ICP Solar Technologies, Inc.: Exhibit 4.2 - Prepared by TNT Filings
   Inc.




  




Exhibit 4.2

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE"ACT") OR APPLICABLE
STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
SAID ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE REASONABLY
SATISFACTORY TO COUNSEL TO THE BORROWER THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT. 

Original Issue Date: June 13, 2008 
Initial
Conversion Price (subject to adjustment herein): $0.50 

11% SENIOR SECURED CONVERTIBLE DEBENTURE 
DUE JUNE 13,
2010 

          FOR
VALUE RECEIVED, ICP Solar Technologies, Inc., a Nevada corporation
(hereinafter called the "Borrower" or “Company”), hereby promises
to pay to the order of BridgePointe Master Fund Ltd., a Cayman Islands
Exempted Company or its registered assigns (the "Holder") the sum of One
Million Six Hundred Sixty-Six Thousand Six Hundred Sixty-Seven U.S. Dollars
(U.S. $1,666,667), on June 13, 2010 (the "Maturity Date"), or such
earlier date as this Debenture is required or permitted to be repaid as provided
hereunder, and to pay interest to the Holder on the aggregate unconverted and
then outstanding principal amount of this Debenture in accordance with the
provisions hereof. This Convertible Debenture (including all Convertible
Debentures issued in exchange, transfer or replacement hereof, this
"Debenture") is one of an issue of Convertible Debentures issued pursuant
to the Securities Purchase Agreement (as defined in Section 1 below) on the
Closing Date (collectively, the "Debentures" and such other Convertible
Debentures, the "Other Debentures").

          Except
as otherwise expressly provided herein, including but not limited to Section
7(c) below, this Debenture may not be prepaid by the Borrower. All payments due
hereunder (to the extent not converted into Common Stock, par value
$0.00001 per share, of the Borrower (the "Common Stock") in
accordance with the terms hereof) shall be made in lawful money of the United
States of America provided that, to the extent that any accrued Interest has not
been paid when due, at the option of the Holder, in whole or in part, such
accrued and unpaid Interest may, upon written notice to the Borrower, be added
to the principal amount of this Debenture, in which event Interest shall accrue
thereon in accordance with the terms of this Debenture and such additional
principal amount shall be convertible into Common Stock in accordance with the
terms of this Debenture. All payments shall be made at the address of the Holder
as set forth in the Securities Purchase Agreement (as defined in Section 1
below) or at such address as the Holder shall hereafter give to the Borrower by
written notice made in accordance with the provisions of this Debenture.
Whenever any amount expressed to be due by the terms of this Debenture is due on
any day which is not a Business Day (as defined below), the same shall instead
be due on the next succeeding day which is a Business Day.

1 




          This
Debenture is subject to the following additional provisions: 

          Section
1. Certain Definitions. Capitalized terms used and not
otherwise defined herein that are defined in that certain Securities Purchase
Agreement, of date even herewith, pursuant to which the Debenture was originally
issued (the "Securities Purchase Agreement" or the “Purchase
Agreement”), shall have the meanings given such terms in the Securities
Purchase Agreement. For the purposes hereof, the following terms shall have the
following meanings: 

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

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

          “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 sixty (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 sixty (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.


          The
"Black-Scholes" value of a Warrant or other Option shall be determined by
use of the Black Scholes Option Pricing Model reflecting (A) a risk-free
interest rate corresponding to the U.S. Treasury rate for a period equal to the
remaining term of the Warrant or other Option as of such date of request and (B)
an expected volatility equal to the greater of 100% and the 100 day volatility
obtained from the HVT function on Bloomberg.

          “Bloomberg”
shall mean Bloomberg L.P. 

          "Business
Day" shall mean any day other than a Saturday, Sunday or a day on which
commercial banks in the City of New York, New York are authorized or required by
law or executive order to remain closed.

2 




          “Buyer(s)”
shall have the meaning ascribed to it in the Securities Purchase Agreement. 

          “Closing
Date” means the Trading Day when (i) all of the Holder’s Transaction
Documents have been executed and delivered by the applicable parties thereto,
(ii) all conditions precedent to (a) each Holder’s obligations to pay the
Subscription Amount and (b) the Company’s obligations to deliver the Debentures
and Warrants have been satisfied or waived, and (iii) Holder shall have
delivered the purchase price for the Debenture to the Company in accordance with
the Securities Purchase Agreement. 

          "Closing
Bid Price," as of any date, means the last bid price of the Common Stock on
the Principal Market as reported by Bloomberg or, if the Principal Market is not
the principal trading market for such security, the last bid price of such
security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if no last bid price
of such security is available on the Principal Market for such security or in
any of the foregoing manners, the average of the bid prices of any market makers
for such security that are listed in the "pink sheets" by the National Quotation
Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on
such date in the manner provided above, the Closing Bid Price shall be the fair
market value as mutually determined by the Company and the Holder. 

          "Closing
Price," as of any date, means the last sale price of the Common Stock on the
Principal Market as reported by Bloomberg or, if the Principal Market is not the
principal trading market for such security, the last sale price of such security
on the principal securities exchange or trading market where such security is
listed or traded as reported by Bloomberg, or if no last sale price of such
security is available on a securities exchange or trading market where such
security is listed or traded as reported by Bloomberg or in any of the foregoing
manners, the average of the bid prices of any market makers for such security
that are listed in the "pink sheets" by the National Quotation Bureau, Inc. If
the Closing Price cannot be calculated for such security on such date in the
manner provided above, the Closing Price shall be the fair market value as
mutually determined by the Company and the Holder. 

          “Commission”
means the Securities and Exchange Commission. 

          “Common
Stock Equivalents” shall have the meaning ascribed to it in the Securities
Purchase Agreement. 

          "Conversion
Amount" shall have the meaning set forth in Section 3(a)(iv) below. 

          "Convertible
Securities" means any stock or securities (other than Options) directly or
indirectly convertible into or exercisable or exchangeable for Common Stock.


          "Debentures"
shall be deemed to refer to this Debenture, as originally executed, or if later
amended or supplemented, then as so amended or supplemented, all other
convertible debentures issued pursuant to the Securities Purchase Agreement and
all 

3 




convertible debentures issued in replacement hereof or thereof
or otherwise with respect hereto or thereto.

          “Default
Conversion Sum” shall have the meaning set forth in Section 11(a) below.


          “Effective
Date” shall mean the date that the initial Registration Statement that the
Company is required to file pursuant to the Registration Rights Agreement has
been declared effective by the Securities and Exchange Commission. 

          "Eligible
Market" shall have the meaning ascribed to it in the Securities Purchase
Agreement by and between the Company and the Holder. 

          “Equity
Conditions” shall mean, during each Trading Day of the period in question,
(i) the Company shall have duly honored all Conversions which have occurred and
with respect to which Conversion Shares are due and issuable by virtue of one or
more Notices of Conversion, if any, (ii) all Required Cash Payments (as defined
in Section 10(a) below) shall have been paid; (iii) no (A) Events of Default or
(B) event that with the passage of time or giving of notice would constitute an
Event of Default, have occurred that have not been cured, (iv) there is an
effective Registration Statement pursuant to which the Holder is permitted to
utilize the prospectus thereunder to resell all of the Conversion Shares,
Warrant Shares and other shares issued or issuable pursuant to the Transaction
Documents (and the Company believes, in good faith, that such effectiveness will
continue uninterrupted for the foreseeable future) or such shares may be resold,
without restriction, pursuant to Rule 144, (v) the Common Stock is trading on an
Eligible Market and all of the shares issuable pursuant to the Transaction
Documents are listed for trading on an Eligible Market (and the Company
believes, in good faith, that trading of the Common Stock on an Eligible Market
will continue uninterrupted for the foreseeable future), (vi) such issuance
would be permitted in full without violating the Beneficial Ownership Limitation
of Section 3(a)(ii) hereof or the rules or regulations of the Eligible Market on
which such shares are listed or quoted, (vii) 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,
(viii) the Company shall not have been a party to a Major Transaction and there
shall not have occurred the public announcement of a pending, proposed or
intended Major Transaction which has not been abandoned, terminated or
consummated, (ix) the Holder is not in possession of any information provided by
the Company that constitutes, or may constitute, material non-public information
(where for purposes of this Subsection, information shall not be considered to
be material non-public information if the Company provides an opinion from its
securities counsel, at the Company’s expense, which provides that the
information in question does not constitute material, non-public information)
and (x) the average daily dollar trading volume of the Common Stock for such
period shall have exceeded $125,000. 

          “Event
of Default” shall have the meaning set forth in Section 10. 

4 




          “Event
of Failure” shall mean the occurrence of any event(s) which trigger the
accrual of Liquidated Damages. 

          “Exempt
Issuance” shall have the meaning ascribed to it in the Securities Purchase
Agreement. 

          
“Holders” shall mean the Holder, and the holders of Other Debentures issued
pursuant to the Securities Purchase Agreement. 

          "Indebtedness"
shall have the meaning ascribed to it in the Securities Purchase Agreement.

          “Interest”
shall heave the meaning set forth in Section 2 below. 

          “Issuable
Shares” shall heave the meaning set forth in Section 3(a)(iii) below.


          “Late
Payment Fees” shall have the meaning set forth in Section 13 below.


          “Late
Share Delivery Liquidated Damages” shall have the meaning set forth in
Section 3(d)(iv) below. 

          “Legend
Removal Failure Liquidated Damages” shall have the meaning ascribed to it in
the Securities Purchase Agreement. 

          “Liquidated
Damages” means any liquidated damages due hereunder, or under the other
Transaction Documents, including but not limited to the Late Share Delivery
Liquidated Damages, the Legend Removal Failure Liquidated Damages, the Late
Payment Fees and the Registration Failure Liquidated Damages (as defined in the
Registration Rights Agreement). 

          "Market
Price," as of any date, means the Volume Weighted Average Price (as defined
herein) of the Common Stock during the five (5) consecutive Trading Day period
immediately preceding the date in question. 

          “Major
Transaction Redemption Premium” shall mean 125%. 

          “Mandatory
Redemption Premium” shall mean 125%.

          "Maximum
Monthly Share Amount" means 20% of the aggregate dollar trading volume (as
reported by Bloomberg) of the Common Stock on the Principal Market over the
twenty (20) consecutive Trading Day period immediately prior to the applicable
Interest Payment Date or Monthly Redemption Date, as applicable. 

          “Monthly
Share Payment Restriction” shall have the meaning set forth in Section 2
below. 

5 




          “Ongoing
Share Reservation Requirement” shall have the meaning ascribed to it in the
Securities Purchase Agreement. 

          "Options"
means any rights, warrants or options to subscribe for or purchase Common Stock
or Convertible Securities. 

          “Original
Issue Date” shall mean the date of the first issuance of any Debenture
regardless of the number of transfers of any particular Debenture. 

          "Parent
Entity" of a Person means an entity that, directly or indirectly, controls
the applicable Person and whose common stock or equivalent equity security is
quoted or listed on an Eligible Market, or, if there is more than one such
Person or Parent Entity, the Person or Parent Entity with the largest public
market capitalization as of the date of consummation of the Fundamental
Transaction. 

          “Permitted
  Indebtedness” means (a) Indebtedness evidenced by the Debentures or
  issuances to the Holders as contemplated by the Transaction Documents; (b) the
  Indebtedness existing on the Original Issue Date as set forth on Schedule
  3(ff) attached to the Securities Purchase Agreement, provided that the principal
  amount thereof is not increased or the terms thereof are not otherwise amended
  or modified after the Closing Date; (c) Indebtedness to trade creditors incurred
  in the ordinary course of business and (d) indebtedness that (i) is expressly
  junior and subordinated to the Debentures pursuant to a written subordination
  agreement with the Buyers that is acceptable to each Buyer in its sole and absolute
  discretion, and (ii) matures at a date later than the Maturity Date, (iii) has
  no prepayments or amortization payments prior to the maturity of the Debentures,
  and (iv) has a rate of interest no greater than the interest rate of the Debentures.
  For purposes of clarification, it is expressly agreed and understood that the
  classification of Indebtedness as “Permitted Indebtedness” does not
  cause such Indebtedness to be exempted from the Subsequent Issuance Adjustments
  (as defined in Section 6 below and as defined in the Warrants), the prohibition
  against the issuance of Variable Equity Securities (as defined in Section 4(d)(ii)
  of the Securities Purchase Agreement), the Buyer’s Rights of Participation
  (as defined in Section 4(d)(iv) of the Securities Purchase Agreement) or from
  any other provisions of the Transaction Documents, except that Permitted Indebtedness
  does constitute an exception to the Indebtedness Negative Covenant specified
  in Section 9(d) hereof.

          “Permitted
Liens” shall have the meaning ascribed to it in the Securities Purchase
Agreement. 

          "Person"
means an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, any other
entity and a government or any department or agency thereof. 

          “Principal
Market” shall have the meaning ascribed to it in the Securities Purchase
Agreement by and between the Company and the Holder. 

6 




          “Redemption”
shall mean any redemption of the Debenture hereunder, including but not limited
to a Redemption Upon Major Transaction, a Mandatory Redemption, and an Automatic
Redemption. 

          “Redemption
Amount” shall mean any amount that is payable to the Holder pursuant to a
Redemption. 

          “Redemption
Date” shall mean the date of any Redemption of the Debenture hereunder. 

          “Registration
Rights Agreement” shall have the meaning ascribed to it in the Securities
Purchase Agreement. 

          “Registration
Statement(s)” shall have the meaning ascribed to it in the Registration
Rights Agreement. 

          “Required
Cash Payment” shall have the meaning set forth in Section 10(a) below. 

          “Required
Holders” shall mean Holders holding greater than seventy five percent (75%)
of the then outstanding principal amount of Debentures. 

          “Shares”
shall mean the shares of Common Stock issuable upon Conversion of the
Debentures.

          “Subscription
Amount” shall mean, as to each Buyer, the amount to be paid for the
Debenture purchased pursuant to the Securities Purchase Agreement as specified
in Section 10 of the Securities Purchase Agreement, in United States Dollars and
in immediately available funds. 

          “Subsidiaries”
shall have the meaning ascribed to it in the Securities Purchase Agreement. 

          "Trading
Day" shall mean any day on which the Common Sock is traded for any period on
the Principal Market, or on the principal securities exchange or other
securities market on which the Common Stock is then being traded.

          “Transaction
Documents” shall have the meaning ascribed to it in the Securities Purchase
Agreement. 

          “Variable
  Equity Securities” shall have the meaning ascribed to it in the Securities
  Purchase Agreement.

          The
"Volume Weighted Average Price" or “VWAP” for any security as of
any date means the volume weighted average sale price on the Principal Market,
as reported by, or as calculated based upon data reported by, Bloomberg or an
equivalent, reliable 

7 




reporting service mutually acceptable to and hereafter
designated by holders of a majority in interest of the Debentures and the
Company or, if no volume weighted average sale price is reported for such
security, then the last closing trade price of such security as reported by
Bloomberg, or, if no last closing trade price is reported for such security by
Bloomberg, the average of the closing trade prices of any market makers for such
security that are listed in the "pink sheets" by the National Quotation Bureau,
Inc. If the Volume Weighted Average Price is to be determined over a period of
more than one Trading Day, then “Volume Weighted Average Price” for the
period shall mean the volume weighted average of the daily Volume Weighted
Average Prices, determined as set forth above, for each Business Day during the
period. If the volume weighted average price cannot be calculated for such
security on such date in the manner provided above, the volume weighted average
price shall be the fair market value as mutually determined by the Company and
the holders of a majority in interest of the Debentures being converted for
which the calculation of the volume weighted average price is required in order
to determine the Conversion Price of such Debentures.

          “Warrant”
shall have the meaning ascribed to it in the Securities Purchase Agreement. 

          “Warrant
Shares” shall have the meaning ascribed to it in the Securities Purchase
Agreement. 

          Section
2.      Interest. The Company
shall pay interest (“Interest”) to the Holder on the aggregate
unconverted and then outstanding principal amount of this Debenture at the rate
of eleven percent (11%) per annum (the “Interest Rate”) from the Original
Issue Date (as defined herein) until the same becomes due and payable, whether
at maturity or upon acceleration or otherwise. Interest shall commence accruing
on the Original Issue Date, shall be computed on the basis of a 365-day year and
the actual number of days elapsed and shall be payable monthly (as further
described below), in cash or, to the extent not yet paid, at maturity or upon
acceleration in accordance with the terms hereof. Payments of Interest shall be
due and payable monthly, in arrears, on the first Business Day of each month
after the Original Issue Date, (in each case, if not a Business Day, then on the
next Business Day) occurring after the Original Issue Date, (ii) on each
Conversion Date (as defined in Section 3(d))(as to that principal amount then
being converted), (iii) on each Redemption Date, and (iv) on the Maturity Date
(as defined above) (each such date, an “Interest Payment Date”). Upon
five (5) Trading Days advance written notice to the Holder, provided that the
Equity Conditions (as defined in Section 1 above) have been met on each of the
twenty (20) Trading Days immediately preceding the date of payment of Interest
Payment Shares (as defined below) and provided that Interest is paid timely, the
Company may pay the Interest payable on this Debenture with registered,
free-trading shares of Common Stock (as defined below)(“Interest Payment
Shares”) with an attributed value per share equal to the Interest Share
Conversion Price as calculated on the Interest Payment Date that such Interest
is due to be paid hereunder (the “Interest Conversion Price”), or as
calculated on the date that such Interest Payment Shares are delivered to the
Holder, whichever is less.

8 




          Notwithstanding
anything herein to the contrary herein, the Company shall not be entitled to pay
Interest in shares of Common Stock if, and to the extent that, in the
sole determination of the Holder, the issuance of such shares of Common Stock
would cause the Beneficial Ownership Limitation of Section 3(a)(ii) to be
exceeded. In the event the Company provides notice of its intention to pay
interest in shares of Common Stock and because of the Beneficial Ownership
Limitation it is unable to issue such shares of Common Stock to the Holder, the
Holder, upon the Company’s written request, must promptly provide documentation
to the Company demonstrating that the Beneficial Ownership Limitation would be
exceeded by payment of Interest in shares of Common Stock.

          Furthermore,
upon the occurrence of an Event of Default (as defined in Section 10 hereof)
which, if curable, has remained uncured for ten (10) Trading Days, the Company
will pay interest to the Holder, payable on demand, on the outstanding principal
balance of and unpaid interest on the Debenture from the date of the Event of
Default until such Event of Default is cured at the rate of the lesser of
eighteen percent (18%) and the maximum applicable legal rate per annum.

          Section
3.      Conversion.

                    (a)      Conversion
  Right. 

                              (i)      Conversion
Timing and Amount. Subject to the limitations on Conversion contained
herein, the record Holder of this Debenture shall have the right (a
“Conversion Right”) from time to time, and at any time on or after the
Original Issue Date hereof to convert any of all of the Debentures (plus any
accrued and unpaid Interest, Liquidated Damages and other Required Cash
Payments) into fully paid and non-assessable shares of Common Stock, or any
shares of capital stock or other securities of the Company into which such
Common Stock shall hereafter be changed or reclassified, at the Conversion Price
(as defined in Section 3(b) below, subject to adjustment as provided herein)
determined as provided herein (a "Conversion"). The Conversion Rights set
forth in this Section 3 shall remain in full force and effect immediately from
the Original Issue Date until the Debenture is paid in full regardless of the
occurrence of an Event of Default. 

                              (ii)      Limitation
On Conversion. Notwithstanding the above, in no event shall the
Holder be entitled to convert any portion of this Debenture in excess of that
portion of this Debenture upon Conversion of which (nor shall the Company be
permitted to pay Interest or any Monthly Redemption in shares of Common Stock to
the extent that) the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder and any applicable affiliates (other than
shares of Common Stock which may be deemed beneficially owned through the
ownership of the unconverted portion of the Debenture, the unexercised Warrants
or the unexercised or unconverted portion of any other security of the Company
subject to a limitation on Conversion or exercise analogous to the limitations
contained herein)(the “Beneficially Owned Shares”) and (2) 

9 




the number of shares of Common Stock issuable upon the
Conversion of the portion of the Debenture with respect to which the
determination of this proviso is being made or upon the payment of Interest in
shares of Common Stock with respect to which the determination of this proviso
is being made, would result in beneficial ownership by the Holder and its
affiliates of more than 4.99% (the “Maximum Percentage”) 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 “Beneficial Ownership Limitation”). For purposes
of the proviso to the immediately preceding sentence, beneficial ownership shall
be determined by the Holder in accordance with Section 13(d) of the Exchange Act
and Regulations 13D-G thereunder, except as otherwise provided in clause (1) of
such proviso in the immediately preceding sentence, and PROVIDED THAT the
Beneficial Ownership Limitation shall be conclusively satisfied if the
applicable Notice of Conversion includes a signed representation by the Holder,
if requested by the Company, that the issuance of the shares in such Notice of
Conversion will not violate the Beneficial Ownership Limitation, and the Company
shall not be entitled to require additional documentation of such
satisfaction.

                              The
parties agree that, in the event that the Company receives any tender offer or
any offer to enter into a merger with another entity whereby the Company shall
not be the surviving entity (an “Offer”), or in the event that Default
Shares are being issued to the Holder pursuant to Section 11 hereof, then the
Maximum Percentage shall be automatically increased immediately after such Offer
to read “9.99%” each place that “4.99%” occurs in the first paragraph of this
Section 3(a)(ii) above. Notwithstanding the above, Holder shall retain the
option to either exercise or not exercise its option(s) to acquire Common Stock
pursuant to the terms hereof after an Offer. The Beneficial Ownership Limitation
provisions of this Section 3(a)(ii) may be waived by such Holder, at the
election of such Holder, upon not less than sixty-one (61) days’ prior notice to
the Company, to change the Maximum Percentage to any other percentage not less
than 4.99% and not in excess of 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
provisions of this Section 3(a)(ii) shall continue to apply. Any such increase
or decrease to the Maximum Percentage will apply only to the Holder and not to
any other holder of Debentures. Upon such a change by a Holder of the Beneficial
Ownership Limitation from such 4.99% limitation to such 9.99% limitation, the
Beneficial Ownership Limitation may not be further waived by such Holder,
provided that, if an Event of Default occurs, thereafter the Beneficial
Ownership Limitation provisions of this Section 3(a)(ii) may be waived by such
Holder, at the election of such Holder, upon not less than 61 days’ prior notice
to the Company, to change the Maximum Percentage to any other percentage not
less than 4.99% (and not limited to 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
provisions of this Section 3(a)(ii) shall continue to apply. The provisions of
this paragraph shall be construed and implemented in a manner otherwise than in
strict conformity with the terms of this Section 3(a)(ii) to correct this
paragraph (or any portion hereof) which may be defective 

10 




or inconsistent with the intended Beneficial Ownership
Limitation herein contained or to make changes or supplements necessary or
desirable to properly give effect to such limitation.

                              (iii)      Maximum
Exercise of Rights. In the event the Holder notifies the Company that the
exercise of the rights described in this Section 3 or the issuance of Interim
Conversion Shares (as defined in Section 6(d) hereof), Payment Shares (as
defined in the Securities Purchase Agreement) or other shares of Common Stock
issuable to the Holder under the terms of the Transaction Documents
(collectively, “Issuable Shares”) would result in the issuance of an
amount of Common Stock that would exceed the maximum amount that may be issued
to a Holder calculated in the manner described in Section 3(a)(ii) of this
Agreement, then the issuance of such additional shares of Common Stock to such
Holder will be deferred in whole or in part until such time as such Holder is
able to beneficially own such Common Stock without exceeding the maximum amount
calculated in the manner described in Section 3(a)(ii) of this Agreement. The
determination of when such Common Stock may be issued without violating the
Beneficial Ownership Limitations shall be made by each Holder as to only such
Holder. 

                              (iv)      Calculation
of Conversion Amount. The number of shares of Common Stock to be issued upon
each Conversion of this Debenture shall be determined by dividing the Conversion
Amount (as defined herein) by the applicable Conversion Price. The term
"Conversion Amount" means, with respect to any Conversion of the
Debenture, the sum of (1) the principal amount of the Debenture to be converted
in such Conversion, PLUS (2) all accrued and unpaid Interest thereon for the
period beginning on the Original Issue Date and ending on the Conversion Date
(as defined in Section 3(d) hereof), PLUS (3) at the Holder's option, any
Liquidated Damages and other Required Cash Payment owed to the Holder.

                    (b)      Conversion
Price. The "Conversion Price" shall initially equal fifty cents
($0.50)(the "Initial Conversion Price")(subject to
adjustments pursuant to the terms of this Debenture and subject to equitable
adjustments for stock splits, stock dividends or rights offerings by the Company
relating to the Company's securities or the securities of any Subsidiary of the
Company, combinations, recapitalization, reclassifications, extraordinary
distributions and similar events).

                    (c)      Reservation
of Shares.

                              (i)      Increase
and Maintenance of Authorized and Reserved Amount. The Company
represents that the aggregate number of its authorized shares of Common Stock is
at least 100,000,000 shares and covenants that it will initially reserve
(the “Initial Share Reservation”) from its authorized and unissued Common
Stock a number of shares of Common Stock equal to at least 150% of the
initial principal amount of this Debenture, divided by the Conversion Price in
effect on the Original Issue Date of this Debenture, free from preemptive
rights, to provide for the issuance of Common Stock upon the Conversion of this
Debenture. Company further covenants that, 

11 




beginning on the Original Issue Date hereof, and continuing
until all of the Debentures have been converted, redeemed or otherwise satisfied
in accordance with their terms, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of shares (the “Required Debenture
Reserve Amount”), free from preemptive rights, equal to 150% of the number
of shares as shall from time to time be necessary to provide for the issuance of
Common Stock upon the full Conversion of all of the Debentures (without regard
to any limitations on conversions) and full exercise of all of the Warrants
(without regard to any limitations on exercises). The Company shall authorize
and reserve such additional amounts (together with the Required Debenture
Reserve Amount, collectively referred to as the “Required Reserve
Amount”) of shares from time to time as necessary to comply with the
Company's obligations to meet the Ongoing Share Reservation Requirements (as
defined in the Securities Purchase Agreement) pursuant to Section 4(e) of the
Securities Purchase Agreement. The Company represents that upon issuance, such
Shares will be duly and validly issued, fully paid and non-assessable. In
addition, if the Company shall issue any securities or make any change to its
capital structure which would change the number of shares of Common Stock into
which the Debenture shall be convertible at the then applicable Conversion
Price, or if the Conversion Price shall be adjusted, the Company shall at the
same time make proper provision so that thereafter there shall be a sufficient
number of shares of Common Stock authorized and reserved, free from preemptive
rights, for Conversion of the outstanding portion of this Debenture.

                              
(ii)      Insufficient Authorized Shares.
If at any time while any of the Debentures remain outstanding the Company
does not have a sufficient number of authorized and unreserved shares of Common
Stock to satisfy its obligation to reserve for issuance upon conversion of the
Debentures and exercise of the Warrants at least a number of shares of Common
Stock equal to the Required Reserve Amount (an "Authorized Share
Failure"), then the Company shall immediately take all action necessary to
increase the Company's authorized shares of Common Stock to an amount sufficient
to allow the Company to reserve the Required Reserve Amount for the Debentures
and Warrants then outstanding. Without limiting the generality of the foregoing
sentence, as soon as practicable after the date of the occurrence of an
Authorized Share Failure, but in no event later than sixty (60) days
after the occurrence of such Authorized Share Failure, the Company shall hold a
meeting of its stockholders for the approval of an increase in the number of
authorized shares of Common Stock. In connection with such meeting, the Company
shall provide each stockholder with a proxy statement and shall use its best
efforts to solicit its stockholders' approval of such increase in authorized
shares of Common Stock and to cause its board of directors to recommend to the
stockholders that they approve such proposal. 

          The
Company shall use its best efforts to authorize and reserve a sufficient number
of shares of Common Stock as soon as practicable following the earlier of (i)
such time that the Holder notifies the Company or that the Company otherwise
becomes aware that there are or likely will be insufficient authorized, reserved
and unissued shares to allow full Conversion of the outstanding amount of the
Debenture and full exercise of the outstanding amount of Holder’s Warrants,
based upon the Holder’s Reserved Share 

12 




Allocation (as defined below) (as defined below). The Company
  shall send notice to the Holder of the authorization of additional shares of
  Common Stock, the date of such authorization and the amount of the Holder's
  accrued Liquidated Damages. 

                              (iii)      Allocations
of Reserve Amount. The initial number of shares of Common Stock
authorized and reserved for conversions of the Debentures and exercise of the
Warrants and each increase in the number of shares so reserved (collectively,
the “Actual Reserved Amount”) shall be allocated pro rata among the
Holders (the "Reserved Share Allocation") of the Debentures based
on the aggregate number of Shares into which each Holder’s outstanding Debenture
would be convertible and into which each Holder’s outstanding Warrants would be
exercisable at the time of the increase (collectively, the “Fully Diluted
Holdings”) as a percentage of the aggregate Fully Diluted Holdings of all of
the Holders. In the event a holder shall sell or otherwise transfer such
Holder’s Debenture, each transferee shall immediately be allocated a pro rata
portion of such transferor’s Reserved Share Allocation. Any portion of the
Reserved Share Allocation which remains allocated to any Person or entity which
does not hold any Debenture shall be allocated to the remaining holders of
Debentures, pro rata based on the Holder’s Fully Diluted Holdings at the time of
such allocation.

                    (d)      Method
of Conversion. 

                              (i)     
Mechanics of Conversion. Subject to Section 3(a) and the other provisions
of this Debenture, this Debenture may be converted into Common Stock by the
Holder in whole or in part at any time and from time to time after the Original
Issue Date, by (A) submitting to the Company a duly executed notice of
Conversion in the form attached hereto as Exhibit A ("Notice of
Conversion") by facsimile dispatched prior to Midnight, New York City time
(the "Conversion Notice Deadline") on the date specified therein as the
Conversion Date (as defined herein) (or by other means resulting in written
notice to the Company on the date specified therein as the Conversion Date) to
the office of the Company; which notice shall specify the principal amount of
this Debenture to be converted (plus the dollar amount of any accrued but unpaid
Interest, Liquidated Damages, and other Required Cash Payments that the Holder
elects to convert into Common Stock), the applicable Conversion Price, and the
number of shares of Common Stock issuable upon such Conversion; and (B) subject
to Section 3(d)(vii), surrendering the Debenture at the principal office of the
Company. 

                              (ii)     
Conversion Date. The "Conversion Date" shall be the date
specified in the Notice of Conversion, provided that the Notice of Conversion is
submitted by facsimile (or by other means resulting in, or reasonably expected
to result in, written notice) to the Company or its transfer agent (“Transfer
Agent”) before Midnight, New York City time, on the date so specified,
otherwise the Conversion Date shall be the date that the Notice of Conversion
(or a facsimile thereof) is first received by the Company or its Transfer Agent.
The Person or Persons entitled to receive the shares of Common Stock issuable
upon Conversion shall be treated for all purposes as the record holder or
holders of such securities as of the Conversion Date. 

13 




                              (iii)     
Delivery of Common Stock Upon Conversion. Upon submission of a
Notice of Conversion, the Company shall, by no later than the third (3rd)
Business Day after the Conversion Date (the "Conversion Shares Delivery
Deadline"), issue and deliver (or cause its Transfer Agent so to issue and
deliver) in accordance with the terms hereof and the Securities Purchase
Agreement to or upon the order of the Holder that number of shares of Common
Stock (“Conversion Shares”) for the principal amount of this Debenture
(plus the dollar amount of any accrued but unpaid Interest, Liquidated Damages,
and other Required Cash Payments that the Holder elects to convert into Common
Stock) converted as shall be determined in accordance herewith. Upon the
Conversion of this Debenture, the Company shall, at its own cost and expense,
take all necessary action, including obtaining and delivering an opinion of
counsel to assure that the Company's Transfer Agent shall issue stock
certificates in the name of Holder (or its nominee) or such other Persons as
designated by Holder and in such denominations to be specified at Conversion
representing the number of shares of Common Stock issuable upon such Conversion.
The Company warrants that no instructions other than these instructions have
been or will be given to the Transfer Agent of the Common Stock and that the
Shares will be free-trading, and freely transferable, and will not contain a
legend restricting the resale or transferability of the Shares provided the
Shares are being issued during the effectiveness of, and will be sold pursuant
to, an effective registration statement covering the Shares or are eligible for
resale pursuant to Rule 144 or another exemption from registration.

                              (iv)     
Delivery Failure; Partial Liquidated Damages; Revocation of
Conversion. If the Company fails for any reason to deliver to the Holder
a certificate or certificates representing the Conversion Shares pursuant to
Section 3(d)(iii) by the fifth (5th) Trading Day after the Conversion Date, the
Company shall pay to such Holder, in cash, as liquidated damages and not as a
penalty, for each $1,000 of principal amount being converted, $10 per Trading
Day (increasing to $20 per Trading Day on the fifth Trading Day after such
liquidated damages begin to accrue) for each Trading Day after such fifth (5th)
Trading Day until such certificates are delivered (the “Late Share Delivery
Liquidated Damages”). Nothing herein shall limit a Holder’s right to pursue
actual damages or damages for an Event of Default pursuant to the terms hereof
for the Company’s failure to deliver Conversion Shares within the period
specified herein and such Holder shall have the right to pursue all remedies
available to it 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. 

                              In
addition to any other remedies which may be available to the Holder, in the
event that the Company fails for any reason to effect delivery of the Conversion
Shares by the Conversion Shares Delivery Deadline, or fails to effect delivery
of Default Shares by the Default Share Delivery Deadline (as defined in Section
11 hereof) (each, a “Delivery Failure”), the Holder, at its option, will
be entitled to revoke all or part of the relevant Notice of Conversion (a
“Conversion Revocation”) or rescind all or part of a Default Conversion
Notice (as defined in Section 11) (a “Default Conversion Revocation”) or
rescind all or part of a Major Transaction Conversion 

14 




Notice (as defined in Section 4) (a “Major Transaction
Conversion Revocation”) or rescind all or part of the notice of Redemption,
including but not limited to a notice of Mandatory Redemption (a “Redemption
Revocation”), as applicable, by delivery of a notice to such effect to the
Company whereupon the Holder shall regain the rights of a Holder of this
Debenture with respect to such unconverted portions of this Debenture and the
Company and the Holder shall each be restored to their respective positions
immediately prior to the delivery of such notice, except that the liquidated
damages described herein shall be payable through the date notice of revocation
or rescission is given to the Company.

                              (v)      Compensation
for Buy-In on Failure to Timely Deliver Certificates Upon Conversion, or
Upon Submission for Legend Removal. 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 (without legends, if the Unrestricted
Conditions have been met) by the Conversion Shares Deliver Deadline pursuant to
Section 3(d)(iii), or if at any time the Holder submits shares of Common Stock
for legend removal when the Unrestricted Conditions have been met, and the
Company fails to deliver or cause to be delivered to such Holder a certificate
representing such shares that is free from all restrictive and other legends by
the applicable Legend Removal Date, and if after such Conversion Shares Deliver
Deadline or Legend Removal Date, as applicable, 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 such Holder of the Conversion Shares which the
Holder was entitled to receive upon the conversion relating to such Conversion
Shares Deliver Deadline or Legend Removal Date, as applicable (each, 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 so purchased 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, if applicable, either reinstate (or if necessary, reissue)
the portion of the Debenture for which such conversion was not honored 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 3(d)(iii). 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 the Debenture with respect to which the actual sale price 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 

15 




Company’s failure to timely deliver certificates representing
shares of Common Stock upon conversion of the Debenture as required pursuant to
the terms hereof. 

                              (vi)      Surrender
of Debenture Upon Conversion; Book-Entry. Notwithstanding anything to
the contrary set forth herein, upon Conversion of this Debenture in accordance
with the terms hereof, the Holder shall not be required to physically surrender
the Debenture to the Company unless all of this Debenture is converted, in which
case such Holder shall deliver the Debenture being converted to the Company
promptly following the Conversion Date at issue. The Holder and the Company
shall maintain records showing the amount of this Debenture that is so converted
and the dates of such Conversions or shall use such other method, reasonably
satisfactory to the Holder and the Company, so as not to require physical
surrender of this Debenture upon each such Conversion. In the event of any
dispute or discrepancy, such records of the Company shall be controlling and
determinative in the absence of manifest error.

                              (vii)     
No Fractional Shares. If any Conversion of this Debenture would
result in a fractional share of Common Stock or the right to acquire a
fractional share of Common Stock, such fractional share shall be disregarded and
the number of shares of Common Stock issuable upon Conversion of this Debenture
shall be the next higher number of shares. 

                              (xiii)      Lost
or Stolen Debentures. Upon receipt by the Company of evidence of the
loss, theft, destruction or mutilation of a Debenture, and (in the case of loss,
theft or destruction) of indemnity reasonably satisfactory to the Company, and
upon surrender and cancellation of the Debenture, if mutilated, the Company
shall execute and deliver a new Debenture of like tenor and date. 

                    (e)     
Legends.

                              (i)     
Restrictive Legends. The Holder understands that the Debentures
and, until such time as Conversion Shares and any other Issued Common Shares (as
defined in the Securities Purchase Agreement) have been registered under the
1933 Act as contemplated by the Registration Rights Agreement or otherwise may
be sold pursuant to Rule 144 without any restriction as to the number of
securities as of a particular date that can then be immediately sold, the
Conversion Shares and any other Issued Common Shares may bear a restrictive
legend in substantially the following form (and a stop-transfer order may be
placed against transfer of the certificates for such Securities): 


  
         "THE SECURITIES REPRESENTED
      BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
      1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY
      NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
      STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN 

  



16 





  
    OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE REASONABLY
      SATISFACTORY TO COUNSEL TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED
      UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT." 

  



                              (ii)      Removal
of Legends. The Company will issue and deliver the Conversion Shares
without restrictive legends (including the legend set forth above in this
Section 3(e)), and will remove, or cause its Transfer Agent to remove at the
Company’s expense, any restrictive legends on any Conversion Shares that contain
restrictive legends (including the legend set forth above in this Section 3(e)),
in each case when and as required under Section 6(a) of the Securities Purchase
Agreement. The Holder agrees to sell all Securities, including those represented
by a certificate(s) from which the legend has been removed, in compliance with
applicable prospectus delivery requirements, if any. 

                    (f)      DTC
Delivery. In lieu of delivering physical certificates representing the
unlegended shares of Common Stock (the “Unlegended Shares”), provided the
Company’s Transfer Agent is participating in the Depository Trust Company
("DTC") Fast Automated Securities Transfer ("FAST") program, upon
request of the Holder, so long as the certificates therefor are not required to
bear a legend and the Holder is not obligated to return such certificate for the
placement of a legend thereon, the Company shall cause its Transfer Agent to
electronically transmit the Unlegended Shares to the Holder by crediting the
account of the Holder's prime broker with DTC through its Deposit Withdrawal
Agent Commission ("DWAC") system. The time periods for delivery and
penalties described herein shall likewise apply to the electronic transmittals
described herein.

                    (g)      Status
as Shareholder. Upon submission of a Notice of Conversion by a Holder, (i)
the portion of the Debenture covered thereby (other than the portion, if any,
pursuant to the Conversion of which shares cannot be issued because their
issuance would exceed such Holder's allocated portion of the Required Reserve
Amount) shall be deemed converted into shares of Common Stock and (ii) the
Holder's rights as a Holder of such converted portion of this Debenture shall
cease and terminate, excepting only the right to receive certificates for such
shares of Common Stock and to any Liquidated Damages or other remedies provided
herein or in the Transaction Documents or otherwise available at law or in
equity to such Holder because of a failure by the Company to comply with the
terms of this Debenture, including but not limited to the remedies provided in
Section 3(d)(iv), Section 3(d)(vi), Section 11 and Section 14 hereof.
Notwithstanding the foregoing, if a Holder initiates a Conversion Revocation, a
Default Conversion Revocation or a Redemption Revocation pursuant to Section
3(d)(iv) hereof, the Holder shall regain the rights of a Holder of this
Debenture with respect to such unconverted portion of this Debenture as
specified in Section 3(d)(iv) and the Company shall, as soon as practicable,
return such unconverted portion of this Debenture to the Holder or, if the
Debenture has not been surrendered, adjust its records to reflect that such
portion of the Debenture has not been converted. In all cases, the Holder shall
retain 

17 




all of its rights and remedies (including, without limitation,
the right to receive Liquidated Damages to the extent required hereby for such
Event of Failure and any subsequent Event of Failure and the right to receive
the Default Amount pursuant to Section 11 to the extent required thereby) for
the Company's failure to convert this Debenture. 

                         (h)     
Pro Rata Conversion. In the event that the Company receives a Conversion
Notice from more than one holder of Debentures for the same Conversion Date and
the Company can convert some, but not all, of such portions of the Debentures
submitted for conversion, the Company shall convert from each holder of
Debentures electing to have Debentures converted on such date a pro rata amount
of such holder's portion of its Debentures submitted for conversion based on the
principal amount of Debentures submitted for conversion on such date by such
holder relative to the aggregate principal amount of all Debentures submitted
for conversion on such date.

          Section
4.      Rights Upon Major
Transaction or Change of Entity Transaction. 

(a)      Definitions. For
purposes hereof,

          “Change
of Entity Transaction” means (i) a consolidation, merger, exchange of
shares, recapitalization, reorganization, business combination or other similar
event, in one or a series of transactions (A) following which the holders of
Common Stock immediately preceding such consolidation, merger, change of shares,
recapitalization, reorganization, business combination or event either (1) no
longer hold a majority of the shares of Common Stock of the Company or (2) no
longer have the ability to elect a majority of the board of directors of the
Company or (B) as a result of which shares of Common Stock shall be changed into
(or the shares of Common Stock become entitled to receive) the same or a
different number of shares of the same or another class or classes of stock or
securities of the Company or another entity. 

          “Sufficient
Trading Characteristics” shall mean that the average daily dollar trading
volume of the common stock of such entity on its primary exchange or market is
equal to or in excess of $100,000 for the 90th through the 31st day prior to the
public announcement of the transaction in respect of which this definition shall
be applied. 

          “Permissible
Change of Entity Transaction” shall mean a Change of Entity Transaction
where the Successor Entity (as defined below) (A) is a publicly traded Company
whose common stock is quoted on or listed for trading on an Eligible Market, (B)
has Sufficient Trading Characteristics (as defined above) and (C) meets the
Assumption Requirements (as required in Section 4(b) below), or any other Change
of Entity Transaction with respect to which the Holder provides the 

18 




Company with a Major Transaction
Approval Notice (as defined in subsection (d) immediately below). 

          “Impermissible
Change of Entity Transaction” shall mean a Change of Entity Transaction
which does not qualify as a Permissible Change of Entity Transaction. 

          “Major
Transaction” means

          (i) an
Impermissible Change of Entity Transaction; and 

          (ii)
the sale or transfer of more than 40%, in the aggregate, of the properties or
assets of the Company to another Person or Persons in any rolling 12 month
period (an “Asset Sale”); and 

          (iii)
a purchase, tender or exchange offer made to and accepted by the holders of more
than the 50% of the outstanding shares of Common Stock. 

                         (b)      Assumption
Upon Permissible Change of Entity Transaction. The Company shall not, so
long as any of the Debentures remain outstanding, enter into or be party to a
Change of Entity Transaction unless any Person purchasing the Company’s assets
or Common Stock, or any successor entity resulting from such Change of Entity
Transaction (in each case, an “Successor Entity”), assumes (an
“Assumption”) in writing all of the obligations of the Company under the
Debenture and the other Transaction Documents in accordance with the provisions
of this Section 4(b) pursuant to written agreements in form and substance
satisfactory to the Required Holders and approved by the Required Holders prior
to such Change of Entity Transaction, including agreements to deliver to each
holder of Debentures in exchange for such Debentures a security of the Successor
Entity evidenced by a written instrument substantially similar in form and
substance to the Debenture, including, without limitation, having a principal
amount and interest rate equal to the principal amount and Interest rate of the
Debentures held by such holder, having similar conversion rights as the
Debentures (including but not limited to a similar Conversion Price and similar
Conversion Price adjustment provisions) and having similar priority to the
Debentures, and satisfactory to the Required Holders. Upon the occurrence of any
Change of Entity Transaction, the Successor Entity shall succeed to, and be
substituted for (so that from and after the date of such Change of Entity
Transaction, the provisions of the Debenture referring to the "Company" shall
refer instead to the Successor Entity), and may exercise every right and power
of the Company and shall assume all of the obligations of the Company under the
Debenture with the same effect as if such Successor Entity had been named as the
Company herein. Upon consummation of a Change of Entity Transaction, the
Successor Entity shall deliver to the Holder confirmation that there shall be
issued upon conversion or redemption of the Debentures at any time after the
consummation of the Change of Entity Transaction, in lieu of the shares of
Common Stock (or other securities, cash, assets or other property) issuable upon
the conversion of the Debentures prior to such Change of Entity 

19 




Transaction, such shares of publicly traded common stock (or
their equivalent) of the Successor Entity, as adjusted in accordance with the
provisions of the Debenture. The provisions of this Section shall apply
similarly and equally to successive Change of Entity Transactions and shall be
applied without regard to any limitations on the conversion of the Debenture.
The requirements of this Section 4(b) are referred to herein as the
“Assumption Requirements.” 

                    (c)      Notice
of Transaction. At least thirty (30) days prior to the consummation of a
Major Transaction or Change of Entity Transaction, but not prior to the public
announcement of such transaction, the Company shall deliver written notice
thereof via facsimile and overnight courier to the Holder (a "Transaction
Notice"), which notice shall specify the nature and terms of the proposed
transaction (including notice of whether or not such transaction constitutes a
Major Transaction) and nature of the Successor Entity (if any).

                    (d)      Redemption
Right Upon Major Transaction. At any time during the period beginning after
the Holder's receipt of a Transaction Notice and ending on the Trading Day
immediately prior to the consummation of such Major Transaction, the Holder may
require the Company to redeem (a “Redemption Upon Major Transaction”) all
or any portion of the Holder’s Debenture by delivering written notice thereof
("Major Transaction Redemption Notice") to the Company, which Major
Transaction Redemption Notice shall indicate the aggregate principal amount of
Debentures (the “Redemption Principal Amount”) that the Holder is
electing to be redeemed. Unless otherwise indicated by the Holder to the Company
in writing, in the event that the holder does not provide a Major Transaction
Redemption Notice to the Company, the Holder shall be deemed to have delivered a
Major Transaction Redemption Notice, on the last day such notice is allowable,
requiring the Company to redeem 100% of the Holder’s Debenture. The Redemption
Principal Amount of Debentures subject to redemption pursuant to this Section
4(d) shall be redeemed by the Company in cash at a price (the "Major
Transaction Redemption Price") equal to the greater of: 

(i)      the product of (A) the sum
of the Redemption Principal Amount being redeemed and any accrued and unpaid
Interest with respect to such Redemption Principal Amount, and any accrued and
unpaid Liquidated Damages and any other Required Cash Payments (such amounts in
addition to the Redemption Principal Amount are referred to herein as the
“Supplementary Amounts”), and (B) the quotient determined by dividing (x)
the greater of (I) the Market Price of the Common Stock immediately following
the public announcement of such proposed Major Transaction and (II) the Market
Price on the date that the Major Transaction Redemption Price is paid to the
Holder, by (y) the Conversion Price,

and

(ii)      the
sum of (A) the Major Transaction Redemption Premium multiplied 

20 




by the Redemption Principal Amount
being redeemed, plus (B) the Supplementary Amounts.

                    (e)      Escrow;
Payment of Major Transaction Redemption Price. The Company shall not effect
a Major Transaction unless it shall first place, or shall cause the Successor
Entity to place, into an escrow account with an independent escrow agent, at
least three (3) Business Days prior to the closing the Major Transaction (the
“Major Transaction Escrow Deadline”), an amount equal to the Major
Transaction Redemption Price. Concurrently upon closing of any Major
Transaction, the Company shall pay or shall instruct the escrow agent to pay the
Major Transaction Redemption Price to the Holder, which payment shall constitute
a Redemption Upon Major Transaction of the Debenture.

                    (f)      Injunction.
In the event that the Company attempts to consummate a Major Transaction
without placing the Major Transaction Redemption Price in escrow in accordance
with subsection (e) above or without payment of the Major Transaction Redemption
Price to the Holder upon consummation of such Major Transaction, the Buyer shall
have the right to apply for an injunction in any state or federal courts sitting
in the City of New York, borough of Manhattan to prevent the closing of such
Major Transaction until the Major Transaction Redemption Price is paid to the
Holder, in full. 

                    (g)     
Mechanics of Redemptions Upon Major Transactions. Redemptions required by
this Section 4 shall be made in accordance with the provisions of Section 12 and
shall have priority to payments to shareholders in connection with a Major
Transaction. To the extent redemptions required by this Section 4(g) are deemed
or determined by a court of competent jurisdiction to be prepayments of the
Debenture by the Company, such redemptions shall be deemed to be voluntary
prepayments. Notwithstanding anything to the contrary in this Section 4, until
the Major Transaction Redemption Price (together with any Supplementary Amounts
thereon) is paid in full, the Redemption Principal Amount submitted for
redemption under this Section and the Supplementary Amounts may be converted
(a “Major Transaction Conversion”), in whole or in part, by the Holder
into shares of Common Stock upon written notice (“Major Transaction
Conversion Notice”) to the Company (or the Successor Entity, if applicable),
or in the event the Conversion Date is after the consummation of a Change of
Entity Transaction (as defined above), into shares of publicly traded common
stock (or their equivalent) of the Successor Entity pursuant to Section 4(b).
Unless otherwise indicated by the Holder in the applicable Notice of Conversion,
any principal amount of this Debenture converted during the period from the date
of the Major Transaction Redemption Notice until the date the Major Transaction
Redemption Price is paid in full shall be considered to be a conversion (instead
of a Redemption) of a portion of the Debenture that would have been subject to
such Redemption, and any amounts of this Debenture converted from time to time
during such period shall be converted in full into Common Stock at the
Conversion Price then in effect, and the dollar amount so converted into Common
Stock shall be deducted from the Redemption Principal Amount (as defined above)
and any Supplementary Amounts that are subject to such redemption. The parties
hereto agree that in the event of the Company's redemption of any portion of


21 




the Debenture under Section 4(d), the Holder's damages would be
uncertain and difficult to estimate because of the parties' inability to predict
future interest rates and the uncertainty of the availability of a suitable
substitute investment opportunity for the Holder. Accordingly, any redemption
premium due under Section 4(d) is intended by the parties to be, and shall be
deemed, a reasonable estimate of the Holder's actual loss of its investment
opportunity and not as a penalty. 

          Section
5.      Effect of Certain
Events.

                    (a)      Participation.
The Holder, as the holder of the Debenture, shall be entitled to receive such
dividends paid and distributions made to the holders of Common Stock to the same
extent as if the Holder had completely converted the Debenture into Common Stock
(without regard to any limitations on Conversion herein or elsewhere and without
regard to whether or not a sufficient number of shares are authorized and
reserved to effect any such exercise and issuance) and had held such shares of
Common Stock on the record date for such dividends and distributions. Payments
under the preceding sentence shall be made concurrently with the dividend or
distribution to the holders of Common Stock.

                    (b)      Voting
Rights. The Holder shall obtain common shareholder voting rights with
respect to the number of shares of Common Stock held by the Holder plus the
number of shares of Common Stock issuable pursuant to Conversions of the
Debenture at any given time (subject to the Beneficial Ownership Limitations).


                    (c)      Rights
Upon Issuance of Purchase Rights. If at any time the Company grants, issues
or sells any Options, Convertible Securities or rights to purchase shares,
warrants, securities or other property pro rata to the record holders of any
class of Common Shares (the “Purchase Rights”), then the Holders will be
entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which such Holder could have acquired if such Holder
had held the number of Common Shares acquirable upon complete Conversion of the
Debenture (without taking into account any limitations or restrictions on the
convertibility of the Debenture) immediately before the date on which a record
is taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Shares are to
be determined for the grant, issue or sale of such Purchase Rights. 

          Section
6.      Adjustment Upon
Issuance of Shares of Common Stock or Common Stock Equivalents and
Certain Other Events; Notice of Adjustment; Notice Failure
Adjustment. If the Company issues or sells, or in accordance with
this Section 6 is deemed to have issued or sold, any shares of Common Stock
(including the issuance or sale of shares of Common Stock owned or held by or
for the account of the Company, but excluding shares of Common Stock deemed to
have been issued by the Company in connection with an Exempt Issuance) for a
consideration per share (the "New Issuance Price") less than a price (the
"Applicable Price") equal to the Conversion Price in effect immediately
prior to such issue or sale or deemed issuance or sale (the foregoing a
"Dilutive Issuance"), then immediately after such Dilutive 

22 




Issuance, the Conversion Price then in effect shall be reduced
to an amount equal to the New Issuance Price. The adjustments required by this
paragraph and by Sections 6(a) – 6(d) below are referred to in the singular, as
a “Subsequent Issuance Adjustment,“ and collectively as “Subsequent
Issuance Adjustments.” For purposes of determining the adjusted Conversion
Price under this Section 6, the following shall be applicable: 

                    (a)     
Issuance of Options. If the Company in any manner grants any Options and
the lowest price per share for which one share of Common Stock is issuable upon
the exercise of any such Option or upon conversion, exercise or exchange of any
Convertible Securities issuable upon exercise of any such Option is less than
the Applicable Price, then such share of Common Stock shall be deemed to be
outstanding and to have been issued and sold by the Company at the time of the
granting or sale of such Option for such price per share. For purposes of this
Section 6(a), the "lowest price per share for which one share of Common Stock is
issuable upon exercise of such Options or upon conversion, exercise or exchange
of such Convertible Securities" shall be equal to the sum of the lowest amounts
of consideration (if any) received or receivable by the Company with respect to
any one share of Common Stock upon the granting or sale of the Option, upon
exercise of the Option and upon conversion, exercise or exchange of any
Convertible Security issuable upon exercise of such Option.

                    (b)     
Issuance of Convertible Securities. If the Company in any manner issues
or sells any Convertible Securities and the lowest price per share for which one
share of Common Stock is issuable upon the conversion, exercise or exchange
thereof is less than the Applicable Price, then such share of Common Stock shall
be deemed to be outstanding and to have been issued and sold by the Company at
the time of the issuance or sale of such Convertible Securities for such price
per share. For the purposes of this Section 6(b), the "lowest price per share
for which one share of Common Stock is issuable upon the conversion, exercise or
exchange" shall be equal to the sum of the lowest amounts of consideration (if
any) received or receivable by the Company with respect to one share of Common
Stock upon the issuance or sale of the Convertible Security and upon conversion,
exercise or exchange of such Convertible Security. In the case of a Convertible
Security which is accompanied by Options (collectively, a “Unit”), the
"lowest price per share for which one share of Common Stock is issuable upon the
conversion, exercise or exchange of such Convertible Security” shall equal (i)
the consideration deemed received in exchange for the Convertible Security, as
determined in accordance with subsection 6(d) below, divided by (ii) the total
number of shares into which such Convertible Security is convertible or
exchangeable (notwithstanding any contractual limitation on the timing or amount
of conversions).

                    (c)     
Change in Option Price or Rate of Conversion. If the purchase price
provided for in any Options, the additional consideration, if any, payable upon
the issue, conversion, exercise or exchange of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into or exercisable
or exchangeable for shares of Common Stock increases or decreases at any time,
the Conversion Price and the number of Conversion Shares in effect at the time
of such increase or decrease shall be adjusted to the Conversion Price and the
number of Conversion Shares which would have 

23 




been in effect at such time had such Options or Convertible
Securities provided for such increased or decreased purchase price, additional
consideration or increased or decreased conversion rate, as the case may be, at
the time initially granted, issued or sold. For purposes of this Section 6(c),
if the terms of any Option or Convertible Security that was outstanding as of
the date of issuance of this Debenture are increased or decreased in the manner
described in the immediately preceding sentence, then such Option or Convertible
Security and the shares of Common Stock deemed issuable upon exercise,
conversion or exchange thereof shall be deemed to have been issued as of the
date of such increase or decrease. No adjustment pursuant to this Section 6
shall be made if such adjustment would result in an increase of the Conversion
Price then in effect or a decrease in the number of Conversion Shares. 

                    (d)      Calculation
of Consideration Received. In case any Option is issued in connection with
the issue or sale of other securities of the Company, together comprising one
integrated transaction, the Options will be deemed to have been issued for their
Black Scholes value, and the other securities issued or sold in such integrated
transaction will be deemed to have been issued or sold for the balance of the
consideration received by the Company. If any shares of Common Stock, Options or
Convertible Securities are issued or sold or deemed to have been issued or sold
for cash, the consideration received therefor will be deemed to be the net
amount received by the Company therefor. If any shares of Common Stock, Options
or Convertible Securities are issued or sold for a consideration other than
cash, the amount of such consideration received by the Company will be the fair
value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the Company
will be the Weighted Average Price of such security on the date of receipt. If
any shares of Common Stock, Options or Convertible Securities are issued to the
owners of the non-surviving entity in connection with any merger in which the
Company is the surviving entity, the amount of consideration therefor will be
deemed to be the fair value of such portion of the net assets and business of
the non-surviving entity as is attributable to such shares of Common Stock,
Options or Convertible Securities, as the case may be. The fair value of any
consideration other than cash or securities will be determined jointly by the
Company and the Required Holders. If such parties are unable to reach agreement
within ten (10) days after the occurrence of an event requiring valuation (the
"Valuation Event"), the fair value of such consideration will be determined
within five (5) Business Days after the tenth day following the Valuation Event
by an independent, reputable appraiser jointly selected by the Company and the
Required Holders. The determination of such appraiser shall be final and binding
upon all parties absent manifest error and the fees and expenses of such
appraiser shall be borne by the Company. 

                    (e)      Record
Date. If the Company takes a record of the holders of shares of Common Stock
for the purpose of entitling them (i) to receive a dividend or other
distribution payable in shares of Common Stock, Options or in Convertible
Securities or (ii) to subscribe for or purchase shares of Common Stock, Options
or Convertible Securities, then such record date will be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the 

24 




declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.

                    (f)      Subsequent
Rights Offerings. If the Company, at any time prior to the date that all of
the Debentures have been converted, redeemed or otherwise satisfied in
accordance with their terms, 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 (the “Base Rights
Offering Price”) that is lower than the Conversion Price then in effect,
then the Conversion Price shall be reduced (but not increased) to the Base
Rights Offering Price. 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. No adjustment shall be made hereunder if such adjustment
would result in an increase of the Conversion Price then in effect. 

                    (g)      Milestone
Adjustments. If the Company shall have failed (each a “Milestone
Failure”) to meet or exceed any of the milestone goals (“Milestone
Goals”) that are set forth on Schedule 6(g) annexed hereto for any
one or more of the following periods (each a “Milestone Period”): (i) the
six (6) month period ending October 31, 2008 or (ii) the twelve (12) month
period ending April 30, 2009 (each a “Milestone Date”), as reported in
the Company’s Form 10-QSB (or Form 10-KSB, if applicable) for such fiscal
period, then the Conversion Price shall be reduced (but not increased) (each, a
“Milestone Adjustment”) to equal the lesser of (a) the Conversion Price
then in effect, (b) the Market Price as determined on the applicable Milestone
Date, or (c) the Market Price as determined on the date (each, a “Milestone
Adjustment Date”) that is five (5) Trading Days after the date that Company
files its next Form 10-QSB (or Form 10-KSB, if applicable) with the Commission
following the end of the applicable Milestone Period (the “Milestone
Adjustment Price”). 

          Each
such adjustment shall be effective as of the first day following each Milestone
Date (by way of example, if the Milestone Goals are not met for the Milestone
Period ending October 31, 2008, the reduction is effective immediately on
November 1, 2008). As to any Conversions by the Holder that occurred following
the end of a Milestone Period but prior to the date the Company’s periodic
report was filed (“Interim Period”), the Company shall
retroactively send the Holder additional Conversion Shares (“Interim
Conversion Shares”) within 3 Trading Days of the date of the applicable
filing if an adjustment is required hereunder (provided that to the extent any
such shares would cause the Beneficial Ownership Limitation to be exceeded, such
excess shares shall not be issued and delivered until such time as such shares
may be so issued without exceeding the Beneficial Ownership Limitation). The
number of additional Conversion Shares issued shall be equal to the number of
Conversion Shares receivable from such Conversions based on the adjusted
Conversion Price less any Conversion Shares previously received on account of
such Conversions. Any subsequent restatements of the Company’s financials shall
require similar retroactive issuances if the aforementioned events are
subsequently deemed to have occurred. The Company shall provide written notice
to the Holder no later than 1 Business Day following the Company’s filing of the


25 




applicable periodic report with the Commission, indicating
therein the new Conversion Price and the revenue for the applicable Milestone
Period. In the event that there is an adjustment to the Conversion Price
pursuant to any other provision under this Debenture during the Interim Period,
the Conversion Price shall be the lower of (i) the Conversion Price as adjusted
pursuant to the other provisions of this Debenture and (ii) the new Conversion
Price as determined hereunder. Notwithstanding anything herein to the contrary,
(i) the provision shall only have the effect of reducing the Conversion Price
and (ii) each adjustment shall be permanent notwithstanding future Revenue or
the achievement of any other milestones and cumulative with any other
adjustments hereunder. 

                    (h)      Adjustments
to Conversion Price During Major Announcements.
Notwithstanding anything contained in this Debenture to the contrary, in
the event the Company makes any public announcement (the date of such
announcement is hereinafter referred to as the “Announcement Date”)
anytime during the period beginning five (5) Business Days before any Milestone
Adjustment Date and ending five (5) Business Days after such Milestone
Adjustment Date (the “Protected Period”), then the “Milestone
Adjustment Price” for such Milestone Adjustment shall equal the lesser of
(X) the Milestone Adjustment Price as determined pursuant to Section 6(g) above,
(Y) the Market Price as determined on the Trading Day immediately preceding the
Announcement Date and (Z) the Market Price as determined on the date that is ten
(10) Trading Days after the Announcement Date. 

                    (i)      Pro
Rata Distributions. If the Company, at any time prior to the date that all
of the Debentures have been converted, redeemed or otherwise satisfied in
accordance with their terms, 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 6(a) – 6(d)
above), 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. 

                    (j)     
Subdivision or Combination of Common Stock. If the Company at any time
subdivides (by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) the shares of Common Stock
acquirable hereunder into a greater number of shares, then, after the date of
record for effecting such subdivision, the 

26 




Conversion Price in effect immediately prior to such
subdivision will be proportionately reduced. If the Company at any time combines
(by reverse stock split, recapitalization, reorganization, reclassification or
otherwise) the shares of Common Stock acquirable hereunder into a smaller number
of shares, then, after the date of record for effecting such combination, the
Conversion Price in effect immediately prior to such combination will be
proportionately increased. 

                    (k)      Notice
of Dilutive Issuances and Adjustments; Notice Failure Adjustment. The
Company shall notify the Holder in writing, no later than one (1) Business Day
following any Dilutive Issuance, indicating therein the applicable issuance
price, or applicable reset price, exchange price, conversion price, exercise
price and other pricing terms (such notice, the “Dilutive Issuance
Notice”). In the event that the Company fails to provide the Holder with a
Dilutive Issuance Notice within five (5) Business Days of any Dilutive Issuance
(the “Dilutive Issuance Notice Deadline”), the Conversion Price shall be
permanently reduced (but not increased) on the Dilutive Issuance Notice
Deadline, and on the same day of each calendar month thereafter until such
notice is given (each, a “Notice Failure Adjustment Date”), or in each
case if not a business day, then on the next business day (each, a “Notice
Failure Adjustment”) to a price equal to the lesser of (a) the Conversion
Price then in effect or (b) 100% of the VWAP for five (5) trading day period
immediately preceding the applicable Notice Failure Adjustment Date
(collectively, the “Notice Failure Adjustment Price”). 

                    The
Company shall notify the Holder in writing, no later than one (1) Business Day
following any Milestone Adjustment Date, indicating therein the applicable
Milestone Adjustment Price (such notice, a “Milestone Adjustment
Notice”). For purposes of clarification, whether or not the Company provides
a Dilutive Issuance Notice or a Milestone Adjustment Notice pursuant to this
Section 6(k), upon the occurrence of any Dilutive Issuance or Milestone
Adjustment, the Holder is entitled to receive a number of Conversion Shares
based upon the Conversion Price (as adjusted) on or after the date of such
Dilutive Issuance or Milestone Adjustment, as applicable, regardless of whether
the Holder accurately refers to the Conversion Price (as adjusted) in the Notice
of Conversion. Whenever the Conversion Price is adjusted pursuant to this
Section 6 or otherwise, the Company shall promptly mail to the Holder a notice
(a “Conversion Price Adjustment Notice”) setting forth the Conversion
Price after such adjustment and setting forth a statement of the facts requiring
such adjustment. For purposes of clarification, whether or not the Company
provides a Conversion Price Adjustment Notice pursuant to this Section 6(k),
upon the occurrence of any event that leads to an adjustment of the Conversion
Price, the Holders are entitled to receive a number of Conversion Shares based
upon the new Conversion Price, as adjusted, for Conversions occurring on or
after the date of such adjustment, regardless of whether a Holder accurately
refers to the adjusted Conversion Price in the Notice of Conversion.

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

27 




stock of any class or of any rights, (iv) 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 (v) 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 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
7.      Automatic Redemption
at End of Term; Monthly Redemption.

                    (a)      Automatic
Redemption at End of Term. Any Debenture that has not been submitted for
Conversion into Common Stock and has not been subjected to a Default Notice by
midnight, New York City time, on the Maturity Date (the “Automatic Redemption
Date”), shall be automatically redeemed (“Automatic Redemption”) for
a redemption price, in cash, equal to the outstanding principal amount of this
Debenture, plus all accrued and unpaid Interest, Liquidated Damages and other
Required Cash Payments (the “Automatic Redemption Amount”). The Automatic
Redemption Amount shall be due and payable within five (5) Trading Days of the
Automatic Redemption Date.

                    (b)      Monthly
Redemption. On each Monthly Redemption Date, the Company shall redeem an
amount of the Debenture equal to the Monthly Redemption Amount (each, a
“Monthly Redemption”). The Monthly Redemption Amount is payable on each
Monthly Redemption Date in cash; provided, however, as to any Monthly Redemption
and upon twenty (20) 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 shares of
Common Stock (the “Monthly Redemption Shares” (such number of shares to
be paid on a Monthly Redemption Date in Monthly Redemption Shares, the
“Monthly Redemption Share Amount”) based on a conversion price equal to
the Monthly 

28 




Redemption Share Conversion Price (subject to adjustment for
any stock dividend, stock split, stock combination or other similar event
affecting the Common Stock during such 20 Trading Day period) but subject to the
Monthly Share Payment Restriction (as defined below); provided, further, that
the Company may not pay the Monthly Redemption Amount in Monthly Redemption
Shares unless, on each day 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. The Holder may convert, pursuant to Section 3(b), 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
Share Amount. 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. The
Company covenants and agrees that it will honor all Notice of Conversions
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 any legally required prospectus
supplement pursuant to Rule 424 disclosing such election. Each Monthly
Redemption Notice shall specifically set forth the manner in which the Company
intends to pay the applicable Monthly Redemption Amount (i.e., the amount to be
paid in cash and/or the amount to be paid in Common Stock). Notwithstanding the
above, the Holder, at its option upon written notice to the Company, may defer
any one or more Monthly Redemptions until the Maturity Date, in which case the
Monthly Redemption Date for that Monthly Redemption Amount shall be the Maturity
Date. 

                    For
purposes hereof, 

                    “Monthly
Redemption Amount” shall mean the Original Principal Amount, divided by
eighteen (18). 

                    “Monthly
Redemption Date” means the 1st Business Day of each month, commencing
immediately upon November 1, 2008, and continuing until this Debenture is fully
redeemed or converted. 

                    “Monthly
Redemption Share Conversion Price” shall mean the lesser of (i) 85% of the
average of the three (3) lowest Closing Bid Prices of the Common Stock 

29 




over the twenty (20) Trading Day period ending on the Trading
Day immediately preceding the applicable Monthly Redemption Date, or (ii) the
Conversion Price then in effect. 

          Notwithstanding
anything to the contrary herein, the Corporation may not issue a number of
shares of Common Stock in excess of the Maximum Monthly Share Amount toward the
payment of Interest and Monthly Redemption Amounts, in the aggregate, for all of
the Debentures including but not limited to the Other Debentures, in the
aggregate, during any rolling twenty (20) Trading Day period, such shares to be
pro-rated among the Holders based upon the original principal amount of each
Holder’s Debenture in relation to the aggregate original principal amount of all
Debentures issued pursuant to the Securities Purchase Agreement)(collectively,
the “Monthly Share Payment Restriction”).

          Section
8.      Senior Debt; Secured
Obligation. 

                    
(a)      Senior Debt; Priority. The
Debentures shall constitute senior debt of the Company. There is no debt
currently outstanding that is senior to the Debentures except as otherwise set
forth on Schedule 8(a). All future debt issued by the Company or any
Subsidiary shall be subordinated and junior to the Debentures. Neither the
Company nor any Subsidiary shall, without the written permission of the Holder,
issue any other debt that is senior to, or pari passu with, the Debentures. From
the Original Issue Date of the Debentures through the date that all of the
Debentures have been paid in full or converted in full, before entering into, or
permitting any Subsidiary to enter into, any future debt with a third party, the
Company shall first obtain a subordination agreement, satisfactory to Holder,
from the proposed debt holder.

                    
(b)      Secured Obligation. The
obligations of the Company under this Debenture are secured by all assets of the
Company and its Subsidiaries pursuant to the Security Agreement (“Security
Agreement”) of date even herewith, between the Company, certain of the
Subsidiaries of the Company and the Secured Parties (as defined therein). 

          Section
9.      Certain Negative
Covenants; Misc. Without the prior written consent of the Required
Holders, for so long as any of the Debentures remain Outstanding, the Company
shall not, and shall not permit any of its Subsidiaries to, directly or
indirectly: 

                    (a)
(i) pay, declare or set apart for such payment, any dividend or other
distribution (whether in cash, property or other securities) on shares of
capital stock or (ii) directly or indirectly or through any Subsidiary of the
Company make any other payment or distribution in respect of its capital stock.
For purposes hereof, each Debenture or any portion thereof shall be deemed to be
“Outstanding” until such time as it has been converted, redeemed or
otherwise satisfied in accordance with its terms. 

                    (b)
redeem, repay, repurchase or otherwise acquire (whether for cash or in exchange
for property or other securities or otherwise) in any one transaction or series
of related transactions any shares of capital stock of the Company or any
warrants, rights or 

30 




options to purchase or acquire any such shares, other than as
to the Conversion Shares or Warrant Shares as permitted under the Transaction
Documents. 

                    (c)      by
amendment of its charter documents, including but not limited to the Articles of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of the
Debenture, and will at all times in good faith carry out all of the provisions
of the Debenture and take all action as may be required to protect the rights of
the Holder of the Debenture. 

                    
(d)      other than Permitted Indebtedness (as
defined herein), 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
(the “Indebtedness Negative Covenant”);

                    (e)      other
than Permitted Liens, enter into, create, incur, assume or suffer to exist any
mortgage, lien, pledge, charge, security interest or other encumbrance upon or
in any property or assets (including accounts and contract rights) owned by the
Company or any of its Subsidiaries (collectively, "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; 

                    
(f)      enter into any transaction with any Affiliate
(as defined in the Securities Purchase Agreement) of the Company, except with
respect to standard employment arrangements with officers and directors and
employees of the Company;

                    
(g)      redeem, defease, repurchase, repay or
make any payments in respect of, by the payment of cash or cash equivalents (in
whole or in part, whether by way of open market purchases, tender offers,
private transactions or otherwise), all or any portion of any Indebtedness,
whether by way of payment in respect of principal of (or premium, if any) or
interest on such Indebtedness, if at the time such payment is due or is
otherwise made or after giving effect to such payment, an event constituting, or
that with the passage of time and without being cured would constitute, an Event
of Default has occurred and is continuing; 

                    (h)     
make any payment on any indebtedness owed to officers, directors or Affiliates;
or 

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

31 




          Section
10.      Events of
Default. 

          Unless
waived by the Required Holders, each of the following events shall be considered
to be an "Event Of Default": 

                    (a)      Failure
to Make Cash Payments When Due. The Company fails to pay (each, a
“Payment Failure”) any cash payments due to the Holder under the terms of
this Debenture when due under this Debenture, whether on an interest or dividend
payment due date, at maturity, upon mandatory prepayment, upon acceleration,
upon an Event of Failure, or upon any Redemption or otherwise or fails to pay
any Liquidated Damages or other cash payments that are due and owing under this
Debenture, the Securities Purchase Agreement, the Registration Rights Agreement,
a Warrant or any other Transaction Document when due, including but not limited
to all accrued and unpaid Interest and Redemption Amounts, and accrued and
unpaid Interest thereon (each cash payment referred to above is referred to as a
“Required Cash Payment”), or fails to pay any late fees accrued on any of
the above, and such Payment Failure continues for a period of ten (10) days
after the applicable due date; or 

                    (b)      Conversion
and Delivery of the Shares. The Company (i) fails to issue and deliver
shares of Common Stock to the Holder upon exercise by the Holder of the
Conversion Rights of the Holder in accordance with the terms of this Debenture
by the fifteenth (15th) Business Day after the Conversion Date, or
(ii) fails for a period of ten (10) Business days to transfer or cause its
Transfer Agent to transfer (electronically or in certificated form) any
certificate for shares of Common Stock issued or issuable to the Holder upon
Conversion of the Debenture as and when required by the terms of this Debenture
or upon exercise the Warrant as and when required by the terms of the Warrant;
or 

                    (c)      Failure
to Effect and Maintain Registration. If (i) the Company fails to file any
Registration Statement or Additional Registration Statement within 45 days of
the date that such filing is required under the Registration Rights Agreement,
or (ii) the Company fails to file with the Commission a request for acceleration
of a Registration Statement in accordance with Rule 461 promulgated by the
Commission pursuant to the Securities Act, within ten (10) Trading Days of the
date that the Company is notified (orally or in writing, whichever is earlier)
by the Commission that such Registration Statement will not be “reviewed” or
will not be subject to further review, or (iii) during the Registration Period
(as defined in the Registration Rights Agreement), either (A) the effectiveness
of the Registration Statement lapses for any reason outside of the Company’s
ability to reasonably cure or (B) the Holder shall not be permitted to resell
Registrable Securities (as defined in the Registration Rights Agreement) either
under the Registration Statement or under Rule 144 for a period of more than 20
consecutive Trading Days or 30 non-consecutive Trading Days during any 12 month
period; provided, however, that if the Company is negotiating a merger,
consolidation, acquisition or sale of all or substantially all of its assets or
a similar or other material transaction and, in the written opinion of counsel
to the Company, the Registration Statement would be required to be amended to
include information concerning such 

32 




pending transaction(s) or the parties thereto which information
is not available or may not be publicly disclosed at the time, the Company shall
be permitted an additional 10 consecutive Trading Days during any 12 month
period pursuant to this Section 10(c)(iii), or (iv) prior to the effective date
of a Registration Statement, the Company fails to file a pre-effective amendment
and otherwise provide a commercially reasonable written response to any comments
(“SEC Comments”) made by the Commission in respect of such Registration
Statement within 20 days after the receipt of comments by or notice from the
Commission that such amendment is required in order for such Registration
Statement to be declared effective; or

                    (d)      Breach
of Covenants. The Company breaches any material representation, warranty,
covenant or other term or condition of this Debenture, or any of the other
Transaction Documents in any material respect, such breach has a material
adverse effect on the Buyer and such breach is not cured by the earlier to occur
of (i) five (5) Trading Days after written notice of such breach to the Company
from the Holder and (ii) ten (10) Trading Days after the Company has become or
should have become aware of such breach; or 

                    (e)      Breach
of Representations and Warranties. Any material representation or
warranty of the Company made herein, in any of the Transaction Documents or in
any agreement, statement or certificate given in writing pursuant hereto
(including, without limitation, pursuant to the Securities Purchase Agreement,
the Registration Rights Agreement, the Security Agreement and the Warrants),
shall be false or misleading in any material respect when made and the breach of
which has a material adverse effect on the rights of the Holder with respect to
this Debenture, the Securities Purchase Agreement, the Registration Rights
Agreement, the Security Agreement or the Warrants; or 

                    (f)      Receiver
or Trustee. The Company or any Subsidiary of the Company shall make
an assignment for the benefit of creditors, or apply for or consent to the
appointment of a receiver or trustee for it or for a substantial part of its
property or business, or such a receiver or trustee shall otherwise be
appointed; or 

                    (g)     
Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Company or any
"significant Subsidiary" (as defined in Rule 1-02(w) of Regulation S-X
promulgated under the 1933 Act) of the Company, or the Company or any
Significant Subsidiary shall otherwise be subject to a Bankruptcy Event; or 

                    (h)     
Delisting of Common Stock. A Delisting Event (as defined below) occurs
and remains uncured for a period of 10 Trading days, where a “Delisting
Event” means that the Common Stock is not listed or traded with an Eligible
Market; or 

                    (i)      Failure
to Authorize and Reserve Common Stock. The Holder's Reserved Share
Allocation is less than the number of shares of Common Stock that the 

33 




Holder would be entitled to receive upon a conversion of the
full Conversion Amount of this Debenture and upon an exercise in full of the
Warrants held by the Holder (without regard to any Beneficial Ownership
Limitations on conversion set forth in Section 3(a)(ii) or otherwise or any
analogous provisions of the Warrants), and such shortfall is not cured within
ten (10) Business Days; or

                    (j)      Legend
Removal Failure. A Legend Removal Failure (as defined below) occurs and
remains uncured for a period of fifteen (15) Business days, where “Legend
Removal Failure” means a failure by the Company to issue Conversion Shares,
Warrant Shares or Payment Shares without restrictive legends or to remove
restrictive legends from Conversion Shares, Warrant Shares or Payment Shares
when so required (or to withdraw any stop transfer instructions in respect
thereof), in each case pursuant to Section 3(e) hereof, Section 6 of the
Securities Purchase Agreement or otherwise pursuant to this Debenture, the
Securities Purchase Agreement or any of the other Transaction Documents; or


                    (k)      Corporate
Existence; Major Transaction. The Company has effected a Major
Transaction without paying the Major Transaction Redemption Price to the Holder
pursuant to Section 4(d) or, if the Holder did not elect a Redemption Upon Major
Transaction (if applicable), the Company has failed to meet the Assumption
Requirements of Section 4(b) prior to effecting a Change of Entity Transaction;
or 

                    (l)     
Breach of Securities Issuance Restrictions, Limited Issuances, Rights of
Participation or Securities Exchange Rights. A breach of any of Section
4(d)(i – v) of the Securities Purchase Agreement occurs; or 

                    (m)     
Security; Impermissible Liens. Any security interest in the
Collateral (as defined in the Security Agreement) ceases to be in effect or
properly perfected as and when required by the terms of this Debenture or the
Security Agreement, or the Company creates or suffers to exist any Lien upon any
of its properties, except for Permitted Liens; or 

                    (n)      Failure
to Comply With Dispute Resolution Procedures. The Company has failed to
comply in good faith with the Dispute Resolution Procedures (as defined herein)
or has failed to adjust the Conversion Price as required hereunder following a
Dilutive Issuance, a Milestone Failure, or otherwise (after any applicable
Dispute Resolution Procedure required herein), and such failure continues for an
additional ten (10) days after the Holder provides written notice (a “Dispute
Resolution Procedure Demand”) to the Company that such performance by the
Company is required; or 

                    (o)     
Cross-Default. A default in the payment when due on any Indebtedness of
the Company in excess of $100,000, in the aggregate, not involving a legitimate
business dispute as to the Company’s obligation to pay, which is not cured
within ten (10) Business Days; or 

34 




                    (p)      Failure
to Perfect Security Interest. The Company shall fail to make all required
filings or shall fail to take all other action necessary to fully perfect the
Holders’ security interest in any issued or pending patents or trademarks in
both (i) the United States and (ii) any other country where such patent or
trademark is issued or pending, in each case within forty five (45) days of the
date hereof (or, in the case of patents or trademarks filed or issued in the
future, within thirty (30) days of the date of such future filing or issuance).


                    (q)      Loss
of Key Person. Sass Peress fails to devote substantially all of his
professional time to the operations of the Company during any time that any
Debenture or any portion thereof is outstanding.

                    (r)      Failure
to Make Timely Public Filings. The Company shall fail to Timely File any
reports, schedules, forms, statements and other documents required to be filed
by it with the Commission pursuant to the reporting requirements of the 1934
Act. For purposes of this Agreement, “Timely Filed” shall mean that the
applicable document was filed (i) within five (5) days of its original due date
under the 1934 Act, or, (ii) if a request for an extension was timely filed in
accordance with Section 12b-25 of the 1934 Act, by such extended due date.

          Section
11.      Mandatory Redemption;
Posting of Bond. 

                    (a)      Mandatory
Redemption. If any Events of Default shall occur then, upon the occurrence
and during the continuation of any Event of Default, at the option of the
Holder, such option exercisable through the delivery of written notice to the
Company by such Holders (the "Default Notice"), the Debenture shall
become immediately due and payable and the Company shall pay to the Holder (a
“Mandatory Redemption”), in full satisfaction of its obligations
hereunder, an amount (such amount referred to herein as the "Default
Amount" or the “Mandatory Redemption Amount”) equal to the greater of
(i) and (ii) immediately below: 

                              (i)
the Mandatory Redemption Premium, multiplied by the sum (such sum of (x), plus
(y), plus (z) immediately below shall be referred to herein as the "Default
Conversion Sum") of

          (x)
the aggregate outstanding principal amount of this Debenture, PLUS

          (y)
all accrued and unpaid Interest thereon for the period beginning on the Original
Issue Date and ending on the date of payment of the Default Amount (the
"Default Payment Date"), PLUS

          (z)
all accrued and unpaid Liquidated Damages and other Required Cash Payments, if
any,

and

35 




                              (ii)
the Conversion Value of the Default Conversion Sum to be prepaid, where
”Conversion Value” means

          (x)
the Default Conversion Sum divided by the Conversion Price in effect on the date
that the Company pays the Default Amount;

MULTIPLIED BY

          (y)
the greater of (i) the Market Price (as defined herein) for the Common Stock on
the Default Notice Date or (ii) the Market Price on the date that the Company
pays the Default Amount.

          Notwithstanding
the occurrence of an Event of Default, Liquidated Damages and any other Required
Cash Payments shall continue to accrue. Five (5) Business Days after the
Company’s receipt of the Holder’s Default Notice (the “Default Amount Due
Date”), the Default Amount, together with all other amounts payable
hereunder, shall immediately become due and payable, all without demand,
presentment or notice, all of which hereby are expressly waived, together with
all costs, including, without limitation, legal fees and expenses, of
collection, and the Holder shall be entitled to exercise all other rights and
remedies available at law or in equity. If the Company fails to pay the Default
Amount by the Default Amount Due Date, (i) the Conversion Price shall be
permanently decreased (but not increased)(each, a “Default Adjustment”)
on the first Trading Day of each calendar month thereafter (each a “Default
Adjustment Date”) until the Default Amount is paid in full, to a price equal
to the lesser of (x) 90% of the Conversion Price in effect on the first such
Default Adjustment Date, or (y) the lowest Market Price that has occurred on any
Default Adjustment Date since the date that the Event of Default began and (ii)
at any time thereafter, the Holder shall have the right at any time, and from
time to time, so long as the Company remains in default (and so long and to the
extent that there are sufficient authorized shares), to require the Company,
upon written notice (“Default Conversion Notice”) (which may be given one
or more times, from time to time anytime after the Default Amount Due Date), to
immediately issue, in lieu of all or any specified portion (the “Specified
Portion”) of the unpaid portion (the “Unpaid Portion”) of the Default
Amount (together with any Late Payment Fees accrued thereon), a number of shares
(the “Default Shares”) of Common Stock, subject to the Beneficial
Ownership Limitation then in effect, equal to the Specified Portion of the
Default Amount (together with any accrued Late Payment Fees thereon) divided by
the Conversion Price in effect on the date such shares are issued to the Holder,
PROVIDED THAT, the Holder may require that such payment of shares be made in one
or more installments at such time and in such amounts as Holder chooses. The
Default shares are due within five (5) Business Days of the date that the Holder
delivers a Default Conversion Notice to the Company (the “Default Share
Delivery Deadline”). 

36 




          To
the extent redemptions required by this Section 11 are deemed or determined by a
court of competent jurisdiction to be prepayments of the Debenture by the
Company, such redemptions shall be deemed to be voluntary prepayments. If the
Company is unable to redeem all of the Debenture submitted for redemption, the
Company shall redeem a pro rata amount from each Holder based on the principal
amount of the Debenture submitted for redemption by such Holder relative to the
total principal amount of Debentures submitted for redemption by all Holders.
The parties hereto agree that in the event of the Company's redemption of any
portion of the Debenture under this Section 11, the Holder's damages would be
uncertain and difficult to estimate because of the parties' inability to predict
future interest rates and the uncertainty of the availability of a suitable
substitute investment opportunity for the Holder. Accordingly, any Mandatory
Redemption Amount due under this Section 11 is intended by the parties to be,
and shall be deemed, a reasonable estimate of the Holder's actual loss of its
investment opportunity and not as a penalty. 

          The
Holder shall not be entitled to receive Default Shares on a given date if and to
the extent that such issuance would cause the Beneficial Ownership Limitation
then in effect to be exceeded. If and to the extent that the issuance of Default
Shares with respect to a given Specified Portion would result in a violation of
the Beneficial Ownership Limitation, then that particular Specified Portion
shall be automatically reduced to a value that would cause the number of Default
Shares to be issued to equal the Maximum Percentage, and the amount of such
reduction shall be added back to the Unpaid Portion of the Default Amount. 

          Upon
the payment in full of the Mandatory Redemption Amount, the Holder shall
promptly surrender this Debenture to or as directed by the Company (or, if
applicable, shall submit a signed notice that such Debenture has been lost,
stolen or destroyed). 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 11. No such rescission or annulment shall affect any subsequent
Event of Default or impair any right consequent thereon. 

                    (b)      Posting
of Bond. In the event that any Event of Default occurs hereunder or
any Event of Default occurs under any of the Transaction Documents (as defined
in the Securities Purchase Agreement), then the Company may not raise as a legal
defense (in any Lawsuit, as defined below, or otherwise) or justification to
such Event of Default any claim that such Holder or anyone associated or
affiliated with such Holder has been engaged in any violation of law, unless the
Company has posted a surety bond (a “Surety Bond”) for the benefit of
such Holder in an amount equal to the aggregate Surety Bond Value (as defined
below) of all of the Holder’s Debenture and Warrants (the “Bond Amount”),
which Surety Bond shall remain in effect until the 

37 




completion of litigation of the dispute and the proceeds of
which shall be payable to such Holder to the extent Holder obtains judgment.

          For
purposes hereof, a “Lawsuit” shall mean any lawsuit, arbitration or other
dispute resolution filed by either party herein pertaining to any of the
Transaction Documents (as defined in the Securities Purchase Agreement).

          “Debenture
Market Value” shall mean the outstanding principal amount of this Debenture,
plus any accrued and unpaid Interest, Liquidated Damages and other Required Cash
Payments, divided by the lowest Conversion Price in effect at any time during
the period between the applicable Event of Default and the filing of the Surety
Bond required by this subsection (the “Surety Bond Pricing Period”), all
multiplied by the highest Closing Price during the Surety Bond Pricing Period.


          “Surety
Bond Value,” for each Debenture, shall mean 130% of the highest Debenture
Market Value (as defined above) of each of the Holder’s Debenture and for each
Warrant, shall mean 130% of the highest Black Scholes value (as defined in the
Warrants) of each of the Holder’s Warrants (where, in each case, such highest
market value represents the highest value determined during the period from the
date of the subject Event of Default through the Trading Day preceding the date
that such Surety Bond goes into effect). 

                    (c)      Injunction
and Posting of Bond. In the event that the Event of Default referred to in
subsection 11(b) above pertains to the Company’s failure to deliver unlegended
shares of Common Stock to the Holder pursuant to a Debenture Conversion, Warrant
Exercise, legend removal request, or otherwise, the Company may not refuse such
unlegended share delivery based on any claim that such Holder or any one
associated or affiliated with such Holder has been engaged in any violation of
law, unless an injunction from a court, on prior notice to Holder, restraining
and or enjoining Conversion of all or part of said Debenture shall have been
sought and obtained by the Company and the Company has posted a Surety Bond for
the benefit of such Holder in the amount of the Bond Amount (as described
above), which bond shall remain in effect until the completion of litigation of
the dispute and the proceeds of which shall be payable to such Holder to the
extent Holder obtains judgment.

                    (d)      Redemption
by Other Holders. Upon the Company's receipt of notice from any of the
holders of the Other Debentures for redemption or repayment as a result of an
event or occurrence of an Event of Default or a Major Transaction (each, an
"Other Redemption Notice"), the Company shall immediately, but no later
than one (1) Business Day of its receipt thereof, forward to the Holder by
facsimile a copy of such notice. If the Company receives a Redemption Notice and
one or more Other Redemption Notices, during the seven (7) Business Day period
beginning on and including the date which is three (3) Business Days prior to
the Company's receipt of the Holder's Redemption Notice and ending on and
including the date which is three (3) Business Days after the Company's receipt
of the Holder's Redemption Notice and the Company is unable to redeem all
principal, interest and other amounts designated in such 

38 




Redemption Notice and such Other Redemption Notices received
during such seven (7) Business Day period, then the Company shall redeem a pro
rata amount from each holder of the Debentures (including the Holder) based on
the principal amount of the Debentures submitted for redemption pursuant to such
Redemption Notice and such Other Redemption Notices received by the Company
during such seven (7) Business Day period. 

          Section
12.      Holder’s
Redemptions.

                    (a)      Mechanics
of Holder’s Redemptions. In the event that the Holder has sent a Major
Transaction Redemption Notice to the Company pursuant to Section 4(d) or a
Default Notice pursuant to Section 11(a), respectively (each, a “Redemption
Notice”), the Holder shall promptly submit this Debenture to the Company. In
the event of a redemption of less than all of the outstanding principal amount
of this Debenture, the Company shall promptly cause to be issued and delivered
to the Holder a new Debenture representing the outstanding principal amount
which has not been redeemed.

                    (b)      Warrants
Detachable. Neither an MFN Exchange (as defined in the Securities Purchase
Agreement) nor any Redemption of the Debenture shall have any effect on the
Holder’s Warrants. The Warrants constitute a separate, detachable security from
the Debentures. Notwithstanding any MFN Exchange or Redemption of the Debenture,
the Holder shall retain all of its outstanding Warrants. 

                    (c)      Maximum
Interest Rate. To the extent that the redemption premium for any Redemption
is deemed to constitute a payment of interest under applicable law, the amount
of such premium shall not exceed the maximum rate permitted by applicable law.


Section
13.      Late Payment
Fees. 

          Any
accrued amount under the Transaction Documents, whether principal, Interest,
Liquidated Damages, a Redemption Amount, Default Amount, or otherwise, which is
not paid when within three Business Days of the date due shall result in a late
charge being incurred and payable by the Company in an amount equal to interest
on such amount at the rate of eighteen (18%) per annum or the maximum rate
permitted by applicable law which shall accrued from the date such amount was
due until the same is paid in full ("Late Payment Fees"). 

Section
14.      Liquidated Damages;
Injunction. 

                    (a)      Payment
of Liquidated Damages. The accrued Liquidated Damages for each Event of
Failure shall be paid in cash on or before the fifth (5th) day of each month
following a month in which Liquidated Damages accrued, PROVIDED that, at the
option of the Holder (by written notice to the Company), if such payments are
not paid within the time period specified, at the option of the Holder, such
payments shall be added to the outstanding principal amount of this Debenture,
in which event interest shall 

39 




accrue thereon in accordance with the terms of this Debenture
and such additional principal amount shall be convertible into Common Stock at
the applicable Conversion Price in accordance with the terms of this Debenture.
Nothing herein shall limit the Holder's right to pursue actual damages (to the
extent in excess of the Liquidated Damages) for the Company's Event of Failure,
and the Holder shall have the right to pursue all remedies available at law or
in equity (including a decree of specific performance and/or injunctive relief).
Any shares of Common Stock issued upon Conversion of such amounts shall be
Registrable Securities (as defined in the Registration Rights Agreement). The
parties hereto acknowledge and agree that the sums payable as Liquidated Damages
or pursuant to a Redemption shall give rise to liquidated damages and not
penalties. The parties further acknowledge that (i) the amount of loss or
damages likely to be incurred by the Holder is incapable or is difficult to
precisely estimate, (ii) the amounts specified bear a reasonable proportion and
are not plainly or grossly disproportionate to the probable loss likely to be
incurred by the Holder, and (iii) the parties are sophisticated business parties
and have been represented by sophisticated and able legal and financial counsel
and negotiated this Agreement at arm’s length. Liquidated Damages are in
addition to any other payments that are or become due hereunder, including but
not limited to Interest Payments and any Shares that the Holder is entitled to
receive upon Conversion of this Debenture.

                    
(b)      Maximum Rate of Interest. Nothing
contained herein or in any document referred to herein or delivered in
connection herewith shall be deemed to establish or require the payment of a
rate of interest or other charges in excess of the maximum permitted by
applicable law. In the event that the rate of interest or dividends required to
be paid or other charges hereunder exceed the maximum permitted by such law, any
payments in excess of such maximum shall be credited against amounts owed by the
Company to the Holder and thus refunded to the Company. 

          Section
15.      Dispute Resolution.
In the case of a dispute as to the determination of the Conversion
Price or the arithmetic calculation of the number of Conversion Shares issuable
upon any conversion of this Debenture, the Company shall promptly issue to the
Holder the number of Conversion Shares that are not disputed and resolve such
dispute in accordance with this section. In the case of a dispute as to the
determination of the Closing Price, Closing Bid Price or the Volume Weighted
Average Price or the arithmetic calculation of the Conversion Price, Conversion
Price Adjustment, the amount of any Required Cash Payment amount, Interest or
dividend calculation, or any redemption price, redemption amount, Default Amount
or similar calculation, or the determination of whether or not a Dilutive
Issuance, a Milestone Failure, any other event which would lead to an adjustment
or the Conversion Price, or any issuance of Variable Equity Securities (as
defined in the Securities Purchase Agreement) has occurred, the Company shall
submit the disputed determinations or arithmetic calculations via facsimile
within two (2) Business Days of receipt, or deemed receipt, of the Conversion
Notice, any redemption notice, Default Notice or other event giving rise to such
dispute, as the case may be, to the Holder. If the Holder and the Company are
unable to agree upon such determination or calculation within two (2) Business
Days of such disputed determination or arithmetic calculation being submitted to
the Holder, then the Company shall, within 

40 




two (2) Business Days submit via facsimile (a) the disputed
determination of the Closing Price, Closing Bid Price or the Volume Weighted
Average Price to an independent, reputable investment bank selected by the
Company and approved by the Holder, which approval shall not be unreasonably
withheld, (b) the disputed arithmetic calculation of the Conversion Price,
Conversion Price Adjustment or any redemption price, redemption amount or
Default Amount to the Company’s independent, outside accountant or (c) the
disputed facts regarding the occurrence of a Dilutive Issuance, Milestone
Failure or issuance of Variable Equity Securities (or any other matter mentioned
above which is not specifically required to be submitted to the investment bank
or the accountant) to an expert attorney from a nationally recognized outside
law firm (having at least 100 attorneys and having with no prior relationship
with the Company) selected by the Company and approved by the Lead Investor as
defined in the Securities Purchase Agreement). The Company, at the Company’s
expense, shall cause the investment bank, the accountant, the law firm, or other
expert, as the case may be, to perform the determinations or calculations and
notify the Company and the Holder of the results no later than five (5) Business
Days from the time it receives the disputed determinations or calculations. Such
investment bank’s or accountant’s determination or calculation, as the case may
be, shall be binding upon all parties absent demonstrable error (collectively,
the “Dispute Resolution Procedures”).

          Section
16.      Miscellaneous.


                    (a)     
Failure or Indulgence Not Waiver. No failure or delay on the part
of the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privileges. All rights and remedies existing hereunder
are cumulative to, and not exclusive of, any rights or remedies otherwise
available. 

                    (b)      Notices.
Any notice herein required or permitted to be given shall be in writing and
may be personally served or delivered by courier or sent by United States mail
and shall be deemed to have been given upon receipt if personally served (which
shall include telephone line facsimile transmission) or sent by courier or five
(5) days after being deposited in the United States mail, certified, with
postage pre-paid and properly addressed, if sent by mail. For the purposes
hereof, the address of the Holder shall be as shown on the records of the
Company; and the address of the Company shall be as follows: Attn: Sass
Peress, President, CEO & Chairman, ICP Solar Technologies, Inc. 7075
Place Robert-Joncas, Montreal H4M272, Phone: 514-270-5770. Both the Holder
and the Company may change the address for service by service of written notice
to the other as herein provided. The Company shall provide the Holder with
prompt written notice of all actions taken pursuant to this Debenture, including
in reasonable detail a description of such action and the reason therefore.
Without limiting the generality of the foregoing, the Company will give written
notice to the Holder (i) immediately upon any adjustment of the Conversion
Price, setting forth in reasonable detail, and certifying, the calculation of
such adjustment and (ii) at least twenty (20) days prior to the date on which
the Company closes its books or takes a record (A) with 

41 




respect to any dividend or distribution upon the Common Stock,
(B) with respect to any pro rata subscription offer to holders of Common Stock
or (C) for determining rights to vote with respect to any Major Transaction,
dissolution or liquidation, provided in each case that such information shall be
made known to the public prior to or in conjunction with such notice being
provided to the Holder. 

                    (c)      Payments.
Whenever any payment of cash is to be made by the Company to any Person pursuant
to this Debenture or otherwise pursuant to the Transaction Documents, such
payment shall be made in lawful money of the United States of America by a check
drawn on the account of the Company and sent via overnight courier service to
such Person at such address as previously provided to the Company in writing
(which address, in the case of each of the Buyers, shall initially be as set
forth on the Schedule of Buyers attached to the Securities Purchase Agreement);
provided that the Holder may elect to receive a payment of cash via wire
transfer of immediately available funds by providing the Company with prior
written notice setting out such request and the Holder's wire transfer
instructions. Whenever any amount expressed to be due by the terms of this
Debenture is due on any day which is not a Business Day, the same shall instead
be due on the next succeeding day which is a Business Day and, in the case of
any Interest Payment Date which is not the date on which this Debenture is paid
in full, the extension of the due date thereof shall not be taken into account
for purposes of determining the amount of Interest due on such date.

                    (d)      Amendments.
Except as otherwise expressly provided herein, the Debentures, the Other
Debentures, and any provision hereof or thereof may only be amended by an
instrument in writing signed by the Required Holders.

                    (e)      Assignability.
This Debenture shall be binding upon the Company and its successors and
assigns, and shall inure to be the benefit of the Holder and its successors and
assigns. 

                    (f)      Payment
of Collection, Enforcement and Other Costs. If (i) this Debenture is placed
in the hands of an attorney for collection or enforcement or is collected or
enforced through any legal proceeding or the Holder otherwise takes action to
collect amounts due under this Debenture or to enforce the provisions of this
Debenture or (ii) there occurs any bankruptcy, reorganization, receivership of
the Company or other proceedings affecting Company creditors' rights and
involving a claim under this Debenture, then the Company shall pay the costs
incurred by the Holder for such collection, enforcement or action or in
connection with such bankruptcy, reorganization, receivership or other
proceeding, including, but not limited to, attorneys' fees and disbursements.


                    (g)      Governing
Law; Equitable Relief. All questions concerning the construction, validity,
enforcement and interpretation of this Debenture or the Transaction Documents
shall be governed by and construed and enforced in accordance with the internal
laws of the State of New York, without regard to the principles of conflicts of
law thereof. Each party agrees that all legal proceedings concerning the 

42 




interpretations, enforcement and defense of the transactions
contemplated by this Agreement and any other Transaction Documents (whether
brought against a party hereto or its respective affiliates, directors,
officers, shareholders, employees or agents) shall be commenced exclusively in
the state and federal courts sitting in the City of New York. 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 or is an 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 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 other
manner permitted by law. The parties hereby waive all rights to a trial by jury.
If either party shall commence an action or proceeding to enforce any provisions
of the Transaction Documents, then the prevailing party in such action or
proceeding shall be reimbursed by the other party for its reasonable attorneys’
fees and other costs and expenses incurred with the investigation, preparation
and prosecution of such action or proceeding. 

                    (h)      Certain
Amounts. Whenever pursuant to this Debenture the Company is required
to pay an amount in excess of the principal amount of the outstanding Debenture
(or the portion thereof required to be paid at that time) plus accrued and
unpaid Interest (including but not limited to any Liquidated Damages or other
Required Cash Payments), the Company and the Holder agree that the actual
damages to the Holder from the receipt of cash payment on this Debenture may be
difficult to determine and the amount to be so paid by the Company represents
stipulated damages and not a penalty and is intended to compensate the Holder in
part for loss of the opportunity to convert this Debenture and to earn a return
from the sale of shares of Common Stock acquired upon Conversion of this
Debenture at a price in excess of the price paid for such Shares pursuant to
this Debenture. The Company and the Holder hereby agree that such amount of
stipulated damages is not plainly disproportionate to the possible loss to the
Holder from the receipt of a cash payment without the opportunity to convert
this Debenture into shares of Common Stock. 

                    (i)      Rule
144 Hold Period. For purposes of Rule 144, it is intended, understood and
acknowledged that the Common Stock issuable upon Conversion of this Debenture
shall be deemed to have been acquired at the time the Debenture was issued.
Moreover, it is intended, understood and acknowledged that the holding period
for the Common Stock issuable upon Conversion of this Debenture shall be deemed
to have commenced on the date this Debenture was issued.

43 




                    (j)      Purchase
Agreement. By its acceptance of the Debenture, the Holder agrees to be bound
by the applicable terms of the Securities Purchase Agreement. 

                    (k)      Notice
of Corporate Events. Except as otherwise provided in this Debenture,
the Holder of this Debenture shall have no rights as a Holder of Common Stock
unless and only to the extent that it converts this Debenture into Common Stock.
The Company shall provide the Holder with prior notification of any meeting of
the Company's shareholders (and copies of proxy materials and other information
sent to shareholders). In the event the Company takes a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation,
reclassification or recapitalization) any share of any class or any other
securities or property, or to receive any other right, or for the purpose of
determining shareholders who are entitled to vote in connection with any
proposed sale, lease or conveyance of all or substantially all of the assets of
the Company or any proposed liquidation, dissolution or winding up of the
Company, the Company shall mail a notice to the Holder, at least twenty (20)
days prior to the record date specified therein (or thirty (30) days prior to
the consummation of the transaction or event, whichever is earlier), of the date
on which any such record is to be taken for the purpose of such dividend,
distribution, right or other event, and a brief statement regarding the amount
and character of such dividend, distribution, right or other event to the extent
known at such time. The Company shall make a public announcement of any event
requiring notification to the Holder hereunder substantially simultaneously with
the notification to the Holder in accordance with the terms of this Section
16(k). 

                    (l)      Remedies.
The remedies provided in this Debenture shall be cumulative and in addition
to all other remedies available under this Debenture and 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 right of the
Holder right to pursue actual damages for any failure by the Company to comply
with the terms of this Debenture or the Transaction Documents. The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Holder, by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Debenture will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Debenture or the other Transaction Documents,
that the Holder shall be entitled, in addition to all other available remedies
at law or in equity, to an injunction or injunctions restraining, preventing or
curing any breach of the Debenture and the other Transaction Documents and to
enforce specifically the terms and provisions thereof, without the necessity of
showing economic loss and without any bond or other security being required.


                    (m)      Construction;
Headings. This Debenture shall be deemed to be jointly drafted by the
Company and all the Purchasers and shall not be construed against any person as
the drafter hereof. The headings of this Debenture are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Debenture. 

44 




          IN
WITNESS WHEREOF, Company has caused the Debenture to be signed in its name by
its duly authorized officer this 13th day of June, 2008. 

COMPANY:
ICP Solar
Technologies, Inc. 

By:__________________________________
      
Sass Peress, President, CEO & Chairman

45 




EXHIBIT A 

NOTICE OF CONVERSION 

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

The undersigned hereby irrevocably
elects to convert $__________ in principal amount of the Debenture (defined
herein) into shares of Common Stock, par value $0.00001 per share ("Common
Stock"), of ICP Solar Technologies, Inc., a Nevada corporation (the
"Company"), plus:

- $_________ in accrued and unpaid
Interest Payments, plus
- $_________ in accrued and unpaid Liquidated
Damages, plus 
- $_________ in other Required Cash Payments (specify):
_______________________________________
__________________________________________________________________.


all according to the conditions of the convertible Debenture of
the Company dated as of June 13, 2008 (the "Debenture"), as of the date
written below. If securities 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. No fee will be
charged to the Holder for any Conversion, except for transfer taxes, if any. By
submitting this Notice of Conversion, the Holder certifies that the issuance of
the number of shares of Common Stock requested hereby will not result in a
violation of the Beneficial Ownership Limitation. 

          The
Company shall electronically transmit the Common Stock issuable pursuant to this
Notice of Conversion to the account of the undersigned or its nominee with DTC
through its Deposit Withdrawal Agent Commission system ("DWAC Transfer").


Name of DTC Prime
Broker:______________________________
Account
Number:________________________________________


In lieu of receiving shares of Common
Stock issuable pursuant to this Notice of Conversion by way of a DWAC Transfer,
the undersigned hereby requests that the Company issue a certificate or
certificates for the number of shares of Common Stock set forth above (which
numbers are based on the Holder's calculation attached hereto) in the name(s)
specified immediately below or, if additional space is necessary, on an
attachment hereto: 

Name:
_________________________________________________


Address:
_______________________________________________


The undersigned represents and warrants that all offers and
sales by the undersigned of the securities issuable to the undersigned upon
Conversion of the Debenture shall be 

46 




made pursuant to registration of the securities under the
Securities Act of 1933, as amended (the "ACT"), or pursuant to an
exemption from registration under the Act. 

(i) Date of
Conversion:_______________________________
Applicable Conversion
Price:________________________
Number of Shares of Common
______________________
Stock to be Issued Pursuant to (i):
____________________
Conversion of the
Debenture:_______________________


(ii) Conversion of accrued and unpaid
Interest Payments, in accrued and unpaid Liquidated Damages, and/or other
Required Cash Payments:

______________________________________________________________. 

Signature:
______________________________________________________
Name:
_________________________________________________________
Address:
_______________________________________________________


Upon Conversion of the Debenture in accordance with the terms
thereof, the Holder shall not be required to physically surrender the Debenture
(or evidence of loss, theft or destruction thereof) to the Company unless all of
the Debenture is converted, in which case such Holder shall deliver the
Debenture being converted to the Company promptly following the Conversion Date
at issue. The Company shall issue and deliver shares of Common Stock to an
overnight courier not later than the third Business Days following receipt of
the Notice of Conversion with respect to the Debenture(s) to be converted, and
shall make payments pursuant to the Debenture for the number of Business Days
such issuance and delivery is late. 

47 




SCHEDULE 6(g) 
MILESTONES 


	Milestone
      Date 	Milestone Goals 
	October 31, 2008 

	- 2 Quarter Trailing Revenues as reported in
      the Company’s public filings equal or exceed $4,000,000 

- 2
      Quarter Trailing Consolidated EBITDA as reported in the Company’s public
      filings equal or exceed $50,000 
	April 30, 2009 

	- 4 Quarter Trailing Revenues as reported in
      the Company’s public filings equal or exceed $13,000,000 

- 4
      Quarter Trailing Consolidated EBITDA as reported in the Company’s public
      filings equal or exceed $1,100,000 



For purposes of the above, the following definitions shall
apply: 

“Consolidated EBITDA” means, with respect to any Person
for any period, the Consolidated Net Income of such Person and its Subsidiaries
for such period, plus without duplication, the sum of the following amounts of
such Person and its Subsidiaries for such period and to the extent deducted in
determining Consolidated Net Income of such Person for such period: (A)
Consolidated Net Interest Expense, (B) income tax expense, (C) depreciation
expense, (D) amortization expense, and (E) any additional non-cash charges
including but not limited to compensation expense and accretion. 

“Consolidated Net Income” means, with respect to any
Person for any period, the net income (loss) of such Person and its Subsidiaries
for such period, determined on a consolidated basis and in accordance with GAAP,
but excluding from the determination of Consolidated Net Income (without
duplication) (a) any extraordinary or non recurring gains or losses or gains or
losses from Dispositions, (b) restructuring charges, (c) any tax refunds, net
operating losses or other net tax benefits and (d) effects of discontinued
operations. 

“Consolidated Net Interest Expense” means, with respect
to any Person, for any period, gross interest expense of such Person and its
Subsidiaries for such period determined on a consolidated basis and in
accordance with GAAP (excluding the interest component of any Capitalized Lease
Obligations), less interest income determined on a consolidated basis and in
accordance with GAAP.

48