exv10w3



 



EXHIBIT
10.3





EXHIBIT A



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



Original Issue Date: October 19, 2007

Original Conversion Price (subject to adjustment herein): $2.50




$_______________




NATURAL HEALTH TRENDS CORP.

VARIABLE RATE CONVERTIBLE DEBENTURE




     THIS DEBENTURE is one of a series of duly authorized and validly issued Variable Rate
Convertible Debentures of Natural Health Trends Corp., a Delaware corporation, (the
“Company”), having its principal place of business at 2050 Diplomat Drive, Dallas, Texas,
75234, designated as its Variable Rate Convertible Debenture (this debenture, the
“Debenture” and, collectively with the other debentures of such series, the
“Debentures”).



     FOR VALUE RECEIVED, the Company promises to pay to                      or its registered
assigns (the “Holder”), or shall have paid pursuant to the terms hereunder, the principal
sum of $                     on October 19, 2009 (the “Maturity Date”) or such earlier date as
this Debenture is required or permitted to be repaid as provided hereunder, or such later date as
may be permitted by the Holder as set forth in Section 2 hereof, 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 Debenture is subject to the following additional provisions:



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



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




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




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




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




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




     “Change of Control Transaction” means the occurrence after the date hereof of
any of (i) an acquisition after the date hereof by an individual or legal entity or “group”
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control
(whether through legal or beneficial ownership of capital stock of the Company, by contract
or otherwise) of in excess of 40% of the voting securities of the Company (other than by
means of conversion or exercise of the Debentures and the Securities issued together with
the Debentures), or (ii) the Company merges into or consolidates with any other Person, or
any Person merges into or consolidates with the Company and, after giving effect to such
transaction, the stockholders of the Company immediately prior to such transaction own less
than 66% of the aggregate voting power of the Company or the successor entity of such
transaction, or (iii) the Company sells or transfers all or substantially all of its assets
to another Person and the stockholders of the Company immediately prior to such transaction
own less than 40% of the aggregate voting power of the acquiring entity immediately after
the transaction, or (iv) when, during any period of thirty-six (36) consecutive months, the
individuals who, at the



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beginning of such period, constitute the Board of Directors (the “Incumbent Directors”)
cease for any reason other than death to constitute at least a majority thereof, provided,
however, that a director who was not a director at the beginning of such 36-month period
shall be deemed to have satisfied such 36-month requirement (and be an Incumbent Director)
if such director was elected by, or on the recommendation of or with the approval of, at
least two-thirds of the directors who then qualified as Incumbent Directors either actually
(because they were directors at the beginning of such 36-month period) or through the
operation of this provision, or (v) the execution by the Company of an agreement to which
the Company is a party or by which it is bound, providing for any of the events set forth
in clauses (i) through (iv) above.




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




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




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




     “Debenture Register” shall have the meaning set forth in Section 2(c).




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




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




     “Effectiveness Period” shall have the meaning set forth in the Registration
Rights Agreement.




     “Equity Conditions” means, during the period in question, (i) the Company shall
have duly honored all conversions and redemptions scheduled to occur or occurring by virtue
of one or more Notices of Conversion of the Holder, if any, (ii) the Company shall have paid
all liquidated damages and other amounts owing to the Holder in respect of this Debenture,
(iii) there is an effective Registration Statement covering the resale of all of the Common
Stock issuable pursuant to the Transaction documents to which the Equity Conditions apply
pursuant to which the Holder is permitted to utilize the prospectus thereunder to resell all
of the shares issuable pursuant to the Transaction Documents (and the Company believes, in
good faith, that such effectiveness will continue uninterrupted for the foreseeable future),
(iv) the Common Stock is trading on a Trading Market and all of the shares issuable pursuant
to the Transaction Documents are listed or quoted for trading on such Trading Market (and
the Company believes, in good faith, that trading of the Common Stock on a Trading Market
will continue uninterrupted for the foreseeable future), (v) 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, (vi) there is no existing
Event of Default or no existing event which, with the passage of time or the giving of
notice, would constitute an Event of Default, (vii) the issuance of the shares in question
(or, in the case of an Optional or Monthly Redemption, the shares issuable upon conversion
in full of the



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Optional or Monthly Redemption Amount) to the Holder would not violate the limitations
set forth in Section 4(c)(i) and Section 4(c)(ii) herein, (viii) there has been no public
announcement of a pending or proposed Fundamental Transaction or Change of Control
Transaction that has not been consummated, (ix) the Holder is not in possession of any
information provided by the Company that constitutes, or may constitute, material non-public
information, (x) for each Trading Day in a period of 20 consecutive Trading Days prior to
the applicable date in question, the daily trading volume for the Common Stock on the
principal Trading Market exceeds (A) $150,000 per Trading Day in the case of an Optional
Redemption pursuant to Section 6(a) herein and a Forced Conversion pursuant to Section 6(d)
herein, (B) $50,000 per Trading Day in the case of a Monthly Redemption pursuant to Section
6(b) herein, and (C) $25,000 per Trading Day in the case of interest payments pursuant to
Section 2 herein, and (xi) the issuance in question does not exceed 20% of the total trading
volume of the Common Stock during the 20 consecutive Trading Days immediately prior to the
date in question.




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




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




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




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




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




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




     “Interest Conversion Rate” means 90% of the lesser of (a) the average of the
VWAPs for the 20 consecutive Trading Days ending on the Trading Day that is immediately
prior to the applicable Interest Payment Date or (b) the average of the VWAPs for the 20
consecutive Trading Days ending on the Trading Day that is immediately prior to the date the
applicable Interest Conversion Shares are issued and delivered if such delivery is after the
Interest Payment Date.




     “Interest Conversion Shares” shall have the meaning set forth in Section 2(b).




     “Interest Notice Period” shall have the meaning set forth in Section 2(b).




     “Interest Payment Date” shall have the meaning set forth in Section 2(b).




     “Interest Period” means, initially, the period beginning on and including the
Original Issue Date and ending on and including December 31, 2007 and each successive period
as follows: the period beginning on and including January 1 and ending on and including
March 31; the period beginning on and including April 1 and ending on and including June 30;
and the period beginning on and including July 1 and ending on and



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including September 30; and the period beginning on October 1 and ending on and
including December 31.




     “Interest Share Amount” shall have the meaning set forth in Section 2(b).




     “Late Fees” shall have the meaning set forth in Section 2(d).




     “LIBOR” means, for each Interest Period (i) the six-month London Interbank
Offered Rate for deposits in U.S. dollars, as shown on such the Trading Day immediately
prior to the beginning of such Interest Period in The Wall Street Journal (Eastern Edition)
under the caption “Money Rates — London Interbank Offered Rates (LIBOR)”; or (ii) if The
Wall Street Journal does not publish such rate, the offered one-month rate for deposits in
U.S. dollars which appears on the Reuters Screen LIBO Page as of 10:00 a.m., New York time,
the Trading Day immediately prior to the beginning of such Interest Period, provided that if
at least two rates appear on the Reuters Screen LIBO Page on any such Trading Day, the
“LIBOR” for such day shall be the arithmetic mean of such rates.




     “Mandatory Default Amount” means the sum of (i) the greater of (A) 115% of the
outstanding principal amount of this Debenture, plus 100% of accrued and unpaid interest
hereon, or (B) the outstanding principal amount of this Debenture, plus all accrued and
unpaid interest hereon, divided by the Conversion Price on the date the Mandatory Default
Amount is either (a) demanded (if demand or notice is required to create an Event of
Default) or otherwise due or (b) paid in full, whichever has a lower Conversion Price,
multiplied by the VWAP on the date the Mandatory Default Amount is either (x) demanded or
otherwise due or (y) paid in full, whichever has a higher VWAP, and (ii) all other amounts,
costs, expenses and liquidated damages due in respect of this Debenture.




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




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




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




     “Monthly Redemption Amount” means, as to a Monthly Redemption,
$___1, plus accrued but unpaid interest, liquidated damages and any other
amounts then owing to the Holder in respect of this Debenture.





 




			
	1	 	1/24th of the original principal amount of
this Debenture.




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     “Monthly Redemption Date” means the 1st of each month, commencing November 1,
2008, and terminating upon the full redemption of $                    2 principal amount of
this Debenture.




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




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




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




     “Optional Redemption” shall have the meaning set forth in Section 6(a).




     “Optional Redemption Amount” means the sum of (i) 115% of the then outstanding
principal amount of the Debenture, (ii) accrued but unpaid interest and (iii) all liquidated
damages and other amounts due in respect of the Debenture.




     “Optional Redemption Date” shall have the meaning set forth in Section 6(a).




     “Optional Redemption Notice” shall have the meaning set forth in Section 6(a).




     “Optional Redemption Notice Date” shall have the meaning set forth in Section
6(a).




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




     “Permitted Indebtedness” means (a) the indebtedness evidenced by the
Debentures, (b) the Indebtedness existing on the Original Issue Date and set forth on
Schedule 3.1(aa) attached to the Purchase Agreement, (c) lease obligations and
purchase money indebtedness of up to $250,000, in the aggregate, incurred in connection with
the acquisition of capital assets and lease obligations with respect to newly acquired or
leased assets and (d) indebtedness that (i) is expressly subordinate to the Debentures
pursuant to a written subordination agreement with the Purchasers that is acceptable to each
Purchaser in its sole and absolute discretion and (ii) matures at a date later than the
Maturity Date.




     “Permitted Lien” means the individual and collective reference to the
following: (a) Liens for taxes, assessments and other governmental charges or levies not yet
due or Liens for taxes, assessments and other governmental charges or levies being contested
in good faith and by appropriate proceedings for which adequate reserves (in the good faith
judgment of the management of the Company) have been established in accordance with GAAP;
(b) Liens imposed by law which were incurred in the ordinary course of the





 




			
	2	 	50% of the original principal amount of this Debenture.




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Company’s business, such as carriers’, warehousemen’s and mechanics’ Liens, statutory
landlords’ Liens, and other similar Liens arising in the ordinary course of the Company’s
business, and which (x) do not individually or in the aggregate materially detract from the
value of such property or assets or materially impair the use thereof in the operation of
the business of the Company and its consolidated Subsidiaries or (y) are being contested in
good faith by appropriate proceedings, which proceedings have the effect of preventing for
the foreseeable future the forfeiture or sale of the property or asset subject to such Lien;
(c) Liens incurred in connection with Permitted Indebtedness under clauses (a), (b) and (c)
thereunder, provided that such Liens are not secured by assets of the Company or its
Subsidiaries other than the assets so acquired or leased; and (d) Liens described in
Schedule 3.1(aa) to the Purchase Agreement.




     “Pre-Redemption Conversion Shares” shall have the meaning set forth in Section
6(b) hereof.




     “Purchase Agreement” means the Securities Purchase Agreement, dated as of
October 19, 2007, among the Company and the original Holders, as amended, modified or
supplemented from time to time in accordance with its terms.




     “Registration Rights Agreement” means the Registration Rights Agreement, dated
as of the date of the Purchase Agreement, among the Company and the original Holders, as
amended, modified or supplemented from time to time in accordance with its terms.




     “Registration Statement” means a registration statement that registers the
resale of all Conversion Shares and Interest Conversion Shares of the Holder, names the
Holder as a “selling stockholder” therein, and meets the requirements of the Registration
Rights Agreement.




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




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




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




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




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




     “Trading Day” means a day on which the principal Trading Market is open for
business.




     “Trading Market” means the following markets or exchanges on which the Common
Stock is listed or quoted for trading on the date in question: the American Stock



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Exchange, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select
Market, or the New York Stock Exchange.




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




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




Section 2. Interest, Extension of Maturity Date.




     a) Interest Rate. The rate of interest on the outstanding principal amount of
this Debenture shall be the greater of (i) LIBOR for the applicable Interest Period plus 4%
and (ii) 10%.




     b) Payment of Interest in Cash or Kind. The Company shall pay interest to the
Holder on the aggregate unconverted and then outstanding principal amount of this Debenture
at the rate per annum equal to the greater of (i) LIBOR for the applicable Interest Period
plus 4% and (ii) 10%, or such lesser rate as shall be the highest rate permitted by
applicable law, payable quarterly on January 1, April 1, July 1 and October 1, beginning on
the first such date after the Original Issue Date, on each Monthly Redemption Date (as to
that principal amount then being redeemed), on each Conversion Date (as to that principal
amount then being converted), on each Optional Redemption Date (as to that principal amount
then being redeemed) and on the Maturity Date (each such date, an “Interest Payment
Date”) (if any Interest Payment Date is not a Business Day, then the applicable payment
shall be due on the next succeeding Business Day), in cash or, at the Company’s option, in
duly authorized, validly issued, fully paid and non-assessable shares of Common Stock at the
Interest Conversion Rate (the dollar amount to be paid in shares, the “Interest Share
Amount”) or a combination thereof; provided, however, that payment in
shares of Common Stock may only occur if (i) all of the Equity Conditions have been met
(unless waived by the Holder in writing) during the 20 Trading Days immediately prior to the
applicable Interest Payment Date (the “Interest Notice Period”) and through and
including the date such shares of Common Stock are actually



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issued to the Holder, (ii) the Company shall have given the Holder notice in accordance
with the notice requirements set forth below, and (iii) as to such Interest Payment Date,
prior to such Interest Notice Period (but not more than 5 Trading Days prior to the
commencement of such Interest Notice Period), the Company shall have delivered to the
Holder’s account with The Depository Trust Company a number of shares of Common Stock to be
applied against such Interest Share Amount equal to the quotient of (x) the applicable
Interest Share Amount divided by (y) the Interest Conversion Rate assuming for such purposes
the Interest Payment Date is the 2nd Trading prior to the Interest Notice Period
(the “Interest Conversion Shares”). Notwithstanding anything herein to the
contrary, until such time as the Company has obtained Shareholder Approval and it is deemed
effective, in no event shall the Company issue any Interest Conversion Shares hereunder to
the extent that such issuance of Interest Conversion Shares would exceed, in the aggregate,
503,967, together with any prior such issuances and issuances of Conversion Shares pursuant
to a Monthly Redemption in excess of the number otherwise issuable if the Monthly Conversion
Price was the Conversion Price (each an “Interest Shares Limited Issuance”). Upon
such Interest Shares Limited Issuance, the Company shall pay interest hereunder in cash
only.




     c) Company’s Election to Pay Interest in Kind. Subject to the terms and
conditions herein, the decision whether to pay interest hereunder in cash, shares of Common
Stock or a combination thereof shall be at the discretion of the Company. Prior to the
commencement of any Interest Notice Period, the Company shall deliver to the Holder a
written notice of its election to pay interest hereunder on the applicable Interest Payment
Date either in cash, shares of Common Stock or a combination thereof and the Interest Share
Amount as to the applicable Interest Payment Date, provided that the Company may indicate in
such notice that the election contained in such notice shall apply to future Interest
Payment Dates until revised by a subsequent notice. During any Interest Notice Period, the
Company’s election (whether specific to an Interest Payment Date or continuous) shall be
irrevocable as to such Interest Payment Date. Subject to the aforementioned conditions,
failure to timely deliver such written notice to the Holder shall be deemed an election by
the Company to pay the interest on such Interest Payment Date in cash. At any time the
Company delivers a notice to the Holder of its election to pay the interest in shares of
Common Stock, the Company shall timely file a prospectus supplement pursuant to Rule 424
disclosing such election. The aggregate number of shares of Common Stock otherwise issuable
to the Holder on an Interest Payment Date shall be reduced by the number of Interest
Conversion Shares previously issued to the Holder in connection with such Interest Payment
Date.




     d) Interest Calculations. Interest shall be calculated on the basis of a
360-day year, consisting of twelve 30 calendar day periods, and shall accrue daily
commencing on the Original Issue Date until payment in full of the outstanding principal,
together with all accrued and unpaid interest, liquidated damages and other amounts which
may become due hereunder, has been made. Payment of interest in shares of Common Stock
(other than the Interest Conversion Shares issued prior to an Interest Notice Period) shall
otherwise occur pursuant to Section 4(d)(ii) herein and, solely for purposes of the payment
of interest in shares, the Interest Payment Date shall be deemed the Conversion



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Date. Interest shall cease to accrue with respect to any principal amount converted,
provided that the Company actually delivers the Conversion Shares within the time period
required by Section 4(d)(ii) herein. Interest hereunder will be paid to the Person in whose
name this Debenture is registered on the records of the Company regarding registration and
transfers of this Debenture (the “Debenture Register”). Except as otherwise provided
herein, if at any time the Company pays interest partially in cash and partially in shares
of Common Stock to the holders of the Debentures, then such payment of cash shall be
distributed ratably among the holders of the then-outstanding Debentures based on their (or
their predecessor’s) initial purchases of Debentures pursuant to the Purchase Agreement.




     e) Late Fee. All overdue accrued and unpaid interest to be paid hereunder
shall entail a late fee at an interest rate equal to the lesser of 18% per annum or the
maximum rate permitted by applicable law (“Late Fees”) which shall accrue daily from
the date such interest is due hereunder through and including the date of actual payment in
full. Notwithstanding anything to the contrary contained herein, if on any Interest Payment
Date the Company has elected to pay accrued interest in the form of Common Stock but the
Company is not permitted to pay accrued interest in Common Stock because it fails to satisfy
the conditions for payment in Common Stock set forth in Section 2(a) herein, then, at the
option of the Holder, the Company, in lieu of delivering either shares of Common Stock
pursuant to this Section 2 or paying the regularly scheduled interest payment in cash, shall
deliver, within three Trading Days of each applicable Interest Payment Date, an amount in
cash equal to the product of (x) the number of shares of Common Stock otherwise deliverable
to the Holder in connection with the payment of interest due on such Interest Payment Date
multiplied by (y) the highest VWAP during the period commencing on the Interest Payment Date
and ending on the Trading Day prior to the date such payment is actually made. If any
Interest Conversion Shares are issued to the Holder in connection with an Interest Payment
Date and are not applied against an Interest Share Amount, then the Holder shall promptly
return such excess shares to the Company.




     f) Prepayment. Except as otherwise set forth in this Debenture, the Company
may not prepay any portion of the principal amount of this Debenture without the prior
written consent of the Holder.




     g) Extension of Maturity Date. Subject to the Company’s prior right of Optional
Redemption as set forth in Section 6(a), the Holder may, in its sole discretion, extend the
Maturity Date of this Debenture for a period of up to 3 additional years as elected by the
Holder in a written notice to the Company delivered prior to the original Maturity Date
(final possible Maturity Date being October 19, 2012).




Section 3. Registration of Transfers and Exchanges.




     a) Different Denominations. This Debenture is exchangeable for an equal
aggregate principal amount of Debentures of different authorized denominations, as



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requested by the Holder surrendering the same. No service charge will be payable for
such registration of exchange.




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




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




Section 4. Conversion.




     a) Voluntary Conversion. At any time after the Original Issue Date until this
Debenture is no longer outstanding, this Debenture shall be convertible, in whole or in
part, into shares of Common Stock at the option of the Holder, at any time and from time to
time (subject to the conversion limitations set forth in Section 4(c) hereof). The Holder
shall effect conversions by delivering to the Company a Notice of Conversion, the form of
which is attached hereto as Annex A (a “Notice of Conversion”), specifying
therein the principal amount of this Debenture to be converted and the date on which such
conversion shall be effected (such date, the “Conversion Date”). If no Conversion
Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such
Notice of Conversion is deemed delivered hereunder. To effect conversions hereunder, the
Holder shall not be required to physically surrender this Debenture to the Company unless
the entire principal amount of this Debenture, plus all accrued and unpaid interest thereon,
has been so converted. Conversions hereunder shall have the effect of lowering the
outstanding principal amount of this Debenture in an amount equal to the applicable
conversion. The Holder and the Company shall maintain records showing the principal
amount(s) converted and the date of such conversion(s). The Company may deliver an
objection to any Notice of Conversion within 1 Business Day of delivery of such Notice of
Conversion. In the event of any dispute or discrepancy, the records of the Holder shall be
controlling and determinative in the absence of manifest error. The Holder, and any assignee
by acceptance of this Debenture, acknowledge and agree that, by reason of the provisions of
this paragraph, following conversion of a portion of this Debenture, the unpaid and
unconverted principal amount of this Debenture may be less than the amount stated on the
face hereof.




     b) Conversion Price. The conversion price in effect on any Conversion Date
shall be equal to $2.50, subject to adjustment herein (the “Conversion Price”).




     c) Conversion Limitations.



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     i. Issuance Limitations. Notwithstanding anything herein to the
contrary, if the Company has not obtained Shareholder Approval, then the Company may
not issue, upon conversion of this Debenture or the issuance of shares of Common
Stock for the payment of principal, interest or liquidated damages, a number of
shares of Common Stock which, when aggregated with any shares of Common Stock issued
on or after the Original Issue Date and prior to such Conversion Date (A) in
connection with the conversion of any Debentures issued pursuant to the Purchase
Agreement or as payment of principal, interest or liquidated damages, would exceed
2,014,862 shares of Common Stock (subject to adjustment for forward and reverse
stock splits, recapitalizations and the like) (such number of shares, the
“Issuable Maximum”). Each Holder shall be entitled to a portion of the
Issuable Maximum equal to the quotient obtained by dividing (x) the original
principal amount of the Holder’s Debenture by (y) the aggregate original principal
amount of all Debentures issued on the Original Issue Date to all Holders. In
addition, each Holder may allocate its pro-rata portion of the Issuable Maximum
among Debentures and Warrants held by it in its sole discretion. Such portion shall
be adjusted upward ratably in the event a Holder no longer holds any Debentures or
Warrants and the amount of shares issued to the Holder pursuant to the Holder’s
Debentures and Warrants was less than the Holder’s pro-rata share of the Issuable
Maximum.




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



12









 







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




d) Mechanics of Conversion.



13









 






     i. Conversion Shares Issuable Upon Conversion of Principal Amount. The
number of Conversion Shares issuable upon a conversion hereunder shall be determined
by the quotient obtained by dividing (x) the outstanding principal amount of this
Debenture to be converted by (y) the Conversion Price.




     ii. Delivery of Certificate Upon Conversion. Not later than three
Trading Days after each Conversion Date (the “Share Delivery Date”), the
Company shall deliver, or cause to be delivered, to the Holder (A) a certificate or
certificates representing the Conversion Shares which, on or after the Effective
Date, shall be free of restrictive legends and trading restrictions (other than
those which may then be required by the Purchase Agreement) representing the number
of Conversion Shares being acquired upon the conversion of this Debenture
(including, if the Company has given continuous notice pursuant to Section 2(b) for
payment of interest in shares of Common Stock at least 20 Trading Days prior to the
date on which the Conversion Notice is delivered to the Company, shares of Common
Stock representing the payment of accrued interest otherwise determined pursuant to
Section 2(a) but assuming that the Interest Notice Period is the 20 Trading Days
period immediately prior to the date on which the Conversion Notice is delivered to
the Company and excluding for such issuance the condition that the Company deliver
Interest Conversion Shares as to such interest payment) and (B) a bank check in the
amount of accrued and unpaid interest (if the Company has elected or is required to
pay accrued interest in cash). On or after the Effective Date, the Company shall use
its best efforts to deliver any certificate or certificates required to be delivered
by the Company under this Section 4 electronically through the Depository Trust
Company or another established clearing corporation performing similar functions.




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




     iv. Obligation Absolute; Partial Liquidated Damages. The Company’s
obligations to issue and deliver the Conversion Shares upon conversion of this
Debenture in accordance with the terms hereof are absolute and unconditional,
irrespective of any action or inaction by the Holder to enforce the same, any waiver
or consent with respect to any provision hereof, the recovery of any judgment
against any Person or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the Holder
or any other Person of any obligation to the Company or any



14









 







violation or alleged violation of law by the Holder or any other Person, and
irrespective of any other circumstance which might otherwise limit such obligation
of the Company to the Holder in connection with the issuance of such Conversion
Shares; provided, however, that such delivery shall not operate as a
waiver by the Company of any such action the Company may have against the Holder.
In the event the Holder of this Debenture shall elect to convert any or all of the
outstanding principal amount hereof, the Company may not refuse conversion based on
any claim that the Holder or anyone associated or affiliated with the Holder has
been engaged in any violation of law, agreement or for any other reason, unless an
injunction from a court, on notice to Holder, restraining and or enjoining
conversion of all or part of this Debenture shall have been sought and obtained, and
the Company posts a surety bond for the benefit of the Holder in the amount of 150%
of the outstanding principal amount of this Debenture, which is subject to the
injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the underlying dispute and the proceeds of which shall be
payable to the Holder to the extent it obtains judgment. In the absence of such
injunction, the Company shall issue Conversion Shares or, if applicable, cash, upon
a properly noticed conversion. If the Company fails for any reason to deliver to
the Holder such certificate or certificates pursuant to Section 4(d)(ii) by the
second Trading Day after the Share Delivery Date, the Company shall pay to the
Holder, in cash, as liquidated damages and not as a penalty, for each $1000 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 second Trading Day after the Share Delivery Date until such
certificates are delivered. Nothing herein shall limit a Holder’s right to pursue
actual damages or declare an Event of Default pursuant to Section 8 hereof for the
Company’s failure to deliver Conversion Shares within the period specified herein
and the Holder shall have the right to pursue all remedies available to it
hereunder, at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief. The exercise of any such rights shall not
prohibit the Holder from seeking to enforce damages pursuant to any other Section
hereof or under applicable law.




     v. Compensation for Buy-In on Failure to Timely Deliver Certificates Upon
Conversion. In addition to any other rights available to the Holder, if the
Company fails for any reason to deliver to the Holder such certificate or
certificates by the Share Delivery Date pursuant to Section 4(d)(ii), and if after
such Share Delivery Date the Holder is required by its brokerage firm to purchase
(in an open market transaction or otherwise), or the Holder’s brokerage firm
otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by
the Holder of the Conversion Shares which the Holder was entitled to receive upon
the conversion relating to such Share Delivery Date (a “Buy-In”), then the
Company shall (A) pay in cash to the Holder (in addition to any other remedies
available to or elected by the Holder) the amount by which (x) the Holder’s total
purchase price (including any brokerage commissions) for the Common Stock so



15









 







purchased exceeds (y) the product of (1) the aggregate number of shares of
Common Stock that the Holder was entitled to receive from the conversion at issue
multiplied by (2) the actual sale price at which the sell order giving rise to such
purchase obligation was executed (including any brokerage commissions) and (B) at
the option of the Holder, either reissue (if surrendered) this Debenture in a
principal amount equal to the principal amount of the attempted conversion or
deliver to the Holder the number of shares of Common Stock that would have been
issued if the Company had timely complied with its delivery requirements under
Section 4(d)(ii). For example, if the Holder purchases Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion
of this Debenture with respect to which the actual sale price of the Conversion
Shares (including any brokerage commissions) giving rise to such purchase obligation
was a total of $10,000 under clause (A) of the immediately preceding sentence, the
Company shall be required to pay the Holder $1,000. The Holder shall provide the
Company written notice indicating the amounts payable to the Holder in respect of
the Buy-In and, upon request of the Company, evidence of the amount of such loss.
Nothing herein shall limit a Holder’s right to pursue any other remedies available
to it hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief with respect to the Company’s failure
to timely deliver certificates representing shares of Common Stock upon conversion
of this Debenture as required pursuant to the terms hereof.




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




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



16









 






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




Section 5. Certain Adjustments.




     a) Stock Dividends and Stock Splits. If the Company, at any time while this
Debenture is outstanding: (A) pays a stock dividend or otherwise makes a distribution or
distributions payable in shares of Common Stock on shares of Common Stock or any Common
Stock Equivalents (which, for avoidance of doubt, shall not include any shares of Common
Stock issued by the Company upon conversion of, or payment of interest on, the Debentures);
(B) subdivides outstanding shares of Common Stock into a larger number of shares; (C)
combines (including by way of a reverse stock split) outstanding shares of Common Stock into
a smaller number of shares; or (D) issues, in the event of a reclassification of shares of
the Common Stock, any shares of capital stock of the Company, then the Conversion Price
shall be multiplied by a fraction of which the numerator shall be the number of shares of
Common Stock (excluding any treasury shares of the Company) outstanding immediately before
such event and of which the denominator shall be the number of shares of Common Stock
outstanding immediately after such event. Any adjustment made pursuant to this Section
shall become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision, combination or
re-classification.




     b) Subsequent Equity Sales. If, at any time while this Debenture is
outstanding, the Company or any Subsidiary, as applicable, sells or grants any option to
purchase or sells or grants any right to reprice, or otherwise disposes of or issues (or
announces any sale, grant or any option to purchase or other disposition), any Common Stock
or Common Stock Equivalents entitling any Person to acquire shares of Common Stock at an
effective price per share that is lower than the then Conversion Price (such lower price,
the “Base Conversion Price” and such issuances, collectively, a “Dilutive
Issuance”) (if the holder of the Common Stock or Common Stock Equivalents so issued
shall at any time, whether by operation of purchase price adjustments, reset provisions,
floating conversion, exercise or exchange prices or otherwise, or due to warrants, options
or rights per share which are issued in connection with such issuance, be entitled to
receive shares of Common Stock at an effective price per share that is lower than the



17









 







Conversion Price, such issuance shall be deemed to have occurred for less than the
Conversion Price on such date of the Dilutive Issuance), then the Conversion Price shall be
reduced to equal the Base Conversion Price. Such adjustment shall be made whenever such
Common Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing, no
adjustment will be made under this Section 5(b) in respect of an Exempt Issuance. If the
Company enters into a Variable Rate Transaction, despite the prohibition set forth in the
Purchase Agreement, the Company shall be deemed to have issued Common Stock or Common Stock
Equivalents at the lowest possible conversion price at which such securities may be
converted or exercised. The Company shall notify the Holder in writing, no later than 1
Business Day following the issuance of any Common Stock or Common Stock Equivalents subject
to this Section 5(b), indicating therein the applicable issuance price, or applicable reset
price, exchange price, conversion price and other pricing terms (such notice, the
“Dilutive Issuance Notice”). For purposes of clarification, whether or not the
Company provides a Dilutive Issuance Notice pursuant to this Section 5(b), upon the
occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of
Conversion Shares based upon the Base Conversion Price on or after the date of such Dilutive
Issuance, regardless of whether the Holder accurately refers to the Base Conversion Price in
the Notice of Conversion.




     c) Subsequent Rights Offerings. If the Company, at any time while the
Debenture is outstanding, shall issue rights, options or warrants to all holders of Common
Stock (and not to Holders) entitling them to subscribe for or purchase shares of Common
Stock at a price per share that is lower than the VWAP on the record date referenced below,
then the Conversion Price shall be multiplied by a fraction of which the denominator shall
be the number of shares of the Common Stock outstanding on the date of issuance of such
rights or warrants plus the number of additional shares of Common Stock offered for
subscription or purchase, and of which the numerator shall be the number of shares of the
Common Stock outstanding on the date of issuance of such rights or warrants plus the number
of shares which the aggregate offering price of the total number of shares issued (assuming
delivery to the Company in full of all consideration payable upon exercise of such rights,
options or warrants) would purchase at such VWAP. Such adjustment shall be made whenever
such rights or warrants are issued, and shall become effective immediately after the record
date for the determination of stockholders entitled to receive such rights, options or
warrants.




     d) Pro Rata Distributions. If the Company, at any time while this Debenture is
outstanding, distributes to all holders of Common Stock (and not to the Holders) evidences
of its indebtedness or assets (including cash and cash dividends) or rights or warrants to
subscribe for or purchase any security (other than the Common Stock, which shall be subject
to Section 5(b)), then in each such case the Conversion Price shall be adjusted by
multiplying such Conversion Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by a fraction of which
the denominator shall be the VWAP determined as of the record date mentioned above, and of
which the numerator shall be such VWAP on such record date less the then fair market value
at such record date of the portion of such assets or



18









 







evidence of indebtedness so distributed applicable to 1 outstanding share of the Common
Stock as determined by the Board of Directors of the Company in good faith. In either case
the adjustments shall be described in a statement delivered to the Holder describing the
portion of assets or evidences of indebtedness so distributed or such subscription rights
applicable to 1 share of Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record date mentioned
above.




     e) Fundamental Transaction. If, at any time while this Debenture is
outstanding, (A) the Company effects any merger or consolidation of the Company with or into
another Person, (B) the Company effects any sale of all or substantially all of its assets
in one transaction or a series of related transactions, (C) any tender offer or exchange
offer (whether by the Company or another Person) is completed pursuant to which holders of
Common Stock are permitted to tender or exchange their shares for other securities, cash or
property, or (D) the Company effects any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is effectively converted into
or exchanged for other securities, cash or property (in any such case, a “Fundamental
Transaction”), then, upon any subsequent conversion of this Debenture, the Holder shall
have the right to receive, for each Conversion Share that would have been issuable upon such
conversion immediately prior to the occurrence of such Fundamental Transaction, the same
kind and amount of securities, cash or property as it would have been entitled to receive
upon the occurrence of such Fundamental Transaction if it had been, immediately prior to
such Fundamental Transaction, the holder of 1 share of Common Stock (the “Alternate
Consideration”). For purposes of any such conversion, the determination of the
Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration
based on the amount of Alternate Consideration issuable in respect of 1 share of Common
Stock in such Fundamental Transaction, and the Company shall apportion the Conversion Price
among the Alternate Consideration in a reasonable manner reflecting the relative value of
any different components of the Alternate Consideration. If holders of Common Stock are
given any choice as to the securities, cash or property to be received in a Fundamental
Transaction, then the Holder shall be given the same choice as to the Alternate
Consideration it receives upon any conversion of this Debenture following such Fundamental
Transaction. To the extent necessary to effectuate the foregoing provisions, any successor
to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder
a new debenture consistent with the foregoing provisions and evidencing the Holder’s right
to convert such debenture into Alternate Consideration. The terms of any agreement pursuant
to which a Fundamental Transaction is effected shall include terms requiring any such
successor or surviving entity to comply with the provisions of this Section 5(e) and
insuring that this Debenture (or any such replacement security) will be similarly adjusted
upon any subsequent transaction analogous to a Fundamental Transaction.




     f) Calculations. All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this
Section 5, the number of shares of Common Stock deemed to be issued and outstanding



19









 







as of a given date shall be the sum of the number of shares of Common Stock (excluding
any treasury shares of the Company) issued and outstanding.




g) Notice to the Holder.




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




     ii. Notice to Allow Conversion by Holder. If (A) the Company shall
declare a dividend (or any other distribution in whatever form) on the Common Stock,
(B) the Company shall declare a special nonrecurring cash dividend on or a
redemption of the Common Stock, (C) the Company shall authorize the granting to all
holders of the Common Stock of rights or warrants to subscribe for or purchase any
shares of capital stock of any class or of any rights, (D) the approval of any
stockholders of the Company shall be required in connection with any
reclassification of the Common Stock, any consolidation or merger to which the
Company is a party, any sale or transfer of all or substantially all of the assets
of the Company, of any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property or (E) the Company shall authorize
the voluntary or involuntary dissolution, liquidation or winding up of the affairs
of the Company, then, in each case, the Company shall cause to be filed at each
office or agency maintained for the purpose of conversion of this Debenture, and
shall cause to be delivered to the Holder at its last address as it shall appear
upon the Debenture Register, at least 20 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as of
which the holders of the Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be determined or (y) the date
on which such reclassification, consolidation, merger, sale, transfer or share
exchange is expected to become effective or close, and the date as of which it is
expected that holders of the Common Stock of record shall be entitled to exchange
their shares of the Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, sale, transfer or share exchange,
provided that the failure to deliver such notice or any defect therein or in the
delivery thereof shall not affect the validity of the corporate action required to
be specified in such notice. The Holder is entitled to convert this Debenture
during the 20-day period commencing on the date of such notice through the effective
date of the event triggering such notice.




Section 6. Redemption and Forced Conversion.



20









 






     a) Optional Redemption at Election of Company. Subject to the provisions of
this Section 6, at any time, the Company may deliver a notice to the Holder (an
“Optional Redemption Notice” and the date such notice is deemed delivered hereunder,
the “Optional Redemption Notice Date”) of its irrevocable election to redeem some or
all of the then outstanding principal amount of this Debenture for cash in an amount equal
to the Optional Redemption Amount on the 20th Trading Day following the Optional
Redemption Notice Date (such date, the “Optional Redemption Date” and such
redemption, the “Optional Redemption”). The Optional Redemption Amount is payable
in full on the Optional Redemption Date. The Company may only effect an Optional Redemption
if each of the Equity Conditions shall have been met (unless waived in writing by the
Holder) on each Trading Day during the period commencing on the Optional Redemption Notice
Date through to the Optional Redemption Date and through and including the date payment of
the Optional Redemption Amount is actually made in full. If any of the Equity Conditions
shall cease to be satisfied at any time during the 20 Trading Day period, then the Holder
may elect to nullify the Optional Redemption Notice by notice to the Company within 3
Trading Days after the first day on which any such Equity Condition has not been met
(provided that if, by a provision of the Transaction Documents, the Company is obligated to
notify the Holder of the non-existence of an Equity Condition, such notice period shall be
extended to the third Trading Day after proper notice from the Company) in which case the
Optional Redemption Notice shall be null and void, ab initio. The Company
covenants and agrees that it will honor all Notices of Conversion tendered from the time of
delivery of the Optional Redemption Notice through the date all amounts owing thereon are
due and paid in full.




     b) Monthly Redemption. On each Monthly Redemption Date, the Company shall
redeem the Monthly Redemption Amount (the “Monthly Redemption”). The Monthly
Redemption Amount payable on each Monthly Redemption Date shall be paid in cash;
provided, however, as to any Monthly Redemption and upon 30 Trading Days’
prior written irrevocable notice (the “Monthly Redemption Notice”), in lieu of a
cash redemption payment the Company may elect to pay all or part of a Monthly Redemption
Amount in Conversion Shares based on a conversion price equal to the lesser of (i) the then
Conversion Price and (ii) 90% of the average of the VWAPs for the 20 consecutive Trading
Days ending on the Trading Day that is immediately prior to the applicable Monthly
Redemption Date (subject to adjustment for any stock dividend, stock split, stock
combination or other similar event affecting the Common Stock during such 20 Trading Day
period) (the price calculated during the 20 Trading Day period immediately prior to the
Monthly Redemption Date, the “Monthly Conversion Price” and such 20 Trading Day
period, the “Monthly Conversion Period”); provided, further, that
the Company may not pay the Monthly Redemption Amount in Conversion Shares unless (y) from
the date the Holder receives the duly delivered Monthly Redemption Notice through and until
the date such Monthly Redemption is paid in full, the Equity Conditions have been satisfied,
unless waived in writing by the Holder, and (z) as to such Monthly Redemption, prior to such
Monthly Conversion Period (but not more than 5 Trading Days prior to the commencement of the
Monthly Conversion Period), the Company shall have delivered to the Holder’s account with
The Depository Trust Company a number of



21









 







shares of Common Stock to be applied against such Monthly Redemption Amount equal to
the quotient of (x) the applicable Monthly Redemption Amount divided by (y) the lesser of
(1) the then Conversion Price and (2) the Monthly Conversion Price assuming for such
purposes the Monthly Conversion Period ends on the 2nd Trading Day immediately
prior to the date of the applicable Monthly Redemption Notice (the “Pre-Redemption
Conversion Shares”). The Holder may convert, pursuant to Section 4(a), any principal
amount of this Debenture subject to a Monthly Redemption at any time prior to the date that
the Monthly Redemption Amount, plus accrued but unpaid interest, liquidated damages and any
other amounts then owing to the Holder are due and paid in full. Unless otherwise indicated
by the Holder in the applicable Notice of Conversion, any principal amount of this Debenture
converted during the applicable Monthly Conversion Period until the date the Monthly
Redemption Amount is paid in full shall be first applied to the principal amount subject to
the Monthly Redemption Amount payable in cash and then to the Monthly Redemption Amount
payable in Conversion Shares. Any principal amount of this Debenture converted during the
applicable Monthly Conversion Period in excess of the Monthly Redemption Amount shall be
applied against the last principal amount of this Debenture scheduled to be redeemed
hereunder, in reverse time order from the Maturity Date; provided, however,
if any such conversion is applied against such Monthly Redemption Amount, the Pre-Redemption
Conversion Shares, if any were issued in connection with such Monthly Redemption or were not
already applied to such conversions, shall be first applied against such conversion. The
Company covenants and agrees that it will honor all 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 a prospectus supplement pursuant to Rule 424
disclosing such election. Notwithstanding anything herein to the contrary, until such time
as the Company has obtained Shareholder Approval and it is deemed effective, in no event
shall the Company issue any Conversion Shares upon a Monthly Redemption hereunder to the
extent that such issuance of Conversion Shares would exceed, in the aggregate, 503,967,
together with any prior such issuances and issuances of Conversion Shares pursuant to a
Monthly Redemption in excess of the number otherwise issuable if the Monthly Conversion
Price was the Conversion Price (each a “Monthly Redemption Limited Issuance”). Upon
such Monthly Redemption Limited Issuance, the Company shall pay interest hereunder in cash
only.




     c) Redemption Procedure. The payment of cash pursuant to an Optional
Redemption shall be payable on the Optional Redemption Date. If any portion of the payment
pursuant to an Optional Redemption shall not be paid by the Company by the applicable due
date, interest shall accrue thereon at an interest rate equal to the lesser of 18% per annum
or the maximum rate permitted by applicable law until such amount is paid in full.
Notwithstanding anything herein contained to the contrary, if any portion of the Optional
Redemption Amount remains unpaid after such date, the Holder may elect,



22









 







by written notice to the Company given at any time thereafter, to invalidate such
Optional Redemption, ab initio, and, with respect to the Company’s failure
to honor the Optional Redemption, the Company shall have no further right to exercise such
Optional Redemption. The payment of cash or Common Stock pursuant to a Monthly Redemption
shall be payable on the Monthly Redemption Date. If any portion of the payment pursuant to
a Monthly Redemption shall not be paid by the Company by the applicable due date, interest
shall accrue thereon at an interest rate equal to the lesser of 18% per annum or the maximum
rate permitted by applicable law until such amount is paid in full. Notwithstanding anything
to the contrary in this Section 6, the Company’s determination to redeem in cash or its
elections under Section 6(b) shall be applied ratably among the Holders of Debentures. The
Holder may elect to convert the outstanding principal amount of the Debenture pursuant to
Section 4 prior to actual payment in cash for any redemption under this Section 6 by the
delivery of a Notice of Conversion to the Company.




     d) Forced Conversion. Notwithstanding anything herein to the contrary, if (i)
after the 12 month anniversary of the Effective Date, the VWAP for each of any 20
consecutive Trading Days, which period shall have commenced only after the Effective Date
(as to such Forced Conversion, such period the “Threshold Period”), exceeds $7.50,
subject to adjustment for reverse and forward stock splits, stock dividends, stock
combinations and other similar transactions of the Common Stock that occur after the date of
this Agreement, or (ii) at least 20 Trading Days (but not more than 45) prior to October 19,
2012 (assuming the Maturity Date was extended by the Holder pursuant to Section 2(g) (as to
such Forced Conversion, the 20 Trading Day period immediately prior to such date, the
“Threshold Period”) (“Maturity Date Forced Conversion”), the Company may,
within 1 Trading Day after the end of any such Threshold Period as to clause (i) and within
the time period prescribed above as to clause (ii), deliver a written notice to the Holder
(a “Forced Conversion Notice” and the date such notice is delivered to the Holder,
the “Forced Conversion Notice Date”) to cause the Holder to convert all or part of
the then outstanding principal amount of this Debenture plus, if so specified in the Forced
Conversion Notice, accrued but unpaid interest, liquidated damages and other amounts owing
to the Holder under this Debenture at, if pursuant to clause (i), the Conversion Price, and
if pursuant to clause (ii), 90% of the average of the VWAPs during the Threshold Period, it
being agreed that the “Conversion Date” for purposes of Section 4 shall be deemed to occur
on, as to clause (i), the third Trading Day following the Forced Conversion Notice Date and
as to clause (ii), October 19, 2012 (such date, the “Forced Conversion Date”). The
Company may not deliver a Forced Conversion Notice, and any Forced Conversion Notice
delivered by the Company shall not be effective, unless all of the Equity Conditions are met
(unless waived in writing by the Holder) on each Trading Day occurring during the applicable
Threshold Period through and including the later of the Forced Conversion Date and the
Trading Day after the date such Conversion Shares pursuant to such conversion are delivered
to the Holder. Any Forced Conversion shall be applied ratably to all Holders based on their
initial purchases of Debentures pursuant to the Purchase Agreement, provided that any
voluntary conversions by a Holder shall be applied against the Holder’s pro rata allocation,
thereby decreasing the aggregate amount forcibly converted hereunder if only a portion of
this Debenture is



23









 







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



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




     a) other than Permitted Indebtedness, enter into, create, incur, assume, guarantee or
suffer to exist any indebtedness for borrowed money of any kind, including but not limited
to, a guarantee, on or with respect to any of its property or assets now owned or hereafter
acquired or any interest therein or any income or profits therefrom;




     b) other than Permitted Liens, enter into, create, incur, assume or suffer to exist any
Liens of any kind, on or with respect to any of its property or assets now owned or
hereafter acquired or any interest therein or any income or profits therefrom;




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




     d) repay, repurchase or offer to repay, repurchase or otherwise acquire more than a
de minimis number of shares of its Common Stock or Common Stock Equivalents
other than as to (a) the Conversion Shares or Warrant Shares as permitted or required under
the Transaction Documents, (b) repurchases of Common Stock or Common Stock Equivalents of
departing officers and directors of the Company, provided that such repurchases shall not
exceed an aggregate of $100,000 for all officers and directors during the term of this
Debenture, and (c) cancellation of Common Stock in satisfaction of withholding tax
obligations on grants of restricted stock under the Company’s 2007 Equity Incentive Plan;




     e) repay, repurchase or offer to repay, repurchase or otherwise acquire any
Indebtedness, other than the Debentures if on a pro-rata basis, other than regularly
scheduled principal and interest payments as such terms are in effect as of the Original
Issue Date;




     f) pay cash dividends or distributions on any equity securities of the Company, except
with respect to cash dividends payable pursuant to 160,000 shares of the Company’s 7% Series
A Convertible Preferred Stock outstanding as of the Original Issue Date;




     g) enter into any transaction with any Affiliate of the Company which would be required
to be disclosed in any public filing with the Commission, unless such



24









 







transaction is made on an arm’s-length basis and expressly approved by a majority of
the disinterested directors of the Company (even if less than a quorum otherwise required
for board approval); or




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




Section 8. Events of Default.




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




     i. any default in the payment of (A) the principal amount of any Debenture or
(B) interest, liquidated damages and other amounts owing to a Holder on any
Debenture, as and when the same shall become due and payable (whether on a
Conversion Date or the Maturity Date or by acceleration or otherwise) which default,
solely in the case of an interest payment or other default under clause (B) above,
is not cured within 3 Trading Days;




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




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




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




     v. the Company or any Significant Subsidiary shall be subject to a Bankruptcy
Event;



25









 






     vi. the Company or any Subsidiary shall default on any of its obligations under
any mortgage, credit agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued, or by which there may
be secured or evidenced, any indebtedness for borrowed money or money due under any
long term leasing or factoring arrangement that (a) involves an obligation greater
than $150,000, whether such indebtedness now exists or shall hereafter be created,
and (b) results in such indebtedness becoming or being declared due and payable
prior to the date on which it would otherwise become due and payable;




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




     viii. the Company shall be a party to any Change of Control Transaction or
Fundamental Transaction or shall agree to sell or dispose of all or in excess of 40%
of its assets in one transaction or a series of related transactions (whether or not
such sale would constitute a Change of Control Transaction);




     ix. the Initial Registration Statement (as defined in the Registration Rights
Agreement) shall not have been declared effective by the Commission on or prior to
the 270th calendar day after the Closing Date;




     x. if, during the Effectiveness Period (as defined in the Registration Rights
Agreement), either (a) the effectiveness of the Registration Statement lapses for
any reason or (b) the Holder shall not be permitted to resell Registrable Securities
(as defined in the Registration Rights Agreement) under the Registration Statement
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 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 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 15 consecutive Trading Days
during any 12 month period pursuant to this Section 8(a)(x);




     xi. the Company shall fail for any reason to deliver certificates to a Holder
prior to the seventh Trading Day after a Conversion Date or any Forced Conversion
Date pursuant to Section 4(d) or the Company shall provide at any time notice to the
Holder, including by way of public announcement, of the Company’s intention to not
honor requests for conversions of any Debentures in accordance with the terms
hereof; or



26









 







xii. any monetary judgment, writ or similar final process shall be entered or
filed against the Company, any subsidiary or any of their respective property or
other assets for more than $250,000, and such judgment, writ or similar final
process shall remain unvacated, unbonded or unstayed for a period of 45 calendar
days.




     b) Remedies Upon Event of Default. If any Event of Default occurs, the
outstanding principal amount of this Debenture, plus accrued but unpaid interest, liquidated
damages and other amounts owing in respect thereof through the date of acceleration, shall
become, at the Holder’s election, immediately due and payable in cash at the Mandatory
Default Amount. Commencing 5 days after the occurrence of any Event of Default that results
in the eventual acceleration of this Debenture, the interest rate on this Debenture shall
accrue at an interest rate equal to the lesser of 18% per annum or the maximum rate
permitted under applicable law. Upon the payment in full of the Mandatory Default Amount,
the Holder shall promptly surrender this Debenture to or as directed by the Company. In
connection with such acceleration described herein, the Holder need not provide, and the
Company hereby waives, any presentment, demand, protest or other notice of any kind, and the
Holder may immediately and without expiration of any grace period enforce any and all of its
rights and remedies hereunder and all other remedies available to it under applicable law.
Such acceleration may be rescinded and annulled by Holder at any time prior to payment
hereunder and the Holder shall have all rights as a holder of the Debenture until such time,
if any, as the Holder receives full payment pursuant to this Section 8(b). No such
rescission or annulment shall affect any subsequent Event of Default or impair any right
consequent thereon.




Section 9. Miscellaneous.




     a) Notices. Any and all notices or other communications or deliveries to be
provided by the Holder hereunder, including, without limitation, any Notice of Conversion,
shall be in writing and delivered personally, by facsimile, or sent by a nationally
recognized overnight courier service, addressed to the Company, at the address set forth
above, or such other facsimile number or address as the Company may specify for such purpose
by notice to the Holder delivered in accordance with this Section 9. Any and all notices or
other communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile, or sent by a nationally recognized overnight
courier service addressed to each Holder at the facsimile number or address of the Holder
appearing on the books of the Company, or if no such facsimile number or address appears, at
the principal place of business of the Holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the facsimile
number specified in this Section 9 prior to 5:30 p.m. (New York City time) on a Trading Day,
(ii) the next Trading Day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile number specified in this Section 9 on a day that is
not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the
second Trading



27









 







Day following the date of mailing, if sent by U.S. nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to whom such notice is required to
be given. The address for such notices and communications shall be as set forth on the
signature pages attached to the Purchase Agreement.




     b) Absolute Obligation. Except as expressly provided herein, no provision of
this Debenture shall alter or impair the obligation of the Company, which is absolute and
unconditional, to pay the principal of, liquidated damages and accrued interest, as
applicable, on this Debenture at the time, place, and rate, and in the coin or currency,
herein prescribed. This Debenture is a direct debt obligation of the Company. This
Debenture ranks pari passu with all other Debentures now or hereafter issued
under the terms set forth herein.




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




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



28









 







action or proceeding to enforce any provisions of this Debenture, then the prevailing
party in such action or proceeding shall be reimbursed by the other party for its attorneys
fees and other costs and expenses reasonably incurred in the investigation, preparation and
prosecution of such action or proceeding.




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




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




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




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




     i) Assumption.  Any successor to the Company or any surviving entity in a
Fundamental Transaction shall (i) assume, prior to such Fundamental Transaction, all of the
obligations of the Company under this Debenture and the other Transaction Documents pursuant
to written agreements in form and substance satisfactory to the Holder (such approval not to
be unreasonably withheld or delayed) and (ii) issue to the Holder a new debenture of such
successor entity evidenced by a written instrument



29









 







substantially similar in form and substance to this Debenture, including, without
limitation, having a principal amount and interest rate equal to the principal amount and
the interest rate of this Debenture and having similar ranking to this Debenture, which
shall be satisfactory to the Holder (any such approval not to be unreasonably withheld or
delayed).  The provisions of this Section 9(i) shall apply similarly and equally to
successive Fundamental Transactions and shall be applied without regard to any limitations
of this Debenture.




     j) Usury. This Debenture shall be subject to the anti-usury limitations
contained in the Purchase Agreement.



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




30









 





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



	 	 	 	 	 	 	 	 	 
	 	 	NATURAL HEALTH TRENDS CORP.	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 

	 	 	 	Name:	 	 	 	 
	 

	 	 	 	Title:	 	 	 	 
	 	 	Facsimile No. for delivery of Notices:	 	 	 	 
	 

	 	 	 	 	 	 	 	 





31









 





ANNEX A




NOTICE OF CONVERSION




     The undersigned hereby elects to convert principal under the Variable Rate Convertible
Debenture due October 19, 2009 of Natural Health Trends Corp., a Delaware corporation (the
“Company”), into shares of common stock (the “Common Stock”), of the Company
according to the conditions hereof, as of the date written below. If shares of Common Stock are to
be issued in the name of a person other than the undersigned, the undersigned will pay all transfer
taxes payable with respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be charged to the holder
for any conversion, except for such transfer taxes, if any.



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



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



Conversion calculations:




	 	 	 
	 

	 	Date to Effect Conversion:
	 
	 	 
	 

	 	Principal Amount of Debenture to be Converted:
	 
	 	 
	 

	 	Payment of Interest in Common Stock
             yes              no
	 

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

	 
	 	 
	 

	 	Number of shares of Common Stock to be issued:
	 
	 	 
	 

	 	Signature:
	 
	 	 
	 

	 	Name:
	 
	 	 
	 

	 	Address for Delivery of Common Stock Certificates:
	 
	 	 
	 

	 	Or
	 
	 	 
	 

	 	DWAC Instructions:
	 
	 	 
	 

	 	Broker No:                    
	 

	 	Account No:                    






32









 





Schedule 1




CONVERSION SCHEDULE



The Variable Rate Secured Convertible Debentures due on October 19, 2009 in the aggregate principal
amount of $4,500,000 are issued by Natural Health Trends Corp. This Conversion Schedule reflects
conversions made under Section 4 of the above referenced Debenture.




Dated:




	 	 	 	 	 	 	 
	 

	 	 	 	Aggregate	 	 
	 

	 	 	 	Principal	 	 
	 

	 	 	 	Amount	 	 
	 

	 	 	 	Remaining	 	 
	 

	 	 	 	Subsequent to	 	 
	 

	 	 	 	Conversion	 	 
	Date of Conversion

	 	 	 	(or original	 	 
	(or for first entry,

	 	Amount of
	 	Principal	 	 
	Original Issue Date)

	 	Conversion
	 	Amount)
	 	Company Attest
	 

	 	 
	 	 
	 	 






33