Unassociated Document


    NEITHER
      THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS CONVERTIBLE
      HAVE
      BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
      COMMISSION OF ANY STATE. THESE SECURITIES HAVE BEEN SOLD 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.

     

    THIS
      DEBENTURE IS ISSUED SUBJECT TO THE TERMS OF A SECONDARY SUBORDINATION AGREEMENT,
      DATED AS OF OCTOBER 31, 2007, AMONG THE ISSUER, THE PURCHASERS OF JUNIOR SECURED
      CONVERTIBLE DEBENTURES AND CERTAIN SENIOR CREDITORS (AS DEFINED THEREIN), A
      COPY
      OF WHICH IS AVAILABLE FROM THE SECRETARY OF THE ISSUER.

     

    HANDHELD
      ENTERTAINMENT, INC.

     

    
      JUNIOR
        SECURED
        CONVERTIBLE
        DEBENTURE

       

    

    
      	
              Issuance
                Date: October 31, 2007

            	 	
              Original
                Principal Amount: $

            
	
              No.
                ZVUE-2-__

            	 	 


    

    


    FOR
      VALUE RECEIVED,
      HANDHELD
      ENTERTAINMENT, INC., a Delaware corporation (the "Company"),
      hereby promises to pay to the order of [__________] or registered assigns (the
      "Holder")
      the
      amount set out above as the Original Principal Amount (as reduced pursuant
      to
      the terms hereof pursuant to redemption, conversion or otherwise, the
      "Principal")
      when
      due, whether upon the Maturity Date (as defined below), on any Installment
      Date
      with respect to the Installment Amount due on such Installment Date (each,
      as
      defined herein), acceleration, redemption or otherwise (in each case in
      accordance with the terms hereof) and to pay interest ("Interest")
      on any
      outstanding Principal at the applicable Interest Rate from the date set out
      above as the Issuance Date (the "Issuance
      Date")
      until
      the same becomes due and payable, whether upon an Interest Date (as defined
      below), any Installment Date or the Maturity Date or acceleration, conversion,
      redemption or otherwise (in each case in accordance with the terms hereof).
      This
      Junior Secured Convertible Debenture (including all Junior Secured Convertible
      Debentures issued in exchange, transfer or replacement hereof, this
      "Debenture")
      is one
      of an issue of Junior Secured Convertible Debentures issued pursuant to the
      Additional Securities Purchase Agreement (collectively, the "Debentures"
      and
      such other Junior Secured Convertible Debentures, the "Other
      Debentures").
      Certain capitalized terms used herein are defined in Section 18.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (1)  GENERAL
      TERMS

     

    (a)  Payment
      of Principal.
      On each
      Installment Date, the Company shall pay to the Holder an amount equal to the
      Installment Amount due on such Installment Date in accordance with Section
      3.
On
      the
      Maturity Date, the Company shall pay to the Holder an amount in cash or stock,
      at the Company’s option (provided that the Equity Conditions are then satisfied
      and the Installment Volume Limitation is not exceeded), representing all
      outstanding Principal and accrued and unpaid Interest. The
      "Maturity
      Date"
      shall
      be November 10, 2010, as may be extended at the option of the Holder (i) in
      the
      event that, and for so long as, an Event of Default (as defined below) shall
      have occurred and be continuing on the Maturity Date (as may be extended
      pursuant to this Section 1) or any event shall have occurred and be continuing
      on the Maturity Date (as may be extended pursuant to this Section 1) that with
      the passage of time and the failure to cure would result in an Event of Default.
      Other than as specifically permitted by this Debenture, the Company may not
      prepay or redeem any portion of the outstanding Principal without the prior
      written consent of the Holder.

     

    (b)  Interest.
      Interest shall accrue on the outstanding principal balance hereof at an annual
      rate equal to seven and one half percent (7.50%) (“Interest
      Rate”).
      Interest shall be calculated on the basis of a 365-day year and the actual
      number of days elapsed, to the extent permitted by applicable law. Accrued
      and
      unpaid Interest hereunder shall be paid on each Installment Date and on the
      Maturity Date (or sooner as provided herein) to the Holder or its assignee
      in
      whose name this Debenture is registered on the records of the Company regarding
      registration and transfers of Debentures at the option of the Company in cash,
      or, provided that the Equity Conditions are then satisfied converted into Common
      Stock at the Company Conversion Price as of the Trading Day immediately prior
      to
      the date paid.

     

    (c)  Security.
      The
      Debenture is
      secured by a security interest in all of the assets of the Company and of each
      of the Company's subsidiaries as evidenced by the security agreement and the
      patent security agreement, each of even date herewith (collectively, the
“Security
      Documents”).

     

    (2)  EVENTS
      OF DEFAULT. 

     

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

     

    (i)  the
      Company's failure to pay to the Holder any amount of Principal, Interest, or
      other amounts when and as due under this Debenture (including, without
      limitation, the Company's failure to pay any Installment Amount or amounts
      hereunder) or any other Transaction Document;

     

    (ii)  The
      Company or any subsidiary of the Company shall commence, or there shall be
      commenced against the Company or any subsidiary of the Company under any
      applicable bankruptcy or insolvency laws as now or hereafter in effect or any
      successor thereto, or the Company or any subsidiary of the Company commences
      any
      other proceeding under any reorganization, arrangement, adjustment of debt,
      relief of debtors, dissolution, insolvency or liquidation or similar law of
      any
      jurisdiction whether now or hereafter in effect relating to the Company or
      any
      subsidiary of the Company or there is commenced against the Company or any
      subsidiary of the Company any such bankruptcy, insolvency or other proceeding
      which remains undismissed for a period of 61 days; or the Company or any
      subsidiary of the Company is adjudicated insolvent or bankrupt; or any order
      of
      relief or other order approving any such case or proceeding is entered; or
      the
      Company or any subsidiary of the Company suffers any appointment of any
      custodian, private or court appointed receiver or the like for it or any
      substantial part of its property which continues undischarged or unstayed for
      a
      period of sixty one (61) days; or the Company or any subsidiary of the Company
      makes a general assignment for the benefit of creditors; or the Company or
      any
      subsidiary of the Company shall fail to pay, or shall state that it is unable
      to
      pay, or shall be unable to pay, its debts generally as they become due; or
      the
      Company or any subsidiary of the Company shall call a meeting of its creditors
      with a view to arranging a composition, adjustment or restructuring of its
      debts; or the Company or any subsidiary of the Company shall by any act or
      failure to act expressly indicate its consent to, approval of or acquiescence
      in
      any of the foregoing; or any corporate or other action is taken by the Company
      or any subsidiary of the Company for the purpose of effecting any of the
      foregoing;

     

    
      
        
        

      

      
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    (iii)  The
      Company or any subsidiary of the Company shall default in any of its obligations
      under any other debenture or any mortgage, credit agreement or other facility,
      indenture agreement, factoring agreement or other instrument under which there
      may be issued, or by which there may be secured or evidenced any indebtedness
      for borrowed money or money due under any long term leasing or factoring
      arrangement of the Company or any subsidiary of the Company in an amount
      exceeding $250,000 (other than the Company’s agreements with Eastech
      Manufacturing), whether such indebtedness now exists or shall hereafter be
      created and such default shall result in such indebtedness becoming or being
      declared due and payable prior to the date on which it would otherwise become
      due and payable;

     

    (iv)  If
      the
      Common Stock is quoted or listed for trading on any of the following and it
      ceases to be so quoted or listed for trading and shall not again be quoted
      or
      listed for trading on any Primary Market within five (5) Trading Days of such
      delisting: (a) the American Stock Exchange, (b) New York Stock Exchange, (c)
      the
      NASDAQ Global Market, (d) the NASDAQ Capital Market, or (e) the NASDAQ OTC
      Bulletin Board (“OTCBB”) (each, a “Primary Market”);

     

    (v)  The
      Company or any subsidiary of the Company shall be a party to any Change of
      Control Transaction (as defined herein) unless in connection with such Change
      of
      Control Transaction this Debenture is retired; 

     

    (vi)  The
      Company shall fail to file the Underlying Shares Registration Statement with
      the
      Commission, or the Underlying Shares Registration Statement shall not have
      been
      declared effective by the Commission, in each case in accordance with the terms
      of the Registration Rights Agreement (“Registration
      Rights Agreement”)
      dated
      as of the date hereof among the Company and the various purchasers of
      Debentures, or, while the Underlying Shares Registration Statement is required
      to be maintained effective pursuant to the terms of the Registration Rights
      Agreement, the effectiveness of the Underlying Shares Registration Statement
      lapses for any reason (including, without limitation, the issuance of a stop
      order) or is unavailable to the Holder for sale of the Holder’s Registrable
      Securities (as defined in the Registration Rights Agreement) which, as of any
      applicable date, shall then have been required to be registered in accordance
      with the terms of the Registration Rights Agreement, and such lapse or
      unavailability continues for a period of more than ten (10) consecutive Trading
      Days or for more than an aggregate of twenty (20) Trading Days (which need
      not
      be consecutive) in any 365-calendar-day period;

     

    
      
        
        

      

      
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    (vii)  the
      Company's (A) failure to cure a Conversion Failure by delivery of the required
      number of shares of Common Stock within seven (7) Business Days after the
      applicable Conversion Failure or (B) notice, written or oral, to any holder
      of
      the Debentures, including by way of public announcement, at any time, of its
      intention not to comply with a request for conversion of any Debentures into
      shares of Common Stock that is tendered in accordance with the provisions of
      the
      Debentures, other than pursuant to Section 4(c);

     

    (viii)  The
      Company shall fail for any reason to deliver the payment in cash pursuant to
      a
      Buy-In (as defined herein) within seven (7) Business Days after such payment
      is
      due; 

     

    (ix)  The
      Company shall fail to observe or perform any other covenant, agreement or
      warranty contained in, or otherwise commit any breach or default of any
      provision of this Debenture (except as may be covered by Section 2(a)(i) through
      2(a)(vii) hereof) or any Transaction Document (as defined in Section 18),
      including, without limitation, Section 4 of the Additional Securities Purchase
      Agreement, which is not cured within the time prescribed, provided that, if
      no
      time is prescribed, then such failure, breach or default, if not involving
      a
      payment or conversion of Debentures, shall not constitute an Event of Default
      if
      cured within seven (7) Business Days of notice delivered by Holder to the
      Company of the existence of such failure, breach or default;

     

    (x)  The
      Company or any of its current senior executive officers or directors shall
      be indicted, convicted or have a judgment entered against it (including in
      a
      settled action) for any intentional or willful violation of
      federal securities laws, including without limitation, in any
      administrative proceeding or Federal District Court action brought by the
      Commission or applicable criminal authorities; or

     

    (xi)  any
      Event
      of Default (as defined in the Other Debentures) occurs with respect to any
      Other
      Debentures.

     

    (b)  During
      the time that any portion of this Debenture is outstanding, if any Event of
      Default has occurred and is continuing (a “Default”), then the Holder, at its
      option, may accelerate the Debenture by providing five (5) Business days
      advanced written Notice to the Company, after which the full unpaid Principal
      amount of this Debenture, together with interest and other amounts owing in
      respect thereof, to the date of acceleration shall become due and payable;
      provided however, the Holder may request (but shall have no obligation to
      request) payment of such amounts in Common Stock of the Company. Furthermore,
      in
      addition to any other remedies, the Holder shall have the right (but not the
      obligation) to convert this Debenture at any time after (x) a Default or (y)
      the
      Maturity Date at the Default Conversion Price. Except as otherwise set forth
      in
      this Debenture, the Holder need not provide and the Company hereby waives any
      presentment, demand, protest or other notice of any kind, (other than required
      notice of conversion) and the Holder may immediately and without expiration
      of
      any grace period enforce any and all of its rights and remedies hereunder and
      all other remedies available to it under applicable law. Such declaration may
      be
      rescinded and annulled by Holder at any time prior to or following payment
      hereunder. No such rescission or annulment shall affect any subsequent Event
      of
      Default or impair any right consequent thereon. 

     

    
      
        
        

      

      
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    (3)  COMPANY
      INSTALLMENT CONVERSION OR REDEMPTION.
      

     

    (a)  General.
      On each
      applicable Installment Date, the Company shall pay to the Holder of this
      Debenture the Installment Amount due on such date by converting such Installment
      Amount into shares of Common Stock of the Company, provided that there is not
      then an Equity Conditions Failure, in accordance with this Section 3 (a
      "Company
      Conversion");
      provided, however, that the Company may, at its option following notice to
      the
      Holder, redeem such Installment Amount in whole or in part (a "Company
      Redemption")
      or by
      any combination of a Company Conversion and a Company Redemption so long as
      all
      of the outstanding applicable Installment Amount shall be converted and/or
      redeemed by the Company on the applicable Installment Date, subject to the
      provisions of this Section 3. On or prior to the date which is the third (3rd)
      Trading Day prior to each Installment Date (each, an "Installment
      Notice Due Date"),
      the
      Company shall deliver written notice (each, a "Company
      Installment Notice"),
      to
      the Holder which Company Installment Notice shall (i) either (A) confirm that
      the applicable Installment Amount of the Holder’s Debenture shall be converted
      in whole pursuant to a Company Conversion or (B) (1) state that the Company
      elects to redeem, or is required to redeem in accordance with the provisions
      of
      the Debenture, in whole or in part, the applicable Installment Amount pursuant
      to a Company Redemption and (2) specify the portion (including Interest) which
      the Company elects or is required to redeem pursuant to a Company Redemption
      (such amount to be redeemed, the "Company
      Redemption Amount")
      and
      the portion (including Interest), if any, that the Company elects to convert
      pursuant to a Company Conversion (such amount a "Company
      Conversion Amount")
      which
      amounts when added together, must equal the applicable Installment Amount and
      (ii) if the Installment Amount is to be paid, in whole or in part, pursuant
      to a
      Company Conversion, certify that there is not then an Equity Conditions Failure
      as of the date of the Company Installment Notice. Each Company Installment
      Notice shall be irrevocable. If the Company does not timely deliver a Company
      Installment Notice in accordance with this Section 3, then the Company shall
      be
      deemed to have delivered an irrevocable Company Installment Notice confirming
      a
      Company Conversion and shall be deemed to have certified that there is not
      then
      an Equity Conditions Failure in connection with any such conversion. The Company
      Conversion Amount (whether set forth in the Company Installment Notice or by
      operation of this Section 3) shall be converted in accordance with Section
      3(b)
      and 3(d) and the Company Redemption Amount shall be paid in accordance with
      Section 3(c).

     

    
      
        
        

      

      
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    (b)  Mechanics
      of Company Conversion.
      Subject
      to Section 3(d), if the Company delivers a Company Installment Notice and
      elects, or is deemed to have elected, in whole or in part, a Company Conversion
      in accordance with Section 3(a), then the applicable Company Conversion Amount,
      if any, which remains outstanding as of the applicable Installment Date shall
      be
      converted as of the applicable Installment Date by converting on such
      Installment Date such Company Conversion Amount at the Company Conversion Price;
      provided that the Equity Conditions are then satisfied (or waived in writing
      by
      the Holder) on such Installment Date and the Installment Volume Limitation
      is
      not exceeded (unless waived in writing by the Holder). The Company shall deliver
      the shares of Common stock pursuant to such Company Conversion in accordance
      with the mechanics of conversion set forth in Section 4(b)(1) and the net share
      settlement mechanics set forth in Section 3(d). If the Equity Conditions are
      not
      satisfied (unless waived in writing by the Holder) on such Installment Date
      or
      the Installment Volume Limitation is exceeded, then at the option of the Holder
      designated in writing to the Company, the Holder may require the Company to
      do
      any one or more of the following (and upon taking any such action any Company
      Event of Default shall be deemed cured): (i) the Company shall redeem all or
      any
      part of the unconverted Company Conversion Amount designated by the Holder
      (such
      designated amount is referred to as the "Unconverted
      Redemption Amount")
      and
      the Company shall pay to the Holder within three (3) Business Days of such
      Installment Date, by wire transfer of immediately available funds, an amount
      in
      cash equal to such Unconverted Redemption Amount, and/or (ii) the Company
      Conversion shall be null and void with respect to all or any part of the
      unconverted Company Conversion Amount designated by the Holder and the Holder
      shall be entitled to all the rights of a holder of this Debenture with respect
      to such designated amount of the Company Conversion Amount; provided, however,
      that the Conversion Price for such unconverted Company Conversion Amount shall
      thereafter be adjusted to equal the lesser of (A) the Company Conversion Price
      as in effect on the date on which the Holder voided the Company Conversion
      and
      (B) the Company Conversion Price as in effect on the date on which the Holder
      delivers a Conversion Notice relating thereto. If the Company fails to redeem
      any Unconverted Redemption Amount by the third (3rd)
      Business Day following the applicable Installment Date, then the Holder shall
      have all rights under this Debenture (including, without limitation, such
      failure constituting an Event of Default). Notwithstanding anything to the
      contrary in this Section 3(b), but subject to Section 4(c)(i), until the Company
      delivers Common Stock representing the Company Conversion Amount to the Holder,
      the Company Conversion Amount may be converted by the Holder into Common Stock
      pursuant to Section 4. In the event that the Holder elects to convert the
      Company Conversion Amount prior to the applicable Installment Date as set forth
      in the immediately preceding sentence, the Company Conversion Amount so
      converted shall be deducted from the Installment Amount relating to the
      applicable Installment Date to the extent provided in Section 18.

     

    (c)  Mechanics
      of Company Redemption.
      If the
      Company elects a Company Redemption, in whole or in part, in accordance with
      Section 3(a), then the Company Redemption Amount, if any, which is to be paid
      to
      the Holder on the applicable Installment Date shall be redeemed by the Company
      on such Installment Date, and the Company shall pay to the Holder on such
      Installment Date, by wire transfer of immediately available funds, in an amount
      in cash (the "Company
      Installment Redemption Price")
      equal
      to the Principal portion of the Company Redemption Amount, plus the Redemption
      Premium associated with such Principal portion, plus accrued and unpaid
      Interest, which the Company has elected to redeem in cash. If the Company fails
      to redeem the Company Redemption Amount on the applicable Installment Date
      by
      payment of the Company Installment Redemption Price on such date, then at the
      option of the Holder designated in writing to the Company (any such designation,
      "Conversion
      Notice"
      for
      purposes of this Debenture), the Holder may require the Company to convert
      all
      or any part of the Company Redemption Amount into shares of Common Stock of
      the
      Company at the Company Conversion Price. Conversions required by this Section
      3(c) shall be made in accordance with the provisions of Section 4(b).
      Notwithstanding anything to the contrary in this Section 3(c), but subject
      to
      Section 4(c)(i), until the Company Installment Redemption Price (together with
      any interest thereon) is paid in full, the Company Redemption Amount unpaid
      (together with any interest thereon) may be converted, in whole or in part,
      by
      the Holder into Common Stock pursuant to Section 4. In the event the Holder
      elects to convert all or any portion of the Company Redemption Amount prior
      to
      the applicable Installment Date as set forth in the immediately preceding
      sentence, the Company Redemption Amount so converted shall be deducted from
      the
      Installment Amount relating to the applicable Installment Date to the extent
      provided in Section 18.

     

    
      
        
        

      

      
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    (d)  Intentionally
      omitted.

     

    (e)  Deferred
      Installment Amount.
      Notwithstanding any provision of this Section 3 to the contrary, the Holder
      may,
      at its option and in its sole discretion, deliver a written notice to the
      Company at least two (2) Trading Days prior to any Installment Notice Due Date
      electing to have the payment of all or any portion of an Installment Amount
      payable on the next Installment Date deferred to the Maturity Date. Any amount
      deferred to the Maturity Date pursuant to this Section 3(d) shall continue
      to
      accrue Interest through the Maturity Date, unless the Company exercises an
      Optional Redemption with respect to all or any portion of such
      amount.

     

    (f)  Company’s
      Additional Cash Redemption Right.
      The
      Company at its option shall have the right to redeem (“Optional
      Redemption”)
      a
      portion or all amounts outstanding under this Debenture in addition to any
      Installment Amount prior to the Maturity Date provided that
      there
      has been no Equity Conditions Failure on the Optional Redemption Notice Date
      (as
      defined below).
      Pursuant to any Optional Redemption, the Company shall pay an amount equal
      to
      the amount being redeemed plus the Redemption Premium, and accrued Interest,
      (collectively referred to as the “Company
      Additional Redemption Amount”)
      subject to the provisions of this Section 3(f). 

     

    The
      Company may exercise its Optional Redemption right under this Section 3(f)
      by
      delivering a written notice thereof by facsimile and overnight courier to Holder
      (the “Redemption
      Notice”
and
      the
      date the Holder received such notice is referred to as the “Optional
      Redemption Notice Date”).
      The
      Redemption Notice shall be irrevocable. The Redemption Notice shall state (i)
      the Trading Day selected for the Optional Redemption in accordance with this
      Section 3(f), which Trading Day shall be at least thirty (30) Trading Days
      following the Optional Redemption Notice Date (the “Redemption
      Date”),
      (ii)
      the Company Additional Redemption Amount, and (iii) that there has been no
      Equity Conditions Failure; provided, however, that the Company may not effect
      an
      Optional Redemption under this Section in excess of the Installment Volume
      Limitation (unless waived by the Holder). Notwithstanding the foregoing, the
      Company may effect only one (1) Optional Redemption during any twenty (20)
      consecutive Trading Days.

     

    Notwithstanding
      anything to the contrary in this Section 3(f), but subject to Section 4(c),
      until the Company Additional Redemption Amount is paid in full (which shall
      be
      on, but not before the Redemption Date) the Company Additional Redemption Amount
      (not including the associated Redemption Premium) may be converted, in whole
      or
      in part, by the Holder into Common Stock pursuant to Section 4. In the event
      the
      Holder elects to convert all or any portion of the Company Additional Redemption
      Amount prior to the applicable Redemption Date as set forth in the immediately
      preceding sentence, the Company Additional Redemption Amount so converted shall
      be deducted from Company Additional Redemption Amount to be paid by the Company
      on the Redemption Date.

     

    
      
        
        

      

      
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    (g)  Volume
      Limitation.
      Notwithstanding anything herein or in any of the Transaction Documents to the
      contrary, the maximum number of shares of Common Stock issuable upon conversion
      of this Debenture, including and all other shares underlying all issuances
      under
      any of the Transaction Documents, shall be determined as defined under the
      term
“Underlying Shares Volume Limitation.”

     

    (4)  CONVERSION
      OF DEBENTURE.
      This
      Debenture shall be convertible into shares of the Company's Common Stock, on
      the
      terms and conditions set forth in this Section 4.

     

    (a)  Conversion
      Right.
       Subject to the provisions of Section 4(c), at any time or times on or
      after the Issuance Date, the Holder shall be entitled to convert any portion
      of
      the outstanding and unpaid Conversion Amount (as defined below) into fully
      paid
      and nonassessable shares of Common Stock in accordance with Section 4(b), at
      the
      Conversion Rate (as defined below). The number of shares of Common Stock
      issuable upon conversion of any Conversion Amount pursuant to this Section
      4(a)
      shall be determined by dividing (x) such Conversion Amount by (y) the Conversion
      Price (the "Conversion
      Rate").
      The
      Company shall not issue any fraction of a share of Common Stock upon any
      conversion. If the issuance would result in the issuance of a fraction of a
      share of Common Stock, the Company shall round such fraction of a share of
      Common Stock up to the nearest whole share. The Company shall pay any and all
      transfer, stamp and similar taxes that may be payable with respect to the
      issuance and delivery of Common Stock upon conversion of any Conversion Amount.
      

     

    (i)  "Conversion
      Amount"
      means
      the portion of the Principal and accrued Interest to be converted, redeemed
      or
      otherwise with respect to which this determination is being made.

     

    (ii)  "Conversion
      Price"
      means,
      as of any Conversion Date (as defined below) or other date of determination,
      $1.90, subject to adjustment as provided herein. 

     

    
      
        
        

      

      
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    (b)  Mechanics
      of Conversion.

     

    (i)  Optional
      Conversion.
      To
      convert any Conversion Amount into shares of Common Stock on any date (a
      "Conversion
      Date"),
      the
      Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt
      on or
      prior to 11:59 p.m., New York Time, on such date, a copy of an executed notice
      of conversion in the form attached hereto as Exhibit
      I
      (the
      "Conversion
      Notice")
      to the
      Company and (B) if required by Section 4(b)(iv), surrender this Debenture to
      a
      nationally recognized overnight delivery service for delivery to the Company
      (or
      an indemnification undertaking reasonably satisfactory to the Company with
      respect to this Debenture in the case of its loss, theft or destruction). On
      or
      before the third Business Day following the date of receipt of a Conversion
      Notice (the "Share
      Delivery Date"),
      the
      Company shall (X) if legends are not required to be placed on certificates
      of
      Common Stock pursuant to the Additional Securities Purchase Agreement and
      provided that the Transfer Agent is participating in the Depository Trust
      Company's ("DTC")
      Fast
      Automated Securities Transfer Program, credit such aggregate number of shares
      of
      Common Stock to which the Holder shall be entitled to the Holder's or its
      designee's balance account with DTC through its Deposit Withdrawal Agent
      Commission system or (Y) if the Transfer Agent is not participating in the
      DTC
      Fast Automated Securities Transfer Program, issue and deliver to the address
      as
      specified in the Conversion Notice, a certificate, registered in the name of
      the
      Holder or its designee, for the number of shares of Common Stock to which the
      Holder shall be entitled which certificates shall not bear any restrictive
      legends unless required pursuant to Section 2(g) of the Additional Securities
      Purchase Agreement. If this Debenture is physically surrendered for conversion
      and the outstanding Principal of this Debenture is greater than the Principal
      portion of the Conversion Amount being converted, then the Company shall as
      soon
      as practicable and in no event later than five (5) Business Days after receipt
      of this Debenture and at its own expense, issue and deliver to the holder a
      new
      Debenture representing the outstanding Principal not converted. The Person
      or
      Persons entitled to receive the shares of Common Stock issuable upon a
      conversion of this Debenture shall be treated for all purposes as the record
      holder or holders of such shares of Common Stock upon the transmission of a
      Conversion Notice. In the event of a partial conversion of this Debenture
      pursuant hereto, the principal amount converted shall be deducted from the
      Installment Amounts due on subsequent Installment Dates.

     

    (ii)  Company's
      Failure to Timely Convert.
      If
      within three (3) Trading Days after the Company's receipt of the facsimile
      copy
      of a Conversion Notice the Company shall fail to issue and deliver a certificate
      to the Holder or credit the Holder's balance account with DTC for the number
      of
      shares of Common Stock to which the Holder is entitled upon such holder's
      conversion of any Conversion Amount (a "Conversion
      Failure"),
      and
      if on or after such Trading Day the Holder purchases (in an open market
      transaction or otherwise) Common Stock to deliver in satisfaction of a sale
      by
      the Holder of Common Stock issuable upon such conversion that the Holder
      anticipated receiving from the Company (a "Buy-In"),
      then
      the Company shall, within three (3) Business Days after the Holder's request
      and
      in the Holder's discretion, either (i) pay cash to the Holder in an amount
      equal
      to the Holder's total purchase price (including brokerage commissions and other
      out of pocket expenses, if any) for the shares of Common Stock so purchased
      (the
"Buy-In
      Price"),
      at
      which point the Company's obligation to deliver such certificate (and to issue
      such Common Stock) shall terminate, or (ii) promptly honor its obligation to
      deliver to the Holder a certificate or certificates representing such Common
      Stock and pay cash to the Holder in an amount equal to the excess (if any)
      of
      the Buy-In Price over the product of (A) such number of shares of Common Stock,
      times (B) the Closing Bid Price on the Conversion Date. Notwithstanding the
      foregoing, Holder shall not undertake any Buy-In and Company shall not be
      responsible for any Buy-In Price make whole as provided in (i), above, unless
      Holder has given prior written notice to Company of its intention to exercise
      its Buy-In and Company has refused to take appropriate action to cure the
      Conversion Failure, provided further, that no Buy-In make whole payment from
      Company shall become due from Company unless the Holder’s Buy-In is required by
      the purchaser following exhaustion of all alternative means to cure or delay
      any
      Holder failure to deliver, and evidence thereof is provided to Company. Any
      profit on a Holder’s Buy-In shall be credited to the next due Installment
      Amount.

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    (iii)  Book-Entry.
      Notwithstanding anything to the contrary set forth herein, upon conversion
      of
      any portion of this Debenture in accordance with the terms hereof, the Holder
      shall not be required to physically surrender this Debenture to the Company
      unless (A) the full Conversion Amount represented by this Debenture is being
      converted or (B) the Holder has provided the Company with prior written notice
      (which notice may be included in a Conversion Notice) requesting reissuance
      of
      this Debenture upon physical surrender of this Debenture. The Holder and the
      Company shall maintain records showing the Principal and Interest converted
      and
      the dates of such conversions or shall use such other method, reasonably
      satisfactory to the Holder and the Company, so as not to require physical
      surrender of this Debenture upon conversion.

     

    (c)  Limitations
      on Conversions.

     

    (i)  Beneficial
      Ownership.
      The
      Holder shall not have the right to convert any portion of this Debenture or
      receive shares of Common Stock as payment of interest hereunder to the extent
      that after giving effect to such conversion or receipt of such interest payment,
      the Holder, together with any affiliate thereof, would beneficially own (as
      determined in accordance with Section 13(d) of the Exchange Act and the rules
      promulgated thereunder) in excess of 9.99% of the number of shares of Common
      Stock outstanding immediately after giving effect to such conversion or receipt
      of shares as payment of interest. Since the Holder will not be obligated to
      report to the Company the number of shares of Common Stock it may hold at the
      time of a conversion hereunder, unless the conversion at issue would result
      in
      the issuance of shares of Common Stock in excess of 9.99% of the then
      outstanding shares of Common Stock without regard to any other shares which
      may
      be beneficially owned by the Holder or an affiliate thereof, the Holder shall
      have the authority and obligation to determine whether the restriction contained
      in this Section will limit any particular conversion hereunder and to the extent
      that the Holder determines that the limitation contained in this Section
      applies, the determination of which portion of the principal amount of this
      Debenture is convertible shall be the sole responsibility and obligation of
      the
      Holder. The provisions of this Section may be waived by a Holder (but only
      as to
      itself and not to any other Holder) upon not less than sixty five (65) days
      prior notice to the Company. Other Holders shall be unaffected by any such
      waiver.

     

    (ii)  Unless
      a
      Default shall have occurred and be continuing, the Holder shall not convert
      in
      any forty (40) consecutive day period more than the greater of: (i) the Holder
      Pro Rata Amount of $618,750 or (ii) the Installment Volume Limitation, unless
      waived by the Company.

     

    (d)  Other
      Provisions.

     

    (i)  The
      Company shall at all times reserve and keep available out of its authorized
      Common Stock the full number of shares of Common Stock issuable upon conversion
      of all outstanding amounts under this Debenture; and within three (3) Business
      Days following the receipt by the Company of a Holder's notice that such minimum
      number of Underlying Shares is not so reserved, the Company shall promptly
      reserve a sufficient number of shares of Common Stock to comply with such
      requirement.

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    (ii)  All
      calculations under this Section 4 shall be rounded to the nearest $0.0001 or
      whole share.

     

    (iii)  The
      Company covenants that it will at all times reserve and keep available out
      of
      its authorized and unissued shares of Common Stock solely for the purpose of
      issuance upon conversion of 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, not less
      than such number of shares of the Common Stock as shall (subject to any
      additional requirements of the Company as to reservation of such shares set
      forth in this Debenture or in the Transaction Documents) be issuable (taking
      into account the adjustments and restrictions set forth herein) 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 and validly authorized, issued
      and fully paid, nonassessable and, if the Underlying Shares Registration
      Statement has been declared effective under the Securities Act, registered
      for
      public sale in accordance with such Underlying Shares Registration
      Statement.

     

    (iv)  Nothing
      herein shall limit a Holder's right to pursue actual damages or declare a
      default following the occurrence of an Event of Default pursuant to Section
      2
      herein for the Company 's failure to deliver certificates representing shares
      of
      Common Stock upon conversion within the period specified herein and such Holder
      shall have the right to pursue all remedies available to it at law or in equity
      including, without limitation, a decree of specific performance and/or
      injunctive relief, in each case without the need to post a bond or provide
      other
      security. 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. 

     

    (5)  Adjustments
      to Conversion Price

     

    (a)  Adjustment
      of Conversion Price upon Issuance of Common Stock.
      If the
      Company, at any time while this Debenture is outstanding, issues or sells,
      or in
      accordance with this Section 5(a) is deemed to have issued or sold, any shares
      of Common Stock, excluding shares of Common Stock deemed to have been issued
      or
      sold by the Company in connection with any Excluded Securities, for a
      consideration per share (the “New
      Issuance Price”)
      less
      than a price equal to the Conversion Price in effect immediately prior to such
      issue or sale (such price the "Applicable
      Price")
      (the
      foregoing a "Dilutive
      Issuance"),
      then
      immediately after such Dilutive Issuance the Conversion Price then in effect
      for
      any unconverted Debentures then outstanding shall be reduced to an amount equal
      to the New Issuance Price. For purposes of determining the adjusted Conversion
      Price under this Section 5(a), the following shall be applicable:

     

    (i)  Issuance
      of Options.
      If the
      Company, at any time while this Debenture is outstanding, in any manner grants
      or sells any Options other than any Excluded Securities, and the lowest price
      per share for which one share of Common Stock is issuable upon the exercise
      of
      any such Option or upon conversion or exchange or exercise of any Convertible
      Securities issuable upon exercise of such Option is less than the Applicable
      Price, then such share of Common Stock shall be deemed to be outstanding and
      to
      have been issued and sold by the Company at the time of the granting or sale
      of
      such Option for such price per share. For purposes of this Section, the "lowest
      price per share for which one share of Common Stock is issuable upon the
      exercise of any such Option or upon conversion or exchange or exercise of any
      Convertible Securities issuable upon exercise of such Option" shall be equal
      to
      the sum of the lowest amounts of consideration (if any) received or receivable
      by the Company with respect to any one share of Common Stock upon granting
      or
      sale of the Option, upon exercise of the Option and upon conversion or exchange
      or exercise of any Convertible Security issuable upon exercise of such Option.
      No further adjustment of the Conversion Price shall be made upon the actual
      issuance of such share of Common Stock or of such Convertible Securities upon
      the exercise of such Options or upon the actual issuance of such Common Stock
      upon conversion or exchange or exercise of such Convertible
      Securities.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    (ii)  Issuance
      of Convertible Securities.
      If the
      Company, at any time while this Debenture is outstanding, in any manner issues
      or sells any Convertible Securities, other than any Excluded Securities, and
      the
      lowest price per share for which one share of Common Stock is issuable upon
      such
      conversion or exchange or exercise thereof is less than the Applicable Price,
      then such share of Common Stock shall be deemed to be outstanding and to have
      been issued and sold by the Company at the time of the issuance or sale of
      such
      Convertible Securities for such price per share. For the purposes of this
      Section, the "lowest price per share for which one share of Common Stock is
      issuable upon such conversion or exchange or exercise" shall be equal to the
      sum
      of the lowest amounts of consideration (if any) received or receivable by the
      Company with respect to any one share of Common Stock upon the issuance or
      sale
      of the Convertible Security and upon the conversion or exchange or exercise
      of
      such Convertible Security. No further adjustment of the Conversion Price shall
      be made upon the actual issuance of such share of Common Stock upon conversion
      or exchange or exercise of such Convertible Securities, and if any such issue
      or
      sale of such Convertible Securities is made upon exercise of any Options for
      which adjustment of the Conversion Price had been or are to be made pursuant
      to
      other provisions of this Section, no further adjustment of the Conversion Price
      shall be made by reason of such issue or sale.

     

    (iii)  Change
      in Option Price or Rate of Conversion.
      If the
      purchase price provided for in any Options, other than any Excluded Securities,
      the additional consideration, if any, payable upon the issue, conversion,
      exchange or exercise of any Convertible Securities other than any Excluded
      Securities, or the rate at which any Convertible Securities are convertible
      into
      or exchangeable or exercisable for Common Stock, other than any Excluded
      Securities, at any time while this Debenture is outstanding, changes at any
      time, the Conversion Price in effect at the time of such change shall be
      adjusted for any then unconverted Debentures to the Conversion Price which
      would
      have been in effect at such time had such Options or Convertible Securities
      provided for such changed purchase price, additional consideration or changed
      conversion rate, as the case may be, at the time initially granted, issued
      or
      sold. For purposes of this Section, if the terms of any Option or Convertible
      Security that was outstanding as of the Issuance Date are changed in the manner
      described in the immediately preceding sentence, then such Option or Convertible
      Security and the Common Stock deemed issuable upon exercise, conversion or
      exchange thereof shall be deemed to have been issued as of the date of such
      change. No adjustment shall be made if such adjustment would result in an
      increase of the Conversion Price then in effect.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    (iv)  Calculation
      of Consideration Received.
      In
      case, at any time while this Debenture is outstanding, any Option is issued
      in
      connection with the issue or sale of other securities of the Company, other
      than
      any Excluded Securities, together comprising one integrated transaction in
      which
      no specific consideration is allocated to such Options by the parties thereto,
      the Options will be deemed to have been issued for the difference of (x) the
      aggregate fair market value of such Options and other securities issued or
      sold
      in such integrated transaction, less (y) the fair market value of the securities
      other than such Option, issued or sold in such transaction and the other
      securities issued or sold in such integrated transaction will be deemed to
      have
      been issued or sold for the balance of the consideration received by the
      Company. If any Common Stock, Options or Convertible Securities, other than
      any
      Excluded Securities, are issued or sold or deemed to have been issued or sold
      for cash, the consideration received therefore will be deemed to be the gross
      amount raised by the Company; provided, however, that such gross amount is
      not
      greater than 110% of the net amount received by the Company therefore. If any
      Common Stock, Options or Convertible Securities are issued or sold for a
      consideration other than cash, other than any Excluded Securities, the amount
      of
      the consideration other than cash received by the Company will be the fair
      value
      of such consideration, except where such consideration consists of securities,
      in which case the amount of consideration received by the Company will be the
      Closing Bid Price of such securities on the date of receipt. If any Common
      Stock, Options or Convertible Securities are issued to the owners of the
      non-surviving entity in connection with any merger in which the Company is
      the
      surviving entity, other than any Excluded Securities, the amount of
      consideration therefore will be deemed to be the fair value of such portion
      of
      the net assets and business of the non-surviving entity as is attributable
      to
      such Common Stock, Options or Convertible Securities, as the case may be. The
      fair value of any consideration other than cash or securities will be determined
      jointly by the Company and the Holder. If such parties are unable to reach
      agreement within ten (10) days after the occurrence of an event requiring
      valuation (the "Valuation
      Event"),
      the
      fair value of such consideration will be determined within five (5) Business
      Days after the tenth (10th)
      day
      following the Valuation Event by an independent, reputable appraiser jointly
      selected by the Company and the Holder. The determination of such appraiser
      shall be deemed binding upon all parties absent manifest error and the fees
      and
      expenses of such appraiser shall be borne by the Company.

     

    (v)  Record
      Date.
      If the
      Company takes a record of the holders of Common Stock for the purpose of
      entitling them (A) to receive a dividend or other distribution payable in Common
      Stock, Options or in Convertible Securities or (B) to subscribe for or purchase
      Common Stock, Options or Convertible Securities, then such record date will
      be
      deemed to be the date of the issue or sale of the Common Stock deemed to have
      been issued or sold upon the declaration of such dividend or the making of
      such
      other distribution or the date of the granting of such right of subscription
      or
      purchase, as the case may be.

     

    (b)  Adjustment
      of Conversion Price upon Subdivision or Combination of Common
      Stock.
      If the
      Company, at any time while this Debenture is outstanding, shall (a) pay a
      stock dividend or otherwise make a distribution or distributions on shares
      of
      its Common Stock or any other equity or equity equivalent securities payable
      in
      shares of Common Stock, (b) subdivide outstanding shares of Common Stock into
      a
      larger number of shares, (c) combine (including by way of reverse stock split)
      outstanding shares of Common Stock into a smaller number of shares, or (d)
      issue
      by reclassification of shares of the Common Stock any shares of capital stock
      of
      the Company, then the Conversion Price shall be multiplied by a fraction of
      which the numerator shall be the number of shares of Common Stock (excluding
      treasury shares, if any) outstanding before such event and of which the
      denominator shall be the number of shares of Common Stock outstanding after
      such
      event. Any adjustment made pursuant to this Section shall become effective
      immediately after the record date for the determination of stockholders entitled
      to receive such dividend or distribution and shall become effective immediately
      after the effective date in the case of a subdivision, combination or
      re-classification.

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

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

     

    (d)  Other
      Events.
      If any
      event occurs of the type contemplated by the provisions of this Section 4 but
      not expressly provided for by such provisions (including, without limitation,
      the granting of stock appreciation rights, phantom stock rights or other rights
      with equity features), then the Company's Board of Directors will make an
      appropriate adjustment in the Conversion Price so as to protect the rights
      of
      the Holder under this Debenture; provided that no such adjustment will increase
      the Conversion Price as otherwise determined pursuant to this Section
      5.

     

    (e)  Other
      Corporate Events.
      In
      addition to and not in substitution for any other rights hereunder, prior to
      the
      consummation of any Fundamental Transaction pursuant to which holders of shares
      of Common Stock are entitled to receive securities or other assets with respect
      to or in exchange for shares of Common Stock (a "Corporate
      Event"),
      the
      Company shall make appropriate provision to insure that the Holder will
      thereafter have the right to receive upon a conversion of this Debenture, at
      the
      Holder's option, (i) in addition to the shares of Common Stock receivable upon
      such conversion, such securities or other assets to which the Holder would
      have
      been entitled with respect to such shares of Common Stock had such shares of
      Common Stock been held by the Holder upon the consummation of such Corporate
      Event (without taking into account any limitations or restrictions on the
      convertibility of this Debenture) or (ii) in lieu of the shares of Common Stock
      otherwise receivable upon such conversion, such securities or other assets
      received by the holders of shares of Common Stock in connection with the
      consummation of such Corporate Event in such amounts as the Holder would have
      been entitled to receive had this Debenture initially been issued with
      conversion rights for the form of such consideration (as opposed to shares
      of
      Common Stock) at a conversion rate for such consideration commensurate with
      the
      Conversion Rate. Provision made pursuant to the preceding sentence shall be
      in a
      form and substance satisfactory to the Required Holders. The provisions of
      this
      Section shall apply similarly and equally to successive Corporate Events and
      shall be applied without regard to any limitations on the conversion or
      redemption of this Debenture.

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    (f)  Whenever
      the Conversion Price is adjusted pursuant to Section 5 hereof, the Company
      shall
      promptly mail to the Holder a notice setting forth the Conversion Price after
      such adjustment and setting forth a brief statement of the facts requiring
      such
      adjustment.

     

    (g)  In
      case
      of any (1) merger or consolidation of the Company or any subsidiary of the
      Company with or into another Person, or (2) sale by the Company or any
      subsidiary of the Company of all or substantially all the assets of the Company
      in one or a series of related transactions, a Holder shall have the right to
      (A)
      exercise any rights under Section 2(b), (B) convert the aggregate amount of
      this
      Debenture then outstanding into the shares of stock and other securities, cash
      and property receivable upon or deemed to be held by holders of Common Stock
      following such merger, consolidation or sale, and such Holder shall be entitled
      upon such event or series of related events to receive such amount of
      securities, cash and property as the shares of Common Stock into which such
      aggregate principal amount of this Debenture could have been converted
      immediately prior to such merger, consolidation or sales would have been
      entitled, or (C) in the case of a merger or consolidation, require the surviving
      entity to issue to the Holder a convertible Debenture with a principal amount
      equal to the aggregate principal amount of this Debenture then held by such
      Holder, plus all accrued and unpaid interest and other amounts owing thereon,
      which such newly issued convertible Debenture shall have terms identical
      (including with respect to conversion) to the terms of this Debenture, and
      shall
      be entitled to all of the rights and privileges of the Holder of this Debenture
      set forth herein and the agreements pursuant to which this Debentures were
      issued. In the case of clause (C), the conversion price applicable for the
      newly
      issued shares of convertible preferred stock or convertible Debentures shall
      be
      based upon the amount of securities, cash and property that each share of Common
      Stock would receive in such transaction and the Conversion Price in effect
      immediately prior to the effectiveness or closing date for such transaction.
      The
      terms of any such merger, sale or consolidation shall include such terms so
      as
      to continue to give the Holder the right to receive the securities, cash and
      property set forth in this Section upon any conversion or redemption following
      such event. This provision shall similarly apply to successive such
      events.

     

    (6)  REISSUANCE
      OF THIS DEBENTURE.

     

    (a)  Transfer.
      If this
      Debenture is to be transferred, the Holder shall surrender this Debenture to
      the
      Company, whereupon the Company will, subject to the satisfaction of the transfer
      provisions of the Additional Securities Purchase Agreement, forthwith issue
      and
      deliver upon the order of the Holder a new Debenture (in accordance with Section
      6(d)), registered in the name of the registered transferee or assignee,
      representing the outstanding Principal being transferred by the Holder and,
      if
      less then the entire outstanding Principal is being transferred, a new Debenture
      (in accordance with Section 6(d)) to the Holder representing the outstanding
      Principal not being transferred. The Holder and any assignee, by acceptance
      of
      this Debenture, acknowledge and agree that, by reason of the provisions of
      Section 4(b)(iii) following conversion or redemption of any portion of this
      Debenture, the outstanding Principal represented by this Debenture may be less
      than the Principal stated on the face of this Debenture.

     

    (b)  Lost,
      Stolen or Mutilated Debenture.
      Upon
      receipt by the Company of evidence reasonably satisfactory to the Company of
      the
      loss, theft, destruction or mutilation of this Debenture, and, in the case
      of
      loss, theft or destruction, of any indemnification undertaking by the Holder
      to
      the Company in customary form and, in the case of mutilation, upon surrender
      and
      cancellation of this Debenture, the Company shall execute and deliver to the
      Holder a new Debenture (in accordance with Section 6(d)) representing the
      outstanding Principal.

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    (c)  Debenture
      Exchangeable for Different Denominations.
      This
      Debenture is exchangeable, upon the surrender hereof by the Holder at the
      principal office of the Company, for a new Debenture or Debentures (in
      accordance with Section 6(d)) representing in the aggregate the outstanding
      Principal of this Debenture, and each such new Debenture will represent such
      portion of such outstanding Principal as is designated by the Holder at the
      time
      of such surrender.

     

    (d)  Issuance
      of New Debentures.
      Whenever the Company is required to issue a new Debenture pursuant to the terms
      of this Debenture, such new Debenture (i) shall be of like tenor with this
      Debenture, (ii) shall represent, as indicated on the face of such new Debenture,
      the Principal remaining outstanding (or in the case of a new Debenture being
      issued pursuant to Section 6(a) or Section 6(c), the Principal designated by
      the
      Holder which, when added to the principal represented by the other new
      Debentures issued in connection with such issuance, does not exceed the
      Principal remaining outstanding under this Debenture immediately prior to such
      issuance of new Debentures), (iii) shall have an issuance date, as indicated
      on
      the face of such new Debenture, which is the same as the Issuance Date of this
      Debenture, (iv) shall have the same rights and conditions as this Debenture,
      and
      (v) shall represent accrued and unpaid Interest from the Issuance
      Date.

     

    (7)  NOTICES.
      Any
      notices, consents, waivers or other communications required or permitted to
      be
      given under the terms hereof must be in writing and will be deemed to have
      been
      delivered: (i) upon receipt, when delivered personally; (ii) upon receipt,
      when
      sent by facsimile (provided confirmation of transmission is mechanically or
      electronically generated and kept on file by the sending party); or (iii) one
      (1) Trading Day after deposit with a nationally recognized overnight delivery
      service, in each case properly addressed to the party to receive the same.
      The
      addresses and facsimile numbers for such communications shall be:

    


    
      	
              If
                to the Company, to:

            	 	
              Handheld
                Entertainment, Inc.

            
	 	 	
              539
                Bryant Street, Suite 403

            
	 	 	
              San
                Francisco, CA 94107

            
	 	 	
              Attention:
                Jeffery Oscodar

            
	 	 	
              Telephone: (415)
                495-6470

            
	 	 	
              Facsimile: (415)
                495-7708

            
	 	 	 
	
              With
                a copy to: 

            	 	
              Haynes
                and Boone, LLP

            
	 	 	
              153
                East 53rd
                Street

            
	 	 	
              New
                York, NY 10022

            
	 	 	
              Attention:
                Harvey J. Kesner, Esq.

            
	 	 	
              Telephone: (212)
                659-7300

            
	 	 	
              Facsimile: (212)
                918-8989

            


    

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

     

    
      	
              If
                to the Holder:

            	 	
              To
                the address of the Holder on the Company’s
                records

            


    

    


    or
      at
      such other address and/or facsimile number and/or to the attention of such
      other
      person as the recipient party has specified by written notice given to each
      other party three (3) Business Days prior to the effectiveness of such change.
      Written confirmation of receipt (i) given by the recipient of such notice,
      consent, waiver or other communication, (ii) mechanically or electronically
      generated by the sender's facsimile machine containing the time, date, recipient
      facsimile number and an image of the first page of such transmission or (iii)
      provided by a nationally recognized overnight delivery service, shall be
      rebuttable evidence of personal service, receipt by facsimile or receipt from
      a
      nationally recognized overnight delivery service in accordance with clause
      (i),
      (ii) or (iii) above, respectively.

     

    (8)  Except
      as
      expressly provided herein, no provision of this Debenture shall alter or impair
      the obligations of the Company, which are absolute and unconditional, to pay
      the
      principal of, interest and other charges (if any) on, this Debenture at the
      time, place, and rate, and in the coin or currency, herein prescribed. This
      Debenture is a direct obligation of the Company. As long as this Debenture
      is
      outstanding, the Company shall not and shall cause their subsidiaries not to,
      without the consent of the Holder, (i) amend its certificate of incorporation,
      bylaws or other charter documents so as to directly adversely affect any rights
      of the Holder to convert the Debenture into the number of shares of Common
      Stock
      entitled under this Debenture at the Applicable Price; (ii) repay, repurchase
      or
      offer to repay, repurchase or otherwise acquire more than 1,500,000 shares
      of
      its Common Stock or other equity securities other than as to the Underlying
      Shares to the extent permitted or required under the Transaction Documents;
      or
      (iii) enter into any agreement with respect to any of the foregoing.


     

    (9)  This
      Debenture shall not entitle the Holder to any of the rights of a stockholder
      of
      the Company, including without limitation, the right to vote, to receive
      dividends and other distributions, or to receive any notice of, or to attend,
      meetings of stockholders or any other proceedings of the Company, unless and
      to
      the extent converted into shares of Common Stock in accordance with the terms
      hereof.

     

    (10)  Pursuant
      to the terms of a Secondary Subordination Agreement among the company, the
      holders of Debentures and the Senior Creditors (as defined therein), dated
      as of
      October 31, 2007 (the “Subordination
      Agreement”),
      this
      Debenture is subordinate to the Senior Debt (as defined in the Subordination
      Agreement).

     

    (11)  This
      Debenture shall be governed by and construed in accordance with the laws of
      the
      State of New York without giving effect to conflicts of laws thereof. Each
      of
      the parties consents to the jurisdiction of the Superior Courts of the State
      of
      New Jersey sitting in Hudson County, New Jersey and the U.S. District Court
      for the District of New Jersey sitting in Newark, New Jersey in connection
      with
      any dispute arising under this Debenture and hereby waives, to the maximum
      extent permitted by law, any objection, including any objection based on forum
      non conveniens to the bringing of any such proceeding in such jurisdictions.
      

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

     

    (12)  If
      the
      Company fails to strictly comply with the terms of this Debenture, then the
      Company shall reimburse the Holder promptly for all fees, costs and expenses,
      including, without limitation, reasonable attorneys’ fees and expenses incurred
      by the Holder in any action in connection with this Debenture, including,
      without limitation, those incurred: (i) during any workout, attempted workout,
      and/or in connection with the rendering of legal advice as to the Holder’s
      rights, remedies and obligations, (ii) collecting any sums which become due
      to
      the Holder, (iii) defending or prosecuting any proceeding or any counterclaim
      to
      any proceeding or appeal; or (iv) the protection, preservation or enforcement
      of
      any rights or remedies of the Holder.

     

    (13)  Any
      waiver by 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
      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. 

     

    (14)  No
      provision of this Agreement may be waived or amended except in a written
      instrument signed by the Company and the Required Percentage. 

     

    (15)  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 shall violate applicable laws governing
      usury, the applicable rate of interest due hereunder shall automatically be
      lowered to equal the maximum permitted rate of interest. The Company covenants
      (to the extent that it may lawfully do so) that it shall not at any time insist
      upon, plead, or in any manner whatsoever claim or take the benefit or advantage
      of, any stay, extension or usury law or other law which would prohibit or
      forgive the Company from paying all or any portion of the principal of or
      interest on 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.

     

    (16)  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.

     

    (17)  THE
      PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT ANY
      OF
      THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON
      OR
      ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION
      DOCUMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL
      OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT
      FOR
      THE PARTIES’ ACCEPTANCE OF THIS AGREEMENT.

     

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

     

    (18)  CERTAIN
      DEFINITIONS For
      purposes of this Debenture, the following terms shall have the following
      meanings:

     

    (a)  “Approved
      Stock Plan”
means
      a
      stock option plan that has been approved by the Board of Directors of the
      Company, pursuant to which the Company’s securities may be issued only to any
      person eligible for award under such plan.

     

    (b)  "Bloomberg"
      means
      Bloomberg Financial Markets.

     

    (c)  “Business
      Day”
means
      any day except Saturday, Sunday and any day which shall be a federal legal
      holiday in the United States or a day on which banking institutions are
      authorized or required by law or other government action to close.

     

    (d)  [Reserved]
      

     

    (e)  “Change
      of Control Transaction”
means
      the occurrence of (a) an acquisition after the date hereof by an individual
      or
      legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the
      Exchange Act) of effective control (whether through legal or beneficial
      ownership of capital stock of the Company, by contract or otherwise) of in
      excess of fifty percent (50%) of the voting securities of the Company (except
      that the acquisition of voting securities by the Holder or any other current
      holder of convertible securities of the Company shall not constitute a Change
      of
      Control Transaction for purposes hereof) by a person not an owner of the capital
      stock of the Company prior to the date of issuance of this Debenture, or their
      affiliates or immediate family members, or any trust for the benefit of such
      persons, (b) a replacement at one time or over time of more than one-half of
      the
      members of the board of directors of the Company which is not approved by a
      majority of those individuals who are members of the board of directors on
      the
      date hereof (or by those individuals who are serving as members of the board
      of
      directors on any date whose nomination to the board of directors was approved
      by
      a majority of the members of the board of directors who are members on the
      date
      hereof), (c) the merger, consolidation or sale of fifty percent (50%) or more
      of
      the assets of the Company or any subsidiary of the Company in one or a series
      of
      related transactions with or into another entity, or (d) the execution by the
      Company of an agreement to which the Company is a party or by which it is bound,
      providing for any of the events set forth above in (a), (b) or (c).

     

    (f)  “Closing
      Bid Price”
means
      the price per share in the last reported trade of the Common Stock on a Primary
      Market or on the exchange which the Common Stock is then listed as quoted by
      Bloomberg.

     

    (g)  “Commission”
means
      the Securities and Exchange Commission.

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

     

    (h)  “Common
      Stock”
means
      the common stock, par value $.0001, of the Company and stock of any other class
      into which such shares may hereafter be changed or reclassified.

     

    (i)  "Company
      Conversion Price"
      means,
      the lower of (i) the applicable Conversion Price and (ii) that price which
      shall
      be computed as ninety percent (90%) of the lowest Volume Weighted Average Price
      of the Common Stock during the ten (10) consecutive Trading Days immediately
      preceding the applicable Installment Date. All such determinations to be
      appropriately adjusted for any stock split, stock dividend, stock combination
      or
      other similar transaction.

     

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

     

    (k)  “Default
      Conversion Price”
means
      the lesser of (a) Conversion Price, subject to adjustment as provided herein,
      or
      (b) seventy five percent (75%) of the lowest Volume Weighted Average Price
      during the ten (10) Trading Days immediately preceding the Conversion Date.
      All
      such determinations to be appropriately adjusted for any stock split, stock
      dividend, stock combination or other similar transaction.

     

    (l)  "Equity
      Conditions"
      means
      that each of the following conditions is satisfied: (i) on each day during
      the
      period beginning two (2) weeks prior to the applicable date of determination
      and
      ending on and including the applicable date of determination (the "Equity
      Conditions Measuring Period"), either (x) the Underlying Shares Registration
      Statement filed pursuant to the Registration Rights Agreement shall be effective
      and available for the resale of all applicable shares of Common Stock to be
      issued in connection with the event requiring determination or (y) all
      applicable shares of Common Stock to be issued in connection with the event
      requiring determination shall be eligible for sale without restriction and
      without the need for registration under any applicable federal or state
      securities laws; (ii) on each day during the Equity Conditions Measuring Period,
      the Common Stock is designated for quotation on the PrimaryMarket and shall
      not
      have been suspended from trading on such exchange or market nor shall delisting
      or suspension by such exchange or market been threatened or pending in writing
      by such exchange or market; (iii) during the Equity Conditions Measuring Period,
      the Company shall have delivered all shares of Common Stock due upon conversion
      of the Debentures to the Holder on a timely basis as set forth in Section
      4(b)(ii) hereof; (iv) any applicable shares of Common Stock to be issued in
      connection with the event requiring determination may be issued in full without
      violating Section 4(c) hereof and the rules or regulations of the Primary
      Market; (v) during the Equity Conditions Measuring Period, there shall not
      have
      occurred and be continuing, unless waived by Holder, either (A) an Event of
      Default or (B) an event that with the passage of time or giving of notice would
      constitute an Event of Default; and (vii) the Company shall have no knowledge
      of
      any fact that would cause (x) the Registration Statements required pursuant
      to
      the Registration Rights Agreement not to be effective and available for the
      resale of all applicable shares of Common Stock to be issued in connection
      with
      the event requiring determination or (y) any applicable shares of Common Stock
      to be issued in connection with the event requiring determination not to be
      eligible for sale without restriction and without the need for registration
      under any applicable federal or state securities laws.

     

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

     

    (m)  "Equity
      Conditions Failure"
      means
      that on any applicable date the Equity Conditions have not been satisfied (or
      waived in writing by the Holder).

     

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

     

    (o)  “Excluded
      Securities”
means,
      (a) shares issued or deemed to have been issued by the Company pursuant to
      an
      Approved Stock Plan (b) shares of Common Stock issued or deemed to be issued
      by
      the Company upon the conversion, exchange or exercise of any right, option,
      obligation or security outstanding prior to August 2, 2007, provided that the
      maturity date, price or duration of such right, option, obligation or security
      is not amended or otherwise modified on or after such date, and provided that
      the conversion price, exchange price, exercise price or other purchase price
      is
      not reduced, adjusted or otherwise modified and the number of shares of Common
      Stock issued or issuable is not increased (other than by operation of, or in
      accordance with, the relevant governing documents) on or after August 2, 2007,
      (c) shares of Common Stock issued or deemed to be issued in connection with
      any
      acquisition by the Company, whether through an acquisition of stock or a merger
      of any business, assets or technologies, leasing arrangement or any other
      transaction the primary purpose of which is not to raise equity capital,
      including, without limitation, pursuant to that certain Asset Purchase
      Agreement, dated August 1, 2007, by and among the Company, EBW Acquisition,
      Inc.
      and eBaum’s World, Inc. or any related agreement, (d) the shares of Common
      Stock issued or deemed to be issued by the Company upon issuance, conversion
      or
      exercise of this Debenture, any Other Debentures, the Warrants or any securities
      issued in connection therewith, (e) shares of Common Stock issued or deemed
      issued upon exercise of warrants issued in connection with the Company’s
      issuance of $1.425 million aggregate principal amount of 8% notes due 2008,
      and
      (f) shares of Common Stock issued or deemed issued by the Company upon the
      conversion, exchange, or exercise of the convertible debentures and warrants
      of
      the Company issued pursuant to a Securities Purchase Agreement dated as of
      August 2, 2007, by and among the Company and YA Global Investments, L.P.,
      provided that the conversion price, exchange price, exercise price or other
      purchase price is not reduced, adjusted or otherwise modified and the number
      of
      shares of Common Stock issued or issuable is not increased (other than by
      operation of, or in accordance with, the relevant governing documents) at any
      time after the date the security is originally issued.

     

    (p)  "Holder
      Pro Rata Amount"
      means a
      fraction (i) the numerator of which is the Original Principal Amount of this
      Debenture on the Issuance Date and (ii) the denominator of which is
      $7,425,000.

     

    (q)  "Installment
      Amount"
      means
      with respect to any Installment Date, the lesser of (A) the product of (i)
      $206,250, multiplied by (ii) Holder Pro Rata Amount and (B) the Principal amount
      under this Debenture as of such Installment Date, as any such Installment Amount
      may be reduced pursuant to the terms of this Debenture, whether upon conversion,
      redemption or otherwise, together with, in each case the sum of any accrued
      and
      unpaid Interest with respect to such Principal amount. The Installment Amount
      on
      any Installment Date shall be reduced (but not to less than zero) by the
      Principal Amount of any conversions made by the Holder of this Debenture prior
      to such Installment Date and after the immediately preceding Installment Date,
      unless the Company elects not to make such reduction. In the event the Holder
      shall sell or otherwise transfer any portion of this Debenture, the transferee
      shall be allocated a pro rata portion of the each unpaid Installment Amount
      hereunder.

     

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

     

    (r)  "Installment
      Date"
      means
      March 13, 2008, and the first Business Day of each successive calendar month
      thereafter. 

     

    (s)  "Installment
      Volume Limitation"
      means
      25% of the aggregate dollar trading volume of the Common Stock on the Primary
      Market over the forty (40) consecutive Trading Day period ending on the Trading
      Day immediately preceding the applicable date of determination. For the purposes
      of this section the term “dollar trading volume” for any Trading Day shall be
      determined by multiplying the VWAP by the volume as reported on Bloomberg for
      such Trading Day.

     

    (t)  Options”
      means
      any
      rights, warrants or options to subscribe for or purchase shares of Common Stock
      or Convertible Securities.

     

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

     

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

     

    (w)  “Redemption
      Premium”
means
      with respect to any payments of Principal to be made hereunder (whether on
      an
      Installment Date, Maturity Date, or otherwise), an amount equal to ten percent
      (10%) of the Principal amount due. 

     

    (x)  “Required
      Percentage”
means
      fifty-one (51%) percent of the outstanding principal amount of Debentures at
      the
      time of taking any action.

     

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

     

    (z)  “Additional
      Securities Purchase Agreement”
means
      the Additional Securities Purchase Agreement, dated as of October 31, 2007,
      among the Company and each purchaser of Debentures. 

     

    (aa)  “Trading
      Day”
means
      a
      day on which the shares of Common Stock are quoted on the OTCBB or quoted or
      traded on such Primary Market on which the shares of Common Stock are then
      quoted or listed; provided, that in the event that the shares of Common Stock
      are not listed or quoted, then Trading Day shall mean a Business
      Day.

     

    (bb)  “Transaction
      Documents”
means
      the Additional Securities Purchase Agreement or any other agreement delivered
      in
      connection with the Additional Securities Purchase Agreement, including, without
      limitation, the Security Documents and the Registration Rights
      Agreement.

     

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

     

    (cc)  “Underlying
      Shares”
means
      the shares of Common Stock issuable upon conversion of this Debenture or as
      payment of interest in accordance with the terms hereof.

     

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

     

    (ee)  “Underlying
      Shares Volume Limitation”
shall
      be determined in the manner set forth under “Reservation of Shares” and shall
      mean the “Share Reserve,” as set forth in Section 4(e) of the Additional
      Securities Purchase Agreement.

     

    (ff)  "Volume
      Weighted Average Price"
      means,
      for any security as of any date, the daily dollar volume-weighted average price
      for such security on the Primary Market as reported by Bloomberg through its
      “Historical Prices - Px Table with Average Daily Volume” functions, or, if no
      dollar volume-weighted average price is reported for such security by Bloomberg,
      the average of the highest closing bid price and the lowest closing ask price
      of
      any of the market makers for such security as reported in the "pink sheets"
      by
      Pink Sheets LLC. 

     

    (gg)  "Warrants"
      has the
      meaning ascribed to such term in the Additional Securities Purchase Agreement,
      and shall include all warrants issued in exchange therefore or replacement
      thereof.

     

    [Signature
      Page Follows]

    


    
      
        
        

      

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

     

    
      	 	 	 
	 	
              COMPANY:

            
	 	
              HANDHELD
                ENTERTAINMENT, INC.

            
	 
 	 
 	 
 
	
            	By:  	 
	 	
              
                

              

              Name: 

              
                
                  Title: 

                

              

            


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    EXHIBIT
      I

     

    CONVERSION
      NOTICE

     

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

     

    
      	
              TO:
                

            


    

    


    The
      undersigned hereby irrevocably elects to convert $      
      of the principal amount of Debenture No. ZVUE-2-[__] into Shares of Common
      Stock
      of HANDHELD
      ENTERTAINMENT, INC.,
      according to the conditions stated therein, as of the Conversion Date written
      below.

     

    
      	
              Conversion
                Date:

            	 	 
	 	 	 
	
              Conversion
                Amount to be converted:

            	 $	
                      

            
	 	 	 
	
              Conversion
                Price:

            	 $	
                      

            
	 	 	 
	
              Number
                of shares of Common Stock to be issued:

            	 	 
	 	 	 
	
              Amount
                of Debenture Unconverted:

            	 $	
                       

            
	 	 	 
	
              Please
                issue the shares of Common Stock in the following name and to the
                following address:

            
	 
	
              Issue
                to:

            	 	 
	 	 	 
	
              Authorized
                Signature:

            	 	 
	 	 	 
	
              Name:

            	 	 
	 	 	 
	
              Title:

            	 	 
	 	 	 
	
              Broker
                DTC Participant Code:

            	 	 
	 	 	 
	
              Account
                Number: