Exhibit 10.3

Exhibit A-2

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 COMPLIANCE WITH APPLICABLE STATE
SECURITIES LAWS OR BLUE SKY LAWS. NOTWITHSTANDING THE FOREGOING, THESE
SECURITIES AND THE SECURITIES ISSUABLE UPON CONVERSION OF THESE SECURITIES MAY
BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR
FINANCING ARRANGEMENT SECURED BY SUCH SECURITIES.

No. [               ]

$[                ]

Date: April __, 2007

 

CARRINGTON LABORATORIES, INC.
SENIOR SECURED CONVERTIBLE DEBENTURE DUE

April __, 2010

THIS DEBENTURE is one of a series of duly authorized and issued Debentures of
Carrington Laboratories, Inc., a Texas corporation (the "Company"), designated
as its Senior Secured Convertible Debentures due April __, 2010, in the
aggregate principal amount of up to $8,000,000 (the "Debentures").

FOR VALUE RECEIVED, the Company promises to pay to the [Holder] or its
registered assigns (the "Holder"), the principal sum of [__________]
$(__________) (the "Original Principal Amount"), on the Maturity Date, or such
earlier date as the Debentures are required or permitted to be repaid as
provided hereunder, and to pay interest to the Holder on the unconverted and
then outstanding principal amount of this Debenture in accordance with the
provisions of this Debenture. The principal amount of this Debenture may be
increased as set forth in Section 2 below. Notwithstanding the foregoing or
anything in this Debenture, the Company hereby unconditionally promises to pay
to the Holder interest on any outstanding unconverted principal or accrued but
unpaid interest payable hereunder during the continuance of an Event of Default
(as hereafter defined) at a rate of 18% per annum (but in no event in excess of
the maximum rate permitted under applicable law) (the "Default Rate"), and all
such interest shall be payable in full upon demand of the Holder.

Interest payable under this Debenture shall be computed on the basis of a year
of 360 days and actual days elapsed (including the first day but excluding the
last day) occurring in the period for which interest is payable.

Payments of principal and interest shall be made in lawful money of the United
States of America to the Holder at its address as provided in Section 13 or by
wire transfer to such account specified from time to time by the Holder hereof
for such purpose in a notice to Company under Section 13. Payments of cash shall
only be credited to the Company's obligations under this Debenture if and when
received by the Holder in immediately available funds.

1. Definitions. In addition to the terms defined elsewhere in this Debenture,
(a) capitalized terms and phrases that are not otherwise defined herein have the
meanings given to such terms and phrases in the Securities Purchase Agreement,
dated as of April __, 2007, among the Company and the Purchasers identified
therein (as amended, restated, supplemented or otherwise modified from time to
time, the "Purchase Agreement"), and (b) the following terms and phrases have
the meanings indicated:

"Closing Sale Price"

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 an Eligible
Market or any other national securities exchange, the closing trade price per
share of the Common Stock for such date (or the nearest preceding date) on the
primary Eligible Market or exchange on which the Common Stock is then listed or
quoted; (b) if prices for the Common Stock are then quoted on the OTC Bulletin
Board, the closing trade price per share of the Common Stock for such date (or
the nearest preceding date) so quoted; or (c) in all other cases, the fair
market value of a share of Common Stock as determined by an independent
appraiser mutually agreed to by the Company and the Purchasers holding a
majority of the aggregate principal amount of the Debentures.

"Company Prepayment Price" for any Debentures which shall be subject to
prepayment pursuant to Section 8(a), shall equal the sum of: (i) 115% of the
principal amount of any such Debentures to be prepaid plus all accrued and
unpaid interest thereon, and (ii) all other amounts, costs, expenses (including,
without limitation, attorneys' fees and expenses) and liquidated damages due in
respect of any such Debentures.

"Conversion Date" means the date a Conversion Notice is delivered to the Company
together with the Conversion Schedule pursuant to Section 6(a).

"Conversion Notice" means a written notice in the form attached hereto as
Schedule 1.

"Conversion Price" means $[_____] per share, subject to adjustment from time to
time pursuant to Section 11.

"Equity Conditions" means, with respect to a specified issuance of Common Stock
or potential issuance of Common Stock, that each of the following conditions is
satisfied: (i) on each day during the period beginning three (3) months prior to
the applicable date of determination and ending on and including the applicable
date of determination (the "Equity Conditions Measuring Period"), the number of
authorized but unissued and otherwise unreserved shares of Common Stock is
sufficient for such issuance; (ii) during the Equity Conditions Measuring
Period, all such shares of Common Stock are registered for resale by the Holder
and may be sold by the Holder pursuant to an effective Registration Statement
covering all of the Underlying Shares or all such shares may be sold without
volume restrictions pursuant to Rule 144(k) under the Securities Act and
applicable state securities laws and without any other restrictions; (iii)
during the Equity Conditions Measuring Period, all of the Common Stock is listed
or quoted (and is not suspended from trading) on an Eligible Market and all such
shares of Common Stock are approved for listing upon issuance and no delisting
or suspension by such Eligible Market is threatened or pending; (iv) such
issuance would be permitted in full without violating Section 6(b)(i) or (ii)
hereof or the rules or regulations of the Trading Market; (v) during the Equity
Conditions Measuring Period, no Bankruptcy Event has occurred; (vi) during the
Equity Conditions Measuring Period, the Company is not in default, violation or
breach with respect to any material obligation hereunder, and no Event of
Default shall have occurred or be continuing and no event shall have occurred
that with the giving of notice or the passage of time should constitute an Event
of Default; (vii) during the Equity Conditions Measuring Period, no public
announcement of a pending or proposed Change of Control transaction or
Fundamental Transaction has occurred that has not been consummated; (viii) the
average daily dollar volume for the Common Stock for the period of 20 Trading
Days immediately preceding the specified issuance is equal to or in excess of
$100,000 per Trading Day (the "Volume Condition") and (ix) the Company shall
have obtained the Company Shareholder Approval.

"Maturity Date" means April [__], 2010, as may be extended at the option of the
Holder (i) in the event that, and for so long as, an Event of Default shall have
occurred and be continuing on the Maturity Date (as may be extended pursuant
hereto) or any event shall have occurred and be continuing on the Maturity Date
(as may be extended pursuant hereto) that with the passage of time and the
failure to cure would result in an Event of Default, (ii) through the date that
is ten (10) Business Days after the consummation of a Fundamental Transaction in
the event that a Fundamental Transaction is publicly announced or the Holder
receives notice of any Fundamental Change is delivered prior to the Maturity
Date and (iii) to the latest designated date for repayment upon the deferral of
payment of any Monthly Installment Amount in accordance with Section 2(g).

"Monthly Installment Amount" means as to a Principal Payment Date, an amount
equal to the lesser of (i) the Original Principal Amount of this Debenture
divided by 30 and (ii) the principal amount under this Debenture as of such
Principal Payment Date, as any such Monthly Installment Amount may be reduced
pursuant to the terms of this Debenture, whether upon conversion, redemption or
otherwise, together with, in each case the sum of any accrued and unpaid
Interest with respect to such principal amount. In the event the Holder shall
sell or otherwise transfer any portion of this Debenture, the transferee shall
be allocated a pro rata portion of the each unpaid Monthly Installment Amount
hereunder.

"Original Issue Date" means the date of the first issuance of any Debentures,
regardless of the number of transfers of any particular Debenture.

"Principal Payment Date" means any date on which payment of a principal amount
of this Debenture shall be due and payable by the Company in accordance with
Section 2(b).

"Triggering Event" means any of the following events: (a) the Common Stock is
not listed or quoted, or is suspended from trading, on an Eligible Market for a
period of five or more Trading Days (which need not be consecutive Trading
Days); (b) the Company fails for any reason to deliver a certificate evidencing
any Securities to a Purchaser within five Trading Days after delivery of such
certificate is required pursuant to any Transaction Document or the exercise or
conversion rights of any Holder pursuant to any Transaction Document are
otherwise suspended for any reason; (c) the Company fails to have available a
sufficient number of authorized but unissued and otherwise unreserved shares of
Common Stock available to issue Underlying Shares upon any exercise of any of
the Debentures; (d) at any time after the First Closing Date, any Underlying
Shares are not listed on an Eligible Market; (e) the effectiveness of the
Registration Statement lapses for any reason or the Holder shall not be
permitted to resell any Underlying Shares under the Registration Statement, in
either case, for five or more Trading Days (which need not be consecutive
Trading Days in any 12-month period); (f) the Company fails to make any cash
payment when required under the Transaction Documents; (g) excluding, for the
avoidance of doubt, any failure under (f) above in this definition, the Company
defaults in the timely performance of or violates or breaches any other
obligation, agreement, covenant, representation and warranty or provision under
any of the Transaction Documents and such default, violation or breach continues
uncured until the earlier to occur of (i) 30 days after the date the Company
becomes or should have become aware of such default, violation or breach or (ii)
10 days after the date on which notice of such default, violation or breach is
first given to the Company by a Purchaser (it being understood that no prior
notice need be given and opportunity to cure shall be granted (x) in the case of
a default that cannot reasonably be cured within the requisite time period or
(y) in the case of a default, violation or breach of any representation,
warranty or negative covenant in the Purchase Agreement; or (h) a final judgment
or judgments for the payment of money aggregating in excess of $100,000 are
rendered against the Company or any of its Subsidiaries and which judgments are
not, within sixty (60) days after the entry thereof, discharged or stayed
pending appeal, or are not discharged within sixty (60) days after the
expiration of such stay; provided, however, that any judgment which is covered
by insurance from a creditworthy party shall not be included in calculating the
$100,000 amount set forth above; or (i) any Event of Default (as defined in the
other Debentures) occurs under any other Debentures.

2. Principal and Interest.

(a) The Company shall pay interest to the Holder on the aggregate unconverted
and then outstanding principal amount of this Debenture at a rate equal to 10%
per annum. Interest shall be payable quarterly in arrears on each March 31, June
30, September 30 and December 31, except if such date is not a Trading Day, in
which case such interest shall be payable on the next succeeding Trading Day
(each, an "Interest Payment Date") and such extensions shall be included in
computing interest. The first Interest Payment Date shall be June 30, 2007.
Interest shall accrue on this Debenture at the applicable interest rate from the
date hereof until all amounts outstanding under this Debenture are paid in full.
Interest not paid when due under this Debenture, including, without limitation,
interest at the Default Rate, shall, on the date any such interest payment is
not paid when due, and on all future dates, constitute additional principal
under this Debenture payable on demand of the Holder.

(b) The Company shall pay the principal balance of this Debenture to the Holder
in 30 consecutive equal monthly installments equal to the Monthly Installment
Amount (each, a "Monthly Installment") commencing on October __, 2007 and to
continue on the first day of each of the 29 months thereafter, except if any
such date is not a Trading Day in which case such principal shall be payable on
the next succeeding Trading Day (each, a "Principal Payment Date"), until the
outstanding principal balance of this Debenture has been paid in full. The
Company shall pay all then accrued and unpaid interest on this Debenture
together with the final payment of principal hereunder. Notwithstanding the
foregoing, the entire unpaid principal balance of this Debenture, together with
interest accrued thereon, shall be payable in full on the Maturity Date, or
earlier, as hereafter specified.

(c) Subject to the conditions and limitations set forth below, the Company shall
pay interest or principal on this Debenture in shares of Common Stock or, at the
Company's option, in cash. The Company must deliver an irrevocable written
notice (the "Payment Election Notice") to the Holder indicating the manner in
which it intends to pay interest or principal at least 21 Trading Days prior to
each Interest Payment Date or Principal Payment Date, as applicable, but,
subject to the conditions and limitations set forth below. Failure to timely
provide such written notice shall be deemed a confirmation by the Company to pay
the amount of any interest or principal in shares of Common Stock.

(d) Notwithstanding the foregoing, but subject to the last sentence of this
paragraph, the Company may not pay interest or principal by issuing shares of
Common Stock unless all of the Equity Conditions are then satisfied with respect
to all shares of Common Stock to be issued in respect of interest or principal
as applicable. If the Company is required to pay interest in cash on any
Interest Payment Date but fails to do so, the Holder may (but shall not be
required to) treat such interest as if it had been added to the principal amount
of this Debenture as of such Interest Payment Date or accept any number of
shares of Common Stock in lieu of such interest payment. If all Equity
Conditions, except the Volume Condition, have been satisfied, and the average
daily dollar volume for the Common Stock for the period of 20 Trading Days
immediately preceding the specified or potential issuance of Common Stock is at
least $50,000, then the Company may only elect to pay up to 50% of the principal
and/or interest payable on any Principal Payment Date or Interest Payment Date,
as applicable, in shares of Common Stock in an amount not to exceed (in the
aggregate with respect to all Debentures) 20% of the dollar value of the Common
Stock traded in the prior month. If the average daily volume for the Common
Stock for the period of 20 Trading Days immediately preceding the specified or
potential issuance of Common Stock is less than $50,000, then the Company may
not pay interest or principal by issuing shares of Common Stock.

(e) Subject to the conditions and limitations in this Debenture, in the event
that the Company elects to pay interest or principal on any Interest Payment
Date or Principal Payment Date, as applicable, in shares of Common Stock, the
number of shares of Common Stock to be issued to each Holder as such interest or
principal shall be (i) with respect to interest, determined by dividing the
aggregate amount of interest then payable to such Holder with respect to which
the election applies by the Adjusted Market Price (as defined below) as of the
applicable Interest Payment Date, and rounding up to the nearest whole share
(the "Actual Interest Share Amount") and (ii) with respect to principal
determined by dividing the total principal then payable to such Holder with
respect to which the election applies by the Adjusted Market Price as of the
applicable Principal Payment Date, and rounding up to the nearest whole share
(the "Actual Principal Share Amount"). The term "Adjusted Market Price" shall
mean 80% of the VWAP during the 20 Trading Days immediately preceding such
Interest Payment Date or Principal Payment Date, as the case may be (not
including such date);

In the event that any interest or principal is paid in Common Stock, the Company
shall on the 21st Trading Day preceding such Interest Payment Date or Principal
Payment Date (i) issue and deliver to such Holder a certificate to be applied
against the Common Stock issuable on such Interest Payment Date or Principal
Payment Date, free of restrictive legends, registered in the name of the Holder
or its designee, for the number of shares of Common Stock equal to fifty percent
(50%) of the total amount of interest or principal, as the case may, then
payable to such Holder on such Interest Payment Date or Principal Payment Date,
divided by the Conversion Price (the "Projected Share Amount"), or (ii) at all
times after the Holder has notified the Company that this clause (ii) shall
apply, credit the Projected Share Amount to the Holder's or its designee's
balance account with The Depository Trust Company through its Deposit Withdrawal
Agent Commission System. On the Interest Payment Date or Principal Payment Date,
the Company shall issue additional shares of Common Stock to the extent the
excess of the Actual Interest Share Amount or Actual Principal Share Amount, as
the case may be, exceeds the Projected Share Amount and the Holder shall return
to the Company within 5 business days any excess shares of Common Stock if the
Projected Share Amount exceeds the Actual Interest Share Amount or Actual
Principal Share Amount, as the case may be. Notwithstanding anything to the
contrary in this Section 2, but subject to Section 6(b), until the Company
delivers shares of Common Stock representing the applicable portion of a Monthly
Installment Amount to the Holder, such Monthly Installment Amount may be
converted by the Holder into Common Stock pursuant to Section 6. In the event
that the Holder elects to convert all or any portion of a Monthly Installment
Amount prior to the applicable Principal Payment Date as set forth in the
immediately preceding sentence, the Monthly Installment Amount so converted
shall be deducted from the Monthly Installment Amounts relating to the
applicable Principal Payment Dates as set forth in the applicable Conversion
Notice.

(f) Notwithstanding any provision of this Section 2 to the contrary, the Holder
may, at its option and in its sole discretion, deliver a written notice to the
Company within fifteen (15) Trading Days following the receipt of any Payment
Election Notice electing to have the payment of all or any portion of a Monthly
Installment Amount payable on the next Principal Payment Date or interest
payable on the next Interest Payment Date deferred (such amount deferred, the
"Deferral Amount") up to a date that is two (2) years from the originally
scheduled Principal Payment Date or Interest Payment Date, as applicable. Any
notice delivered by the Holder pursuant to this Section 2(g) shall set forth (i)
the Deferral Amount and (ii) the date that such Deferral Amount shall now be
payable. Any amount deferred to the Maturity Date pursuant to this Section 2(g)
shall continue to accrue interest through the Maturity Date and shall be paid on
such date in cash.

(g) Except as specifically permitted by the Debentures, the Debentures may not
be prepaid in whole or part absent written consent from the Holder.

3. Covenants and Security.

(a) So long as any Debentures are outstanding, the Company hereby covenants to
the Holders that neither the Company nor any Subsidiary shall, directly or
indirectly, issue any Floating Price Security (as defined in Section 11(d)(ii)).

(b) The Company covenants that it will at all times reserve and keep available
out of its authorized but unissued and otherwise unreserved Common Stock, solely
for the purpose of enabling it to issue Underlying Shares as required hereunder,
130% of the number of Underlying Shares which are then issuable and deliverable
upon the conversion of (and otherwise in respect of) this entire Debenture
(taking into account any adjustments that were required to be made pursuant to
Section 11 and disregarding any limitations set forth in Section 6(b)), free
from preemptive rights or any other contingent purchase rights of Persons other
than the Holder. The Company covenants to Holder that all Underlying Shares so
issuable and deliverable shall, upon issuance in accordance with the terms
hereof, be duly and validly authorized and issued and fully paid and
nonassessable.

(c) The Company herby repeats and makes all covenants which the Company makes in
the Purchase Agreement, all of which are hereby incorporated into this
Debenture.

(d) This Debenture will be secured by a security interest in the Collateral as
described and defined in the Security Agreement.

4. Registration of Debentures. The Company shall register the Debentures upon
records to be maintained by the Company for that purpose (the "Debenture
Register") in the name of each record holder thereof from time to time. The
Company may deem and treat the registered Holder of this Debenture as the
absolute owner hereof for the purpose of any conversion hereof or any payment of
interest or principal hereon, and for all other purposes, absent actual notice
to the contrary.

5. Registration of Transfers and Exchanges. The Company shall register the
transfer of any portion of this Debenture in the Debenture Register upon
surrender of this Debenture to the Company at its address for notice set forth
herein. Upon any such registration or transfer, a new Debenture, in
substantially the form of this Debenture (any such new Debenture, a "New
Debenture"), evidencing the portion of this Debenture so transferred shall be
issued to the transferee and a New Debenture evidencing the remaining portion of
this Debenture not so transferred, if any, shall be issued to the transferring
Holder. The acceptance of the New Debenture by the transferee thereof shall be
deemed the acceptance by such transferee of all of the rights and obligations of
a holder of a Debenture. 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 or other fee
will be imposed in connection with any such registration of transfer or
exchange.

6. Conversion.

(a) At the Option of the Holder. All or any portion of this Debenture shall be
convertible into shares of Common Stock (subject to the limitations set forth in
Section 6(b)), at the option of the Holder, at any time and from time to time
from and after the Original Issue Date. The number of Underlying Shares issuable
upon any conversion hereunder shall equal the outstanding principal amount of
this Debenture to be converted, plus the amount of any accrued but unpaid
interest on this Debenture to be converted through the Conversion Date, divided
by the Conversion Price on the Conversion Date. The Holder shall effect
conversions under this Section 6(a) by delivering to the Company a Conversion
Notice together with a schedule in the form of Schedule 2 attached hereto (the
"Conversion Schedule"). In the event of a partial conversion of this Debenture
pursuant hereto, the principal amount converted shall be deducted from the
Monthly Installment Amounts relating to the Principal Payment Dates as set forth
in the Conversion Notice. If the Holder is converting less than all of the
principal amount of this Debenture, or if a conversion hereunder may not be
effected in full due to the application of Section 6(b), the Company shall honor
such conversion to the extent permissible hereunder and shall promptly deliver
to the Holder a Conversion Schedule indicating the principal amount (and accrued
interest) which has not been converted.

(b) Certain Conversion Restrictions Relating to the Number of Shares.

(i) Subject to Section 6(b)(ii), the number of shares of Common Stock that may
be acquired by a Holder upon any conversion of Debentures (or otherwise in
respect hereof) shall be limited to the extent necessary to ensure that,
following such conversion (or other issuance), the total number of shares of
Common Stock then beneficially owned by such Holder and its Affiliates and any
other Persons whose beneficial ownership of Common Stock would be aggregated
with such Holder's for purposes of Section 13(d) of the Exchange Act, does not
exceed 4.999% (the "Threshold Percentage") or 9.999% (the "Maximum Percentage")
of the total number of issued and outstanding shares of Common Stock (including
for such purpose the shares of Common Stock issuable upon such conversion). For
such purposes, beneficial ownership shall be determined in accordance with
Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder. Each delivery of a Conversion Notice hereunder will constitute a
representation by the applicable Holder that it has evaluated the limitations
set forth in this Section 6(b)(i) and has determined that issuance of the full
number of Underlying Shares issuable in respect of such Conversion Notice does
not violate the restrictions contained in this Section 6(b)(i).

(ii) Notwithstanding the provisions of Section 6(b)(i), by written notice to the
Company, the Holder shall have the right (x) at any time and from time to time
to reduce its Maximum Percentage immediately upon notice to the Company in the
event and only to the extent that Section 16 of the Exchange Act or the rules
promulgated thereunder (or any successor statute or rules) is changed to reduce
the beneficial ownership percentage threshold thereunder to a percentage less
than 9.999% and (y) at any time and from time to time, to waive the provisions
of this Section insofar as they relate to the Threshold Percentage or to
increase its Threshold Percentage (but not in excess of the Maximum Percentage)
unless the Holder shall have, by written instrument delivered to the Company,
irrevocably waived its rights to so increase its Threshold Percentage, but (A)
any such waiver or increase will not be effective until the 61st day after such
notice is delivered to the Company, and (B) any such waiver or increase or
decrease will apply only to the Holder and not to any other holder of
Debentures.

(iii)

If the Company has not previously obtained the Company Shareholder Approval,
then the Company may not issue shares of Common Stock in excess of the Issuable
Maximum upon conversions of Debentures or exercises of Warrants of, or other
issuances of Common Stock under, the Debentures and the Warrants. "Issuable
Maximum" means a number of shares equal to 19.99% of the Company's outstanding
shares on the First Closing Date. Each Holder (or such Holder's successor in
interest) shall be entitled to a portion of the Issuable Maximum (and any
amounts to be paid in excess thereof) equal to the quotient obtained by
dividing: (x) the Original Principal Amount of Debentures issued and sold to
such Holder on the Original Issue Date by (y) the aggregate original principal
amount of Debentures issued and sold by the Company on the Original Issue Date.
If any Holder (or such Holder's successor interest) shall no longer hold
Debentures or Warrants, then such Holder's remaining portion of the Issuable
Maximum (and any amounts to be paid in excess thereof) shall be allocated
pro-rata among the remaining Holders. If on any Conversion Date: (A) the sum of
(I) the aggregate number of shares of Common Stock that would then be issuable
upon conversion or exercise, as the case may be, in full of (i) all then
outstanding principal amount of (and accrued interest on) the Debentures and
(ii) the Warrants and (II) all shares of Common Stock previously issued pursuant
to any of the Debentures and Warrants, would exceed the Issuable Maximum, and
(B) the Company shall not have previously obtained the Company Shareholder
Approval, then, (with respect to such conversion) the Company shall issue to the
converting Holder a number of shares of Common Stock equal to the lesser of the
(i) number of shares of Common Stock to be issued pursuant to the Conversion
Notice and (ii) such Holder's pro-rata portion (which shall be calculated
pursuant to the terms hereof) of the Issuable Maximum less all Underlying Shares
previously issued under the Debentures and the Warrants to such Holder. The
Company and the Holder understand and agree that shares of Common Stock issued
to and then held by the Holder as a result of conversions of Debentures shall
not be entitled to cast votes on any resolution to obtain Company Shareholder
Approval pursuant hereto. It is acknowledged and agreed that this Section
6(b)(iii) is meant to work in conjunction with Section 11(b) under the Warrants
so that in no instance are Underlying Shares issued so that the aggregate amount
of Common Stock issued hereunder and thereunder exceeds the Issuable Maximum
unless the Company has obtained the Company Shareholder Approval.

7. Mechanics of Conversion.

(a) Upon conversion of this Debenture, the Company shall promptly (but in no
event later than three Trading Days after the Conversion Date) issue or cause to
be issued and cause to be delivered to or upon the written order of the Holder
and in such name or names as the Holder may designate a certificate or if the
Company's transfer agent is participating in the Depository Trust Company
("DTC") Fast Automated Securities Transfer Program effect the electronic
transfer to the DTC account of such Holder or such Holder's nominee through the
DTC's Deposit Withdrawal Agent Commission system for the Underlying Shares
issuable upon such conversion, free of restrictive legends other than those
required in the Purchase Agreement. The Holder, or any Person so designated by
the Holder to receive Underlying Shares, shall be deemed to have become holder
of record of such Underlying Shares as of the Conversion Date. The Company may,
and upon request of the Holder shall use its reasonable best efforts to, deliver
Underlying Shares hereunder electronically through the Depository Trust
Corporation or another established clearing corporation performing similar
functions.

(b) Execution and delivery of the Conversion Notice shall have the same effect
as cancellation of the original Debenture and issuance of a New Debenture
representing the remaining outstanding principal amount. Upon surrender of this
Debenture following one or more partial conversions, the Company shall promptly
deliver to the Holder a New Debenture representing the remaining outstanding
principal amount.

(c) The Company's obligations to issue and deliver Underlying 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 set-off, 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 Underlying Shares.

(d) If by the third Trading Day after a Conversion Date the Company fails to
deliver to the Holder such Underlying Shares in such amounts and in the manner
required pursuant to Section 7(a), then the Holder will have the right to
rescind such conversion.

(e) If by the third Trading Day after a Conversion Date the Company fails to
deliver to the Holder such Underlying Shares in such amounts and in the manner
required pursuant to Section 7(a), and if after such third Trading Day the
Holder purchases (in an open market transaction or otherwise) shares of Common
Stock to deliver in satisfaction of a sale by such Holder of the Underlying
Shares which the Holder anticipated receiving upon such conversion (a "Buy-In"),
then the Company shall either (i) pay cash to such Purchaser in an amount equal
to such Purchaser's total purchase price (including brokerage commissions and
other out of pocket expenses, if any) for the shares of Common Stock so
purchased (the "Buy-In Price"), at which point the Company's obligation to
deliver such certificate (and to issue such Common Stock) shall terminate, or
(ii) promptly honor its obligation to deliver to such Purchaser a certificate or
certificates representing such Common Stock (or deliver such Common Stock to the
Holder's account) and pay cash to such Purchaser in an amount equal to the
excess (if any) of the Buy-In Price over the product of (A) such number of
shares of Common Stock, times (B) the Closing Price on the date of the event
giving rise to the Company's obligation to deliver such Underlying Shares.

8. Prepayment, Forced Conversion and Forced Prepayment.

(a) So long as the Equity Conditions have been satisfied as of the date of
delivery of the Company Prepayment Notice and as of the Company Prepayment Date,
20 Trading Days after effective delivery of an irrevocable written notice to the
Holder (a "Company Prepayment Notice" and the date such notice is effectively
delivered to the Holder, the "Company Notice Date"), the Company shall be
required to prepay (a "Company Prepayment") all, or, such portion as set forth
in the Company Prepayment Notice, of the outstanding principal amount of this
Debenture plus any accrued and unpaid interest under this Debenture (the
"Prepayment Amount") for an amount in cash equal to the Company Prepayment Price
and the Series E Warrants shall become exercisable, as of the Company Prepayment
Date, for such number of shares of Common Stock as would have been issuable upon
the conversion of such Prepayment Amount that is prepaid. The Holder may at any
time prior to the Company Prepayment Date convert all or any portion of the
outstanding principal amount of this Debenture and any accrued and unpaid
interest under this Debenture subject to a Company Prepayment Notice. Once
delivered, the Company shall not be entitled to rescind a Company Prepayment
Notice and the Company Prepayment Notice shall be irrevocable. For the avoidance
of doubt, said conversion shall be deemed effective upon delivery of a
Conversion Notice in accordance with Section 6 hereof.

(b) The Company Prepayment Price shall be due on the 20th Trading Day
immediately following the Company Notice Date (the "Company Prepayment Date").
Any such prepayment shall be free of any claim of subordination. If any portion
of the Company Prepayment Price shall not be timely paid by the Company,
interest shall accrue thereon at the Default Rate until the Company Prepayment
Price plus all such interest is paid in full, which payment shall constitute
liquidated damages and not a penalty. In addition, if any portion of the Company
Prepayment Price remains unpaid after such date, the Holder subject to such
prepayment may elect by written notice to the Company to invalidate ab initio
such Company Prepayment Notice with respect to the unpaid amount,
notwithstanding anything herein or in any document and no default interest shall
be owed to the Holder in respect thereof. If the Holder makes such an election,
the principal amount of this Debenture, together with the accrued and unpaid
interest thereon shall be reinstated with respect to such unpaid amount and the
Company shall no longer have any prepayment rights under this Section 8.

(c) 20 Trading Days after effective delivery of an irrevocable written notice to
the Holder (a "Forced Conversion Notice" and the date such notice is delivered
by the Company, the "Forced Conversion Notice Date"), the Company may force the
Holder to convert all, or such portion as set forth in the Forced Conversion
Notice, of the outstanding principal balance of the Debenture plus any accrued
and unpaid interest under this Debenture at the then effective Conversion Price.
Assuming all of the conditions set forth in Section 8(d) are satisfied, this
Debenture, or the portion hereof, required to be converted pursuant to the terms
of a Forced Conversion Notice, shall automatically convert and the Company shall
deliver to the Holder the Underlying Shares on the 20th Trading Day following
the Forced Conversion Notice Date (the "Forced Conversion Date").
Notwithstanding anything in this Debenture or any document, the Company shall
only be entitled to deliver a Forced Conversion Notice pursuant to the terms
hereof and force conversion of all or any portion of the outstanding principal
amount of this Debenture or any interest under this Debenture if (i) the Equity
Conditions are satisfied with respect to all shares of Common Stock issuable
pursuant to the Debentures or Warrants or any other Convertible Securities,
pursuant to the Transaction Documents on the Forced Conversion Notice Date and
(ii) the VWAP of the Common Stock for each of the twenty consecutive Trading
Days immediately preceding the Forced Conversion Notice Date is greater than or
equal to 200% of the Conversion Price (the "Price Condition"). If any of the
Equity Conditions or the Price Condition shall cease to be in effect or
satisfied with respect to shares of Common Stock issuable during the period
between the Forced Conversion Notice Date and the Forced Conversion Date, then
the Holder subject to such forced conversion may elect, by written notice to the
Company given at any time after any of the Equity Conditions and/or the Price
Condition shall cease to be in effect or satisfied, to invalidate ab initio such
forced conversion, notwithstanding anything herein contained to the contrary.

(d) Notwithstanding anything to the contrary herein, the Company may not elect a
prepayment or forced conversion pursuant to Section 8 unless the Company, makes
such prepayment or forced conversion election to all of the Holders on a pro
rata basis, based on such Holders then outstanding principal amount of
Debentures.

(e) On the last day of each fiscal quarter, commencing with the fiscal quarter
ending June 30, 2007, the Company shall:

(i) have a Trailing Twelve Month Revenue of at least $23.5 million with respect
to fiscal quarters in 2007 and at least $25 million thereafter (the "Trailing
Twelve Months Revenue Test"). "Trailing Twelve Months Revenue" means the
aggregate of all revenue generated by the Company and its Subsidiaries on a
consolidated basis during the four completed fiscal quarters preceding the date
of calculation from all sources, as determined in accordance with generally
accepted accounting principles in the United States, consistently applied in
accordance with the Company's customary practices in effect as of the date of
this Agreement ("GAAP").

(ii) have Secured Debt Coverage Ratio of no less than 1. "Secured Debt Coverage
Ratio" shall be defined as the quotient obtained by dividing (i) the sum of (a)
cash and cash equivalents, (b) accounts receivable (excluding any accounts
receivable outstanding for more than 90 days), and (c) inventory by (ii) the
outstanding principal of Debentures, in each case determined in accordance with
GAAP.

In the event of a breach of either of the covenants set forth above, Holder, at
its option, may on 5 business day's notice require the Company to prepay all,
or, such portion of the outstanding principal amount of this Debenture, plus any
accrued and unpaid interest at an amount equal to the Company Prepayment Price.

(f) The Company shall publicly announce (the date of such announcement, the
"Announcement Date") its operating results (the "Operating Results"), as part of
an Annual Report on Form 10-K, a Quarterly Report on Form 10-Q, on a Current
Report on Form 8-K,or otherwise, from which compliance with the Trailing Twelve
Months Revenue Test and the Secured Debt Coverage Ratio can be determined for
each fiscal quarter no later than the forty-fifth (45th) day after the end of
each fiscal quarter or, with respect to the last fiscal quarter of any fiscal
year, the ninetieth (90th) day after such quarter (each such date, the
"Announcement Date Deadline") and, such announcement shall include a statement
to the effect that either (i) the Company has satisfied the Trailing Twelve
Months Revenue Test and the Secured Debt Coverage Ratio for such fiscal quarter
or (ii) failed to satisfy either the Trailing Twelve Months Revenue Test or the
Secured Debt Coverage Ratio for such fiscal quarter (any such failure, a
"Financial Covenant Failure"). In the event of a Financial Covenant Failure, the
Company shall also publicly disclose on the Announcement Date the fact that the
holders of Debentures have a right to require prepayment of all or any portion
of the Debentures. On each Announcement Date, the Company shall also provide to
the holders of Debentures a certification, executed on behalf of the Company by
the Chief Financial Officer of the Company, certifying whether or not the
Company has satisfied the Trailing Twelve Months Revenue Test and the Secured
Debt Coverage Ratio for such Fiscal Quarter and, if the Company has failed to
satisfy the Trailing Twelve Months Revenue Test or the Secured Debt Coverage
Ratio.

9. Events of Default.

(a) "Event of Default" 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 principal, interest or liquidated damages or
any other sums in respect of any Debentures, as and when the same becomes due
and payable (whether on a date specified for the payment of principal or
interest or liquidated damages or any other sums or the date on which the
obligations under any Debentures mature or by acceleration, redemption,
prepayment or otherwise);

(ii) the Company or any Subsidiary defaults, violates or breaches in or in
respect of any of its obligations, agreements, covenants, representations and
warranties or provisions under any other note 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 or any Subsidiary in an amount exceeding
$100,000, whether such indebtedness now exists or is hereafter created;

(iii) the occurrence of a Triggering Event; or

(iv) the occurrence of a Bankruptcy Event.

(b) At any time or times following the occurrence of an Event of Default, the
Holder shall have the option to elect, by notice to the Company (an "Event
Notice"), to require the Company to repurchase in cash in immediately available
funds all or any portion of (i) the outstanding principal amount of this
Debenture, at a repurchase price equal to 115% of such outstanding principal
amount, plus all accrued but unpaid interest thereon through the date of
payment. The aggregate amount payable pursuant to the preceding sentence is
referred to as the "Event Price." The Company shall pay the Event Price to the
Holder no later than the third Trading Day following the date of delivery of the
Event Notice, and upon receipt thereof the Holder shall deliver this Debenture
and certificates evidencing any Underlying Shares so repurchased to the Company
(to the extent such certificates have been delivered to the Holder).

(c) Upon the occurrence of any Bankruptcy Event, all amounts pursuant to
Section 9(b) shall immediately become due and payable in full in cash, without
any further action by the Holder.

(d) In connection with any Event of Default, 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 the Transaction Documents and/or applicable law. Any such
declaration may be rescinded and annulled by the Holder at any time prior to
payment hereunder. No such rescission or annulment shall affect any subsequent
Event of Default or impair any right consequent thereto.

10. Charges, Taxes and Expenses. Issuance of certificates for Underlying Shares
upon conversion of (or otherwise in respect of other shares of Common Stock
issuable pursuant to Section 2 of this Debenture) this Debenture shall be made
without charge to the Holder for any issue or transfer tax, withholding tax,
transfer agent fee or other incidental tax or expense in respect of the issuance
of such certificate, all of which taxes and expenses shall be paid by the
Company; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the registration
of any certificates for Underlying Shares or other shares of Common Stock
issuable pursuant to Section 2 of this Debenture or Debentures in a name other
than that of the Holder. The Holder shall be responsible for all other tax
liability that may arise as a result of holding or transferring this Debenture
or receiving Underlying Shares in respect hereof.

11. Certain Adjustments. The Conversion Price is subject to adjustment from time
to time as set forth in this Section 11.

(a) Stock Dividends and Splits. If the Company, at any time while this Debenture
is outstanding, (i) pays a stock dividend on its Common Stock or otherwise makes
a distribution on any class of capital stock that is payable in shares of Common
Stock, (ii) subdivides outstanding shares of Common Stock into a larger number
of shares, (iii) combines outstanding shares of Common Stock into a smaller
number of shares, or (iv) issues by reclassification of shares of Common Stock
any shares of capital stock of the Company, then in each such case the
Conversion Price shall be multiplied by a fraction of which the numerator shall
be the number of shares of Common Stock outstanding immediately before such
event and of which the denominator shall be the number of shares of Common Stock
outstanding immediately after such event (excluding treasury shares, if any).
Any adjustment made pursuant to clause (i) of this Section 11(a) shall become
effective immediately after the record date for the determination of
shareholders entitled to receive such dividend or distribution, and any
adjustment pursuant to clause (ii) or (iii) of this Section 11(a) shall become
effective immediately after the effective date of such subdivision or
combination.

(b) Pro Rata Distributions. If the Company, at any time while this Debenture is
outstanding, distributes to all holders of Common Stock (i) evidences of its
indebtedness, (ii) any security (other than a distribution of Common Stock
described in Section 11(a)), (iii) rights or warrants to subscribe for or
purchase any security, or (iv) any other asset or cash (in each case,
"Distributed Property"), then, in each such case, the Conversion Price in effect
immediately prior to the record date fixed for determination of shareholders
entitled to receive such distribution shall be reduced effective on such record
date to equal the product of such Conversion Price times a fraction of which the
denominator shall be the VWAP determined as of such record date and of which the
numerator shall be such VWAP less the then fair market value of the Distributed
Property (which in the case of any cash, shall be such cash amount) distributed
in respect of one outstanding share of Common Stock, as determined by the
Company's independent certified public accountants that regularly examine the
financial statements of the Company (an "Appraiser"). In such event, the Holder,
after receipt of the determination by the Appraiser, shall have the right to
select an additional appraiser (which shall be a nationally recognized
accounting firm), in which case such fair market value shall be deemed to equal
the average of the values determined by each of the Appraiser and such
appraiser. As an alternative to the foregoing adjustment to the Conversion
Price, at the request of the Holder delivered before the 90th day after such
record date, the Company will deliver to such Holder, within five Trading Days
after such request (or, if later, on the effective date of such distribution),
the Distributed Property that such Holder would have been entitled to receive in
respect of the Underlying Shares for which this Debenture could have been
converted immediately prior to such record date. If such Distributed Property is
not delivered to a Holder pursuant to the preceding sentence, then upon any
conversion of the Debenture that occurs after such record date, such Holder
shall remain entitled to receive, in addition to the Underlying Shares otherwise
issuable upon such exercise (if applicable), such Distributed Property.

(c) Fundamental Changes. If, at any time while this Debenture is outstanding,
the Company shall, directly or indirectly, in one or more related transactions
(i) effect any merger or consolidation of the Company with or into another
Person, in which the shareholders of the Company prior to the effective date of
such transaction own less than 66 2/3% of the issued and outstanding voting
rights or equity interests in the surviving corporation following the effective
date of such transaction, (ii) effect any sale of 30% or more of its assets in
one or more transactions, (iii) engage in 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, (iv) effect any reorganization,
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 (other than as a result of a subdivision or
combination of shares of Common Stock covered by Section 11(a)) above, (v)
engage in an acquisition after the date hereof by an individual or legal entity
or "group" (as described in Rule 13d-5(b)(1) under the Exchange Act) of more
than one-third of the voting rights or equity interests in the Company, (vi)
replace of more than one-half of the members of the Company's board of directors
that is not approved by those individuals who are members of the board of
directors on the date hereof (or other directors previously approved by such
individuals); (vii) engage in a recapitalization, reorganization or other
transaction involving the Company or any Subsidiary that constitutes or results
in a transfer of more than one-half of the voting rights or equity interests in
the Company; (viii) consummate of a "Rule 13e-3 transaction" as defined in Rule
13e-3 under the Exchange Act with respect to the Company, or (ix) the execute by
(or its controlling shareholders execute) an agreement providing for or
reasonably likely to result in any of the foregoing events (in any such case, a
"Fundamental Change"), then upon any subsequent conversion of this Debenture,
the Holder shall have the right to receive at the option of the Holder, (a) for
each Underlying Share that would have been issuable upon such conversion absent
such Fundamental Change, the same kind and amount of securities, cash or
property as it would have been entitled to receive upon the occurrence of such
Fundamental Change if it had been, immediately prior to such Fundamental Change,
the holder of one share of Common Stock (the "Alternate Consideration") or (b)
cash within five Trading Days after such election (or, if later, on the
effective date of the Fundamental Change), equal to the greater of (A) the Black
Scholes value of the remaining unconverted portion of this Debenture on the date
of such election and (B) 120% of the unpaid principal balance and accrued
interest on this Debenture. 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 one share of Common Stock in such Fundamental Change, 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 Change, 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 Change. In the event of and as a condition to a
Fundamental Change, the Company or the successor or purchasing Person, as the
case may be, shall execute with the Holder a written agreement in form and
substance satisfactory to the Holder providing that:

(x) this Debenture shall thereafter entitle the Holder to purchase the Alternate
Consideration,

(y) in the case of any such successor or purchasing Person, upon such
consolidation, merger, statutory exchange, combination, sale or conveyance such
successor or purchasing Person shall be jointly and severally liable with the
Company for the performance of all of the Company's obligations under this
Debenture and the Purchase Agreement, and

(z) if registration or qualification is required under the Exchange Act or
applicable state law for the public resale by the Holder of shares of stock and
other securities so issuable upon conversion of this Debenture, such
registration or qualification shall be completed prior to such reclassification,
change, consolidation, merger, statutory exchange, combination or sale.

If, in the case of any Fundamental Change, the Alternate Consideration includes
shares of stock, other securities, other property or assets of a Person other
than the Company or any such successor or purchasing Person, as the case may be,
in such Fundamental Change, then such written agreement shall also be executed
by such other Person and shall contain such additional provisions to protect the
interests of the Holder as the Board of Directors of the Company shall
reasonably consider necessary by reason of the foregoing. At the Holder's
request, any successor to the Company or surviving Person in such Fundamental
Change 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 Change is effected shall include terms requiring any such successor
or surviving Person to comply with the provisions of this Section 11(c) and
ensuring that this Debenture (or any such replacement security) will be
similarly adjusted upon any subsequent transaction analogous to a Fundamental
Change.

(d) Subsequent Equity Sales.

(i) If, at any time while this Debenture is outstanding, the Company or any
Subsidiary issues additional shares of Common Stock or rights, warrants, options
or other securities or debt convertible, exercisable or exchangeable for shares
of Common Stock or otherwise entitling any Person to acquire shares of Common
Stock (collectively, "Common Stock Equivalents") at a price per share of Common
Stock (the "Effective Price") less than the Conversion Price (as adjusted
hereunder to such date), then the Conversion Price shall be reduced to equal the
Effective Price. If, at any time while this Debenture is outstanding, the
Company or any Subsidiary issues Common Stock or Common Stock Equivalents at an
Effective Price greater than the Conversion Price (as adjusted hereunder to such
date) but less than the average Closing Price over the five Trading Days prior
to such issuance (the "Adjustment Price"), then the Conversion Price shall be
reduced to equal the product of (A) the Conversion Price in effect immediately
prior to such issuance of Common Stock or Common Stock Equivalents times (B) a
fraction, the numerator of which is the sum of (1) the number of shares of
Common Stock outstanding immediately prior to such issuance, plus (2) the number
of shares of Common Stock which the aggregate Effective Price of the Common
Stock issued (or deemed to be issued) would purchase at the Adjustment Price,
and the denominator of which is the aggregate number of shares of Common Stock
outstanding or deemed to be outstanding immediately after such issuance. For
purposes of this paragraph, in connection with any issuance of any Common Stock
Equivalents, (A) the maximum number of shares of Common Stock potentially
issuable at any time upon conversion, exercise or exchange of such Common Stock
Equivalents (the "Deemed Number") shall be deemed to be outstanding upon
issuance of such Common Stock Equivalents, (B) the Effective Price applicable to
such Common Stock shall equal the minimum dollar value of consideration payable
to the Company to purchase such Common Stock Equivalents and to convert,
exercise or exchange them into Common Stock, divided by the Deemed Number, and
(C) no further adjustment shall be made to the Conversion Price upon the actual
issuance of Common Stock upon conversion, exercise or exchange of such Common
Stock Equivalents.

(ii) If, at any time while this Debenture is outstanding, the Company or any
Subsidiary issues Common Stock Equivalents with an Effective Price or a number
of underlying shares that floats or resets or otherwise varies or is subject to
adjustment based (directly or indirectly) on market prices of the Common Stock
(a "Floating Price Security"), then for purposes of applying the preceding
paragraph in connection with any subsequent conversion, the Effective Price will
be determined separately on each Conversion Date and will be deemed to equal the
lowest Effective Price at which any holder of such Floating Price Security is
entitled to acquire Common Stock on such Conversion Date (regardless of whether
any such holder actually acquires any shares on such date).

(iii) Notwithstanding the foregoing, no adjustment will be made under the
paragraph (d) in respect of any Excluded Stock.

(iv) Unless and until such time as the Company receives the Company Shareholder
Approval, no adjustment pursuant to Section 11(d) shall cause the Conversion
Price to be less than $2.75, as adjusted for any stock dividend, stock split,
stock combination, reclassification or similar transaction.

(e) Calculations. All calculations under this Section 11 shall be rounded up to
the nearest cent or the nearest share, as applicable. The number of shares of
Common Stock outstanding at any given time shall not include shares owned or
held by or for the account of the Company, and the disposition of any such
shares shall be considered an issue or sale of Common Stock.

(f) Notice of Adjustments. Upon the occurrence of each adjustment pursuant to
this Section 11, the Company at its expense will promptly compute such
adjustment in accordance with the terms hereof and prepare and deliver to the
Holder a certificate describing in reasonable detail such adjustment and the
transactions giving rise thereto, including all facts upon which such adjustment
is based.

(g) Notice of Corporate Events. If the Company (i) declares a dividend or any
other distribution of cash, securities or other property in respect of its
Common Stock, including without limitation any granting of rights or warrants to
subscribe for or purchase any capital stock of the Company or any Subsidiary,
(ii) authorizes or approves, enters into any agreement contemplating or solicits
shareholder approval for any Fundamental Change or (iii) authorizes the
voluntary dissolution, liquidation or winding up of the affairs of the Company,
then the Company shall deliver to the Holder a notice describing the material
terms and conditions of such transaction, at least 20 calendar days prior to the
applicable record or effective date on which a Person would need to hold Common
Stock in order to participate in or vote with respect to such transaction, and
the Company will take all steps reasonably necessary in order to insure that the
Holder is given the practical opportunity to convert this Debenture prior to
such time so as to participate in or vote with respect to such transaction.

(h) Other Events. If any event occurs of the type contemplated by the provisions
of this Section 11 but not expressly provided for by such provisions (including,
without limitation, the granting of stock appreciation rights, phantom stock
rights or other rights with equity features), then the Company's board of
directors will make an appropriate adjustment in the Conversion Price and the
number of shares of Common Stock issued upon conversion so as to protect the
rights of the Holder.

12. No Fractional Shares. The Company shall not issue or cause to be issued
fractional Underlying Shares on conversion of this Debenture. If any fraction of
an Underlying Share would, except for the provisions of this Section 12, be
issuable upon conversion of this Debenture, the number of Underlying Shares to
be issued will be rounded up to the nearest whole share.

13. Notices. Any and all notices or other communications or deliveries hereunder
(including any Conversion Notice) shall be in writing and 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 in
this Section 13 prior to 6:30 p.m. (New York City time) on a Trading Day, (ii)
the next Trading Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified in
this Section 13 on a day that is not a Trading Day or later than 6:30 p.m. (New
York City time) on any Trading Day, (iii) the Trading 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.
The addresses for such communications shall be: (i) if to the Company, to
Carrington Laboratories, Inc., 2001 Walnut Hill Lane, Irving, TX 75038,
facsimile: (972) 518-1020, attention: Robert Schnitzius, or (ii) if to the
Holder, to the address or facsimile number appearing on the Company's Debenture
holder's records or such other address or facsimile number as the Holder may
provide to the Company in accordance with this Section 13.

14. Disclosure. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Debenture, unless the Company has in good
faith determined that the matters relating to such notice do not constitute
material, nonpublic information relating to the Company or its Subsidiaries, the
Company shall within one (1) Business Day after any such receipt or delivery
publicly disclose such material, nonpublic information on a Current Report on
Form 8-K or otherwise. In the event that the Company believes that a notice
contains material, nonpublic information relating to the Company or its
Subsidiaries, the Company so shall indicate to such Holder contemporaneously
with delivery of such notice, and in the absence of any such indication, the
Holder shall be allowed to presume that all matters relating to such notice do
not constitute material, nonpublic information relating to the Company or its
Subsidiaries.

15. Miscellaneous.

(a) This Debenture shall be binding on Company and inure to the benefit of the
Holder and their respective successors and permitted assigns. The Company shall
not be permitted to assign this Debenture. This Debenture is freely assignable
by Holder without the need for obtaining any consent.

(b) Subject to Section 15(a), nothing in this Debenture shall be construed to
give to any person or corporation other than the Company and the Holder any
legal or equitable right, remedy or cause under this Debenture.

(c) Governing Law; Venue; Waiver Of Jury Trial. 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 hereby irrevocably submits to the exclusive jurisdiction of
the state and federal courts sitting in the city of new york, borough of
manhattan, 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, that such suit, action or proceeding is improper. 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
agreement 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 hereby waives all rights to a trial by jury.

(d) The headings 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.

(e) In case any one or more of the provisions of this Debenture shall be invalid
or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Debenture shall not in any way be
affected or impaired thereby and the parties will attempt in good faith to agree
upon a valid and enforceable provision which shall provide Holder with the
maximum protection possible, as a substitute therefor, and upon so agreeing,
shall incorporate such substitute provision in this Debenture.

(f) In the event of any stock split, subdivision, dividend or distribution
payable in shares of Common Stock (or other securities or rights convertible
into, or entitling the holder thereof to receive directly or indirectly shares
of Common Stock), combination or other similar recapitalization or event
occurring after the date hereof, each reference in this Debenture to a price
shall be amended to appropriately account for such event.

(g) No provision of this Debenture may be waived or amended except in a written
instrument signed, in the case of an amendment, by the Company and the Required
Holders or, or, in the case of a waiver, by such Required Holders. No
consideration shall be offered or paid to any holder of Debentures to amend or
consent to a waiver or modification of the Debentures unless the same
consideration also is offered to all of the holders of Debentures. No waiver of
any default with respect to any provision, condition or requirement of this
Debenture shall be deemed to be a continuing waiver in the future or a waiver of
any subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right. This
Debenture, together with the Transaction Documents, constitutes the agreement
between the Company and the Holder relating to the subject matter of such
documents.

(h) No remedy conferred in this Debenture and/or any Transaction Documents upon
Holder is intended to be exclusive of any other remedy, and each and every such
remedy shall be cumulative and shall be in addition to every other remedy
conferred herein and/or in the Transaction Documents or now or hereinafter
existing at law or in equity or by statute or otherwise. Nothing contained in
this Debenture shall be construed to extend any payment date or the Maturity
Date or require any notice for payment on the Maturity Date or any other payment
date.

(i) The Company acknowledges that this Debenture and the Company's obligations
under this Debenture are, and shall at all times continue to be, absolute and
unconditional in all respects, and shall at all times be valid and enforceable.
To the extent permitted by applicable law, the Company hereby absolutely,
unconditionally and irrevocably forever waives any and all right to assert any
defense, set off, offset, counterclaim, crossclaim or claim of any nature
whatsoever with respect to this Debenture or the Company's obligations
hereunder.

(j) The Company shall pay upon demand all of Holder's costs in connection with
the enforcement or collection of this Debenture, whether or not a lawsuit is
brought, including, without limitation, attorneys' fees and costs, as well as
Holder's costs (including, without limitation, attorney's fees and expenses) in
connection with any amendments, modifications or waivers under or with respect
to this Debenture. This includes, without limitation, all attorneys' fees and
costs in connection with any bankruptcy, insolvency or other proceedings.

(k) The Company hereby covenants and agrees that the Company will not, by
amendment of its Certificate of Incorporation, Bylaws or through any
reorganization, transfer of assets, consolidation, merger, scheme of
arrangement, dissolution, issue or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Debenture, and will at all times in good faith carry out all of the
provisions of this Debenture and take all action as may be required to protect
the rights of the Holder of this Debenture.

(l) Upon receipt by the Company of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Debenture, and, in
the case of loss, theft or destruction, of any indemnification undertaking by
the Holder to the Company in customary form and, in the case of mutilation, upon
surrender and cancellation of this Debenture, the Company shall execute and
deliver to the Holder a new Debenture representing the outstanding principal and
accrued obligations.

(m) The remedies provided in this Debenture shall be cumulative and in addition
to all other remedies available under this Debenture and any of the other
Transaction Documents at law or in equity (including a decree of specific
performance and/or other injunctive relief), and nothing herein shall limit the
Holder's right to pursue actual and consequential damages for any failure by the
Company to comply with the terms of this Debenture. Amounts set forth or
provided for herein with respect to payments, conversion and the like (and the
computation thereof) shall be the amounts to be received by the Holder and shall
not, except as expressly provided herein, be subject to any other obligation of
the Company (or the performance thereof). The Company acknowledges that a breach
by it of its obligations hereunder will cause irreparable harm to the Holder and
that the remedy at law for any such breach may be inadequate. The Company
therefore agrees that, in the event of any such breach or threatened breach, the
Holder shall be entitled, in addition to all other available remedies, to seek
an injunction restraining any breach, without the necessity of showing economic
loss and without any bond or other security being required.

 

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.

 

CARRINGTON LABORATORIES, INC.

   

By___________________________

Name:

Title:

[Footnotes exh10.3]

1

For Debentures issued at the Second Closing insert a price equal to lesser of
(i) the VWAP of the Common Stock for the five (5) consecutive Trading Days
ending on the Trading Day immediately preceding the date of the Second Closing
and (ii) the Conversion Price then in effect of the Debentures issued in the
First Closing (subject to a floor of $1.125).

 

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

Schedule 1

FORM OF CONVERSION NOTICE

(To be executed by the registered Holder
in order to convert Debenture)

The undersigned hereby elects to convert the specified principal amount of
Senior Secured Convertible Debentures (the "Debentures") into shares of common
stock, par value $0.01 per share (the "Common Stock"), of Carrington
Laboratories, Inc., a Texas corporation, according to the conditions hereof, as
of the date written below.

 

______________________________________________________________

Date to Effect Conversion

 

______________________________________________________________

Principal amount of Debentures owned prior to Conversion

 

______________________________________________________________

Principal amount of Debentures to be converted
(including accrued but unpaid interest thereon)

 

______________________________________________________________

Number of shares of Common Stock to be Issued

 

______________________________________________________________

Applicable Conversion Price

 

______________________________________________________________

Principal amount of Debentures owned subsequent to Conversion

 

______________________________________________________________

Monthly Installment Amount to be reduced and amount of reduction

 

______________________________________________________________

Name of Holder

 

By__________________________

Name:

Title:

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

 

Schedule 2

CONVERSION SCHEDULE

This Conversion Schedule reflects conversions of the Senior Secured Convertible
Debentures issued by Carrington Laboratories, Inc.

Date of Conversion

Amount of Conversion

Aggregate Principal Amount Remaining Subsequent to Conversion