Exhibit 10.4

 

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS 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.  THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.

 

Original Issue Date: March       , 2008

Original Conversion Price (subject to adjustment herein): $0.15

 

$                              

 

ORIGINAL ISSUE DISCOUNT SENIOR SECURED CONVERTIBLE DEBENTURE
DUE MARCH       , 2009

 

THIS ORIGINAL ISSUE DISCOUNT SENIOR SECURED CONVERTIBLE DEBENTURE is one of a
series of duly authorized and validly issued Original Issue Discount Senior
Secured Convertible Debentures of Advanced Cell Technology, Inc., a Delaware
corporation, (the “Company”), having its principal place of business at Alameda,
California designated as its Original Issue Discount Senior Secured Convertible
Debenture due March       , 2009 (this debenture, the “Debenture” and,
collectively with the other debentures of such series, the “Debentures”).

 

FOR VALUE RECEIVED, the Company promises to pay to
                                                 or its registered assigns (the
“Holder”), or shall have paid pursuant to the terms hereunder, the principal sum
of $                               on March       , 2009 (the “Maturity Date”)
or such earlier date as this Debenture is required or permitted to be repaid as
provided hereunder.  This Debenture is subject to the following additional
provisions:

 

Section 1.               Definitions.  For the purposes hereof, in addition to
the terms defined elsewhere in this Debenture, (a) capitalized terms not
otherwise defined herein shall have the meanings set forth in the Purchase
Agreement and (b) the following terms shall have the following meanings:

 

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“Alternate Consideration” shall have the meaning set forth in Section 5(e).

 

“Bankruptcy Event” means any of the following events: (a) the Company or any
Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation
S-X) thereof commences a case or other proceeding under any bankruptcy,
reorganization, arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency or liquidation or similar law of any jurisdiction relating to the
Company or any Significant Subsidiary thereof, (b) there is commenced against
the Company or any Significant Subsidiary thereof any such case or proceeding
that is not dismissed within 60 days after commencement, (c) the Company or any
Significant Subsidiary thereof is adjudicated insolvent or bankrupt or any order
of relief or other order approving any such case or proceeding is entered,
(d) the Company or any Significant Subsidiary thereof suffers any appointment of
any custodian or the like for it or any substantial part of its property that is
not discharged or stayed within 60 calendar days after such appointment, (e) the
Company or any Significant Subsidiary thereof makes a general assignment for the
benefit of creditors, (f) the Company or any Significant Subsidiary thereof
calls a meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts or (g) the Company or any Significant
Subsidiary thereof, by any act or failure to act, expressly indicates its
consent to, approval of or acquiescence in any of the foregoing or takes any
corporate or other action for the purpose of effecting any of the foregoing.

 

“Base Conversion Price” shall have the meaning set forth in Section 5(b).

 

“Beneficial Ownership Limitation” shall have the meaning set forth in
Section 4(c)(ii).

 

“Business Day” means any day except any Saturday, any Sunday, any day which
shall be a federal legal holiday in the United States or any day on which
banking institutions in the State of New York are authorized or required by law
or other governmental action to close.

 

“Buy-In” shall have the meaning set forth in Section 4(d)(v).

 

“Change of Control Transaction” means the occurrence after the date hereof of
any of (a) 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 (other than by means of conversion or exercise
of the Debentures and the Securities issued together with the Debentures),
(b) the Company merges into or consolidates with any other Person, or any Person
merges into or consolidates with the Company and, after giving effect to such
transaction, the stockholders of the Company immediately prior to such
transaction own less than 66% of the aggregate voting power of the Company or
the successor entity of such transaction, or (c) the Company sells or transfers
all or substantially all of its assets to another Person and the stockholders of
the Company immediately prior to such transaction own less than 66% of the
aggregate voting power

 

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of the acquiring entity immediately after the transaction, (d) a replacement at
one time or within a three year period of more than one-half of the members of
the 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
(e) 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 in clauses
(a) through (d) above.

 

“Conversion” shall have the meaning ascribed to such term in Section 4.

 

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

 

“Conversion Price” shall have the meaning set forth in Section 4(b).

 

“Conversion Schedule” means the Conversion Schedule in the form of Schedule 1
attached hereto.

 

“Conversion Shares” means, collectively, the shares of Common Stock issuable
upon conversion of this Debenture in accordance with the terms hereof.

 

“Debenture Register” means the records of the Company regarding registration and
transfers of this Debenture.

 

“Dilutive Issuance” shall have the meaning set forth in Section 5(b).

 

“Dilutive Issuance Notice” shall have the meaning set forth in Section 5(b).

 

“Equity Conditions” means, during the period in question, (a) the Company shall
have duly honored all conversions and redemptions scheduled to occur or
occurring by virtue of one or more Notices of Conversion of the Holder, if any,
(b) the Company shall have paid all liquidated damages and other amounts owing
to the Holder in respect of this Debenture, (c)(i) the Legend may be removed
from the applicable Security pursuant to Section 4.1 of the Purchase Agreement
or (ii) all of the Conversion Shares issuable pursuant to the Transaction
Documents may be resold pursuant to Rule 144 without volume or manner-of-sale
restrictions and the current public information requirements have been met by
the Company as determined by the counsel to the Company pursuant to a written
opinion letter to such effect, addressed and acceptable to the Transfer Agent
and the Holder, (d) the Common Stock is trading on a Trading Market and all of
the shares issuable pursuant to the Transaction Documents are listed or quoted
for trading on such Trading Market (and the Company believes, in good faith,
that trading of the Common Stock on a Trading Market will continue uninterrupted
for the foreseeable future), (e) there is a sufficient number of authorized but
unissued and otherwise unreserved shares of Common Stock for the issuance of all
of the shares issuable pursuant to the Transaction Documents, (f) there is no
existing Event of Default or no existing event

 

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which, with the passage of time or the giving of notice, would constitute an
Event of Default, (g) the issuance of the shares in question (or, in the case of
a Monthly Redemption, the share issuable upon conversion in full of the Monthly
Redemption Amount) to the Holder would not violate the limitations set forth in
Section 4(c) herein, (h) there has been no public announcement of a pending or
proposed Fundamental Transaction or Change of Control Transaction that has not
been consummated, (i) the Holder is not in possession of any information
provided by the Company that constitutes, or may constitute, material non-public
information and (j) in a period of 20 consecutive Trading Days prior to the
applicable date in question, the average daily trading volume for the Common
Stock on the principal Trading Market exceeds 200,000 shares.

 

“Event of Default” shall have the meaning set forth in Section 8(a).

 

“Exempt Issuance” means the issuance of (a) options to employees, officers,
directors or consultants (provided, however, that issuances to consultants shall
not exceed 500,000 shares in any 12 month period, subject to adjustment for
reverse and forward stock splits, stock interests, stock combinations and other
similar transactions that occur after the date of the Purchase Agreement;
provided, further, that the issuance price of such shares shall be equal to or
greater than the VWAP on the Trading Day immediately prior to the date of such
issuance) of the Company pursuant to any stock or option plan currently in
effect or hereafter duly adopted by a majority of the non-employee members of
the Board of Directors or a majority of the members of a committee of
non-employee directors established for such purpose, provided that the exercise
price of such options shall not be less than the VWAP on the Trading Day
immediately prior to the grant of such option), (b) securities upon the
exercise, conversion or redemption (amortization) of any securities issued
pursuant to the Purchase Agreement, convertible securities, options or warrants
issued and outstanding on the date of the Purchase Agreement (including the
issuance of Debentures to service providers of the Company in lieu of cash
payments due as of the date of the Purchase Agreement, including the payment of
placement agent fees hereunder and accrued but unpaid legal and consulting fees
and expenses), provided that such securities have not been amended since the
date of the Purchase Agreement to increase the number of such securities or to
decrease the exercise, exchange or conversion price of any such securities
except in accordance with their terms as in effect as of the date hereof or
(c) securities issued pursuant to acquisitions or strategic transactions,
provided any such issuance shall only be made in connection with a transaction
involving a Person which is, itself or through its subsidiaries, an operating
company in a business synergistic with the business of the Company and in which
the Company receives benefits in addition to the investment of funds, but shall
not include a transaction in which the Company is issuing securities primarily
for the purpose of raising capital or to an entity whose primary business is
investing in securities.  Notwithstanding anything herein to the contrary,
additional issuances of securities by the Company not referenced above shall be
deemed “Exempt Issuances” upon receipt by the Company of the consent of each
holder (including holdings by affiliates) of the Debentures with an original
Subscription Amount of at least $300,000 under the Purchase Agreement on the
Closing Date, and if no such holders hold any Debentures or Warrants

 

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at such time, upon receipt by the Company of the consent of 51% of the holders
of Debentures then outstanding.

 

“Forced Conversion” shall have the meaning set forth in Section 6(c).

 

“Forced Conversion Date” shall have the meaning set forth in Section 6(c).

 

“Forced Conversion Notice” shall have the meaning set forth in Section 6(c).

 

“Forced Conversion Notice Date” shall have the meaning set forth in
Section 6(c).

 

“Fundamental Transaction” shall have the meaning set forth in Section 5(e).

 

“Mandatory Default Amount”  means the sum of (a) the greater of (i) the
outstanding principal amount of this Debenture, divided by the Conversion Price
on the date the Mandatory Default Amount is either (A) demanded (if demand or
notice is required to create an Event of Default) or otherwise due or (B) paid
in full, whichever has a lower Conversion Price, multiplied by the VWAP on the
date the Mandatory Default Amount is either (x) demanded or otherwise due or
(y) paid in full, whichever has a higher VWAP, or (ii) 120% of the outstanding
principal amount of this Debenture and (b) all other amounts, costs, expenses
and liquidated damages due in respect of this Debenture.

 

“Monthly Conversion Period” shall have the meaning set forth in
Section 6(b) hereof.

 

“Monthly Conversion Price” shall have the meaning set forth in
Section 6(b) hereof.

 

“Monthly Redemption” means the redemption of this Debenture pursuant to
Section 6(b) hereof.

 

“Monthly Redemption Amount” means, as to a Monthly Redemption, $          (1),
plus accrued but unpaid interest, liquidated damages and any other amounts then
owing to the Holder in respect of this Debenture.

 

“Monthly Redemption Date” means the 1st of each month, commencing on October 1,
2008, and terminating upon the full redemption of this Debenture.

 

“Monthly Redemption Notice” shall have the meaning set forth in
Section 6(b) hereof.

 

“New York Courts” shall have the meaning set forth in Section 9(d).

 

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(1)           1/6th of the original principal amount.

 

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“Notice of Conversion” shall have the meaning set forth in Section 4(a).

 

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

 

“Permitted Indebtedness” means trade payables, indebtedness consisting of
capitalized lease obligations and purchase money indebtedness incurred in
connection with acquisition of capital assets and obligations under
sale-leaseback arrangements with respect to newly acquired or leased assets;
provided, however, that in each case such obligations are not secured by liens
on any assets of the Company or its Subsidiaries existing as of the date of the
Purchase Agreement and may only be secured by the assets so acquired or leased
thereafter.

 

“Permitted Lien” mean (a) Liens with respect to the payment of taxes or
governmental charges in all cases which are not yet due or which are subject to
a good faith contest; (b) any Liens incurred in connection with Permitted
Indebtedness provided that such liens are not secured by assets of the Company
or its Subsidiaries other than the assets so acquired or leased; (c) statutory
Liens of landlords or equipment lessors against any property of the Company or
its Subsidiaries existing as of the date of the Purchase Agreement in favor of
suppliers, mechanics, carriers, materialmen, warehousemen or workmen; and
(d) Liens created under the Security Agreement.

 

“Purchase Agreement” means the Securities Purchase Agreement, dated as of
March       , 2008 among the Company and the original Holders, 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.

 

“Share Delivery Date” shall have the meaning set forth in Section 4(d)(ii).

 

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

 

“Threshold Period” shall have the meaning set forth in Section 6(c).

 

“Trading Day” means a day on which the New York Stock Exchange is open for
business.

 

“Trading Market” means the following markets or exchanges on which the Common
Stock is listed or quoted for trading on the date in question: the American
Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq
Global Select Market, the New York Stock Exchange or the OTC Bulletin Board.

 

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

 

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“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
Trading Market, the daily volume weighted average price of the Common Stock for
such date (or the nearest preceding date) on the Trading Market on which the
Common Stock is then listed or quoted for trading as reported by Bloomberg L.P.
(based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New
York City time)); (b)  if the OTC Bulletin Board is not a Trading Market, the
volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then
quoted for trading on the OTC Bulletin Board and if prices for the Common Stock
are then reported in the “Pink Sheets” published by Pink Sheets, LLC (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 (d) in
all other cases, the fair market value of a share of Common Stock as determined
by an independent appraiser selected in good faith by the Holder and reasonably
acceptable to the Company.

 

Section 2.               Interest and Prepayment.  This Debenture was issued for
an original issue discount. No regularly scheduled interest payments shall be
made on this Debenture. Except as otherwise set forth in this Debenture, the
Company may not prepay any portion of the Principal Amount of this Debenture
without the prior written consent of the Holder.

 

Section 3.               Registration of Transfers and Exchanges.

 

a)             Different Denominations. 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 payable for such registration of transfer or exchange.

 

b)            Investment Representations. 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
regulations.

 

c)             Reliance on Debenture Register. Prior to due presentment for
transfer to the Company 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 4.               Conversion.

 

a)             Voluntary Conversion. At any time after the Original Issue Date
until this Debenture is no longer outstanding, this Debenture shall be
convertible, in whole or in part, into shares of Common Stock at the option of
the Holder, at any time and from time

 

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to time (subject to the conversion limitations set forth in
Section 4(c) hereof).  The Holder shall effect conversions by delivering to the
Company a Notice of Conversion, the form of which is attached hereto as Annex A
(each, a “Notice of Conversion”), specifying therein the principal amount of
this Debenture to be converted and the date on which such conversion shall be
effected (such date, the “Conversion Date”).  If no Conversion Date is specified
in a Notice of Conversion, the Conversion Date shall be the date that such
Notice of Conversion is deemed delivered hereunder.  To effect conversions
hereunder, the Holder shall not be required to physically surrender this
Debenture 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 in an amount equal to the
applicable conversion.  The Holder and the Company shall maintain records
showing the principal amount(s) converted and the date of such conversion(s). 
The Company may deliver an objection to any Notice of Conversion within 1
Business Day of delivery of such Notice of Conversion.  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.

 

b)            Conversion Price.  The conversion price in effect on any
Conversion Date shall be equal to $0.15, subject to adjustment herein (the
“Conversion Price”).

 

c)             Conversion Limitations.  The Company shall not effect any
conversion of this Debenture, and a Holder shall not have the right to convert
any portion of this Debenture, to the extent that after giving effect to the
conversion set forth on the applicable Notice of Conversion, the Holder
(together with the Holder’s Affiliates, and any other person or entity acting as
a group together with the Holder or any of the Holder’s Affiliates) would
beneficially own in excess of the Beneficial Ownership Limitation (as defined
below).  For purposes of the foregoing sentence, the number of shares of Common
Stock beneficially owned by the Holder and its Affiliates shall include the
number of shares of Common Stock issuable upon conversion of this Debenture with
respect to which such determination is being made, but shall exclude the number
of shares of Common Stock which are issuable upon (A) conversion of the
remaining, unconverted principal amount of this Debenture beneficially owned by
the Holder or any of its Affiliates and (B) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company
subject to a limitation on conversion or exercise analogous to the limitation
contained herein (including, without limitation, any other Debentures or the
Warrants) beneficially owned by the Holder or any of its Affiliates.  Except as
set forth in the preceding sentence, for purposes of this Section 4(c),
beneficial ownership shall be calculated in accordance with Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder.  To the
extent that the limitation contained in this Section 4(c) applies, the
determination of whether this Debenture is convertible (in relation to other
securities owned by the Holder together with any Affiliates) and of which
principal amount of this Debenture is convertible shall be in the

 

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sole discretion of the Holder, and the submission of a Notice of Conversion
shall be deemed to be the Holder’s determination of whether this Debenture may
be converted (in relation to other securities owned by the Holder together with
any Affiliates) and which principal amount of this Debenture is convertible, in
each case subject to the Beneficial Ownership Limitation. To ensure compliance
with this restriction, the Holder will be deemed to represent to the Company
each time it delivers a Notice of Conversion that such Notice of Conversion has
not violated the restrictions set forth in this paragraph and the Company shall
have no obligation to verify or confirm the accuracy of such determination.  In
addition, a determination as to any group status as contemplated above shall be
determined in accordance with Section 13(d) of the Exchange Act and the
rules and regulations promulgated thereunder.   For purposes of this
Section 4(c), in determining the number of outstanding shares of Common Stock,
the Holder may rely on the number of outstanding shares of Common Stock as
stated in the most recent of the following: (A) the Company’s most recent
periodic or annual report, as the case may be; (B) a more recent public
announcement by the Company; or (C) a more recent notice by the Company or the
Company’s transfer agent setting forth the number of shares of Common Stock
outstanding.  Upon the written or oral request of a Holder, the Company shall
within two Trading Days confirm orally and in writing to the Holder the number
of shares of Common Stock then outstanding.  In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to
the conversion or exercise of securities of the Company, including this
Debenture, by the Holder or its Affiliates since the date as of which such
number of outstanding shares of Common Stock was reported. The “Beneficial
Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock
outstanding immediately after giving effect to the issuance of shares of Common
Stock issuable upon conversion of this Debenture held by the Holder.  The
Holder, upon not less than 61 days’ prior notice to the Company, may increase or
decrease the Beneficial Ownership Limitation provisions of this Section 4(c),
provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of
the number of shares of the Common Stock outstanding immediately after giving
effect to the issuance of shares of Common Stock upon conversion of this
Debenture held by the Holder and the Beneficial Ownership Limitation provisions
of this Section 4(c) shall continue to apply.  Any such increase or decrease
will not be effective until the 61st day after such notice is delivered to the
Company.  The Beneficial Ownership Limitation provisions of this paragraph shall
be construed and implemented in a manner otherwise than in strict conformity
with the terms of this Section 4(c) to correct this paragraph (or any portion
hereof) which may be defective or inconsistent with the intended Beneficial
Ownership Limitation contained herein or to make changes or supplements
necessary or desirable to properly give effect to such limitation. The
limitations contained in this paragraph shall apply to a successor holder of
this Debenture.

 

d)            Mechanics of Conversion.

 

i.              Conversion Shares Issuable Upon Conversion of Principal Amount. 
The number of Conversion Shares issuable upon a conversion hereunder shall be
determined by the quotient obtained by dividing (x) the

 

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outstanding principal amount of this Debenture to be converted by (y) the
Conversion Price.

 

ii.             Delivery of Certificate Upon Conversion. Not later than three
Trading Days after each Conversion Date (the “Share Delivery Date”), the Company
shall deliver, or cause to be delivered, to the Holder a certificate or
certificates representing the Conversion Shares which on or after the six month
anniversary of the Original Issue Date shall be free of restrictive legends and
trading restrictions (other than those which may then be required by the
Purchase Agreement) representing the number of Conversion Shares being acquired
upon the conversion of this Debenture. On or after the six month anniversary of
the Original Issue Date, the Company shall, 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 4(d) electronically through the Depository Trust Company or another
established clearing corporation performing similar functions.

 

iii.            Failure to Deliver Certificates.  If in the case of any Notice
of Conversion such certificate or certificates are not delivered to or as
directed by the applicable Holder by the third Trading Day after the Conversion
Date, the Holder shall be entitled to elect by written notice to the Company at
any time on or before its receipt of such certificate or certificates, to
rescind such Conversion, in which event the Company shall promptly return to the
Holder any original Debenture delivered to the Company and the Holder shall
promptly return to the Company the Common Stock certificates representing the
principal amount of this Debenture unsuccessfully tendered for conversion to the
Company.

 

iv.            Obligation Absolute; Partial Liquidated Damages.  The Company’s
obligations to issue and deliver the Conversion Shares upon conversion of this
Debenture in accordance with the terms hereof are absolute and unconditional,
irrespective of any action or inaction by the Holder to enforce the same, any
waiver or consent with respect to any provision hereof, the recovery of any
judgment against any Person or any action to enforce the same, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged
breach by the Holder or any other Person of any obligation to the Company or any
violation or alleged violation of law by the Holder or any other Person, and
irrespective of any other circumstance which might otherwise limit such
obligation of the Company to the Holder in connection with the issuance of such
Conversion Shares; provided, however, that such delivery shall not operate as a
waiver by the Company of any such action the Company may have against the
Holder.  In the event the 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 anyone associated or affiliated
with the Holder has been engaged in any violation of law, agreement or for any
other reason, unless an injunction from a court, on notice to Holder,
restraining and or enjoining conversion of all or part of this Debenture shall
have been sought

 

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and obtained, and the Company posts a surety bond for the benefit of the Holder
in the amount of 150% of the outstanding principal amount of this Debenture,
which is subject to the injunction, which bond shall remain in effect until the
completion of arbitration/litigation of the underlying dispute and the proceeds
of which shall be payable to the Holder to the extent it obtains judgment.  In
the absence of such injunction, the Company shall issue Conversion Shares or, if
applicable, cash, upon a properly noticed conversion.  If the Company fails for
any reason to deliver to the Holder such certificate or certificates pursuant to
Section 4(d)(ii) by the third Trading Day after the Conversion Date, the Company
shall pay to the Holder, in cash, as liquidated damages and not as a penalty,
for each $1,000 of principal amount being converted, $10 per Trading Day
(increasing to $20 per Trading Day on the fifth (5th) Trading Day after such
liquidated damages begin to accrue) for each Trading Day after such third (3rd)
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 8 hereof for the Company’s failure to deliver Conversion
Shares within the period specified herein and the Holder shall have the right to
pursue all remedies available to it hereunder, 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 Holder from seeking to
enforce damages pursuant to any other Section hereof or under applicable law.

 

v.             Compensation for Buy-In on Failure to Timely Deliver Certificates
Upon Conversion. 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 by the Share Delivery Date pursuant to Section 4(d)(ii), and if
after such Share Delivery Date the Holder is required by its brokerage firm to
purchase (in an open market transaction or otherwise), or the Holder’s brokerage
firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a
sale by the Holder of the Conversion Shares which the Holder was entitled to
receive upon the conversion relating to such Share Delivery Date (a “Buy-In”),
then the Company shall (A) pay in cash to the Holder (in addition to any other
remedies available to or elected by the Holder) the amount by which (x) the
Holder’s total purchase price (including any brokerage commissions) for the
Common Stock so purchased exceeds (y) the product of (1) the aggregate number of
shares of Common Stock that the Holder was entitled to receive from the
conversion at issue multiplied by (2) the actual sale price at which the sell
order giving rise to such purchase obligation was executed (including any
brokerage commissions) and (B) at the option of the Holder, either reissue (if
surrendered) this Debenture in a 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 if the Company had timely complied with
its delivery requirements under Section 4(d)(ii).  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 this Debenture with respect to
which the actual sale price

 

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of the Conversion Shares (including any brokerage commissions) 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 and, upon request of the
Company, evidence of the amount of such loss.  Nothing herein shall limit a
Holder’s right to pursue any other remedies available to it hereunder, at law or
in equity including, without limitation, a decree of specific performance and/or
injunctive relief with respect to the Company’s failure to timely deliver
certificates representing shares of Common Stock upon conversion of this
Debenture as required pursuant to the terms hereof.

 

vi.            Reservation of Shares Issuable Upon Conversion. The Company
covenants that it will at all times reserve and keep available out of its
authorized and unissued shares of Common Stock for the sole purpose of issuance
upon conversion of this Debenture, as herein provided, free from preemptive
rights or any other actual contingent purchase rights of Persons other than the
Holder (and the other holders of the Debentures), not less than such aggregate
number of shares of the Common Stock as shall (subject to the terms and
conditions set forth in the Purchase Agreement) be issuable (taking into account
the adjustments and restrictions of Section 5) upon the conversion of the
outstanding principal amount of this Debenture.  The Company covenants that all
shares of Common Stock that shall be so issuable shall, upon issue, be duly
authorized, validly issued, fully paid and nonassessable.

 

vii.           Fractional Shares. No fractional shares or scrip representing
fractional shares shall be issued upon the conversion of this Debenture.  As to
any fraction of a share which Holder would otherwise be entitled to purchase
upon such conversion, the Company shall at its election, either pay a cash
adjustment in respect of such final fraction in an amount equal to such fraction
multiplied by the Conversion Price or round up to the next whole share.

 

viii.          Transfer Taxes.  The issuance of certificates for shares of the
Common Stock on conversion of this Debenture shall be made without charge to the
Holder hereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificates, 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 this Debenture 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.

 

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Section 5.               Certain Adjustments.

 

a)             Stock Dividends and Stock Splits.  If the Company, at any time
while this Debenture is outstanding: (i) pays a stock dividend or otherwise
makes a distribution or distributions payable in shares of Common Stock on
shares of Common Stock or any Common Stock Equivalents (which, for avoidance of
doubt, shall not include any shares of Common Stock issued by the Company upon
conversion of the Debentures), (ii) subdivides outstanding shares of Common
Stock into a larger number of shares, (iii) combines (including by way of a
reverse stock split) outstanding shares of Common Stock into a smaller number of
shares or (iv) issues, in the event of a reclassification of shares of the
Common Stock, any shares of capital stock of the Company, then the Conversion
Price shall be multiplied by a fraction of which the numerator shall be the
number of shares of Common Stock (excluding any treasury shares of the Company)
outstanding immediately before such event and of which the denominator shall be
the number of shares of Common Stock outstanding immediately 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.

 

b)            Subsequent Equity Sales.  If, at any time while this Debenture is
outstanding,  the Company or any Subsidiary, as applicable, sells or grants any
option to purchase or sells or grants any right to reprice, or otherwise
disposes of or issues (or announces any sale, grant or any option to purchase or
other disposition), any Common Stock or Common Stock Equivalents entitling any
Person to acquire shares of Common Stock at an effective price per share that is
lower than the then Conversion Price (such lower price, the “Base Conversion
Price” and such issuances, collectively, a “Dilutive Issuance”) (if the holder
of the Common Stock or Common Stock Equivalents 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 are issued in connection with such issuance,
be entitled to receive shares of Common Stock at an effective price per share
that is lower than the Conversion Price, such issuance shall be deemed to have
occurred for less than the Conversion Price on such date of the Dilutive
Issuance), then the Conversion Price shall be reduced to equal the Base
Conversion Price.  Such adjustment shall be made whenever such Common Stock or
Common Stock Equivalents are issued.  Notwithstanding the foregoing, no
adjustment will be made under this Section 5(b) in respect of an Exempt
Issuance. If the Company enters into a Variable Rate Transaction, despite the
prohibition set forth in the Purchase Agreement, the Company shall be deemed to
have issued Common Stock or Common Stock Equivalents at the lowest possible
conversion price at which such securities may be converted or exercised. The
Company shall notify the Holder in writing, no later than 1 Business Day
following the issuance of any Common Stock or Common Stock Equivalents subject
to this Section 5(b), indicating therein the applicable issuance price, or
applicable Conversion Price, exchange price, conversion price and other pricing
terms (such notice, the “Dilutive Issuance Notice”).  For purposes of
clarification, whether or not the Company provides a Dilutive Issuance Notice

 

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pursuant to this Section 5(b), upon the occurrence of any Dilutive Issuance, the
Holder is entitled to receive a number of Conversion Shares based upon the Base
Conversion Price on or after the date of such Dilutive Issuance, regardless of
whether the Holder accurately refers to the Base Conversion Price in the Notice
of Conversion.

 

c)             Subsequent Rights Offerings.  If the Company, at any time while
the Debenture is 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 at a price per share that is lower than the VWAP
on the record date referenced below, then the Conversion Price shall be
multiplied by a fraction of which the denominator shall be the number of shares
of the Common Stock 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 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 (assuming delivery to the Company in full of
all consideration payable upon exercise of such rights, options or warrants)
would purchase at such VWAP.  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.

 

d)            Pro Rata Distributions. If the Company, at any time while this
Debenture is outstanding, distributes to all holders of Common Stock (and not to
the Holders) evidences of its indebtedness or assets (including cash and cash
dividends) or rights or warrants to subscribe for or purchase any security
(other than the Common Stock, which shall be subject to Section 5(b)), then in
each such case the Conversion Price shall be adjusted by multiplying such
Conversion 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 1
outstanding share of the Common Stock as determined by the Board of Directors of
the Company in good faith.  In either case the adjustments shall be described in
a statement delivered to the Holder describing the portion of assets or
evidences of indebtedness so distributed or such subscription rights applicable
to 1 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.

 

e)             Fundamental Transaction. If, at any time while this Debenture is
outstanding, (i) the Company effects any merger or consolidation of the Company
with or into another Person, (ii) the Company effects any sale of all or
substantially all of its assets in one transaction or a series of related
transactions, (iii) 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

 

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other securities, cash or property, or (iv) 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 Conversion Share that would have been issuable
upon such conversion immediately prior to the occurrence of 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 1 share of Common Stock (the “Alternate Consideration”).  For
purposes of any such conversion, the determination of the Conversion Price shall
be appropriately adjusted to apply to such Alternate Consideration based on the
amount of Alternate Consideration issuable in respect of 1 share of Common Stock
in such Fundamental Transaction, and the Company shall apportion the Conversion
Price among the Alternate Consideration in a reasonable manner reflecting the
relative value of any different components of the Alternate Consideration.  If
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 Section 5(e) and insuring that this Debenture (or
any such replacement security) will be similarly adjusted upon any subsequent
transaction analogous to a Fundamental Transaction.

 

f)                                        Calculations.  All calculations under
this Section 5 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 5, the number of shares
of Common Stock deemed to be issued and outstanding as of a given date shall be
the sum of the number of shares of Common Stock (excluding any treasury shares
of the Company) issued and outstanding.

 

g)                                     Notice to the Holder.

 

i.                                          Adjustment to Conversion Price. 
Whenever the Conversion Price is adjusted pursuant to any provision of this
Section 5, the Company shall promptly deliver to each Holder a notice setting
forth the Conversion Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment.

 

ii.                                       Notice to Allow Conversion by Holder. 
If (A) the Company shall declare a dividend (or any other distribution in
whatever form) on the Common Stock, (B) the Company shall declare a special
nonrecurring cash dividend on or a

 

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redemption of the Common Stock, (C) the Company shall authorize the granting to
all holders of the Common Stock of 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 or (E) the Company shall
authorize the 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 this
Debenture, and shall cause to be delivered to the Holder at its last address as
it shall appear upon the Debenture Register, at least twenty (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 deliver such notice or any defect therein or in the delivery thereof
shall not affect the validity of the corporate action required to be specified
in such notice.  The Holder is entitled to convert this Debenture during the
20-day period commencing on the date of such notice through the effective date
of the event triggering such notice.

 

Section 6.                                            Monthly Redemption and
Forced Conversion.

 

a)                                      Monthly Redemption.  On each Monthly
Redemption Date, the Company shall redeem the Monthly Redemption Amount (the
“Monthly Redemption”). The Monthly Redemption Amount payable on each Monthly
Redemption Date shall be paid in cash; provided, however, as to any Monthly
Redemption and upon 10 Trading Days’ prior written irrevocable notice (the
“Monthly Redemption Notice”), in lieu of a cash redemption payment the Company
may elect to pay all or part of a Monthly Redemption Amount in Conversion Shares
based on a conversion price equal to the lesser of (i) the then Conversion Price
and (ii) 80% of the average of the VWAPs for the 10 consecutive Trading Days
ending on the Trading Day that is immediately prior to the applicable Monthly
Redemption Date (subject to adjustment for any stock dividend, stock split,
stock combination or other similar event affecting the Common Stock during such
10 Trading Day period) (the price calculated during the 10 Trading Day period
immediately prior to the Monthly Redemption Date, the “Monthly Conversion Price”
and such 10 Trading Day period, the “Monthly Conversion Period”);

 

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provided, further, that the Company may not pay the Monthly Redemption Amount in
Conversion Shares unless (y) from the date the Holder receives the duly
delivered Monthly Redemption Notice through and until the date such Monthly
Redemption is paid in full, the Equity Conditions have been satisfied, unless
waived in writing by the Holder, and (z) as to such Monthly Redemption, prior to
such Monthly Conversion Period (but not more than 5 Trading Days prior to the
commencement of the Monthly Conversion Period), the Company shall have delivered
to the Holder’s account with The Depository Trust Company a number of shares of
Common Stock to be applied against such Monthly Redemption Amount equal to the
quotient of (x) the applicable Monthly Redemption Amount divided by (y) the
lesser of (A) the Conversion Price and (B) 80% of the average of the 10 VWAPs
during the period ending on the 3rd Trading Day immediately prior to the date of
the Monthly Redemption Notice (the “Pre-Redemption Conversion Shares”).  The
Holder may convert, pursuant to Section 4(a), any principal amount of this
Debenture subject to a Monthly Redemption at any time prior to the date that the
Monthly Redemption Amount, plus accrued but unpaid interest, liquidated damages
and any other amounts then owing to the Holder are due and paid in full.  Unless
otherwise indicated by the Holder in the applicable Notice of Conversion, any
principal amount of this Debenture converted during the applicable Monthly
Conversion Period until the date the Monthly Redemption Amount is paid in full
shall be first applied to the principal amount subject to the Monthly Redemption
Amount payable in cash and then to the Monthly Redemption Amount payable in
Conversion Shares.  Any principal amount of this Debenture converted during the
applicable Monthly Conversion Period in excess of the Monthly Redemption Amount
shall be applied against the last principal amount of this Debenture scheduled
to be redeemed hereunder, in reverse time order from the Maturity Date;
provided, however, if any such conversion is applied against such Monthly
Redemption Amount, the
Pre-Redemption Conversion Shares, if any were issued in connection with such
Monthly Redemption or were not already applied to such conversions, shall be
first applied against such conversion.  The Company covenants and agrees that it
will honor all Notices of Conversion tendered up until such amounts are paid in
full.  The Company’s determination to pay a Monthly Redemption in cash, shares
of Common Stock or a combination thereof shall be applied ratably to all of the
holders of the then outstanding Debentures based on their (or their
predecessor’s) initial purchases of Debentures pursuant to the Purchase
Agreement.  At any time the Company delivers a notice to the Holder of its
election to pay the Monthly Redemption Amount in shares of Common Stock, the
Company shall file a prospectus supplement pursuant to Rule 424 disclosing such
election.  Notwithstanding anything herein to the contrary, on 3 occasions at
the election of the Holder by written notice to the Company prior to Monthly
Redemption Date that is to be paid in shares, the Holder may defer the pending
Monthly Redemption to a subsequent date as determined by the Holder.  Upon the
deferment of a Monthly Redemption, the Holder shall give at least 5 Trading
Days’ prior notice that such Monthly Redemption is due, including the deemed
Monthly Redemption Date as to such Monthly Redemption, and the Monthly
Conversion Price as to such Monthly Redemption shall be calculated off such
Monthly Redemption Date.

 

17

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b)                                     Redemption Procedure.  The payment of
cash or issuance of Common Stock, as applicable, pursuant to a Monthly
Redemption shall be payable on the Monthly Redemption Date.  If any portion of
the payment pursuant to an Monthly Redemption shall not be paid by the Company
by the applicable due date, interest shall accrue thereon at an interest rate
equal to the lesser of 18% per annum or the maximum rate permitted by applicable
law until such amount is paid in full.  Notwithstanding anything herein
contained to the contrary, if any portion of the Monthly Redemption Amount
remains unpaid after such date, the Holder may elect, by written notice to the
Company given at any time thereafter, to invalidate such Monthly Redemption, ab
initio.  Notwithstanding anything to the contrary in this Section 6, the
Company’s determination to redeem in cash or its elections under
Section 6(b) shall be applied ratably among the Holders of Debentures. The
Holder may elect to convert the outstanding principal amount of the Debenture
pursuant to Section 4 prior to actual payment in cash for any redemption under
this Section 6 by the delivery of a Notice of Conversion to the Company.

 

c)                                      Forced Conversion.  Notwithstanding
anything herein to the contrary, if after the six month anniversary of the
Original Issue Date, (i) each of the Closing Prices for any 20 consecutive
Trading Days (such period commencing only after the six month anniversary of the
Original Issue Date, such period the “Threshold Period”)) exceeds the then
Conversion Price by $0.30 (subject to adjustment for reverse and forward stock
splits, stock dividends, stock combinations and other similar transactions of
the Common Stock that occur after the Original Issue Date) or (ii) the Company
consummates a bona fide firm commitment public underwritten offering of the
Common Stock by a nationally recognized investment bank of its Common Stock for
an offering price that is equal to or exceeds the then Conversion Price by $0.30
(subject to adjustment for reverse and forward stock splits, stock dividends,
stock combinations and other similar transactions of the Common Stock that occur
after the Original Issue Date), the Company may, within 1 Trading Day after the
end of any such Threshold Period, deliver a written notice to the Holder (a
“Forced Conversion Notice” and the date such notice is delivered to the Holder,
the “Forced Conversion Notice Date”) to cause the Holder to convert all or part
of the then outstanding principal amount of Debentures plus, if so specified in
the Forced Conversion Notice, accrued but unpaid liquidated damages and other
amounts owing to the Holder under this Debenture, it being agreed that the
“Conversion Date” for purposes of Section 4 shall be deemed to occur on the
third Trading Day following the Forced Conversion Notice Date (such third
Trading Day, the “Forced Conversion Date”).  The Company may not deliver a
Forced Conversion Notice, and any Forced Conversion Notice delivered by the
Company shall not be effective, unless all of the Equity Conditions are met
(unless waived in writing by the Holder) on each Trading Day occurring during
the applicable Threshold Period through and including the later of the Forced
Conversion Date and the Trading Day after the date such Conversion Shares
pursuant to such conversion are delivered to the Holder.  Any Forced Conversion
shall be applied ratably to all Holders based on their initial purchases of
Debentures pursuant to the Purchase Agreement, provided that any voluntary
conversions by a Holder shall be applied against the Holder’s pro rata
allocation, thereby decreasing the aggregate amount forcibly converted hereunder
if only a portion of this Debenture is forcibly converted. 

 

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For purposes of clarification, a Forced Conversion shall be subject to all of
the provisions of Section 4, including, without limitation, the provision
requiring payment of liquidated damages and limitations on conversions.

 

Section 7.                                            Negative Covenants. As
long as any portion of this Debenture remains outstanding, unless the holders of
at least 67% in principal amount of the then outstanding Debentures shall have
otherwise given prior written consent, the Company shall not, and shall not
permit any of its subsidiaries (whether or not a Subsidiary on the Original
Issue Date) to, directly or indirectly:

 

a)                                      other than Permitted Indebtedness, enter
into, create, incur, assume, guarantee or suffer to exist any indebtedness for
borrowed money of any kind, including, but not limited to, a guarantee, 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;

 

b)                                     other than Permitted Liens, enter into,
create, incur, assume or suffer to exist any Liens 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;

 

c)                                      amend its charter documents, including,
without limitation, its certificate of incorporation and bylaws, in any manner
that materially and adversely affects any rights of the Holder;

 

d)                                     repay, repurchase or offer to repay,
repurchase or otherwise acquire more than a de minimis number of shares of its
Common Stock or Common Stock Equivalents (other than Exempt Issuances under
clause (b) thereof) other than as to (i) the Conversion Shares or Warrant Shares
as permitted or required under the Transaction Documents and (ii) repurchases of
Common Stock or Common Stock Equivalents of departing officers and directors of
the Company, provided that such repurchases shall not exceed an aggregate of
$100,000 for all officers and directors during the term of this Debenture;

 

e)                                      repay, repurchase or offer to repay,
repurchase or otherwise acquire any Indebtedness, other than the Debentures if
on a pro-rata basis, other than regularly scheduled principal payments as such
terms are in effect as of the Original Issue Date, provided that such payments
shall not be permitted if, at such time, or after giving effect to such payment,
any Event of Default exist or occur;

 

f)                                        pay cash dividends or distributions on
any equity securities of the Company;

 

g)                                     enter into any transaction with any
Affiliate of the Company which would be required to be disclosed in any public
filing with the Commission, unless such transaction is made on an arm’s-length
basis and expressly approved by a majority of the disinterested directors of the
Company (even if less than a quorum otherwise required for board approval); or

 

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h)                                     enter into any agreement with respect to
any of the foregoing.

 

Notwithstanding anything to the contrary set forth in this Debenture, under no
circumstances shall any actions taken by the Company that are necessary to
comply with the Prior Transaction Documents (as defined in the Purchase
Agreement) be deemed to breach or trigger any default with respect to any
provision in this Debenture.

 

Section 8.                                            Events of Default.

 

a)                                      “Event of Default” means, wherever used
herein, any of the following events (whatever the reason for such event and
whether such event 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
(A) the principal amount of any Debenture or (B) other fees owing on any
Debenture, or liquidated damages in respect of, any Debenture, 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, solely in the case of
defaults under clause (B) above, is not cured, within 3 Trading Days;

 

ii.                                       the Company shall fail to observe or
perform any other covenant or agreement contained in the Debentures (other than
a breach by the Company of its obligations to deliver shares of Common Stock to
the Holder upon conversion, which breach is addressed in clause (ix) below)
which failure is not cured, if possible to cure, within the earlier to occur of
(A) 5 Trading Days after notice of such failure sent by the Holder or by any
other Holder to the Company and (B) 10 Trading Days after the Company has become
or should have become aware of such failure;

 

iii.                                    a default or event of default (subject
to any grace or cure period provided in the applicable agreement, document or
instrument) shall occur under (A) any of the Transaction Documents or (B) any
other material agreement, lease, document or instrument to which the Company or
any Subsidiary is obligated (and not covered by clause (vi) below);

 

iv.                                   any representation or warranty made in
this Debenture, any other Transaction Documents, any written statement pursuant
hereto or thereto or any other report, financial statement or certificate made
or delivered to the Holder or any other Holder shall be untrue or incorrect in
any material respect as of the date when made or deemed made;

 

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v.                                      the Company or any Significant
Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X)  shall be
subject to a Bankruptcy Event;

 

vi.                                   the Company or any Subsidiary shall
default on any of its obligations under 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 that (a) involves an obligation greater than $150,000,
whether such indebtedness now exists or shall hereafter be created, and
(b) results in such indebtedness becoming or being declared due and payable
prior to the date on which it would otherwise become due and payable;

 

vii.                                the Common Stock shall not be eligible for
listing or quotation for trading on a Trading Market and shall not be eligible
to resume listing or quotation for trading thereon within five Trading Days;

 

viii.                             the Company shall be a party to any Change of
Control Transaction or Fundamental Transaction or shall agree to sell or dispose
of all or in excess of 33% of its assets in one transaction or a series of
related transactions (whether or not such sale would constitute a Change of
Control Transaction);

 

ix.                                     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 Section 4(d) or any Forced Conversion Date pursuant
to Section 6 or the Company shall provide at any time notice to the Holder,
including by way of public announcement, of the Company’s intention to not honor
requests for conversions of any Debentures in accordance with the terms hereof;

 

x.                                        the Company does not meet the current
public information requirements under Rule 144 in respect of the shares of
Common Stock issuable pursuant to the Transaction Documents; or

 

xi.                                     any monetary judgment, writ or similar
final process shall be entered or filed against the Company, any subsidiary or
any of their respective property or other assets for more than [$100,000], and
such judgment, writ or similar final process shall remain unvacated, unbonded or
unstayed for a period of 45 calendar days.

 

b)                                     Remedies Upon Event of Default. If any
Event of Default occurs, the outstanding principal amount of this Debenture,
plus accrued but unpaid liquidated damages and other amounts owing in respect
thereof through the date of acceleration, shall become, at the Holder’s
election, immediately due and payable in cash at the Mandatory Default Amount. 
Commencing 5 days after the occurrence of any Event of

 

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Default that results in the eventual acceleration of this Debenture, the
interest rate on this Debenture shall accrue at an interest rate equal to the
lesser of 18% per annum or the maximum rate permitted under applicable law. 
Upon the payment in full of the Mandatory Default Amount, the Holder shall
promptly surrender this Debenture to or as directed by the Company.  In
connection with such acceleration described herein, 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 acceleration may be
rescinded and annulled by Holder at any time prior to payment hereunder and the
Holder shall have all rights as a holder of the Debenture until such time, if
any, as the Holder receives full payment pursuant to this Section 8(b).  No such
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereon.

 

Section 9.                                            Miscellaneous.

 

a)                                      Notices.  Any and all notices or other
communications or deliveries to be provided by the Holder hereunder, including,
without limitation, any Notice of Conversion, shall be in writing and delivered
personally, by facsimile, or sent by a nationally recognized overnight courier
service, addressed to the Company, at the address set forth above, or such other
facsimile number or address as the Company may specify for such purpose by
notice to the Holder delivered in accordance with this Section 9(a).  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, or sent by
a nationally recognized overnight courier service addressed to each Holder at
the facsimile number or address of the Holder appearing on the books of the
Company, or if no such facsimile 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 number specified on the signature page prior to
5:30 p.m. (New York City time), (ii) the date immediately following the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified on the signature page between 5:30 p.m. (New York
City time) and 11:59 p.m. (New York City time) on any date, (iii) the second
Business Day following the date of mailing, if sent by nationally recognized
overnight courier service or (iv) upon actual receipt by the party to whom such
notice is required to be given.

 

b)                                     Absolute Obligation. 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 and liquidated damages, as applicable, 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.

 

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c)                                      Lost or Mutilated Debenture.  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,
reasonably satisfactory to the Company.

 

d)                                     Governing Law.  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 conflict of
laws thereof.  Each party agrees that all legal proceedings concerning the
interpretation, 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 such New York Courts,
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 other manner permitted by
applicable 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 party for
its attorneys fees and other costs and expenses incurred in the investigation,
preparation and prosecution of such action or proceeding.

 

e)                                      Amendments and Waivers.  This Debenture,
or any provisions hereof, may be modified or amended or the provisions hereof
waived with the prior written consent of the Company and the Holder.  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

 

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or deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Debenture.

 

f)                                        Severability.  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 the applicable law governing
usury, the applicable rate of interest due hereunder shall automatically be
lowered to equal the maximum rate of interest permitted under applicable law.
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 this Debenture 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 impede
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.

 

g)                                     Next Business Day.  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.

 

h)                                     Headings.  The headings contained herein
are for convenience only, do not constitute a part of this Debenture and shall
not be deemed to limit or affect any of the provisions hereof.

 

i)                                         Assumption.  Any successor to the
Company or any surviving entity in a Fundamental Transaction shall (i) assume,
prior to such Fundamental Transaction, all of the obligations of the Company
under this Debenture and the other Transaction Documents pursuant to written
agreements in form and substance satisfactory to the Holder (such approval not
to be unreasonably withheld or delayed) and (ii) issue to the Holder a new
debenture of such successor entity evidenced by a written instrument
substantially similar in form and substance to this Debenture, including,
without limitation, having a principal amount equal to the principal amount of
this Debenture and having similar ranking to this Debenture, which shall be
satisfactory to the Holder (any such approval not to be unreasonably withheld or
delayed).  The provisions of this Section 9(i) shall apply similarly and equally
to successive Fundamental Transactions and shall be applied without regard to
any limitations of this Debenture.

 

j)                                         Secured Obligation.  The obligations
of the Company under this Debenture are secured by all assets of the Company and
each Subsidiary pursuant to the

 

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Security Agreement, dated as of March       , 2008 between the Company, the
Subsidiaries of the Company and the Secured Parties (as defined therein).

 

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

 

(SIGNATURE PAGES FOLLOW)

 

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

 

 

 

ADVANCED CELL TECHNOLOGY, INC.

 

 

 

 

 

 

 

By:

 

 

 

Name:

 

 

Title:

 

Facsimile No. for delivery of Notices:                                     

 

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ANNEX A

 

NOTICE OF CONVERSION

 

The undersigned hereby elects to convert principal under the Original Issue
Discount Senior Secured Convertible Debenture due March     , 2009 of Advanced
Cell Technology, Inc., a Delaware corporation (the “Company”), into shares of
common stock (the “Common Stock”), of the Company according to the conditions
hereof, as of the date written below.  If shares of Common Stock 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 Common Stock does not exceed
the amounts specified under Section 4 of this Debenture, as determined in
accordance with Section 13(d) of the Exchange Act.

 

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 Debenture to be Converted:

 

 

 

Number of shares of Common Stock to be issued:

 

 

 

 

 

Signature:

 

 

 

Name:

 

 

 

Address for Delivery of Common Stock Certificates:

 

 

 

Or

 

 

 

DWAC Instructions:

 

 

 

Broker No:

                                

 

Account No:

                               

 

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Schedule 1

 

CONVERSION SCHEDULE

 

The Original Issue Discount Senior Secured Convertible Debentures due on
March       , 2009 in the aggregate principal amount of
$                         are issued by Advanced Cell Technology, Inc., a
Delaware corporation.  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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