Exhibit 10.3

 

NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.

 

Date of Issuance: March 28, 2003

 

$500,000

 

7% CONVERTIBLE DEBENTURE

DUE March 27, 2005

 

THIS DEBENTURE is one of a series of duly authorized and issued Debentures of
Path 1 Network Technologies, Inc., a Delaware corporation, having a principal
place of business at 6215 Ferris Square, Suite 140, San Diego, California 92121
(the “Company”), designated as its 7% Convertible Debenture due 24 months from
their date of issuance (the “Debentures”).

 

FOR VALUE RECEIVED, the Company promises to pay to Palisades Master Fund L.P. or
its registered assigns (the “Holder”), the principal sum of $500,000 on March
27, 2005 or such earlier date as the Debentures are required or permitted to be
repaid as provided hereunder (the “Maturity Date”) and to pay interest to the
Holder on the aggregate unconverted and then outstanding principal amount of
this Debenture at the rate of 7% per annum, payable semi-annually on June 1, and
December 1, beginning on the first such date after the Original Issue Date and
on each Conversion Date (as to that principal amount then being converted), on
each Monthly Redemption Date (as to that principal amount then being redeemed)
and on the Maturity Date (except that, if any such date is not a Business Day,
then such payment shall be due on the next succeeding Business Day) (each such
date, an “Interest Payment Date”), in cash or shares of Common Stock at the
Interest Conversion Rate, or a combination thereof; provided, however, payment
in shares of Common Stock may only occur if: (i) there is an effective
Underlying Shares Registration Statement pursuant to which the Holder is
permitted to utilize the prospectus thereunder to resell all of the shares of

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Common Stock to be issued in lieu of cash (and the Company believes, in good
faith, that such effectiveness will continue uninterrupted for the foreseeable
future), (ii) the Common Stock is listed for trading on a Principal Market (and
the Company believes, in good faith, that trading of the Common Stock on a
Principal Market will continue uninterrupted for the foreseeable future), (iii)
there is a sufficient number of authorized but unissued and otherwise unreserved
shares of Common Stock for the issuance of all of the share issuable pursuant to
the Transaction Documents, including the shares to be issued for interest in
lieu of cash and (iv) such issuance would be permitted in full without violating
the limitations set forth in Section 4(a)(ii). Subject to the terms and
conditions herein, the decision whether to pay interest hereunder in shares of
Common Stock or cash shall be at the discretion of the Company. Not less than 20
Trading Days prior to each Interest Payment Date, the Company shall provide the
Holder with irrevocable written notice of its election to pay interest hereunder
either in cash or shares of Common Stock (the Company may indicate in such
notice that the election contained in such notice shall continue for later
periods until revised upon 20 days’ prior written notice). Subject to the
aforementioned conditions, failure to timely provide such written notice shall
be deemed an election by the Company to pay the interest on such Interest
Payment Date in cash. Interest shall be calculated on the basis of a 360-day
year and shall accrue daily commencing on the Original Issue Date until payment
in full of the principal sum, together with all accrued and unpaid interest and
other amounts which may become due hereunder, has been made. Payment of interest
in shares of Common Stock shall otherwise occur pursuant to Section 4(b) and for
purposes of the payment of interest in shares only, the Interest Payment Date
shall be deemed the Conversion Date. Interest shall cease to accrue with respect
to any principal amount converted, provided that the Company in fact delivers
the Underlying Shares within the time period required by Section 4(b)(i).
Interest hereunder will be paid to the Person in whose name this Debenture is
registered on the records of the Company regarding registration and transfers of
Debentures (the “Debenture Register”). Except as otherwise provided herein, if
at anytime the Company pays interest partially in cash and partially in shares
of Common Stock, then such payment shall be distributed ratably among the
Holders based upon the principal amount of Debentures held by each Holder. All
overdue accrued and unpaid interest to be paid hereunder shall entail a late fee
at the rate of 18% per annum (or such lower maximum amount of interest permitted
to be charged under applicable law) (“Late Fee”) which will accrue daily, from
the date such interest is due hereunder through and including the date of
payment. The Company may not prepay any portion of the principal amount on this
Debenture without the prior written consent of the Holder.

 

This Debenture is subject to the following additional provisions:

 

Section 1. This Debenture is exchangeable for an equal aggregate principal
amount of Debentures of different authorized denominations, as requested by the
Holder surrendering the same. No service charge will be made for such
registration of transfer or exchange.

 

Section 2. This Debenture has been issued subject to certain investment
representations of the original Holder set forth in the Purchase Agreement and
may be transferred or exchanged only in compliance with the Purchase Agreement
and applicable federal and state securities laws and

 

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regulations. Prior to due presentment to the Company for transfer of this
Debenture, the Company and any agent of the Company may treat the Person in
whose name this Debenture is duly registered on the Debenture Register as the
owner hereof for the purpose of receiving payment as herein provided and for all
other purposes, whether or not this Debenture is overdue, and neither the
Company nor any such agent shall be affected by notice to the contrary.

 

Section 3. Events of Default.

 

(a) “Event of Default”, wherever used herein, means any one of the following
events (whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgment, decree or order of any
court, or any order, rule or regulation of any administrative or governmental
body):

 

(i) any default in the payment of the principal of, interest on or liquidated
damages in respect of, any Debentures, free of any claim of subordination, as
and when the same shall become due and payable (whether on a Conversion Date or
the Maturity Date or by acceleration or otherwise) which default is not cured,
if possible to cure, within 3 days of notice of such default sent by the Holder;

 

(ii) the Company shall fail to observe or perform any other covenant, agreement
or warranty contained in, or otherwise commit any breach of any of the
Transaction Documents (other than a breach by the Company of its obligations to
deliver shares of Common Stock to the Holder upon conversion or interest payment
which breach is addressed in clause (x) below) which is not cured, if possible
to cure, within 5 days of notice of such default sent by the Holder (except with
respect to breaches pursuant to Sections 4.1, 4.8 and 4.9 of the Purchase
Agreement and Section 3(a) of the Warrant);

 

(iii) the Company or any of its subsidiaries shall commence, or there shall be
commenced against the Company or any such subsidiary a case under any applicable
bankruptcy or insolvency laws as now or hereafter in effect or any successor
thereto, or the Company commences any other proceeding under any reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or
liquidation or similar law of any jurisdiction whether now or hereafter in
effect relating to the Company or any subsidiary thereof or there is commenced
against the Company or any subsidiary thereof any such bankruptcy, insolvency or
other proceeding which remains undismissed for a period of 60 days; or the
Company or any subsidiary thereof is adjudicated insolvent or bankrupt; or any
order of relief or other order approving any such case or proceeding is entered;
or the Company or any subsidiary thereof suffers any appointment of any
custodian or the like for it or any substantial part of its property which
continues undischarged or unstayed for a period of 60 days; or the Company or
any subsidiary thereof makes a general

 

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assignment for the benefit of creditors; or the Company shall fail to pay, or
shall state that it is unable to pay, or shall be unable to pay, its debts
generally as they become due; or the Company or any subsidiary thereof shall
call a meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts; or the Company or any subsidiary
thereof shall by any act or failure to act expressly indicate its consent to,
approval of or acquiescence in any of the foregoing; or any corporate or other
action is taken by the Company or any subsidiary thereof for the purpose of
effecting any of the foregoing;

 

(iv) the Company shall default in any of its obligations under any other
Debenture or any mortgage, credit agreement or other facility, indenture
agreement, factoring agreement or other instrument under which there may be
issued, or by which there may be secured or evidenced any indebtedness for
borrowed money or money due under any long term leasing or factoring arrangement
of the Company in an amount exceeding $150,000, whether such indebtedness now
exists or shall hereafter be created and such default shall result in such
indebtedness becoming or being declared due and payable prior to the date on
which it would otherwise become due and payable;

 

(v) the Common Stock shall not be eligible for quotation on or quoted for
trading on the OTC Bulletin Board, the Nasdaq SmallCap Market, the New York
Stock Exchange, the American Stock Exchange or the Nasdaq National Market (each,
a “Principal Market”) and shall not again be eligible for and quoted or listed
for trading thereon within five Trading Days;

 

(vi) the Company shall agree to sell or dispose of all or in excess of 33% of
its assets in one or more transactions (whether or not such sale would
constitute a Change of Control Transaction) or shall redeem or repurchase more
than a de minimis number of its outstanding shares of Common Stock or other
equity securities of the Company (other than redemptions of Underlying Shares);

 

(vii) an Underlying Shares Registration Statement shall not have been declared
effective by the Commission on or prior to the 180th calendar day after the
Original Issue Date;

 

(viii) if, during the Effectiveness Period (as defined in the Registration
Rights Agreement), the effectiveness of the Underlying Shares Registration
Statement lapses for any reason or the Holder shall not be permitted to resell
Registrable Securities (as defined in the Registration Rights Agreement) under
the Underlying Shares Registration Statement, in either case, for more than 10
consecutive Trading Days or 20 non-consecutive Trading Days during any 12 month
period;

 

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(ix) an Event (as defined in the Registration Rights Agreement) shall not have
been cured to the satisfaction of the Holder prior to the expiration of thirty
days from the Event Date (as defined in the Registration Rights Agreement)
relating thereto (other than an Event resulting from a failure of an Underlying
Shares Registration Statement to be declared effective by the Commission on or
prior to the Effectiveness Date (as defined in the Registration Rights
Agreement), which shall be covered by Section 3(a)(vii));

 

(x) the Company shall fail for any reason to deliver certificates to a Holder
prior to the fifth Trading Day after a Conversion Date pursuant to and in
accordance with Section 4(b) or the Company shall provide notice to the Holder,
including by way of public announcement, at any time, of its intention not to
comply with requests for conversions of any Debentures in accordance with the
terms hereof; or

 

(xi) the Company shall fail for any reason to deliver the payment in cash
pursuant to a Buy-In (as defined herein) within five days after notice thereof
is delivered hereunder.

 

(b) If any Event of Default occurs and is continuing, the full principal amount
of this Debenture (and, at the Holder’s option, all other Debentures then held
by such Holder), together with interest and other amounts owing in respect
thereof, to the date of acceleration shall become at the Holder’s election,
immediately due and payable in cash. The aggregate amount payable upon an Event
of Default shall be equal to the Mandatory Prepayment Amount. Interest shall
accrue on the Mandatory Prepayment Amount hereunder from the 5th day after such
amount is due (being the date of an Event of Default) through the date of
prepayment in full thereof in an amount equal to the Late Fee, to accrue daily
from the date such payment is due hereunder through and including the date of
payment. All Debentures for which the full prepayment price hereunder shall have
been paid in accordance herewith shall promptly be surrendered to or as directed
by the Company. The Holder need not provide and the Company hereby waives any
presentment, demand, protest or other notice of any kind, and the Holder may
immediately and without expiration of any grace period enforce any and all of
its rights and remedies hereunder and all other remedies available to it under
applicable law. Such declaration may be rescinded and annulled by Holder at any
time prior to payment hereunder and the Holder shall have all rights as a
Debenture holder until such time, if any, as the full payment under this Section
shall have been received by it. No such rescission or annulment shall affect any
subsequent Event of Default or impair any right consequent thereon.

 

Section 4. Conversion.

 

(a) (i) At any time after the Closing Date, this Debenture shall be convertible
into shares of Common Stock at the option of the Holder, in whole or in part at
any time

 

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and from time to time (subject to the limitations on conversion set forth in
Section 4(a)(ii) hereof). The Holder shall effect conversions by delivering to
the Company the form of conversion notice attached hereto as Annex A (a
“Conversion Notice”), specifying therein the principal amount of Debentures to
be converted and the date on which such conversion is to be effected (a
“Conversion Date”) and shall contain a completed schedule in the form of
Schedule 1 to the Conversion Notice (as amended on each Conversion Date, the
“Conversion Schedule”) reflecting the remaining principal amount of this
Debenture and all accrued and unpaid interest thereon subsequent to the
conversion at issue. If no Conversion Date is specified in a Conversion Notice,
the Conversion Date shall be the date that such Conversion Notice is provided
hereunder. To effect conversions hereunder, the Holder shall not be required to
physically surrender Debentures to the Company unless the entire principal
amount of this Debenture has been so converted. Conversions hereunder shall have
the effect of lowering the outstanding principal amount of this Debenture plus
all accrued and unpaid interest thereon in an amount equal to the applicable
conversion, which shall be evidenced by entries set forth in the Conversion
Schedule. The Holder and the Company shall maintain records showing the
principal amount converted and the date of such conversions. The Company shall
deliver any objection to the figures represented in the Conversion Schedules
within 1 Business Day of receipt of such notice. In the event of any dispute or
discrepancy, the records of the Holder shall be controlling and determinative in
the absence of manifest error. The Holder and any assignee, by acceptance of
this Debenture, acknowledge and agree that, by reason of the provisions of this
paragraph, following conversion of a portion of this Debenture, the unpaid and
unconverted principal amount of this Debenture may be less than the amount
stated on the face hereof. In the event a Holder of this Debenture shall elect
to convert any or all of the outstanding principal amount hereof, the Company
may not refuse conversion based on any claim that the Holder or any one
associated or affiliated with the Holder of has been engaged in any violation of
law, agreement or for any other reason, unless, an injunction from a court, on
notice, restraining and or enjoining conversion of all or part of this Debenture
shall have been sought and obtained and the Company posts a surety bond for the
benefit of the Holder in the amount of 150% of the principal amount of this
Debenture outstanding, which is subject to the injunction, 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 to the extent it
obtains judgment. In the absence of an injunction precluding the same, the
Company shall issue Conversion Shares or, if applicable, cash, upon a properly
noticed conversion. Nothing herein shall limit a Holder’s right to pursue actual
damages or declare an Event of Default pursuant to Section 3 herein for the
Company’s failure to deliver Conversion Shares within the period specified
herein 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. The exercise of any such rights shall

 

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not prohibit the Holders from seeking to enforce damages pursuant to any other
Section hereof or under applicable law.

 

(ii) Certain Conversion Restrictions. A Holder may not convert Debentures or
receive shares of Common Stock as payment of interest hereunder to the extent
such conversion or receipt of such interest payment would result in the Holder,
together with its Affiliates, beneficially owning (as determined in accordance
with Section 13(d) of the Exchange Act and the rules promulgated thereunder) in
excess of 4.999% of the then issued and outstanding shares of Common Stock,
including shares issuable upon conversion of, and payment of interest on, the
Debentures held by such Holder after application of this Section. The Holder
shall be entitled to rely on the Company’s public filing with respect to the
number of shares of Common Stock which are then issued and outstanding, and the
Holder may inquire of the Company’s Chief Financial Officer to obtain a more
current number, which shall be provided within 2 Business Days of written
request therefor. To ensure compliance with this restriction, the Holder will be
deemed to represent to the Company each time it delivers a Conversion Notice
that such Conversion Notice has not violated the restrictions set forth in this
paragraph. If the Holder has delivered a Conversion Notice for a principal
amount of Debentures that, without regard to any other shares that the Holder or
its affiliates may beneficially own, would result in the issuance in excess of
the permitted amount hereunder, the Company shall notify the Holder of this fact
and shall honor the conversion for the maximum principal amount permitted to be
converted on such Conversion Date in accordance with the periods described in
Section 4(b) and, at the option of the Holder, either retain any principal
amount tendered for conversion in excess of the permitted amount hereunder for
future conversions or return such excess principal amount to the Holder. In the
event of a merger or consolidation of the Company with or into another Person,
this paragraph shall not apply with respect to a determination of the number of
shares of common stock issuable upon conversion in full of the Debentures if
such determination is necessary to establish the Securities or other assets
which the holder of Common Stock shall be entitled to receive upon the
effectiveness of such merger or consolidation. The provisions of this Section
4(a)(ii) may be waived by the Holder at the election of the Holder upon not less
than 61 days’ prior notice to the Company, and the provisions of this Section
4(a)(ii) shall continue to apply until such 61st day (or such later date, as
determined by the Holder, as may be specified in such notice of waiver). No
conversion of this Debenture in violation of this Section 4(a)(ii) but otherwise
in accordance with this Debenture shall affect the status of the Underlying
Shares as validly issued, fully-paid and nonassessable.

 

(iii) Underlying Shares Issuable Upon Conversion and Pursuant to Interest.

 

(A) Conversion of Principal Amount. The number of shares of Common Stock
issuable upon a conversion shall be determined by the

 

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quotient obtained by dividing (x) the outstanding principal amount of this
Debenture to be converted and (y) the Set Price, and

 

(B) Payment of Interest in Underlying Shares. The number of shares of Common
Stock issuable upon payment of interest under this Debenture shall be the number
determined by (x) the product of (I) the outstanding principal amount of this
Debenture to be converted and (II) the product of (aa) the quotient obtained by
dividing 7% by 360 and (bb) the number of days for which such principal amount
was outstanding, divided by (y) the applicable Interest Conversion Rate,
provided, that if the Company shall have elected to pay the interest due on an
Interest Payment Date in cash pursuant to the terms hereof, this subsection (B)
shall not be used in the calculation of the number of shares of Common Stock
issuable upon a conversion hereunder.

 

(C) Notwithstanding anything to the contrary contained herein, if on any
Conversion Date:

 

(1) the number of shares of Common Stock at the time authorized, unissued and
unreserved for all purposes, or held as treasury stock, is insufficient to honor
such conversion;

 

(2) the Common Stock shall fail to be listed or quoted for trading on a
Principal Market; or

 

(3) the Company has failed to timely satisfy its conversion obligations
hereunder.

 

then, at the option of the Holder, the Company, in lieu of delivering shares of
Common Stock pursuant to this Section 4, shall deliver, within three Trading
Days of each applicable Conversion Date, an amount in cash equal to the product
of the number of shares of Common Stock otherwise deliverable to the Holder in
connection with such Conversion Date and the highest VWAP during the period
commencing on the Conversion Date and ending on the Trading Day prior to the
date such payment is made.

 

(b) (i) Not later than three Trading Days after any Conversion Date, the Company
will deliver to the Holder (A) a certificate or certificates for the Shares of
Common Stock which shall be free of restrictive legends and trading restrictions
(other than those required by the Purchase Agreement) representing the number of
shares of Common Stock being acquired upon the conversion of Debentures and (B)
a bank check in the amount of accrued and unpaid interest (if the Company has

 

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timely elected or is required to pay accrued interest in cash). The Company
shall, upon request of the Holder, if available and if allowed under applicable
securities laws, use its best efforts to deliver any certificate or certificates
required to be delivered by the Company under this Section electronically
through the Depository Trust Corporation or another established clearing
corporation performing similar functions. 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 fifth Trading Day after a Conversion Date, the
Holder shall be entitled by written notice to the Company at any time on or
before its receipt of such certificate or certificates thereafter, to rescind
such conversion, in which event the Company shall immediately return the
certificates representing the principal amount of Debentures tendered for
conversion.

 

(ii) If the Company fails for any reason to deliver to the Holder such
certificate or certificates pursuant to Section 4(b)(i) by the third Trading Day
after the Conversion Date, the Company shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, for each $5,000 of principal amount
being converted, $50 per Trading Day (increasing to $100 per Trading Day after 3
Trading Days and increasing to $200 per Trading Day 6 Trading Days after such
damages begin to accrue) for each Trading Day after such third Trading Day until
such certificates are delivered. Nothing herein shall limit a Holder’s right to
pursue actual damages or declare an Event of Default pursuant to Section 3
herein for the Company’s failure to deliver certificates representing shares of
Common Stock upon conversion within the period specified herein 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. The exercise of any such rights shall not prohibit the
Holders from seeking to enforce damages pursuant to any other Section hereof or
under applicable law.

 

(iii) In addition to any other rights available to the Holder, if the Company
fails for any reason to deliver to the Holder such certificate or certificates
pursuant to Section 4(b)(i) by the third Trading Day after the Conversion Date,
and if after such third Trading Day the Holder is required by its brokerage firm
to purchase (in an open market transaction or otherwise) Common Stock to deliver
in satisfaction of a sale by such Holder of the Underlying Shares which the
Holder anticipated receiving upon such conversion (a “Buy-In”), then the Company
shall (A) pay in cash to the Holder (in addition to any remedies available to or
elected by the Holder) the amount by which (x) the Holder’s total purchase price
(including brokerage commissions, if any) for the Common Stock so purchased
exceeds (y) the product of (1) the aggregate number of shares of Common Stock
that such Holder anticipated receiving from the conversion at issue multiplied
by (2) the actual sale price of the Common Stock at the time of the sale
(including brokerage commissions, if any) giving rise to such purchase
obligation and (B) at the option of the Holder, either reissue Debentures in

 

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principal amount equal to the principal amount of the attempted conversion or
deliver to the Holder the number of shares of Common Stock that would have been
issued had the Company timely complied with its delivery requirements under
Section 4(b)(i). For example, if the Holder purchases Common Stock having a
total purchase price of $11,000 to cover a Buy-In with respect to an attempted
conversion of Debentures with respect to which the actual sale price of the
Underlying Shares at the time of the sale (including brokerage commissions, if
any) giving rise to such purchase obligation was a total of $10,000 under clause
(A) of the immediately preceding sentence, the Company shall be required to pay
the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In.
Notwithstanding anything contained herein to the contrary, if a Holder requires
the Company to make payment in respect of a Buy-In for the failure to timely
deliver certificates hereunder and the Company timely pays in full such payment,
the Company shall not be required to pay such Holder liquidated damages under
Section 4(b)(ii) in respect of the certificates resulting in such Buy-In.

 

(c) (i) The conversion price in effect on any Conversion Date shall be equal to
$0.65 (subject to adjustment herein)(the “Set Price”).

 

(ii) If the Company, at any time while the Debentures are outstanding: (A) shall
pay a stock dividend or otherwise make a distribution or distributions on shares
of its Common Stock or any other equity or equity equivalent securities payable
in shares of Common Stock (which, for avoidance of doubt, shall not include any
shares of Common Stock issued by the Company pursuant to this Debenture,
including interest thereon), (B) subdivide outstanding shares of Common Stock
into a larger number of shares, (C) combine (including by way of reverse stock
split) outstanding shares of Common Stock into a smaller number of shares, or
(D) issue by reclassification of shares of the Common Stock any shares of
capital stock of the Company, then the Set Price shall be multiplied by a
fraction of which the numerator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding before such event and of which
the denominator shall be the number of shares of Common Stock outstanding after
such event. Any adjustment made pursuant to this Section shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
re-classification.

 

(iii) If the Company, at any time while Debentures are outstanding, shall issue
rights, options or warrants to all holders of Common Stock (and not to Holders)
entitling them to subscribe for or purchase shares of Common Stock or Common
Stock Equivalents at a price per share less than the VWAP at the record date

 

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mentioned below, then the Set Price shall be adjusted by multiplying the Set
Price in effect immediately prior to such record date by a fraction, of which
the denominator shall be the number of shares of the Common Stock (excluding
treasury shares, if any) outstanding on the date of issuance of such rights or
warrants plus the number of additional shares of Common Stock offered for
subscription or purchase, and of which the numerator shall be the number of
shares of the Common Stock (excluding treasury shares, if any) outstanding on
the date of issuance of such rights or warrants plus the number of shares which
the aggregate offering price of the total number of shares so offered would
purchase at the VWAP on the record date. Such adjustment shall be made whenever
such rights or warrants are issued, and shall become effective immediately after
the record date for the determination of stockholders entitled to receive such
rights, options or warrants.

 

(iv) If the Company or any subsidiary thereof, as applicable, at any time while
Debentures are outstanding, shall convert, exercise, adjust or reset any Laurus
Securities into Common Stock or offer, sell, grant any option to purchase or
offer, sell or grant any right to reprice its securities, or otherwise dispose
of or issue (or announce any offer, sale, grant or any option to purchase or
other disposition) any Common Stock or any equity or equity equivalent
securities (including any equity, debt or other instrument that is at any time
over the life thereof convertible into or exchangeable for Common Stock)
(collectively, “Common Stock Equivalents”) entitling any Person to acquire
shares of Common Stock, at an effective price per share less than the then Set
Price (“Dilutive Issuance”), as adjusted hereunder (if the holder of the Common
Stock or Common Stock Equivalent so issued shall at any time, whether by
operation of purchase price adjustments, reset provisions, floating conversion,
exercise or exchange prices or otherwise, or due to warrants, options or rights
per share which is issued in connection with such issuance, be entitled to
receive shares of Common Stock at an effective price per share which is less
than the Set Price, such issuance shall be deemed to have occurred for less than
the Set Price and shall be subject to adjustment hereunder), then the Set Price
shall be reduced to equal the effective conversion, exchange or purchase price
for such Common Stock or Common Stock Equivalents (including any reset
provisions thereof) at issue; provided, however, with respect to the Laurus
Securities only, any adjustment hereunder shall be on a one for one basis, that
is, if the holder thereof converts, exercises or is granted an adjustment or
reset with respect to any portion of the Laurus Securities, the adjustment to
the Set Price hereunder shall be only with respect to an equivalent principal
amount of this Debenture (the Holder, in its sole discretion, shall determine
which principal amount is adjusted). Such adjustment shall be made whenever such
Common Stock or Common Stock Equivalents are issued, adjusted or reset. The
Company shall notify the Holder in writing, no later than the Business Day
following the issuance of any Common Stock or Common Stock Equivalent

 

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subject to this section, indicating therein the applicable issuance price, or of
applicable reset price, exchange price, conversion price and other pricing
terms.

 

(v) If the Company, at any time while Debentures are outstanding, shall
distribute to all holders of Common Stock (and not to Holders) evidences of its
indebtedness or assets or rights or warrants to subscribe for or purchase any
security, then in each such case the Set Price shall be determined by
multiplying such price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the VWAP determined as of the record
date mentioned above, and of which the numerator shall be such VWAP on such
record date less the then fair market value at such record date of the portion
of such assets or evidence of indebtedness so distributed applicable to one
outstanding share of the Common Stock as determined by the Board of Directors in
good faith. In either case the adjustments shall be described in a statement
provided to the Holders of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of Common Stock.
Such adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.

 

(vi) [RESERVED]

 

(vii) All calculations under this Section 4 shall be made to the nearest cent or
the nearest 1/100th of a share, as the case may be. For purposes of this Section
4, the number of shares of Common Stock deemed to be outstanding as of a given
date shall be the sum of the number of shares of Common Stock (excluding
treasury shares, if any) outstanding.

 

(viii) Whenever the Set Price is adjusted pursuant to any of Section 4(c)(ii) -
(v), the Company shall promptly mail to each Holder a notice setting forth the
Set Price after such adjustment and setting forth a brief statement of the facts
requiring such adjustment.

 

(ix) If (A) the Company shall declare a dividend (or any other distribution) on
the Common Stock; (B) the Company shall declare a special nonrecurring cash
dividend on or a redemption of the Common Stock; (C) the Company shall authorize
the granting to all holders of the Common Stock rights or warrants to subscribe
for or purchase any shares of capital stock of any class or of any rights; (D)
the approval of any stockholders of the Company shall be required in connection
with any reclassification of the Common Stock, any consolidation or merger to
which the Company is a party, any sale or transfer of all or substantially all
of the assets of the Company, of any compulsory share exchange whereby the
Common Stock is converted into other securities, cash or property; (E) the
Company shall authorize the

 

12

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voluntary or involuntary dissolution, liquidation or winding up of the affairs
of the Company; then, in each case, the Company shall cause to be filed at each
office or agency maintained for the purpose of conversion of the Debentures, and
shall cause to be mailed to the Holders at their last addresses as they shall
appear upon the stock books of the Company, at least 20 calendar days prior to
the applicable record or effective date hereinafter specified, a notice stating
(x) the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of the Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided, that the
failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. Holders are entitled to convert Debentures during the 20-day
period commencing the date of such notice to the effective date of the event
triggering such notice.

 

(x) Fundamental Transaction/Change of Control. If, at any time while this
Debenture is outstanding, (A) the Company effects any merger or consolidation of
the Company with or into another Person, (B) the Company effects any sale of all
or substantially all of its assets in one or a series of related transactions,
(C) any tender offer or exchange offer (whether by the Company or another
Person) is completed pursuant to which holders of Common Stock are permitted to
tender or exchange their shares for other securities, cash or property, or (D)
the Company effects any reclassification of the Common Stock or any compulsory
share exchange pursuant to which the Common Stock is effectively converted into
or exchanged for other securities, cash or property (in any such case, a
“Fundamental Transaction”), then upon any subsequent conversion of this
Debenture, the Holder shall have the right to receive, for each Underlying Share
that would have been issuable upon such conversion absent such Fundamental
Transaction, the same kind and amount of securities, cash or property as it
would have been entitled to receive upon the occurrence of such Fundamental
Transaction if it had been, immediately prior to such Fundamental Transaction,
the holder of one share of Common Stock (the “Alternate Consideration”). For
purposes of any such conversion, the determination of the Set Price shall be
appropriately adjusted to apply to such Alternate Consideration based on the
amount of Alternate Consideration issuable in respect of one share of Common
Stock in such Fundamental Transaction, and the Company shall apportion the Set
Price among the Alternate Consideration in a reasonable manner reflecting the
relative value of any different components of the Alternate Consideration. If

 

13

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holders of Common Stock are given any choice as to the securities, cash or
property to be received in a Fundamental Transaction, then the Holder shall be
given the same choice as to the Alternate Consideration it receives upon any
conversion of this Debenture following such Fundamental Transaction. To the
extent necessary to effectuate the foregoing provisions, any successor to the
Company or surviving entity in such Fundamental Transaction shall issue to the
Holder a new debenture consistent with the foregoing provisions and evidencing
the Holder’s right to convert such debenture into Alternate Consideration. The
terms of any agreement pursuant to which a Fundamental Transaction is effected
shall include terms requiring any such successor or surviving entity to comply
with the provisions of this paragraph (c) and insuring that this Debenture (or
any such replacement security) will be similarly adjusted upon any subsequent
transaction analogous to a Fundamental Transaction. If a Change of Control
Transaction occurs, including a Fundamental Transaction that constitutes a
Change of Control Transaction, then at the request of the Holder delivered
before the 90th day after such Fundamental Transaction, the Company (or any such
successor or surviving entity) will purchase the Debenture from the Holder for a
purchase price, payable in cash within five Trading Days after such request (or,
if later, on the effective date of the Fundamental Transaction), equal to the
100% of the remaining unconverted principal amount of this Debenture on the date
of such request, plus all accrued and unpaid interest thereon, plus all other
accrued and unpaid amounts due hereunder.

 

(xi) Notwithstanding the foregoing, no adjustment will be made under this
paragraph (c) in respect of (A) the granting of options to employees, officers
and directors of the Company pursuant to any stock option plan duly adopted by a
majority of the non-employee members of the Board of Directors of the Company or
a majority of the members of a committee of non-employee directors established
for such purpose, (B) upon the exercise of this Debenture or any other Debenture
of this series or of any other series or security issued by the Company in
connection with the offer and sale of this Company’s securities pursuant to the
Purchase Agreement, or (C) other than the SLD Debentures, upon the exercise of
or conversion of any convertible securities, options or warrants issued and
outstanding on the Closing Date, provided such securities have not been amended
since the date of the Purchase Agreement, or (D) acquisitions or strategic
investments, the primary purpose of which is not to raise capital.

 

(d) The Company covenants that it will at all times reserve and keep available
out of its authorized and unissued shares of Common Stock solely for the purpose
of issuance upon conversion of the Debentures and payment of interest on the
Debentures, each as herein provided, free from preemptive rights or any other
actual contingent purchase rights of persons other than the Holders, not less
than such number of shares of the Common Stock as shall (subject to any
additional requirements of the Company as to reservation of such shares

 

14

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set forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 4(b)) upon the conversion of the
outstanding principal amount of the Debentures and payment of interest
hereunder. The Company covenants that all shares of Common Stock that shall be
so issuable shall, upon issue, be duly and validly authorized, issued and fully
paid, nonassessable and, if the Underlying Shares Registration Statement has
been declared effective under the Securities Act, registered for public sale in
accordance with such Underlying Shares Registration Statement.

 

(c) Upon a conversion hereunder the Company shall not be required to issue stock
certificates representing fractions of shares of the Common Stock, but may if
otherwise permitted, make a cash payment in respect of any final fraction of a
share based on the VWAP at such time. If the Company elects not, or is unable,
to make such a cash payment, the Holder shall be entitled to receive, in lieu of
the final fraction of a share, one whole share of Common Stock.

 

(d) The issuance of certificates for shares of the Common Stock on conversion of
the Debentures shall be made without charge to the Holders thereof for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided that the Company shall not be required
to pay any tax that may be payable in respect of any transfer involved in the
issuance and delivery of any such certificate upon conversion in a name other
than that of the Holder of such Debentures so converted and the Company shall
not be required to issue or deliver such certificates unless or until the person
or persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.

 

(e) Any and all notices or other communications or deliveries to be provided by
the Holders hereunder, including, without limitation, any Conversion Notice,
shall be in writing and delivered personally, by facsimile, sent by a nationally
recognized overnight courier service or sent by certified or registered mail,
postage prepaid, addressed to the Company, at the address set forth above,
facsimile number (858) 450-4203, Attn: John Zavoli or such other address or
facsimile number as the Company may specify for such purposes by notice to the
Holders delivered in accordance with this Section. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile, sent by a nationally recognized
overnight courier service or sent by certified or registered mail, postage
prepaid, addressed to each Holder at the facsimile telephone number or address
of such Holder appearing on the books of the Company, or if no such facsimile
telephone number or address appears, at the principal place of business of the
Holder. Any notice or other communication or deliveries hereunder shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 5:30 p.m. (New York City
time), (ii) the date after the date

 

15

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of transmission, if such notice or communication is delivered via facsimile at
the facsimile telephone number specified in this Section later than 5:30 p.m.
(New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) four days after deposit in the United States mail,
(iv) the Business Day following the date of mailing, if sent by nationally
recognized overnight courier service, or (v) upon actual receipt by the party to
whom such notice is required to be given.

 

Section 5. [RESERVED]

 

Section 6. Definitions. For the purposes hereof, in addition to the terms
defined elsewhere in this Debenture: (a) capitalized terms not otherwise defined
herein have the meanings given to such terms in the Purchase Agreement, and (b)
the following terms shall have the following meanings:

 

“Business Day” means any day except Saturday, Sunday and any day which shall be
a federal legal holiday in the United States 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.

 

“Change of Control Transaction” means the occurrence after the date hereof of
any of (i) an acquisition after the date hereof by an individual or legal entity
or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act)
of effective control (whether through legal or beneficial ownership of capital
stock of the Company, by contract or otherwise) of in excess of 33% of the
voting securities of the Company, or (ii) a replacement at one time or within a
one year period of more than one-half of the members of the Company’s board of
directors which is not approved by a majority of those individuals who are
members of the board of directors on the date hereof (or by those individuals
who are serving as members of the board of directors on any date whose
nomination to the board of directors was approved by a majority of the members
of the board of directors who are members on the date hereof), or (iii) the
execution by the Company of an agreement to which the Company is a party or by
which it is bound, providing for any of the events set forth above in (i) or
(ii).

 

“Commission” means the Securities and Exchange Commission.

 

“Common Stock” means the common stock, $0.001 par value per share, of the
Company and stock of any other class into which such shares may hereafter have
been reclassified or changed.

 

“Conversion Date” shall have the meaning set forth in Section 4(a)(i) hereof.

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

16

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“Interest Conversion Rate” means 90% of the lesser of (i) the average of the 20
VWAPs immediately prior to the applicable Interest Payment Date or (ii) the
average of the 20 VWAPs immediately prior to the date the applicable interest
payment shares are issued and delivered if after the Interest Payment Date.

 

“Late Fees” shall have the meaning set forth in the second paragraph to this
Debenture.

 

“Laurus Securities” shall mean any securities of the Company issued to Laurus
Master Fund, Ltd., or any of its Affiliates, in the past, present or future.

 

“Mandatory Prepayment Amount” for any Debentures shall equal the sum of (i) the
greater of: (A) 150% of the principal amount of Debentures to be prepaid, plus
all accrued and unpaid interest thereon, plus all other accrued and unpaid
amounts due hereunder, or (B) the principal amount of Debentures to be prepaid,
plus all accrued and unpaid interest thereon, plus all other accrued and unpaid
amounts due hereunder, divided by the Set Price on (x) the date the Mandatory
Prepayment Amount is demanded or otherwise due or (y) the date the Mandatory
Prepayment Amount is paid in full, whichever is less, multiplied by the VWAP on
(x) the date the Mandatory Prepayment Amount is demanded or otherwise due or (y)
the date the Mandatory Prepayment Amount is paid in full, whichever is greater,
and (ii) all other amounts, costs, expenses and liquidated damages due in
respect of such Debentures.

 

“Original Issue Date” shall mean the date of the first issuance of the
Debentures regardless of the number of transfers of any Debenture and regardless
of the number of instruments which may be issued to evidence such Debenture.

 

“Person” means a corporation, an association, a partnership, organization, a
business, an individual, a government or political subdivision thereof or a
governmental agency.

 

“Purchase Agreement” means the Securities Purchase Agreement, dated as of March
28, 2003, to which the Company and the original Holder are parties, as amended,
modified or supplemented from time to time in accordance with its terms.

 

“Registration Rights Agreement” means the Registration Rights Agreement, dated
as of the Original Issue Date, to which the Company and the original Holder are
parties, as amended, modified or supplemented from time to time in accordance
with its terms.

 

“Securities Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.

 

“Set Price” shall have the meaning set forth in Section 4(c)(i).

 

17

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“Trading Day” means (a) a day on which the shares of Common Stock are traded on
the Principal Market on which the shares of Common Stock are then listed or
quoted, or (b) if the shares of Common Stock are not quoted on a Principal
Market, a day on which the shares of Common Stock are 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, that in the event that the shares of Common Stock
are not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading
Day shall mean a Business Day.

 

“Transaction Documents” shall have the meaning set forth in the Purchase
Agreement.

 

“Underlying Shares” means the shares of Common Stock issuable upon conversion of
Debentures or as payment of interest in accordance with the terms hereof.

 

“Underlying Shares Registration Statement” means a registration statement
meeting the requirements set forth in the Registration Rights Agreement,
covering among other things the resale of the Underlying Shares and naming the
Holder as a “selling stockholder” thereunder.

 

“VWAP” means, for any date, the price determined by the first of the following
clauses that applies: (a) if the Common Stock is then listed or quoted on a
Principal Market or the OTC Bulletin Board, the daily volume weighted average
price of the Common Stock for such date (or the nearest preceding date) on the
Principal Market (or OTC Bulletin Board) on which the Common Stock is then
listed or quoted as reported by Bloomberg Financial L.P. (based on a Trading Day
from 9:30 a.m. ET to 4:02 p.m. Eastern Time) using the VAP function; (b) if the
Common Stock is not then listed or quoted on a Principal Market or the OTC
Bulletin Board and if prices for the Common Stock are then reported in the “pink
sheets” published by the National Quotation Bureau Incorporated (or a similar
organization or agency succeeding to its functions of reporting prices), the
most recent bid price per share of the Common Stock so reported; or (c) in all
other cases, the fair market value of a share of Common Stock as determined by a
nationally recognized independent appraiser selected in good faith by Purchasers
holding a majority of the outstanding principal amount of Debentures.

 

Section 7. Except as expressly provided herein, no provision of this Debenture
shall alter or impair the obligation of the Company, which is absolute and
unconditional, to pay the principal of, interest and liquidated damages (if any)
on, this Debenture at the time, place, and rate, and in the coin or currency,
herein prescribed. This Debenture is a direct debt obligation of the Company.
This Debenture ranks pari passu with all other Debentures now or hereafter
issued under the terms set forth herein. As long as there are Debentures
outstanding, the Company shall not and shall cause it subsidiaries not to,
without the consent of the Holders, (a) amend its certificate of incorporation,

 

18

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bylaws or other charter documents so as to adversely affect any rights of the
Holders; (b) repay, repurchase or offer to repay, repurchase or otherwise
acquire shares of its Common Stock or other equity securities other than as to
the Underlying Shares to the extent permitted or required under the Transaction
Documents; (c) enter into any agreement with respect to any of the foregoing; or
(d) issue any variable priced equity securities or variable priced equity linked
securities.

 

Section 8. If this Debenture shall be mutilated, lost, stolen or destroyed, the
Company shall execute and deliver, in exchange and substitution for and upon
cancellation of a mutilated Debenture, or in lieu of or in substitution for a
lost, stolen or destroyed Debenture, a new Debenture for the principal amount of
this Debenture so mutilated, lost, stolen or destroyed but only upon receipt of
evidence of such loss, theft or destruction of such Debenture, and of the
ownership hereof, and indemnity, if requested, all reasonably satisfactory to
the Company.

 

Section 9. The Company will not and will not permit any of its subsidiaries to,
directly or indirectly, enter into, create, incur, assume or suffer to exist any
indebtedness of any kind, on or with respect to any of its property or assets
now owned or hereafter acquired or any interest therein or any income or profits
therefrom that is senior in any respect to the Company’s obligations under the
Debentures.

 

Section 10. All questions concerning the construction, validity, enforcement and
interpretation of this Debenture shall be governed by and construed and enforced
in accordance with the internal laws of the State of New York, without regard to
the principles of conflicts of law thereof. Each party agrees that all legal
proceedings concerning the interpretations, enforcement and defense of the
transactions contemplated by any of the Transaction Documents (whether brought
against a party hereto or its respective affiliates, directors, officers,
shareholders, employees or agents) shall be commenced in the state and federal
courts sitting in the City of New York, Borough of Manhattan (the “New York
Courts”). Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the New York Courts for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein (including with respect to the enforcement of any of the
Transaction Documents), and hereby irrevocably waives, and agrees not to assert
in any suit, action or proceeding, any claim that it is not personally subject
to the jurisdiction of any such court, or such New York Courts are improper or
inconvenient venue for such proceeding. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof via registered or certified
mail or overnight delivery (with evidence of delivery) to such party at the
address in effect for notices to it under this Debenture and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. Each party hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, any and
all right to trial by jury in any legal proceeding arising out of or relating to
this Debenture or the transactions contemplated hereby. If either party shall
commence an action or proceeding to enforce any provisions of this Debenture,
then the prevailing party in such action or proceeding shall be reimbursed by
the other

 

19

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party for its attorneys fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such action or proceeding.

 

Section 11. Any waiver by the Company or the Holder of a breach of any provision
of this Debenture shall not operate as or be construed to be a waiver of any
other breach of such provision or of any breach of any other provision of this
Debenture. The failure of the Company or the Holder to insist upon strict
adherence to any term of this Debenture on one or more occasions shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Debenture. Any waiver
must be in writing.

 

Section 12. If any provision of this Debenture is invalid, illegal or
unenforceable, the balance of this Debenture shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances. If it shall be found
that any interest or other amount deemed interest due hereunder violates
applicable laws governing usury, the applicable rate of interest due hereunder
shall automatically be lowered to equal the maximum permitted rate of interest.
The Company covenants (to the extent that it may lawfully do so) that it shall
not at any time insist upon, plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay, extension or usury law or other law which
would prohibit or forgive the Company from paying all or any portion of the
principal of or interest on the Debentures as contemplated herein, wherever
enacted, now or at any time hereafter in force, or which may affect the
covenants or the performance of this indenture, and the Company (to the extent
it may lawfully do so) hereby expressly waives all benefits or advantage of any
such law, and covenants that it will not, by resort to any such law, hinder,
delay or impeded the execution of any power herein granted to the Holder, but
will suffer and permit the execution of every such as though no such law has
been enacted.

 

Section 13. Whenever any payment or other obligation hereunder shall be due on a
day other than a Business Day, such payment shall be made on the next succeeding
Business Day.

 

*********************

 

20

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IN WITNESS WHEREOF, the Company has caused this Convertible Debenture to be duly
executed by a duly authorized officer as of the date first above indicated.

 

PATH 1 NETWORK TECHNOLOGIES, INC.

By: /s/ John R. Zavoli

 

 

Name: John R. Zavoli

Title: Chief Financial Officer

   

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

ANNEX A

 

NOTICE OF CONVERSION

 

The undersigned hereby elects to convert principal and, if specified, interest
under the 7% Convertible Debenture of Path 1 Network Technologies, Inc., (the
“Company”) due on                              , 2005, into shares of common
stock, $0.001 par value per share (the “Common Stock”), of the Company according
to the conditions hereof, as of the date written below. If shares are to be
issued in the name of a person other than the undersigned, the undersigned will
pay all transfer taxes payable with respect thereto and is delivering herewith
such certificates and opinions as reasonably requested by the Company in
accordance therewith. No fee will be charged to the holder for any conversion,
except for such transfer taxes, if any.

 

By the delivery of this Notice of Conversion the undersigned represents and
warrants to the Company that its ownership of the Company’s Common Stock does
not exceed the amounts determined in accordance with Section 13(d) of the
Exchange Act, specified under Section 4 of this Debenture.

 

The undersigned agrees to comply with the prospectus delivery requirements under
the applicable securities laws in connection with any transfer of the aforesaid
shares of Common Stock.

 

Conversion calculations:

 

Date to Effect Conversion:

Principal Amount of Debentures to be Converted

Payment of Interest in Common Stock  ¨ Yes            ¨ No

If yes, $              of Interest Accrued on Account of Conversion at Issue

Number of shares of Common Stock to be Issued:

Applicable Set Price:

Signature:

Name:

Address:

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

Schedule 1

 

CONVERSION SCHEDULE

 

7% Convertible Debentures due on                           , 2005, in the
aggregate principal amount of $                     issued by Path 1 Network
Technologies, Inc. This Conversion Schedule reflects conversions made under
Section 4 of the above referenced Debenture.

 

Dated:

 

Date of Conversion

(or for first entry,
Original Issue Date)

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

    

Amount of
Conversion

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

    

Aggregate
Principal
Amount
Remaining
Subsequent to
Conversion

(or original
Principal
Amount)

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

    

Company Attest

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

 

 

 

 

 

 

 

 

 

 

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