part thereof;
          and  Holder  has  no  present  intention  of  selling,   granting  any
          participation in or otherwise  distributing the same.  Holder does not
          have any  contract,  undertaking,  agreement or  arrangement  with any
          person  to  sell,  transfer  or  grant  participation  in  any  of the
          Securities to such person or to any third person; and

     c.   INVESTMENT  EXPERIENCE.   Holder  is  an  investor  in  securities  of
          companies in the  development  stage and  acknowledges  that Holder is
          able to fend for himself and bear the economic risk of its investment,
          including  the  complete  loss  thereof,  and has such  knowledge  and
          experience in financial or business  matters that Holder is capable of
          evaluating the merits and risks of the  investment in the  Securities.
          Holder  has not  been  organized  for the  purpose  of  acquiring  the
          Securities.

     d.   ACCREDITED  INVESTOR.   Holder  understands  the  definition  of,  and
          represents that Holder is, an "accredited investor" as defined in Rule
          501 of  Regulation  D, as presently in effect,  promulgated  under the
          Securities Act of 1933, as amended (the "1933 Act").

     e.   RESTRICTED  SECURITIES.  Holder  understands  that the Securities that
          Holder is purchasing  are  characterized  as  "restricted  securities"
          under the federal securities laws, inasmuch as they are being acquired
          from the Company in a transaction not involving a public offering, and
          that under such laws and applicable regulations such securities may be
          resold without registration under the 1933 Act only in certain limited
          circumstances.  In this connection,  Holder is familiar with Rule 144,
          as presently in effect, and understands the resale limitations imposed
          thereby and by the 1933 Act.

8.   DISCLOSURE OF  INFORMATION.  The Company has  heretofore  delivered to each
     Holder a copy of its most recent  Annual  Report on Form 10-K as filed with
     the  Securities and Exchange  Commission  and of every Report  subsequently
     filed with said agency.  The Company  represents  and warrants  that it has
     also  delivered a writing  containing a description of every fact necessary
     to make the disclosures in said Reports current and not misleading.  Holder
     therefore  believes  that Holder has  received all the  information  Holder
     considers  necessary or  appropriate  for deciding  whether to purchase the
     Securities.  Holder has had an  opportunity  to ask  questions  and receive
     answers from the Company regarding the terms and conditions of the offering
     and sale of the Securities.

9.   FURTHER  LIMITATIONS  ON  DISPOSITION.  Without  in any  way  limiting  the
     representations  set forth  above,  Holder  further  agrees not to make any
     disposition of all or any portion of the  Securities  (other than the valid
     exercise or conversion  thereof in accordance with their respective  terms)
     unless  and  until:  (a) there is then in effect a  registration  statement
     under the 1933 Act covering such proposed disposition, and such disposition
     is made in accordance with such registration  statement;  or (b) (i) Holder

                                       5
<PAGE>
     has notified the Company of the proposed  disposition and has furnished the
     Company with a detailed  statement  of the  circumstances  surrounding  the
     proposed  disposition,  and (ii) if requested  by the  Company,  Holder has
     furnished the Company with an opinion of counsel,  reasonably  satisfactory
     to the Company, that such disposition will not require registration of such
     Securities  under the 1933 Act or registration or  qualification  under any
     applicable state securities law.

     Notwithstanding  the  foregoing,  no  investment  representation  letter or
     opinion of counsel shall be required for any transfer of Securities  (i) in
     compliance with Rule 144 or Rule 144A of the 1933 Act or (ii) by gift, will
     or  intestate  succession  by  Holder  to  his  or  her  spouse  or  lineal
     descendants  or ancestors or any trust for any of the  foregoing;  provided
     that, in each of the foregoing cases,  the transferee  agrees in writing to
     be  subject to the terms of this Note.  In  addition,  if the holder of any
     Securities  delivers to the Company an unqualified  opinion of counsel that
     no subsequent transfer of such Securities shall require  registration under
     the 1933 Act, the Company shall, upon such contemplated transfer,  promptly
     deliver new documents/certificates for such Securities that do not bear the
     legend set forth in Section 10 hereof.

10.  LEGENDS.  It is understood that the certificates  evidencing the Securities
     may bear one or more of the following legends:

     (a)  The following legend under the 1933 Act:

          "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECUTITIES ACT OF
          1933, AS AMENDED.  THEY MAY NOT BE SOLD,  OFFERED FOR SALE, PLEDGED OR
          HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH
          RESPECT  TO THE  SECURITIES  UNDER  SUCH ACT OR AN  OPINION OF COUNSEL
          SATISFACTORY  TO THE COMPANY THAT SUCH  REGISTRATION IS NOT REQUIRED",
          or

     (b)  Any legend required by state securities laws.

          The Company agrees to remove promptly,  upon the request of the holder
          of  Securities  issued upon  conversion  of this Note,  the legend set
          forth in Section 7(a) hereof from the  documents/certificates for such
          Securities  upon full  compliance  with this  Note,  Rules 144 and 145
          under the 1933 Act and any  other  applicable  provisions  of the 1933
          Act.

11.  ASSIGNMENT.  This Note  applies to,  inures to the benefit of and binds the
     successors  and assigns of the parties  hereto.  Any  transfer of this Note
     will  be  effected  only by  surrender  of this  Note  to the  Company  and
     reissuance  of a new note to  transferee.  The  Holder  and any  subsequent
     holder(s) of this Note receive this Note subject to the foregoing items and
     conditions, and agree to comply with the foregoing terms and conditions for
     the benefit of the Company and any other holders.

12.  NOTICES. Any notice,  request or other communication  required or permitted
     hereunder  shall be in writing  and shall be deemed to have been duly given
     (i) when  received,  if  personally  delivered,  faxed,  sent by nationally
     recognized courier or U.S. Mail  return-receipt  requested,  or (ii) on the
     third  business day after deposit in the U.S.  Mail, if sent by first-class
     mail,  in any such case to the address of the Holder set forth below and to
     the Company at Bestnet  Communications Corp. 5075 Cascade Road SE, Suite A,
     Grand Rapids,  Michigan 49546,  Attention:  Robert A. Blanchard President &
     CEO.  Any party hereto may by notice so given change its address for future
     notice hereunder.

13.  NO STOCKHOLDER RIGHTS. Nothing contained in this Note shall be construed as
     conferring  upon the  Holder  or any other  person  the right to vote or to
     consent or to receive  notice as a  stockholder  in respect of  meetings of
     stockholders  for the  election  of  directors  of the Company or any other
     matters or any rights  whatsoever as a stockholder  of the Company;  and no

                                       6
<PAGE>
     dividends  shall be  payable  or  accrued  in  respect  of this Note or the
     capital stock obtainable hereunder until, and only to the extent that, this
     Note shall have been converted.

14.  NOTE  REGISTER.  This  Note is  transferable  only  upon  the  books of the
     Company,  which  it shall  cause to be  maintained  for such  purpose.  The
     Company  may treat  the  registered  holder  of this Note as he,  she or it
     appears on the Company's books at any time as the Holder for all purposes.

15.  LOSS. Etc. OF NOTE. Upon receipt of evidence satisfactory to the Company of
     the loss,  theft,  destruction or mutilation of this Note, and of indemnity
     reasonably  satisfactory  to the  Company  if this Note is lost,  stolen or
     destroyed, and upon surrender and cancellation of this Note if this Note is
     mutilated,  the Company  shall execute and deliver to the Holder a new Note
     of like date, tenor and denomination.

16.  AMENDMENT,  WAIVER.  ETC.  The terms of this Note may be  amended or waived
     only upon the written  agreement  of the Company and the Holder;  provided,
     however,  that the terms of this Note and all of the other Bridge Notes may
     be amended or waived  upon the  written  agreement  of the  Company and the
     Holders of both Bridge  Notes,  as long as such  amendment or waiver is the
     same for all Bridge Notes.

17.  HEADING: REFERENCES. All headings used herein are used for convenience only
     and shall not be used to  construe or  interpret  this Note.  Except  where
     otherwise  indicated,  all references  herein to Sections refer to Sections
     hereof.

18.  SEVERABILITY.  If one or  more  provisions  of  this  Note  are  held to be
     unenforceable  under  applicable law, such provision shall be excluded from
     this Note and the  balance  of this Note  shall be  interpreted  as if such
     provision were so excluded and shall be enforceable in accordance  with its
     terms.

19.  MISCELLANEOUS.  This Note shall be governed by and  construed in accordance
     with  the  laws  of  the  State  of  Arizona.  The  Company  hereby  waives
     presentment,  demand,  notice of nonpayment,  protest and all other demands
     and notices in connection  with the delivery,  acceptance,  performance  or
     enforcement of this Note. If an action is brought for collection under this
     Note, the Company will pay all costs of collection actually incurred by the
     Holder,  including, but not limited to, the reasonable attorneys' fees of a
     single counsel for all holders of Bridge Notes as selected by such holders.

                                       7
<PAGE>
IN WITNESS WHEREOF,  the undersigned have caused this Senior Secured Convertible
Promissory Note to be executed by the undersigned as of the date first set forth
above.

BESTNET COMMUNICATIONS CORP.,
a Nevada corporation

-------------------------------------
Robert Blanchard, President

ATTEST:
       ------------------------------
                (Secretary)

The undersigned  Holder of this Note understands and acknowledges the provisions
of this Note,  including  Sections 7, 8, 9, 10 and 11, and agrees to be bound by
the provisions herein.

------------------------------------
(Signature of Holder)

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

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City, State and Zip Code

The  undersigned   officers  of  the  Company  understand  and  acknowledge  the
provisions in Section 4 of this Note regarding the reduction in compensation and
hereby agree to be bound by all provisions of this Note.

------------------------------------
Robert Blanchard, President

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Paul Jachim, Chief Financial Officer

                                       8
<PAGE>
                                   SCHEDULE I

                       BESTNET COMMUNICATIONS CORPORATION
                                JANUARY 29, 2003

INVESTMENT SUMMARY:

BestNet  Communications  Corp. (the "Company") is offering for sale to qualified
investors  4,500,000  units at a per unit cost of $.30 (the "Units").  Each Unit
consists of the following securities:

     *    3 shares of BestNet Common Stock;

     *    1 share of BestNet Series A Preferred Stock convertible to 2 shares of
          Common Stock at a cost of $.10 per share; and

     *    1 three-year warrant to purchase an additional share of BestNet Common
          Stock at a per share exercise price of $.30.

REGISTRATION RIGHTS/TRADABILITY:

Qualified  investors  will be granted  registration  rights with  respect to the
Units and the securities underlying the Units on the following terms:

     *    Upon  completion of the private  placement,  the Company agrees to use
          its best  efforts  to  register  the  Units as well as the  underlying
          common shares and the Series A Preferred Shares.

     *    The 3 common  shares  included in the Units have been  authorized  and
          reserved  for  issuance.  The 3 common  shares will be included in the
          registration statement filed by the Company.

     *    Similarly,  the  common  shares  underlying  the  Preferred  Stock and
          warrants will be included in the  registration  statement filed by the
          Company  and will be  tradable  following  the  effectiveness  of that
          registration statement and approval by the Company's shareholders of a
          proposal to increase the  authorized  capital  stock of the Company to
          accommodate  the conversion of the Preferred Stock and the exercise of
          the Warrants.  The Company  expects to file promptly a proxy statement
          relating to such  shareholder  proposal within a reasonable  period of
          time following the sale of the Units.

     *    The Company will have the authority to determine the opportune time to
          permit the  securities  underlying  the Units to trade  apart from the
          Units (i.e.,  the trading of the Preferred Stock, the Warrants and the
          Common Stock underlying the Preferred Stock and the Warrants).

TIMING:

The Units are being offered to qualified  investors for the period commencing on
the date hereof and ending on February 28, 2003,  unless extended by the Company
in its discretion by not more than 30 days.

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00050-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00050-of-00352.parquet"}]]